OSI Systems, Inc.
Q1 2016 Earnings Call Transcript

Published: 29 Oct 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the OSI Systems’ Q1 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will have a question-and-answer session and instructions will be given at that time. [Operator Instructions]. As a reminder, today’s program is being recorded. I would now like to introduce your host for today’s program, Alan Edrick, Chief Financial Officer. Please go ahead.

[Alan Edrick:]

Good afternoon, and thank you for joining us. I’m Alan Edrick, Executive Vice President and CFO of OSI Systems. Welcome to the OSI Systems’ fourth quarter and year end fiscal 2015 conference call. We’d like to extend a special welcome to anyone who is a first-time participant on our conference calls. Please note that this presentation is being webcasts and is expected to remain in our website located at www.osi-systems.com for approximately two weeks. Deepak Chopra could not join this today due to an unavoidable scheduling conflict. Earlier today, we issued a press release announcing our first quarter fiscal year 2016 financial results. Before we discuss our financial and our operational highlights, I’d like to read the following statement. In connection with this conference call, the company wishes to take advantage of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 with respect to statements during this call that may be deemed to be forward-looking statements under the Act. Forward-looking statements relate to the company's current expectations, beliefs, projections, and similar expressions, and are not guarantees of future performance or outcomes. Forward-looking statements involve uncertainties, risks, assumptions and contingencies, many of which are outside the company's control that may cause actual results or outcomes to differ materially from those described in or implied by any forward-looking statement. Such statements include without limitation, information provided regarding expected revenues and earnings in fiscal 2016 and statements regarding the expected financial and operational performance of the company and its operating divisions. The company wishes to caution participants on this conference call that numerous factors could cause actual results to differ materially from these forward-looking statements. These factors include the risk factors set forth in the company's last annual report on Form 10-K and other risks described in documents subsequently filed by the company with the SEC from time to time. All forward-looking statements made on this call are based on currently available information, and speak only as of the date of this call. And the company undertakes no obligation to update any forward-looking statement that becomes untrue because of new information, subsequent events or otherwise. Before discussing the business in more detail, I will provide a high level overview of our financial performance. We will again touch on several themes that we have discussed during past conference calls. Highlights for our first quarter of fiscal 2016 are as follows

[Operator:]

Thank you. [Operator Instructions]. And our first question comes from the line of Josephine Millward of The Benchmark Company. Your line is open.

[Josephine Millward:]

Thank you. Hi, Alan.

[Alan Edrick:]

Hi, Josephine.

[Josephine Millward:]

Alan, given your strong bookings during the quarter, how should we think about the overall growth at your security business this year? And in terms of seasonality, if you can talk about seasonality and when do you expect Albania to be fully operational?

[Alan Edrick:]

Sure, Josephine, good questions. I will maybe take them in inverse order. Albania we expect to be fully ramped during the course of this fiscal year, is moving up at a nice pace and we think will enter fiscal 2017 at a full ramp rate. So we’re very pleased with the progress that we’re making in Albania. With respect to the other parts of the security, the non-turnkey, very happy with the bookings. We believe the division is positioned nicely for growth and we believe that growth is going to occur in the second half of the fiscal year. As you know, the first half of the fiscal year had extraordinarily difficult comps for that part of the business namely from the revenues that we were able to recognize in the prior year related to the foreign military sale to Iraq.

[Josephine Millward:]

Great. Just a quick follow-on, can you give us an update on timing of potential follow on for Military sales order from Iraq?

[Alan Edrick:]

Sure, Josephine, yes, I mean while we think we are very well-positioned for follow on order, as you know in dealing with Iraq is very difficult to ever predict timing. So at this point, we would refrain from try and predict timing. But we think we are well-positioned if and when an order is placed.

[Josephine Millward:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Jeff Martin from ROTH Capital Partners. Your line is open.

[Jeff Martin:]

Thanks. Hi Alan.

[Alan Edrick:]

Hi Jeff. How are you doing today?

[Jeff Martin:]

I'm doing well, thanks. On the FMS looking back to last year I got a note of roughly $40 million from FMS in the December quarter last year, is that accurate in that period? Obviously, a tough comp which I think people largely recognize but just looking to quantify.

[Alan Edrick:]

Sure, Jeff, that is confirm. That number is very close to what we recognized in the prior Q2.

[Jeff Martin:]

Okay. And then on Optoelectronics you had 8.9% operating margin in the quarter, is that a sustainable margin to expect going forward or is that was there something anomalous to the first quarter with respect to the operating margin contribution?

[Alan Edrick:]

Yes, Jeff, we focused quite a bit over the last 12 months or so on improving the Opto operating margins and we have had some nice success in that regard. I think each of the past four quarters we have seen a sequential operating margin improvement. 8.9% was particularly strong it was driven by sales in particular segments within Opto that carry higher margins. That being said, we think there is further opportunity to expand those margins in Opto. So while we may not expand on a sequential basis every quarter, we do think there is opportunities for further expansion there, and based on the product mix certain quarters maybe a little bit higher, certain quarters maybe a little bit lower.

[Jeff Martin:]

Okay. Can you talk about expecting some second half growth in Opto, what are the drivers there?

[Alan Edrick:]

Yes, the biggest drivers are some of the new contracts we have gotten. Our sales team in Opto has done an outstanding job. We have landed some new customers and the timing of those deliveries occur in the second half. Complementing that are the tough comps that we had in Opto from some of the changes we intentionally made in division are largely behind us as we head into the second half. So we feel quite good about that.

[Jeff Martin:]

Okay. And then any developments with RTT certification with TSA?

[Alan Edrick:]

Yes we expect to submit for certification this fiscal year. So we believe we’re on track for that. And our primary focus in RTT at this point is on sales outside the United States where we have certification; it’s going very well for us.

[Jeff Martin:]

Great. And could you comment on the proposal or the request for proposal activity for RTT in Europe, and just give us an update there?

[Alan Edrick:]

The pipeline for RTT activity is extremely strong. We’ve landed a number of major wins. There continues to be a high funnel of opportunities of RFPs out there. So we really look at RTT as a nice driver of growth for us for many years to come.

[Jeff Martin:]

Or safe to say it is tracking well to your expectations?

[Alan Edrick:]

That is safe to say, that is correct.

[Jeff Martin:]

Okay. Thank you, Alan. Appreciate it.

[Alan Edrick:]

Sure.

[Operator:]

[Operator Instructions]. Our next question comes from the line of Les Sulewski from Sidoti and Company. Your line is open.

[Les Sulewski:]

Hey good afternoon Alan. How are you?

[Alan Edrick:]

I’m doing good, Les. Thank you.

[Les Sulewski:]

Prior quarters you mentioned in your press release you stated you had restructuring charges; were they none this quarter or just was omitted? Any comment on that?

[Alan Edrick:]

Yes. Over the past few years we have been looking at a lot of opportunities to streamline the business and get more efficient, which often time resulted in restructuring charges. This past quarter, the September quarter did not have any, which is why it shows zero. That being said, we are always looking for opportunities to improve, we have a mantra of continuous improvement. So that is very possible very likely that you will see restructuring charges in future quarters.

[Les Sulewski:]

Okay. Also I think just rephrase the other question on the RTT in Europe, in previous quarters you mentioned a number of machines still left out there, do you have that number by any chance?

[Alan Edrick:]

Yes, there is a large number of machines left out there I don’t think we probably didn’t mentioned any type of exact number because we’re not necessarily privy to the exact number of machines that are out there. But it’s safe to say it’s in the very early stages of the replacement cycle in Europe, we’re doing very well in the early innings and we’re excited about the potential for RTT in Europe really throughout this replacement cycle that is going to go on for several years.

[Les Sulewski:]

Got it. On the IDIQ so there is about a say $270 million left given that you were allocated $19 million, do you know other suppliers that were allocated certain amounts closer to that $19 million. Are you the only one out there? And then any comment on how the remainder could get allocated?

[Alan Edrick:]

Sure, good question. Our understanding is that we’re the only supplier who have been awarded any significant award. Each supplier may have been awarded a very nice small initial award but have any material amount which $19 million clearly was, we believe we are the only supplier who have been awarded that so far. We’re pleased with getting ready to fulfill that order in terms of calling how the $293 million maybe spent in terms of timing probably little bit premature for us to comment on that.

[Les Sulewski:]

Are there any machines that you perhaps might not have to fill that order?

[Alan Edrick:]

No, we believe we have the product portfolio that will enable us to fulfill that order yet such is provided.

[Les Sulewski:]

Got it. Thank you. And just last one on any FX headwinds in the first quarter and perhaps in the second and then we might have some lapping in the second half but any comment on that?

[Alan Edrick:]

Yes, there were some FX headwinds on the top line for us in the first quarter namely with the strength of the dollar relative to some other currencies. It probably affected us less than 2% for the first quarter. We will have to see how those FX headwinds begin to dissipate a little bit throughout the remaining of the fiscal year. We will have to see how – we will have to see what the volatility of the foreign exchange will tend to show us. But in the first quarter it was not as significant as it was for us in the last few quarters.

[Les Sulewski:]

Got it. Thank you, Alan. Appreciate it.

[Alan Edrick:]

Sure.

[Operator:]

And I’m showing no further questions in the queue. I would like to turn the call back to you, Mr. Edrick, for closing remarks.

[Alan Edrick:]

Great, thank you. While we like to thank everyone for joining our call today. We look forward to speaking with you on our next call. Thank you again, good bye.

[Operator:]

Ladies and gentlemen thank you for participating in today’s conference. This does conclude the program. You may all disconnect. Everyone have a wonderful day.