Conference Transcript - OSIS 2026-05-05

Speaker 2

Okay. Thank you, David and Alan. Thanks for being with us today. Happy to discuss with you, as we've done several times at our conference this year. So appreciate your ongoing participation. You know, a bit of a stark reaction to the stock price today, maybe get into a little bit of that down the road. But first and foremost, the business models made great strides over the past several years and just wanted to start at a high level. And here you describe the process of OSI's emergence as the number one global position in security screening infrastructure and the strategic positioning of the company today versus five to 10 years ago, including what you think has changed most about OSI as a company and about the serve market, Tim, what's changed there over the past

Alan Edrick, CFO

decade? Yeah, thanks, Chris, and nice to be with you here again. Yeah, we're really pleased with the progress that our security division has made over those years. You know, you talk about the five or 10-year timeframe. We've gone from kind of a medium-sized player to a real market leader in security detection. And some of the things that we think have helped differentiate us from our competitors and how we've done that is the strategy we took to go to market. Some of our competitors focused on a single technology or a few technologies, and that would be the primary thing that they could sell to the customer. We chose an alternative path and said we want to have most of the technologies and thereby we can offer and have some of the best products and solutions for those customers. And we don't, we might not need to push a particular technology on the customer, but we can see what's, what's right for them. And to that end, we did a lot of internal development. We supplemented that with some, some key acquisitions. We bought one of our primary competitors in the, in the cargo space about, oh, now it's, it's coming up on 10 years here, I think, this summer. And what that helped us do at that point in time was take our strong medium and high energy positions in cargo and vehicle inspection for screening at ports and borders and critical infrastructure and combine it with a low energy setting and do combinational technologies that really allowed us to move over time from a smaller player in the cargo market to today the market leader in cargo and vehicle inspection. And with that, we also challenged the business models. So while the business and the industry traditionally sells products and then gets recurring revenue through service, spare parts, and maintenance, and it's a wonderful business model, we do well in that as well as our competitors do as well, we said, well, what if there's customers that's out there that either don't have the capital or the money to buy the equipment, or if they do, maybe they don't have the operational expertise. What if we did what we call a turnkey solution or our version of SaaS, meaning security as a service? And to that end, we became the first company to do this and won a number of contracts. And from that, we developed some proprietary software called CertScan, which really helped differentiate us, not just in the security as a service market, but even in basic product offerings as well. And through all of this, it's really allowed us to capture some significant market share, imports and borders and critical infrastructure. And then we're also, you know, play a major role in aviation. So from our standpoint, between the strong organic growth that we've had driven by a lot of our R&D projects, the great sales and marketing initiatives, coupled with some of the inorganic growth that supplemented our top line and accelerated our bottom line. Together, that's all allowed us to capture a very significant market share today.

Speaker 2

Great. And then for skipping over to the other high-performing segment, the up to electronics and manufacturing, what are the fastest-growing verticals there? I know you have a range of blue chip customers and some nice verticals, A&D, healthcare, automotive, industrial. But, you know, it strikes one that maybe munitions and military stock depletions are creating a significant growth pipeline. You know, kind of a couple little lower growth for maybe a quarter or two with some tougher comps, but pretty soundly in a strong mid-single digits environment. I'm wondering if munitions replenishment kind of pushed this into a more accelerated phase. I don't know what your spectrum and application breadth is across defense in particular, but I think munitions is part of the story.

Alan Edrick, CFO

Yeah, yeah, you're certainly right. And the Opto business has performed extremely well for us. We've had strong double-digit growth for a number of consecutive quarters. And like you're saying, this tends to be kind of more of a mid-single-digit type growth market, a GDP growth that we try to turbocharge that and grow a little bit faster. And we have, and it's a really nice business for us that's well-diversified in those markets that you've mentioned, with customers as well. We don't have any significant customer concentration, a lot of blue-chip customers throughout these industries. And aerospace and defense has been, you know, one of the segments that's been leading the charge in terms of this faster growth. And for the areas that you mentioned, we do look at that as an opportunity, harder to quantify for us at this point in time. But as we move into our fiscal 27, which for us starts in, you know, just under two months, you know, we think that could be a nice source of growth for us as we move forward. And the OptoDivision, you know, in addition to selling to the third-party companies, is also a very key supplier to our sister divisions, both security and healthcare. And through that vertical integration, we're able to enhance the overall gross margin of OSI systems, while at the same time being, you know, faster and more responsive to our customer needs.

Speaker 2

Okay, great. Right. So, yeah, so obviously the scaling at security has been very good for some time now. And just looking at the stock down to 15 percent today, you know, going into the call, I would have thought maybe backlog growth was the first item to look for. And you had a bit of that, but, you know, maybe some rounding between one eight and one nine. and opto had like a 40 million dollar order that could bridge the gap from one eight to one nine with rounding itself so it um you know it strikes one that if the golden dome order had not landed in march then you know it like maybe the regular way smaller and mid-sized project orders there's a major lull there or something changing. Because that was a once every two-year size order for OSI. And I realize that might be changing now with DHS on the way and Golden Dome Encore and things. But the stock is trading today. It's in a liquid market, and we need to discuss that. So, you know, there is a reason why it's down. It might be a proprietary reason by a PM or two, but, you know, my job is to try to channel what's going on. And I'm working with your investors who are doing the same thing. And, you know, my most plausible thought currently is that there's a real lull in the regular way, smaller SMID project orders for security right now.

Alan Edrick, CFO

Yeah, certainly hard to say. So yeah, we do believe it was a solid quarter and the outlook over multi-years continues to look very favorable for us. We were pleased with the overall results in the quarter, surprised by the reaction as well today as the sentiment from frankly everybody I've talked to has been surprised because it appeared that the quarter was solid and the results and the outlook are good as well. With respect to bookings, yeah, we were very happy with the overall bookings and the book-to-bill ratio. Of course, a big part of that was the Homeland Defense order. It's noteworthy that, you know, in the quarter, we continue to have the U.S. government shutdown. So while we were anticipating significant U.S. government orders in the March quarter, those shifted to the right while the government was shut down. We're pleased that the government has reopened and hope over the coming months, we're going to see some very sizable U.S. CBP, Customs and Border Protection Orders. In addition, during the quarter, well, a conflict broke out in the Middle East. The Middle East is very fertile territory for us for bookings and award activity. And while we think this represents significant opportunities for us as the conflict ultimately winds down. As you might imagine, in the last month or so of the quarter when this broke out, you're not seeing a whole lot of new bookings activity. So all of that would have impacted that. Nothing changes for the company overall, we don't believe, from a timeline perspective. So again, strong book to Bill. And with the reopening of the Department of Homeland Security, and ultimately the wind down of the Middle East conflict, wow, we think

Speaker 2

it represents real significant opportunities for us. Okay. That sounds good. So I know you guys announce some orders, you don't announce some. That's always a negotiation with your customer and things like that. But oftentimes in security, you don't announce orders probably below a certain threshold, but collectively, those are important. So are you suggesting that, you know, given the activity levels in the Middle East for your business the past few years, that there's usually more of a consistent flow of those kind of like intra-quarter, shorter cycle type orders?

Alan Edrick, CFO

That is often the case for us, yes.

Speaker 2

Okay, great. Yeah, I just wanted to kind of flush that out because a lot of of times the discussion anchors around you know these big chunky orders which are obviously for for obvious reasons but um you know so uscbp orders on the horizon um i think they have a track record of getting to work you know pretty pretty quickly too and um i'm not sure about you know golden dome don't have a way to handicap how quickly that'll get to work um but you know could Could the DHS be your biggest growth, or rather DHS or CBPs handicap one or the other as your biggest growth probability next year?

Alan Edrick, CFO

We think it can be a very significant growth opportunity for us. The last several years have been really driven by international growth in our security division. And while we think international markets continue to be very robust, as we look out to fiscal 27, 28, maybe beyond, we would anticipate that the U.S. is really going to be sort of stepping up with orders coming from CBP through the one big beautiful bill, through their existing budgets. it really does represent a tremendous growth opportunity for us. And that, coupled with Golden Dome, also here in the United States, suggests that the U.S. growth could be quite significant for us going forward.

Speaker 2

And vendors and investors are talking about Golden Dome concepts being replicated in other countries. I don't know if that is anything in the supply chain chatter yet, But, you know, just wondering if there's any of that on the visible horizon that you've identified yet.

Alan Edrick, CFO

You know, so our RF solutions business, which is what we're using in this case, is a global business. We have customers throughout the world. Probably wouldn't be appropriate for me in these type of sensitive topics to talk about other countries or other type of programs. but the technology can be used on a global basis.

Speaker 2

Okay. And in terms of US CBP, the reports on the last IDIQs and the process of you and other competitors providing content was that the relative performance of OSI was pretty favorable. So I'm wondering if you anticipate higher market share with CBP in the forthcoming project rounds versus those awarded several years ago.

Alan Edrick, CFO

Yeah, it is our understanding that we're looked upon very favorably by the U.S. CBP. I think we've done a great job delivering high quality products on time, on schedule from when they've asked us for it. In the past, the awards that we've gotten from CBP have been a decently high percentage of the overall awards. And, you know, we would hope that we could maintain or increase that percentage of the overall awards. We think our track record in our service would certainly be deserving of that. But of course, there's always lots of factors that go into awards.

Speaker 2

And just back to the RF business a little bit, what's the competitive field like? It seems like you've been kind of limited on what you can say about it. it seems like the you know technology is fairly novel and current um but when there's big applications like this that there's never one viable competitor yet uh yeah you know maybe there is just kind of curious how you're seeing it i mean are you just like a shoe-in to get similar awards as Golden Dome rolls out in the next three or four years?

Alan Edrick, CFO

Well, it would always be nice to say we're a shoe-in. We think we're well-positioned. Our business is well-regarded by the government and by the customers. Of course, we operate in a lot of classified programs, so we're very limited in what we can say. But we think we're extremely well-positioned, which is why we believe we received this initial award. And we think we're position for follow-on awards as well. So we really like where we stand. And the big picture is we hear very, very favorable things from the customers about what we provide in the service

Speaker 2

level and the quality of our products. Okay. And understanding that I might be stepping on the line of what you can and can ask, but with that large order, is that through to Golden Dome by a one oem customer or a handful of customers this is a single customer okay great um and uh yeah what and explain these beyond uh uscbp and uh golden zone which i guess would be homeland security um what's the cadence with other u.s government agencies

Alan Edrick, CFO

Oh, we work with a number of different U.S. government agencies, you know, the DOD or the DOW, a number of agencies within that, within the Department of State. They're just, you name the main government agency, if they need security detection, we often, you know, play with them. So, U.S. government for us is fertile territory, and we would expect to, you know, continuing receiving a fair share of awards there.

Speaker 2

Okay, great. And, you know, I think the aviation business is probably kind of a steady state, kind of a churn-sized market presently, correct me if I'm wrong. But the kind of sort of goalpost there is as the FAA starts, a scheduled, predictable kind of technology upgrade cycle across the U.S. airports. But, you know, in that scenario, would you characterize aviation as kind of a, you know, get your fair share, maintain share, or is that a clear share pickup opportunity?

Alan Edrick, CFO

Our hope and our goal is to pick up market share in aviation. You know, much like years ago, we were smaller in the cargo and vehicle inspection, and now we're the market leader. Our hope would be in aviation that we could, you know, pick up market share as well. And a big opportunity around that is in the United States, the check baggage replacement cycle. So when check baggage machines were first installed many, many years ago, we didn't have a product for check baggage. So we don't have a current installed base of check baggage machines in U.S. airports. We then developed one of the industries first, specifically with security in mind, and have received nice market share throughout much of the rest of the world. As the U.S. begins its replacement cycle in a few years, which will then go on for many years, starting at zero, of course, which is where we also started internationally, gives us a great opportunity to pick up market share in aviation overall. So we're excited about it. We think it's going to be a big procurement. And the timing, you know, should be in a nice position for us.

Speaker 2

And then, you know, I think you have at least a simple majority share in cargo applications, ports and borders globally. What are the biggest challenges to defending that outsized share over the long term?

Alan Edrick, CFO

Well, we don't take anything for granted. We like our market share. We like our competitive dynamic. dynamic. You know, when you are the market leader, of course, others, you know, come after you as we've done also in the past. But we think the strong technology position we have, the strong IP that we have, the great service organization, the great sales and marketing and relationships will allow us to continue to differentiate ourselves and still, you know, maintain market leadership in

Speaker 2

this area. How much of the business is very concentrated, whereas an installer or customer may integrate radiation detection from one player who I wouldn't even know to ask you about, and then just other different applications might be from a hodgepodge of investors. I'm just wondering how concentrated the the top of the market is from the integrated players like you

Alan Edrick, CFO

smiths light us to a degree yeah so you know each customer is different there are certain customers that will buy the whole enchilada so to speak from from one player such as such as ourselves there are other customers who might buy a particular product from one player and another product from another one and maybe another one from another one. I would say the majority tend to procure all from one single source. If they can, it's easier to manage one relationship and have one party ultimately accountable. But that's not how it is everywhere. So there are places that they'll have multiple vendors associated with a particular security solution.

Speaker 2

and just uh you know anything on the um international pipeline i think middle east has been one of the stronger uh markets there i think you know out the other end even if there's a little uh gating factor presently that i think you're suggesting it might be stronger than it would be otherwise um but uh just curious if you take a little bit of a trip around the world you know, how's the, anything interesting about the pipeline in the funnel there, project funnel?

Alan Edrick, CFO

Yeah. So without going into too much detail, of course, for competitive sensitivities, we believe that the international pipeline, you know, remains very strong. Our teams are excited about the Middle East opportunities that you're referring to, but also in the EU, in Latin America, and parts of Asia. Just generally speaking, unfortunately, the world's not getting a whole lot safer, as we read about in the news every day. But that plays well into what we do. So not just here domestically, but across the world. So we think the international opportunities remain

Speaker 2

quite robust for us. Okay, great. And I'm just going to see if anyone put a question in, Alan. let's pause for a sec um the i'm not sure about the system here some kind of checking to see if i can check for uh questions but um yeah and people on the line may know uh my email as well you can email me something um i do have an area i can check for questions There's nothing on display presently. And what have you been, your main investments in people in capacity over the past year? I know the RF has been really reinforced since you bought it because the growth there has been so profound. But, you know, any other, you know, you come up, you got an hour on the call, you talk about the questions people talk about. But any kind of behind-the-scenes developments that, while we have the time, would be worth bringing up. I imagine there's a lot of diligent blocking and tackling, but new CEO, relatively new. I know he's probably co-CEO for quite some time with Deepak.

Alan Edrick, CFO

Yeah, so you talk about investments. We continue to make significant investments in RD. Our goal is always to obsolete ourselves and to bring out new products. The bulk of our R&D investment is in our security division, which, of course, is our largest division, and we're quite excited about that. From a CapEx standpoint, we're not a highly capital-intensive business, but you're right. We did invest in some CapEx associated with increasing our capacity and some new facilities in the RF business, which has proved fortuitous because not just for the business itself that was growing, but now with the new Homeland Defense and further opportunities there, that additional capacity is extremely valuable. So we think we're in a great position. Our new CEO, A.J. Mara, who's been the CEO now for about 16 months, has brought tremendous energy to the operation. And we've seen, you know, significant, you know, top line and bottom line growth over that period of time. And, you know, and looking at things in different ways. Of course, he's been at the company for some time. And, you know, our former CEO, who continues to be our chairman of the board, was instrumental in so much of the growth that we've had. And AJ has helped carry that on and taken it even to the next level. So we're quite excited as we wind down our fiscal year here in the next couple of months and embark on our new fiscal year here come July 1st.

Speaker 2

Great. Okay. And I think last one for me, and then we'll close it a bit early. The RF acquisition, I think it came in with $50 million in sales or so a little over a year and a half ago and you know it's run rating maybe triple that now based on at least the quarterly run rate you said uh yesterday on earnings and uh you know then the the golden dome water is yet another sort of almost kind of exponential element the scaling prospects of the business look i imagine you had some identify all the like possibilities when you bought it but But did you think it could look like this?

Alan Edrick, CFO

Well, we're super excited about it. Of course, when we went through our diligence, we looked at things very carefully. Golden Dome wasn't even really a concept when we were looking at this a couple of years ago leading up to the acquisition. So the company itself, we thought, had outstanding opportunities to take their fantastic technologies, supplement their sales organization with a larger sales organization that OSI Systems has, both the U.S. and internationally, utilize the source of our balance sheet, which has been extremely helpful as well. So I would say we're extremely pleased with how the business is done. And I'd say the Golden Dome was frankly a little bit even on top of the already strong business that we acquired and was growing very, very nicely.

Speaker 2

Okay, and I forget if there were any earnouts in that deal, but is there an earnout structure to go?

Alan Edrick, CFO

There is. There was a two-year earnout for that, yes.

Speaker 2

Well, Alan, thanks for your time. I think you covered a lot of ground, and we're going to shave the last few minutes and give you a break. Thank you very much, Chris. Appreciate it.