OSI Systems, Inc. (NASDAQ:OSIS) Q2 2023 Earnings Call Transcript

Alan Edrick: Brian, this is Alan. Good question. And while we see some signs of the supply chain improvement, there’s still certain challenges. And you’re right, there’s a certain backlog that we have that we’d be able to convert to revenue on an accelerated basis, if not for those final missing components that are still supply chain-challenged. So yes, we still see nice strong demand. We’ve got a heck of a backlog. And as the supply chain issues begin to ease up, that should help as well.

Deepak Chopra: Brian, this is Deepak. Just to add on to what Alan said that it’s been a very good success. Kudos to the team. But I said in the last October call also, there is a big focus on the OEM customers who are trying to get away from dependence on China. And our facilities in Batam, Indonesia; Malaysia; our new facilities, expansion in India, we have a lot of opportunity to work with our customer base. We’re happy with us and feel confident that we can be there longer term for them. That’s been a big growth story, and that’s been — and we think that will continue.

Operator: And our next question comes from Larry Solow with CJS Securities.

Larry Solow: Just, I guess, a couple of follow-ups. On the large deal, it doesn’t sound like you have great 100% visibility on timing at all, but it does sound like it will be pretty much a few quarter type of delivery. I’m just curious at the maintenance part of the service part. How should we look at that? Is that like — I know your service revenue today is like 25% in total revenue. But is this more like a recurring piece, would be like a 10% to 20% type range? Any way to just kind of think of that? And then the second part of that question, is this government customer, I suppose, or private?

Alan Edrick: Larry, this is Alan. Good questions. This is a sovereign customer, so we like that aspect of it. We’re working with the customer currently on the anticipated timing, and we’ll have a better feel, probably by the time of our next conference call as to what that rollout may look like. But it will begin in fiscal ’24 and expect it to be substantial. While Deepak mentioned that it’s predominantly product sales and civil works, there is a service element of it, too. And you’re right, as the initial service contract ends and warranty period ends, there’s always a nice recurring revenue that comes with service and spare parts thereafter. So we are looking for that to be a nice recurring revenue base for us.

Larry Solow: Okay. And is this — and I know it’s not full turnkey. There are missing aspects that sort of somewhat quasi turnkey. But is it — could we assume this is a better margin than sort of your normal product sales?

Alan Edrick: Yes. So Larry, this is not turnkey. This would be a sort of a typical product sale, except on quite a large scale. As you know, we don’t go into margins on specific programs, but we do like the economies of scale and benefits that we get when we produce products and volume, so that’s usually beneficial to our margins.

Larry Solow: Okay. That’s fair. And speaking just on the service revenue on that topic. You had a nice little bump this quarter. I think service revenue grew like close to 10% and have high. And I didn’t look back, but it’s certainly like the last eight quarters, maybe more than that. So was there something — I know you’re sort of ramping up maybe a little bit more in Guatemala than you have. Or what — was there anything specific driven that?

Alan Edrick: Really, as some of our products rolled off of warranty and came on to service contracts, they accelerated some of the service revenue for us, and we think that’s maintainable. So as we look forward, we expect to have continued strong service revenues.