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

Larry Solow: Okay. Fair enough. And then on — just on security. You mentioned margins were — you guys said you were pleased, and you thought performance was good there. So it just seems like it’s predominantly a mix issue there. I know they’re up a little bit sequentially and even year-over-year. But if you look back the last couple of — in the back half of last year, I know margins were quite stronger. I just want to clarify, you kind of expect that same — it feels like that same kind of cadence this year?

Alan Edrick: Yes, Larry, this is Alan. We do expect the operating margins for security to be much stronger in the second half than we saw in the first half. As Deepak mentioned, a few pushouts. We’re a little bit more weighted to Q4 than Q3, and we would expect strong operating margins in each of those quarters.

Larry Solow: Okay. And just to follow up on Brian’s question on the Healthcare, on the sort of the patient monitor side. ’24, ’25, is that — would that be like a whole next-generation, a hold swap out? Or would that just be partial? Or any more color on that?

Deepak Chopra: Well, it’s Deepak here. It’s not like an overall pushout kind of a thing. You add on to your products that’s more applications, more connectivity, better results, more reliability and more features. So that it will be — it will start coming in late ’24 and ’25. But when you do that, you basically are looking at what we call, and that’s why there’s significant R&D investment. It’s a significant, what we call it, upgrade to the next generation for the next 10 years, the next generation of the whole system.

Larry Solow: Okay. Great. Last question, just on free cash flow. Alan, you mentioned it was up a little bit on the first half year-over-year, but basically pretty close to flat last 2 years in the front half. And usually, I think the front half is a little bit better for you guys historically. So what’s your thoughts sort of in the back half of this year for cash flow and then even going forward just from a high level over the next few years?

Alan Edrick: Yes. Great question, Larry. And we’re really excited about — we move into fiscal ’24. In fiscal ’23, outside of this new large contract, we would say the opportunity for strong operating and free cash flow in the second half would be extremely robust. That being said, with this large contract and prepping for fiscal ’24, there’s likely going to be a substantial investment in inventory as we begin to produce and manufacture these products. So we’ll probably see a little bit more muted cash flow than we’ve historically seen in fiscal ’23, with the opportunity for a very strong cash flow in fiscal ’24/’25.

Operator: And our next question comes from Christopher Glynn with Oppenheimer.

Christopher Glynn: So I had a couple of questions also on this kind of convergence of 2 large projects, the CBP and the new international win, just addressed one on the free cash flow side. But I’m curious, as you have these 2 large programs set to both be materially active in fiscal ’24, curious about your capacity. And are you walking away from any nice margin, kind of $0.50 pieces of business to execute on these $10 bills?