It's David, Morgan Stanley, and welcome, Alan, to the Morgan Stanley Tech Conference.
Thanks for having us, David.
Wonderful. So this is OSI Systems, and Alan has been the CFO since 2006.
That's correct.
The whole time.
Yeah.
Yeah. That's an amazing run at this great company. So yeah, maybe just give us, to start off, just warm us up with we'll dive into the different components in a second. But just give us a sense for, you know, the mission of the company is to drive solutions for a safer and healthier world. And so.
Yeah.
What was sort of the origins of the company and the mission and, you know, how it all fits together?
Yeah. That tagline all really comes back to, you know, our two primary divisions, Security and Healthcare, which are supported by our third division, Optoelectronics. And we make security products that really protect the world. And, it's difficult to turn on the news these days without seeing an event taking place somewhere in the world. And while quite unfortunate circumstances, it plays very well into what we do. And similarly, on the Healthcare side, we provide products that go into hospitals, medium and large hospitals. And, during COVID, you know, our products were needed at an accelerated pace. So it's really, that's where the tagline really kinda comes from in terms of solutions for a safer and a healthier world.
Makes sense. And then just at the highest level, is it from an in terms of what brings it all together, is there a technology core? Is there a kind of a sales and marketing core, R&D?
Yeah. The core technology really is our sensors, our detectors, our electronics components.
Yep.
That our Optoelectronics division makes. So in security and healthcare, where we sell to the end customers in Opto, we really provide sensors, detectors, and electronic components to some of the leading OEMs in the world, technology companies, aerospace and defense, medical, industrial, automotive. But that same technology, we also supply many of the key components that go into our security products and into our healthcare products. So through that vertical integration, we end up enhancing the margins over overall OSI Systems. We can be much faster and more responsive to our customer needs. And in some of the days of supply chain challenges, which we've particularly seen the last few years, it's been incredibly helpful for us and given us a real competitive advantage in the marketplace.
Right. All right. Great. So let's dive into, I think, the business that.
Yeah.
Probably OSI's best known for. So.
Yeah.
Just give us a sense for the security business, the products you sell, who you sell to, some of your biggest customers.
Sure. So our security business, which does represent over 60% of our revenues.
Mm-hmm.
Our brand is called Rapiscan Systems. You see it all the time when you go through airports and other locations. We're best known for the aviation setting because it's so visible, where we sell X-ray systems and CT systems for checked baggage, for carry-on baggage. And then we make trace detection products and the like. But the biggest and fastest growing part of our business is actually our cargo and vehicle inspection products, where we sell products for the ports, the borders, and critical infrastructure. These same products that we sell throughout the ports and borders, or more specifically some of the checkpoint products in aviation, we also sell to sporting events, hotels.
Mm-hmm.
Office buildings. So it's really quite a wide array. And the markets just kinda keep on expanding, unfortunately, as events take place in the world.
Yeah. So maybe just touch on that. So yeah, just over the last three or four, three-five years, obviously, from a geopolitical perspective, we all can read the news. But just broader tailwinds in your business, what drives that security business?
Well, a lot of things really drive it.
Yeah.
But events in the world, you know.
Yeah.
Some of the events we're seeing, unfortunately, right now in, you know, Ukraine, in the Middle East, you know.
Yeah.
Drive demand. Terrorist events, you know, drive demand. But fundamentally, there's just an increased need for countries to secure the borders, to secure the ports. There's always been a, you know, regulatory need.
Mm-hmm.
To secure airports and the like. But fundamentally, with the increasing risks taking place in the world, countries really wanna secure not just countries, but commercial organizations wanna secure themselves as well.
Is it primarily? Has it all been penetrated? Or are there literally some countries or certain markets that are actually putting in security systems for the first time? Or is it all kind of more of a replacement market every three-five years?
Yeah. Really a great question. And it really, the answer is, it really depends on which markets we're talking about.
Okay.
In aviation, of course, there are new airports being built. There's new terminals, which require new equipment. Aviation is largely a replacement market.
A largely replacement market, yeah.
For technological upgrades and the like.
Yeah.
But ports and borders, which is our fastest growing market and our largest market as well, is really in the early, early innings in its infancy, you know, here in the United States, as well as internationally. So we think the opportunities for growth in this area are extremely robust.
Interesting. Give us a sense for just, you know, if you're just trying to understand the market, the structure, how do you think about the main swim lanes of competition? And where.
Mm-hmm.
Where is OSI the strongest? And where maybe are you, you know, maybe number two or number three and you're trying to get to number one?
Yeah. So we would generally characterize ourselves as number one or number two in the industry.
Yep.
And then when you look at it by submarket segment, if you look at Cargo and Vehicle Inspection, we believe we're the number one player. And we believe.
Yeah.
We're the number one player by a long shot, which is a great place to be, especially in a big and growing market like it is today in its early innings.
Yep.
When we look at aviation, you know, we're probably number two.
Yeah.
You know, the biggest competitors that we have in throughout our business really ends up being Smiths Detection out of the U.K..
Yeah.
And Leidos. There's, you know, there's a few other companies as well. But this is really where we would look at our market position.
So basically, ports and borders and aviation, anything else? Or is that those are the two main?
Those are really the main areas.
Yeah.
I mean, we play in personnel screening, where there's a number of companies as well and various checkpoints that are non-aviation.
Right.
Again, in those things like office buildings and courthouses and hotels and sporting events, where there's probably a little bit more competition in that regard. But in the big areas of customs and border protection and aviation, there's a very finite amount of competitors.
I'm super interested in just the actual, you know, we've all been through a you know, some of us have done, like, a CT scan. And there's some pretty cutting-edge technology.
Yeah.
You know, on the medical side. But actually.
Yeah.
It's really interesting what is under the hood in the advanced level of capabilities that an OSI machine has. So give us a sense for just the actual technology that you actually have.
Yeah. So we have multimodalities, a number of different types of technology. You know, on the cargo and vehicle inspection side, we have the broadest technology in the industry.
Yeah.
We have what's called low-energy, medium-energy, and high-energy X-ray.
Okay.
We developed a lot internally as well as by acquisition. Some was brought in. We take those technologies and we're able to combine them into combinational technologies, being one of the industry's only companies able to do that. That's really given us a distinct advantage. While some of our competitors have to push a particular technology on the company, we can see what's right for the customer. We offer all types of different technologies, which has been really helpful. We invest a significant amount in R&D that's driving a lot of the.
Mm-hmm.
You know, the new technologies that we're coming out with. You're right. On the CT side, which is used predominantly for aviation, we've come out with some of the fastest high-res imaging out there. It's really quite exciting. We really think we're on the forefront. We always look to be the technology leaders in the security detection space.
All right. What about the business model side? Just how has the business model evolved in terms of how you price and sell? And then maybe.
Yeah.
Just before you go there, just how do you actually distribute? Is it direct? Or is it through channel partners?
Yeah. So to your last question first, we sell predominantly direct.
Correct.
We do have some distributors and agents in certain countries, where it makes sense to do so. But the bulk of our sales are on a direct.
Okay.
Basis.
Yep. Okay. In terms of just the business model evolution, is it?
Yeah.
I'm gonna assume the original business model was basically sell a direct product to a customer.
Mm-hmm.
That's kind of it, one and done.
Yes. So you're exactly right. So our basic business model in the past, it's always been we sell the product to the customer.
Yeah.
And then we get nice recurring revenue through the service and maintenance.
Service, yeah.
Which is key for us and gives a lot of recurring.
Okay.
Revenue for us.
What's the approximate? Is it 80/20, in terms of the value of the service versus the.
Yeah. Probably the initial sale.
Yeah.
You know, it's probably 85/15.
Sure.
What you end up getting is, over the life of the product out there, you probably get twice the original purchase price or pretty close to that through the recurring annual revenue over a 7+ year.
Okay.
basis.
That's a typical contract, seven-seven-ish years?
That's the replacement cycle typically.
Yeah.
Seven years. Sometimes it can be extended a little bit.
Yeah.
Longer with technological upgrades in between. But several years ago, we challenged ourselves, to your point, and said.
Mm-hmm.
You know, how can we expand the revenue potential? How can we expand the margins? And we said, well, what if there's a customer set out there that either doesn't have the capital, they don't have the money to buy the equipment? Or if they do, what if they don't have the operational expertise to run it? What if we do a full program for them? We call it a turnkey program.
Yep.
and it's ours. It's another version of a SaaS model, security as a service as opposed to software as a service. We were the first to come out with this. We've had a tremendous first-mover advantage. We've had a number of successes. What we do is, rather than sell the equipment, we manufacture the equipment. We place it at the customer site.
Mm-hmm.
We staff it up with our people. But we own the equipment. And then we charge a fee per scan or a fee per site per month. We enter into a long-term contract, the contracts that are arranged from five-15 years.
Yeah.
We get higher margins.
Mm-hmm.
on these. So now we got great recurring revenue at more attractive margins, which has been a tremendous success story for us. And one of the best things that came out of it was a proprietary software that we developed, called CertScan, which has.
Yeah.
Really been an industry first and has given us a clear differentiation in the marketplace.
Give us a sense for the functionality of CertScan.
Yeah. So CertScan is really a command and control center. We've using the images that we were able to obtain through our turnkey program.
Mm-hmm.
That gave us a, you know, advantage over our competition with millions of images. We're really able to try to perfect this software. While we predominantly use this software in our turnkey programs, we've now taken it out as a standalone SaaS, software as a service, model for us. Again, just in its infancy, we think it's gonna have tremendous growth potential for us at SaaS-like margins, increasing our recurring revenue percentage significantly. It's not just helpful as a standalone product, but it continues to help us in our actual product equipment sales. For instance, we won a couple of very, very large contracts in the last fiscal year. One of the big reasons why we won those contracts for the equipment was because it included CertScan as well that no other company could provide.
So while we thought we might share some of those contracts with our competition, we ended up becoming sole-sourced and winning 100%. We believe CertScan was a big contributor to that decision-making process on the part of the customer.
Wow. In terms of the, so back on that, so that's a SaaS product, but that grew out of just the overall evolution of the turnkey business model. And so with the turnkey.
Mm-hmm.
Business model, how should we think about that and how prevalent that will be across the entire security business? Is it kind of like one or two contracts a year? Or is it something where you're turning the entire company to do turnkey?
Well, you know, ideally speaking, we would love if every customer went turnkey.
Okay.
In the reality, most customers prefer to still buy the equipment themselves.
Okay.
And operate it. And then we get a nice service contract. But we do really look at all customers, particularly on ports and borders. But now moving into aviation, we won our first aviation turnkey, more recently, as really potential opportunities for turnkey. So yes, we'd like to migrate it.
Yeah.
Even faster. But it does represent a huge potential for us.
Okay. You mentioned some of the big contracts. Can you just drill into that? I think you mentioned two big contracts that you signed. I think one was $200 million. One was $500 million.
Yeah. You're exactly right.
Okay.
So over the past 12 months or so, we signed two what we consider very sizable contracts for us, $200 million-plus and $500+ million, as you mentioned. The $500 million contract was in Mexico with the Mexican army called SEDENA. And the $200 million contract was also an international contract. Both of these, while we thought, as I alluded to a little bit earlier, we thought we might share these awards with some of our competitors, ended up sole-sourcing to us, to OSI Systems.
Some of the reasons we think for that, so for instance, the $500 million contract with SEDENA in Mexico, you know, Mexico talked, you know, to the United States, who gave us a, you know, a tremendous reference in that regard, working with CBP, Customs and Border Protection, which is an outstanding, you know, customer of the company.
Mm-hmm.
These contracts have been great. We're just starting to scale them up right now. So it's providing tremendous visibility. We're sitting today at a record backlog or at the end of our fiscal year at a record backlog, which gives us the best visibility we've ever had in our company's history. So it's exciting. We've increased our capacity and our throughput significantly to scale up for these contracts. And our factories are rocking and rolling.
But you would say the main driver I think you mentioned one of them was the CertScan capability relative to your competitors just simply didn't have the.
S2's, yes. Our competitors didn't have CertScan. We think that was a huge differentiation.
Yeah.
For us.
Mm-hmm.
That landed us 100% of that $500 million contract as opposed to potentially sharing it.
Okay.
With one or two competitors.
Was that aviation? Or was that in ports and borders?
This was on the border side.
On the border side.
This was for borders.
Yeah.
Yes.
Okay. Both of them.
Yes. Both of them were in that area.
Okay.
Okay.
Great. Thanks. What about just more on the geopolitical side? So.
Yeah.
You know, Israel and Ukraine and just what's it been like, you know, on the ground? And is that how much of that is actually driving your business? You know, obviously, we see the headlines.
Mm-hmm.
But actually, when you bring it down to the, you know, 500 ft level, like, is it actually on the ground driving your business?
Well, it's certainly helping our business.
Yes.
It hasn't resulted in material new sales.
Okay.
As of yet.
Yeah.
But, you know, the Ukraine conflict, they're certainly looking to secure their internal borders.
Yeah.
They've talked to us.
Yeah.
There's business coming there, not just in Ukraine.
Mm-hmm.
But in their neighboring countries as well. It represents, you know, significant opportunities. We're in discussions with them regularly. You know, similarly, in the Middle East, you know, very unfortunate, in the world.
Yeah.
But we're also looking at screening folks coming over from Gaza into Egypt, screening folks going back into Israel. It's, you know, supplying some nice opportunities. So nothing that's necessarily driven our business so far in this fiscal year, but stuff that's gonna lead to, we think it's gonna lead to, some substantial opportunities.
In the future. Yeah. Okay.
Yep.
I guess I have to ask just from a federal budget perspective.
Yeah.
Just, what's it like? And, you know, I don't know. I don't wanna ask you for your prediction.
Mm-hmm.
Just, you know, how are you planning for the current, you know, situation with the federal?
Yeah.
Cycle? Yeah.
So we would, of course, love to see the U.S. federal government pass a budget.
Sure.
You know, it's important to remember that more than half of our security business is outside the United States.
Okay.
You know, while they're operating on continuing resolution here in the United States, we continue to work with them on our existing programs, which has been fantastic. But the new federal budget will then allow for new programs to be funded, and the like. So that's important to us. We think we stand in good position to receive some substantial contracts, you know, if and when that does occur. We know it will happen. It's just a question of time.
Sounds good. All right. So let's maybe move into the healthcare side.
Sure.
Yeah. So maybe just do the same thing, just level set for us, the core product areas within the healthcare business.
Yeah. So our healthcare business, sort of important to remember, it represents, you know, 12% or so of our revenue. So it's our smallest division. But it's our highest contribution margin division. Every incremental dollar that we sell in healthcare, a big amount drops to the bottom line. In healthcare, we sell to medium and large hospitals.
Direct?
Direct.
Okay.
Yeah. So we sell mostly direct. We sell direct in the U.S. and Western Europe and through distributors in other parts of the world. We're also direct in Canada, but we sell as patient monitoring products.
Mm-hmm.
And cardiology products. And what the patient monitoring products are is the monitor that you might see at your bedside while you're sitting in the hospital. That's connected to a central station where a nurse can look at multiple rooms simultaneously, which is connected to our telemetry products so the patient can be continuously monitored as they move throughout the hospital, which is also connected to the hospital's electronic medical records. So it's really a fully connected solution, an important area for us. In hospitals, you know, it's predominantly a replacement market.
Yeah.
As there are some new hospitals and new wings being built. But it's mostly a replacement market that we're dealing with in both, patient monitoring as well as in cardiology.
Mm-hmm. And once again, yeah, it gives us a sense for the competitive landscape in the different submarkets that you.
Our biggest market in healthcare is patient monitoring. You know, together with the service and the supplies and accessories.
Mm-hmm.
The nice recurring revenue that we get, Patient Monitoring can represent, you know, approximately two-thirds of our overall revenue.
Yeah.
Unlike security, where we're number one or number two in the market.
Mm-hmm.
In healthcare, we compete against, you know, a few of the big boys, like.
Okay.
Like Philips and GE.
Okay.
We're not naive enough to believe that we're gonna overtake, you know, either one of those.
Mm-hmm.
But we think there's a great opportunity to capture some additional market share. We're coming out with some new products, that we think will really help that, as well.
How about cardiology?
Cardiology is a bit more fragmented business. We also compete against folks like, Philips and.
Yeah.
GE and former Hillrom, but it's a, it's a much more fragmented market.
Okay. You know, in terms of the recent results on the Healthcare side.
Mm-hmm.
In the last quarter, just give us a sense for the, you know, the environment with hospital spending and,
Yeah.
I guess when do you what's going on there? And when do you think.
Yeah.
That'll recover?
So the hospital spending environment, CapEx spending environment's been a little bit more challenged.
Mm-hmm.
Hospitals' own balance sheets have been tougher. So as a result, if they can defer certain CapEx spending, they are. They also pulled a lot of spending forward.
Mm-hmm.
When COVID first occurred, they brought a lot of the patient monitoring purchases they might have made in future years into 2021.
I see.
2020, 2021, 2022.
So you're experiencing a pull forward. That's.
That's exactly right.
When do you think that?
Yeah.
You know, normalizes.
You know, we think it's beginning to normalize now.
Okay. Yeah.
You know, and then we expect really the more sizable growth for our own business to be coming with the kind of the next-gen really the launch of our next-generation platform.
Makes sense.
Yep.
That's obviously a CapEx burden on these hospitals. And so you've been doing some interesting things to try to lessen that burden.
Yeah.
Yeah.
Yeah. Exactly. So, you know, hospitals, because they've had a challenging capital expenditures, budgets, we've been saying, "How can we operate within their own operating budgets?
Mm-hmm.
To that end, we created a model we call the equity subscription model. For many years, hospitals have sometimes rented equipment for companies. When they rent equipment, they sometimes end up paying 2-3 times what they would actually pay if they just bought the equipment itself.
Yeah.
Through our equity subscription model, it's kind of a rent-to-own model where they're paying us under their existing operating budgets, which is easier to kinda get through their environment. And then at the end, they can own the equipment for a certain transfer cost, which is substantially less than the traditional just renting the equipment.
than just renting it.
So.
Upright. Yeah.
Yeah. So we've seen great receptivity, you know, at the highest levels of some of these healthcare organizations. So brand new model for us. We've already gotten some nice wins on it. But we expect it's gonna be significant for us going forward.
Great. On the margin side, why is the Healthcare division the highest contribution margin segment? What drives the margins there?
I think it's the nature of the industry. You know, when you look at medical devices in Healthcare, because of the level of R&D spend, because of the sales and marketing organizations required to sell the product, they generally carry higher margins. It's a very rational competitive landscape. So it's not a race to the bottom, as you see in some industries. Everybody kinda keeps pricing.
Yeah.
You know, relatively stable, not to say, you know, for certain deals, you might go a little bit more aggressive.
Sure.
It's a very rational marketplace. These are the type of margins that you tend to see in the medical device arena, which is, you know, a bit more favorable than we might see in our other segments.
Makes sense. All right. Finishing off.
Yeah.
With the Opto side. So Opto is call it, what, 30-ish%?
Yeah. A little bit less than that.
Okay. A little bit less. Okay.
Yeah.
Great.
Yeah. So just.
Yeah.
Refresh our eyes on what are the core products. Yeah. So in Opto again, we make sensors and detectors and electronic components.
Yep.
We're an OEM manufacturer. So we sell to the leading technology companies, mainly right here in the Silicon Valley in San Francisco. We sell to the leading aerospace and defense companies and medical companies, automotive, industrial. We get engineered into their products. And once we're engineered into the products.
Yeah.
It tends to be very, very sticky. We can be there for the entire life cycle, of the product unless, you know, we screw something up, which, knock on wood, rarely ever happens. So many of our customers have been with us for well over a decade, on particular programs. And then we try to mine, you know, new programs from them.
Mm-hmm.
We operate in multiple locations in a lot of low-cost jurisdictions. So we do a lot of our manufacturing in Indonesia, Malaysia, India. We also have U.S.-based operations, as well as in the U.K. and a New Mexico location. So it's been a great area for us. Our third-party sales are great. And of course, fundamentally, that vertical integration that you started the conversation with is paramount to kind of everything we do. So many of the key components, again, that go into our security and healthcare products are made by our Opto division and sold at arm's length pricing.
I see. Right. So do you give the percentage publicly?
Yes. It's a.
What percentage are you selling to yourself versus externally?
Around 85% of our sales are third-party and about 15% are intercompany.
Intercompany.
And although that 15% gets eliminated in consolidation.
Mm-hmm.
The margin remains in-house and stays with us.
Okay. Got it. You recently established a location in Mexico on the Opto side.
Yeah. Very exciting for us.
Yeah.
So.
You gave us a sense of that. Yeah.
Yeah. So you know, as just mentioned, we do a lot of our manufacturing in Southeast Asia.
Mm-hmm.
We don't do anything in China. But a lot of our manufacturing in Southeast Asia. And our customers have been, you know, clamoring now for nearshoring opportunities. So in December, we now have a new location in Mexico and.
Mm-hmm.
In Tecate, Mexico. So we're, you know, we're very excited about that. We've got some new customers there. We're bringing on a number of new customers. We think that's gonna lead to some nice growth, in our Opto division as we move into fiscal 2025 here in about four months.
Mm-hmm.
Our customers couldn't be happier. So now we have a combination of offering them manufacturing in places like Batam, Indonesia, and Malaysia, but also in Mexico for those who want the nearshoring capability.
Why is the nearshoring so critical for in that, you know, to the global market? Lots of products are manufactured everywhere, Asia, the U.S., etc.
Yeah.
Why why is it so critical?
Some customers like the proximity. You know.
Yeah.
U.S.-based customers like to be able to just go right over the border to Mexico.
Right. I see. Yeah.
As opposed to flying, you know, half-halfway across the world. That, that's a huge thing for them. Some like the shortened logistics time through.
Absolutely.
You know, when you manufacture it, shipping it is, you know, far shorter rather than doing ocean-bound freight. It can be a much briefer period.
Makes sense. So you start off, hitting kind of the idea of the turnkey business on the security side. And then you actually mentioned you have a kind of a pseudo-turnkey business on the healthcare side with your rent-to-own model. And so on the recurring side for the Opto side obviously, you probably don't have something like that. But the business is inherently recurring. So give us a sense for how much recurring revenue do you have in the Opto side versus healthcare and security?
Yeah. So when we look at it, you know, and it often surprises people, you know, we think about maybe around 45% of our overall revenues.
Overall business. Yeah.
Are recurring.
Yeah.
When you speak to Opto.
Yeah.
Specifically, those repeat revenues.
Mm-hmm.
We think it's well over 80%. In fact, you know, for customers who buy $1 million or more from us the last three or four years, that repeat revenue is 100%.
That's because you're.
It's designed into these products.
Precisely. I see. That's precisely right. Okay.
Yeah. So very exciting for us.
That's great. All right. So just in terms of just going back to core technology, you know, what's.
Yes.
What's next on the horizon here? What's cutting edge, that you're gonna come out with in the next few years? I mean, you don't have to mention specifically.
Mm-hmm.
Just, you know, thematically, just what are you excited about across the three different divisions?
Yeah. So, you know, we spend a nice amount in R&D. Most of the R&D that you see reflected in our P&L is in security and healthcare because the Opto R&D that we spend in Opto is generally customer-funded.
Yeah.
You know, when you look at healthcare, the exciting thing is we're coming out with the next-generation patient monitoring platform. We've been selling the same platform for a number of years. This will be our first new platform in quite some time.
Okay.
That's got a lot of remote monitoring capabilities.
Mm-hmm.
We think it's gonna really make us state-of-the-art. That's where a lot of our development is going.
Yeah.
Quite exciting. On the security side, a lot of exciting things we're developing there. Unfortunately, we can't talk to them right now.
I see. Yeah.
Until we release it. But that's where the bulk of our R&D spending is. And like we've shown in the past, which has allowed us to become the market leader, you know, in the cargo and solutions business, a lot of the stuff that we're developing, we think will allow us to not only, you know, be the market leader in cargo and solutions but ultimately to be, hopefully, the largest security detection company overall.
Great. Last quarter was very strong. You surpassed $1 billion in revenues. And then, you know, record quarter.
Yes.
From a top-line perspective.
Yes.
So yeah, just give us a sense for just more from a financial lens, you know, what are some of your core priorities ongoing into 2024?
Yeah. I mean, it couldn't be more exciting for us. You're right. We just had a record quarter on the top line. We had, I think, 26% revenue growth, which we leveraged a significantly faster operating income and EBITDA growth, which is always sort of our core mantra. We always wanna grow our bottom line faster than we're growing our top line, leveraging our infrastructure. We sit here with, you know, the best visibility that we've really had in our company's history by virtue of the backlog that we have.
Yeah.
But we also have an outstanding pipeline of opportunities. So as we think about, you know, 2024, to your question, for us, it's execution, execution, execution, you know, just about executing. And our teams have historically done a great job at that. We see no reason why that's not gonna continue. And then just as importantly, our sales teams, which are doing, you know, such a fantastic job with new business development opportunities, wanna continue to land those strong bookings, to give us visibility out, you know, for an extended number of years. So that's really our primary focus on an organic basis that we're quite excited about.
Great. What about just more on the balance sheet side? Just give us a sense for.
Yeah.
You know, I think you have a revolver in place and just your broader capital allocation strategy in any given year and maybe going into 2024.
Yeah. Our balance sheet is pristine. We have low net leverage, overall.
Mm-hmm.
We'd like to use that, on an opportunistic basis. In the past, with the free cash flow that we've driven, we've done, you know, some significant amounts of stock buyback. We've done acquisitions. You know, any excess cash we have, we've often used to, you know, pay down debt. But again, that net leverage is low. You know, right now, as we're growing so rapidly, there's working capital usage as we're, you know, growing, you know, inventory and receivables and the like.
Mm-hmm.
But that's exactly what we wanna put our balance sheet to work for. So from a capital allocation standpoint, we don't think we're limited to, you know, any of the three. We think we can continue to do M&A. We can continue to do stock buyback. We can continue to invest in capital expenditures. We don't think, you know, it's mutually exclusive.
Great. Just have a couple more questions. I'd love to open it up to the audience here. One of the potential uses would be acquisitions. Can you just remind us in history how many acquisitions OSI has made and how critical has that been as a toolkit to kinda grow the company?
Acquisitions are a big part of our strategy.
Yeah.
Acquisitions are in our DNA. You know, we do acquisitions. Most of the acquisitions we do are creative out of the gate or very soon thereafter, usually very strategic, that will fill a channel need.
Mm-hmm.
A technology need.
Mm-hmm.
Maybe take out a competitor. We've had some, you know, examples of some extraordinary acquisitions that we did. We took out one of our publicly traded competitors called AS&E, a few years back. And we can only characterize that as a grand slam. You know, it brought that leading low-energy X-ray technology to us that we blended with our medium energy and high energy, giving us really the leading cargo and solutions, you know, company today. It brought us some incredible talent to the organization, which has really helped us as well. So that's just kind of an example. So sometimes the acquisitions we've done have been larger. Most of the time, they've been more bolt-on technologies and companies and the like. As we look forward, acquisitions and M&A are a key part of our strategy. We see nice organic growth going for us.
But we'd like to turbocharge that, with some acquisitions as well, utilizing the strength of the balance sheet, as you mentioned. So that will clearly be part of our strategy going forward.
You have three main pillars. Do you think you would ever think about a fourth pillar for OSI, that brings it all together? Or do you have enough to chew off with the three?
You know, we believe that, the three main pillars are sort of the right pillars for us.
Yeah.
We do not foresee necessarily adding a fourth pillar. Never say never. But it's not part of our current line of thinking.
Yeah. I understand. Go back to all right. Actually, let me just see if we have any questions from the audience. No? Great. Let's go back to on the international side. You know, obviously, we at Morgan Stanley are very excited about areas like India, as an example for you know next 10-year growth. Where should we see where you are underleveraged today? And where should we see OSI really across any of your businesses?
You know, interesting you mentioned India. We agree with Morgan Stanley.
Yeah.
We see India as a tremendous opportunity as well. You know, we have a base there and a beachhead.
Mm-hmm.
Predominantly in our security and Optoelectronics industries. But we see huge opportunity, on the security side in India, with the expanding number of airports there, ports and borders, very much an underpenetrated area. So that is a huge part of our strategic direction. In fact, as we sit here today, our CEO happens to be in India right now.
Okay. Yeah.
So India's a big part of our overall strategy. And.
We currently know no existing kind of revenue traction today. But.
No. I wouldn't I wouldn't say that. No.
Yeah.
We do revenues.
Yeah. You are.
We have been selling into India for years. But we believe the opportunities are multiple times greater.
Absolutely. Yeah.
Of going forward. So it's a real important area for us.
Mm-hmm.
As is much of the Asia-Pacific region.
Mm-hmm.
We also look at the Middle East as very fertile territory throughout the Middle East. Right here in the United States, we continue to believe there's, you know, tremendous opportunities for us, particularly at the borders. Latin America, much of Latin America continues to be underpenetrated as well, notwithstanding the big Mexico contract we talked about earlier. When you look at, you know, Central America, South America, and the like, still tremendous opportunities.
Great. So yeah. Let's maybe just wrap it up with a wrap-up question. Just where do you see OSI?
Mm-hmm.
You know, kinda longer term, next five-10 years?
Yeah. Yeah. Great question. I mean, we think we've had some nice success over the past several years. But we really think the best is yet to come. You know, as we look forward, I think we're gonna migrate more and more, you know, to the services element of the business.
Yeah.
That recurring revenue that we were talking about and the SaaS portion of our business is gonna become a bigger and bigger part of our business, which is extremely exciting for us. The SaaS margins and the service margins in general carry are much stronger than product margins. So as we look forward, you know, though security now is well north of, you know, 60% of our revenues, we expect it to probably continue to be the fastest-growing part of our business. And notwithstanding acquisitions, we expect that to probably increase more and more. And, you know, we couldn't be more excited as we look out over the next five years with our product roadmap, the pipeline of opportunities, some of the big replacement cycles that are slated to happen here in a few years. You know, we think the future is extremely bright.
All right. Thank you very much.
Thank you.
Yeah. Really appreciate it.
Thanks a lot.