All right, welcome everyone to the OSI Systems presentation. Here with Alan and AJ from OSI, as well as, Chris Quinn, lead analyst here. We've been covering OSI for about four years. So I'm gonna turn it over to Alan and AJ for a presentation, and then we'll open it up for Q&A. Take it away, guys.
All right. Well, thank you, Patrick. We have an exciting story to share with you today. So without further ado, let me jump into it. So OSI Systems, as many of you may know, you know, we have three divisions. We have a security, a healthcare, and an Optoelectronics business. In security and healthcare, we sell to the end customers, whereas in Optoelectronics, we sell predominantly to the Fortune 500 in a variety of industries, you know, including aerospace and defense, medical, industrial, automotive, technology, and the like. I n addition to selling to these third-party companies, our Opto division also makes many of the key components that go into both our security products and into our healthcare products.
T hrough that vertical integration, we're able to control the supply chain better, enhance our overall gross margins, and be a bit faster and more responsive to our customer needs. T hat's kinda how the three businesses, you know, tie together. We're a June fiscal year-end, so we've got, you know, just under two months to go in our fiscal 2024. What you see here, pictured to the right, are our fiscal 2023 numbers, where we did about $1.3 billion in revenues, and security represented 59% of our overall sales. Our security business has been growing extremely fast, and as a result, for fiscal 2024, you know, the security division will represent an even higher percentage than it did in 2023. We're a very global company.
About half of our sales in the 2023 time period were in the U.S., and about half internationally. We're seeing a little bit more of a growth on the international side in this fiscal year than we were in the previous fiscal year, but that mix will change from a year-to-year perspective. You know, when we think about our company, we do think we're a highly compelling investment opportunity. We've got some great macro tailwinds, you know, particularly in our security business. It's hard to turn on the news without seeing something going on in the world from a security concern basis. W hile that's unfortunate for the world, it does play well into a lot of the things that we do.
We've been focused more and more on our recurring and our reoccurring revenues across all three of our business lines, and we've seen that percentage increase nicely and expect to see it increase going forward as well. In the security business, you know, today, we're the number two player. We've been taking market share in a growing market, and, you know, we think we're well-positioned to become the number one player in the global screening and detection market in the future. We invest significant amount in R&D. We have a large installed base, which really validates our strong leadership position and also gives us very good recurring revenues from service. Strong customer base and a strong management team. Some changes taking place there that, I'm sure there might be some questions on in the end.
You know, when we think about our business, fiscal 2024 really does represent a step function change in scale for us. We've given guidance that we'll grow our top line by more than 19%. Most of that is organic growth, driven by tremendous bookings and a very strong backlog. We look to leverage that growth to even faster operating income and earnings growth. We've given guidance that we'll grow our adjusted EPS in fiscal 2024 by more than 30%.
You know, we finished last year with a record backlog of $1.8 billion, and even with the very, very strong revenues that we've shown through the first nine months of this fiscal year, with the strong bookings and book-to-bill that we've had, you know, we've maintained that $1.8 billion backlog, which is a great position to be in and gives us great visibility as we move into our fiscal 2025 year in just a couple of months. We have a very strong balance sheet with low net leverage overall, giving us good flexibility to act opportunistically in many cases. A couple financial slides, and then we'll jump into our overall businesses. On the revenue side, you know, we've been a consistent grower over the years.
Took a little bit of a pause on that during, during COVID for, for some obvious reasons. Began to see some acceleration in our fiscal 2023, where we grew over 8%, and, and this year, we expect to grow over 19%. What you see pictured here to the right is something we're really proud of, that, you know, despite what economic cycle we may see, or even when we have a period of flatter revenues, we continuously grow our earnings per share. T his year, we're growing it we expect to grow it at a clip of, of over 30%, which we think we're well positioned to achieve. I mentioned a little bit earlier about recurring revenue, and this is something very, very important to us.
In security, over 40% of our revenue is now recurring through our service, through our turnkey operations, consumable, and our software-as-a-service model that we call CertScan. In healthcare, you know, close to a third of our revenue, we consider to be recurring as well. T hen in Optoelectronics, while it doesn't meet the standard definition of recurring revenue, more than 80% of our revenue is repeat revenue, which is quite nice for us. And pictured on the right, you just kinda see that growth in the backlog, you know, through our fiscal 2023. So it's given us really, really nice visibility as we look outwards. From a cash flow perspective, we've historically been a very strong cash flow generator.
This year, with the big growth that we've had in revenues and projecting to continue to have, we've used a lot of working capital, investing in receivables and inventory. A s we move into fiscal 2025, you know, we would anticipate again being a strong free cash flow generator. What have we done with that cash? We've typically been pretty active in our stock buyback program. We've done some M&A and some CapEx. Any residual cash that we have, we'll use to pay down our borrowings. We have low leverage. At the end of our March quarter, our net leverage was about 1.5, so it really puts us in a nice position.
We talked a little bit about the macro tailwinds and the growth opportunities that we have in front of us. You know, on the security side, there really is a strong, strong global demand in both the private and the public sector. This is exciting for us. It's giving us a huge potential pipeline of opportunities that we're looking to capitalize on. We've been quite successful in the bookings that we've achieved both this year and in prior years, which is allowing us the good recurring revenue and the good straight-on product revenue as well. W hen we look for some of those growth opportunities, we see that both on the product side, in some of our large integrated turnkey solutions, in some of our SaaS offerings, we really think we're well positioned.
On the Optoelectronic side, you know, our team has really done an outstanding job over the years. The last quarter, our Q3 was a bit of an aberration, where we saw some of our customers right-sizing inventory levels, where they may have done some risk mitigation buys in the past with some supply chain issues. We expect Opto to bounce right back. We've got a great competitive offering where we can manufacture globally. We manufacture in a lot of low-cost jurisdictions, where we can share some of those cost savings with our customers, coming out with a number of new technologies and new products for our customers as well. And in healthcare, of course, there's an increasing demand with our aging population.
Our business, called Spacelabs Healthcare, has a number of multi-year contracts with leading GPOs or group purchasing organizations. We've been investing heavily to come out with a new patient monitoring platform that we're excited about for the future. We've done a couple of small acquisitions in this business, which has really helped differentiate our product offering. A t the heart of things, we are a technology company, and we look at technology as a primary competitive advantage. We invest a significant amount in R&D, mostly in our security business and in our healthcare business, because much of Opto R&D is funded by the customer. The R&D that we've done has come out with a number of new products in the security area, which has allowed us to have such significant growth.
We think that's been a major contributor for us. It's also allowed us, in the healthcare side, to grow on the cardiology side, and, we're looking forward to some new patient monitoring introductions, in the future. We are a global company. We're headquartered in California, but we manufacture in many locations throughout the world, so not just the United States, but in places like Malaysia, Indonesia, India, Mexico. We have sales offices across most continents and R&D facilities, as well. So let's first start off talking about our security business. Our security business, which goes by the primary brand of Rapiscan, but also AS&E and S2 Global, really is a leader out there. We're clearly the leader in cargo and vehicle inspection for inspecting at ports and borders and critical infrastructure. We're quite strong in aviation.
We're the leader in security as a service, or what we call turnkey projects. We have a large, large installed base out there, which is nice for us, because being the incumbent, we're able to often win the replacements. We get invited to nearly every tender that comes out, given the strong brand reputation for us, and it's really given us a, a significant amount of, of recurring service revenue. When we look at what we do, we really provide an integrated solution. You know, we have these advanced security screening systems, we have cargo and vehicle inspection systems. We think we have the most diversified product portfolio in the industry.
U nlike some who may have to push a particular technology on a customer, we have nearly all of the technologies in nearly all the configurations, so we can see what is right for the customer, and tailor it to their needs. In addition to having the right products, we're also the, the clear leader in screening solutions through our S2 brand, where we do turnkey projects and others, which has given us some nice long-term contracts for recurring revenue at, and healthy margins. Talking about turnkey, so we view this as a, as another form of SaaS, so rather than software as a service, it's security as a service. We were the pioneer in this space. We've won some major contracts on the international front for screening at ports and at borders. We've now won our first aviation contract as well.
Great area for us. This is something where, rather than selling the equipment, we manufacture the equipment. It generally sits in our balance sheet. We staff it up with our people, and then we charge a fee per scan or a fee per site per month, enter into long-term contracts. They've generally ranged from six years to 15 years, so we get some real nice, recurring revenue. It's a longer sales cycle, so it takes a little bit of time to land the contract, but once we do, it gives us great recurring revenue, at generally a higher margin. So a very exciting area for us and quite differentiated from that of our competition. When we look at our recurring revenue, the bulk of our recurring revenue comes from our field service.
W e'll sell the product, and after it rolls off of warranty, we get substantial field service, and field service also carries higher margin. Lot of opportunities to continue to grow our field service revenue. The middle area is probably our fastest-growing area, well, the middle to the right. Security as a service and software as a service, you know, two versions of SaaS for us, and these have been, you know, significant contributors to some recent wins that we've had. We had a big win for over $500 million in Mexico, another $200 million plus international win, and even another $100 million international win, all relatively recently. And some of the CertScan, which is our proprietary software for this, was a big contributor to us winning these opportunities.
W e do have a major focus on recurring revenue, which also carries higher margin, and we think is a big part of our future growth. When we think about our biggest product area, it's these cargo and vehicle inspection systems that you see pictured at the right here, where we're inspecting at borders and at ports and at critical infrastructure. We have a variety of different technologies, ranging from high energy, medium energy, low energy, X-ray, and backscatter technologies in a variety of configurations, that really enables us to see what's best for the customer. We've been winning, you know, very, very significant deals, you know, throughout the world. In the U.S., we've been winning with CBP, Customs and Border Protection.
We've had a big order in Mexico with their army called SEDENA, but really across most major continents. Big growth area for us. It's really what's led to some of the most significant growth that we've seen in fiscal 2024. We've seen growth in our other product lines as well, but cargo has really led the way. When we look at a couple of the more recent contracts that we've had, in December of fiscal 2023, we won a $200 million plus order. And we followed that up a few months later with a $500 million plus order, and more recently, a $100 million order.
We've started to fulfill and begin delivering on the $200 million order and the $500 million order, which has been contributing nicely to our growth here in fiscal 2024 and will continue to do so in the future. There'll be great tail of service revenue on each of these contracts. T hen more recently, you know, we won this $100 million rail scanner and ZBV order, which we're quite excited about as well, you know, just continuing to fill the strong demand and strong pipeline of opportunities that we've seen. Moving a little bit to the aviation side, we provide products for checked baggage as well as checkpoint.
Checked baggage, which is most commonly referred to as hold baggage, we make a product called RTT, stands for Real-Time Tomography. It was the first product designed specifically for security applications, rather than taking an existing medical CT technology and adapting it for security. It's been a great market for us. We've been selling it really everywhere in the world but the U.S. We think the U.S. represents a big opportunity as a replacement cycle will be starting here in a few years and will be a major replacement cycle. Another area that sometimes flies under the radar that we are doing extremely well is in air cargo. So selling to many of the commercial companies, you know, such as DHL or FedEx or UPS, as well as airlines.
We've been doing extremely, extremely well in air cargo. This is a certified product for us. We look to—we, you know, this is growing nicely for us as well as, as we look to the future, and we think that, you know, some of the biggest opportunities will be right, right here in the United States as that replacement cycle comes, as these machines in the U.S. have been out there for a significant length of time. What we're most often associated with is our baggage and parcel inspection systems. What you see pictured to the right, you might see at an airport, but we sell probably 5-7 x as many of these machines outside of airports, into courthouses, office buildings, sporting events, cruise lines, all these types of different venues. Great area for us.
We're one of the industry leaders in this area as well. Pictured at the bottom right is a CT technology that we're selling into airports as well, predominantly outside the United States. So a real good area for us for both product revenues and the recurring service revenues that come along with it. O ne of the products that we sell along with our baggage and parcel inspection systems, and sometimes our checked baggage scanners, is our trace detection products. We got certification last year for the Itemiser 5X, which has led to significant new orders and significant growth in sales in this area for us. It's a big opportunity for us both domestically and internationally. We manufacture these products in the United States, and they've been really, really well-received, so an exciting area for us.
When we look a little bit about our customers, starting with the U.S., you know, we sell into the government in some shape, manner, or form for the large majority of our sales. We'll also have commercial customers as well, but within the government, we sell to leading agencies within the DoD, Department of Homeland Security. You know, the biggest customers will be places like CBP, which is Customs and Border Protection, you know, TSA, and others. We'll sell to the Department of Justice. But really suffice it to say, any major tender that comes out in the United States, we seem to be invited to and seem to win our fair share.
S imilarly, internationally, whether we're looking at other parts of the Americas or the EMEA region or Asia-Pacific, you know, we really have a who's who list of customers and have had just tremendous success, not just with government customers and commercial customers, really in sporting events as well. We did the World Cup in Qatar about a year and a half ago. We'll be providing much of the security detection for the upcoming Olympics in Paris as well. That takes us to our next division, Optoelectronics and Manufacturing. You know, in Opto, again, unlike security, where we sell to the end customer, in Opto, we sell predominantly to the Fortune 500 in addition to selling to our sister divisions in security and healthcare.
We go under two primary brands: OSI Optoelectronics, which is sensors, detectors, or other electronic components, and OSI Electronics, which can be some PCB assembly and some other type of contract manufacturing. In 2023, it represented about a quarter of our sales. When we look at, you know, who our customer base is, pictured here to the right, you know, we sell a lot to aerospace and defense. You know, big companies like a Raytheon and a Northrop and a Boeing and a Honeywell. We'll sell to technology companies like, like Apple and Meta and, and Google, a variety of medical companies, automotive companies, industrial companies. The nice thing is, once we get engineered into our customer solutions, we tend to be there for a significant length of time or through the product's life cycle.
We have a lot of long-term customer relationships, many spanning, you know, well, well over a decade with some of these customers. We really do believe we've got a world-class, cost-efficient, global manufacturing footprint. When something needs to be made in smaller volumes, we can make it in our U.S. or U.K. locations, and when something moves to higher volumes, we have locations in Mexico, in Malaysia, in India, in Indonesia, that really serve our customers very well. W e really look at it as a true global offering. We think there's a lot of high-growth opportunities for us in the areas that we play in, but principally in markets like aerospace and medical and defense, a lot of stuff in virtual reality and technology and automotive. So the opportunities are immense.
We don't have any customer concentration within our Opto segment, which is quite nice, and our sales team, you know, has done an outstanding job bringing in new business with existing customers, as well as new business via brand-new customers. So an area that we're excited as we look forward. And finally, our third division is healthcare. Our brand is called Spacelabs Healthcare. Unlike security, where we tend to be number one or number two in all the markets that we play in, in healthcare, we compete against some bigger boys. We don't have any illusion that we're gonna overtake them, but we think we have some of the best-in-breed technology, great customer service, some differentiated SaaS offerings, and predictive analytics tools that will allow us to compete very, very successfully.
This is predominantly a replacement market, so we think the best customer you have is the customer you have, and we have a high retention rate of our current customers, and then we go after competitive conversions. Of course, there's new, new hospitals that come up and, and new wings as well, but it's predominantly a replacement market. This is our highest contribution margin division, so as revenues go up, you know, an awful lot can drop to the bottom line. Very important to be on the GPO contracts, the group purchasing organization contracts in the U.S., which give a company really a license to hunt. IDNs or integrated delivery networks are playing an increasing role within the healthcare networks as well, so important to have strong relationships there too.
We make great efforts to do so on both. W hat do we do in healthcare? We predominantly sell into hospitals. We sell patient monitoring products and cardiology products, and then we have recurring revenue through service, supplies and accessories, and some of our SaaS-based offerings. On the patient monitoring, which is the bulk of our revenues, we make the patient monitor that's at the bedside when in a hospital, that's then connected to the central station, where a nurse can look at multiple rooms simultaneously. It's then connected to the hospital's electronic medical records. It can also be connected to the telemetry systems, so a patient can be continuously monitored as they move throughout the hospital. Very exciting for us.
We've come out with some new revenue models, a subscription-based revenue that we call monitoring as a service, and the like. We think the biggest, you know, growth opportunities for us is when we roll out some of our new products here in the not-too-distant future, and we're really, really excited about that. We've been investing very significantly in R&D for a number of years in advance of that proposition. On the cardiology side, we have rolled out a number of new products already, and we've seen some nice cardiology growth. The cardiology gross margins are, tend to be not only the highest gross margins in our healthcare division, they tend to also be the highest gross margins in all of OSI Systems. We have some leading market share positions in places like Germany and the U.K.
We're increasing our market share in the, in the United States as we've brought on some of these new, new programs, largely software-based products in, in many cases. So really, really nice area for us, and we're continuing to come out with, with new products in our cardiology area. So really, you know, in, in summary, we don't think our company has ever been better positioned. You know, we've got a lot of scale. We've got some large contract awards that we've won. We see some large contract award opportunities in the future. We've got a significant backlog, which gives us great visibility as we finish up 2024 and move into, you know, 2025, 2026, and, and beyond with a great pipeline of opportunities. You know, our markets are growing. We've, we've, we've really sort of reinvented some of the revenue models.
You know, our industry have predominantly been product with field service going with it. With what we've done in turnkey and SaaS and security, it's really major innovation in the overall industry. We've done some acquisitions that have enhanced our position in security. We'll likely do more. So we really think we're in a really, really nice position and are really excited to finish up fiscal 2024 here over the next couple of years, excuse me, next couple of months, and begin fiscal 2025, which we think will be an outstanding year for us as well. So with that, you know, I'm happy to take any questions.
All right. Thanks, Alan. Good summary there. Maybe at this time I can remind the audience listening if you do have any questions for the OSI team, to please use the chat function, and I can relay those here from my side. But while we wait for those to come in, maybe I can start with the first one. Obviously, the CEO retirement announcement came out over the weekend. You know, Deepak's the founder of this company and has been leading it since its inception in 1987, and is even heading up several of the subsidiaries. So needless to say, a monumental transition forthcoming for the company.
Not sure what you can share with us at this time, but if you could just describe what you can about the succession plan and maybe how long OSI has been planning for this day?
Oh, sure. Sure. Good question. Yeah, Deepak has done an outstanding job as our founder and visionary leader for many years. I think we all knew this, you know, this day was to come. He's the Chairman and CEO of OSI Systems. He doesn't head up any of our subsidiaries. Might say so on paper, but we have division presidents for all of our basic business units. But he is the Chairman and CEO, and he will stay on as the Chairman of the board when a successor is ultimately found. So we're excited for the next chapter in our evolution.
Big shoes to fill 'cause Deepak has done a terrific job, but I'm sure we'll find the right candidate to do that and help take us to the next level overall. Outside of that, as you can imagine, I can't really comment any further.
Understood. All right, thanks, Alan. Maybe moving over to the security business, you know, hoping you can walk us through, you know, some of the staging and visibility to fiscal 2025 growth, the follow-through and beyond. You know, you guys have often stated your growth expectations for years to come. You know, given that very high growth this year, I think it's. You're up 40%-50% year to date in that business. Just thought it would be a good time for an update on the trajectory of that business?
Yeah, you know, we're extremely excited about the business. We'll, of course, give guidance for fiscal 2025 at our next earnings call, so a little bit premature to say too much. But I think a number of people had thought with the strong growth that we saw in security, you know, thus far through the first nine months, that, you know, there'd be a reduction in our backlog. But with the fantastic bookings that the sales team has done, you know, the backlog has remained, you know, relatively comparable to where we started the fiscal year. So it really puts us in a great position, you know, as we enter fiscal 2025, and beyond.
We also have a number of great opportunities in our pipeline, some in similar areas that we're playing in today and some in some new areas as well that, you know, we're not yet prepared to discuss. But we think the opportunities out there are outstanding for us, and we think this is just a new baseline for us. So yes, we've had, you know, tremendous growth in fiscal 2024. We think that's the new baseline that we're gonna continue to grow from, for years to come.
Great. Maybe with respect to the margins in that business and, you know, the current rollout of large projects and the broad backlog that you just mentioned, you know, does OSI gain, you know, many learnings and methods to deliver projects, you know, more and more efficiently? Are you performing at, you know, a pretty optimized level, you know, presently? Is there any, you know, muscle memory that, you know, is that a margin opener as you, you know, deliver more and more of these large projects?
Yeah. Yeah, good questions. You know, it's always a culture of continuous learning, so the more and more large projects we do, we just get better and better. That being said, really hats off to our operations team. You know, they've done an incredible job on these two large programs that we have, that we've ramped up, ramped up, you know, extremely quickly and are delivering on now and will continue to deliver on into, you know, sort of the foreseeable future. So a great job by those guys. But to your, you know, to your comment, yes, the, you know, the more and more we do it, we get, you know, operationally more efficient, stronger. Should enhance, you know, margins as well.
Constantly learning from, you know, from our successes and some of the areas that we can do a little bit better in.
How would you split the margin upside potential there between, you know, things like the turnkey solutions and your CertScan software business, the higher margin mix versus, you know, maybe the opportunity to expand on productivity?
I think they both represent some real good opportunities for us. You know, turnkey, you know, the security as a service, as well as the software as a service through CertScan, should inherently have higher margins for us. So that's exciting for us and should lead to some margin expansion in those areas. But also, as you say, just the continued efficiencies in our overall business and operations can lead to margin expansion also. It'll, oftentimes, the latter will be a function of the mix of the products and who the customers might be, but I think both of those, you know, represent opportunities for continuous margin expansion.
Gotcha. Okay, thanks. Maybe shifting over to the O&M business. You know, Deepak discussed on the last earnings call that you guys began, you know, introducing, you know, prospective customers to your new operation in Mexico and, you know, increasing reshoring opportunities for those looking for it. Just, you know, wondering maybe how and where you're seeing customers shift toward the nearshore and, you know, how investors can anticipate the O&M business, you know, benefiting in that capacity?
Yeah, yeah, another great question. So the Mexico operation, which became part of us in December of 2023, so we're now a healthy five or six months into it. You know, the first quarter, first full quarter that we had in March, you know, clearly some learning opportunities and some transitions that we are doing that impacted some margins, and those are largely behind us now. W e're seeing more and more customers excited about those opportunities. You know, for those who would rather have a nearshoring solution as opposed to an Asia presence are extremely excited that we're doing this. W e're actually seeing some of our customers who wanna do both.
They want to have some of their manufacturing that we do for them continue to be done in places like Indonesia or Malaysia, and. But in addition, for certain product lines, want it to be done in Mexico as well. We think this is gonna really be a real strong area of growth for Opto and the manufacturing business here, you know, over the short term, medium term, and long term. We really think this could be a new beachhead for us that can really establish a real presence and show some significant growth for us.
All right, excellent. Just wanna take a break here and see if there's any questions from the audience. Again, just use the chat function if you have anything to share with the OSI team. I probably have one more myself, but if anybody wants to ask a question, just let us know. I think my final question would just be around the healthcare business. You know, you've been dealing with a challenging hospital CapEx environment, and maybe if you could just discuss how, you know, OSI is navigating that challenge and perhaps, you know, how the business can remain resilient in these types of cycles?
Yeah, yeah. Also a good question. So, you know, our healthcare team, our sales team is, is an outstanding team. Some of the new products that we have coming out will clearly help us. Some of the predictive analytics and software tools that we have added to our overall portfolio over the last couple of years clearly differentiate us as well. With some of the more challenging hospital CapEx budgets, we've come out with different models that allow a hospital to also put it on their as an operating expense through some of our monitoring as a service, and other revenue-type models.
O ur sales team has been pretty innovative in coming up with solutions that will work for us and will work for the company, or work for the customer, and we think this will, you know, allow us to, you know, continue to do pretty well until some of our new products come out and the hospitals get into a little bit, healthier, spending environment as well. So that's really what our goal is.
All right. Well, thanks, Alan. We just have about a minute left, so we'll cut it off there. I know you have some meetings, so good luck with the rest of the day, and thanks again for participating.
Oh, thank you very much.
All right.