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

So all I can say is that our competition advantage is that we have the product base, we are well regarded, and we have a very good reputation to deliver the product and to maintain our credibility long term. Alan?

Alan Edrick: Sure. The product quality, the service organization, the reputation, all of those really factored in, in addition to all the areas that Deepak mentioned.

Jeff Martin: Okay. Great. And then with respect to your anticipated improvement in the Healthcare division for the second half of the year, are there any specific factors that come into play there? And is the challenges you’ve had in the first half, how much of that do you think is internal factors versus market — external market factors?

Alan Edrick: Jeff, this is Alan. So good questions. Some of the reasons why we have a bit more confidence in this second half as we enter Q3 compared to the first half really is based on the pipeline of opportunities that we’re looking at. We’re seeing some more sizable opportunities that weren’t available in the first half. You talked about why were we softer in the first half. Part of it was indeed the marketplace. The hospital market has been a bit more challenged, their own financials at hospitals. And then some of it was a little bit self-inflicted as well from a timing perspective on some of our products as well. It’s a little bit a combination of both, but we do feel better for this for the second half and with a very strong contribution margins. As our revenues go up from what you saw in Q2, there’s a big pull-through to operating income and operating margin.

Jeff Martin: Yes. Okay. And then last question for me is with the FIFA equipment on display, it has been the event to card. You mentioned that opportunities in the Middle East with show thinking and equipment. Curious if there’s near-term opportunities or if that’s a longer-term expectation.

Deepak Chopra: Well, Deepak here. What I meant was it’s a great showcase. It’s been very well received. Lot of kudos, a lot of exposure to various people in Middle East. I would say, and we don’t comment on it, there are opportunities all over the world. Middle East has always been a strong pipeline opportunity. And we continue to look at it, but I do want to comment on anything specific that’s there. Alan? It’s just a broader application. And it’s out there, and we feel that it’s very good for us to be a showcase as what happened. And it’s a very successful event.

Operator: And our next question comes from Josh Nichols with B. Riley.

Josh Nichols: Just kind of to extrapolate a little bit further. Clearly, the company is positioned for a pretty strong second half given what we’re seeing with the backlog and the order flow. On the gross margin front, I think last year, you were doing 35%, 36% and gross margin. Do you expect that, that’s kind of achievable in the second half of this year, given that you’re targeting kind of 10-ish percent top line growth in the back half?

Alan Edrick: Josh, this is Alan. A very good question. And we do expect to see stronger gross margins in the second half than the first half, and I think the numbers you alluded to are not unreasonable by any means.

Josh Nichols: Yes. And then just for cash flow, understandable, right? There’s some upfront investment for these big orders, a lot of which it seems like you’re going to be coming through next fiscal year. Fair to assume that like the free cash flow cadence is going to be, let’s call it, maybe comparable to last year, but next year likely to be in excess of the $100-or-so million you’ve kind of historically achieved as some of the revenue materializes.