OSI Systems Inc

NASDAQ:OSIS

Earnings Call Analysis

Record Q2 Earnings with Strong Revenue Growth

In this fiscal year's second quarter, the company saw a significant 26% uptick in revenue to $373 million, largely due to its Security division's 49% increase. This bolstered the per-share earnings, which soared by 86% to come in at $2.21. The operating income rose to 105% over the last year with an adjusted operating margin of 22.7%. Looking ahead, there is an expectation of considerable revenue and earnings growth. Despite strong revenue conversion, the company sustained a $1.8 billion backlog, indicating robust future potential.

Record-Breaking Performance with Strong Revenue and Operating Income Growth

OSI Systems reported a remarkable second quarter for fiscal year 2024, with revenues soaring to $373 million, a significant 26% increase from the prior year. The company's operating income surged by an astonishing 105% over the same period of the previous year. This stellar growth was primarily fueled by exceptional execution in the Security division, which saw a staggering 49% increase in revenue. A substantial portion of this success can be traced back to major contracts for cargo programs with the Mexican Defense Agency and a substantial international customer.

Expanding Footprint and Product Innovation Drive Confidence

Encouraged by an extremely healthy backlog and a robust opportunity pipeline, OSI expects a strong performance for the remainder of fiscal 2024 and beyond. The company's innovative efforts in the Healthcare division, despite a disappointing revenue decrease, highlight a forward-looking strategy, with the introduction of new services such as remote telemetry management and promising booking figures that suggest future growth. With new offerings such as leasing and subscription programs, OSI aims to rejuvenate sales growth and leverage the division's high contribution margin.

Elevated Gross Margins Reflect Operational Excellence

The second quarter's gross margin reached 37.9%, up significantly from 32.5% in the previous year's Q2. This expansion was noted across all divisions but was most pronounced within the Security division. Improved sales mix and operations led to this favorable outcome. Nonetheless, the gross margin is subject to variation due to factors such as revenue mix and changes in the supply chain costs.

Strategic Management of Costs to Enhance Profitability

OSI's deliberate management of Selling, General, and Administrative (SG&A) expenses at $71.6 million, while slightly higher year-over-year, is expected to decline as a percentage of sales in the latter half of fiscal 2024. Research and Development (R&D) remains a priority, with expenses standing at $16.4 million or 4.4% of sales, reflecting the company's ongoing commitment to innovation particularly in the Security and Healthcare divisions. This focus on R&D is seen as crucial to OSI's long-term success.

Sturdy Balance Sheet and Positive Guidance

The company's balance sheet remains robust with a moderate net leverage under 1.4x, substantial capacity for future investments, and most debt not maturing until fiscal 2027. OSI Systems is optimistic about its financial trajectory, increasing its fiscal 2024 revenue guidance to more than a 19% increase over fiscal 2023. Non-GAAP diluted earnings per share (EPS) is also expected to grow by more than 29% over the previous fiscal period. However, these projections are subject to uncertainties in supply chain disruptions, inflation, and interest rates. Regardless, OSI maintains its focus on growth and proactive cost management, with a strategic blueprint aimed at delivering innovative products and solutions.

Earnings Call Transcript 2024-Q2

[Operator]

Good day, and thank you for standing by. Welcome to the OSI Systems, Inc. Second Quarter 2024 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.I would now like to hand the conference over to your speaker today, Alan Edrick, CFO. Please go ahead.

[Alan Edrick, executive]

Well, thank you. Good morning, and thank you for joining us. I'm Alan Edrick, Executive Vice President and CFO of OSI Systems, and I'm here today with Deepak Chopra, OSI's President and CEO. Welcome to the OSI Systems fiscal '24 second quarter conference call. We are pleased that you can join us as we review our financial and our operational results. Earlier today, we issued a press release announcing our 2024 fiscal year second quarter financial results.Before we discuss our results, however, I'd like to remind everyone that today's discussion will include forward-looking statements, and the company wishes to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 with respect to such forward-looking statements. All forward-looking statements made on this call are based on currently available information, and the company undertakes no obligation to update any forward-looking statement based on subsequent events or new information or otherwise.During today's call, we will refer to both GAAP and non-GAAP financial measures when describing the company's results. For further information regarding non-GAAP measures and comparable GAAP measures of the company's results and a quantitative reconciliation of those figures, please refer to today's earnings press release.I will begin with a high-level summary of our financial performance for the second quarter of fiscal '24 and then turn the call over to Deepak for a discussion of our business and operational performance. We will then finish with more detail regarding our financial results and a discussion of our outlook for fiscal year 2024.We mentioned on the last earnings call that we expected to see accelerated growth beginning in Q2, and that was indeed the case. Our second quarter financial results were very strong, with the Security division again generating double-digit revenue growth and significant year-over-year operating margin expansion. The Opto division performed solidly, while the Healthcare division experienced a challenging quarter. We anticipate significant overall revenue and earnings growth for the balance of fiscal '24, and we are encouraged by the momentum in the business.Let's start with a summary of our fiscal 2024 Q2 results. First, revenues increased 26% year-over-year to a Q2 record of $373 million, driven by the performance in our Security division, where revenues were up 49% year-over-year. Second, the strong revenue growth, coupled with gross margin expansion, led to record Q2 non-GAAP adjusted earnings per share of $2.21, up 86% from Q2 of the prior fiscal year. Third, bookings were solid with a book-to-bill of approximately 1, and we ended the quarter with a backlog of nearly $1.8 billion. This strong backlog provides outstanding visibility for the full fiscal year.Before diving more deeply into our financial results and discussing the fiscal '24 outlook, I will turn the call over to Deepak.

[Deepak Chopra, executive]

Thank you, Alan, and thank you to everyone joining us today.I'm happy to report a record-breaking second quarter for fiscal 2024 with revenues reaching $373 million, representing 26% growth year-over-year and operating income growing 105% over the same period from last year. This exceptional performance was driven by relentless execution in Security, complemented by solid results in the Optoelectronics and Manufacturing division. Our backlog, as Alan mentioned, and opportunity pipeline remains extremely healthy, providing confidence for strong performance in the second half of '24 and beyond.Let's discuss each division's performance starting with Security. The Security division delivered Q2 revenues of $250 million, representing 49% growth year-over-year from last year. that doubled its profitability in the same period. The adjusted operating margin expanded significantly to 22.7%, reflecting a favorable mix of higher gross margin sales, efficient operations and robust market demand. Bookings were also solid. Despite the sizable conversion of backlog to revenue in the quarter, the Security division's backlog at the end of Q2 was comparable to the start of the fiscal year, given a book-to-bill ratio of approximately 1.0 in the first half of fiscal 2024.Q2 marked the commencement of revenue recognition on our recent major cargo programs announced earlier with SEDENA, the Mexican Defense Agency, as well as continued momentum on the cargo program with a large international customer previously announced. We continued to expand our presence for port and border solutions and secured significant recent new contracts. Shortly after the quarter end, we announced a $59 million contract that we received in Q2 from an EMEA region customer for various cargo and vehicle inspection platforms, including our Eagle series and Carview systems. Furthermore, we are expected to integrate these inspection systems into a national command center through our proprietary Certscan integration platform, which has been gaining traction with port and border custom agencies worldwide and allows us to differentiate our offering from our competitors.During the quarter, we also announced a $5 million award from a Latin American customer for port security solutions, including installation and integration support for the Eagle P60 high-energy drive-through cargo and vehicle inspection Z portals, high throughput, and the VM-500 drive-through radiation monitoring portal. Both of these awards include maintenance and service elements and highlight the compelling value and versatility of the multiple platforms available in our broad portfolio, creating ample opportunities for recurring revenue going forward.Our aviation business also had a good quarter as well as airport related activity continued to return to pre-pandemic levels. As a testament to our expansion at airports, we converted on a couple of significant airport opportunities. During Q2, we announced an $18 million contract to enhance an international airport security infrastructure with advanced screening solutions, including the RTT110 real-time tomography explosive detection systems for screening hold baggage, Metor walk-through metal detectors and Itemiser 5X explosive trace detection system for secondary screening of passengers. We will be providing comprehensive multiyear maintenance service and support as part of these awards.We also announced another international airport win of a $15 million order for various checkpoint screening systems, enhancing air passenger safety and threat detection capabilities. Among the systems provided for this award include the Orion 920CT checkpoint screening system, Orion 920DX dual-view checkpoint screening systems and iItemiser 5X explosive trace detection systems. Besides the equipment as well as recurring maintenance and service revenue in forward years. Our turnkey projects continue to do well in Albania, Puerto Rico and Guatemala. The aviation project for turnkey service that we announced last year at a European airport went live in December. For this airport, we manage screening services for the staff, airline crews and vehicles at perimeter entry points. In addition, the planning phase has started for the recently awarded Uruguay port turnkey contract, and we look forward to becoming operational later this calendar year.With the numerous port and border opportunities in our pipeline, there are often meaningful discussions regarding a turnkey offering, even if the initial RFP or tender is for just traditional equipment and service only. We are excited to be the only company in the security screening marketplace that can point to a decade-long history of proven experience in managing successful turnkey programs of various sizes and scopes worldwide. Looking ahead, we believe that Security division has unprecedented visibility with a strong backlog and pipeline of opportunities for robust growth in balance 2024 and beyond years.Just looking at the Optoelectronics division, which had another solid quarter, the Opto division has been working with certain OEM customers to accommodate their demand forecasts that have involved some short-term, near-term pushouts of deliveries. We see this as a transitional phase as OEMs in competitive markets increased levels to mitigate delays as a result of supply chain disruptions during the pandemic economy. Concurrently, we are also working with multiple OEMs to take over new programs as they trim their supplier base and gravitate towards more reliable and versatile suppliers like us. To that end, we had several notable bookings during the quarter and announced orders valued in aggregate of about $14 million, that included a $5 million order to provide electronic assemblies to a leading technology OEM customer and another $5 million for electronic assemblies to a motion control and fluid technology OEM and finally, a $4 million order to supply military grade components for missile systems to a leading defense electronics OEM. These awards highlight our capability to cater to our customers' base diverse and specialized needs.Building on a tranche stated last year, we are engaging with several customers that have a China-centric supply chains and are looking to shift the focus to other regions like Southeast Asia, the U.S. or even nearshore U.S. to help mitigate disruptions due to shutdowns in freight transportation. Consequently, we now have a wholly owned facility opened just now operational in Mexico that has about 60,000 square feet dedicated to manufacturing electronic components and higher level assemblies. We are excited about this endeavor as many customers have indicated a clear desire to source from nearshore, especially for finished products that are eventually destined for their customers in the U.S. Looking ahead, we believe that the Opto division is well positioned for long-term success.And finally, let's discuss the Healthcare division, where revenues were down approximately 4% compared to the same period in the prior year, definitely a disappointment. We had anticipated modest growth, but certain larger U.S. patient monitoring orders did not materialize in time. However, overall bookings were solid as the book-to-bill ratio was nearly 1.2, which is encouraging. The hospital market continues to be challenged, but we had several nice order wins during the quarter and continued to strengthen our hospital presence. We announced 3 orders totaling approximately $12 million, which included a $5 million order for patient monitoring solutions and related accessories for a U.S. [ bed ] hospital, where we will also provide our advanced Rothman Index, SafeNSound, Xhibit Central Station and Qube bedside patient monitors. This order arrived unfortunately close to the end of the quarter and could not be delivered within the quarter, but revenue is expected to commence in Q3.As I mentioned on the last call, Spacelabs is working on new innovative offerings to the marketplace, such as leasing and subscription programs to help reduce the burden of capital spending by the hospitals. To that end, I am happy to announce that Spacelabs has commenced offering remote telemetry management services to hospitals utilizing the SafeNSound digital health platform and mobile app to provide real-time patient monitoring services. We are committed to enhancing patient care and expanding our footprint in the healthcare sector by offering differentiated innovative features like SafeNSound, patient alarm management and Rothman predictive health analytics. We continue to significantly invest in developing new products to further strengthen our patient monitoring portfolio, including our next-generation platform. Going forward, we will continue to focus on operational execution and aggressively pursue sales growth in this division that has the highest contribution margin in our company.Overall, we are very pleased with the company's fiscal 2024 second quarter performance. We are in a good position for the second half of '24 and have attained good visibility into fiscal 2025 and thereafter. Alan now will talk more in detail about our updated fiscal 2024 financial guidance, and then we'll open up to questions.

[Alan Edrick, executive]

Well, thank you, Deepak. So let's review in greater detail the financial results for our fiscal '24 second quarter. Again, our fiscal Q2 revenues were up 26% with the second quarter of the prior fiscal year. Q2 Security division revenues were up 49%, largely the result of sales growth of our cargo and vehicle inspection products. We also had double-digit revenue growth in our aviation and checkpoint products and related services. Q2 revenues included continued shipments from the $200 million-plus cargo contract announced in January '23 and initial revenues from the $500 million-plus cargo contract announced in March '23.Opto sales were down approximately 1% year-over-year. Strong intercompany Opto sales to support anticipated Security division growth were partially offset by reduced third-party revenues as certain Opto customers decreased inventory levels or are experiencing program delays, which we anticipate will continue to impact us for another quarter or so.The Healthcare division sales decreased 4% year-over-year, with growth in recurring revenues of SaaS, service, supplies and accessories, along with growth in cardiology product revenues. These increases, though, were outweighed by a decrease in revenues reported for our largest product family, patient monitoring in the challenging hospital CapEx environment.The fiscal '24 Q2 gross margin of 37.9% was up over 500 basis points from the 32.5% gross margin in Q2 last year. While the gross margin expanded in each division, the most notable improvement was seen in the Security division, which experienced a favorable mix of sales, along with strong operational execution. Our gross margin will generally fluctuate from period to period based on revenue mix and volume, inflation and impacts of changes in supply chain costs, amongst other factors.Moving to operating expenses. We continue to work diligently across each of our divisions to improve efficiency and to prudently manage our SG&A cost structure. Q2 SG&A expenses were $71.6 million or 19.2% of sales compared to 18.3% of sales in Q2 of the prior year. The year-over-year increase was driven by higher compensation costs, including incentive compensation linked to our significant sales growth, increased professional fees and a higher level of bad debt expense than in the prior year Q2. We expect to leverage our SG&A for fiscal '24, where such expenses are expected to decline as a percentage of sales on a full year basis, implying a lower SG&A run rate in the second half of the 2024 fiscal year than we reported in Q2.Research and development expenses in Q2 of fiscal '24 were $16.4 million or 4.4% of sales compared to $14.5 million or 4.9% of sales in the prior year quarter. We continue to dedicate considerable resources to R&D, particularly in Security and Healthcare as we remain focused on innovative product development, which we view as vital to the long-term success of our businesses. We recorded $1 million of restructuring and other charges in Q2 of fiscal 2024 compared to $2.3 million of such charges in Q2 of the prior fiscal year.Moving to interest and taxes. Net interest and other expenses in Q2 increased to $6.5 million in fiscal year '24 from $5.2 million in fiscal year '23, primarily due to increased interest rates on a higher level of borrowings. We executed an interest rate swap during Q1 of fiscal '23 to fix a portion of our floating rate bank debt. Our reported effective tax rate under GAAP was 20.2% in Q2 of fiscal '24 compared to 19.5% in Q2 of fiscal '23. In Q2 of fiscal '24, we recognized a discrete tax benefit of $2.5 million compared to $0.7 million in Q2 of the last fiscal year. Excluding the impact of discrete tax items, our normalized effective tax rate in Q2 of fiscal '24 was 25.7% compared to a normalized effective tax rate of 23% in Q2 last year.I will now turn to a discussion of our non-GAAP adjusted operating margin. Overall, our non-GAAP adjusted operating margin in the second quarter of fiscal '24 increased to 15.5% from 10.7% in Q2 of fiscal '23 driven by strength in the Security division. The non-GAAP adjusted operating margin in the Security division expanded to 22.1% in Q2 of this year from 14.7% in Q2 of last year, primarily due to a favorable sales mix and operational improvements. The adjusted operating margin in our Opto division was again solid, increasing to 13.4% in the second quarter of fiscal 2024 from 13.1% in last year's Q2. The Healthcare division's adjusted operating margin was negligible with the reduction in the division sales.Moving to cash flow. As mentioned on past calls, we expected to invest significant amounts in working capital associated with the anticipated strong growth in Security. In Q2, cash used in operations was $23.5 million, primarily due to increases in accounts receivable associated with the revenue growth and inventory increases in preparation for program deliveries under the 2 large Security division contracts announced last year. CapEx in the second quarter was $3.5 million, while depreciation and amortization expense was $10.3 million.Our balance sheet is solid with modest net leverage of under 1.4x and significant capacity for investments, acquisitions and stock buybacks. Aside from $7.5 million of annual required principal payments under our bank term loan, the bulk of our debt matures in fiscal 2027.Finally, turning to guidance. We are increasing both our fiscal '24 revenues and non-GAAP diluted EPS guidance. We currently expect our fiscal 2024 revenues to increase more than 19% over revenues in fiscal '23, and we anticipate our fiscal 2024 non-GAAP diluted EPS to grow more than 29% over our non-GAAP diluted EPS in fiscal '23. This non-GAAP diluted EPS guidance excludes potential impairment, restructuring and other charges, amortization of acquired intangible assets and their associated tax effects as well as discrete tax and other nonrecurring items.We currently believe this guidance reflects reasonable estimates. The actual impact on the company's financial results of timing changes on expected revenues, disruptions and increased costs in the supply chain and inflation and interest rates is difficult to predict and could vary significantly from the anticipated impact currently reflected in our estimates and guidance. Actual revenues and non-GAAP earnings per diluted share could also vary from the guidance indicated above due to other risks and uncertainties discussed in our SEC filings. We continue to remain focused on the growth of our businesses and proactive management of our cost structure. We believe our efforts will enable OSI to continue providing innovative products and solutions. We would like to take this opportunity to thank the global OSI Systems team for its continued dedication in supporting our customers and partners, and at this time, we'd like to open the call to questions.

[Operator]

Thank you. [Operator Instructions] Our first question comes from the line of Josh Nichols from B. Riley.

[Josh Nichols, analyst]

Great to see such strong results, particularly from the Security division. I think you highlighted it on the call, but you've had pretty strong award wins this year as well, to year-to-date, including that $59 million award out of the EMEA region. One, fair to assume that's not in backlog because it happened after quarter end. And then two, are you seeing other opportunities in this region or others with things like the conflict in Israel that are going on that could offer some large contract wins later this calendar year.

[Deepak Chopra, executive]

This is Deepak here. As I mentioned in my call, the pipeline in Security looks very strong to us and in basically all regions. The only place that there is a little bit of slowdown and everybody on hold is in U.S. because of what's going on in Washington. But all over the world, the pipeline is very strong, and we believe that we are very well poised to win some other strong big contracts all over the globe, not only just in cargo, but even in aviation.

[Josh Nichols, analyst]

And then just since you touched on the U.S., I know we don't have a budget yet. But if you look in here, there's clearly a lot of focus on the southern border. You've had some very nice large award wins there. Could you talk about some of the opportunity that could come to fruition later this year on that front? Because there's still a good amount of availability under the IDIQs or even later, potentially if we look at like a TSA refresh next calendar year or something like that?

[Deepak Chopra, executive]

Again, good question. On the southern border, definitely, there's a lot of interest and even in the temporary budgets that are being talked about it, there's lots of interest from both sides of the house for enhancing the border security. And we've said that before, we are very well poised for it. And the CVP itself has an IDIQ out there, which still has a lot of capacity, and we are very much favored as a strong partner in that space.On your second half of the question of aviation, definitely, the air traffic is increasing all over the globe. And we believe that we are very well poised for it, both domestically and internationally. And we've announced some orders internationally that there is a lot of growth opportunity. And definitely, there is some uncertainty with the Middle East, what's going on in the Ukraine. But we also look at it and we've said it a couple of times before, sooner or later, as this thing settle down, and I keep praying that it does, all the [ barriers ] around that area where there's conflict, all those countries will need security equipment. And we, again, are very well poised for it.

[Josh Nichols, analyst]

Last question for me. One, impressive that the company has maintained this $1.8 billion backlog despite what's been a pretty high conversion for the Security with record 2Q revenue. I presume the visibility into not just this year, but fiscal '25 has to be improving as well with these new awards. Like how much of the backlog do you think you can have for next year? And how much visibility do you have and confidence that you're going to be able to grow the top line, not just this year, but next year as well, too?

[Deepak Chopra, executive]

Well, again, very good question. As we have said that, our backlog even after what you just mentioned, after a strong Q2 in revenue, still is very strong. Pipeline seems strong. And we think that it'll continue into the next years, not just '25 into '26 and beyond. But as you know that we've already said that historically, it's a lumpy business. Some customers push it out. Some people wanted even accelerated into it. So that can happen. So we don't want to give any specific numbers. But all we are saying is that we are sitting very pretty with a very strong backlog and a very strong pipeline and the economy is looking good. The interest rates hopefully will come down. Traffic is increasing, freight has to be moved around. And we think that all of that looks like good for the next coming years. Alan, do you want to add something?

[Alan Edrick, executive]

I think that sums it up quite nicely. Strong visibility for the remainder of this year and into coming years. So we think we're quite well positioned.

[Operator]

Our next question comes from the line of Christopher Glynn from Oppenheimer.

[Christopher Glynn, analyst]

A question on healthcare. So it sounds like a little better second half, most likely a little seasonal help, right? And perhaps it will still be a little below normalized. And maybe if you can just work with that construct a little bit. How do we think about natural market normalization of progression beyond this year? The pandemic growth is maybe more digested, perhaps that's still an overhang? Or is the market just become a bit more of a street fight?

[Deepak Chopra, executive]

Well, again, you sort of answered it yourself. Yes, during the pandemic, we got a little, I would call it, a great tailwinds. And it's definitely slowing down. And if you read it everywhere, healthcare section is a challenging section, the hospitals are having a tough time. But at the same time, we believe that we have approached some new technology and products that we are looking at it. And one of the things that we are very much excited about it is, besides selling monitors, which is one of our primary business is, that because of the shortness of capital and stuff, we believe the subscription model looks like a good catch all for medium to small hospitals. And we are very proud to announce that we actually have, what I said, a start-up of what we call is a remote telemetry, people are sitting in a control room away from the hospital. We got a contract with the hospital, and we give services to them in any time there is a vital sign event, the technician sitting in a control room far away from the hospital, they call up, we talk to the technicians. We tell them, hey, go look at patient #14, and that has caught on. And it's a subscription model. It's a paying model. And with our Rothman Index also into it, we are sort of differentiating ourselves from our customers. But overall, it is a challenging business. And we are spending a lot of money for the last couple of years and will continue, hopefully with the success of a brand-new platform in the coming year.

[Christopher Glynn, analyst]

Okay. Great. And then on the Security margins, you called out mix a couple of times and it occurs to me, I wanted to ask, I think, different phases of these large projects might have different mixes. So should we regard the mix dynamic as kind of optimized in the second quarter relative to what's probable in most quarters as you execute these projects?

[Alan Edrick, executive]

Chris, this is Alan. Good question. It was indeed a favorable mix in the second quarter. That being said, a number of the projects that we have in our backlog and in our pipeline of opportunities appear to be strong margins as well. So while it may not carry the same gross margin profile that we saw in Q2, we still expect it to be very solid as we move forward. But it was a very favorable mix in Q2. You're exactly right.

[Christopher Glynn, analyst]

Okay. Great. And last one. No surprise on the slightly negative year-to-date free cash flow. I know it's timing, and obviously, you have the projects and overall revenue ramp. But should we assume continued pretty tight next year and more harvest time in fiscal '25?

[Alan Edrick, executive]

Yes. Chris, although we don't really provide cash flow guidance, I think, directionally, what you're saying is correct. We'll continue to invest in some working capital associated with these big contracts in the near term. And then there's an opportunity to harvest an awful lot of free cash flow going forward as we have in years in the past. So we're excited about this. This is what we like to put our balance sheet to work with.

[Operator]

Our next question comes from the line of Larry Solow from CJS Securities.

[Lawrence Solow, analyst]

A couple of follow-ups. Most of my questions have been answered. Actually just on the margins. I know you don't give specific guidance, Alan, but obviously, in the Security piece, I think it was a good 250 points above your previous record high. Curious anything in there that would or going forward that would make this an unusual number? Or why can't we kind of sort of say at least in this low 20s range as I look at just on the near fact of a big bump in revenue, it looks like the last couple of times you've gotten on to this revenue level, you've also had margins sort of in that high 19s or over 20. So just trying to parse out, is there anything that should kind of make this margin not sustainable?

[Alan Edrick, executive]

Yes, Larry, this is Alan. Good questions, and we don't disagree with you. Again, as we don't provide guidance on an operating margin level, but which you're talking about in the past saying 19 and low 20s at these type of revenue levels, there's every reason to believe that those things are sustainable. There will always be changes associated with the different mix and the like. But yes, we do believe that there's every opportunity to sustain and even increase those type of margins over time.

[Lawrence Solow, analyst]

Okay. And then in terms of sort of the order queue or the funnel, not so much orders, but I guess potential orders as you look out, obviously, it sounds like most areas are still doing really strong. But can you just kind of give us a feel qualitatively, in terms of, are you still seeing a lot of vehicle inspection demand? Is it cargo inspection at ports? What are sort of the bigger drivers, if you will.

[Deepak Chopra, executive]

This is Deepak here. Good question. It's a very broad, what I said in my statement, both in borders and port security and even in aviation, all that area is a lot of demand and a lot of interest, not only just for expansion but also to replace the old technology with the new technology. and every customer is more conscious about to make it more efficient. And one of the things that we are very proud about it is because of our success turnkey multiyear contracts that have been very successful with happy customers, they make a very good reference point as a selling tool for customers that are not even thinking about going to a turnkey solution and just buying equipment, but they look at that and that expands into it. So our presence, and we can be very confidently say we consider ourselves #1 in this space. But I look at this as a growing business with the economy there and with people more security conscious and border security everywhere, people are more conscious and we have the right equipment. It's no one area, it's broad all over the world.

[Lawrence Solow, analyst]

Okay. And just switching gears real fast on just on Opto. You mentioned, I guess, a couple of things there. Just a little more color on the sort of the flattish quarter, but it sounds like you feel like this is temporary. I think you mentioned some program delays, I guess, were there a couple of specific larger sort of delays that impacted the quarter and what kind of gives you the encouragement going forward? And then secondly, if you can just elaborate a little bit more, I guess you said you're opening up a new facility in Mexico. Is that the case?

[Alan Edrick, executive]

Sure. This is Alan, Larry. Good question. So on the Opto side, there were no large programs to any significant magnitude that were delayed. It was just a number of programs from customers who probably overbought inventory a little bit during the pandemic times for risk mitigation and they now are rightsizing their inventory levels to a more optimum level and maybe some of their own programs have experienced some delays. So it's just a little bit of that kind of stuff that led to the relatively flat Opto sales. And as I said in sort of my remarks as well, that could continue for another quarter or so. Offsetting that to some extent going forward, we did open up a new facility in Mexico that we're excited about. It's gaining traction, and we think it's going to be a big contributor to us in fiscal '25 and beyond.

[Deepak Chopra, executive]

This is Deepak here. Just to add on to it, I did say that, and we've been saying that and we've seen that in this opto space, this China-centric manufacturing customers are very concerned about it. They want to go broaden their portfolio with vendors who can deliver away from there. We are very well placed into it in Indonesia, in Malaysia and India. And now with this Mexico facility opened up, it gives us a broader reach to go to our OEM customers and cater to a bigger, bigger part for them to look at us.

[Operator]

[Operator Instructions] Our next question comes from the line of Jeff Martin from ROTH MKM.

[Jeff Martin, analyst]

I wanted to touch on the markets in general, where you think you are in terms of those being growth markets or whether you're gaining share, how that kind of parses out. And then specifically on Security, what percentage of contracts now have Certscan? Are they all Certscan? That seems like a huge differentiator that could become kind of a self-fulfilling win rate as countries need to communicate across their systems and identify threats that can be helpful for prevention.

[Deepak Chopra, executive]

Jeff, this is Deepak here. A very broad question. Definitely, I can't say Certscan is in everything. But we believe longer term, the 2 things that differentiate us in the Security field from other competitors, we have a very broad product portfolio, high energy, medium energy, low energy. And we have demonstrated that we can integrate it together with the Certscan software and we can do it remote monitoring and stuff like that. All that stuff does help. But I won't go back to say that every unit or every contract we have has Certscan built into it. We do try to push that, and we have seen success, and I've said that where initially it might not have it, but then it results into the next add-ons and stuff like that. Regarding where positioned, I'm still very confident about it that I can say proudly that at least in the borders and sports security cargo, we are very confident that we are #1, broadest portfolio, very good reputation, and we are very well liked by both domestic U.S. and international customers. Aviation, I don't think so that I can probably say we are #1, but we are #2 and #3, and we are catching ground. But we are also in that space very good in the air cargo space. We have a very broad portfolio and a very large installed base, and we think that's another growth opportunity for us. And even in that space, we have started doing what is called remote monitoring for employee screening and stuff like that, where we're doing it from a remote control screen.

[Jeff Martin, analyst]

Great. And then if I could just ask one more, look through more of a longer-term lens here. Could you help us understand where some of the bigger replacement cycles are throughout the world. I think in the U.S., you're going to see a passenger screening replacement cycle at some point in the next several years here. But what other markets there might be replacement cycle is upcoming, not necessarily in the next 12 months, but maybe in the next 3 to 5 years?

[Deepak Chopra, executive]

Well, definitely, replacement cycle for the checked baggage is coming in U.S. in the next couple of years. There has been some delay. Passenger screening more AI, more automation is definitely going to happen. And internationally, there's not one specific area. Just look at it wherever there is passenger traffic, wherever you think that passenger traffic is going to increase, tourism or business related, all of them need the space for increasing their security. For example, one of the things everybody is talking about it, India has a huge potential growth opportunity. They're expanding in infrastructure. They're making like 20, 30, 40 new airports. We are very well positioned there. So those are the kind of places where we think, but there's no one specific area. It's all over, Mexico, Latin America, Middle East, Asia, even Africa, everywhere there is growth positive potential.

[Jeff Martin, analyst]

Great. And then just one more, if I could. Latches on to what you just mentioned. Are there technologies where you feel like you've got some internal development to do. You do spend a lot on R&D. You mentioned AI, in airport screening. Just curious if there's technologies out there that you see as a significant opportunity to continue to differentiate?

[Deepak Chopra, executive]

Well, that technology advancement will continue. In the cargo space, we are very well focused into it. We keep spending good money into it. We are integrating like, for example, Certscan and some other automation into the cargo space. In the aviation space, our RTT for checked baggage is very well received. We are putting some AI into it. In the passenger screening and what I call the metal gates and the stuff, definitely, there is technology out there for higher throughput, more technology to do better resolution stuff. We are working, developing it ourselves, plus also partnering with some new technology platforms to integrate our products.

[Operator]

Thank you. At this time, I would now like to turn the conference back over to Deepak Chopra, CEO, for closing remarks.

[Deepak Chopra, executive]

Thank you all for participating in our call, and I want to again thank our employees and our customers and all our stockholders supporting us. It's been a great quarter, and we look forward to again talking to you, and we feel very good and confident about a strong second half and the year beyond. Thank you.

[Operator]

This concludes today's conference call. Thank you for participating. You may now disconnect.