OSI Systems, Inc. (NASDAQ: OSIS) First Quarter 2023 First Quarter Conference Call October 27, 2022 12:00 PMm. ET
Participating companies
Alan Edrick, Executive Vice President and Chief Financial Officer
Deepak Chopra – President and Chief Executive Officer
Conference Call Participants
Brian Ruttenbur – Imperial Capital
Larry Solow – CJS Values
Christopher Glynn – Oppenheimer
Jeff Martin – ROTH Capital
Josh Nichols – B. Riley
Operator
Have a nice day and thank you for being here. Welcome to the OSI Systems, Inc. Conference Callof the first quarter of 2023. At this time, all participants are in listen-only mode. After the presentation of the speakers, there will be a response session. [Operator Instructions]
Please note that today’s convention is recorded. Now I’d like to speak with your speaker today, Alan Edrick, CFO. Continue.
Alan Edrick
Fine thank you. Hello and thank you for joining us. I’m Alan Edrick, Executive Vice President and Chief Financial Officer of OSI Systems, and I’m here with Deepak Chopra, President and CEO of OSI. Welcome to OSI Systems’ first quarter fiscal year 2023 convention call.
We are pleased that you can register with us while we review our monetary and operational effects. Today, we issued a press release announcing our monetary effects for the first quarter of fiscal 2023.
However, before discussing those results, I would like to remind everyone that today’s discussion will come with forward-looking statements and that the Company wishes to take credit for the port provisions of the Private Securities Litigation Reform Act of 1995 with respect to such future. Looking at statements. -Look at the statements.
All forward-looking statements made in this call are based on recently available data and the company assumes no legal responsibility to update any forward-looking forward-looking statements or new or other data.
During today’s call, we will address GAAP and non-GAAP currency measures when describing the company’s effects. For more information on the non-GAAP and GAAP measures of the company’s effects and a quantitative reconciliation of those figures, please see today’s earnings release.
I’ll start with a discussion about our first quarter monetary functionality and then pass it on to Deepak to review our trading functionality. We will then conclude with more main points about our monetary effects and a discussion of our outlook for the year. .
Our first quarter revenue and earnings were in line with our expectations. We expect a good start to the year with momentum from the current quarter, supported by the planned delivery schedule of our huge order book.
As we navigate the existing economic environment, adding chain delays and emerging costs, disruptive geopolitical events, inflation and emerging interest rates, as well as the ongoing effects of COVID-19, we continue to prioritize meeting commitments to our consumers and trading partners and positioning. The company for long-term success.
We will now review a high-level summary of our currency effects. First, we reported revenue of $268 million in the first quarter, down 4% from a year earlier. These effects included an adverse currency effect of approximately $4 million.
Second, we reported consistent adjusted earnings at a consistent percentage of $0. 87, down from $1. 16 in the first quarter of last year, due to the decline in revenue just mentioned, a less favorable sales mix and more interest expense under the credit facility, which increased in December 2021 with the number one goal of withdrawing convertible bonds.
Third, first-quarter bookings were strong, with an order-to-invoice ratio of approximately 1. 2, resulting in a record end-of-quarter order book of nearly $1300 million.
And finally, operating money for the first quarter was $17 million, an improvement of $28 million over the first quarter of last year. Capital expenditures of approximately $3 million were consistent with the same quarter of the prior fiscal year.
We were active again in our buyback percentage program, spending approximately $17 million in the quarter, and then, last month, our Board of Directors increased the number of percentages allowed in our buyback percentage program to 2 million percents.
Before we delve into our monetary effects and talk about the outlook for fiscal 2023, I’ll pass the word on to Deepak.
Deepak Chopra
Thank you Alain and good morning everyone. Our functionality in the first quarter of fiscal 2023 was in line with our expectations. As Alan mentioned, we expected earnings expansion in fiscal 2023 to be more skewed towards the second, third and fourth quarters. We had a very smart quarter of bookings, achieving an order-to-billing ratio of 1. 2.
Despite our start to the year, with a huge build-up and near-term visibility of some attractive opportunities, we expect fiscal 2023 to be in line with our early currencies and adjusted earnings guidance, implying strong expansion for the next nine months. Our operating money in the first quarter exceeded operating money in the same quarter last year and we expect even stronger operating money for the rest of the year.
I will now turn to the functionality of each department in the quarter, starting with the Security department, where first quarter revenue decreased 3% year-over-year and bookings were approximately $204 million for an order-to-invoice ratio of 1. 4 for the fourth.
The reduction in the Security division’s operating margin for the quarter was primarily due to the division’s product line and minimum revenue. We expect the Security division’s operating margins to increase particularly during the remainder of the year.
Overall demand for security products for checkpoints and similar facilities continued as airport and similar activities intensified. We also noticed an increased demand for our materials and accessories, which come with consumable parts that are a recurring source of revenue.
We are very proud that Rapiscan’s inspection systems will be used at the 2022 FIFA World Cup in Qatar. We are finalizing our preparation for the event, which begins at the end of November.
Our ORION 920CX baggage screening systems and packages, Large Tunnel 922CX models and Metor 6S steel detectors will be components of the device that will be used to inspect thousands of people and bags at this prestigious football event.
During the quarter, we continued to be active in researching and securing visitor opportunities in port and border security, whether in the U. S. or in the U. S. U. S. and abroad.
We have had several victories and announced some. We won a $22 million order to provide full service, maintenance and spare parts for various Rapiscan vehicle inspection and shipping CVI systems implemented internationally.
The peak activity at the border for us is the giant orders we’ve gotten from U. S. Customs and Border Protection. The U. S. economy, which is expected to be delivered primarily in the next two to three years.
Our shipment and vehicle inspection products are widely used at borders to prevent contraband and illicit fabrics and drugs, such as phenethyl and methamphetamine, from entering the United States.
We continue to deliver those inspection products to CBP in the first quarter with modest and significant gains from this CBP program for the remainder of this fiscal year and through fiscal year 2024. However, the schedule is likely to be replaced a bit due to consumer wishes and evaluations.
We also continue to invest in the generation and responses that our security provides and that can generate recurring revenue. During the quarter, we finalized the acquisition of a small strategic acquisition called Quadriga, a UK provider of core educational software for checkpoint security operators.
We plan to further expand this generation and integrate it with our existing CertScan software platform and modules to expand our standalone subscription that provides security to customers.
CertScan is a non-unusual integration platform designed in particular to work on multi-system and multi-site security inspection systems and for customs and security operators to operate at the highest level. CertScan is deployed in major ports and checkpoints around the world and receives much more exposure. and acceptance.
Our turnkey service operations and Puerto Rico, Albania and Guatemala continue to perform well, as our consumers depend on those systems for protection and industry regulatory requirements and rates. Service revenues vary from quarter to quarter depending on the express volume of port activity.
During the quarter, we added a new consumer of multi-year turnkey installations in the first fiscal quarter. Although small, it is very significant because it is the first in the airport aviation sector. Services deserve to include a daily assessment of airport staff and equipment and inspecting vehicles as well as occupants in access control problems at the airport perimeter. The safety buildup is strong and the development of activity in many of our end markets provides a lot of confidence for the rest of 2023.
Transition to the Optoelectronics and Manufacturing division. Opto delivered fiscal first quarter earnings of $94 million, adding intercompany profit, which is an unprecedented quarterly record with the division’s operating profit expansion.
Opto’s momentum is expected to continue, as our order book at the end of the first quarter of 2023 is 22% higher than the order book at the end of the first quarter of 2022. Opto won new consumers and has become a prized supplier by many OEM consumers.
As an example of the quarter’s peak visitor satisfaction, our Flex operation won the ZOLL Heart Safe Hero award for being a critical and valuable supplier to ZOLL’s cardiac defibrillation product lines, which is a great honor.
In addition to healthcare, Opto’s OEM visitor base varies across markets, adding defense, space, customer-edge technology, industrial, and automotive. Given the expected higher demand at Opto, we have expanded our production operations to Canada, India and Batam, Indonesia.
Now let’s move on to the healthcare department, where the first quarter was a challenging quarter, with sales down 14% year-over-year. variant at that time.
During the quarter, we secured several orders from U. S. hospitals. We announced one of the largest, a $4 million order for follow-up responses from patients and similar accessories for a U. S. hospital. In the U. S. we plan to obtain Xhibit central stations, Aurel Telemetry, Expression Patient Monitors, Qube patient monitors, and SafeNSound patient monitoring software.
We have been successful in adding software modules such as SafeNSound to the included patient tracking products, expanding the percentage of recurring revenue in our overall sales and differentiating our products from our competitors.
We continue on the R
With a strong lag in Safety and Opto, we are pleased with our outlook in those divisions for the remainder of 2023 and also expect more powerful healthcare functionality as we look ahead to the remainder of fiscal 2023.
With that, I will call Alan Edrick again to communicate in more detail about our monetary functionality before opening the call for questions. Thank you.
Alan Edrick
Now let’s take a closer look at our first quarter monetary results. Our first quarter revenue decreased 4% from the first quarter of last year or approximately 2% in uniform currency given the strength of the dollar.
In the first fiscal quarter, security revenues decreased by 3%, mainly due to the unfavorable effect of exchange rates. As Deepak mentioned, the security department’s order-to-bill ratio was about 1. 4, which positions the department well going forward. and we expect significant sales expansion starting this quarter.
Opto sales increased 2% year-over-year due to expansion of intercompany sales to upcoming planned security sales, while Opto third-party sales were in line with third-party sales in the prior year quarter. Opto’s reserves were again strong, resulting in a record accumulation of Opto, however, supply chain constraints led to delays in production and shipments of some orders.
The healthcare department reported a 14% year-over-year relief in revenue, in part due to tougher year-over-year competition, given last year’s call for the increase in the Delta COVID variant.
First quarter gross margin was 32. 6%, approximately 2. 9% less than the previous year. This substitution is basically due to the decrease in sales in the Health department, which upon reaching the highest gross margin of our 3 departments, the accumulation in Opto sales as a percentage of total sales, since this department tends to reach the lowest gross margin of the 3 departments, and a less favorable combination of sales in the Department of Safety and Security with increases in the prices of safe components and freight that have a negative effect. Effect on the gross margin of each department. Our gross margin, in general, will vary from era to era depending on the combination of earnings and volume, inflation, chain of origin has an effect, among other factors.
Turning to operating expenses, we continue to work diligently across each of our divisions to prudently strengthen and manage our SG position structure.
SG Expenditure
Research and progression expenses in the first quarter of fiscal 2023 were $14. 5 million, which is consistent with last year. We continue to dedicate significant resources to R
Let’s move on to interest and taxes. Net interest and other expenses in the first quarter of 2023 increased to $3. 4 million from $2 million at the same time last year, primarily due to higher interest rates and the maturity of our convertible notes of 1. 25% on September 1, which were at a decreasing rate than our notable loans. We executed an interest rate change in the first quarter to fix a portion of our floating rate debt.
On the tax side, our GAAP reported effective tax rate was 24. 4% in the first quarter of fiscal 2023, compared to 15. 9% in the first quarter of fiscal 2022. In the first quarter of fiscal 2023, we recorded a discrete tax gain of $0. 1 million, compared to a discrete tax. Made a profit of $2. 1 million in the first quarter of last year. Excluding the effect of discrete tax items, our normalized effective tax rate in the first quarter of 2023 was 25. 1%, compared to an effective normalized tax rate of 25. 4% in the first quarter of fiscal 2022.
I will now turn to a discussion of our adjusted non-GAAP operating margin. Overall, our adjusted operating margin in the first quarter of fiscal 2023 decreased to 8. 7% from 10. 9% in the same era last year. This is basically due to the relief in revenue and gross margin described above.
We are pleased with the accrual in adjusted operating margin for our Opto division, which increased 12. 7% in the first quarter of fiscal 2023, to 11. 4% in the first quarter of last year, due to a more favorable product mix and the implementation of safe power improvement measures. Initiatives.
The Department of Homeland Security’s adjusted operating margin decreased to 12. 8% in the first quarter to 16. 2% in the first quarter of last year, due to declining earnings and declining gross margin in a less favorable product mix. We expect a large sequential improvement in this department in the current quarter thanks to stronger earnings and a more favorable earnings mix.
With diminishing earnings and a less favorable earnings mix, our Healthcare department’s adjusted operating margin decreased from 4. 9% to 12. 1% in the prior year quarter. We expect this department to show significant improvement in the first quarter already this quarter. .
In terms of moneyArray, money generated from trades was $17 million to $17 million in the first quarter of fiscal 2023, compared to $11 million of money used in trades in the same quarter last year. This accumulation is due to accelerated current capital. Capital expenses in the first fiscal quarter were $3. 2 million, while depreciation and amortization in the first quarter was $9. 5 million.
We remain active in our percentage repurchase program in the first quarter of fiscal 2023, in which we spent $17. 3 million to repurchase approximately 208,000 percents. Our Board of Directors increased buyback authority in September and, at the end of the quarter, approximately 1. 9 million percentages were to be repurchased under the program.
Our balance sheet is strong, with net leverage of 1. 6 and significant additional acquisition capacity and repo rate. We retired the convertible notes in September, a combination of our revolving and term loan, which we had established in December 2021, mainly for this purpose, leaving plenty of liquidity. In addition to approximately $7 million in annual principal repayments required under the term loan, the majority of our debt matures in fiscal year 2027.
And finally, with respect to guidance, we reiterate our previous guidance for non-GAAP adjusted earnings and earnings consistent with participation. This implies a profit expansion of between 7% and 11% and an adjusted EPS expansion of 17% to 22% in the remaining nine. months of fiscal year 2023.
The diversity of non-GAAP diluted EPS excludes prospective restructuring and other impairment charges, amortization of acquired intangible assets and non-cash interest expense, and their related tax effects, such as discrete items and other non-recurring items.
Lately we believe that these non-GAAP earnings and earnings reflect moderate estimates. The real has an effect on the company’s monetary effects of the COVID pandemic, disruptions and higher prices in the chain of origin, and emerging market inflation and interest rates are difficult to manage. are expecting and may differ materially from the expected effect recently reflected in our estimates and forecasts. Actual and non-GAAP earnings consistent with the consistent diluted percentage may also differ from expected levels due to other risks and uncertainties discussed in our filings with the SEC.
We remain focused on developing our business and proceeding to proactively manage our job title structure. We believe our efforts in those spaces will allow OSI to continue to supply cutting-edge products and solutions.
We look to the future to proceed in navigating today’s dynamic and challenging environment, while gaining traction in key strategic expansion spaces and positioning the business to capitalize on end markets such as aviation. We would like to take this opportunity to thank the global team at OSI Systems for their continued determination to support our customers and partners.
And at that time, we would like to open the question forum.
Q&A session
Operator
Thank you. [Operator Instructions] And the first comes from Brian Ruttenbur of Imperial Capital. Your line is now open.
Brian Ruttenbur
Great, thank you very much. Great quarter and let me go straight to the questions.
Alan Edrick
Thank you Brian.
Brian Ruttenbur
So, can you give us an update on TSA certification where it sits on CT-based inspection equipment?
Deepak Chopra
Yes, Brian. Hello. I’m Deepak. As we have already discussed regarding checked baggage, the existing certification we have is 5. 8, which applies to shipping and we have been very lucky in that regard.
There is no express qualification for the existing replacement cycle, which TSA says is still a few years away and they are still finalizing with the European Union what the final procedure will be. So at this point we have 5. 8, like the others and we do very well in everything that is happening, especially in the shipping space.
Brian Ruttenbur
Is there an update on the update cycle that’s intended to happen, I guess, in the last five years there was talk about that, but in terms of U. S. TSA?Do you have checked baggage?
Deepak Chopra
Well, all we know is that it is postponed, we are in 2024, 2025, but we hear that it is not in our hands. It’s in the hands of the TSA and they have to make their decision, and COVID has pushed everything to the right. But on the European side, there is a lot more activity and we are very well qualified to win those orders.
Brian Ruttenbur
Super. Passing very temporarily on the side of Opto, it continues to work very well. Is there something fast, a fast sector, a fast product that’s driving all this growth?
Deepak Chopra
Well, Alan can raise something, however, in my opinion, on closer inspection, all sectors have done very well. The automotive sector has been very, very successful. The medical sector has been very smart and continues to show very strong growth. That’s one of the things Alex-Alan also mentioned.
The flexible circuit, which is a department of OSI Electronics, worked very well and we got wonderful congratulations from our customers. of the things we are very proud of. It is a very varied product portfolio.
And we think one of the things that I’ve already said, one of the things that has also helped us a lot, there’s a lot of preference in the OEM consumer component to move away from China and with our presence in Indonesia, our presence in Malaysia, our presence in India, it’s a big blessing for us and that’s one of the reasons why I said in my speech that we’ve expanded our services there. That has been very positive. Alan?
Alan Edrick
Ouais. Je I think what Deepak was describing is surely accurate. Our diversified model, our diversified clientele in the medical, defense, aerospace, technological, industrial, automotive sectors, among others, has played well for us.
And I’d like to congratulate many of our sales and business advancement groups who pass through and get new business from existing customers as well as new customers. So we have noticed a massive force in the department and indeed I expect this to continue for the foreseeable future.
Brian Ruttenbur
So, my last query concerns the Division of Health. This is a weak year year after year compared to the first quarter of last year. When do you expect to see this recovery and is there an express reason, is it a weak year?year-on-year in that first quarter, was there any express shipment or product line that didn’t come out?
Deepak Chopra
Well, again, Brian, it’s one thing that the first trimester is weak to start historically, and secondly, we expected it. Last year, COVID was still here, a lot of call for rapid patient follow-up that call to slow down. So – it’s down, obviously, we’re not so happy.
But we think the current quarter, third quarter and fourth quarter will be more powerful and there will be a lot more activity and one of the things is that we’re making a pretty strong investment in SafeNSound, our software platform, which has worked very well. He won and he can, and essentially it makes us a little different from our competition and we continue to see that as an opportunity for expansion and that also has a bigger margin. High. Alan, do you need to upload something?
Alan Edrick
Ouais. Je I think Deepak summed it up well. But, Brian, we expect to bounce back with a more powerful sequential quarter for sure here in the current quarter and gain momentum in the current half. As a result, the functionality of the healthcare division will be much higher for the rest of the year compared to the first quarter.
Brian Ruttenbur
Super. Thank you so much.
Operator
And thank you and a moment for our nextArray AND our next one comes from Larry Solow of CJS Securities. Your line is now open.
Larry Solow
Great. Hi guys. Just a couple of follow-ups, Deepak, you discussed and I know you even talked about it for a few years, just the two big orders, I think, $200 million with customs and border protection, did you start delivering on that at all?And then, I guess, the timing part, I know I think the last quarter talked about a little stretching in terms of deliveries. There’s an update on that and it’s been about a year since you, I assume, I think there’s still a pretty large portion of the IDIQ. What is your visibility on additional orders?
Alan Edrick
Larry, here is Alan. Je will answer the first component of the query and Deepak can continue. So, yes, we delivered some of IDIQ’s CBP orders in the fourth quarter of last year, and we continued into the first quarter of this year. Pretty modest revenue, I think, as Deepak commented in his opening remarks this quarter.
That said, we expect to see a significant acceleration in earnings going forward. Therefore, we will see much higher profits in the second, third and fourth quarters until 2024 and perhaps part of 2025. So that’s our perspective actual. es and then we anticipate that there could be follow-up orders. Deepak, do you need to upload something?
Deepak Chopra
Yes. Larry, that Deepak here. Alain said it well. The acceleration will start faster now in the second, third and fourth quarter of this year to which was not good and at maximum has nothing to do with us. . It’s the heist and. . .
Larry Solow
it’s okay.
Deepak Chopra
. . . Civil works are not in condition elsewhere. That’s the heist on that side. For this to continue and, as Alan mentioned, it will continue until 2024 and beyond, and we are still very confident that with this we are very well placed for the IDIQ, it is possible that there will be more bookings as well as new products are delivered. .
Whereas, we see this as a long-term game, we’ve said that, and yes, some of the things are not in our hands, however, CBP is a very specific consumer and wants some things done at the border and we are very well positioned with it, adding our CertScan software, which is very important.
Larry Solow
And CBP, I suppose, would be the only company involved, I guess, for the U. S. border. “Whether you’re in the U. S. , the southern border and the northern border, or there are other agencies and then others, I guess there are significant opportunities abroad, because in terms of vehicle inspection around the world, I think it’s minimal today, isn’t it?And there are, I don’t know if they are competitive estimates, but other people should aim to search for many, a large majority of at least advertising vehicles, if I’m not mistaken?
Deepak Chopra
Well, you said it very well. CBP is the main client. Yes, there is foreign traction and that is why we are also very excited about the implementation of CertScan software. But, in addition, one of the other comments that we need to make is that there are other agencies that have nothing to do with border security.
Larry Solow
Right.
Deepak Chopra
There are other agencies like the State Department, the Department of Defense and others, also very large consumers for us and we continue to have wonderful good fortune with other divisions of the U. S. government. U. S. and foreign governments.
Larry Solow
they gave it to me It’s okay. I just need a quick follow-up just on Brian’s consultation about the Opto segment and you said that the accumulation has increased up to 22% year over year. I guess there’s a safe value there or is it more commonly volume, have there been acquisitions built into that or what kind of engine is a giant number, is it – there are larger orders with longer lead times there, is it distorting that or is it just quite a bit of natural growth?
Alan Edrick
Larry, Alan speaks. Good question. And it’s all biological because we didn’t make any acquisitions in this era in the Opto division. What we see from some consumers with some of the demanding situations and longer supply chain and lead times is that they infrequently give us a longer order.
If someone used to give us a three-month order, they may only give us a six-month order. If someone has given us a six-month order in the past, maybe that will only give us a nine-month order. Then we receive larger orders as a result of that to give greater visibility in the future. A bit of pricing with the pass-through of some acquisition value differentials and things with inflation, and certainly, unit volume expansion as well, so a combination of all factors one.
Deepak Chopra
Larry, to add. . .
Larry Solow
Gotcha. Yes.
Deepak Chopra
Just to go higher. It’s Deepak here. What I want. . .
Larry Solow
Of course.
Deepak Chopra
. . . Stress, there’s a lot to escape from China. And if you did. . .
Larry Solow
Right.
Deepak Chopra
. . . well with your visitor and you have the skill for them and you have the chain of origin under control and services like we have and we said we have expanded them in Batam, Indonesia, Malaysia, India, has played an important role in capturing more business from our normal consumers who are essentially more focused on expanding and operating with a small supplier organization and we have: We are well located in diverse locations and have been a very, very smart supplier to our consumers.
Larry Solow
It is ok. Super. I appreciate this color. Last query just about moneyArray Alan, I know the first quarter was obviously a bit of a busy year, but operating money exceeded the quarter’s net revenue source, even on an adjusted basis. Will you expect it to continue for a full year? I don’t think it is, Array regularly loses money, but will you expect the operating money and lost money to improve, obviously, compared to last year, still?Isn’t it expected to be a net source of income as it has been in the past?
Alan Edrick
Yes. Larry, although we do not provide any kind of money address according to the. . .
Larry Solow
Right.
Alan Edrick
In fact, there is an opportunity for a strong flow of loose money in fiscal 2023.
Larry Solow
it’s okay.
Alan Edrick
That said, we expect inventories to remain at a peak this year. But in terms of. . .
Larry Solow
Right.
Alan Edrick
. . . Conversion, I think we can have a very strong conversion north of where we were last year and continue where we were in the past. And our 3 companies, despite everything, are listening to the main levers that generate operations money and loose moneyArray So, yes, a wonderful opportunity there.
Larry Solow
they gave it to me Super. Thank you. Thanks again.
Operator
And thank you and a moment for our nextArray And our next one comes from Christopher Glynn of Oppenheimer. Your line is now open.
Christophe Glynn
Thank you. Good morning and afternoon. . .
deepak chopra
Hello.
Christophe Glynn
. . . Depending on where you are, I guess. Therefore, inquire about optoelectronics, be curious to know if you can estimate the backlog. And also in relation to that, if you unlock it and while unlocking it, is there a genuine accumulation in execution rate similar to that in and around what you discussed about migration from China?It turns out that this business is a bit small and as smart as the numbers are, the backdrop he describes is: does it almost seem like it’s in another area?
Alan Edrick
yes. Chris, very clever question. It’s Alain. No I would necessarily classify it as backlog because we work well with all the clients there. But that said, there’s probably an opportunity, probably, anything below $10 million of what. . . more profit we could have had if there had been no shortage of components [Audio Gap]
You can have 98% of the parts, but if you’re missing that final 2%, you can’t send a full part. So, it’s not a great backup that will generate particularly higher revenue. But we only hope the company will continue to grow strongly each quarter for the remainder of the fiscal year.
Deepak Chopra
That’s Deepak. I mean, I think Alan said it right. I would also point out that we have a lot in what we call a raised price. So if you’re running with the visitor to supply the $5 price of the pieces, now in a broad generation and our global presence, we’re trying to figure out if we can raise more price on that, which is a very, very smart strategy for Opto Group, because it puts us at the top of the food chain on the visitor list. and As the visitor looks, we essentially continue to work with them to get a higher price than we can offer, which we believe in the long run will continue to grow.
Christophe Glynn
Super. Et one in security,. He had a backlog there and a large chunk of CBP. And, in some cases, lagging companies have a little more difficulty with the value burden. It seems that it eliminated the worst value and load mismatch in the existing quarter order book. . But I just need to review first affirm from this point or explain and then with the wonderful victory of IDIQ, how do you maintain the economy of those victories from the moment you bid and it is possible?
Alan Edrick
Good question. Surely he is right, in longer-term contracts, the value is fixed, so he cannot replace it. But we did not see, however, there were setbacks and rejections, due to the shortage of parts and not being ready.
But I would say on a larger scale so far, we haven’t noticed too much erosion of our margin in what I call paper in products. And in the same way, think about it that everything indicates that there is some flexibility in the supply chain, whether in freight and in the loading of parts and everything. So as we launch this product with a longer lead time, we expect things to stabilize.
Christophe Glynn
Super. Thank you.
Operator
And thank you and a moment for our nextArray And our next one comes from Jeff Martin of ROTH Capital. Your line is now open.
Jeff Martin
Hello, Alan and Deepak. I hope you are well. Deepak, I searched to see if you can give us a little more detail about the traction that CertScan can get, is it still too early to communicate too much?Are you also curious about how long the sales cycle is and when we can expect to see a faster ramp?
Deepak Chopra
Again, ask.
Jeff Martin
And as you say, secondly, how does that relate to the acquisition of Quadriga that you talked about this morning?
Deepak Chopra
Well, Jeff. With slow progress with CBP this quarter, we expect the second, third and fourth quarters to be stronger. As in 2024. As the installed base grows, it also brings the CertScan software.
And the other good news for us is that we have been rated on what is called ATO, which is a great advantage for the software to be installed in the places that the visitor wants. Therefore, we continue to see progress, however, it is slow progress.
At the same time, Quadriga offers us a combination of education and CertScan, so we can combine things and provide more programs and more skills for the additional purposes the visitor needs us to do.
So all of this keeps focusing on the fact that, at the end of the day, this software, not just in the United States, but in other parts of the world, will still like licensing software with recurring revenue, which is happening.
It’s not like it’s tomorrow. It is for educational purposes that we have to work with the consumer and their needs, but everything indicates that in many places, especially with CBP, we have a lot of traction.
Jeff Martin
It is ok. So, I would mention this first new turnkey visitor of several years in airport aviation. I’m curious about how this opportunity evolved and how it was revealed in the end, and then what do you think?Is this a major strategic initiative for Rapiscan in the future?
Deepak Chopra
Well, I’m going to answer the other way around. First, we believe it is enough to take a look at our history. From where we were five years ago, 10 years ago, we followed a new line. Ports and borders have been won very well with our turnkey solution that has been a great success.
Therefore, we work very diligently to see what other positions we can look at. Aviation turns out to be another domain that, as I’m sure you’ve read, everybody is talking about it, it can do inspections quite quickly, if you have to stay expanding the number of people, the workforce is not there. This kind of automation is a game of herbs.
We’ve shown customers, worked with them, what can be done in ports and border security and other areas. Then we discovered a successful victory in a new foreign-scale box. Although very small at the moment, it is — what I would call, it’s the beginning of a new market that is opening up for the aeronautical side.
And we’re running diligently. It is not a needle changer at the moment. But he is very strategically intelligent. And as it grows and becomes more successful and we can showcase more stuff and tell other consumers about it, we think it’s a new market.
Jeff Martin
And finally consult with the hurricane that crosses Puerto Rico and that causes main disturbances. I’m just curious to know if he saw any disruption in his turnkey operations there.
Alan Edrick
Jeff is Alan. No there was a significant disruption, obviously. For a few days while this is happening, our overall volumes in Puerto Rico tend to be more or less the same, some delays and some documents and the like there, but overall, there is no significant replacement. in Puerto Rico
Deepak Chopra
And the most sensitive thing is that, fortunately, our devices were not damaged and our workers are safe. And in the meantime, we’ve been running diligently and continuing to, as Alan mentioned, we’re still functioning.
Jeff Martin
Excellent. Thank you for your time, guys.
Alan Edrick
Thank you.
Operator
And thank you. [Operator Instructions] The next one comes from Josh Nichols of B. Riley. Your line is now open.
Jose Nichols
Yes. Thank you for accepting my question. First, I just want to ask you a few questions about the small acquisition you made. Could you elaborate on this and the progress the company has made in expanding its SaaS earnings base and opportunities on this front as we look a little deeper?
Deepak Chopra
Well, smart question. It’s a very small acquisition. They do education. They were founded in the UK. They do education for other people in the inspection domain at checkpoints. We’ve been them like salespeople for some time and thought it was strategically smart that we now knew it to mix it up. therefore, we can expand our CertScan platform to open up more programs to our wider visitor base.
And yes, everything is moving towards a SaaS style between CertScan and Quadriga and we feel like we’re going to continue. But, again, I must emphasize, and again, before the other user asks the question, we are sure that in the long run it will continue to grow. It’s a slow part. This is a new domain we are entering. We work with our customers. And according to the SaaS style, we have a license plus a smart margin.
And we’re also very focused on the fact that it’s independent of the device you’re connected to, whether it’s a Rapiscan device or a competing device, whether it’s X-ray machines, TV cameras or whatever. for this software model.
Jose Nichols
So, just out of curiosity, the new turnkey you announced, small in size, but pioneering in the airport aviation sector, is it like an opportunity for landing and expansion, maybe it makes more sense?Curious about expansion opportunities here or if there are more opportunities in the aviation sector where you haven’t done so much on the turnkey side before?
Deepak Chopra
Yes, yes and yes. We have a multi-year contract. Start very small to see if it is viable. As it grows, even in the existing client, it can grow particularly as more and more programs are added to it.
And then, as it becomes a style, the same style that we said before from Puerto Rico to Mexico to Albania, until this end of borders and ports, we think it’s a smart style to grow in the aviation sector and we. ‘ We will continue to see a smart fortune as we demonstrate the effectiveness of that: This turnkey style.
Jose Nichols
So the last query for me, only that inventories are trading at a fairly low point of 7 to 8 times EBITDA, even though it has a record lag and I think the outlook for this year is that expansion will be particularly driven. compared to last year. What do you think of the purchase?Evidently, you have bought back quite aggressively, but coins over $50 million, are you willing to allocate a very high percentage of your loose coins to percentage buybacks if inventory remains at unit grades or what do you think about the capital allocation strategy there??
Deepak Chopra
Well, we’re not talking about what those particular things will be in the future. But you said it very well, we are very competitive on this, we feel undervalued and we keep looking when we can buy. And the board has been a great support in that with the construction of the percentage acquisition plan, and we have been very active in that and we will continue to be active.
Jose Nichols
Super. Thank you.
Operator
And thank you. And I’m popping up any other questions right now.
Deepak Chopra
Well, I have everyone to thank. I know it’s morning and the market is open. Thank you so much for taking the time to attend. I would like to thank everyone who participated. And I need to highlight and thank our employees, their families and our consumers for their full help in the collaboration and we thank them and look forward to the next one: our next call to the convention. Thank you very much.
Operator
That concludes the convening of today’s convention. Thank you for participating. You can now log out.