OSI Systems Inc (OSIS) 2003 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the OSI Systems, Incorporated Third Quarter 2003 Results Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time, if you have a question, please press the one, followed by the four, on your telephone. As a reminder, this conference is being recorded Friday, May 2, 2003.

I would now like to turn the conference over to Anuj Wadhawan, Chief Financial Officer. Please go ahead, sir.

Thank you, Kelly. Good afternoon, everyone. Thanks for taking the time to participate in the conference call of OSI Systems’ third quarter of fiscal 2003 results.

First, Deepak Chopra, our CEO, will have some opening remarks, and then I will go through the financials. At that time, I’ll turn it back to Deepak, and he will have some closing comments. And then we will open it up to questions.

Please note that over the course of this conference call, we will make certain predictive statements in an effort to assist you in understanding the Company and its results. You are all familiar with the difficulty of making any predictions for a company dealing in a dynamic and competitive industry. In addition to those inherent risks, the Company’s recent 10-K and 10-Qs give important risk factors that could cause actual results to differ from those in our predictions.

With that, I will turn it over to Deepak.

Thank you very much, Anuj.

Again, I want to welcome you all to OSI’s third quarter 2003 results.

The revenues for the quarter were another record of $50.9m, with earnings per share of 24 cents on 15 million shares. This result is after including a pre-tax charge of $1m for the reduction in the market value of a previously announced strategic equity investment totaling $1.75m in Imagis, a publicly traded biometric company. Excluding this charge, pro forma diluted EPS for Q3 was 29 cents on 15 million shares.

Our security business continues to be strong. The quotation activity, especially in the international sector, is quite strong. We are seeing relatively even stronger quotation activity in both large cargo and conventional scanning internationally compared to the beginning of 2003. As we mentioned in our Q2 conference call, we continue to invest both in marketing and R&D in security, especially large cargo.

Our efforts have paid off especially in the U.S. as we announced end of February our first sale of our Gamma Radiographic Detection System cards to a non-aviation federal agency. Before this, the only approved source was SAIC.

We have also cracked open the Mexican market by a sale of a Gamma Auto System for [MT] truck scanning validation. We have been demonstrating our Portal Gamma System at the California-Mexico border for the past several months, and we’re very happy with the recent visit to this site by the Homeland Security Secretary, Mr. Tom Ridge, in the month of April.

Internationally, the gamma scanners of Rapiscan have been very well received. Although the activity is quite strong, there have been delays in closing the sale due to the Iraq conflict in the Middle East and the SARS in Asia. Both these events have curtailed travel and delayed the decision makers to ink the contracts. Hopefully, in the near future, with these incidents behind us or coming to a closure, we can get back to normal business.

In the U.S., we have started showing our gamma-based products to various federal agencies. On the PFNA TNA technologies, Ancore continues to make progress, especially on the El Paso project. As you know, we are working on this project with various government agencies and estimate the site to be ready by the end of 2003 or first quarter of 2004.

Besides the land port-based cargo interest, now that the government has started looking at the air cargo besides the checked baggage issue, the PFNA TNA technology has generated a lot of interest for air cargo. It’s a known fact that the CT-based EDS machines suffer from a very large false alarm rate. We believe that they are not suitable for air cargo due to the large false alarm rate and the inability to check large-sized pallets, especially due to the size of limitation of the CT scanner.

PFNA TNA inherently has an advantage due to its material specificity in detection, which would reduce the extra labor in eliminating false alarms. We are actively pursuing the airports and the federal government to look at a possibility of a demonstration site for this technology for air cargo just like the El Paso site for a land border crossing.

In the conventional side of our security business, activity in this [indiscernible] business continues to be robust both domestically and internationally. We recently announced in April a $7.3m order to the TFA for our Certified TRX carry-on baggage inspection machines. By the way, we are told that we got about 50 percent of the business.

We also received recently the TSA certification for our metal detectors for U.S. airport deployment. We are the only company which has both the X-ray and metal detector certification under one roof. This, we think, is an important advantage as we can support the customer under one umbrella as a vendor.

Non-security business continues to be weak, although in all our non-security companies, we are seeing little better visibility than before although we continue to remain cautious and conservative.

With that, I will hand over Anuj Wadhawan to talk about the financial highlights and then open to questions.

Thanks, Deepak.

A quick financial highlights.

The Company’s revenue for the third quarter of fiscal 2003 was $50.9m, compared to $32.1m for the third quarter of fiscal 2002, an increase of 59 percent. Revenues from the Security and Inspection side of our business for this quarter were $34. 1m, or 67 percent of total revenues. Revenues from the Opto, Electronic and Medical Imaging side of our business were $16.9m, or 33 percent of total revenues.

Revenues for the nine months were $131.7m, compared to $88.6m for the prior-year period, an increase of 49 percent. Revenues from the Security and Inspection side of our business for [inaudible] nine months were $85.9m, or 65 percent of total revenues. Revenues from Opto, Electronic and Medical Imaging business were $45.8m, or 35 percent of total revenues.

The net income for the quarter was $3.6m, compared to $2.3m for the third quarter of fiscal 2002. Diluted earnings per share were 24 cents, compared to 18 cents for the last year’s third quarter.

The net income for the nine months was $10.6m, compared to $4m for the prior year’s nine months. Diluted earnings per share were 73 cents, compared to 37 cents for the last year’s nine months.

Excluding a pre-tax charge of $1m for the write-off of an equity investment in the quarter and nine months ended March 31, 2003 and a pretax charge of $608,000 for the write-off of certain deferred costs relating to the acquisition of certain [indiscernible] assets, in the nine months ended March 31, 2003, the diluted earnings for the quarter and nine months ended March 31, 2003 were 29 cents and 81 cents, respectively. Due to the adoption of SFAS 142, third quarter and nine months of fiscal 2003 do not include any goodwill amortization, compared to goodwill amortization of $101,000 and $303,000 in the last year’s third quarter and nine months, respectively.

To give you the breakdown on the Security side of our business revenue grew 76 percent to $34.1m this quarter from $19.4m for the last year’s third quarter. Revenues for nine months grew 65 percent to $85.9m from $51.9m for the last year’s nine months. The security side of our business includes Ancore’s revenue, which was acquired in November 2002. Ancore’s revenue for the quarter and nine months were $1.5m and $2.2m, respectively.

On the Opto and Medical Imaging side of our business, revenue grew 32 percent to $16.9m this quarter from $12.7m for the last year’s third quarter. For the nine months, revenue grew 25 percent to $45.8m from $36.7m for the last year’s nine months.

The Opto side of our business includes Centrovision’s revenue, which was acquired in July 2002. Centrovision’s revenue for the quarter and nine months ended March 31, 2002 was $1m and $2.7m, respectively. The increase in the Opto and Medical Imaging side of our business was mainly due to increased sales to defense and security industries and increased sales of medical imaging systems and inclusion of Centrovision’s revenue.

Gross margin for the quarter was 31.6 percent, compared to 32.4 percent for the third quarter of last year and 33.2 percent for the second quarter of this year. Gross margin for nine months was 33.1 percent, compared to 29.7 percent for the last year’s nine months. The change in gross margin was due to a shift in business to Security side, which has higher gross margin. As explained earlier in the last conference call in January 2003, the gross margin for the quarter ended March 31, 2003 has decreased due to a shipment of large cargo products which have initial non-[indiscernible] development costs charged to cost of sales. Also, Ancore’s revenues consist of government grants, which have lower gross margin.

R&D for the quarter was $2.7m, or 5.3 percent of revenues compared to $1.7m or 5.3 percent of revenues for the third quarter of last year. R&D for the nine months was $6.5m or 4.9 percent of revenues compared to $4.9m, or 5.5 percent of revenues for the last year’s nine months. The increase in R&D was largely due to increased R&D spending on Security side of our business and also inclusion of R&D’s expenses of Centrovision and Ancore’s acquisitions.

SG&A for the quarter was $7.5m or 14.7 percent of revenues compared to $5.5m or 17.1 percent of revenues for the previous year’s quarter and $6.8m or 15.5 percent for the second quarter of fiscal 2003. SG&A for the nine months was $21.1m or 16 percent of revenues compared to $15.4m or 17.4 percent of revenues for the previous year’s nine months. The increased SG&A was primarily due to increased legal and professional fees, increased headcount, and increase in sales and marketing expenses and increased administrative expenses, and also inclusion of SG&A expenses of Ancore and Centrovision. As a percentage of revenue, SG&A has gone down because of leveraging SG&A on a higher revenue base.

In July 2002, we made a strategy equity investment of $1.75m in Imagis Technologies, a publicly traded company, which is included in our Other Assets. As the market value of this equity investment has declined and to comply with SEC regulations, we have taken a permanent charge of $1m to adjust the value to March 31, 2003.

Our tax rate for the nine months was 28.9 percent compared to 28.7 percent for the last year’s nine months. Our tax rate is dependent on the mix of income from the U.S. and foreign locations due to tax differences between countries.

Our balance sheet remains strong. We have over $91m in cash and marketable securities.

Our guidance for fiscal 2003 remains unchanged -- $275m in revenues and $1.01 in EPS after taking a charge of three cents in second quarter and five cents in third quarter. Guidance for the next two quarters – we expect revenues to be in the range of $91-93m.

With that, I’ll open it up to questions.

[Caller instructions.]

The first question is from the line of [Jeff Rosenberg][ph] with William Blair. Please go ahead.

Hi. First of all, can you give us a little more breakdown on the security side? Maybe some flavor for revenue contribution of InVision and the large cargo scanners during the quarter?

In the $34.1m, security revenue for the quarter, in that, we have approximately $10m of large cargo, and InVision is approximately – a little over $6m.

Okay, and is there any InVision that is in the Opto side? Or is that pretty much the whole InVision contribution?

It’s pretty much done; it’s a very small amount.

Okay. And then can you give us an update on the status of the backlog at the end of the quarter?

Current backlog is a little over $80m.

And does that include the order from the TSA? Or is that – we would add that to it to get your backlog where we sit today?

It does include the order from TSA; that’s right.

Okay. And my last question is, on the TSA order, can you talk a little bit about opportunities for follow-on orders there, sort of any flavor for what the application is, whether it’s an expansion of checkpoints or upgrades of machines? Just some color there on what’s happening there.

Jeff, this is Ajay. You know, we’ve always said over the last year and a half or so that TSA was more concerned what’s going on with checked baggage and concentrating on InVision and L3. Since supposedly they’ve pretty much – over and done with that, they’re looking at now the [handbag, inside][ph] of things. This we think is an initial order. I think there are more orders to follow. You know, what they’re going to be obviously is going to depend on funding. I think there are more checkpoints that need to be upgraded. They’re looking to see if they can ease the passenger flow as well to see if newer checkpoints are required. So we’re going to see that if that continues, but we’re going to look at it from a quarter-to-quarter basis.

Okay. But when you look at the guidance you gave us three months ago, was some of this, what you’re seeing, already contemplated in there? Or did you have a pretty good feel for at least some business here? And, similarly, what are you kind of thinking about over the six months you’re giving us today in terms of this – the contribution from TSA?

I think obviously this is going to ship over, you know, starting this quarter going into next quarter, and we’ll just have to wait and see what happens with TSA. But as I said, we expect to get more business. When that’s going to hit exactly, we don’t know, but the guidance we’ve given obviously for the next six months, we feel very comfortable with.

Okay, thanks.

The next question is from the line of [Steve Murphy][ph] with CIBC World Markets. Please go ahead.

Hi, good afternoon. Given the mix you anticipate, can you talk a little bit about what the trend in gross margins might be for the next couple of quarters?

As I stated in the last conference call, our margins for this quarter and the next quarter will be a little lower because as we are shipping these initial cargo machines and all the initial development costs will be charged to cost of sale. And as we get the repeat orders, that will improve the margins, but for next two quarters, we expect in the range of 31 to 32 percent. It all depends upon the mix, too.

Okay, but in terms of – you know, you did $10m in cargo revenue, which is a pretty sizable amount, so this should be approximately the low point on gross margin?

You know, I think that we still have a very healthy backlog in cargo, so that for the next couple of quarters, I personally look at that that the shipments are going to have a mix which is similar to this quarter so that you should expect that the margins are pretty much going to be where this quarter’s margins were.

Got it. Okay, that makes sense. Okay, you mentioned that you’re pursuing potentially a demo system for the air cargo screening in the U.S. Is this something that looks relatively optimistic, could happen in the next quarter or so, or is this probably a longer-term opportunity?

Well, whichever state you are in, you could write to your Congressman. Maybe it will get faster. Ajay, do you want to comment on it?

Yes, I think Congress is just starting to look at what to do with air cargo. I think we’re going to see over the next quarter or two [indiscernible] we’re talking to them actively. I don’t think it’s something – you know, if you’re looking from a revenue standpoint, it’s not something you’re going to have in the next quarter or two, but we’re basically working very diligently because really the key thing here is to have some kind of standard on what air cargo should look at, and that’s really the key thing because if this can become the standard, obviously you’re looking at future procurements by air cargo.

Just to add on to what Ajay mentioned, as you know that we are working on the El Paso site, which is a land border crossing. That had been in the making for the last couple of years, and we finally cracked that open, and that generated, as you know, a lot of publicity. Frankly, when somebody joked in the last conference call, they put us on the front page of Wall Street.

There is a lot of interest at the [TSL][ph] level, now that the checked baggage issue is done with, to start looking at what to do with air cargo. This is one of the technologies that we are pushing. We have talked to the airports. We have talked to some airlines. We’ve talked to some federal agencies. And because it inherently has a better jam self-catching the bad object or [indiscernible] object because of material specificity and even positioning specificity, we think it lends itself for air cargo. Obviously, it has to have a site, but I think that the first one, the El Paso site, was a little bit more difficult because that was just the first time anybody was looking at it. But once that’s done and we are working on it, for the air cargo side to start looking and trying something similar, I think relatively maybe it’s easier than the first one. But we are aggressively pushing it. We are talking to people, not only just in U.S. but even outside U.S., and we believe that it will happen. But [indiscernible] it’s not going to happen [inaudible] and even if we do book one, it is not a one-quarter, two-quarter revenue. It’s a demonstration site, and our intent is just like what we have said to the Street from the El Paso site – the important thing is to get a site so that one can bring customers, one can look at what this technology can do, one can maybe do some standardization or a yardstick compared to other technologies, and once you’re able to put a relative competition or a bake-off of various technologies and prove that this technology does have the ability to work, then it’s easier to look at what the sales potential is going to be. Right now, we are saying we’re only targeting to go try and push for a demonstration site.

Okay, fair enough. Let’s see. Last question – you’ve said all along that the timing on these deals is very hard to predict, and it’s obviously compounded by the recent events that you cited. But can you give us a feel for how many international large cargo systems you think, you know, judging by your pipeline you might get under contract, say, over the rest of the calendar 2003 year?

Well, more than we have now.

Absolutely, more than what we have now. No, seriously, there’s a tremendous amount of activity, and I said in the beginning of the conference call that we measure the activity obviously different ways. Every company measures it differently. Our measure is that Ajay's group marketing is aggressively and very busy – more busy than they were in the beginning of the year. Obviously with these two things happening worldwide, it’s difficult to meet the right people or even get travel done, but there is a tremendous amount of activity.

On the other side, one thing that we have noticed with the gamma kind of products, that the X-ray products, the fixed-site products or relocatable products had a longer cycle to complete after you get the order, whereas the portals – gamma portals or the trucks with the gamma-based system are a faster delivery than the fixed-site’s relocatable X-ray, and we have actively taken the position after winning the last order, the first one that we opened the U.S. government, that we are actually building in anticipation of sales multiple trucks with various kinds of products in the gamma product line – one, to show and tell, two, to get it out there, both domestically and internationally, and, three, to be ready to deliver a product when the sale actually happens because the cycle time from the order to the need of a customer has become very different now than, say, a year ago.

I think just to add on that, the other difference really is that we’ve got demo sites, we’ve got some trucks and other equipment sold, so we are actively right now demonstrating not just internationally, but also within the U.S. we have similar products going around to various different government agencies. And as Deepak mentioned in the beginning as well, we had a demonstration of our site on the Mexico-U.S. border as well. So we’re getting a lot of visibility out there which we didn’t have before, and that’s helping a lot.

Great. Thank you very much.

The next question is from the line of [Brian Ruddenberg][ph] with Morgan Keegan. Please go ahead.

Okay, great quarter. Couple questions. First of all, on backlog for the fourth quarter, can you tell us what is planned to come out on the cargo side and the InVision side? So where would backlog sit at the end of fourth quarter, [indiscernible]?

Would you repeat that? I mean you answered a couple of things in one question.

Okay, backlog for fourth quarter?

Presently, or at the end of [fourth quarter]?

Yes, what do you expect it to be at the end of fourth quarter?

I think the best way to answer that, Brian, is, you know, currently we’re sitting at a little over 80 million, as the news pointed out. You’ve got approximately -- the breakdown of that approximately, what, $15m? --

Fifteen million.

-- in large cargo, and InVision is about $3m. What it’s going to be at the end of fourth quarter? You know, we’re not going to comment where it’s going to be, but obviously it’s – you know, we’ve said all along where we expect InVision to be and large cargo depending on when we book orders might be higher, might be lower.

Okay, so three million of InVision backlog will come out in the fourth quarter. Will that entire – is that correct?

Yes, that’s right.

Okay, and then $15m of large cargo will also come out in the period?

It depends when we ship that $15. Some of it might ship in this quarter. Some of it might ship in next quarter.

Okay, so that’s a variable. Okay. The next thing is guidance for fiscal ’04. Do you expect an up year in fiscal ’04? Can you give us some kind of maybe general terms?

Well, you know, Brian, we have given guidance for the next two quarters. More than that, it’s difficult to give guidance at this time. I think we are going into our budget and planning meeting, which we normally do on a yearly basis, and end up June, beginning July. And we’ll be able to have a better idea. What we’ve been trying to do is to give forward two quarters all the time, but as you can look at it, that – the last couple of quarters and the forward two quarters we are giving pretty much are in the line of the numbers, which is $90m, $95m-plus for six months. You can add the numbers yourself.

Okay. Fourth – you don’t see any change then in that? You don’t see a dropping off? You see things consistent then going forward?

Well, we have said that our business visibility in the non-security area is getting better. Our [indiscernible] business continues to hold both domestically and internationally. We have still $15m of cargo business. The activity is quite strong, and the delivery time, especially on the gamma side, is much shorter than before, so that I think that, you know, the next two quarters we are very comfortable with, we have the backlog, and, you know, one of the concerns everybody had was that maybe we shipped $50m in this quarter by taking all the cargo shipments. We only shipped 10 million bucks out. So that means that known cargo and non-InVision, we still had a very healthy shipment of other products. Going forward, our total backlog is about $3m of InVision and $15m of cargo. If you take over the two quarters, that’s $18m out of the $80m that we already have on the books.

Okay. And then let me just make sure I understand guidance. In revenue guidance for fiscal ’03 is $175m. You have year-to-date reported $131.7m in the first nine months. That implies by just looking at that, that’s $42-43m in revenue in the fourth quarter. Am I reading that correctly?

I think the best way to answer that is a lot of that depends whether it’s that number or a little different on what large cargo shipments go this quarter versus next quarter. That’s why just like last quarter we’ve given guidance for two quarters in a row.

Okay. But then on the EPS side, you’ve given guidance of a buck one, $1.01 ex the [acent’s][ph] charge, so a buck nine is the guidance you’re giving, you know, ex all the charges. That implies a 28-cent earnings-per-share quarter in the fourth quarter. Is that correct?

We have said that we’re going to have the same earnings guidance as we had last time, so I guess you could put the numbers together.

Great. The thing that I’m scratching my head on, and just maybe you guys can help me out, if you’re only going to do $43m in revenue in the fourth quarter, going off that guidance right there, and you’re going to have flat gross margins, you know, are you going to cut R&D, G&A? What’s going on?

Well, I think the first item is we’ve given guidance of a gross margin for the next couple of quarters based upon the mix that we know, but we’re sitting in $15m of cargo, which inherently has lower gross margin because of the reasons Anuj mentioned, and he also mentioned that all of that cargo is not going to ship in Q4. So we feel at this stage with what we know in the mix that I think that we are very comfortable with the year-end guidance for EPS based upon the mix that we think we’re going to have for the quarter. What Ajay was leading to it, that depending upon the cargo, which is a little bit more unpredictable, just like we saw this time, you know, your guidance was $47m; for Q3, we did $51m. That thing is, the cargo might ship in one shape or the other so the number of shipments for this quarter might be higher. But there’s a little bit of uncertainty where the cargo ships, so we are more comfortable by saying, I think with the mix we know, most of the $43m, $44m that you are backing into for this quarter revenue, I think earnings are there.

Okay, and that would not include cargo or would include cargo, that forty—

It would include some cargo. We just don’t know how much cargo’s going to go this quarter versus next quarter, and that’s why we said, “Here’s where we are for six months on revenue.”

Okay, okay. I don’t mean to beleaguer the point. That’s good. The building of inventory – can you tell us how much inventory you plan to build? And then I have one final question and I’ll shut up.

You’re talking in terms of what, on the cargo side?

Yes, you were talking about building some inventory out there to show off your gamma systems and things like that. I didn’t know how much you were going to invest in inventory to do that.

I think what Deepak was saying, we already have, but, you know, we’re building some production units in anticipation of orders basically. That’s what he was implying.

Okay. And then the order cycle is – I don’t know if I’m looking at this right. In the U.S., I’m anticipating it to be kind of summer/fall time period. What is the international order cycle for cargo?

Order cycle in terms of what?

In terms of when awards should be coming. When should be – I mean there’s a lot of bid activity, you mentioned, out there. We believe that there’s going to be a lot of bid activity in the U.S. When will that bid activity in your opinion break loose with awards? Is that going to be a summer/fall timeframe? Is that going to be a spring timeframe? Is that going to be at the end-of-the-year timeframe?

Well, you know what? We are saying it’s anywhere from tomorrow to sometime in the future. We are actively pursuing it. It also depends upon, as you know, we have the broadest product line. So the activity that we are looking at is not only in gamma. They’ll be looking at 450 KVs, we’re looking at relocatable, we’re looking at fixed sites. Nine and maybe six and maybe three and maybe 2.5. We’re looking at freight forwarders, the TNA, BFNA. It’s such a broad question that we – the way to describe it is, Brian, that since January, the quotation activity or the demand internationally has gone up instead of going down. But since we’ve not been able to travel much or to be able to sort of do the closure with all the stuff that’s happening, it’s difficult to put a timeline of saying finitely when we can close. And you’ll know it in this environment that cargo has that uncertainty of the closure. But if we are building the trucks in anticipation, we feel quite confident that at least in the international sector, some of the gamma kind of business is imminent.

Okay, very good. And then there is no drop anticipated in optical/medical, or is there a drop? Do you to kind of steady state model around 16, 17 million?

I think so. I think I said it that we are still recommending caution. But as you’ve seen, you know, we are holding our own. In the model I think anywhere from 15, 16, 17 million is a good number. Obviously that our [Dolphin][ph] medical oximetry which we have been diligently doing new development with new [indiscernible] end of this year. So we think that the latter part of our 2004 – that means that in the January to June time period -- we should see some aggressive activity in that product line.

Great. Thank you very much.

The next question is from the line of Steve [Gish][ph] with Roth Capital Partners. Please go ahead.

Congratulations on a nice quarter. Deepak, in your opening statements, you had mentioned the test site down in Texas. The expectation was that site would go live by the end of the year or possibly Q1. Has there been a slight push-out or slowdown in construction on that site?

When you said just to clarify, when he said at the end of the year, it was end of not fiscal year, calendar year.

End of calendar year. But, Deepak, he had also mentioned possibly in Q1.

Yes, the answer to your [indiscernible], Steve, that’s why I gave you – originally it was 2003 end. Now we’re looking at 2004 first quarter. Again, it’s not because of us – because of the site. And, again, it is to do with -- some of the key people who are involved in the site construction or planning happen to be in a country called Iraq.

Okay, okay. What about the biometric applications? You know, in the past, you put out a prototype product. Any interest in that at this point? And, also, can you talk about any other strategic or venture investments that you have made or are contemplating?

Well, you already know the answer to the latter one. If we are contemplating of making anything, we’re not going to talk [inaudible]. I mean that we can answer very confidently.

On the biometric thing, yes, we have started showing the unit. As we have mentioned that we believe that a biometric add-on device on top of the metal gate, which is the one place in any site where you want to protect like an airport or something everybody goes through. The thing is that, again, most of the focus has been up to now in checked baggage. And as more and more people now start looking at other weak spots in the security, we believe that that’s a good product. We are looking at – we have demonstrated that at a couple of shows. We are talking about it. We are improving it. We don’t have any specific quotation that we can say to you that we are actually quoting that. We are still looking at – and the idea was to have this unit that’s out there so that we could get more feedback from the customers of what needs to be done to this kind of a product.

And we’ve actually actively demonstrated at some of the exhibitions and everything where we’ve been, and it’s received some pretty positive feedback. And the feedback that we’ve gotten, we’ve tried to make some changes or adjustments in the product.

On the second part of your question, we continue to look at it. Basically, we have a strong balance sheet. We have a tremendous interest in the security field. As you know, that we have said in the last couple of conference calls, EDS is one side of the business that we don’t have any commercial presence in, but we actually want to be in that. We have been actively developing our phantom product. We are hopefully going to get it over to the FAA TSA by sometime in May.

In the EDS area, since we have a product and an interest and a strong balance sheet, we definitely are looking at whether we internally develop it and/or do we enhance it with a strategic technology, or do we look at the possibility of acquiring a business to go forward in that product line? The two areas that we are looking very aggressively in that is cargo and in EDS. In the EDS mode, we are looking at both CT, and we’re also looking at hybrid technologies based upon combination of dual-view X-ray, quadruple resonance, a deflection X-ray and whatever else is out there to combine it to make not only just a EDD but an EDS. But we definitely have interest in pursuing the CT area.

In the cargo side, we have a very broad product line, but we continue to look at how we can broaden it further. So I mean that’s the menu.

Okay. And you had mentioned how much of the – in the backlog is related to InVision. You know, they had announced recently that they’re taking in some of that pre-scanner work that Analogics was doing on their 9000 system. Do you anticipate in the future to continue to manufacture components for their 5500 series? And then, Anuj, if you could provide the cash flows from operations and capex for the quarter?

First of all, Analogic is not doing any work, as far as I know, for InVision, but I think it was L3 you meant.

In terms of the 5500, obviously, you know, whatever orders they get, we’re still shipping them. If they get more, we’ll obviously get orders there. Nine thousand (9000), we said last time. You know, we are quoting, actively talking to them at this point, and, you know, we’ll see what happens. But from our standpoint, InVision is not very significant going forward.

Okay.

Just want to emphasize because a lot of people have asked that, InVision going forward is not a significant customer for us in any of our projections. It’s a non-event.

What about cash flow from operations and capex?

Cash flow from operations for nine months would be approximately $15m, and capex expenditure is approximately $3m for a period of nine months.

Over the last nine months?

Yes.

Okay, thanks.

The next question is from the line of [Chris Zippel][ph] with [Precept Capital]. Please go ahead.

Hi, guys. Like to get a little bit more color on the backlog. You guys said it was slightly more than $80m. Does that include the Ancore El Paso project? And if you guys could, maybe talk a little bit about how much backlog is non-security versus security-related? Thank you.

The answer to the first question is yes, it does include Ancore. And basically just like last time, you know, this time we only broke out Ancore and the large cargo, which I think is approximately 22, 23m, and that’s really as far as we’ve broken out in the past, and I really don’t want to make a change at this point.

So 23 million out of the 80 is large cargo?

That’s correct.

And Ancore.

Large cargo and Ancore.

Okay. Could I assume the $23m is all security?

Yes.

Okay. So in there, in that 23 is also the $7m –

Of Ancore.

No, [inaudible.]

The new TFT contract you guys got this quarter?

No, no, no.

[Inaudible.]

Let me just make sure – I think you were getting confused there. Twenty-three million is large cargo and Ancore only. There is additional backlog in security, which is where the TFT contract would fall. We just have not broken out what those numbers are.

Okay. All right. Thank you very much.

The next question is from the line of [J.D. Padgett][ph] with [Founders Asset Management][ph]. Please go ahead.

Yes, hi, guys. Good quarter. A couple questions. Remember at the end of the December quarter you kind of gave the full-year guidance that would’ve suggested that the cargo shipments for the March quarter and the June quarter would be somewhere around 20, 21 million? To the extent everything is still on track there, couldn’t we kind of infer from that that we’d do at least 10 million in the June quarter?

I think the best way to answer that is, you know, you’re looking at approximately $15m in backlog there, and I’ve said we’re going to ship it between this quarter and next quarter. So I’m not going to go into specifics, but obviously there’s always some timing difference, etcetera. But our thoughts are pretty much where they were, you know, a few months ago.

Okay, so it should be at least 10 million to the extent that you could get some of that stuff installed more quickly?

I didn’t say that; you did. I’m just saying it’s going to ship within the next couple of quarters.

Would that earlier logic maybe not take into account just how difficult it is to kind of complete projects given all the issues you mentioned such that maybe we could see that a little bit more smooth between the June and September quarter, that 15 million?

If you’re saying, just like Brian does, if we give you two quarters’ shipments, Brian is going to do some other way of dividing it in half or whatever. If you want to say that, you’ve got $15m approximately of backlog; you want to smoothen it over two quarters, if you do that, we are splitting hairs, a couple of million, to your number of 10.

Right.

But you are doing your own questions, and I think that you’re on the right track.

I think we’re pretty much – you know, and that’s the reason we said it’s over two quarters because it’s hard to predict when it’s going to ship.

Okay. What about the [indiscernible] from the TSA to pull out a bunch of screeners across the country? I didn’t know if that was because they were already running into budget problems or whether they want to free up some money to spend maybe on some additional equipment?

I don’t know if the two matters are related or not, but the best comment I can ask you is go through an airport next time and tell me if there are too many screeners or not enough screeners. I think you can judge for yourself.

Okay. You don’t necessarily have any insight into whether that is a negative signal or a positive signal for you guys?

I don’t think it’s any signal at all.

Okay, yeah, I had heard maybe that they were going to just reallocate some of those resources to buying more equipment, so I thought that might be good for you.

I think, just as a traveling public, I can comment on it that there’s just too many people there with white shirts.

Right. I agree with that.

That was more polite. You were more polite.

And one more question. The tax rate – what should we assume for the June quarter and looking into next year?

As I said last conference call, our tax rate is dependent on the mix, foreign income and U.S. income, and the tax rate for nine months is approximately 29 percent. And for next quarter, I think it’ll be safe to use 29 percent. For next year, again, we don’t have the number as yet.

Is it safe to increase it from there, or could it potentially be maintained at the same level?

I really cannot comment on that because as Deepak mentioned, we’re going to go to our strategy meeting, and it depends on U.S. income and foreign income. And as in May/June, we’ll go through all the calculations, and we’ll provide you with the guidance on that in the next conference call.

Just to add on to it, also a function of it is what kind of mix of bookings we get. So it’s difficult to plan it, but I think it’s a couple of percent one way or the other. Doesn’t matter.

Okay. Let me ask just one more quick one. InVision was, what, about 22m then for the full fiscal year ’03; is that about right?

It’ll be about 19-20m [for] earlier.

Okay. Thank you.

The next question is from the line of [Andy Shopick][ph] with Nutmeg Securities. Please go ahead.

I think one of my questions was just answered. You’re confirming that you anticipate InVision will be approximately 19-20m for the full fiscal year?

Nineteen million for nine months and then another fourth quarter, three. It will be about 22 million for full fiscal [inaudible].

Okay, so it’s 19m for year-to-date plus the anticipated shipment of additional three million?

And for the whole year, it’ll be about $22m.

Okay. And the other question I really wanted to ask is I remember it was a year ago at this time when there was a great deal of concern or confusion about the administration reducing the plans to install equipment in the airports for baggage screening. How has this all played out? Do you have any accurate count on whether or not all the 420 U.S. airports were done by the end of the year and whether or not there are additional plans or an anticipation of additional budget money being spent to equip other airports in this calendar year?

Well, I think just to answer that question first of all, the plan was to have this equipment for checked baggage, and really what that did from our standpoint was hold back the equipment for hand baggage, and that’s some of the releases that we’re starting to see from the TSA right now. You know, what their future budgets are on the checked baggage side on the current machines that are out there, I think that’s a question better answered by, you know, InVision or L3. You know, we’re a vendor to them, and as and when we get orders, we’ll ship them. But like I said before, from our standpoint, that’s insignificant going forward.

Just to add on to it, on the carry-on side, as Ajay has mentioned, the government’s focus has been the last year to just get the deadline of December 2002 done by checked baggage. And they’ve done them in some shape or form by combining various technologies. Now, they are more focused into – there’s a lot of talk going on on traveling public inconvenience, long lines, at the carry-on checkpoint so that, you know, we got the order, we think that as the focus goes more towards – away from checked baggage more towards the carry-on side, there is still a lot of steam left into the placement and maybe additional checkpoints being put in there to reduce the crowdedness or the long lines. And then don’t forget – one of the areas that everybody now is looking at is air cargo.

Well, you’ve got air cargo and you obviously have port security and everything else.

But cargo becomes a major issue, and there’s a lot of publicity both that at ports only 2 or 3 percent of the containers are getting checked. We said in the last conference call we believe that that is going to be a cooperative initiated by U.S. and the trading partners. We are well positioned into it. New technology units will all be up and running by end of this of different technologies and different countries. But in the air cargo side, people are now looking at more focus into it what goes into a plane besides people and their checked baggage. It’s a revenue loss for a lot of airlines. It’s a revenue loss for airports. So there’s a lot of talk going on into it, and we are actively pursuing that. And I think as they get more focused into it and as more policy gets defined, we think that’s a great opportunity for growth. We are well positioned. We have a very strong presence internationally in the freight forwarding industry. We have talked over the last couple of conference calls. That business continues to be strong. We are talking about air cargo both from PFNA, TNA, for large site installation; also, for looking at other alternate ways of air cargo. So there’s a lot of money that’s going to be looked at as the pressure of the checked baggage gets reduced to [indiscernible].

But there are no specific congressional actions or bills pending that would give any clarity to this right now?

Well, that’s not true either. There are lots of things [indiscernible]. For example, there is a container CSI, Container Scanning Initiative, at ports.

Okay.

Money’s been given to ports. The reason we are talking about air cargo because people have asked us to start looking at that at airport sites. There is talk about being able to put – what to do with putting packages on air carriers. A lot of airlines are losing a lot of revenue. So I won’t say that there are no specific things marked. I think as we speak the budgets are being formed. There has been talk-about specifically and there are very different signals or there are different bodies and different regulatory governments who are overlapped in their decisions and their monies, and this thing is pretty confusing, but it’s there in bits and pieces.

Is there an expectation that over the course of the summer that there would be more specific clarity to these initiatives, if you will?

Well, I think that the more we all talk to our congress people, maybe it will get – by some other more specific. We think this is not going to be a knee-jerk reaction like what happened after 9/11 for checked baggage. I think this is a more [indiscernible]. There are different technologies. There are different kinds of ways to do it. So my feeling is it’s going to take some time, and it’s going to come in dribbles and bits and pieces is the way it’s going to happen.

Keep in mind the applications, you know, when you talk about cargo are a lot broader then, you know. With aviation security, we’re specifically just looking at 424 airports. You know, when you look at cargo, you’re looking at airports, you’re looking at freight forwarders, you’re looking at ports, you’re looking at cargo coming to buildings, you’re looking at border crossings. It’s a lot broader than – and there are a lot more different agencies involved than just looking at 429 airports in the U.S.

Okay. Thank you.

The next question is from the line of [Joel Rameen][ph] with [Bridger Capital][ph]. Please go ahead.

Hey, guys, good quarter. Can you just give us – what did Ancore contribute to revenues in the quarter?

For the quarter, it was $1.5m.

And was there any incremental Ancore backlog?

What do you mean –

Did you guys generate additional Ancore backlogs in the quarter over last quarter?

I think it was pretty much the same as last quarter within a million dollars here or there.

So just whatever – because what I’m looking at, last quarter I think you guys had talked about it being about $7m of the $20m plus in cargo? And then this quarter it looks like it’s, you know, around $8m just taking the $23m of large cargo plus Ancore against the $15m of large cargo that you were talking about. So I’m just trying to figure out, we’re recording revenue, generating revenues from the Ancore business. Are we adding back? Is that revenue being replaced into backlog with additional Ancore orders, or is it just – are the numbers just moving around a little between last –

We’ve got some additional orders. And, you know, Ancore really – you know, going forward next quarter, we’re really going to start talking about large cargo as a whole because that’s really mixed in very much with large cargo right now. So, yes, they have got additional orders if that’s –

Yup, that’s the question. Okay. And so just – so you guys are saying sort of 80-plus million dollars in backlog. Is that like 80-point something or is that like 82 or – can you be a little more precise?

It’s north of 80.

North of 80 and less than like 81? I mean this isn’t like an $84m number that you’re –

North of 80 and less than 90. I think –

You know, we don’t have a finite number. It’s the middle of the quarter, but it’s north of 80, the answer Ajay’s given you. If it was 90, close to 90, we would’ve told you. So it’s north of 80. It’s definitely higher than 80 and it’s less than 90, but, you know –

But there’s no, like -- and forget where we are now. I mean there’s no like March 31 backlog number that we can have?

Sure, we’ve given that. I think Anuj mentioned that. Jeff asked it. The end of March quarter, the backlog was close to 72 or 73 million.

Okay, then I missed that. All right.

Just to clarify again. People keep asking backlog. The backlog in some shape or form, we have tried to caution the Street, besides talking about backlogs, specifically in terms of large cargo because it has a longer delivery and gives you a visibility longer term. The rest of the company’s backlog is [indiscernible] business. And a good example is what happened in this quarter. We only used $10m of that cargo backlog, but there is a lot of [indiscernible] business with it, so, again, we want to caution everybody, backlog should not be a [indiscernible] reflection of what the next quarter’s going to be.

Right.

Or the next couple of –

Next couple of quarters.

Right. So given that then, what – I mean you guys sort of beat certainly my revenue estimate for the quarter and I think most of the Street’s by about $5m. What drove that up side surprise to revenues? Was it cargo? Did you only expect to recognize $5m in large cargo? Was it the turns business? Did you expect – where was that $5m [indiscernible] coming from?

Well, keep in mind, that’s the reason we want to start telling you again, once you get cargo into the pipeline, which is what we did, we want to talk about two quarters.

Understood. So basically when we had last sort of spoken you had anticipated, you know, the $5m that you brought in this quarter perhaps coming in next quarter and not this quarter?

Well, we have reaffirmed our year-end numbers, and I think Brian from Morgan Keegan backed into, that looks like – that it looks like a 43, 44 million next quarter, but it’s still 95 million for the two quarters.

Okay. So let me just be very clear. So the $5m in incremental revenue that we generated this quarter above expectations was just more of a timing issue between this quarter and last quarter than anything else and is related to the large cargo? I mean, in a sentence, that’s an accurate statement?

You –

Yes and no. [Inaudible.] I think, you know, you look at the overall business, obviously Deepak has said the base business has been strong, the cargo business again, we don’t know if it goes in this quarter, next quarter, and, again, we’ve given you two quarters going forward, and it might be a little better, it might be the same. It’s very hard for us to know when some of the cargo shipments are going to ship.

Right. Okay, so just – I mean it’s real simple. So it looks like it shipped a little sooner than we expected it to ship when we were talking about the two-quarter timeframe? That’s all. We just – we got some more shipments this quarter than we anticipated, or at least than I anticipated? Fair to say?

Well, I think you’re saying it right. I think the way you look at it is – the thing we want to get across to you is the rest of the Company’s business, the turns business has not slowed down.

Right. Gotcha. Okay, simple enough. And what was depreciation amortization for the quarter?

It’s about three million for nine months and approximately around about $1m a quarter.

Okay. And then just looking at the balance sheet on the receivables side, I guess – I guess the receivables-- looks like they were up by like $5.5m from last quarter? Is that just – is that just a direct function of having recognized large cargo revenues in the quarter?

No, it’s a function of – if you look at it, we shipped $51m, and [indiscernible] shipment [indiscernible] increase receivables.

Right. And I’m just – specifically, you can zero in on that as being the large cargo receivables, the increase?

It’s a mix, not necessarily large cargo, and as I could mention the turn business, too. But if you look at our DSO, typically we had been running 90 days, but now with the improved collections in last two quarters, and the DSO has gone down to about 82 days.

Right.

Keep in mind, you know, our shipments were higher in Q4 – I mean Q3 than they were in Q2, so that obviously, you know, makes a difference in large cargo and other areas. So it’s not just concentrated on one area.

Okay. Good, good, good. Let’s see, is that everything? Yup, great. Thanks very much, guys. Good quarter.

The next question is from the line of [Greg Weaver][ph] with [Kern Capital][ph]. Please go ahead.

My question’s been answered. Thank you.

Thank you.

The next question is from the line of [Tim Quillin][ph] with Stephens, Incorporated. Please go ahead.

Hey, good evening. It’s getting a little bit late here on Friday. I’ll try to keep this brief. One is just on the turns business. It looks to me if I strip out $10m in revenue from large cargo and $6m in revenue from InVision, from the security number, I get to about $18m, which is actually about a 7-percent decline from the March quarter last year, and I’m wondering if I’m doing the math wrong or are you seeing something different there?

How much was the revenue for cargo last quarter, was $3m? Twenty-four – oh, last year. You were comparing it from last year’s third quarter or sequential prior quarter?

Comparing it to last year’s March quarter.

Last year’s March quarter, we had $19m in security revenue.

How much was that InVision in?

How much was InVision?

So, eighteen, so it hasn’t gone down.

About flat.

It’s about flat, just the same number.

Okay, so it’s about flat if we strip out of the March quarter last year, if we strip out cargo and InVision?

Yeah, [inaudible] I haven’t done the actual math, but I would say it’s pretty much in line.

Okay.

Which is what we’ve been saying all along that that portion of the business has not slowed down.

Well, okay. It has not gone down anyway. I guess my broader question is, if you take $20m out of 2003 revenue from Envision that probably cannot be replicated, that would get you to about $155m. I’m just wondering what kind of growth in the core business, you know, your core turns business, you think is realistic for us to think about on a go-forward basis?

Well, one way you should look at it is that if our guidance for the next two quarters are $91-93m, out of that, InVision only accounts for 10 million bucks, two quarters put together.

Right.

Sorry, sorry. I’m sorry. Three million dollars is the total InVision in the next two quarters.

That gives you an idea.

So that gives you an idea whether the bucket has been filled by the loss of InVision business.

Right.

We are saying that we have just started now entering the cargo market in U.S. and internationally with the gamma trucks. So I think that we are very comfortable, and if you look at our guidance for the first two quarters, this quarter and next quarter, and then Ajay has said that we’re going to ship about $3m of InVision in this quarter, that means theoretically we are telling you that Q1 has no InVision.

Right. Fair enough. I think you’ve covered that well. My last question is just regarding specifically the gamma-based systems. Where do you expect the international orders to come from? Is it going to be repeat customers? Is that who you’re building them from? Or will it be new customers?

And then, secondly, in the President’s FY ’04 budget request, there was a photo of SAIC’s gamma-based cargo screening system, and I’m just wondering what you can do to become at least a second supplier to SAIC in the U.S.?

Well, Ajay’s going to answer you the details, but I can tell you that maybe there was not room to put two pictures, so they decided to put their picture. We are very – we can tell you that the language in the bill going forward does not specify a back-up system of SAIC. It does not. The bill originally was going to say that, but by some magic, it got changed. Regarding the issue of where are we going to sell the stuff in, we haven’t sold enough to really confidently tell you that it’s going to be repeat business, though people who have bought one, obviously they like it. Most of the requirements and interest are coming from new potential customers, and as they find out that U.S. customs are using these systems, it’s becoming a better and easier door opener to sell that just [indiscernible].

Keep in mind, you know, don’t underestimate – we always say we’ve been an international company. We are an international company, and we have our machines in practically every country in the world. So our name is out there, so obviously we’re using that to leverage on this side as well. But, again, this is new products, and this is basically, to a large degree, even a new industry, so we’re going to see a lot of new customers, and once we see new customers, you might see some repeat ones.

And the other thing is we have never said that we are going to replace or become a dominant player in the gamma against SAIC.

We just want to get our fair share.

We want to get our fair share, and we are very proud about the fact that we were able on the GSA – we were able to sell a system to a federal agency. And now with one procurement done, we do a good job, we are showing it to other people, we are mentioned to you that we’re building some in anticipation. We don’t want photographs with the president; we just want to sell systems.

That sounds good to me. I’m going to let you guys go. Have a great weekend.

Thank you.

Thank you.

The next question is from the line of Jeff Rosenberg with William Blair. Please go ahead.

Hi, sorry to ask another one, but there’s one just modeling thing that I’m still confused about, which is if you do 43 million in revenue or 44, it seems to me like what you’re implying is that’s the number you’re comfortable with because of the uncertainty of cargo. But if cargo’s low and that’s why you’re there, you would have a higher gross margin? Because otherwise, I don’t understand how you make the 28 cents. So if maybe – hopefully, that’s helpful, if you could clarify that.

I think you’ve already answered your question.

Okay, so I’m right. So the only way – so if you do 43 or 44 million, it’s going to be because cargo’s relatively low and, therefore, the mix you had this quarter would not be the same next quarter, and we should assume gross margins are higher?

I think you’ve said it.

Okay, thanks.

We are comfortable with the earnings.

Thanks.

The next question is from the line of J.D. Padgett with Founders Asset Management. Please go ahead.

Just one quick follow-up with respect to – you kind of touched on this talking about building up the inventory for the gamma trucks, but how quickly do you think you could book orders and convert revenue, you know, that would hit within a timeline of 12 months? Are there enough projects that are kind of short enough lead-time like that that could convert to revenue next year if you were to book those over the next couple quarters?

I think on the gamma trucks specifically, that’s the answer you had. I mean we can do [inaudible] in a matter of three to four months.

Um-hmm. And then what about any other – I mean some of the more significant deals that you’re working on the pipeline right now? Or did those have potential, you know, if those were to book in the next quarter or two to convert to revenue in fiscal ’04?

Yes.

Okay. Is there a pretty sizable chunk of those deals in the pipeline that you think could layer on next year?

I think – I really don’t want to comment any further than we already have on what that pipeline is, but we said that quote activity is very strong, and it’s stronger than it was three months ago.

Okay. From the standpoint of just trying to offset the InVision business in the next fiscal year, for instance, though, you have opportunities in the hopper now that give you some confidence that those will help to do that?

Yes.

Okay, thanks a lot.

There are no further questions at this time. Please continue.

Well, in summary, we’ve had a record quarter in earnings. Going forward, obviously with what’s happening in the marketplace out there with [stars] and any [indiscernible] coming to a closure, while hopefully we could capitalize on the things that we have in the hopper, we are basically comfortable with this year’s model that has been put out there for year-end and the earnings. And with a strong balance sheet, we basically look at strategic technologies out there. We are not shy of acquisitions. Security is very important to us. And both in the EDS sector and in the cargo sector, we continue to look at strategic partnerships and/or acquisitions or organic growth. And we just have to make a couple of these things to come to a closure.

Thank you very much for staying on a Friday evening. We apologize for doing this call on Friday after the market close because many of our guys are leaving, including myself. We are attending two conferences next week, and we are on the road. Ajay just came back from South America, so we apologize and appreciate all of your staying till wee hours of the evening on Friday, especially on the East Coast. Thank you very much.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for our participation and ask that you please disconnect.