OSI Systems Inc (OSIS) 2003 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the OSI Systems, Inc. fourth quarter and year end 2003 results conference call. During the presentation all participants will be in a listen-only mode. Afterwards, we will conduct the 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 Wednesday, August 20th, 2003. Your speakers for today are Deepak Chopra, Chief Executive Officer and Ajay Mehra, President, Security Group.

I would now like to turn the conference over to Anuj Wadhawan, Chief Financial Officer with OSI Systems, Inc. Please go ahead.

Thank you very much. Good afternoon everyone. Thanks for taking time to participate in the conference call of OSI Systems fourth 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 will 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-Q's 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, Ajay. Again, let me once again welcome you all to the fourth quarter and year end conference call.

The revenues for the fourth quarter were $50.9 million with earnings per share of 35 cents on $15 million shares. This result is after including a pre-tax gain of $1.8 or 8 cents per share after tax on the sale of marketable securities and a pre-tax charge of $407,000 or 2 cents per share after tax for the impairment of an equity investment. This charge specifically is on the same equity that we took a charge last quarter also.

For the year, we had record revenues of 182.6 million compared to revenues of 124.2 million for fiscal 2002, an increase of 47 percent. 2003 was a very successful year for us in a challenging dynamic environment. We were able to maintain a strong growth momentum in our core technology X-ray systems business and to meet our ambitious targets for the year.

The quotation activity, especially in the international sector, continues to be quite strong. This quotation activity is equally strong internationally in both segments of our security business that is conventional/ parcel and cargo. In addition, we continue to get our fair share in the domestic conventional/parcel x-ray segment, especially from the TSA.

We continue to invest both in marketing and R&D in the security arena.

On the conventional x-ray side of our business, we are developing the next generation of smart x-ray machines with more features and enhanced performance. These products will be introduced over the next couple of months. Our goal continues to be that we want to be a market leader and innovator in this segment of our business. This business, as you know, is metric down's business and continues to be strong for us. Not only is the business robust, but also our margins are being maintained both domestically and internationally. We at present are actively involved in various global volume tenders for these products.

On the metal gate front, we got qualified for the TSA airport requirement, which is a first for us. We have always been very strong in the State Department and prisons arena but this extra achievement is quite important as it opens a new avenue for our metal gates in the aviation sector.

In the cargo sector, we have achieved major highlights for the year. We are very proud to announce that we completed and handed over the $10 Million Fix-site cargo nine million electron bolt system to Hong Kong. This is the most modern, high purport inspection facility in the world. We are told by the customer that in the very first month of operation it has caught more than a million dollars of duty recovery.

In addition to this, we delivered and handed over three nine MEV relocatable systems to Lacordian (ph) customs. They also informed us that in their first two months of operation they confiscated and recovered duties worth $1.8 million. The product they caught was, believe it or not, illegal haul of Viagra pills coming into the country.

We also handed over the first hybrid x-ray thermo neutron activation system for air cargo to the government of Taiwan. The first mobile gamma truck systems were also delivered to Romania in the same period.

In short, we are very proud of the fact that we have the broadest technology-based large cargo systems deployed worldwide with different technologies. This gives us an edge over our competitors to show and tell our new technologies to our worldwide customers.

Regarding the material specific end course PFNA system, work goes on, on the El Paso system. As you know, this is funded by the federal government. It scheduled for completion in the first part of 2004. As you know, this project has drawn a lot of attention, both from competitors, customers and especially the U.S. government. Our goal is to get the project up and running and let the customer - in this case, the U.S. government, try various technologies and products, side by side for comparison and performance.

What we hope would come out of this would be some standardization to which all technologies and manufacturers have to adhere to. Our funding for this project is intact and we are adequately covered through the completion of this project. In the checked baggage explosives section arena, as you know that we have been working last year on our Bantam (ph) project, which is a TSA funded EDD - explosive detection device. We completed our phase two program and submitted our unit to the TSA a couple of months ago for testing.

The results were very encouraging, the data collection got completed last month and we are now fine tuning the unit, which is scheduled to go to an airport, which at this stage, we would rather not disclose to which airport - or live data gathering in September time period and we are scheduled to go back to the TSA for final testing and certification in the month of October. Caution - there is no guarantee at this time that we will get certification as an EDD on the first go. All we can say at this time is that there is enough interest in the product that we have been asked to submit proposals by the TSA for additional funding.

We have already started planning to make additional units and have found friendly customers to agree to place these units before end of December, 2003 for testing and evaluation. Just to clarify the difference between EDD and EDS - EDD checks four out of five categories of explosives and needs additional hybrid technology to pass as a full-blown EDS device. We are working for the last year with other technologies in parallel to our EDD technology testing towards EDS ultimately which is our goal. Our ((Bantam)) is based upon conventional multi-view front end X-ray with proprietary back end substance identification unit based upon deflection X-ray technologies.

Besides Bantam we have also been working on high speed CT technology which has the potential of achieving 1,000 to 1500 bags per hour. But it's at an early stage of development. By early, we mean that we've been into it for a year approximately. It looks quite promising but is still out in the future for any revenue generation.

In summary, we finished a very successful year in security and our goal is to continue the progress we have made. Both conventional and cargo sectors of our business are projected to grow for us next year. In the non-security field, last year was a tough year. We had projected flat revenues for the year and going forward into 2004 we see the same with some glimmer of hope for growth.

The growth we are projecting is in the medical sector and the rest of the sectors which are more closely tied up to the economy are projected to be flat to some growth. In all segments of our business, both security and non-security, we continue to look at ways to consolidate as many operations as possible so we could increase our productivity and efficiency. For example, in the medical product lines, both Osteometer our osteoporosis product line and Dolphin Medical for non-invasive (inaudible) product line, the product lines will still have different names but the manufacturing operations, R&D and sales and marketing are being consolidated to increase the productivity and efficiency.

Same is true for the Opto product line, UDT sensors and our newly acquired Centrovision division which we did last year are consolidating some of the manufacturing operations. They continue to also move as much product as they can to our Malaysian production facility to reduce cost.

Last year off $182.9 million of revenue, approximately $21 million was shipped to InVision Technologies. We supplied them products from both the Opto group and security group with a vast majority of it coming from the security group.

Going forward, we project very little revenue from Envision. Our guidance, as in our news release, for the next year is between 180 to $185 million, which although flat for the year in reality has approximately 11% growth overall. This equates to approximately 17% growth from our security product growth. Both sectors, conventional and cargo are projected to grow.

With that, I will hand over to Anuj Wadhawan for financial highlights and after him, I will give some more comments on some questions that we have been asked before opening it to general question and answers.

Thank, Deepak. Quick financial highlights.

The company's revenues for the fourth quarter of fiscal 2003 were $50.9 million compared to $35.6 million for the fourth quarter of fiscal 2002, an increase of 43%. Revenues from the security and inspection side of our business for this quarter were $34.9 million or 68% of total revenues. Revenues from optoelectronic and medical imaging side of our business was $16 million or 32% of total revenues.

The net income for the quarter was $5.2 million compared to $2.9 million for the fourth quarter of fiscal 2002, an increase of 78%.

Diluted earnings per share were 35 cents compared to 22 cents for the last year's fourth quarter.

Revenues for fiscal 2003 were $182.6 million compared to $124.2 million for fiscal 2002, an increase of 47%. Revenues from security and inspection side of our business for the year were $120.8 million or 66% of total revenues. Revenues from optoelectronics and medical imaging business were $61.8 million or 34% of total revenues.

The net income for the year was $15.8 million compared to six point nine million for the prior year, an increase of 128%.

Diluted earnings per share were $1.09 compared to 60 cents for the last year. These EPS numbers include a pre-tax charge of $407 thousand in the quarter and one point four million for fiscal 2003 for the write-off of an equity investment as well as $608 thousand for the write-off of certain deflowed (ph) acquisition related costs for fiscal 2003 and a pretax gain of $1.8 million in the quarter and fiscal 2003 on the sale of marketable securities. Due to the adoption of SFAS 142, fourth quarter and fiscal 2003 do not include any goodwill amortization compared to goodwill amortization of 99,000 and 402,000 in the last year's fourth quarter and year respectively. To give you the breakdown on the securities side of our business, revenue grew 62% to 34.9 million in this quarter from 21.5 million from last year's fourth quarter.

Revenue for the year grew 65% to $120.8 million from $73.4 million for last year. Included in the security revenues for the quarter and fiscal 2002 are large cargo revenues of $14.8 million and $30.8 million respectively. Ancore revenues are a part of large cargo. On the Opto and Medical Imaging side of our business, revenues grew 14% to $16 million this quarter from $14.1 million for the last year's fourth quarter.

For the year, revenues grew 22% to $61.8 million from $50.8 million for the last year. The Opto side of our business include Centrovision's revenues, which was acquired in July 2002. Without Centrovision's acquisition, revenue for the quarter and year would have increased by 8% and 15% respectively. The increase in Opto and Medical Imaging side of our business was mainly due to increased sales to defense industry.

Gross margin - gross margin for the quarter was 32.2% compared to 33.8% for the fourth quarter of last year and 31.6% for the third quarter of this year. Gross margin for the year was 32.8% compared to 30.8% for the last year. The change in gross margin was due to change in the product mix. We expect the gross margin for the first quarter to be at the current level. R&D for the quarter was $2.4 million or 4.7% of revenues compared to $1.6 million or 4.4% of revenues for the fourth quarter of last year. R&D for the year was $8.9 million or 4.9% of revenues compared to $6.4 million or 5.2% of revenues for last year. The increase in R&D was largely due to increased R&D spending on security side of our business.

SG&A for the quarter was $8.1 million or 15.9% percent of revenues compared to $6.3 million or 17.6% of revenues for the previous year's quarter. SG&A for the year was $29.2 million or 16% of revenues compared to $21.6 million or $17.4 million of revenue for the previous year. The increase in SG&A was primarily due to increased legal and professional fees, increased headcount in sales and marketing and increased administration expenses and inclusion of SG&A expenses of Ancore and Centrovision. SG&A for Centrovision and Ancore for fourth quarter and for fiscal 2003 were $668,000 and $1.5 million respectively.

Our tax rate for the year was 29% compared to 30% for the last year. Our tax rate is dependent upon the mix of income from the U.S. and foreign locations due to tax differences between countries. As we have utilized certain tax credits in fiscal 2003, we expect our tax rate to increase to 33 to 35%.

Our balance sheet remains very strong. We have over 98 million in cash and investments. The receivables have gone down from 41 million at the end of March to 36.9 million at the end of June even though our revenues are up.

DSO is about 75 days compared to over 90 days at the end of fiscal 2002. The inventory is also down from 49.2 million at the end of March to 42.4 million at the end of June.

Our guidance from the last conference call has been revenues for the fourth quarter of fiscal 2003 and first quarter of 2004 to be at 91 to 93 million range. We shipped 51 million in the fourth quarter of fiscal 2003 and hold revenue guidance for the first quarter of fiscal 2004 at 40 to 42 million. Our revenue guidance for fiscal 2004 to be at 180 to 185 million.

With that, I will turn it back to Deepak for closing comments.

Thank you very much. Before we open it up to questions, I just wanted to clarify some comments made by one of the analysts that our Ancore grants are in jeopardy or have been stopped. We have an $8 and a half million contract for the El Paso cargo site. Approximately $2 plus million has been what recognized for the last year. So there's about $6 and a half million is still there. We have already received monies in excess of 2 million and have no indication at all of any stoppage.

The other comment was regarding our Bantam grants. It's a true statement that the phase two, which was approximately one point eight million dollar program by the DSA on the development of the Bantam product, finished sometime in the middle to third quarter of last year. We, as I mentioned in my initial remarks, we delivered the unit per our obligation. We now have completed phase two but are continuing to develop a whole slew of products and product lines based on the Bantam product.

And in that way, in the fourth quarter we continue that development and as we have mentioned in our previous conference calls, we continued to increase our spending in R&D both in the cargo, conventional, and the EDS sector.

So with that, I will hand it back to the operator to open it up for questions.

Thank you. Ladies and gentlemen, if you would like to register a question please press the one followed by the four on your telephone. You will hear a three tone prompt to acknowledge your request. If you question has been answered and you would like to withdraw your registration, please press the one followed by the three. If you are using a speakerphone please lift your handset before entering your request.

One moment please for the first question.

Our first question comes from the line of Steve Murphy with CIBC World Markets. Please proceed with your question.

Hi. Good afternoon, a couple of questions. First of all, you had a nice product announcement this morning on some cargo systems. Can you give any color on what types of systems they were? At least, you know if anything about the customers?

Well, Stephen, the only thing we can talk about it is that it's large cargo. A majority of that is international but beyond that I feel very uncomfortable for comparative reasons what technology it was. All we can tell you is that it's large cargo.

OK. Fair enough.

After the third quarter, you had about $23 million in backlog for large cargo and core combined, I believe. And you said you shipped about $15 million in this quarter. You did - you did get that order which you mentioned so by my calculations you have about $13 million in backlog now.

You said you expect to be up from this year's revenue, which was $30.8 million. Wondering if you can help me with where this additional revenue is going to come from?

Well firstly you are absolutely right. Our backlog at present approximately in the cargo growth is approximately 12 and a half to $13 million ...

With the current, previous announcement.

Yes. And we shipped $31.8 million. We have a lot of products in the pipeline quotation activity as we have mentioned is quite heavy. And one clarification that I think one of the confusions everybody has from last year comparison. Last year we had some fixed site and longer lead-time and the first time around Lolla Benjinic (ph) behind it for longer delivery times. For example, what we are sitting on that now is almost all of it is shippable within this fiscal year. Now ...

Almost all that's in your pipeline now is shipping?

Yes. And for example, some of the large cargo Dyna Systems are now almost turning into inventory turns kind of business, especially the mobile gamma trucks and the mobile product lines. We can book and ship in the same quarter. We've also announced last - I think, conference call that we are increasing our production and building some of the trucks so that we can react faster. So to meet the number of growth, we feel at this stage, that there is enough in the pipeline activity, that we are working both domestically and internationally, that we will see closure and shipment during the year.

OK. What was the total backlog at June quarter end?

Total was 53 - just over $53.5 million.

OK. And do you have the number for the year over year growth rate in the conventional parcel scanning business? I guess, without - you know, which would exclude both cargo and InVision?

Ajay, you want to comment on it?

Yes. We don't - we don't have it for - in front of us for last year, but we've seen consistent growth on the - on the parcel business. And if you look at just the guidance that we gave for next year - Deepak went over it a little bit - that if you look at the parcel business, it did about $71 million, including our metal gates and everything else and about 30, $31 million on cargo. And we had roughly $21 million in InVision, of which $19 million was on the - on the securities side. So I think that $19 million is going to be down to a negligible number and that growth of that $19 million is going to come from both the parcel as well as the - as well as the cargo sector. And we're seeing some very strong activity right now on both those sectors.

Dick (ph), just to add onto Ajay's comment, the conventional parcel sector of our business continues to show robust growth and as we have said, that's an inventory torn (ph) business. It continues to book and ship and we are actively involved in some major global vendors in that product line.

OK. Great. Last question. SG&A was up from the third quarter and also, you know, up considerably from the first half of the year. Was there anything in particular and what were, I guess, litigation expenses in the quarter?

Just to give you a thumbnail on the sketch on the InVision SG&A over the year, legal and professional fee has gone up by about $1.5 million from last year's. General administrative expenses and we are implementing a new ERP system, combined together, is about 600,000. Increased sales and marketing expenses for security group is about 1.7 million and increased sales and marketing expenses for medical group is about 800,000. And inclusion of Ancore and Centrovision's SG&A - of about $1.5 million.

Keep in mind - Ancore and Centrovision were not there the previous year.

Right. OK. I guess, what's the trend on the legal and professional costs? I mean, should we see that, you know, taper due to where you're at - at that point and in that situation or is that going to keep up?

Well, you know, it's a double-edged sword. On the professional expenses, as you know, with the new requirements (inaudible) and some of the other ones that aren't happening, it's going to continue to increase some of the cost to make the new regulations satisfactory.

On the legal side, we continue our battle with L3. Out of the Q4 which we commented on last year, our expenses for Q4 were approximately $250,000 and the quarter before that was about $300,000. So that for the year, the litigation L3 expenses specifically, were about three quarter's worth which was about $800,000.

The rest of them, legal expenses are general administrative. And there is about a couple of hundred thousand dollars of expenses associated with us continuing to look at various strategic acquisitions and that consumes some of that general legal expenses.

So, I guess specific to the L3 should we, you know, think about continuing around 250 or 300K until that is resolved?

Well, we've been asked this question before and we've basically avoided putting any number on it but committed to the street that every quarter we will disclose what we have spent in that quarter. It can go up and down depending upon the activity that takes place in the quarter.

Right. Got you. OK. Thank you very much.

Our next question comes from the line of Jeff Rosenberg with William Blair. Please proceed with your question.

Hi, first off, can you give us a little bit of detail on how much of the TSA business that was, I guess, from both orders you've received was shipped during the quarter? How big a customer were they?

Do we have it handy? The 2.1 that we just booked, obviously we have not shipped anything in that quarter.

Right. I was thinking more about the seven that was supposed to ship over this quarter and next. Seven and a half.

I don't have the exact number, but I think it's in the - it's in the $2.5, 2 to $3 million range.

OK. That's helpful. And then I don't have all my numbers in front of me, was there any revenue from InVision this quarter?

This quarter we have about $2 million.

OK. So that's pretty much done at this point; right?

That's right.

Well, you've said that twice. I'm sorry. OK. And then on the Cargo, I just want to make sure that I'm looking at apples to apples because my numbers were a little different in my head than the last caller. I guess the $15 million backlog number I had in my mind didn't include Ancore; is that right? Is that what the number ex-Ancore last quarter?

Last quarter, the thing was $23 million, that included Ancore.

OK. So I have 15. OK, so that was just - OK, so now the number including both is the number you gave, 12 and a half to 13?

That's right.

OK. And then in terms of the gross margin, I would assume just looking at the backlog and the revenue guidance that you're giving that Cargo's going to be a smaller portion of the mix relative to this quarter so I'm surprised that you're not expecting a little bit of a return to some of the gross margins you had seen some improvement over what you've had recently? Any reason the mix won't be a positive factor in terms of gross margin in Q1?

I think - I think you're looking at the mix within the security group as well and obviously, you know, that's - you know, our crystal ball tells us it's in the same region, whether it's 1 percent here or there is something that we're going to have to look at.

On the other hand, what I want to emphasize to you is when you looked at InVision, Anuj said we shipped about 2 million, keep in mind when we say the - the (inaudible) business or our conventional business was strong, even without InVision we feel very good about what's going on there.

OK. OK.

And just to clarify your margin thing, we've always said that our sweet spot is in the low to mid 30's and the last quarter was 32.8. I think that, as Anuj just said, our guidance going forward at this stage for Q1 and frankly for the whole year, our guidance looks like there's a pretty much historical repeat to what our last year was. So you should look at as close to what 32% and the gross margin.

OK. That's fair. All right. And then the last caller was asking some questions about trying to look at the various components of SG&A but as revenues trend down both for the quarter and then even at your guidance there'll be a little bit lower than the last couple of quarters. I mean can you, do you think you can bring the combination of SG&A and R&D down below $10 million per quarter or is somewhere in that $10 million per quarter range what we should be thinking about in terms of trying to get to an EPS figure?

I think that you're absolutely right. I mean just because the revenue is going to be down doesn't mean that we can - we're going to change the R&D. As a matter of fact, R&D, we've always said that we're going to put more into it.

SG&A a little bit has some flexibility into what is going to befall in because the legal side and we have emphasized that our M&A activity continues to be, at least we're looking at a lot of stuff, buy any consequent number down.

But I think on an average $10 million is a good number to look at in the 10 and a half million is the area where it is. We are, though, looking at consolidations and various groups and hopefully, you know, we can increase the efforts in productivity even the SG&A as we start looking at consolidation of some of the product lines.

But there's no identified savings from the medical consolidation or from the UDT Centrovision consolidation that you can talk about at this point? So I'm kind of coming up with like an eight percent type-operating margin. I mean that's, anything you would - anything wrong with that calculus there?

I think - I think we've pretty much said what we're going to say. I think in terms of the SG&A we're looking at it. It's going to take us a quarter or two to see where some of the consolidation and savings are coming in. And we're going to look at it from a quarter-by-quarter basis.

OK. Great.

Just to add on to it, keep in mind that we have the effect that we don't have anymore funding from the DSA for any of the new products but we've been asked to write various proposals and if any of that stuff comes in better than our effect.

So some - how much of that is in your expectation? I mean clearly you're expecting some revenue improvement as the year unfolds. I mean can you give us a flavor for what you're expecting to get better? I mean is some of it from these new products on things that you're funding today? Or is some of that really would be characterized as upside if it comes through?

Best way to put it is that you've known us for a long time. We are being conservative.

OK. All right. That's it for me. Thanks.

Our next question comes from the line of Steve Gish with Roth Capital Partners. Please proceed with your question.

Deepak, you talked a lot about the Bantam project and also the company's working on CT technology. Is this or is the ultimate goal to move into the check baggage market or is this more of a defensive move to ward off competitors perhaps trying to move CT into carry-on baggage?

Well the first answer is we always said it when we were looking at the parking number of product line of the Arges (ph) that we are very interested to make it a broad enough product line that we got to be an EDS. We have spent a couple of years working on the Bantam product. We have absolutely focused plan to move into the ED, EDS, or EDD or check baggage business. Not as a defense mechanism but to be a player in that marketplace. That's a given. We have spent money. We are very aggressive in that. And the CT (ph) that we are working for the last one year is a lead prompt technology for high-speed, 1,000 to 1,500 bags an hour, specifically for checked baggage.

Then, on your second portion of your question, I don't think those are defense mechanisms, I think the guys who are on the checked baggage business with CT, they would love to come in and try to do CT into the - into the carry-on baggage market. It's no secret. They would love to do it. We, on the other hand, continue to develop our kind of products. I think the Bantam is a perfect hybrid product for maybe looking at both sides of the marketplace.

So in the - in summary, both markets are important. We have not been a player as a direct seller in the checked baggage market, except as an OEM to InVision. But everybody knows we are working on those products and we hope, as we have said previously, that we are actually making some extra Bantam units. We have been asked to place some units at friendly customers to start demonstrating the unit, hopefully, before the end of the year. And we can - we are going back to the TSA for our final testing. And we continue to look at additional hybrid technologies to add onto Bantam, to become an EDS device.

Do you have any sense, at this point, in terms of the price point - will it be more expensive or less expensive than existing systems?

Well, the Bantam, definitely is significantly cheaper than the present EDS products. The Bantam EDD, together with the hybrid technology product, will still be significantly cheaper than the CT solution. The high-speed CT that we are developing, (inaudible) too preliminary for us to talk about it. But we are hoping that we could be in the same price range as the present 300 to 500 bags per hour CT, but be able to provide 1,000 to 1,500 bags per hour CT capability.

OK. In the two contracts you've announced this month - the two million, I think, and $2.1 million - one of those was to the TSA for tips (ph) enabled machines. However, I believe that specific order - the expectation is most of those units will not be shipped until the end of the year or that order will be completed by the end of the year. Is there a longer shipment time for tips enabled systems?

I'm not - I'm not sure I understand your question, but just on the TSA orders alone, you know, we already have an order that we're shipping again so we're currently shipping and we expect to complete the order that we got by the end of - by the end of our second quarter, which is December.

OK. And a new (inaudible) - the tax rates - you're expecting 33 to 35%?

That's correct.

OK. Thanks.

Our next question comes from the line of Tim Quillin with Stevens Incorporated. Please proceed with your question.

Good afternoon. I want to understand that the operating expenses in FY '04 just a little bit better or what your margin outlook might be because I kind of get to the same level of operating margins - kind of an 8%, given your operating expense guidance. And that gets me to an EPS number that's, you know, well, well, well below where the estimates are.

So I just want to - I just want to make sure that we're all on the same sheet of music on this as far as what you expect - are you going to manage expenses to a certain margin or are you going to continue to spend through what could be a near term or a relatively long, you know, period of revenue - flat revenue?

Well, number one, our guidance is about 180 to $185 million for revenue which takes into account the $20 million shortfall from the previous years of InVision which we think is going to be from the conventional and the cargo side. Our margin guidance is close to the 32% which is historically what the year looks like. I think that we've talked about that. The SG&A looks like between, depending on little bit of variability of what happens in the legal side and the R&D, without any funding from the TSA, is about 10, $10.5 million per quarter.

So, if you look at it, if it's on the 35 percent tax rate versus 33 percent tax rate or the last year was 29% tax rate, I guess you can do your math yourself.

OK. OK. Well, I just wanted to make sure that that was the message that you wanted to send. OK. Well, as far as backlog is concerned, of the $53.5 million is there - I'm assuming there's nothing from InVision in there?

The question is, is there any backlog ...

From InVision?

... from InVision? Insignificant.

OK. OK. And, again, what was - what's in there from the cargo, that's about $12.5 to $13 million and would that be roughly 50, 50 between Ancore and other large cargo?

I think that large cargo may be slightly more than ...

More than Ancore.

... more than Ancore.

OK. OK. And then on InVision you gave the number - the revenue number for the year which is helpful but it would also be helpful to be able to look at year to year comparisons on a quarterly basis; do you have the quarterly revenue numbers for InVision?

The quarterly (inaudible) for last couple of quarters for InVision?

The last (inaudible) the fourth quarter?

Well, I'm actually hoping that you have them for each quarter in FY '03 so that we can, kind of, understand, you know, the comparisons versus a year ago as we go through FY '04?

Q1 of last year we shipped about $6.4 million. Q2 4.4, Q3 $6 million and Q4 about 2.1

And Q1 is negligible.

Great. Great. And revenue from large cargo and Ancore during the fourth quarter was about $15 million; is that correct?

That's correct.

OK. And Ancore as I remember, I think Ancore was only about $1 and a half or $2 million in last quarter, is that about the same - is that about right for the fourth quarter? It was about that much in the third quarter of '03; was it about a million and a half, two million in the fourth quarter of '03?

Fourth quarter, I don't have the breakdown but it's approximately, a little over a million dollars.

OK. OK. And what is the current backlog?

We - as I said earlier, at end of June we had a backlog of about 53.5, 53.8.

Right.

I don't have the current backlog as of today, but after that we have announced the orders.

It's higher than that number.

It's higher than June backlog.

OK. OK. That's what I was kind of getting at. OK. And I guess lastly because, you know, I guess it sounds to me like there's going to be pretty significant year to year EPS declines without, you know, new revenue beyond what your guidance implies. I'm just, you know, kind of help me understand what it's going to be in terms, you know, is it going to be a large cargo systems international that you know are going to happen relatively soon. And then if you can give me a little bit of flavor on what the U.S. is doing on large cargo screening and how you might participate there.

Well the answer to your first question is I mean it comes back to it that in a flat year, Tim, there is a $20 million Envision that was a bump in last year's revenue.

Right.

Which we are saying in our guidance is going to be more than enough compensated by both growth in the conventional and the cargo business.

So that when we look at it, the cargo business - the security business continues to show growth and we are projecting maybe about a 17% growth in that business, both sectors.

The issue about the what's happening in the U.S. market may Ajay you can talk about it, you want to comment on it?

Yes, I think, you know, it's been an uphill battle for us. We've entered the U.S. market. As you know we just introduced some newer products. We've introduced a gamma truck, which we announced the first sale for a U.S. agency through Ancore. We're looking at our TNA technology, which is ((Vats Vehicle Explosive Detection Systems (ph), which is specifically used for looking for large bombs. What's been happening in Iraq and a couple of other places over the last few weeks. Again, it's used for force protection for U.S. Army bases. So we think that with our newer products are coming in and a newer technologies, there's a lot going on there.

As far as the ports are concerned, we are actively talking to the ports. I think we want to look at our technology, especially on the PF&A with El Paso and see how we can maybe come up with some goals for the - for the U.S. government to look at and what they're trying to look at in terms of the specifications.

So there's a lot going on.

Internationally, there's a lot of activity right now. We're looking at various different projects. We want a few, as we announced, and we feel very good about what the prospects are over the next upcoming months.

And just specifically on the SAICs Vaxic (ph) product, where, you know, what's the chances of you being a second supplier with them?

We are pushing very hard. You know, we cracked the international market against SAIC. We finally cracked the U.S. market. If you know some of the - some of the legislation in Congress, it was used to mentioned Vaxic specifically. Now they say gamma systems because we've pushed very hard and we're second source. In fact our products, we think, are better. But it's an uphill target. It's an uphill battle. But we are getting there and one step at a time.

Tim, just to comment on Ajay's comment, domestically SAIC has a pretty strong hold because obviously they have a big install base. Internationally, we are much better, relatively, than the U.S. We've had success in Romania. We've - we're bidding actively into it on a side-by-side test. We have been told that we have a system which is maybe better than the other guy's system. We don't have any cutoff - corner cutoff. Our unit goes six inches from the ground up. So all in all, I think that, though it's an uphill task, but they are the only two systems - SAIC and us - so we get our share.

And we have - not just a mobile, but we have a whole family of products that we've introduced there and we've had success in some countries overseas right now.

Then just to, again, clarify the revenue that you mentioned, Q1 last year, our total revenues were approximately 37 million. Out of that, as Anuj mentioned, InVision was $6.4 million.

Right.

That means that non-InVision revenue was $30.6 million. Our Q1 guidance for Q - 2004 - approximately 42 million with InVision being insignificant or not even on the radar screen - means that we are approximately projecting the rest of the business, year to year quarter, to grow approximately 34%.

Right. Yes. I guess I was just thinking about the EPS comparisons. I think the gross margins in first quarter last year were 35% and total operating expenses were less than $8-and-a-half million. So your expenses are just going to be a little bit higher and so the EPS comparisons might be a little more difficult.

That's true. On the other hand, everybody was predicting that the margins, as we ship more cargo and as the business slows down or gets more competitive in the conventional side, will have an impact on margin. Overall, our margins - we are very happy to be in the same spot - about 32.5 to 33%.

OK. Thanks, guys.

Our next question comes from the line of Brian Ruddenberg with Morgan Keegan. Please proceed with your question.

Great. Thank you. I had a question, first of all, on the R&D grants. Can you talk to us about what you have in the bag right now? Is it $6.5 million? And what you did on the full fiscal year with Ancore, in terms of revenue R&D?

Would you repeat that question again, Brian?

Yes. What kind of R&D grants do you currently have in the bag for fiscal 2004? That's the first part of the question.

The only grant for the contract that we have is the $8-and-a-half million contract with about two million recognized last year is about $6-and-a-half million.

OK.

There is no other ...

They have less than about a million dollars.

Yes. They have another million of some other products.

OK. Great. So - and then, can you - as I understand it, there was 10 to $11 million on the full year last year, if you compared apples to apples on Ancore? What Ancore received on a full apples to apples basis from June 2002 to June 2003? I just want to make sure I understand.

No, that - because we only bought the company in ...

November.

November of 2000 ...

2002.

2002. So we've never even had a full year on it. And their total revenues, as Anuj mentioned ...

A little over $3 million ...

A little over $3 million.

OK. Now, if you - what would Ancore have been if you looked at them from June 2002 to June 2003? Do you see what I'm saying? What were their revenues on an apples to apples basis last year?

I don't have the exact number but my guess is it'll be around $4 to $5 million.

Oh, OK. Great. The next question I have is on EPS. You had, on the last conference call, given guidance - revenue guidance of 90 to $92 million for the June and September period and EPS of 50 cents. As I do the math, it doesn't look like 50 cents for those two quarters; is that correct or am I off on something?

Well, if it did close to 29 cents just in the first quarter - I mean on the Q4, I'm positive we never gave any guidance for Q4 and Q1 for earnings.

OK.

We only give guidance for revenue.

OK. Well, then I'm mistaken. I apologize. OK. The - the other question I had was, what have you assumed in the 100 to $185 million in revenue for cargo?

Well, we last year in $182.6 million our cargo revenue was $31 million. We have said in our guidance today that for the next year in 180 to 185, the cargo group will grow. So the only guidance that we're giving you, the revenue for next year is going to be higher than $31 million.

The $20 million shortfall from InVision that we don't have is the growth there is going to come from both the cargo as well as the conventional group.

OK. Great. And then I'm also coming up with a low operating margin and I just wanted to make sure, is there any way with more security growth that - could margins be on the gross line higher than 32 percent if optical doesn't grow as fast? Could there be a margin expansion or is 32 pretty much it?

Well, you know -

We basically have said that that's the guidance that we have. Obviously if the mix is more towards gamma trucks versus X-ray it has a positive impact. But at this stage we only feel comfortable that historically the whole year had this kind of margin and we are giving the best guidance that we have right now that at present the gross margins are going to be in the 32 and a half to 33 percent.

Great. Thank you very much.

Our next question comes from the line of Tim Quillin with Stephens Incorporated. Please proceed with your question.

Tim Quillin Yeah, just had one quick follow up. I'm just wondering why you are not giving EPS guidance for the first quarter? It sounds like you have a pretty good handle on where revenue's going to come in and feel like you know where gross margin's going to come in, maybe even operating expenses; I'm just wondering what the rationale is for not giving explicit EPS guidance? Thanks, guys.

Tim, if we've given you the revenue line, we've given you the estimated gross margins, you've asked us questions about SG&A, I guess you can do your own math to come up with where you need to be.

Right. You're just forcing us to do addition and subtraction?

Well, I guess, I'm sure you can at least do subtractions and additions.

OK. Just wondering. Thanks

Our next question comes from the line of Andy Ing (ph) with Mason Street Advisement. Please proceed with your question.

Hi. Sorry to belabor this EPS point but I'm doing my additions and subtractions and I'm seeing a big drop in EPS, my - please tell me if I'm doing this incorrectly or not based on the guidance that you've given?

Well, if you look at the revenue line ...

Yes, I have that.

And, you know, if you look at some of the people who were at the last conference call ...

Yes.

...we intentionally gave a revenue guidance of 90 to $92 million because we didn't know. We have the revenues going to fall for Q4 because of the cargo.

I have no problem with the revenues lines. And I have no problem with your gross margin guidance and no problems with the R&D expenses. I just want to make sure that everything that you've told me so far and if I'm doing my additions and subtractions correctly, I am getting a negative EPS from growth, I guess.

Are you saying negative EPS or negative ...

Negative EPS growth so your EPS is going to be a negative growth.

I think we are - the guidance we're giving is 180 to $185 million and we really don't want to for the whole year. We really don't want to get into specifics on the EPS at this point.

OK. Thank you.

Our next question comes from the line of Steve Gish with Roth Capital Partners. Please proceed with your question.

One question, maybe if you could help us. Could you give us a sense of what type of operating margin did you experience on the Envision in fiscal '03? Was it higher or lower than the overall operating margins of the company?

We really don't want to comment specifically on any political or customers margins for comparative reasons.

OK. Thanks.

Ladies and gentlemen, as a reminder to register for a question press the one followed by the four.

Our next question comes from the line of Leo Burnstein (ph) with CS First Boston. Please proceed with your question.

Hey, guys. I'm not going to belabor the earnings for the next quarter just because I sympathize with my analyst brethren. But I did want to make a comment or ask a question just about the backlog and more particularly the large cargo business. And why we're not seeing kind of a flurry of orders? What we're all kind of expecting is going to happen as the government kind of continues to push these inspection systems into the airports. I'm sorry, not into the airports, but into the cargo facilities, into the ports.

I guess on every conference call we have cautioned the streak about the cargo product line, especially U.S. government. There is no standardization of any specifications. There are no standardizations of a certain goal post. And it's such a big bear that government is going to get their handle on what exactly do they want to do to inspect it at the boats? Do they want to get inspection at the boats? Do they want to get their trading partners involved?

Well I think that expectation that somebody had we definitely have always prepared it down by saying this is something that everybody talks about it.

Sure.

We have a little bit better confidence and a - and a predictability in the international sector where we also maintain our last year that both customers are - were planning to buy units for duty evasion, redone the investment even prior to nine 11. And they have selected the sites, they have selected the places, they have selected more technologies. And then there were plenty of activity after nine 11 to buy some stuff and after the units they bought now they are looking more cautiously what the U.S. government is going to do. They're looking at what exactly is going to be the mandate from the security angle. And look at whether the technologies or the products they were planning to buy for return on investment duty evasion - what do they need to fine tune then - they would need to change the product or what they want to do to be able to also satisfy the mandate for security.

Sure.

So there is a little bit of uncertainty in that area.

OK.

But, on the other hand, more and more people, over the last year or so, have started thinking they must do something. So the activity for the gamma-based trucks, relocatables, mobiles, have significantly increased and the fashion of a fixed site is gone. Nobody wants a fixed site unless they can plan three years hence. And as the relocatables and mobiles and other systems are much faster to deploy and are mobile. So, Emmett (ph), that's what's happening in the world out there and we continue to look at the pulse in both domestic and international.

But what we are trying to get across is that this product line must - there's not simple bullet. This product line must be a broad-based product line ...

Sure.

... so one can fine-tune the customer needs to the product line.

Sure.

And that's what we have. We have a very broad product line. We have installed various systems and we have actively increased our staffing and marketing. We are banging a lot of doors. We are building some trucks to show to people and we continue to talk into it to close orders.

Sure. No, I understand. It's just - you know, you talked a lot about, you know, the InVision revenue that needs to be replaced and that it's going to be coming from large cargo, in part, right? And you know, I'm just trying to understand a little bit better sort of what's behind the enthusiasm. Do you know what I mean? And - because, you know, it's - we're not seeing - you know, the backlog's obviously gone, you know, the backlog's a little bit better than 55 million it sounds like, but we're not starting to see the backlog, you know, gradually increase and grow as, you know, I think a lot of, you know, myself, certainly, would like to see.

And I'm just trying to understand - A - it sounds like we're not going to - that's not the way the order patterns work or it's - maybe I have it all wrong. I don't know. I ...

Well, one thing that we've also said - that some of the large cargo business, which were maybe a longer lead time because of the mix change, is almost becoming like an elementary ((torn)) business.

Yes. No, I understand.

You can see, on some of these systems, people are expecting delivery in 60 days so that it might fall under what we call the way the elementary ((torn)) business that we are used to looking at. And that's happening. And that's why if you see that the order that we announced this morning - it's all shippable this year. So that what's going to happen is that as the customers start looking at what product they want, they want faster deployment. They want flexibility.

Sure.

It's going to happen. And the conventional business continues to show the growth that nobody expected and it continues to be strong.

OK. That's great. I've got one last question, just to help me kind of understand the opportunity a little bit better and maybe - and I'm not trying to ask the same question three different ways. But maybe, if you could spend a couple minutes just talking about how big you think, you know, the large cargo inspection opportunity is. You guys must have sized it. I just would love to hear how big you think it is over the next, say, three years.

I don't know how to answer that. You know, if you listen to what homeland security talks about, if you listen to the newspaper saying that 2 to 3 percent of containers are getting inspected and everybody wants to get 100 percent inspection, you know, you can sit here and do any calculation you want.

No, I know, I know. But I figure you - you know, you're absolutely right. I obviously like to see a big number, it's simply I'm just kind of curious more what you guys used in terms of your haircut because, you know, the TSA's got a billion - you know, multi-billion dollar budget but obviously the piece that you're addressing is just one segment of it so.

What we are - what we are looking at in cargo is what we know right now in terms of quotation activity, in terms of what we think is going to happen in the near future. If, you know, Homeland Security comes up with different mandate's, et cetera, that's a whole new ball game.

OK. That's fair. OK.

I think it's also incident driven. It's event driven and I think that's true for this business. But we believe that this is a long-term - it'll continue to show growth and maybe there are some spurts off some decisions by the government of U.S. but it'll be continued growth. We have - we have given a guidance, even today, that both businesses from last year when it was pretty heavy -- keep in mind we went from four or five million to $31 million. We are saying now that it's going to continue to grow.

Yeah. No, I understand. OK. Gentlemen, thank you.

Our next question comes from the line of Andy Shopic (ph) with Nutmeg Securities. Please proceed with your question.

Andy Shopic Yes. To management, this is really more in the form of a comment than a question because I've listened very carefully to the call and it's going on for quite a while. You have consistently provided in previous press releases guidance in terms of both revenue and earnings per share. By deliberately not doing it now is going to leave open the door for all of us to make our own conclusions and there's nothing wrong with anybody's math here on this call. I just don't understand why you would not want to frame it and bracket it in some way because otherwise you may see a range of estimates there that are somewhat less favorable than you might otherwise like to see.

And the lack of consistency is what really disturbs me here.

Well, number one, I just want to clarify that last conference call we emphasized on a revenue guidance for two quarters, we refrained from giving guidance even for a quarter for revenue. We said, because we did not know where the cargo would fall.

Well, I guess what I'm ...

And secondly, we never - we never gave guidance last conference call for earnings.

I think what you've done though is you've done preliminary press releases over the course of this fiscal year, at least two or three times, I believe and in those preliminary releases you have tended to give some specific kinds of number, but, yes, I hear what you're saying but I hope you understand my point.

We understand it.

OK. Thank you.

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

Oh, if there are no other questions, I want to close the thing by saying, thank you very much for attending the conference call. We've had a fantastic year. We have a challenge in front of us for the shortfall from the InVision bump last year. Our bookings and our quotation activity in the security group in both conventional and cargo continues to look very strong. We are looking at the automated bomb detection EDD (ph) area. We continue to invest in R&D. We are looking forward to the PF&A product getting completed. And as the economy becomes stronger, our rest of product lines have fantastic future too.

With that, thank you very much and I'll end it.

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