OSI Systems Inc (OSIS) 2006 Q2 法說會逐字稿

Welcome to the OSI Systems second quarter 2006 earnings conference call. My name is Carlo and I will be your coordinator for today's presentation. [OPERATOR INSTRUCTIONS]

I would now like to turn the presentation over to your host for today's call, Victor Sze, Corporate Counsel. Please proceed, sir.

Thank you very much. On the call today are OSI Systems Chairman and CEO Deepak Chopra here with me in London. In Hawthorne, California, we have the President of the OSI Security Group, Ajay Mehra and OSI's Chief Financial Officer, Anuj Wadhawan. We're also very pleased to have with us sitting in on the call today, Dave Tilley, who is the President of Spacelabs Medical, and Ralph Hunter, who is the CFO of Spacelabs Healthcare.

During our presentation this afternoon, we will make forward-looking statements concerning upcoming events and our expectations regarding the Company's financial performance. Each time we do, we will try to identify these statements with words such as expect, believe, anticipate, or other words that indicate potential events. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those in the forward-looking statements. Please consider the risk factors contained in today's press release and stated during this conference call as well as with the risk factors described in our latest Form 10-K filed with the SEC.

For a limited time we will make a webcast replay of this presentation available on the investor relations section of our website. Our website address is www.OSI-Systems.com. Please note that the date of this conference call is February 9th, 2006. Any forward-looking statements we make today are based on assumptions that we believe to be reasonable as of today. We undertake no obligations to update these statements as a result of future events.

Finally, this conference call is a property of OSI Systems. And any recording, reproduction or rebroadcast of this conference call without the express written consent of OSI Systems is prohibited. I'll turn over the call now to our CEO, Deepak Chopra.

Thank you very much, Victor. As Victor mentioned, I'm speaking from London. So I apologize if there is any disturbance on the line. Let me once again welcome you all to the second quarter 2006 earnings call of OSI Systems.

Revenues for the quarter were a record $117 million. Operating income of $2.9 million, after stock-based compensation expense, up 1.3 million. Break-even diluted earnings per share after stock-based compensation expenses of 1.3 million or $0.06 per diluted share. Minority interest provision of approximately $1 million associated with Spacelabs Healthcare or $0.06 per diluted share. And the tax expense for the quarter of 1.9 million at a tax rate of 64.4%. Anuj Wadhawan, the CFO, who is in Los Angeles right now, will cover the financial highlights. I'm going to touch on the operational view and the forward for the Company.

Overall, the Company had a very good quarter and continues to make progress. We are very happy with the results, especially after the last couple of quarters where we have announced losses. The Optoelectronics manufacturing group, as mentioned earlier, had revenue growth and returned to approximately double-digit operating income, which we had mentioned at our last conference call. Inter-company sales were also up to 5.6 million, primarily driven by shipments to the Healthcare group, which I will mention later had a very good second quarter, especially the month of December. Commercial Opto area driven by sales to the medical sector for CT scanner electronics, continued strong growth and, as mentioned earlier, commercial Opto inherently has higher gross margins compared to the contract manufacturing area and hence higher operating income for the quarter compared to the Q1 2006. We believe that the Opto group will continue this trend for the second half of 2006.

Medical sector. Spacelabs Healthcare had a very strong second quarter with revenues of approximately 61 million, primarily driven by strong growth in the patient monitoring which grew approximately 16% globally. This is a major achievement for the group, as the market in patient monitoring is growing approximately 5% to 6% globally. Gross margins also improved and the operating income for the second quarter was 5.3 million, approximately 9%.

The other financial highlights for the group were that they were awarded a three-year multisource supply contract with Premier, Inc, one of the U.S.'s leading hospital and Healthcare system alliances, launched a wireless network option for the range of Ultraviews SL2400 compact monitors in North America. And received 510(k) approval from the U.S. FDA for distribution of the Blease series anesthesia system into the U.S. market. We are expecting to launch this product in the U.S. market in 2007.

Continued gross margin improvement driven by new patient monitoring products and manufacturing efficiencies in the anesthesia product line. We continued to integrate the anesthesia product line into the monitoring product line and bring to the anesthesia manufacturing some of the manufacturing practices that Spacelabs has in their Issaquah plant in Seattle. Our commitment to R&D continues as we work to bring new products to market.

The low acuity monitor that we have been developing for the last 12 months is targeted to launch in 2006. It is targeted towards the Asia Pacific market which has a little bit more sensitivity on the [ASP], and it should also fit very well into the outer reach, from the hospital to the independent surgery clinics, and we believe that, together, with this low acuity monitor, and the series product line of anesthesia machines, we should be able to go into a new area in U.S., away from the hospitals into the independent surgery centers. We continue to look at strategic acquisitions with complimentary products and technology in the medical sector both stateside and U.S. and the rest of the world.

Security product line. The group continues to make progress towards returning to profitability. Q2, on a revenue of 30.4 million, had an operating loss of approximately $650,000, which has reduced significantly from the previous quarters. Backlog continues to be strong, [partitioned] activity, especially in large cargo international, is maintaining its strength. We continue to invest in R&D, both in cargo and in automated HBS- hold baggage screening.

As we announced recently, we have received certification for Rapiscan MVXR5000, in-line automated whole baggage screening system for checked baggage, from the department of transport in U.K. That allows the ability for us to start selling this system in known U.S. area, and we believe that we would make some success in selling this as early as the second half of 2006, with a big push aggressively into the market in our fiscal 2007. That starts in July, 2006.

Additionally, we continue to invest in the development of the first of its kind high-speed solid-state CT system that we call realtime tomography or RTT. The RTT being electronic and nonmechanical can achieve a throughput of up to 1500 bags per hour, compared to the current systems on the market, which have a throughput of approximately 600 bags an hour. The RTT will also result in the reduction of installation costs and maintenance issues. As mentioned, in our last conference call, we have started on a low-key stock showing and talking to prospective customers for this product to get their inputs of the final configuration of the system. As mentioned earlier, that we are saying that the revenue stream from this product is scheduled for late 2007, 2008, as we still have the challenge of bringing it out of the lab into prototype, beta testing, and certification from various government bodies.

We plan to get profitable on the operating income line in the security group for the second half of 2006. Primarily driven by increased revenue in the cargo product line and continued strength in the people and parcel screening product line.

Overall, the company continues to make progress and we plan to be profitable for the second half of 2006. With that, I will hand it over to Anuj Wadhawan to give you the financial details.

Thanks, Deepak. Financial highlights for the quarter and six months ended December 31st, 2005, our revenues for the second quarter of fiscal 2006 increased by 14.6 million or 14% to 117.1 million compared to 102.5 million for the second quarter of last year. For the six months revenue increased by 28.8 million or 15% to 219 million from 190.2 million for the first six months of last year.

Net income for the second quarter was 85,000 compared to 2.5 million for the second quarter of last year. Net loss for the six months was 4.1 million compared to the net income of 3.8 million for the first six months of last year. Diluted income per share for the quarter was breakeven compared to $0.15 for the second quarter of last year. Diluted loss per share for first six months was $0.26 compared to diluted income per share of $0.23 for the last year's six months. In the first quarter of fiscal 2006 we adopted FASB 123r with the result we recorded a stock-based compensation expense of 1.3 million in the second quarter and 2.5 million for the first half of fiscal 2006. We anticipate stock-based compensation expense for fiscal 2006 to be approximately 5.5 million.

To give you the breakdown of revenues, on the Security side of our business, revenues decreased by 1.6 million or 5% to 30.4 million in this quarter compared to 32 million for the last year's second quarter. For the six months, Security revenue decreased by 4.7 million or 8% to 57.3 million from 62 million. The decrease in revenues in the quarter and six months was due to decrease in revenues of cargo and vehicle inspection product line and was offset in part by an increase in baggage parcel and people screening product line. Our baggage parcel and people screening business grew in the quarter by 9% over last year's second quarter and 10% over first-year -- over first quarter of fiscal 2006.

On the Healthcare side of our business, revenues increased by 7 million or 13% to 61 million in this quarter, compared to 54 million in the last year's second quarter. For the first half, revenues increased by 15.6 million or 16% to 112.4 million compared to 96.8 million in the first half of fiscal 2005. The increase in revenues was primarily due to increased revenues from patient monitoring systems and inclusion of revenues from Blease medical, which was acquired in February, 2005.

On the Optoelectronics side of our business, revenues increased by 56% to 25.8 million in the second quarter compared to 16.5 million in the last year's second quarter. For the first half, revenues increased by 57% or 17.9 million to 49.3 million from 31.4 million in the last year's first half. The increase in revenue in the Optoelectronics group for the quarter and six months was primarily due to increase in revenues of both commercial Optoelectronics and OEM contract manufacturing.

Our gross profit for the quarter increased by 8.6 million or 24% to 45.1 million as compared to 36.5 million for the prior year second quarter. And gross profit for the first half increased by 11.9 million or 17% to 82.1 million compared to 70.2 million for the same period last year. Our gross margin for this quarter was 38.5%, compared to 35.6% for the last year's second quarter and 36.3% for the first quarter of fiscal 2006. The increase in gross margin was primarily due to introduction of new patient monitoring product line by our Healthcare group and the favorable impact of restructuring actions completed previously and the product mix in the security group. We expect our gross margin for the second half of fiscal 2006 to be in the range of 38 to 40%.

SG&A for the second quarter was 33.5 million, compared to 25.6 million for the second quarter of last year and 33.4 million for the first quarter of fiscal 2006. The increase in SG&A in the second quarter compared to last year's second quarter was primarily due to increased legal and professional fee of $1.3 million, higher administrative cost, inclusion of stock-based compensation expense of 1.1 million, and foreign currency translation losses. The increase in SG&A was also due to higher sales and marketing spending to support higher revenues by our Healthcare group and the inclusion of SG&A of Blease Medical.

R&D for the second quarter was 8.7 million, compared to 7.1 million in the second quarter of last year, and 8.7 million for the first quarter of fiscal 2006. The increase in R&D spending for the second quarter of fiscal 2006 compared to last year's second quarter was due to increased R&D spending by our Healthcare group for the development of next generation products, inclusion of R&D spending of Blease medical, and increased R&D spending for the development of our whole baggage screening and cargo and vehicle inspection systems by our Security group.

Operating income for the quarter was 2.9 million compared to 3.2 million for the second quarter of last year and an operating loss of 6.5 million for the first quarter of fiscal 2006. Our tax rate for the second quarter of fiscal 2006 was 64.4% compared to 24.3% for the second quarter of last year. The increase in tax rate for the second quarter was due to Company not receiving any tax benefit for losses in certain non-U.S. subsidiaries and inclusion of incentive stock option expense which does not qualify for tax deduction. Our tax rate is also dependent upon mix in income from U.S. and foreign locations. We expect our tax rate for fiscal 2006 to be in mid-40s.

At the end of December, 2005, we had cash of approximately 17 million compared to 14.6 million at the end of June and 16.1 million at the end of September. During the second quarter, we raised approximately 26 million net of expenses in an IPO of our Spacelabs subsidiaries on the London AIM market and repaid approximately 24 million under the lines of credit, bringing us lines of credit [borings] to 2.2 million at the end of December, from 26.4 million at the end of September.

In the first half of fiscal 2006, we used approximately 8 million of cash in operating activities. It was primarily due to an increase in accounts receivables of approximately 10 million and an increase in inventory of 3.5 million and was offset in part by advances from customers. The increase in accounts receivable was due to increased revenues and increase in inventory was due to anticipated higher shipments. Our backlog at the end of December remained strong at approximately 134 million. Our security backlog has increased at the end of December compared to at the end of September. Cargo backlog at the end of December was approximately 46 million, which remained at the same level compared to September.

We expect our revenues for the second half of fiscal 2006 to be in the range of 231 million to 236 million and expect to be profitable in the second half of fiscal 2006. We expect our revenue and earnings to be stronger in the fourth quarter when compared to third quarter of fiscal 2006. With that, I will open it up for questions.

Thank you, sir. [OPERATOR INSTRUCTIONS]

And, sir, our if first question is from the line of Joshua Zaret.

Thank you. I have two questions. The first one is in regard to that guidance, second half our revenue guidance of 231 million to 236 million. And the question is, I guess, with the backlog so strong, particularly in the cargo and vehicle inspection business, would we be wrong to view your guidance as being conservative? And if so, why are you taking such a conservative approach.

Josh, this is Deepak. Since you asked the question specifically on Security, Ajay, you want to take that question?

Sure. I think first of all, the guidance of 231 to 236 that you're talking about, yes, we are being conservative on cargo. And primarily the reason for that is that we expect to ship cargo shipments in Q3, Q4. But some of them are going to slip into Q1 of next year, primarily due to the fact that they're going to international locations. We need to make sure that they're installed before we can recognize the revenue. So is it possible from a timing standpoint, some fight fall into Q4 versus Q1? Yes. Are we being conservative? Yes.

Okay. So this, conservatism really just relates to the cargo and vehicle or the Security side, not the Healthcare side.

Yes. At the end of the day, we've been shipping cargo for a long time and it's always difficult to figure out if it's going to fall into one quarter or the next quarter. And there's some lumpiness. So, that's the view we've taken.

Great, thank you. And the second question, your corporate elimination to the quarter for operating income declined to 4.3 million from 5.7 million. First of all, can you reconcile for us the reasons for this decline, Sarbanes-Oxley, et cetera. And, two, can you give us a sense of the magnitude of the step-up you expect this quarter, due to the L-3 litigation or other factors that may be in there? Thank you.

Anuj, do you want to take the first portion and then Victor, you want to take the L-3 side?

On the corporate eliminations have declined primarily because of the legal and what it includes is the corporate expenses, stock-based compensation expense and the legal expense. And these are the numbers which goes into the corporate eliminations.

Yes, Josh, it's Victor Sze on the L-3 litigation. We now have trials scheduled for the fourth quarter, and with any luck, we'll get the thing resolved. And I think at that point, the L-3 expenses will go down, of course.

Should we expect a big, a material step-up as we go to this December-quarter? You know for the quarter you have the trial in, if there is a trial?

Well, Josh, the thing is that firstly, I just want to again emphasize, this is a moving target of the date. Originally it was February and went to March, now it is scheduled for April. And we hope that it doesn't change again. But if the trial starts in April, you are right, that there will be step-up legal expenses regarding L-3 in Q4. But keep in mind, to get up to the trial, there might be some expenses increased step-up even in Q3, March-quarter, and one of the reasons why the number was lower for the last quarter, because everything got pushed.

The total number estimation for the trial has not changed. It's shifting from one place to the other. And we just want to again emphasize, like we've done in the past, we cannot predict it. We only report it as it falls. And there is no surety that the trial will start in April.

Okay. Well, thank you very much.

And, sir, our next question is from the line of Tim Quillan with Stephens, Inc.

Good morning or good afternoon or good evening, wherever you may be. Whatever time zone you may be in. A couple of quick questions, maybe three quick questions. One is, what was the cargo -- the revenue from large cargo screening systems in the second quarter?

In the second quarter, it was approximately 5 million, compared to 4 million in the first quarter of fiscal 2006.

And about 8 million in the second quarter of 2005?

That's correct.

Right. And could you discuss a little bit or talk a little bit about the Healthcare acquisition strategy and the timing and size of a potential deals, and kind of what you're looking for to round out the Spacelabs product portfolio?

Well, on that subject, Tim, firstly, even if I had a detailed strategy, which we almost do have, I can't talk about it. But what I would say, what we have said before, the areas in which we are targeting is, primarily we are a monitoring company, 70% of our revenue comes from monitoring. And any product line that enhances our penetration into the monitoring, whether it does it by enhancement of performance or increases our geographic penetration in any part of the world are both acceptable, and we will continue to look for ways of doing it.

Second area is low acuity monitoring, and the same monitoring has been our focus. We are developing internally our own products. At the same time, if we can find the right product, which has some revenue, and can get into our portfolio faster, we will continue to look at it.

And the other area, which we have said before, the clinical trial area, is very important to us. As a matter of fact, one of the highlights for the quarter have been that our backlog in that particular sector has gone up from 2.2 million end of June to $5.2 million in end of December, a significant growth though very small portion of our business. We believe that that's a great opportunity, and we continue to look at whether there's a possibility of buying a product line, a group in some shape or form, which gives us more capability, gives us more capacity, gives us more clinical strength of testing that we can offer to our customers.

The third area, obviously, is that as the Blease product line launches in 2007, and the low acuity monitoring comes online like we have said in 2006, combining those together, it opened up a brand-new area in U.S., besides the hospitals, the outer clinics, independent surgery centers, doctors' offices, dental offices, anesthesia plastic surgery areas. For that, we might look at either looking at enhancing that by our internal sales channel, or again going on an acquisition trail to look at if something that fits in to get to the market faster.

So, in that particular segment, those are the kind of areas that we are concentrating on. We definitely have identified specific names but nothing beyond that. And there is nothing that we are close to it. And we basically continue to look at it because it's part of our strategy.

That's helpful color, though. And then, lastly, the Spacelabs' IPO, I think, has been successful. Are there, are you contemplating further strategic alternatives with regards to either the Security business or the Opto business?

Well, we continue to look at enhancement of shareholder value. Definitely the Spacelabs IPO has been a great success story for us. We continue to look at ways to do it, nothing specific has been decided.

And as we have mentioned to you specifically, that in the security area, the most important thing is that cargo, which has been touted as and we believe in, that has a great growth story, we still are trying to grapple with what really is happening in that marketplace and continue to invest wisely to build up a broad product portfolio. And I believe that unless we get a better predictability and traction in that product line, and the HBS that we continue to invest for check baggage area, I think we are not ready to sort of go and make any ultimate decision. We continue to look at various alternate ways. In the meantime we continue to invest our own R&D dollars into it.

In the Opto product line, it is a double-digit operating income. It has come back to that as we have said in the last conference call. It is predictable. It's also showing growth. We continue to look at it strategically both from the outside sales and also to increase sales to the inter-company, both Security and Healthcare. And in that segment, our strategy basically is to continue to look at other product lines or R&D group out there that we can broaden our product line. We have not gone beyond that.

Okay. Thanks, Deepak.

Our next question is from the line of Brian Ruttenbur from Morgan Keegan.

All right, great. Congratulations, great quarter. First of all. And then, moving forward, on the second half of the year, can you give us, on the revenue side, a rough breakdown on how you see the second half of the revenue breaking down between Medical, Optical and Security? Kind of in the buckets? Is it similar to the first half as a percentage or should we see anything different?

Oh, I think that one of the things we can say is we can't sort of break it down. But we can give you some flavor to it. We believe that the second half should show growth in Security revenue.

Especially in the cargo area and the continued strength, and as Anuj just mentioned, our overall backlog is up in the overall security group. Cargo backlog is still in the $46 million region. That means that as that starts shipping, as Ajay mentioned, and continued strength in our inventory [done] business and Security, that portion for the second half should have higher revenue compared to the first half.

The medical business, as we finished our conference call just now here in U.K. for that sector, second half should be, in my mind, similar to the first half, with Q3 weaker than Q4 because that's the historical nature of it. Although Q2, as we have mentioned to you before, is the strongest. So, if you really look at it, the second half is approximately the same region, kind of, and that the rest of it is Opto, which is predictable. So basically, I think the way that you should look at it is, the mix is going to be more Security revenue in the second half than the first half.

Okay. So you've been running, at least this last quarter, about 25% of your total revenue with Security, that percentage should go back up to the historical levels around the 30-ish standpoint? Is that fair to say from my perspective?

Well, I haven't looked at the percentage, but I think that what we are saying is, again, with some caution, because as you know, the cargo business is quite lumpy, and Ajay has told you, since the majority of the shipments are international, and we are concerned about when it actually ships, because it has some other, the owner-controlled items into it. But I don't know about percentage-wise, but I would say that with such strong backlog, definitely Security is going to shift more and approximately what you are saying might be the kind of target numbers, as a percentage of total revenue.

Okay. Very good. That helps me out a lot. The other thing is, the fall-off, there should be, then, a fall-off from Q2 levels in total revenue to Q3 because of seasonality, is that correct?

In what product?

In total revenue, in your total company revenue. There's a medical fall-off, we know. You just mentioned it. Optical should be pretty flat. But then Security should be relatively flat or should it be up, from Q2 levels?

Again, Brian, we don't know cargo between Q3 and Q4, like Ajay has said, might fall in Q1. But you're absolutely right. Q3 medical revenue will be lower than Q2. Definitely. We have already said it, it's historical.

The Security, we don't know. And that's why we are saying you should look at Q3, Q4 together. Though the total company we think will be stronger in Q4 compared to Q3. But depending upon the cargo shipments, it's unpredictable in the Security area between Q3 and Q4, whether the increase will be offsetted by the slowdown in Medical or whether it's not. So it's very difficult to pin that number.

Outstanding, that helps me out a lot. Moving forward into litigation standpoints, let's see. L-3, lawsuit. Can you give us an update, why did everything get shifted over several months? Maybe you can give a little color on that.

Yes, it's Victor Sze. It's just really scheduling matters. Apparently the judge might have had some other trials going on. And so the trial was rescheduled, our trial was rescheduled.

Just to add onto it, Brian, there is no, there is no technical reason, there is nothing else that has happened in the trial that has pushed the delay except judge's calendar.

Okay. Can you give us an update, also, on other major pieces of litigation? Has anything changed out there, anything moved ahead or moved back or forward on any other pieces of litigation you're involved with? I think the L-3 is the most near-term thing, I believe.

Yes. I think the other item that we've talked about in the past is the [SCIC] litigation. The status of that is that we have a summary judgment motion pending there. We continue to go forward. There's also some continuing discovery taking place as well.

And on the GE side, basically we are waiting for the judge's answer in Delaware, what his recommendation is to go into accounting, arbitration or legal arbitration or both, or whatever.

Okay. So there's, there hasn't been any major changes with any other pieces of litigation out there, beyond L-3?

No.

Okay. Great. Thank you very much, great quarter.

Thanks.

And, sir, our next question is from the line of Josh Jabs with Roth Capital.

Hi, guys. Great quarter. Can you, as we look at the R&D investments that you're making in Spacelabs right now, and I guess that's continued now for a couple of quarters, as well as what you're doing on the Security side, can you kind of talk about that number on an absolute basis going forward? I know we're kind of getting into the home stretch on the CT side. And maybe on some of the other cargo products, can you just talk about the balance there?

I think, Josh, I don't know the absolute numbers. But we believe that what you have seen in the R&D span for the Healthcare side is pretty much what it is going to be with some changes but not any significant changes for the second half. In the Security side, in the cargo business, I think there is not much that's happening, we're coming to the end of some of the R&D programs.

The only area which we have continued to say that we cautiously but continue slowly to increase our R&D spend is in the electronic CT area, which we believe has become more closer and closer to get it out of the lab. We continue, will continue to ramp up R&D spending in that area. We don't have any absolute numbers. It is depending a lot on milestones reached, to us feeling more confident to increase more R&D.

But as we have mentioned, in the last conference call and today, we have actually gone and started talking to potential customers and making them look at what we are doing to get inputs from them. And depending on what kind of inputs we are getting, and what kind of interest we are getting, will determine some of the R&D spend rates that we go forward with. Ajay, you want to add something?

No, I think that's -- I think you've put it very well. The best way for us to answer that is, we are looking in that aggressively, and we'll keep you updated as and when those milestones come into place

All right, great. And then on just a bit of clarification. You started -- or you mentioned shipping, I belive into the U.S. in 2007 and then there was some discussion on whole baggage and when you expected that to maybe gain some traction. Is that fiscal year '07 or calendar year '07?

Well, the two things, first. On the Blease anesthesia products, we are saying launching it in year 2007. That means that we are hedging our bets a little bit by saying it could be later part of fiscal 2007, which is January through June, or it could be the first half of fiscal 2008. So the reason is not because we're not ready to launch it. In America, in these kind of marketplaces, we're going to get one chance and one chance only. We want to make sure that we are ready, the market is ready, the distribution channel is ready. Which we have not decided yet, whether we're going to sell it through the Spacelabs channel, which primarily is hospital-driven, or look at a distributor model outside the hospital, or set up our own hybrid channel, where in some places, like California, Northeast and Southeast, we might go direct and other place in the U.S. we might go distributor. So the timing is a little bit flexible, but right now we are committing it that in 2007, it will happen.

Your second question was more on the MVX and the Security side. I said that, a, we have got certification. We are getting some traction, we are showing units. We have placed some demo units out there. We are bringing customers to look at it. We are bidding aggressively. But since we just got certification a month or so ago, and this is a new product, we think that, being the conservative nature of the customer in this marketplace, we think that the remainder of 2006, there will be sales but it's not going to be significant. The real strength of the real projections we are putting together, that in fiscal 2007, as we go -- or 2008, sorry, as we go July, 2006 onwards -- 7 -- is the place where we think we are going to push that.

And as in our news release, that marketplace a pretty big market, with more than 700, 800 units up for replacement, which are a vintage of 7 to 8 years old, mostly the Vivid product line or the L-3 product line now. And we believe that with that market coming open, and the competition being L-3s might give you [Hyman Schmit]'s product and our new product, that we will get some traction off that marketplace.

On the CT scanner launch of the certified unit, we think that it's like a 2008 product because it's going to require much more certification and testing. But the market size of that is huge. We believe there's about 1500 machines in inline for U.S. airports in the conveyer belt systems, and maybe double that number in the rest of the world. So it's about 3,000 machines approximate $1 million, a huge market. And it's a 5- 10-year cycle. So there is that area that we are looking at. But it's a couple of years ahead.

All right. Perfect. Good quarter. Thanks, guys.

And, sir, we have a question from the line of Joseph -- Jeff Rosenberg with William Blair.

Hi, guys, this is actually Michael Bartlet for Jeff Rosenberg. Just a quick question on Spacelabs or the Healthcare group in general. I remember -- I don't know if it was about a year ago or so, you guys kind of had an operating margin target out there of roughly 10%. And given that we're almost there, should we think about that 10% level as the ultimate goal or is there actually a lot more margin potential for this segment?

The way to look at that is that if you look at a [beers], and we said it before, we continue to make progress to increase our manufacturing gross margin. And we think that double-digit operating income model is achievable. If you look at our second quarter, on $61 million revenue, we did approximately 5.3 million or so. Which basically puts it at about 8.7%, and a year ago we were in the same mode at 1.9%. It is revenue driven. And as we improve our gross margin, which by the way also we are saying we continue the trend of improving our gross margin. We have improved it already. We think the second half of this year, we will again show the trend of increased manufacturing gross margin, which will put to the bottom line mode operating income.

I think by the time we go into next year, we will continue to make progress and start approaching towards that number. The sweet spot in that area is between 10% to 12%. Monitoring has a higher margin, operating income margin, relative to the anesthesia product lines. So that we have a little bit of blend into it. So we think that the 10% is achievable in near future and we are building towards that. If we overshoot and I'm sure all of you will be happy. But that's what we're building towards.

Okay. Maybe onto something Ajay can maybe help us, or help me with, understand. Just in general, with the TSA, what's going on with them? In their overall buildout? And maybe if you could just comment on it , general trend in spending at the TSA.

You know, we continue to work very closely with TSA. And obviously, they're looking at a lot of working with them on several grants. We're working with them on, we obviously still shipping some of our TRX units there. We are working with them on the body scanner as well. But I think we're only getting more specific in what we're doing with TSA, I would feel very uncomfortable, for competitive reasons, talking about that. And plus, we do have confidentiality agreements with the TSA. But we are working, we are working very closely with them and very actively.

Okay. And maybe one last small question. Anuj mentioned restructuring benefits had helped margins a little bit. Are, should we expect the full benefit -- is the full benefit already in place, so to speak? Or should we expect some incremental restructuring benefits in the second half of the fiscal year?

In terms of on the Security, we have already realized the full benefit. But as Deepak mentioned on the Healthcare side, overall, our gross margins would be improving, as I said. We expect our gross margins for second half will be in the range of about 38% to 40%.

All right, great. Thanks again, guys.

[OPERATOR INSTRUCTIONS]

Any other persons waiting for questions?

Not at this time, sir.

Then, in summary, I want to thank everybody listening to our call. We have changed the timing from our historical we report to accommodate both sides of the pond in U.S. and U.K. We as a management are very happy with the quarter. And we believe that there is continued room to improve.

We've had some new things that have come up from last year that didn't have in the last year, that -- now stock-based compensation expense, minority interest effect and we continue to look at ways to increase our efficiency. We believe that Security, which we have been investing heavily, and I'm sure all of you have been patiently waiting to turn the corner, we believe our second half will be profitable.

We believe that we have demonstrated what we have said over the last 5, 6 quarters of our intent with the Medical side of the business, we continue to look at growing that business by acquisitions and by organic growth. We have beaten the growth, market growth in the monitoring by more than double digits. As far as the growth is concerned, we are capturing market share. We are also taking market share away from our competitors. We are investing heavily into it. We continue to look at globally for the product lines that are needed by the customers to what we are developing.

In the Security side, we want to emphasize that our people and parcels screening business continues to grow. Continues to be profitable. And we continue to invest in two great opportunities in cargo and in HBS. Both markets are huge. And we definitely believe that the markets are there. We continue to invest and we believe that the products that we are developing in that marketplace are the products the customers need. And when we look at it from the international side, that the products and the mix that we have answer to most of the questions that are facing the challenge that the customers are facing.

The Opto area is an area which was predictable. We continue to look at that, that area will continue to grow. And we expect that with each quarter, we will continue to make progress. Thank you very much.