OSI Systems Inc (OSIS) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2011 OSI Systems earnings conference call. My name is Shaquana, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of this conference. (Operator Instructions) I would now like to turn the presentation over to your host for today's call, Mr. Alan Edrick, CFO of OSI Systems. Please proceed, sir.

Thank you.

Good morning and thank you for joining us. I am Alan Edrick, Executive Vice President and CFO of OSI Systems. I am here today with Deepak Chopra, our President and CEO, Ajay Mehra, President of our Security Division, Rapiscan Systems, and Victor Sze, our General Counsel.

Welcome to the OSI Systems second-quarter fiscal 2011 conference call. We would like to extend a special welcome to anyone who is a first-time participant on our conference calls. Please also note this presentation is being webcast and will remain on our website for approximately two weeks.

Before discussing our financial and operational highlights, I would like to read the following statement. In connection with this conference call, the Company wishes to take advantage of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995 with respect to statements that may be deemed to be forward-looking statements under the act. Such forward-looking statements could include general or specific comments by Company officials on this call about future company performance as well as certain responses to questions posed to Company officials about future operating matters. During today's conference call, we may refer to both GAAP and non-GAAP financial measures of the Company's operating and financial results.

For complete information regarding non-GAAP measures, the most directly comparable GAAP measures, and a quantitative reconciliation of those figures, please refer to today's press release regarding our second-quarter results. The press release has also been filed with the SEC as part of a Form 8-K. The Company wishes to caution participants on this call that numerous factors could cause actual results to differ materially from any forward-looking statements made by the Company. These factors include the risk factors set forth in the Company's SEC filings. Any forward-looking statements made on this call speak only as of the date of this call, and the Company undertakes no obligation to revise or to update any forward-looking statements whether as a result of new information, future results or otherwise.

Before turning the call over to Deepak, I will provide a high level overview of our financial performance during our second quarter. We will again touch on several themes that we discussed during past conference calls. We entered Q2 with expectations to return to solid revenue growth, capitalizing on last quarter's record backlog and leveraging this top-line growth to strong earnings while simultaneously stepping up our investment in R&D to deliver an exciting new product pipeline. This plan was achieved.

Highlights for our second quarter of fiscal '11 are as follows. First, we achieved a new record for quarterly sales of $169 million, an increase of 12% over the prior year, led by the performance of Rapiscan whose revenues increased 30% and our Optoelectronics Group, which delivered top-line growth of 9%. Second, bookings were again solid leading to a record Q2 backlog of $293 million, a 22% increase over the same period last year providing outstanding visibility for the remainder of fiscal 2011. Third, our strong earnings growth momentum continued as we reported a 24% increase in Q2 diluted earnings per share, excluded restructuring and other nonrecurring charges. This quarter's results marked our strongest Q2 EPS ever in the 14th quarter out of the last 15 that we generated year-over-year earnings growth. Fourth, we generated positive free cash flow for the 12th consecutive quarter, which has significantly strengthened our balance sheet.

And finally, during the second quarter we announced a completion of $250 million credit facility on very favorable terms. Concurrent with closing this facility, we applied a portion of our existing cash balance to pay off our term loan of approximately $26 million that was outstanding under the former facility. As a result, our debt now solely consists of a very small amount of real estate loans and capital leases. This new five-year facility positions us very well to capitalize on future opportunities. We are pleased to have reported another strong quarter, and our even more optimistic about our future prospects.

I will provide additional financial details and we'll discuss our updated fiscal 2011 guidance. But first let me turn the call over to Deepak.

Thank you, Alan.

And again, good morning, good afternoon and welcome to the OSI Systems earnings conference call for the second quarter of fiscal 2011. OSI continues to gain momentum in all three businesses; Security, Healthcare and Optoelectronics, and this is a reflected in our strong performance. I will now go over the business status of all the three segments of our business.

Starting with the security division, Rapiscan, where we achieved record revenues by reaching $76.7 million for the quarter. The strong sales growth in turn contributed to operating profit growth of 69% from the prior quarter, placing us well on our way to reaching the double-digit operating margin goal we have set for this business. We ended the quarter with $191 million Security backlog and we see significant opportunities for growth across all major product lines that is Baggage Screening Solutions, Cargo and Vehicle Inspection systems, people screening and turnkey screening services.

Several years ago we embarked on a strategy to invest in not only diversifying the product portfolio, but also developing and/or strengthening the marketing and sales channels for major US Government agencies and regions of the world that would benefit from an integrated approach to meeting correct detection requirements. As a result, we now see an unprecedented number of opportunities in our sales funnel. Similar to the efforts that yielded success at the TSA with check point solutions, our efforts in the cargo and vehicle inspection market are gaining traction with potential customers in the US, Europe, Middle East, Asia, and Latin America, and have significant revenue potential. Our pipeline of activity continues to be the strongest in the history of the Company.

A bit more about our Cargo business. During the quarter, we received multiple new orders for various cargo and vehicle inspection systems from key to graphic regions that we have targeted for growth. We're on the right track with our strategy and focus to develop multiple platforms and services for this segment. We often have customers that need multiple platforms to fulfill their requirements. As an example, during this quarter we received a $9 million order from a US Government agency for multiple units of the Rapiscan Eagle T10 Cargo and Vehicle Inspection system and 638 Dual View parcel inspection systems. The detailed cargo and vehicle inspection system is a brand new product and it can detect threats that are deep inside a vehicle that could be missed by similar lower energy systems. In contrast, the 638 Dual View is an advanced large pallet-cargo screening system.

Our broad offering of Portal, Gantry and Mobile systems allows the customers to select the appropriate system, or a combination of systems, that are best suited to meet the threat detection requirements. We continue to support the TSA in the implementation of the Secure 1000 series of body scanners as part of our $173 million IDIQ contract. We are also working with the TSA on software upgrades to address privacy issues.

Onto our service efforts. During this quarter, we received several orders from customers for service and maintenance of inspection systems in the field. With thousands of systems installed with hundreds of customers all over the world, we actively market our maintenance and service capabilities which cost effectively supports the full product-line life-cycle. We plan to grow this portion of our business because it also helps us enhance the customer's overall experience and satisfaction. In addition, the service effort can also result in a lead generation opportunity for replacements of upgrades to newer platforms.

The market development of our Turn-key Service Model also continues to make progress. The construction phase for the contract in Puerto Rico is nearly complete, and we should begin to see revenue this quarter from this initiative. We are very excited about this market segment because our efforts are being received with great enthusiasm by potential customers. Commercial and government agencies that have critical requirements to detect threats are considering our screening as a service model as a viable option. And this trend is expected to increase. With our technical expertise, global infrastructure, and a very broad range of inspection products, we can efficiently meet the needs of this growing market segment worldwide.

Turning to our Healthcare group, during the second quarter, our Spacelab division continued to weather the headwinds in the hospital market, especially in the US, but delivered a double-digit operating margin of 10.2%. This is a testament to our management team and our foresight to make proactive measures to reduce the cost structure while dedicating resources to develop new products in patient monitoring, anesthesiology and cardiology. In fact, as Alan mentioned, our R&D investment both in absolute dollars and as a percentage of sales increased in the quarter. As a result, over the next 12 to 18 months, we anticipate launching more new products than we have ever launched in the last five years combined in the Healthcare Group.

As medical centers in the US continue to upgrade their patient information management systems and infrastructure, our Healthcare division stands to benefit with a new product launches, and as a result, see additional opportunities for growth. In addition, our patient monitoring solutions open-architecture design enables hospitals the ultimate flexibility in selecting the best in-class solutions versus healthcare companies using a proprietary-design architecture, which makes it more expensive for the hospital to utilize robust solutions provided by independent connectivity and healthcare database suppliers.

The foundation of success at Spacelabs, and any of the business for that matter, is the way you serve customers, and, in turn, how they feel about you. We are again proud to be ranked first for overall service performance in 2010 by ServiceTrak, a market survey conducted by an independent research organization. This award marks the third time in the last four years that we have received the ServiceTrak number one ranking compared to our peers. I congratulate the team at Spacelabs for a job well done.

Optoelectronics grew sales 9% to $47.5 million, and operating profit by 31% to $4.3 million. In addition to our traditional defense, medical, and industrial OEM customer base, the Opto division is establishing new customer relationships at higher margins. Opto is also a sought-after partner for companies, especially start-ups, that have electronic assembly content in their products, but do not wish to invest heavily in building-out and manufacturing infrastructure.

Examples of growing market segments are innovative products in healthcare and renewable energy. With our domestic and offshore production capabilities, we can support low volume in the US during the prototyping and low-rate production phases, and shift production to lower-cost manufacturing regions when it makes sense to do so. Looking ahead, we feel very good about our standing in the current fiscal year and beyond. Each division is optimized with a cost structure that should see significant operating leverage as the top line continues to grow. We are thrilled about the opportunity pipeline, new product introductions, and new customer relationships. These are exciting times at OSI, and I am proud of our team and the relentless dedication and focus to deliver overall value to our customers and shareholders.

With that I am going to hand the call back over to Alan to talk in greater detail about our financial performance before we open the call for questions. Thank you.

Thank you, Deepak.

As mentioned on each of our conference calls over the past few years, we continue to focus on growth initiatives and operating improvements throughout the Company in order to deliver significant earnings expansion and free cash flow. We are pleased with both the earnings momentum and cash flow generated, and are excited about our prospects given our strong backlog and excellent pipeline of opportunities which are expected to fuel continued growth. I will speak to our guidance shortly, but first let me review the financial results of the second quarter of fiscal '11.

As mentioned before net sales were up 12% on an overall basis. Sales in our Security division increased by 30%, driven by strong demand for our Baggage Inspection products as well as Cargo and Vehicle product lines. Furthermore, service revenue continues to increase as our install base widens. In this record quarter for Security revenue, sales to the TSA for our advanced imaging technology products, which are better known as body scanners, accounted for less than 1% of revenues. Though the body scanners are currently our most high profile product, the real strength of our Security division lies in the breadth and range of our product portfolio.

As Deepak mentioned, we were also very pleased with the strong sales growth in our Opto division, which saw third party revenues increase 7% while sales to our sister divisions were up 19%, leading to a combined 9% increase in sales. While such inner segment revenues are eliminated in consolidation, they demonstrate the strength of our vertical integration strategy. And while there are signs of improvement in healthcare, leading us to be confident in second half sales growth, sales declined by 2% in Q2 in this division with the softness most acute in the US.

Our gross margin increase slightly during the first half of the year though we experienced a drop in the gross margin during Q2 to 35.4% from 37.4%, due primarily to the significant sales growth of Security and Opto, relative to Healthcare. While operating margins are strong in Security and Opto, the blended gross margin is below that of our Healthcare division, which historically generates the highest gross margin across the three divisions, and therefore adversely impacts the consolidated gross margin. Our gross margin does typically vary from quarter to quarter as a result of a number of factors, including the product mix, unit volumes, pricing, inventory reserves and capacity utilization.

With strong cost controls remaining in place, our Q2 SG&A expenses decreased 2% from the comparable prior year quarter, reflecting the impact of the actions we undertook in the prior year and continued into fiscal 2011. This is especially noteworthy since we were able to reduce SG&A expenses while generating double-digit revenue growth. As a percentage of revenue, SG&A costs were 20.1% as compared to 23% in the second quarter of fiscal '10. Going forward, we do anticipate increases in such costs associated with a higher number of product launches and other general costs.

We continue to invest significant resources in R&D to enhance our Security and Healthcare product offerings. To this end our R&D spending increased 14% in the second quarter to $11.8 million with such incremental investment occurring in both our Security and our Healthcare divisions. We continue to invest resources and technologies to add value to our Security and Healthcare product offerings. And as a result, we believe these efforts will enable the Company to capture major opportunities in our core markets in the future.

Our effective tax rate for the quarter was 28.1%. Our provision for income taxes is dependent upon the mix of income from US and foreign locations, and due to tax rate differences among such countries as well as the impact of permanent taxable differences. The extension of the R&D tax credit favorably impacted our effective tax rate.

As a result of the improved financial metrics, we reported a significant improvement in our diluted EPS to $0.47 per share compared to $0.39 in the comparable prior year period; however, excluding the impact of restructuring charges, our non-GAAP normalized EPS for Q2 would have been approximately $0.51 per share, representing a 24% increase over last year. And moving to cash flow, we generated operating cash flow of nearly $10 million during Q2 and nearly $20 million during the first half of fiscal '11, driven mainly by our improved profitability, but also due to our continued focus on working capital management, resulting in improved receivable collections, which were partially offset by a build up of inventory to support our strong backlog. Capital expenditures were on the lighter side this quarter totaling $2.6 million, while depreciation and amortization was $4.7 million. We paid off approximately $26 million of debt during the quarter, including the retirement of our term debt concurrent with entering into a new credit facility.

Overall, our net cash position continues its upward momentum. As mentioned in previous conference calls, generating strong cash flow remains a top priority. We are very pleased with the sustained progress we have made. With strong top-line growth forecasted over the remainder of the year, investments in working capital are expected to be required.

Finally, turning to our fiscal 2011 guidance. With the outstanding backlog and funnel activity providing improved visibility, we are raising our revenue guidance to $650 million to $662 million for fiscal '11, which implies second half sales growth of 13% to 17%. Consistent with past year seasonality, we expect that the fourth quarter sales will be larger than that of the third quarter. As higher sales are anticipated, we are also expecting strong earnings. As a result we're increasing our EPS guidance to $1.75 to $1.85 per diluted share, excluding restructuring and other charges, representing a 26% to 33% increase over fiscal '10.

During the past few years, we have transformed our Company into a sustainable and consistent performer, building a strong foundation for significant future earnings power. Given the operational improvements that we have implemented over the past several years, coupled with the restructuring activities that reduced our cost structure, we believe and have demonstrated that we are well positioned for continued operating margin expansion in the coming years. Thank you for listening to this conference call. At this time we would like to open the call to questions.

(Operator Instructions) Your first question comes from the line of Brian Ruttenbur representing Morgan Keegan. Please proceed.

Thank you very much. Great quarter. First question I have on gross margins, they were down year-over-year December versus December. Can you remind us why that was?

Certainly, Brian. This is Alan. Our Healthcare division carries the strongest gross margin in the Company, and our Healthcare division sales were down by 2%. Our Security sales and our Opto sales were up considerably, 30% and 9% respectively. So, as a result of the weighting of those various factors overall our consolidated gross margin goes down, but the operating margins are very strong amongst the divisions. As a result, we continued to see operating margin expansion.

Okay. And then the bookings being weak versus last year, and maybe you can remind us, wasn't there big orders last year that were body scanners or something like that? Was there anything that caused the bookings year-over-year, in fact were they weak year-over-year, or not?

Brian, are you referring to overall for the Company, or Security in specific?

I was talking about overall for the Company.

This is Alan. Generally speaking, we'll see some seasonality. And typically we see our Q1, in the Security perspective, being the strongest bookings quarter. Last year, we did have some particular strong bookings in Q2, which made our Q2 bookings very robust. This year return back to our normal seasonal patterns and our security bookings, in fact our overall OSI bookings, were still quite strong for the quarter in general, which is why despite a record sales quarter we still have a $293 million backlog. Going forward, looking at the pipeline of activity, we're expecting some very strong bookings again through the second half of the fiscal year.

Great.And then a couple other ones. On Puerto Rico, I believe Deepak mentioned the launch expecting revenue this quarter. Do you have anything more definitive on a timing for the actual date of the launch and starting to screen 100%? Have you started screening anything yet, or is it going to be 0% to 100% the first day?

This is Deepak here, Brian. I think what we have said is that the revenue stream will start this quarter. It might not go to 100% in one shot, but we expect that the site is ready, and we have the equipment there. We have started the fine tuning of it, and we expect revenue generation to start later part of this quarter.

Okay. Is there anything that could hold that up in your opinion at this point?

I think not. Ajay, do you want to comment?

Deepak said we start our operational testing very soon, and we're moving forward at this point.

Okay. Has there been any major pushback from any of the shippers that said, we're not going to participate in this or we can't afford this, or anything along those lines?

Not that we know of.

Okay, and then the last question is along the lines of the medical. Can you give us an update on the launch of some of the new products, what those are, and the timing of those actual product launches?

We have multiple launches. We try to coordinate and fine tune some of the launches with various trade shows that happen all over the world. We have launches of the new patient monitoring product. We have launches of some new cardiology products. We have some launches of the anesthesia products. Some of them are scheduled in the next couple of months in the US. Some of them are scheduled in Europe. Some of them are scheduled in Asia. So, it is all over. Basically, all companies in this space try to fine tune them with various shows, trade shows, that take place all over the year.

Great. Thank you very much.

Your next question comes from the line of Rick Hoss representing ROTH Capital Partners. Please proceed.

Hi, Good morning.

Good morning.

Alan, can you break out the difference in the interest expense, or interest rate I should say, for the old facility versus the new facility?

Certainly, Rick. The interest expense is actually the same. Our rate under the former facility was LIBOR plus 2%, which at the time was the prevailing market rate. At the time we did this facility of course the prevailing market rate was significantly higher than that. But due to the strong financials that we have, and other factors, we're able to keep the same interest rate, which in today's world is a very attractive interest rate, while at the same time improving the overall capacity of the credit facility, the covenants, and other terms. So, essentially, if we're to summarize, this facility in every respect is superior to our former facility, and in no respects have we taken a step back.

Okay. And then, on the, in Opto, it's the segment that gets forgotten about for the most part. Can you get into a little bit more detail about where the strength was coming from and maybe just give us an appreciation for the customer demographic and percentage of government versus non-government in revenue?

This is Deepak here. I think one of the best signals that we work with that is that, since Opto sells a lot of OEMs, we think that the customer confidence has come back. Customers are designing new products, and the Opto Group is in the front line of the development of new products. It is coming from all segments of medical. It's coming from telecom, semiconductor equipment, construction, and defense. On your second question, we really do not sell anything directly to the government in the Opto segment. We sell normally to what I call principle players, like the General Dynamics or the Raytheons of this world, Boeing in the defense area. So, we will sell to them, but never sell to the government directly.

Right. So, of the defense contractors then, I guess that's really what I was looking for is the defense related or sold to these guys versus semi-equipment?

It is all over. We have a very, very broad customer base in the Opto area, and all segments have shown customer confidence coming back.

Okay. And then, Alan, on the restructuring, is there a segment orientation that, I think previously you focused mostly on Spacelabs, and is that done? Or do you continue to focus equal percentage on the various segments? Or are you focused on one more than another?

Well, Rick, our mantra is continuous improvement. So, we're always looking to see how we can get more efficient, and as a result the process continues. I would say we tend to focus on the areas that we think the greatest opportunity may lie, and certainly what plays into that is our growth rates on the top line. So, for instance, with Security growing by 30%, while we're looking to get more efficient, it is not necessarily through restructuring type activities, it is more through supply chain and other operational improvements. When we've had certain challenges on the top line in areas like Spacelabs, or in the past if it related to Opto, we would focus in those areas. So, it is not necessarily equal weighted. It is where we think the greatest opportunity lies, and what the prospects are for each division in our eyes at the time. So, we will continue to focus to improve.

Just to add onto it, this is Deepak here. As Alan mentioned in his last conference call, the heavy lifting is behind us. This is what I call the optimization, and as Alan mentioned, we look at all areas all the time to look at the fine tuning and that's what you see. There will be a little bit of restructuring going on all the time. Just improves our efficiency.

Okay, and then the last question for me. Yesterday's bombing in Moscow. Can you comment on that, and give us an appreciation for if you have contacts in Russia, Russian government, and just paint us a picture based on that event that happened yesterday?

First of all, we do a lot of business in Russia, like every where else, and our condolences go out to the Russian people. It is a real tragedy what happened. We are actively talking to the appropriate people in Russia and other places. And I think, really for me to comment any further what we're doing or what some of the things are, I leave it up to the local and the national governments to comment on that. But, yes, we are aware of the situation and we are working with several people.

Okay. Fair enough. Thanks, gentlemen.

Your next question comes from the line of Tim Quillin representing Stephen Inc. Please proceed.

Hi. Congratulations on the quarter. With regards to Puerto Rico, can you just give us a sense of what hurdles you have overcome so far, and what hurdles remain before you actually start?

I wouldn't use the word hurdles, Tim. It's a process. It is a new way of doing business. You have to work through with the shippers. You have to work through with the government. You have to work with the board. You have to work through with all the regulations there, the permits. There has been no hurdles. Yes, there has been some change of the guard, but that's expected. And we just work through it and we are making progress. And we expect them, and I mean there is three, six months delay, but that's expected. So, we won't call it at all as a hurdle. It is any time new business starts, like in even in R&D. And a good example I give you is when you start on new product development, you are going to have a couple of places that you didn't anticipate. We feel very good and confident and it has been a very cooperative state government. We are very, very positive that, and we don't believe there is any hurdles, Ajay.

I think we obviously have gone through the process over the last few months and like we said, we expect to be operational and have revenue this quarter.

Okay. And I know that there is no consideration given to backlog for this contract. Once it starts up, is there something that goes into backlog, or will it never actually get reflected there?

Tim, based on the fee per scan model, which isn't like a purchase order per se, on that type of model it would not be part of backlog. There could be certain contracts that are more fixed price in nature, which would then allow it to be entered into the backlog in the future.

Okay. That brings up the next question regarding the pipeline of other fee per scan opportunities and maybe you can talk about the nature of those and the timing of those.

This is Ajay. We have taken this model. We've talked to several customers. It is something we're looking at around the world. There is a lot of opportunity, specifically, obviously I am not going to comment on it for competitive reasons, but the pipeline in this area is very, very strong. In fact, stronger than it was even last quarter.

And I know you wouldn't want to talk about what customers you are talking about, but is it five potential customers? Is it ten potential customers?

There are several potential customers.

Okay.

Tim, just to add on, we said it in the last conference call also. Trying to emphasize to all of you that this is not like a different kind of doing business. We have been talking to all our major potential customers who are going to buy the product. They themselves can look at this as an additional option because it gives them more flexibility in the product breadth and the ability as cargo changes over from the kind of equipment that they buy. So, it is not like 7, 8 customers. We can almost say that the pipeline that we have all over the world, all the potential large procurement potentials, we talking to every one of them.

Right, right. That makes sense. And in terms of the Security pipeline and bookings expectations, I think typically in the back half of the year you burn backlog in the Security business. You have the strong bookings in the first quarter, and then gradually work through the back book over the course of the year. Would you expect to burn backlog in the Security business in the back half of this year?

Well, as Alan mentioned, there is definitely going to be seasonality. Some orders come in earlier than others, but we believe, as Alan has said, all three divisions will have a stronger second half than the first half, and we don't expect that we will burn in the Security too much backlog. Ajay, do you want to add something?

No, that's fine.

Okay. And then just lastly, on the cash and the debt capacity you have with the new facility, what are you thinking in terms of uses of cash? How might you deploy them? Thanks.

Well obviously, we have said it in the last conference call, we continue to look at, diligently, some of the opportunities that are out there which fit in our scope in all the three product lines. Obviously, it gives us a bit more aggressive posture in the fee for scan services model. So, it is nice to have dry powder, and we believe that there are a lot of opportunities globally that we can look at in all three segments.

Thank you.

Your next question comes from the line of Josephine Millward representing the Benchmark company. Please proceed.

Hi Deepak, Hi Alan.

Hi.

Hello.

Great quarter. Do you have any body scanners left in your backlog from TSA?

You know, I think specifically what we have with the TSA, what we don't have with the TSA, I cannot comment on.

I am just curious you know whether you shipped all the orders you received from TSA on the body scanners?

I think the best way to describe it is like Ajay said. We can't be very specific, but as Alan has already said, we hardly had any shipments and dollars related with this quarter. Basically, it is insignificant.

Okay. As you know, Deepak, there has been a lot of public backlash on the body scanner.I was wondering if you can comment on how committed you think the TSA or Congress are on fielding this capability going forward?

As you know, in the order that we did announce, we got the lion's share. We did get the bigger share than the other guys. We believe they're committed. I think it is a great technology, and any time there is a new technology that comes out, there is a lot of backlash in the press. On the other hand, the acceptance at the airports, and all of the various things that the dooms people talked about that is going to be disruption and stuff, there is generally acceptance all over.

That's helpful. Can you talk about what you think your revenue exposure insecurity will be in the coming year that the revenue split between US and international and maybe in '12? And the reason I am asking this question, Deepak, as you know it looks like we might not have a fiscal year '11 budget at all, and my understanding is TSA has requested funding to purchase another 500 body scanners. So, if the federal government continues to run on a CR for the remainder of the fiscal year, what happens to that funding request?

The best way to describe it is we have always prided ourselves by saying that we are a global company. Our business sandbox, and Security especially, even the other divisions, all global. We're very excited about it, and we try to continue to build the Company's fundamental strength that no one area hopefully, or no one product we're dependant upon.

Can you give me a rough breakdown of what you think your revenue mix will be in Security, the US and international split?

Josephine, we have never done it for competitive reasons. All we want to say is that, globally, we continue to make big strides, and we continue to look at all segments, all areas.

What about looking ahead in Security? I know you expect growth in all product areas. Can you help us rank what product area you think will grow, be the fastest growth driver? If you can help us think about what product area it is going to be most important going forward?

Josephine, it is obvious that Cargo has always been and everybody will tell you is the biggest (background noise). But we are also very much active into the HBS area. We are also active in the people screening, and in the services business. So, it is very difficult for me to say which area of the crystal ball tells you. I think Cargo relatively is the biggest opportunity that everybody will tell you in scanning.

Okay. Final question. Now that you are close to getting Puerto Rico up and running, can you help us quantify what you think this program might look like in the coming year? What's assumed in your guidance? And if you can just give us more clarity on revenue contribution for the year?

Josephine, this is Alan. As we have indicated on past conference calls, we believe it is premature to give any type of revenue or financials on the Puerto Rico project. But what we have said is once we have a full quarter under our belt, we will be able to provide greater insight. We do believe that it will significantly enhance our overall Rapiscan operating margins.

Okay. So, we'll probably get an update on the next call on what you think revenue contribution might be from Puerto Rico?

We do plan to give an update on the next call.

Great. Thank you.

(Operator Instructions) Your next question is from the line of Michael Kim representing Imperial Capital. Please proceed.

Hi, Good morning, guys. On Rapiscan, can you talk a little bit about the contribution from services, maintenance services with the expansion install base, and what the composition was for backlog and bookings in this last quarter?

We don't break out, we traditionally have not broken out what the backlog on service is, but one of the things, obviously, as our install base grows, our service content is growing as well, and especially as we look at more and more into the Cargo product line and the HBS product line. One of the key things obviously on service is not only is it a mechanism of customer retention, but once we do have an install base there, we have a potential service revenue for several years. And as our install base is growing, that's what we're seeing. And we feel very good about the growth prospects on a service side.

And just to clarify, you pretty much service all of your systems or are there third parties that also contribute to services designated by some of your customers?

You know, we service our systems directly. We also have internationally our distributors that we train who help us service our systems. But one way or the other, we are involved with all the systems that are out there, and whether it is supplying spare parts or doing all the service or just doing secondary labor service, it is a combination of them.

Okay, and then switching gears, do you have an update on the RTT product and certification process?

We said it last time. We're in the process both in the US and in Europe. We're going through it. Really for me to comment any further would be inappropriate, more for competitive reasons. But we are actively involved in the process as we speak.

And is it your sense that particular platform would have a stronger adoption in international markets or do you see an equivalent US opportunity?

I think it is a product for the entire world.

And Alan, just switching over to your guidance and the Healthcare expectations, are you assuming a pretty significant recovery in the Healthcare business in the second half and what your visibility is on the US CapEx spending side?

Sure, Michael, we are expecting that we'll see growth in the healthcare markets in both Q3 and Q4. Remember again we had relatively softer quarters last year, so the comps become a bit easier to achieve from a growth perspective. We certainly are anticipating that. We have a higher backlog entering the third quarter than we've had in some time in Healthcare, so that gives us improved visibility. We feel optimistic that we're going to see a much better second half than we saw in the first half for our Healthcare group.

From a revenue standpoint, is it your sense then that second half quarterly revenues looked fairly similar to the second quarter in this mid $50 million range, or do you expect to sort of bounce around that?

I think there is always some seasonality in the healthcare business as you have seen in the past with Q2 and Q4 being -- tend to be the strongest quarters in our Healthcare business. But when we look at comparing it versus prior year, I think we will see nice increases both in Q3 and Q4.

And just to add onto that. This is Deepak here, keep in mind we also said that we have a significant amount of launches of new products, which we expect to also generate some excitement in revenue.

And with the new products over the next 12 to 18 months that you talked about, what's your sense of the typical sales cycle from product launch to actual deliveries?

In the healthcare area, basically, that's why everybody keeps it very close to their chest. Whenever we launch a product, it basically is an instant replacement and instant add-on to the present products you have. So, there is not a very big delay in the sales cycle.

And would you expect any change in the gross margin profile with the new products versus the replacement products?

The answer is yes.

Up or down?

We expect upwards.

Upwards. Okay. Great. Thank you very much.

At this time there are no further audio questions. I would now like to turn the call back to Mr. Edrick for closing remarks.

I'm going to hand it over to Deepak.

Thank you very much for attending the call. In summary, we are very excited about the second quarter and frankly the first half. As Alan has mentioned, we are very, very optimistic about the second half. It is going to be stronger than the first half and all three divisions, in our opinion, are well poised for growth and exciting times. And I want to thank the total employees of OSI and thank you for attending the call.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.