OSI Systems Inc (OSIS) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2012 OSI Systems earnings conference call. My name is Janaida, and I will be your Operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Allen Edrick, CFO. Please proceed.

Thank you. Good morning, and thank you for joining us.

I'm Alan Edrick, Executive Vice President and CFO of OSI Systems. I'm 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 2012 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 that 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. This press release has also been filed with the SEC as an exhibit to a current report on 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 last annual report on Form 10-K and other 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, let me provide a brief overview of our financial performance during our second quarter. You may note that I will touch on several themes that we discussed during past conference calls. As you may recall, we finished the first quarter of fiscal 2012 with a record backlog of $413 million, which positioned us well to continue our recent trend of double-digit revenue growth into the second quarter and beyond. We are pleased to have again been able to meet these expectations. Highlights for our second quarter of fiscal '12 are as follows.

First, we recorded second-quarter revenues of $188 million, which represent the highest level of quarterly revenues in the Company's history, and an increase of 11% over a very strong second quarter in fiscal '11. This record performance was driven by strong growth in all three divisions. Leading the way was our Security Division, which grew by 16% in the quarter and 26% for the first half of fiscal '12. Our Opto Division delivered sound results, reporting 8% revenue growth on external sales. And finally, our Healthcare Division has shown very healthy growth, with sales increasing 6% in the quarter, which we leveraged to achieve over 40% operating income growth. This represents the fourth consecutive quarter of positive revenue growth for the Healthcare Division.

Second, our trend of delivering even greater growth and profitability continues, with diluted earnings per share increasing 28% in the quarter, and 29% for the first half of fiscal '12, excluding the impact of restructuring charges. This most recent quarter marks the tenth consecutive quarter in which we have generated year-over-year EPS growth in excess of 20%. Third, our backlog remains very strong, totalling $377 million at the end of December '11, representing a 29% increase over Q2 last year, and our second-highest reported backlog in the Company's history. This high level provides good visibility for our business over the next 12 months.

And finally, subsequent to quarter-end, we announced a landmark award for our Security Division, with Mexico's tax and customs authority. This turnkey security solutions deal, our largest award in the history of the Company, will be discussed later on this call. It is important to note that the value of this award is not included in the quarter-end backlog figure that I just provided to you.

We are pleased to report another strong quarter of financial and operational performance, and remain very enthusiastic about our future success. I will provide additional financial details and will discuss our updated fiscal '12 financial guidance, but first, let me turn the call over to Deepak.

Thank you, Alan. And again, good morning, and welcome to the OSI Systems earnings conference call for the second quarter of fiscal 2012.

As Alan mentioned, all three businesses of OSI -- Security, Healthcare, and Optoelectronics, delivered top-line growth and strong profitability, as reflected by double-digit sales growth and operating profit margin of 9.7% in the quarter. We entered the quarter with a record Q2 backlog of $377 million, an increase of 24% over the prior fiscal year-end. Q3 to date has had good bookings, especially in the Cargo Security branch.

Let us review the highlights for each division, beginning with our Security Division. Rapiscan, where sales were up 16% to $89 million in the quarter. In the last four quarters, Rapiscan has booked almost $425 million, which amounts to a book-to-bill ratio of 1.3, suggesting a continued growth trajectory for our Security Division. And of course, this does not include our landmark $400 million booking subsequent to quarter-end. As we discussed in the prior call, we are bolstering our capabilities in the areas of systems integration and turnkey screening services.

In Q1, we made great strides in systems integration efforts by winning a $98 million contract with the US Army. We will continue to leverage our robust global marketing and sales channels to grow in the US and overseas by capturing more systems integration business. I would like to take the opportunity here to spend more time to discuss our efforts in the turnkey services. Last week, we announced that we were awarded a six-year agreement with SAT, Mexico's tax and customs authority, to provide inspection services by implementing a wide-ranging program of cargo and vehicle security screening systems and services throughout Mexico.

This agreement is a landmark event in an industry where, traditionally, customers have considered handling security infrastructure as a capital project as opposed to seeking a viable alternative from full-service solution providers. OSI is at the forefront in efforts to show the industry that a turnkey service model works equally well in security. Under this award, Rapiscan will provide complete ongoing operations of a comprehensive X-ray screening program, which will include technology, staffing, systems integration, and maintenance support at locations controlled by Mexico's customs authorities, such as ports of entry as well as inland checkpoints and airports.

The initial award from SAT has a value of approximately $400 million, and this amount could potentially be higher as the program scope is finalized. I want to emphasize that this award is unlike an indefinite delivery, indefinite quantity order; with the minimum scope and value of the agreement clearly established, this turnkey screening services agreement will provide substantial recurring revenue and profit streams to OSI over its six-year duration. Our operations at the Puerto Rico Ports Authority, combined with this great win in Mexico, provide validation of our strategic direction to expand the turnkey service business. We intend to capitalize on the foundation that we have created here.

A quick update on Puerto Rico -- the second inspection site is now operational and producing revenue. The third site is under construction, and planned to be operational towards the end of this quarter. Here are some highlights from Security during the second quarter -- as we continue to develop new products and turnkey solutions, we appreciate that we are still recognized for our core research capabilities by our major customers such as the Department of Homeland Security. To that end, we secured multiple contracts valued up to $7 million with the Global Nuclear Detection office, an agency under DHS, to perform research to advance the US's capabilities to detect nuclear material threats.

On the international front, we won contracts from three key customers in the EMEA region to provide baggage and parcel inspection systems and Eagle mobile cargo scanners. We have been consistently successful with international customers who really value the Eagle series of cargo scanners that are available in several fixed and mobile configurations, and are easily customized to best suit their requirements. As we have mentioned in prior calls, international customers typically desire a solution package for cargo inspection that includes a follow-on service and support package, which puts us in a great position. During the second quarter, Rapiscan also received awards recognizing two of our recently developed inspection systems. The Airport Operators Association, a UK airport trade association, recognized Rapiscan with the Best Innovator 2011-12 award for its Real Time Tomography RTT inspection system. The RTT is currently being evaluated by both US and European aviation authorities to inspect checked baggage at airports. We at Rapiscan are very focused on achieving certification for this product.

At the Government Security News -- GSN magazine's -- Homeland Security Awards, Rapiscan was the winner of the best explosive solution for its Eagle M45 cargo and vehicle inspection system. The M45 achieves high penetration of densely packed cargo, and has several compelling features such as the drive-through scan mode, where the driver can remain inside the cab while the cargo is being inspected, which in turn improves throughput at the checkpoint. With success in turnkey services highlighted by our recent $400 million award in Mexico, continued penetration of other international markets, and new inspection solutions under development or testing, Rapiscan has a very bright future. We are poised to stay on track to deliver strong revenue growth and operating performance in the security field.

Turning over to Healthcare Division, our Healthcare Division continues to show improvement as sales grew 6% in the second quarter to $59 million, resulting in an operating profit margin exceeding 14%. A few of the highlights during this quarter -- we had several wins at hospitals to provide a wide range of solutions to upgrade their patient-monitoring systems. Healthcare providers continue to upgrade their information technology infrastructure to gain efficiencies and lower the overall cost of patient care. As such, we design our solutions prioritizing factors that improve functionality, promote ease of use, and streamline the flow and access of clinical information. Customer feedback to date has validated that we are hitting the mark with our new products' design and performance. This quarter, we also filed a 510(k) notifying the FDA of our intent to market our new anesthesia system, named Arkon. Furthermore, we received 510(k) approval for our new anesthesia gas monitoring solution called the Multigas Module. We are optimistic that these new solutions will facilitate our growth in the US anesthesia market, which is essentially a new market for us with respect to anesthesia products.

We added to our growth purchasing organization relationships during the second quarter by executing new multiyear contracts with Novation and MedAssets, respectively. Novation and MedAssets have thousands of members that benefit from the GPO's supply-chain relationships. To give you an example of the power of healthcare GPOs, the annual healthcare spend relying on supply contracts negotiated by Novation and MedAssets is $17 billion and $47 billion, respectively, and covered about 6,000 hospitals. Overall, our efforts to launch new products and develop new strategic relationships should help us maintain a growth pattern in the Healthcare Division.

Moving on to our Optoelectronics Division, the Optoelectronics Division continues to deliver growth, with revenues of $51 million, an increase of 8% from the prior year. The operating margin was an impressive 8.7%. The Opto customer base continues to grow and is well-diversified. During this quarter, we added new customers to our solutions provider in field sales, energy, test and measurement, and healthcare diagnostic devices. These customer additions remind us not only of the diversity of Opto customers base, but also Opto's stellar reputation as an OEM supplier being able to perform such a wide range of customer types.

Our local to offshore vertical integrated flexible manufacturing model continues to resonate with customers, especially with increasing cost strength in traditionally low-cost areas like China. We consider Opto a bellwether, as the division's revenue growth reflects the composite trend of several industries. We truly benefit from this exposure to a variety of industries, and familiarity with each industry allows us to perform a deep dive to assess any given trend and stay proactive in not only the Opto Division, but also in our Security and Healthcare Divisions.

We had an exciting first half, making significant achievements with new product launches, getting traction in new regions, and capturing tremendous wins. We strive to reach and consistently maintain double-digit profitability for OSI. Our backlog continues to be strong, which points to even a better second half.

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

Thank you, Deepak.

Our relentless focus on growth initiatives and operating improvements throughout the Company has succeeded in delivering significant sales and earnings growth. With the strong momentum across each of our divisions, coupled with an outstanding backlog, we remain excited about our future prospects for top-line growth and margin expansion. I will speak to our updated guidance shortly, but first let me review the financial results for the second quarter. As mentioned before, net sales were up 11% on an overall basis. Our Security Division led the way, with 16% growth in the second quarter.

First-half Security bookings totaled $247 million, which represents a 42% increase over the first half of fiscal '11, positioning us for continued growth through fiscal '12 and into 2013. In addition, the Mexico agreement, booked subsequent to quarter-end, is expected to provide long-term recurring revenues above and beyond our quarter-end backlog. Sales in our Opto Division were again very solid, increasing 8%; and our Healthcare Division delivered a very respectable 6% increase in revenues in the second quarter of fiscal '12. Again, it is important to note that after multiple quarters of flatter declining revenues for our Healthcare Division during the height of the US recession, we have now booked our fourth consecutive quarter of growth in the Healthcare Division.

This quarter's growth was spearheaded by double-digit revenue growth in the United States, with softness experienced in Europe, as was anticipated. Just as importantly, Healthcare achieved a record level of profitability, with an operating margin of over 14%, demonstrating that our focus on improving operating efficiencies is paying off. Given Healthcare's recent and upcoming product launches, coupled with the signing of several new long-term group purchasing organization contracts, we expect to see revenue accelerate from this division in the future.

Our gross margin for the Company in Q2 was 35%, or just under the gross margin level of 35.4% for the same quarter last year. This slight decrease was primarily due to two factors -- first, it was the mix of revenue growth. As discussed in the past, while operating margins are generally strong in our Security and Opto Divisions, the gross margins are generally below that of our Healthcare Division. Since Security and Opto represented a higher percentage of total revenues in the most recent quarter, the consolidated margin was naturally lower. We anticipate that as our mix changes, with increased turnkey revenues in Security, it will have a positive impact on our margin.

Second, for those on the call who participated in our past conference calls, you may remember that last year, our Security Division agreed to take on the role of a prime contractor, including construction services, on a large international equipment and service sale. On our last three earnings calls, we mentioned that cost overruns would unfavorably impact our gross margin in the first half of fiscal '12. This contract was essentially completed in Q2, and so we expect the impact on gross margins from this contract to be behind us.

With regard to operating expenses, our SG&A expenses as a percentage of revenues were 19.1% in Q2, which is an improvement of approximately 100 basis points from the prior year, as we continued to effectively leverage our organizational infrastructure. This marks the first quarter in seven years that this ratio was below 20%. In absolute dollars, SG&A expenses were up about $2 million, or 6%, in support of the 11% revenue growth. For the first half of fiscal '12, our SG&A as a percent of revenue was 20.1%, which was 200 basis points below the prior-year level and 340 basis points below the level achieved two years ago in the first half of fiscal '10, demonstrating our continued success in increasing our operating efficiencies.

R&D expenses decreased slightly in Q2 to $11.5 million, or 6.1% of revenues. This compares to $11.8 million, or 7% of revenues, in the second quarter of last year. We continue to invest resources and technologies to add value to both our Security and to our Healthcare product offerings. As a result, we believe these efforts will enable our Company to capture major opportunities in our core markets in the future. Turning to our tax rate -- our effective tax rate for the second quarter was 30%, as compared to a 28.1% tax rate in the prior-year period. Our provision for income taxes is dependent on the mix of income from US and foreign locations, due to tax rate differences among such countries, as well as the impact of permanent taxable differences.

This strong sales growth and our ability to effectively manage our cost structure resulted in second-quarter diluted EPS of $0.61 per share, or a 28% increase over the $0.47 per share that we earned in the second quarter of fiscal year 2011. Moving to cash flow, we generated operating cash flow of $2.5 million during the second quarter of fiscal '12. Capital expenditures were $5.9 million, while depreciation and amortization was $4.9 million. Overall, our net cash position decreased slightly in the second quarter of fiscal '12, as we invested in inventory in our Security Division to support the record backlog. We ended the second quarter with $50 million of net cash, which was in line with our expectations.

Generating strong cash flow remains a top priority for the Company, and we remain pleased with our consistent ongoing level of progress we have made in this area over the last few years. Given the very positive performance across all divisions, which generated record revenues and earnings for the Company, and our continued robust backlog, we are increasing both our sales and our earnings guidance. For the second half of fiscal '12, we expect that revenues will accelerate further to generate full-year revenues of approximately $750 million to $770 million, representing a 14% to 17% increase over fiscal '11. This compares to our prior-year revenue guidance of $740 million to $760 million. Similarly, we are increasing our fiscal 2012 EPS guidance to $2.30 to $2.42, excluding restructuring and other charges, representing an increase of 25% to 32% over fiscal '11.

The above guidance does not reflect any impact from our Security Division's recently announced award from the Mexican tax and customs authority. Recall that this approximately $400 million agreement is expected to be a six-year award. As we obtain greater clarity on the timing and implementation of this ground-breaking program, we will determine how it might impact our future financial guidance.

During the past few years, we have transformed OSI into a Company with strong and sustainable top-line growth, along with an organizational framework that positions the Company well for future positive earnings momentum.

Thank you for listening to this conference call. And at this time, we would like to open the call to questions.

(Operator Instructions)

Brian Ruttenbur, Morgan Keegan.

Great quarter.

First of all, the big question on everybody's mind is Mexico. Can you talk maybe about how the process went? And the competition and the sales cycle -- how long it took, and what kind of resources you had to put in to win Mexico?

That's an interesting question, Brian. On these kind of programs, as we have mentioned before on conference calls, and when we announced Puerto Rico, it took more than a year. We have been working with them -- and keep in mind that any of these programs, as we have also said, are the same people you sell your products to; and as we have more things to offer, we started talking to them about this other alternate. And in the end, they liked it, and it was an international bidding process.

Many of our competitors bid on it, and we are very happy that the customer selected us for our performance and our broad product line and our ability to do systems integration. And Puerto Rico played a big part in it -- being, I think, one of the only companies which makes the products and also services the product and manages the program, was a big plus point for us.

Ajay, you want to add anything?

No, that's all.

Can you say if this can be protested like a US RFP, or is this beyond the protest period?

Well, this is not a US win. It's a Mexico. I don't know what their side of the laws are; but as far as we are concerned, it was a competitive bid, hard fought by all people, and we are very happy that we won.

Okay. And can you talk about any other potential -- does this help you in other potential Mexico-type or Puerto Rico-type transactions? And are you hitting capacity with Mexico coming on board?

Answer to your first question -- yes, we have always said it, that since there is a long cycle in it, we are actively involved in other potential, these kind of wins all over the world. On the second side of the program, definitely not capacity-limited. This is part of what we planned for, and the total investment of equipment and stuff has no bearing on straining our capacity.

Okay. And then, I may have missed this, this is some housekeeping, probably for Alan.

Alan, can you tell us the Security backlog and bookings in the quarter, specifically just Security?

Certainly. Brian, the Rapiscan backlog at the end of the quarter was about $286 million, which represented bookings for the quarter of about $56 million. Our first-half bookings for Security were $247 million, which was a record. Some of the bookings that would have gone into Q2 in fact came in, in Q1, and some of the bookings that we were expecting in December in fact have come in this month of January. So, we are very pleased with our overall bookings for Rapiscan on a year-to-date basis.

Okay. Thank you very much.

Jeff Martin, Roth Capital Partners.

I was curious if you could help characterize the global opportunity for cargo screening. What is the catalyst for the decision to move to a complete solution? Is there an upgrade cycle that is driven within each country? Just to help us get our arms around the opportunity and the timing -- it's a long sale cycle. But what all plays into the decision to go ahead and install a system like this?

Well, number one, we have always maintained, and it's very important that we have been saying for the last couple of quarters, that potentially all cargo buyers of equipment could be a potential candidate to turn over into a services kind of business. And the decision is already individual-based to the customer. Some customers have the infrastructure themselves to do it, they buy the equipment or lease the equipment or whatever. Some customers who have many other broader things to look at over their overall plan think that maybe it's better for somebody who is more focused onto the scanning of it and can do a better job and more efficient job for the customer would choose this kind of a model.

And it all depends upon -- there is no fixed rules. And I think that what we have been saying along, after what happened in Puerto Rico, what happened in Mexico, and the other ones we are working on, that as we execute and as we show our breadth of product and our ability to handle these kind of -- the systems, I think there is more ease and comfort that the customer feels that maybe this is a good thing to turn over.

Regarding the -- what's the size of the market, it's very difficult to put it down. The only thing we can say, it's very large. It was always there, but it was divided up between procurement of product, services, somebody else managing it. And what we have done is to combine everything together to offer a one-stop shop to the customer, so we can be more efficient and do better, productive things for the customer.

And then, could you help characterize what needs to happen from today, the initial signing of the contract to the point where you feel you have more clarity and can give a little more definition to the timing and near-term magnitude?

I think the best way to answer that is, as Alan mentioned, by next quarter's April conference call, we would have a better clarity, just like what happened with Puerto Rico. We are working with the customer, we are defining the parameters, we are defining the scope; and as we get more clarity, we should be able to talk more intelligently. But one thing is for sure, as Alan has mentioned -- it's going to be fully operational sometime in the fiscal 2013. Alan?

That covers it.

Okay. And then, could you give us an update on the Army contract impact for the second half? Is there a ramp involved? Is it a switch turning on? What your contribution expectations are -- maybe not on an absolute basis, but on a relative basis?

Yes, Jeff, this is Alan.

The Army contract is going very well. We have been working with the customer since signing it three or four months ago. We are continuing to work with the customer on the timing of the deliverables, and we expect that there will be substantial revenues that we recognize this fiscal year -- but we expect to see revenues in calendar 2012 for this contract overall.

Okay, great. Thanks, guys.

Tim Quillin, Stephens, Inc.

Hey, congratulations on the quarter.

A couple more questions on the Mexican contract, if I could -- and I know you will know more in a few months. But do you have kind of a rough sense of just the timing of capital expenditures?

Alan?

Tim, yes, this is Alan.

We will start gearing up in the not too distant future for the CapEx associated with this contract. And as Deepak mentioned, as we get to a full run rate before the end of the next fiscal year, we will see CapEx going out over that period of time. So, you will see it throughout calendar 2012 into 2013, as well.

Okay, and are you in a position to kind of bracket CapEx expectations for the project?

It's a little bit premature at this point. We certainly have some of our own internal expectations; but as we are going through some of the scoping decisions and parameters that Deepak referred to, we will have a much greater idea and much greater clarity by the time that we have our next conference call.

Right. And Deepak, I think you mentioned in the prepared comments that it theoretically could grow from the current level. Just roughly, are we talking a little bit of growth or a lot of growth from the implied run rate in the current contract?

Tim, again, we are in the planning mode with the customer right now. It would not be right for me to comment on it. Obviously, internally, we have some ideas of the ranges; but at this stage, the best answer we could give you what we gave, that this is a minimum. That is what we have announced. And it can grow from there.

Right, okay. Fair.

I know this is not a big part of your business right now, but what is the TSA telling you now about the potential for additional body scanner orders? There has been a lot of noise about the fears around backscatter.

This is Ajay.

Basically, we are working with TSA. It's business as usual. We are actually going through some operational testing of our ATR, which is the Automatic Threat Recognition system -- basically takes away the image. So, we're going through that process, working with them, and we expect that they will be looking at potential orders within the next few months.

Okay. Still steady as she goes there.

And Ajay, on the RTT, can you give us any kind of an update of where that stands?

We're in the process of going through testing, both in Europe, as well as over here. We feel that we're going through some tests in Europe over the next two or three months. We're getting much closer. We feel very comfortable with the results that we have seen so far, and we're also working with TSA. It's maybe a little longer process with the TSA. But all the results, all the indications we are getting on both sides of the Atlantic are very positive, as far as the test results are concerned.

Okay, great.

And on Puerto Rico, I guess -- I understand you correctly, the third site is the final site, correct? And so, you will be, knock on wood, fully up and running by the end of March. Do you have a sense, at this point, what the margin profile might look like? And is there any difficulties staffing it relative to the volume, so you are getting paid based on the number of scans? Is it difficult at all to staff correctly for that?

Well, first of all, the third site that we mentioned that is going through is the largest site, and there is another, much smaller site after that. But it really -- essentially, 85%, 90% of the program is covered after the third site is operational. In terms of bringing in people -- not been an issue. We have actually got trained staff. It's a very high-profile program; we find it relatively easy to find people, we feel very good about the people we have gotten. So, no real issue. We feel very confident moving forward.

Okay.

And Tim, with respect to the margins -- it's Alan.

As we have said before, for both competitive purposes and business development opportunity purposes, we are not providing the margin profile. But what we have said is that the margin profile of this type of business is significantly above that of our typical business. And that goes not only for Puerto Rico, but for all these turnkey screening solutions that we are pursuing.

Right.

And Alan, just in the December quarter that you just reported, where are you in terms of the revenue off of the Puerto Rico contract, relative to where it should be at peak? Was it -- did you get 50% of the revenue of what you expected at peak in the December quarter? Or where was it?

It was -- Tim, it was probably in the neighborhood of about 20%.

Okay.

We had one site at that point, as Deepak mentioned; the second site went live this month. And as Ajay mentioned, when the third site goes live in the next couple of months, we expect to be at about 85% to 90% of our annual run rate.

Okay, so the fiscal fourth quarter, we will see the full impact.

And then, on the Healthcare business, two questions -- one, I think you have talked about the FDA approval process on the anesthesia -- the new anesthesia equipment. But where are you in that process right now?

Tim, we filed the 510(k) in October. As you know, if everything goes absolutely perfect, it's about a 90-day process. But, in reality, it very rarely goes without question. So, usually there's some back and forth. So, we do anticipate having that FDA clearance during this fiscal year.

Okay, so, is it a black box? I guess maybe you're having some back and forth right now. Is there any sense of what the timing might be?

Yes, you are correct. We are having some back and forth, and it's going very well. Difficult to predict actual timing, though we are still confident it will happen in our Q3/Q4 timeframe.

Okay.

And just to add on to it, Tim, at both the shows where we showed it, very well-received. Very excited. There's a lot of customer interest in it. As you know, in this business, you cannot offer it for sale until you get 510(k).

Got it. And then, just lastly on the GPOs and getting a couple of the big GPOs on board now -- can you say what amounts of sales are you doing through GPOs now? And what your expectations are, let's say, 12 months from now?

For competitive reasons, Tim, we can't answer that. We don't want to break it down specifically between GPOs and non-GPOs. I think Alan has said it before. I have said it. The best way to answer that is -- this is the first time that Spacelabs has been on that many GPOs as we are. So, we believe that this will give us a lot of impetus for growth, as it gives us the ability to work with a very larger base of hospitals.

Okay, great. Thanks, guys. Congratulations.

Thank you.

Jonathan Richton, Imperial Capital.

Just in terms of the Mexico win -- you got Puerto Rico and now you got Mexico. In the past, you [swung] about international opportunities globally. But does this turn your focus a little more on Latin America and the Caribbean area? Just because you already have your two customers so far there, and that's kind of more where you see the near-term opportunities, having already been in with a couple of governments there?

Go ahead, Ajay.

Just to go through, we obviously do a lot of international business. We do -- half our business is international, half US, approximately. So, yes, we have had a couple of wins in Central and Latin America. We are looking at the rest of world, as well. I mean, this is an international market. It's not just limited to one area of the world.

Just to add on to it, we are a global player in this market. We have said it before -- this is the global opportunity, and we continue to look at it. And one of the strengths we have as a Company, we have a very broad reach and our products are well-received. We have a great reputation all over the world, so it's not limited to Caribbean or Latin America. We plan to play globally in whole world.

I was just wondering, in terms of closer and near-term, where we see possibly coming -- just as a result of the more recent wins flowing in that region, and then kind of flowing to the rest of the world. But is there any way you can give us some indication of how many customers you are in negotiation with now, just so we can understand in terms of potential timing of a similar contract award announcement?

We have said it before, that every potential customer who is a potential to buy equipment is a potential for services. Beyond that, we can't tell you how many we are working with, for competitive reasons.

Okay. But anyone that you speak to about the cargo -- just buying your screening solutions, you also mention -- hey, by the way, here is our services and our turnkey solution, and you present it that way?

That's right.

Right, okay. And then, looking in terms of raising guidance -- maybe this is more towards Alan. I'm just wondering if you can give us a better idea of it. Is raising it -- is it more because of the Security end, or more of the Healthcare end? Which segment is really the driver of the increase that we are going to see?

I think the greatest growth we have seen has been in the Security business. And given the very, very strong bookings that we have seen throughout Rapiscan, the increase in guidance is probably more related to Rapiscan, certainly on the top line. And of course, we have seen the very strong profitability, as evident in this last quarter, within Healthcare; that's driving part of that increase, as well.

Okay, great. Thank you very much.

(Operator Instructions)

Josephine Millward, The Benchmark Company.

Congratulations on Mexico.

Thank you.

Deepak, most of your competitors in Security are actually struggling to grow, while you are winning bigger and bigger programs. Can you talk about what you are doing differently?

Josephine, we are a very focused Company with very focused strategy. And I think one of the things that we have been saying for the last four or five years, and if we practice it, we always look at a broad mix, always look at a broad -- whether it's a technology platform, whether it's a customer base, whether it's the services we provide. And I don't think any of our competitors have that kind of a strategy. And I think that's what's driving it. More than that -- you asked the same thing in the last call -- we continue to be focused, bench ourself every morning, and we are humble and very focused to be customer-oriented.

Well, I think Mexico is a great validation of your strategy.

I also was hoping you can give us an update on the RTT. Since TSA has already issued an RFP for medium-sized EDS, do you think you could get certified in time for the first round of awards? And when do you think that might be?

Number one -- as Ajay mentioned, we continue to strive -- and I mentioned, very focused to get certification on both sides of the Atlantic. More than that is difficult to say. But I think we can definitely say, in the RFP that is already out there for the medium, that is from the last tier, Ajay? Those are the people who already are certified. We are not in there.

Great. Thank you very much, Deepak.

Thank you.

At this time, we have no further questions. I would now like to turn the call back over to Mr. Deepak Chopra for any closing remarks.

Thank you very much for listening to us. We are very excited of the first half. And we expect, as Alan has mentioned, the second half to be even more exciting and better. We are very proud about our win in Mexico, and now it's a question of execution. I want to thank the employees of the Company who continue to strive for doing better and better for the stockholders. Thank you.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.