OSI Systems CEO Speaks About His Company

Jan.29.07 | About: OSI Systems, (OSIS)

On January 29, The Wall Street Transcript interviewed Deepak Chopra, Chairman and Chief Executive Officer of OSI Systems, Inc. (NASDAQ:OSIS). Key excerpts follow:

TWST: Would you give us a brief historical sketch of the company and a picture of the things you are doing now?

Mr. Chopra: The company, OSI Systems, is a NASDAQ-listed company. We started the company in 1988. The company went public in 1997. There are three areas in which the company does business, primarily in homeland security, where our product line is very broad. We have one of the broadest technology platforms in this sphere. We are in people and parcel scanning, which is the X-ray machines and the gates through which you walk through. We are in cargo inspection. We make this large cargo containing scanning equipment, and even in that we have a very broad technology platform with X-ray, gamma, Pulsed Fast Neutron Activation and some radiation inspection product line.

We have also just launched a new product line in the checked baggage arena, and we are developing what we call the real time tomography, which is the certifiable, high-speed, ultimate inspection system for checked baggage. That total product line is growing very well. We have invested heavily into it with a lot of R&D over the last couple of years. Our last year's revenues June-ending in the security product line was about $130 million plus and we are projecting that it's going to grow by about 20% plus this fiscal year, primarily driven by the cargo inspection product line and a continued growth in our people and parcel screen.

The other product line is in the healthcare area. Our last year's revenue in that product line was about $220 million. We make patient monitoring equipment for vital sign measurement of patients, primarily in hospitals, operating rooms, and neonatal and critical care area. That product line is global. Our revenues are pretty much spread between the US and the rest of the world. Over the last two years, we've also added complementary product lines, an anesthesia product, and just recently in cardiology, so that we have a complete suite in the cardiology and monitoring equipment to broaden our penetration in that marketplace.

The third area is what we call Optoelectronics and Manufacturing. We make electro-optical components that go into other OEM equipment. For example, it goes in construction equipment, in medical CT scanners and imaging equipment, and in telecommunication. That's about $100 million in external revenue. In addition, the strategy of the company has been that as our end products, homeland security products, and medical products grow, we are the complete opposite to outsourcing; we manufacture in-house. So the business not only caters to the outside, but it also does inter-company revenues. As those groups grow, so do the revenue and margins within our Optoelectronics and Manufacturing product line. Our guidance for next year June-ending is about $535-$545 million, which is about an 18% growth from last year.

TWST: Looking ahead, how do the product areas grow? Where are the greatest opportunities?

Mr. Chopra: Homeland security, for the next couple of years, is the fastest growing segment. On the other hand, we have grown the medical group by acquisitions from $11 million in FY 2003 to $220 million in FY 2006. So the two different strategies are the homeland security area, which is primarily sales to the US government, which sort of is the main customer, and international, which are also quasi-government bodies. Our growth is going to come from the penetration and the growth in that segment and a lot of internal R&D is going into it. Over the last couple of years, we spent maybe $100 million in R&D in that segment, whereas the growth in the health care, which is the mature market, is mostly 8% to 10% by organic.

The rest is by strategic acquisitions to leverage our SG&A and marketing, because we have 100 direct sales people in the US and we have direct sales in Canada, UK, Germany and France, so that we could sort of leverage that by strategic acquisitions. Our idea is to grow the healthcare business by strategic acquisitions and leveraging our SG&A, whereas in the security area, we look at it as internal investment of R&D to develop newer and newer and better products. Obviously the third segment automatically is tied up to the economy, and it will continue to grow at the same time as the other two sectors grow - the inter-company revenue will also grow. So that will grow it automatically.

TWST: What about challenges ahead? What might you worry about over the next few years?

Mr. Chopra: The major challenge we all have, especially in the large cargo scanning, is that we have invested heavily, and we have lost a lot of money in it, because we've been waiting patiently for the US government to put some standards in place for inspection. As you can see, there is a lot of talk in the newspapers that the Democrats now want to do 100% inspection on cargo coming into our ports. It was just in yesterday's newspaper. So we are sort of dependent upon what the US government is going to do for inspection. Whatever the US government decides to do and standardize, the rest of the world is going to follow through. So the challenge basically is to keep patiently waiting, and develop the products for what the US government wants and work with the agencies. That's one challenge.

The second challenge is that this is a fast-moving industry. On the other hand, it's a very new industry. Not many people cared before the tragedy of 9/11. So this is a new five year-old business. The paradigm is changing. There are a lot of new products, new ways of doing business and new products that we are doing. There is not too much history behind it. So the challenge is to harness the technology and make the right products, because as we make more and more products to catch the bad guys, the bad guys continue to come up with more and more creative ways of doing harm to society. It's an ongoing battle.