OSI Systems, Inc. (OSIS) Q4 2022 Earnings Report, Transcript and Summary

Hello, thank you for standing by and welcome to the OSI Systems, Inc. Fourth Quarter 2012 Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference may be recorded. I would now like to hand the conference over to your speaker today, Alan Edrick, Chief Financial Officer. Please go ahead.

Well, thank you. Good afternoon and thank you for joining us. I'm Alan Edrick, Executive Vice President and CFO of OSI Systems. Deepak Chopra, our President and CEO, could not join the call today due to an unavoidable last minute complex. Welcome to the OSI Systems fiscal ‘22 fourth quarter conference call. Let's review our business performance, financial and operational results. Earlier today we issued a press release announcing our fourth quarter and fiscal year ‘22 financial results. Before we discuss the results, however, I would like to remind everyone that today's discussion will include forward-looking statements and the company wishes to take advantage of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 with respect to such forward-looking statements. All forward-looking statements made on this call are based on currently available information and the company undertakes no obligation to update any forward-looking statements based upon subsequent events or new information, or otherwise. During today's call, references will be made to both GAAP and non-GAAP financial measures. When describing the company's results. For information regarding non-GAAP measures and GAAP measures of the company's results and a quantitative reconciliation of those figures, please refer to today's earnings release. Let's begin with the discussion of our financial performance for the fourth quarter of fiscal 2022, provide an overview of our business performance and then let's finish up with more detail regarding our financial results and a discussion of our outlook for fiscal ’23. We are pleased with our results last quarter, particularly given the macroeconomic challenges we faced, including supply chain delays and logistics cost, disruptive geopolitical events, the COVID-19 pandemic, inflation and rising interest rates. As we managed the current environment, we continue to prioritize delivering on commitments to our customers and partners and positioning the company for long-term success. Now, let's go through a high level summary of our financial results. First, we reported record Q4 revenues of $337 million, a 1% year-over-year increase, driven by record Security division sales. The strength in Security sales was partially offset by a slight reduction in year-over-year Opto sales, mainly due to certain supply chain constraints and a small reduction in health care division sales. Second, we reported record Q4 adjusted earnings per share of $1.96, up 27% from Q4 of the prior year, driven by productivity improvements, a favorable sales mix, tighter cost controls, a lower tax rate and a reduced share count which outweighed higher supply chain, logistics and labor costs. Third, bookings were solid with a book to bill ratio of just above 1 for Q4 and 1.3 for the full fiscal year. We concluded the fiscal year with a record Q4 backlog of over $1.2 billion, a 15% increase over the backlog at the end of fiscal ’21. And finally, operating cash flow for the fourth quarter was strong, as we generated approximately $22 million, while capital expenditures were approximately $5 million. We spent approximately $15 million in our stock buyback program in the fourth fiscal quarter. Before diving more deeply into our financial results and discussing the fiscal ‘23 outlook, let's provide more detail of our business performance by division, starting with Security, where Q4 and fiscal ‘22 revenues increased 4% and 5%, respectively year-over-year. Securities Q4 book to bill ratio of 1.0 was solid, given record sales in the quarter. The Security division ended fiscal ‘22 with a backlog 10% higher than the end of fiscal ’21. Q4 was highlighted by robust performance, important border security-related products and services with some notable bookings for these products, particularly with international customers. We previously announced a few of these wins, a $12 million international contract to provide Eagle P60s EVX, drive-thru cargo and vehicle inspection systems and related products and follow-on services, another $12 million international award for Eagle M60 Mobile high energy cargo and vehicle inspection systems, along with follow-on service and support and a $29 million international order to provide several cargo and vehicle inspection systems and various mobile and fixed configurations. As international travel restrictions are gradually dissipating, we're capitalizing on opportunities where face-to-face sales and customer support are crucial. In the US, we began to deliver on the significant awards received earlier in fiscal ‘22 under the indefinite delivery, indefinite quantity contracts or IDIQs from the US Customs and Border Protection in Q4. These programs, not only utilize our cargo and vehicle inspection platforms, but also our Search Scan software and vehicle checkpoint lane control solutions and gatekeeper, a business we acquired in the second half of fiscal ’22. We anticipate recognizing most of the revenue from these delivery orders over the next three years, which is somewhat longer than originally expected, mainly due to customer readiness timing. These were the first orders under the five year IDIQs and there is opportunity to receive additional orders during this timeframe as [CDP] (ph) continues to work towards their goals at the US southern border. We continue to see traction with large US customers for Search Scan, our proprietary software platform that is cyber secure, can manage inspection image data, integrates with other IT systems at checkpoints and facilitates the automation of inspection activity. We're also working on international opportunities that would rely or Search Scan as a key component, where equipment installation, image data management and systems integration and training are required. Our turnkey service programs continue to perform well in Puerto Rico, Albania and Guatemala and we are actively pursuing additional turnkey services opportunities. Our revenue growth in ports and border security was offset to some degree by the lower revenues in our aviation related business. Within this sector there were bright spots during the year as we work with global logistics carriers, such as DHL and FedEx to address their demands for AirCard to screening as passenger aviation related sales were more modest. We anticipate that we could see an overall improvement in the aviation sector in calendar ‘23 and forward as demand at international airports is anticipated to increase for servicing and upgrading passenger and baggage inspection infrastructure. I should note that while aviation is an important market for us long term and accounted for under 10% of the total company revenues in fiscal ‘22. These percentages will fluctuate year-to-year based on upgrade and replacement cycles among other factors. Looking ahead, with a significant backlog and a strong pipeline of opportunities the Security division enters fiscal ‘23 in a good position to drive revenue growth. Moving onto Optoelectronics. The Optoelectronics and Manufacturing division generated total revenues including inter-company of $367 million for fiscal ’22, representing a 5% increase over revenues in the prior fiscal year and a new record for the division. The Opto division had strong bookings, finishing the fiscal year with a book-to-bill ratio of 1.2 and a record year-end backlog. Opto continues to support a wide variety of OEMs in aerospace, defense, health care, test and measurement, automotive and consumer technologies, supply chain constraints, longer lead times and rising input costs adversely impacted us in fiscal ‘22 and continue to adversely impact us today. We have been proactive, however, and increased our inventory of certain materials to help mitigate the impact of supply chain disruptions and continuing to serve our customer base, while adjusting our pricing to reflect the increased material costs in this division. During fiscal ‘22 we broaden our global operational footprint and improved our ability to handle heightened demand with the addition of a new Indian manufacturing facility is now nearly fully operational and has necessary regulatory approvals and customer acceptance, particularly from healthcare customers. We also further vertically integrated our flexible circuit manufacturing operations by adding a wet etch processing operation, reducing our reliance and outsourcing to an already constrained global electronic supply chain, which is expected to increase operating margins as well. Opto started fiscal ‘23 with a large backlog and a global customer base that continues to rely on suppliers like Opto that can execute in a tough environment. We believe that we are well positioned in the Opto division for a strong year. Although supply chain constraints are expected to push certain planned Q1 revenues into a subsequent quarter. Moving to health care. The Healthcare divisions fiscal ‘22 revenues were 3% below fiscal ’21, as expected. The lower revenue level in fiscal ‘22 resulted primarily from reductions in pandemic related health care spending. We continue to invest significant resources in R&D in our Healthcare division to enhance our core offerings and to develop new products in patient monitoring and diagnostic cardiology that align well with the trend in the marketplace for enhanced digital connectivity to enable hospital to home patient care. Looking ahead in the Healthcare division, we will focus on the continued growth of our cardiology and remote monitoring business and also drive recurring services, supplies and accessories revenues to counter the drawdown of the elevated purchases of patient monitoring products during the pandemic. Now, let's go through the financial results for our fourth quarter in greater detail. So as mentioned Q revenues were up 1% compared with that of the prior year Q4, fiscal fourth quarter Security division revenues were up 4% on a very challenging comp, given the divisions exceptional performance in Q4 fiscal ‘21. This increase was primarily driven by our cargo and vehicle inspection offerings, while both product and service revenues increased, we saw a more notable increase in service revenues. Aviation related sales were again down year-over-year, however, we are seeing increased activity levels in this area. Opto third party sales decreased 1% year-over-year for the quarter, while Opto’s total sales, including intercompany sales decreased 2% year-over-year. Though we entered Q4 with a then-record Opto backlog and now enter fiscal ‘23 with a new record Opto backlog, supply chain constraints have led to delays in production and shipments of certain orders. The Healthcare division reported a 3% reduction in Q4 year-over-year revenues, while patient monitoring and cardiology sales decreased in the quarter, there was an increase in services supplies and accessory sales, which tend to be recurring in nature. The fiscal ‘22 Q4 gross margin was 36.4% compared to 35.5% reported in Q4 of fiscal ’21. The increase was driven primarily by a 9% increase in service revenues, which tend to carry a better gross margin than product sales, as well as the mix of sales within the Security and Opto divisions. The small reduction in health care division sales, which has the highest gross margin among the three divisions partially offset the increases just noted. We also experienced increases in certain component and freight costs in each division. These increased costs are expected to impact overall gross margin in fiscal ‘23. Our gross margin will fluctuate from period to period, based upon revenue mix and volume among other factors. Moving to operating expenses. We continue to work diligently across each of our divisions to improve efficiencies and to prudently manage our SG&A cost structure. Our Q4 results again demonstrate the success of these efforts. Q4 SG&A expenses were $66 million or 19.5% of sales compared to $68 million or 20.5% of sales in the prior year Q4. Research and development expenses in Q4 of fiscal ‘22 were $14.6 million, representing a year-over-year increase of 5%. We continue to dedicate considerable resources to R&D, particularly in Security and Healthcare as we remain focused on innovative product development, which we view as vital to the long-term success of our businesses. In Q4 of fiscal ‘22, we recorded $2.7 million of restructuring and other charges as compared to $2.2 million in Q4 of the prior fiscal year. Over to interest and taxes. Net interest and other expense in Q4 of fiscal ‘22 decreased to $2.4 million from $4.1 million in the same prior year period, primarily due to the adoption of the accounting standard, ASU 2020-06, which eliminated the non-cash interest expense associated with our convertible debt as we previously discussed. However, our cash interest expense increased approximately 17% in Q4 of fiscal ‘22 compared to Q4 of the prior year. I will further discuss interest expense in the context of our fiscal ‘23 guidance later on this call. On the tax side, a reported effective tax rate under GAAP was 9% in Q4 of fiscal ‘22 compared to 12.9% in the prior year Q4. In Q4 of fiscal ‘22, we recognized a discrete tax benefit of $4.9 million as compared to $4.0 million in Q4 last year. Excluding the impact of discrete tax items, our effective tax rate in Q2 of fiscal ‘22 was 22.3% compared to an effective tax rate of 26.3% in Q4 of fiscal ’21. I will now turn to a discussion of our non-GAAP adjusted operating margin. Overall, our adjusted operating margin in Q4 of fiscal ‘22 increased 150 basis points to 13.7% compared to 12.2% in the same prior year period. This operating margin expansion was driven by an improved gross margin, highlighted by increased service revenues and strong SG&A expense management. We were particularly pleased with the increase in the non-GAAP adjusted operating margin in our Security division, which expanded to 19.7% in the last quarter of fiscal ‘22 from 18.0% in the prior fiscal year fourth quarter, driven by increased service gross margin and lower operating expenses. We were also delighted that the adjusted operating margin in our Opto division increased to 12.7% in Q4 of 2022 fiscal year from 11% in the prior fiscal year fourth quarter despite slightly lower revenues due in part to gross margin expansion on a favorable product mix. And with lower revenues and a less favorable revenue mix the adjusted operating margin of for our Healthcare division decreased 8.9% from 11.8% in the prior year. Now moving to cash flow. Cash flow provided by operations was $22 million in Q4 of fiscal ‘22 compared to $8 million in the same prior-year quarter, driven by higher profits and certain working capital improvements, CapEx in the fourth quarter was $4.6 million, while depreciation and amortization expense in Q4 was $9.7 million. We continue to be active in our stock buyback program in the quarter, during which we spent approximately $14.8 million to repurchase 177,336 shares, leaving approximately 1.25 million shares available to repurchase under the current authorized share repurchase program. Our balance sheet is solid with net leverage under 1.5 and significant capacity for acquisitions and additional stock buybacks. Our Convertible Notes mature next month. We increased our credit facility in December of 2021 in contemplation of retiring the convertible notes. We expect to utilize $100 million from our delayed-draw term loan and $142 million from our revolver to retire the approximately $242 million of convertible notes outstanding. We anticipate having over $300 million available under our credit facility, following the retirement of the Convertible Notes, including the outstanding letters of credit. In this rising interest rate environment, we anticipate our borrowing cost will approximately double in fiscal ‘23 at the current level of debt outstanding. Finally, turning to guidance. For fiscal ‘23 the company anticipates revenues in the range of $1.240 billion to $1.275 billion and adjusted earnings per diluted share in the range of $6.02 to $6.25. The non-GAAP diluted EPS range excludes potential impairment restructuring and other charges, amortization of acquired intangible assets and non-cash interest expense and their associated tax effects, as well as discrete tax and other non-recurring items. Given the current rising interest rate environment, the adjusted EPS guidance reflects an impact of approximately $0.30 per diluted share of expected increases in interest expense resulting from the utilization of our credit facility to retire our maturing low interest rate Convertible Notes, as well as higher cost on the existing outstanding borrowings. Our earnings guidance also contemplates increased costs associated with certain products already in backlog, which we do not expect to pass on to customers, most notably in the security division. In fiscal 22, our performance was heavily weighted to the fourth fiscal quarter. Based on what we are currently seeing from our backlog and pipeline of opportunities and factoring the end customer timeline preferences for deliveries and supply chain limitations, we currently anticipate revenues and adjusted operating income will be strongest at fiscal quarters two through four in fiscal ’23. We currently believe this revenue and adjusted earnings guidance reflect reasonable estimates, the actual impact on the company's financial results of the pandemic, supply chain disruptions and increasing costs and rising inflation and interest rates is difficult to predict and could vary significantly from the anticipated impact currently reflected in our estimates and guidance. Actual revenues and non-GAAP earnings per diluted share could also vary from the anticipated ranges due to other risks and uncertainties discussed in our SEC filings. In the face of these challenging times, we continue to remain focused on the growth of our businesses and continued management of our cost structure. We believe our efforts in these areas will enable OSI to continue providing innovative products and solutions. We delivered solid results throughout fiscal ‘22 in a dynamic and challenging environment. We continue to navigate effectively through uncertainty, while gaining traction in key strategic growth areas and positioning the company to capitalize on improving end markets. We would like to take this opportunity to thank the global OSI Systems team for its continued dedication in supporting our customers and contributing to the creation of value for our stockholders and other stakeholders. And at this time, we'd like to open the call to questions.

Thank you. [Operator Instructions] Our first question comes from Brian Ruttenbur with Imperial Capital. You may proceed.

Yes, thank you very much. A couple of quick questions. First of all on the quarterly breakdown, you mentioned that it's going to be weighted to the second, third and fourth quarter is going to be your strongest, can you talk a little bit about first quarter, are we going to be looking flattish year-over-year first quarter 2023 versus, first quarter of 2022?

Yeah, great question, Brian. We had some strong sales in our Q1 of fiscal 2022. So as we currently look out, although we provide annual guidance. We're currently anticipating that Q1 will be down a little bit from what it was a year ago. The nice thing for our whole year was, while we were very back-loaded in fiscal ‘22 to Q4, we think it'll be a little bit more evenly distributed between Q2 and Q3 and Q4, while Q1 just becomes a little softer based upon our customer delivery preferences and some supply chain limitations.

And that's going to be primarily the security division is going to be weighted that way or is it all divisions in that first quarter?

I think we're seeing it throughout our business.

Okay. Very good. Next question is in terms of cash flow for fiscal 2023. The last year or so because a building receivables and a variety of other things cash flow hasn't been as strong as historically it's been. Can you talk a little bit about cash flow, what you anticipate in 2023 or give us a proxy?

Sure. Great question and you're right, Brian. When we look back from ‘19, ’20, ’21, our free cash flow or operating cash flow was outstanding. Generally, we had a conversion above 100% of net income. In fiscal 22, we made the intentional decision to increase our inventory levels in order to mitigate some of the risks in supply chain and the plan for some of the growth in the strength in the backlog. So our cash flow was a bit lower than we historically see. As we move to fiscal ’23, as we sit here today, we're anticipating a nice rebound and returning to some of the historical cash flow levels that we've typically seen. And now we can see that potentially even accelerating from there. So we're looking to a strong free cash flow year in fiscal ‘23 for us.

Okay. And then -- thank you. And then one other just follow-up and I'll give the line to somebody else. On the Opto side, you're probably more exposed to economic factors in that division maybe than others. Can you talk about what you're seeing in terms of backlog booking specifically in the Opto division?

Yeah. So we're really, really encouraged by what we see in the Opto division. We have had 10 consecutive quarters in Opto with a book to bill north of 1 and we entered fiscal ‘23 with an all-time record backlog in Opto. We do not have any exposure to any concentration in any particular industry. We deal with Aerospace and Defense and Medical, Technology, Automotive, Test and Measurement, Industrial, just to name a few. We're continuing to see strong order flow and with our strong backlog, we think we're going to be continuing to deliver quite nicely. The biggest challenge we have in Opto is, is just getting some of the components in order to finish off some of the products in order to deliver to our customer base. But the nice thing is, we are seeing still strong demand and are anticipating a very solid year yet again for Opto.

Thank you.

Thank you. One moment for questions. Our next question comes from Larry Solow with CJS Securities. You may proceed.

Great, thanks. Thank you for taking the questions. Just a couple of maybe on the -- quick follow-ups on the CBP orders and delivery timeline. So it sounds like you mentioned stretched out a little bit over a three-year period. Could you -- can you just give us an idea. Do you previously think they would be done more like in the next year or two years, how much -- just trying to get a better scope on how far out extend they're becoming? And does that maybe suggest that future orders might be sort of in the back half of that five year timeline if some of these deliveries, if they're not ready for certain deliveries yet today?

Larry, thanks for the question. Good question. And you're right on point on the first point. The --we weren’t initially anticipating that the couple of hundred million dollars of orders that we received about a year ago would be primarily delivered in our fiscal ‘23 and ‘24. So there was a bit more front-loading to it. Based upon customer request they've asked us to elongate that process a bit. So now we're currently anticipating that most of it will be delivered over a three-year time period rather than two. We're are ready, we're prepared to do it faster if they want it faster, but it looks like it will be out at that timeframe. In terms of when the next orders would come on those IDIQs always difficult to say, but I would imagine that there'll be wanting to see some deliveries of the products of a more substantial nature and then we should see some potential new orders and there is significant balances left on those IDIQs for them to make further purchases.

Okay. And all in, your backlog, obviously, is -- your book-to-bill, I guess, trailing is 1.1. I know you don't sort of guide to the quarter. I mean to the segment, but do you think in Security you grow year-over-year or is that tough say on a topline basis?

We are absolutely expecting to grow year-over-year on the Security business in fiscal ‘23 and that's what's implied in our guidance.

And what about just in terms of inflation and stuff, I think you kind of suggested you don't pass, obviously, once you sell your contracts are fixed at the time, I guess, that there are -- deliveries are signed on. But you do you raise prices over time. How do you sort of offset some of these inflationary pressures if you're now passing onto your customers at all?

Yeah. Good question, and it really can vary by division, Larry. In the Opto business, we're able to pass on a good portion of those material cost increase nearly immediately to most of our customers as they well understand it. In the security business, which tends to be longer lead time backlog, if you have an order in the backlog, particularly to a government type customer that it's been there for a while, it's difficult to pass on cost as they move up with that particular contract and we think that will impact us a little bit, which is embedded in in our guidance, but as we come out with new orders and new awards, the pricing that we do factors in that new cost structure for us. At the same time, we're always trying to counter some of those increases and some of those input costs with more efficiencies and productivity improvements, which the team has been very good at achieving.

Okay, great. And then if I can maybe switch gears and squeeze one more question, just on the Healthcare front, what's going on in terms of next-generation monitors? Is that still in the queue? And is that more of a fiscal ‘24 event?

Yes. So, developing a new patient monitoring platform and some of the new products is very much in the queue. It's where we're investing a sizable portion of our R&D in our Healthcare division. So the team was making progress in those efforts, we won't see any of that impact here in fiscal 2023 on the topline. But we do look at that as a long-term growth driver for the Healthcare business. So a very important element for us.

Okay. I appreciate all the color. Thanks again.

Thank you.

Thank you. One moment for questions. Our next question comes from Jeff Martin with ROTH. You may proceed.

Thanks. Hi, Alan. I wanted to get a sense for with increased free cash flow in fiscal ‘23 at least relative to ‘22. How are you looking at use of that cash flow and share repurchases, acquisitions or debt reduction.

Hi, Jeff. Good question. You really hit on all three areas that we focus on for capital allocation. In fiscal ’22 we did some small acquisitions, but we invested pretty heavily in stock buyback throughout the year. As we look at fiscal ’23 we think all three of those options are available to us. While we'd like to grow organically, we'd like to give a bit of a boost to that acceleration factor through M&A, which has been part of our DNA in our history. So we'd like to continue to do good strategic acquisitions that add some nice shareholder value. Supplementing that, we'll always look at stock buyback and residual cash that we have in paying down some of our revolver balances. So all three are at play for us.

Yeah. Okay. And then in terms of gross margins for this year, how should we think of them relative to fiscal ’22. We have got the materials cost increase in some of the areas of the business still have to absorb. You are offsetting that, I would think you've got higher software and services concentration that partially offsets that, but what -- how should we think about gross margins this year relative to fiscal ’22?

Yeah, Jeff, you've hit the nail on the head again with some of the puts and takes. Generally speaking, as our sales rise, we would look at some economies of scale and look to have expanded gross margins. I think with some of the higher costs, given some of the supply chain challenges and some of the cost that’s already embedded in some of the backlog we have, I think we're currently anticipating that our gross margin will be relatively comparable to what we saw in fiscal ‘22 on a full-year basis, it will bounce around a little bit based on the mix of revenues and the level of revenues from quarter to quarter on an annual basis should be comparable, give or take a bit.

Okay. And then last question is, I was curious on the Aviation market in the Security segment, are you seeing increased engagement on the client side in terms of building some sales pipeline, what gives you a suggestion that that market may be turning around this year?

Yeah. We are definitely seeing more activity on the aviation side, the level of RFPs the customer business that we're having, we don't anticipate that will drive a material amount of increased revenues in the first half of the year, but as we move into second half and into calendar ’23 we think there is a nice opportunity for growth in aviation and we're hearing good things from our sales and marketing teams in that regard and remain optimistic that will be the case.

Okay, great. Well, good luck with that.

Thank you.

Thank you. One moment for questions. Our next question comes from Josh Nichols with B. Riley. You may proceed.

Yeah. Thanks for taking my question. I guess like I'm trying to get a little bit better handle on it. So some of the large security orders from the CBP right, those now going to be filled over three years, I think that's fine, but how much of the $1.2 billion backlog do you think is going to be flowing through to revenue in fiscal ‘23 given like the extension of that CBP award?

Yeah. Our estimate, Josh, at this point would be something north of $700 million would likely flow through to fiscal ’23. That number could end up being little higher or a little bit lower, but our best guess is little bit north of $700 million at this point. So what that means is, we got some pretty good revenue visibility as we start out here in fiscal ’23.

Yeah, it sounds like it -- I'm thinking just looking at here, the service revenue levels that you did this quarter were higher than, I guess, anything I could recall, right. At least in the last few years, is that expressed to be sustainable or what's -- a little bit more detail on what's driving that? And are those gross margin impact is going to likely flow through into next year as well?

Yeah, we are really pleased with the work done by our service team in increasing some of the service orders and the revenues and the flow down to margin. Q4 was very strong on the service side. As we look forward, outside of Q1, which is historically a little bit softer on the service side as parts of the world seem to be more indication during the during the summer timeframe. We would anticipate that we'll continue to have strong service revenue levels, particularly in Q2, Q3 and Q4. And I would like to see that continue to flow down and expand our margins in that arena. So we look at that is a great opportunity. Embedded in that is also some of the recurring revenues that we're doing in Search Scan, some of our software and some acceleration and turnkey revenues that we're doing. So yeah, we believe there is a nice opportunity to continue to show strength within the service revenues as part of our consolidated revenues.

Thanks. Last question for me, I know you've mentioned Search Scan in the last couple of quarters, right? I think most people are aware of the existing turnkey contracts you have, but in terms of new opportunities on those two higher margin fronts, is the stuff that you mentioned that you're pursuing kind of incremental or some of these like larger eight, nine figure potential opportunities if you are to secure them.

Yeah, I think the -- I think some of the near-term opportunities are incremental that are nice level of revenues, at nice margins. And I think more on the kind of the medium-term and long-term, there are some very, very substantial opportunities that we're pursuing that will be in our pipeline. Always difficult to estimate when that actually might hit, but very exciting opportunity pipeline on the service side for us, including in Search Scan and including in Turkey.

Thanks, Alan.

Thank you.

Thank you. [Operator Instructions] Our next question comes from Ellen Page with Jefferies. You may proceed.

Hi guys. Thanks for the question. Just [indiscernible] healthcare margins, you mentioned some mix in that, but they were down almost 600 bps sequentially with the detrimental of over 100% by my math, can you discuss the drivers of an improvement in that margin. And when you expect to get back into the mid-teens?

Yeah. Hi, Ellen. Good question. So while our Q4 revenues were in line with our expectations in health care, the margins were lower, as you've noted. This really was due to a less favorable mix of revenues in the quarter and we also have some operating expenses that exceeded some of our expectations. The margin in our healthcare business is highly sensitive to the top line, so a little bounce around from time to time, because the incremental margins and the contribution margins are so strong when revenues go up. There is a big flow through to the operating margin. And similarly, if revenues are down, you can't change your cost structure enough to mitigate that. Our team is highly focused on delivering strong operating margins on an annual basis. So we're optimistic that as we move forward the team will continue to improve operating margins in the health care business. Again like much of the rest of our business focused beyond the first quarter great.

Great. And then on Security margins are well above where they've been. Should we think of high teens as sustainable level as you continue to execute on some of these larger contracts?

Yeah, we're always focused on operating margin expansion in security as well. It will also move from period to period, based upon the level of the revenues and the mix of the revenues with some of the recurring revenues and some of the new programs that we're moving into, we think there's opportunities on a longer-term basis to absolutely expand those margins. On a shorter term basis, we do have some headwinds with supply chain and some of the strong backlog that we have that has some locked in pricing, while some of the input costs have gone up. So we think the margin expansion opportunities will move forward probably more in the medium and the long-term.

Thanks for that color. I'll hop back in the queue.

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Alan for any further remarks.

Well, thank you very much. It's been an interesting year. Overall, I think our team proved that it can really deliver to customers and operationally execute in an incredibly challenging environment. I'd like to lastly thank all in attendance for joining this call and we look forward to speaking to you in a couple of months on our next quarterly call. Thank you.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.