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Ajay Mehra

Thank you Allen and thank you everyone for joining us today. I'm pleased to join this call as CEO for the first time after assuming the role on January 1. It is gratifying to report another record breaking second quarter for fiscal 2025 where we achieve revenues of $420 million representing a 12% growth year over year and strong earnings.
The quarterly performance was driven primarily by excellent execution in security and solid results from the Optoelectronics and manufacturing division.
Our continued healthy backlog as Alan pointed out an expanding opportunity pipeline provides us confidence for robust growth in the second half and a fiscal year and positions us well for the future.
Let me discuss each division's performance, starting with Security. The Security division delivered Q2 revenues of $290 million representing a 60% growth over Q2 in the prior year. Bookings were also excellent as we achieved a book-to-bill ratio of approximately 1.2 for the quarter.
During Q2, we continued to deliver on programs and numerous locations, including airports, ports, borders and critical infrastructure. In addition, our turnkey projects are performing well in Albania, Puerto Rico, Guatemala and Uruguay, which as we mentioned before, commenced earlier last quarter.
During the quarter, we received significant orders for both aviation and cargo products and announced a few of these wins shortly after the quarter ended. First, we announced a $27 million award to provide checkpoint and whole baggage inspection products for an international airport.
The products to be provided include RTT 110, explosive detection systems for screening whole baggage, Orion 920 CT checkpoint screening systems, which are integrated with our Rapiscan trade return systems. In addition, we will supply our trace and other screening systems for air cargo.
This award is the latest in a string of major international airport awards received in the past few quarters. which indicate promising growth for our aviation security product revenues going forward.
Second, we announced an $81 million order from an international customer for Eagle M60 mobile high-energy cargo and vehicle inspection systems for border security applications. Third, we announced a $32 million award from an international customer for M60s, including service and support for port and border security applications.
Expanding our install base among aviation and border security customers, not only broadens our hardware install base but also significantly boost our potential for future recurring service revenues. Our aviation contracts open up avenues for additional revenue through follow up training, hardware maintenance, spare parts and upgrades to our automated threat detection algorithms.
Similarly, some of our border and cargo security clients, aside from seeking these types of services mentioned also utilize a proprietary search scan, multi site integration platform.
This platform allows us to increase future revenues through new user licenses and software upgrades. Our inspection systems have a typical life cycle of 7 to 10 years, thereby creating predictable stream of ongoing recurring service revenues.
Lastly, we announced a $23 million order to support deploying and integrating long range radio frequency critical communication systems. As part of the award, we're expected to provide essential hardware and technical services to enhance the US government's strategic RF communication capabilities in a critical region.
This is an excellent win for us in our recently acquired our solutions business. Furthermore, we are optimistic that we can enhance this business in the marketplace by utilizing our global reach across regions and offering solutions to customers with critical security communication and surveillance requirements.
Our security pipeline includes a wide range of opportunities, both internationally and domestically. Moreover, domestic growth would accelerate driven by the new administration's national security policies. In both major political parties supporting enhanced for security, we are well positioned to play a key role
A nonintrusive and specie technologies are ideally suited to bolster security at airports, ports, waters and other critical infrastructure points. Overall, while product revenue growth has been robust, we expect service revenue as a percentage of overall security revenues to increase and these historically have a higher margin.
Moving on to Optoelectronics. Optoelectronics delivered another impressive quarter on modest top line growth, achieving a quarterly record with $101 million in revenues. This record was in part driven by our flex circuit operation, which serves consumer and medical technology customers was a major contributor to Q2 growth. Based on Opto's recent trends and our dialogues with key OEMs, we believe that the phase where many customers were adjusting inventory levels and tempering demand forecast is now mostly in the past.
During the quarter. We announced an $11 million order to provide critical electronics subassemblies for a long-standing health care OEM customer. We also announced an order for $6 million from a different health care OEM to provide optical sensors for its patient care devices.
These orders exemplify the kind of repeat business we consistently secure from established customers. Accounting for approximately 80% of this division's total revenue. We are actively working with clients looking to diversify away from China by relocating component or value added manufacturing to our international facilities.
Given our current demand visibility, we anticipate the division will deliver a robust performance in the second half of the fiscal year. And finally, let's discuss the health care division where Q2 revenues grew 7% year over year with improving profitability. Although less than we typically see, it was nice to see a return to growth in health care. Indicative of a pickup in order activity from hospitals and solid execution of our sales strategy built around a clinical workflow and predictive analytics solutions.
During the quarter, we announced a $6 million order from a US based hospital system to provide patient monitoring solutions and related supplies. We expect to provide a range of patient monitoring solutions and accessories to support this customer and others.
While we continue to invest in developing new products including our next generation platform, we are intently focused on driving growth and improving the overall operating performance of our security division.
On a personal note, I'm honored and excited to begin the President and CEO role at O SI, the company has a critical mission to support the global community safety, security and well being. Having been part of this company's journey, I have seen the potential in all of our operational divisions and the talented individuals who have been key to our success.
I look forward to continuing all size growth overall. We are pleased with O I's first half. Look and look forward to an even stronger performance in the second half.
I will now return the call to Allen to discuss our financial performance further before we open the call for questions. Thank you.

Alan Edrick

Thank you AJ. Now I will review in greater detail the financial results for the fiscal '25 2nd quarter.
As previously mentioned, our Q2 revenues were up 12% compared with revenues in the second quarter of the prior fiscal year. This increase was primarily driven by our largest division security. The 16% year over year increase in Q2 security division revenues was fueled by growth in aviation and checkpoint product sales including strong growth in trace detection system sales.
Q2 revenues included continued shipments from the $200 million plus cargo contract and also from our two contracts with Sedana in Mexico. In addition, the business inquired, acquired a fiscal Q1 is gaining momentum and contributed to the security division revenues nicely.
Third-party Opto sales were solid, delivering a 4% year-over-year increase, driven by growth from our Flex business as well as others. The rightsizing of inventory levels, as Ajay mentioned, with our opto customers is largely complete and we anticipate an acceleration of the revenue growth rate in the Opto division as early as Q3.
And the Healthcare division returned to growth, reporting a 7% increase in year-over-year sales in Q2. The fiscal '25 Q2 gross margin of 35.1% was solid. Our gross margin in Q2 last year of 37.9% was the strongest in any quarter of fiscal '24, due to a very favorable product mix and security.
Our gross margin will generally fluctuate from period to period based on revenue mix and volume impacts of changes in supply chain cost X and inflation among other factors.
Moving to operating expenses. SG&A expenses were $71 million or 16.8% of sales compared to $72 million or 19.2% of sales in Q2 of the prior year. The 240 basis point improvement resulted from leveraging our fixed cost structure and maintaining strong discipline in managing such costs. We work diligently across each of our divisions to improve efficiency and manage our SG&A cost structure.
Research and development expenses in Q2 of fiscal '25 were $18 million or 4.3% of revenues compared to $16 million or 4.4% of revenues in the same prior year quarter. We continue to dedicate considerable resources to R&D, particularly in our Security and Healthcare divisions as we remain focused on innovative product development, which we view as vital to the long-term successes of our businesses. We recorded a $0.2 million restructuring and other charges in Q2 of fiscal '25 compared to $1 million in the same quarter of the prior year.
Moving to interest and taxes. Net interest and other expenses in Q2 fiscal '25 increased to $8.6 million from $6.5 million in Q2 fiscal '24 and primarily due to a higher amount of borrowings associated with the investment in working capital for the sales growth and acquisition completed in Q1 and stock buyback, partially offset by the favorable impact of the convertible notes issued during Q1, which were partially used to repay higher cost borrowings.
Our reported effective tax rate under GAAP was 23.3% in Q2 of fiscal '25 compared to 20.2% in Q2 of last year. However, excluding the impact of discrete tax benefits, our normalized effective tax rate, which is the rate reflected in our calculation of non-GAAP adjusted EPS was 24.0% in Q2 fiscal '25 compared to 25.8% in Q2 of '24.
I'll now turn to a discussion of our non-GAAP adjusted operating margin. Overall, our adjusted operating margin in the second quarter of fiscal '25 was a solid 15.0%, up sequentially from 10.3% in Q1. This quarter faced a tough comp as Q2 in fiscal '24 was 15.5%, which was the strongest adjusted operating margin quarter of FY '24. The Q2 adjusted operating margin in the Security division was 19.9%, although down year-over-year due to this tough comp, this represented the second strongest adjusted operating margin in the Security division's history. Due to a ramp-up of newer Opto operations, the Opto division's adjusted operating margin was 12.8% in the second quarter of fiscal '25 compared to 13.4% on last year's Q2. We anticipate nice adjusted operating margin expansion in Opto in the second half of fiscal '25. The Healthcare division's adjusted operating margin while wider than we would like, still increased 300 basis points year-over-year.
Moving to cash flow. Q2 marked a return to significant cash flow with cash provided by operations of $53 million. CapEx in the '25 second fiscal quarter was $5.5 million, while depreciation and amortization expense in fiscal Q2 was $10.6 million. We saw a nice improvement in DSO in Q2 and as solid collections led to a 16% reduction in DSO from Q1. As we mentioned last quarter, our receivables and DSO are both above typical levels mainly because of the timing of billings and collections for our significant international security cargo contracts.
For these contracts, building is triggered by the achievement of significant project milestones, which are highly influenced by the customers' time line and sign off. So under GAAP, we recorded an unbilled receivable for revenue earnings and then bill and collect cash subsequent to the achievement of the relevant milestone. Note, while unbilled receivables are elevated relative to the historical levels, and represent a significant source of future cash flow, the balance decreased by 19% at the end of Q2 versus the end of Q1. We continue to anticipate operating cash flow could be significant in the second half of fiscal '25.
Our balance sheet is solid with net leverage of approximately 2.1 as calculated under our credit agreement. Aside from $7.5 million of annual required principal payments under our bank term loan, the bulk of our bank debt matures in fiscal '27. We estimate over 70% of our debt was fixed versus floating at the end of Q2 of fiscal '25.
And finally, turning to guidance. We are increasing our fiscal '25 revenues and non-GAAP diluted EPS guidance. For the full fiscal year, we anticipate revenues in the range of $1.65 billion to $1.710 billion, increasing our guidance on year-over-year revenue growth to a range of 9.5% to 11.1%. We are also increasing FY '25 non-GAAP adjusted earnings per diluted share guidance to a range of $9.10 to $9.40 per share, representing 11.9% to 15.6% growth.
The fiscal '25 non-GAAP diluted EPS guidance excludes potential impairment, restructuring and other charges, amortization of acquired intangible assets and their associated tax effects, as well as discrete tax and other nonrecurring items. We currently believe this guidance reflects reasonable estimates.
The actual impact on the company's financial results and timing changes on the expected conversion of backlog to revenues and new bookings is difficult to predict and put very significantly from the anticipated impact currently reflected in our guidance.
Actual revenues and non-GAAP earnings per diluted share could also vary from the guidance indicated above due to other risks and uncertainties discussed in our SEC filings.
We continue to remain focused on the growth of our businesses. We believe our efforts will enable OSI to continue providing innovative products and solutions. We'd like to take this opportunity to thank the global OSI team for its continued dedication in supporting our customers and partners.
And at this time, we'd like to open the call to questions.

Question and Answer Session

Operator

(Operator Instructions)
Josh Nichols with B. Riley.

Josh Nichols

Yeah, thanks for taking my question and AJ congratulations on the new role. Things are off to a great start. Looking at you touched on it briefly, I think, but, well, it's early days, the new administration clearly has an increased focus on border security.
Any context you could provide around the potential increase in opportunity for versus what you're currently doing on the US border front and how that could change if there's some increased allocations to the budgets for some of these three letter agencies that they are going to be doing a lot of the border security is there's an anticipated ramp up over the next few years, presumably.

Ajay Mehra

Josh, this is AJ thank you. So, you know, great question. You know, it's been three, not even three days, but I think as you know, that the border security really is a bipartisan issue and there's been a lot of, there's been a lot of movement both on the House and on the Senate trying to reconcile the bills which are substantially higher than what they were previously in terms of total funding.
So we think with the new emphasis with the new administration, it's positive, you know, we believe that the technology that we provide and not just the technology but some of the software like search can which we're able to really go in and look to see if drugs, the wrong people are coming in is really a plus for us, we are the dominant player with CBP and we feel very good as we go forward. And I think that you know, we'll see more and more over the next 3, 6 months. But all indications from our end are positive.

Josh Nichols

Thanks for the context and then just a little bit deeper. I mean, on the recent acquisition, the RF solutions business seems to be that that business is already doing pretty well. I noticed the company secured, I think a $23 million award already.
Could you talk a little bit about some of the opportunities that you see layering this into O SI systems given that you have a much larger global sales infrastructure and the opportunity to kind of expand the revenue base relative to what it was currently doing before you acquired the business.

Ajay Mehra

I think you kind of answered your question over there because yes, one of the advantages that this company has now is it's got the OSI's financial muscle as well as you know, the different areas that we are in all over the world.
So, you know, we definitely are going to help them, we are integrating them working very closely. I mean, just keep in mind they're in the defense sector, but also they're over the horizon radar. It's really crucial for border security and drug interdiction.
Keep in mind that, these radars provide broad range based surveillance systems that enables tracking of aircraft drones, surface ships and designated zones around the US water. And we feel that's an opportunity as we go forward. Besides obviously their traditional opportunities in defense. So we are talking to the customers and we have had a very positive response.
Also, I think from an O SS I perspective, we have customer base which is very similar to theirs, but it's got us deeper into those customers and more and more we have more to discuss with them. So we're not just discussing scanning, but we're discussing how we protect the overall border. For example, sounds good. Thank you.

Operator

Mariana Perez Mora with Bank of America.

Mariana Perez Mora

Hello, everyone and thank you for taking my question. So the first one is going to be around Mexico and I appreciate the details you gave in the prepared remarks. But like, could you please describe how much of a contribution Mexico was to the quarter? And how should we think about that going forward? At least in the second half of the year. I see that book to Bill was really strong in the quarter and you also had like a really strong start to the year with orders. So, is that enough to offset any slow down in terms of like recognition of the, of the SINA contracts or like, how should we think about that transition? Thank you.

Alan Edrick

Hi, Mariana. This is Alan. Good question. You know, the Mexico contract was a significant contributor to us in the, in the first half of the year. In the second half of the year. It's anticipated to continue to be a significant contributor, but at a lighter amount than we saw in the second half of fiscal '24 with a very robust backlog in the strong opportunity pipeline.
We're effectively replacing the strong Mexico revenues that we had in Q3 and Q4, a portion thereof with non Mexico contracts. And we feel, extremely, extremely confident about that. So really a robust opportunity set Mexico is important to us.
But as we have said, we shipped a significant amount last year, shipping a significant amount this year. But we are really well positioned for the future because we have such a strong backlog of, of non Mexico business and such a strong opportunity set as well.

Mariana Perez Mora

Thank you. And then when you think about this transition, right, especially because the early stages of this contract were mostly products. How should we think about the products versus services, mix the second quarter and like probably in the, like the trend towards like the next 12 months.

Ajay Mehra

So this is AJ you know, I think that if you look at the product that's getting shipped, we always say that one of the things, the products that we ship leads us to recurring service revenue. So we feel really into 26 and really 27. And beyond that, we're going to see some very good recurring revenue for service. All these products have to be serviced in Mexico, for example. So that revenue will continue and as I mentioned earlier, that the service revenue has very good margins. So we're fully expecting that and.

Alan Edrick

Maybe to, to supplement that, this is Allen. You know, we've had significant product revenue growth over the last few years and as those products are now beginning to roll off a warranty and create service revenue as described, we ex we expect to see real strong service revenue growth at the higher contribution margins, beginning as early as now this, sort of Q3. So it's, it's a nice position to be in with a strong installed base that we put out there moving to this more recurring revenue at higher margin is a nice position to be in.

Mariana Perez Mora

Thank you. And one more from my end, I was curious like part of this like radio frequency critical Communications award that you got, how much of that is like incremental to the portfolio you acquired and how much is more like a recompeted of like what the existing portfolio was?

Ajay Mehra

Well, I think this is you know, there's always incremental business but this one is new as we move forward. So we're actually looking not just to get the incremental business, but get the growth, as I mentioned earlier with having the O SI muscle behind us and being able to not just get into the defense side, but maybe also the border security side where we can see new business and we're very focused on maintaining the business that we have getting that business, but looking at new opportunities.

Mariana Perez Mora

Perfect. Thank you so much for the call.

Operator

Larry Solow with CJS Securities.

Larry Solow

Great. Thank you AJ, I welcome you, congratulate you on your new role as well. I guess first question for you AJ you mentioned sort of this expanding opportunity pipeline. And you know, you've spoken a lot, a lot about most of your kind of end markets and verticals.
I'm just curious if any of those verticals stand out where there's more opportunity for expansion going forward. I mean, obviously we've talked a lot about ports and borders.
And it does sound like the new administration a bit, we're bipartisan, so maybe not a significant real change there, although maybe headlines sound like it will change. But, maybe just the question is, is the new administration driving these expand opportunity, where are you seeing kind of, outsized opportunity growth?

Ajay Mehra

So I think, you know, thank you first of all, Larry, but you know, the call the growth is across the board. So yes, we talk about borders security, that's in the news. Sure, we're going to see, we think we're going to see growth. A lot of it is just starting. And as Alan pointed out, it's not just about the initial product, but it's about, what else can we do? Can we integrate some of it with our search scan software? Get recurring revenues, get the service revenue.
Aviation is huge internationally, we have a lot of opportunities. We've announced a couple of orders and we feel on the check baggage as well as a checkpoint there. A lot of opportunities, ts A as, they've had some changes there with the new administration, administrator coming in.
We don't know who that's going to be, but they checked baggage, which we have a excellent product in our R TT. Those are, in some cases, 20 plus years old. So they have to replace those probably in the next, 2, 3, 4 years when they start, they trade systems where we participate in and these are huge opportunities not just in the US but internationally.
And I think as you look at the opco side, we keep on, we talk about security but the anti the moving away from China manufacturing, we as a company are uniquely situated with a lot of international facilities that we have around the world where we can accommodate that. And really, we do business with a lot of defense companies on the security side at Opto side.
And I think we can really merge those opportunities and go talk to the customers as a large company who's unique in providing obviously the security side, but the ability to manufacture on the optical side and you know, and medical for us, we're investing a lot of money in the next generation products. Looking at how we broaden that product line just like we're doing in security.
So, you know, we feel very good about all the growth opportunities. So I would not just say it's just on ports and borders, that's one very significant pillar, but there's a lot more out there.

Larry Solow

Right? And, and on the ports and borders in particular, it feels like you've announced several larger size deals, most of them were actually international. I'm just curious is the, do you feel like you got a bigger opportunity now? Well, obviously international is a bigger geographical region but is the US seems to me seems like maybe it's lower on your proportion of what's driving ports and borders today. Is that a fair statement?

Ajay Mehra

You know, I think that us is just as important, if not the most important to us as you look at it. We've been driven a lot internationally, but we have these ID IQs with CD P for example, and you know, I think they're going to be new ID, IQs coming in.
We have worked very closely with CD P and other organizations where we develop new products. They're coming out, we have the largest share of the market in the US and we feel as the next generation products come out, which we've developed very closely talking to our customers.
So it's not just something we're coming out with and integrating the hardware with the software where it makes it easier for people. And, to look for contraband, etcetera and keep in mind a lot of people just look at security as an expense.
But at the end of the day when we introduce these products, and I'm not going to go into some specifics for competitive reasons, but it really facilitates the trade coming through the borders. And in the end, it's really cheaper overall for the consumer at the end of it. So a lot going on, but the US is important. I think there's a good opportunity for the next several years.

Larry Solow

Got you. And if I may just squeeze it out question for you just on the, on the margin security, like you said, that the gross margin was down. But if we year over year because of the mix, but if we just look sequentially, looks like your, your services revenue were about flat. And your, your margin went up like 550 bits. Is that mostly just on the SG&A leverage on the higher revenue? Is that the, I guess the biggest driver or the predominant driver?

Alan Edrick

Yes, Larry, it really is, the economy of scale as we leverage our fixed cost structure. So that, that is really kind of what drove it on a on a sequential basis for O si systems overall.

Larry Solow

You're. Exactly. Right. Got you. And then just lastly on the division up 4% in the quarter. And a nice return to growth in the first half. You mentioned a lot of qualitative things, obviously onshoring. I know you have a new facility in Mexico. What sort of what, what's the kind of driver of you mentioned margin expansion in the back half of the year? Is that also just on operating leverage or any color on? That would be great.

Alan Edrick

Thanks. A good question, Larry, this is Alan. So I'd say really what's going to drive the accelerated growth in Opto as we expect in the second half of the year is a few fold. One is kind of the right sizing the inventory levels is, is largely behind us.
So we're now seeing customers return to their, their normal ordering patterns. And in fact, our book to bill in Opto in our second quarter was was north of one as well. So, we expect that to drive accelerated growth.
You mentioned the new operation that, that we have in the in Mexico that is gaining momentum also, which will will certainly help the mix of business is expected to be favorable for us in the second half, which should also drive some margin expansion. So all in all, we expect to see some nice top line growth coupled with operating margin expansion in the second half for the for the division.

Larry Solow

Great, thanks Allen. I appreciate it.

Operator

Thank you. Our next question comes from the line of Christopher Glynn with Oppenheimer. Please go ahead.

Christopher Glynn

Yeah, thanks. Curious, just wanted to dive into the aviation sector a little bit and welcome RJ. Good, good to hear you on the call. Curious, curious, would you call the global kind of replacement and upgrade cycle in aviation? And in it early days, I know the US is sort of lagging the international but may maybe kind of an innings rating for the international and in the total global on that. And, and are you seeing i improving win rates in aviation versus historical?

Ajay Mehra

Thanks Chris. So, it's, it's an interesting question because, you know, aviation is such a big market and when you look at aviation, you've got checkpoints within checkpoints, you have, your checkpoint CT systems where you put your baggage through, you have people screening, you have trace, you have so many different products out there and then obviously you have your check baggage.
So coming to the US, the US has been focused on checkpoint CT I think as we move forward, they are definitely going to see what they do in trace, which we have a, which you know, which we are a very significant player. And I believe one of the leaders R TT on the check baggage is definitely a big opportunity for us as well. And we feel that you know, TS A is going to have to look at potentially, upgrading, replacing some of these products starting a couple of years from now.
So that's, that's, maybe three years from now, but that's where the market is. And we feel that we're in a good position to participate internationally. You know, we're, we're winning a lot of orders. It's a big market, obviously, we are in the checkpoint as well as check baggage as well as trace. You know, we have bundled some of the products, you know, customers know us very well. And then market is, is, in some places it's starting, some places is in the middle.
And as, keep in mind as you get towards the end another cycle starts. So it's the continuing cycles, not just, you fill this up and it's going to go away. You know, it's almost like a car, you're going to have a car. I told, I mentioned, I believe in my prepared remarks that was 7 to 10 years was what, what some of this equipment is there for in aviation, depending on technology might even be in some cases, a little faster, a little slower.
So it's a continuing, it's a continuing business and, and the key thing over there is as we get into this business, there is recurring service revenue as we move forward. So it is really, there's no one answer, beginning and middle. It's, it's really a continuing business the best way to answer it.

Christopher Glynn

Great. That's really helpful for understanding that. And then, you mentioned the bulk of the debt coming due and, I'm not sure if you said fiscal '27 or calendar 27. But, you know, when are you, what are you anticipating for, pricing or timing as you redo that? How, how you know, far ahead are you interested in addressing that?

Alan Edrick

Hey, Chris, this is Allen. So, yeah, the credit facility, which is sort of our natural five year credit facility matures in December of 26 which is our fiscal '27 throughout the course of, you know, calendar 25. We'll be, we'll be working with our banks as we've done numerous times in the past to likely amend and extend the credit facility as you may know, even though we're not an investment grade company due to our size, we have investment grade pricing as it comes to the credit facility, so quite, quite favorable for us.

Christopher Glynn

Great. Thanks, that's all I got.

Operator

Matt Akers with Wells Fargo.

Matt Akers

Hey, good morning guys. Thanks for the question and congrats AJ on the new role. I wanted to ask about cash, good to see you know, positive cash flow in the quarter, some of that work and capital reversing. And I know Alan, you mentioned the back half.
Continue to see pretty good, good cash. I'm just curious. Should we see that as still kind of lumpy around maybe some of these milestones of some of the big international pro products or are we to the point now where that's kind of a steadier free cash flow here going forward.

Alan Edrick

Yeah, Matt. Good, good question. This is, this is Allen, it'll never be a sort of a steady pace of cash flow in the likes of our business. We'll always have some quarters that are, that are much stronger and some quarters that are, they're a little bit lighter.
We have an opportunity to continue to sort of outperform on a cash flow basis with a strong free cash flow to net income conversion rate, given that we have some money, sort of tied up in working capital. So as the receivables begin to normalize, as does the inventory, there's opportunity for significant free cash flow generation and we expect to see that in our, in our second half and as we move into fiscal '24 and forward, so we think we'll continue to have a good free cash flow conversion rate.
So it's never going to be perfectly smooth due to kind of the nature of our business and some of the international contracts that we have.

Matt Akers

Yes. Got it. Okay. And I wanted to ask about tariffs. You know, given that, that, that's been kind of a topic with the new administration, just just curious how you think about any risk associated with either, prices due to tariffs or, customers, you guys have a lot of international business, Mexico, for example, just how you're, you're kind of thinking about the risk around that.

Ajay Mehra

You know, it's, it's, it's a question that is on, you know, a lot of, a lot of people's minds, obviously, I think it's a little too early to tell, you know, what's going to happen. But I will say, you know, from a o SI perspective, we're well situated because, we have manufacturing facilities in the US, we have manufacturing facilities in Europe, Asia.
And you know, we have the flexibility to turn things around and really work closely with our customers on you know, what their needs are and you know, if they need to address any tariff situation. So, you know, I think at this point, it's a wait and see attitude.
But I think it's much more of a challenge for companies that are manufacturing only outside the US and importing into the US for us. You know, like I said, it's much more flexible and we have the ability to really switch manufacturing to different locations. So, we'll, we'll, we'll watch it just like everybody else is watching it.

Matt Akers

Yeah, great. Thank you. And then if I could squeeze 11 last one and I guess maybe any way to think about the seasonality between Q3 and Q4, I think at all. As you mentioned, Q2 last year margins kind of kind of unusually strong. Just anything to think about it as we go into the back half.

Alan Edrick

Yeah. Matt, good question. We would see the back half weighted a bit more to Q4 as we typically do Q4 tends to be our strongest quarter at the end of the fiscal year.
As a result, we would see our, our revenue stronger there. And from a margin mix perspective, we would expect to see the operating margins stronger in Q4 than in than in Q3.
Great. Thank you.

Operator

(Operator Instructions) Mariana Perez with Bank of America.

Mariana Perez Mora

Thank you and hello again. So I have a follow up to Matt's question. When we think about balance sheet and free cash flow, how should we think about receivables going forward and especially the unbilled receivables balance?

Alan Edrick

Oh, hi, Marion. It's Allen. So we would expect that that our DSO is going to improve going forward. Of course, we expect to grow the top line. So, in absolute dollars receivables could grow from time to time, but we'd expect to see our DSO down with respect to unbilled receivables.
We were really pleased to see a 19% decrease in our unbilled receivable from the end of Q1 to Q2, which is, which is what we are anticipating. I believe as we get to the end of the fiscal year in June, we'll see those unbilled receivables significantly down from where they are today.
And as we move the unbilled receivables to build receivables and, and therefore cash collection, that's what should drive sort of this outsized free cash flow for us as well. So a real nice position to be enforced.

Mariana Perez Mora

Thank you and one more on the contribution from the acquisition. Have you measured how much was, was it for share.

Alan Edrick

And not, not per share? You know, we did roughly roughly $17 million of revenues in the quarter. So it performed quite nicely for us.

Mariana Perez Mora

Thank you so much.

Operator

Jeff Martin with ROTH Capital Partners.

Jeff Martin

Hi, I'm not AJ somehow I got mixed up in the queue. Apparently, wanted to dive into the surveillance business that you acquired in September a little more in terms of product portfolio. Are there things you can do to enhance that offering? Is it where it should be? Do you need to invest significantly in R&D and other complementary products that are either in your existing security product portfolio or that you might look to acquire in the future to enhance that.

Ajay Mehra

So, Jeff, I think, I think I went into it a little bit but just to re emphasize, why, why this made sense was number one, the customer base that they have in the US with Dod and obviously internationally is really something that we're very familiar with and we're able to go and talk to those customers and really expand our offering.
You go and look at, some of the products that they have. I mentioned the over the Horizon radar, obviously what everybody looks at it over the horizon radar is for, drones and missiles, like what's going on in Ukraine, everybody was looking at ballistic missiles coming through.
And you know, and that's where satellites would pick up, but, cruise missiles and drones are causing just as much damage. So there's a big opportunity for traditional over the high radar to be there.
Having said that it really applies very closely, like I mentioned to what we do is more security because these radars can be used for, ships, vehicles, drones coming across the border carrying all kinds of drugs than anything else.
And the capabilities of drones from a payload is going to get bigger and bigger. So I think that's going to become a definitely more and more of a threat and then traditionally, they're in other defense areas like their ULF, which is ultra low frequency, which is only for communication of, you know, for submarines when they're underwater, that's the only form of communication that they really have. And there are opportunities in space and others.
But really the key opportunity for us is, is providing them with the capabilities from a financial standpoint, from a reach standpoint and really, you know, working much closer with some of the larger companies, defense contractors out there.
As far as the question R&D, you know, they spend money on R&D, but a lot of that R&D is funded by their customers. So, you know, we'll, we think it's a very good fit and the opportunities are definitely there and, you know, we'll keep you informed over the next several quarters, but we feel good about it.

Jeff Martin

That's awful. I appreciate that. So the security and the Opto have been covered pretty extensively. So, I'll throw a health care division question out there. I know you've been working on, a next generation patient monitoring system for several years now.
Are you at a point where you can kind of give a time line on, what the roll out of that new platform looks like? And you know, you also have mentioned in the past that you're evaluating the leasing model within the industry, which, could be a differentiator and just maybe give an update if that's gained much traction or if that's more pending the launch of the, of the new patient monitoring platform.

Ajay Mehra

So, you know, I think that we've, we're actually spending considerable resources on the new platform with the R&D team. I'm not going to give you an exact timing more for competitive reasons than anything else, but we think that it's you know, 26 and, and, and, and beyond,
But we feel good about you know what we're hearing, what progress we're making from that standpoint and, and really, it's not just over there but some of the, some of the other ions and other products that we're able to offer besides our next generation platform, whether it's remote monitoring, whether it's predictive analysis, et cetera.
So all that really goes together and, the objective is that you know, we come from a technology as well as from a sales standpoint, it gives us a, good boost down the road, but exact timing, like I said, you know, we, as we start introducing the products, we'll give you more color on that.

Jeff Martin

Great. And then last question for me on the turnkey segment mentioned, existing customers are, are happy, things are going well, there. Are you seeing much opportunity to expand the customer base within the turnkey solutions offering.

Ajay Mehra

The short answer is yes, we're working on several opportunities, like, these are, these are not opportunities that happen in a couple of months. You know, in some cases, you have to work with the, you have to work with the international governments.
You have to basically, go through and educate them on the whole process. So it's, it's a, it takes quite a while to get through it, but we are actively working on several opportunities right now.

Jeff Martin

Excellent. Thank you.

Operator

Thank you so much and I do not see any further questions in the queue back to you guys.

Ajay Mehra

Well, thank you. Once again, thank you for participating in our conference call and we look forward to speaking with you at our next earning call.

Operator

And thank you everyone for participating in today's program. You may now disconnect.