A recent contract award from the Puerto Rico Ports Authority (PRPA) calling for Rapiscan to provide turnkey container screening services on a fee-per-scan basis is creating potential new opportunities for the company as international ports explore ways to meet U.S. mandates for cargo screening in the future, say officials from parent company OSI Systems [OSIS].
The new model “substantially expands the size of the market we address by opening new opportunities for customers who are not in the market for outright ownership of scanning equipment or are seeking the efficiencies and operational expertise offered by our turnkey solutions team,” Deepak Chopra, OSI’s chairman and CEO, says on the company’s recent second quarter earnings call. He adds that Rapiscan’s screening solutions business, called S2 Global, is “actively talking other opportunities globally.”
These opportunities will grow as more international seaports move to implement screening mandates set forth by Congress requiring 100 scanning of cargo bound for the U.S., Chopra believes. However, while the mandate calls for that level of screening to begin in 2012, the Department of Homeland Security has said that timeframe is unrealistic.
The PRPA contract is for 10 years and includes two five-year options (TR2, Jan. 21). Because it is a fee-per-scan model, Rapiscan will accrue revenue once it begins providing screening services. Chopra expects revenues to kick in during OSI’s FY ’11, which begins in July.
Analysts have pegged the potential value of the PRPA contract at between $100 million and $300 million over the 10-year period. While the company didn’t offer revenue projections from the contract, Chopra says that it offers a long-term revenue stream and larger operating margins. He also says that the contract should help smooth out the “lumpy” quarterly revenue stream that currently flows from Rapiscan.
Under the contract Rapiscan will provide multiple units of its Eagle High-Energy cargo inspection systems that its S2 Global unit will operate to scan all inbound containers at the Port of San Juan. There is still hiring, training, testing and infrastructure set up that has to be done, Chopra says.
The new business model at the port will be a showcase that other ports will be looking at so Rapiscan will making sure it provides “world class execution,” Chopra says.
As for risks, Chopra says they come down to things such as the stability of the local government and the ups and downs of the economy which in turn may impact the amount of cargo to be screened.
For the PRPA there will be basically little or no initial capital outlays required. Rapiscan on the other hand expects its upfront costs to be between $8 million and $12 million to get the scanning systems and other features of the screening service in place. Another customer benefit is that there is no technology obsolescence, Chopra says. Rapiscan will have the flexibility to use the right scanning products, he says.