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OSI Systems Inc. (OSIS), with a market capitalization of $3.78 billion, reported its third-quarter earnings for fiscal year 2025, revealing a strong financial performance that exceeded analyst expectations. The company posted a record non-GAAP adjusted earnings per share (EPS) of $2.44, surpassing the forecasted $2.41. Revenue also exceeded projections, coming in at $444 million against an anticipated $437.07 million. Following the announcement, OSI Systems’ stock surged by 9.92%, closing at $225.05. According to InvestingPro analysis, the stock appears to be trading above its Fair Value, with a P/E ratio of 27.6x.
Key Takeaways
- OSI Systems reported a record Q3 non-GAAP adjusted EPS of $2.44, beating forecasts.
- Revenue increased by 10% year-over-year, reaching $444 million.
- The stock price jumped nearly 10% in pre-market trading, reflecting positive investor sentiment.
- The company raised its fiscal 2025 revenue and EPS guidance, indicating strong future growth prospects.
- A record backlog of $1.8 billion and a book-to-bill ratio exceeding 1.0 highlight robust demand.
Company Performance
OSI Systems demonstrated solid performance in Q3 2025, with revenues rising 10% year-over-year. The company benefited from strong growth across its divisions, including a 15% increase in the Optoelectronics division and a 10% increase in the Security division. The acquisition of an RF-based solutions business contributed $29 million to the quarter’s revenues. A record operating cash flow of $82 million and improved margins underscore the company’s operational efficiency. InvestingPro data shows the company maintains strong financial health with a current ratio of 1.88 and an Altman Z-Score of 4.29, indicating robust financial stability. Want deeper insights? InvestingPro offers an extensive research report on OSIS, along with 10+ key ProTips for informed investment decisions.
Financial Highlights
- Revenue: $444 million, up 10% year-over-year
- Earnings per share: $2.44, a record for Q3
- Gross margin: 33.8%, an increase of 20 basis points from last year
- Adjusted operating margin: 14.2%, up from 13.9% the previous year
Earnings vs. Forecast
OSI Systems exceeded analyst expectations with an EPS of $2.44 against a forecast of $2.41, marking a positive surprise of approximately 1.2%. The revenue of $444 million also surpassed the projected $437.07 million, reflecting strong performance across its business segments. InvestingPro analysis reveals the company has achieved impressive returns, with a return on equity of 17% and a gross profit margin of 33.9% over the last twelve months. These metrics are part of over 100+ financial indicators available to InvestingPro subscribers.
Market Reaction
The company’s stock experienced a significant increase of 9.92% following the earnings announcement, closing at $225.05. This surge reflects investor confidence in OSI Systems’ ability to deliver consistent growth and exceed market expectations. The stock’s performance places it near its 52-week high of $225.21, showcasing its strong market position.
Outlook & Guidance
Looking ahead, OSI Systems raised its fiscal 2025 revenue guidance to between $1.690 billion and $1.715 billion, indicating growth of 9.8% to 11.5%. The company also increased its non-GAAP diluted EPS guidance to a range of $9.15 to $9.45, reflecting anticipated growth of 12.5% to 16.2%. OSI Systems expects continued strong cash flow and growth in service revenues, positioning it well for fiscal 2026. InvestingPro data shows the company has maintained a five-year revenue CAGR of 5%, with a beta of 1.19, indicating moderate market sensitivity. Discover comprehensive valuation metrics and growth forecasts with InvestingPro’s detailed research report, available for 1,400+ top US stocks.
Executive Commentary
"We are excited by the momentum across our businesses as we conclude fiscal ’twenty five," said Alan Edrick, CFO of OSI Systems. Highlighting the company’s strategic focus, Edrick added, "Our goal is to grow the service revenue as a percentage of overall OSI revenue over the next several years." CEO A.J. Mera also expressed confidence in the company’s position regarding the homeland security budget, stating, "We feel good that we are in decent shape."
Risks and Challenges
- Tariff uncertainties could impact global trade dynamics and supply chains.
- Competition in the security and optoelectronics sectors may pressure market share.
- Economic fluctuations could affect demand across key markets.
- Potential delays in government budget approvals could impact revenue streams.
- Supply chain disruptions remain a concern, particularly in manufacturing.
Q&A
During the earnings call, analysts inquired about the impact of tariffs, to which OSI Systems responded that minimal near-term effects are expected. The company also discussed its strong pipeline of opportunities in the Security division and potential market share gains in Optoelectronics due to supply chain shifts. OSI Systems emphasized its continued focus on service revenue growth as a strategic priority.
Full transcript - OSI Systems Inc (OSIS) Q3 2025:
Conference Call Operator: Thank you for standing by. Hello and welcome to the OSI Systems Inc. Third Quarter twenty twenty five Conference Call. I would now like to turn the call over to our Executive Vice President and Chief Financial Officer, Alan Edrick. Mr.
Edrick, please go ahead.
Alan Edrick, Executive Vice President and Chief Financial Officer, OSI Systems: Thank you very much. Good morning and thank you for joining us today. I’m Alan Edrick, Executive Vice President and CFO of OSI Systems. And I’m here today with A. J.
Mera, OSI’s President and CEO. Welcome to the OSI Systems fiscal twenty five third quarter conference call. We are pleased that you can join us as we review our financial and operational results. Please excuse my voice today as I am a bit under the weather. Earlier today, we issued a press release announcing our fiscal twenty twenty five third quarter financial results.
Before we discuss these results, however, I’d 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 statement based on subsequent events or new information or otherwise. During today’s call, we will refer to both GAAP and non GAAP financial measures when describing the company’s results. For further information regarding non GAAP measures and comparable GAAP measures of the company’s results and a quantitative reconciliation of those figures, please refer to today’s earnings press release. I will begin with a high level summary of our financial performance for the third quarter of fiscal twenty twenty five and then turn the call over to A.
J. For a discussion of our business and our operational performance. We will then finish with more detail regarding our financial results and a discussion of our updated outlook for fiscal year twenty twenty five. Our third quarter financial results were strong with multiple Q3 records across different financial metrics. We are excited by the momentum across our businesses as we conclude fiscal ’twenty five over the next two months and get ready to kick off fiscal ’twenty six.
Now for the high level summary of our Q3 results. First, revenues increased 10% year over year to a Q3 record of $444,000,000 with growth in each of the three divisions highlighted by a 10% year over year revenue increase in our Security division and a 15% year over year increase in our Opto division, including intercompany sales. Second, the strong revenue growth led to record Q3 non GAAP adjusted earnings per share of $2.44 Third, bookings were significant. And with a book to bill ratio exceeding one point zero in Q3, we finished the quarter with a record backlog of more than 1,800,000,000.0 This backlog and robust pipeline of opportunities provides good visibility going forward. And fourth, we generated record Q3 operating cash flow of $82,000,000 representing a $134,000,000 jump over the negative cash flow of $52,000,000 in the same quarter in the last fiscal year.
This performance was driven by strong profits and an improvement in working capital metrics. Before diving more deeply into our financial results and discussing our updated outlook for the full fiscal year twenty five year, I will turn the call over to AJ.
A.J. Mera, President and CEO, OSI Systems: Thank you, Alan, and welcome to the OSI Systems earning call for the third quarter of fiscal twenty twenty five. We are pleased to report another record breaking quarter for numerous financial metrics, as Alan described. With a quarter end record backlog of over $1,800,000,000 we are focused on finishing fiscal ’twenty five strong and continuing to build the foundation for fiscal ’twenty six. Before we dive into our divisional highlights and outlook, I want to address the evolving global trade environment, particularly the recent U. S.
Tariff policies that have introduced uncertainty across industries. With significant revenue generated from international markets, we’re not immune to these challenges. However, while instability surrounding international trade regulation is a continuing concern, our team is taking action to mitigate the impact of rising trade frictions that may affect our business. We’re actively pursuing cost optimization and engaging in strategic pricing discussions with customers and suppliers. These efforts, combined with our diversified portfolio and strong customer relationships, position us to navigate the landscape while continuing to drive value for our shareholders.
As we speak, we do not anticipate any meaningful P and L impact from tariffs on our Q4 results. Given the ongoing volatility in this area, it is difficult at this time to assess impacts on periods further out on the calendar. We will update you further on our earnings call next quarter. This quarter performance was fueled by exceptional execution in the Security division and robust growth in the Optoelectronics and Manufacturing division. In healthcare, we are encouraged by the positive momentum positioning us well for long term growth.
Let’s discuss each division in more detail, starting with security, where revenues increased 10% year over year. This top line performance was particularly notable since we had a challenging comparison with last year’s record results. Demand for our products and services continues to be strong across multiple regions with robust bookings. Even with a sizable backlog conversion to revenue, the division ended the quarter with a record backlog reinforcing our confidence in sustained positive momentum. Our performance at Ports and Borders was powerful this quarter, with significant new orders and we announced a few of them, including a $12,000,000 order for Eagle M60 VX systems with advanced imaging capabilities, a $17,000,000 order from a North American customer for Eagle M60 systems under a multiyear framework, and a 24,000,000 order for zPortal high throughput drive thru inspection systems for scanning large vehicles and cargo containers.
Recently, we announced another award received during Q3 for orders totaling $50,000,000 from an existing U. S. Customer to support the ongoing deployment of our cargo inspection systems. These awards highlight the global demand for our innovative and high performance inspection solutions designed to secure borders and critical infrastructure. Our aviation and checkpoints business remains robust, as ongoing investments continue to be funded by airport and air cargo customers upgrading or expanding security infrastructure.
During the quarter, we announced a $76,000,000 order for a major international airport to deploy RTT-one 10 explosive detection systems and Itemizer 5X for whole baggage and trace detection. This is the largest award for major airport in the history of the company. Our broad portfolio and technology leadership continue to be recognized by customers worldwide. Our security services business, including turnkey operations, continues to perform as anticipated, demonstrating our experience and capability to deliver highly customized solutions. Earlier in the fiscal year, we further expanded our engineering and manufacturing capabilities for defense and security markets through a strategic acquisition of an RF based solutions business, principally serving defense customers.
During Q3, we secured a $32,000,000 order international order for long range secure communication systems with integration and deployment support. This business is building nice momentum, and we are pleased with the early successes. We are proud of our growing role in supporting secure long range communications worldwide for military and government applications. Overall, we anticipate the global focus funding and funding for defense and security will continue to trend in our favor over the long run. Moving on to the Optoelectronics and Manufacturing division, which delivered a standout quarter with revenues growing 15% year over year, surpassing $100,000,000 in sales for another quarter and achieving record nine month sales.
The division saw strong operating margin expansion. Growth was driven by sales to multiple OEMs across industries, including medical and consumer technology, with flexible circuit products performing exceptionally well. Opto continues to benefit from a vertically integrated structure and is well positioned for future growth opportunities. Although bookings remain steady in the face of global tariff uncertainties, we will remain vigilant to address any potential challenges in the upcoming months. Our global manufacturing footprint in Malaysia, Indonesia, India, Canada, Mexico, and of course, The U.
S. Positions us to help existing and new customers adjust their value chains to minimize tariff impacts, potentially enabling the division to gain market share. We expect Opto to maintain its momentum into Q4. Now, let’s move to the Healthcare division, which had encouraging sales growth in the quarter. In Q3, we welcomed a new President, Wilson Constantine, an industry veteran to lead the Healthcare division.
We have already seen a positive impact on the team’s focus and energy in the brief time he has been here. Shortly after quarter end, we announced a significant award we received during Q3 for approximately $4,000,000 to provide patient monitoring solutions and related supplies and accessories to a U. S.-based hospital. We acknowledge the substantial work ahead and are confident that the business is now guided by strong, capable leadership. In summary, Boisai is poised for continued success as we leverage our global footprint.
Innovative technologies and strategic acquisitions like the RF based solutions business to deliver exceptional value to customers worldwide. With anticipated growing attention and funding for defense and security, we are well positioned to size emerging opportunities. Although the tariff environment is currently unstable, we will proactively work to mitigate negative impacts from international trade frictions. We’ve had a strong three quarters and look forward to finishing the year strong. As always, I would like to thank our employees, customers and stockholders for their continued support and dedication.
With that, I will turn the call over to Alan to discuss our financial results and guidance in more detail before we open the call for questions.
Alan Edrick, Executive Vice President and Chief Financial Officer, OSI Systems: Thank you. Thank you, AJ. Now let’s review in greater detail the financial results for our third quarter. As previously mentioned, our Q3 revenues were up 10% compared with revenues in the third quarter of the prior fiscal year. Fueled by growth in service revenues, aviation and checkpoint product sales, including trace detection systems, Security Division revenues in the third fiscal quarter increased 10% year over year to $315,000,000 In addition, the RF business acquired in fiscal Q1 gains momentum and contributed nicely to Security division revenues.
Q3 revenues included continued shipments from our contract in Mexico, contracts in Mexico, though as expected at a lesser rate. As Mexico revenues were $69,000,000 in Q3 of fiscal twenty five compared to $137,000,000 in the same quarter of the prior year. Revenues not directly related to acquisitions or our Mexico contracts increased at a solid double digit clip in the quarter. Driven by growth in our Flex business and also the performance of our core optoelectronics and contract manufacturing operations, third party opto sales increased 10% year over year to $86,000,000 representing a new Q3 record. And in the third quarter, our Healthcare division achieved the second of back to back quarters of top line growth with a 5% year over year increase.
The fiscal twenty twenty five Q3 gross margin of 33.8% was up 20 basis points from the 33.6% reported in Q3 last year. Our gross margin fluctuates from period to period based on revenue mix and volume, impacts of changes in supply chain costs, FX, tariffs and inflation among other factors. Moving to operating expenses. Q3 SG and A expenses were $73,200,000 or 16.5% of sales compared to $66,600,000 or 16.4 percent of sales in Q3 of the prior year. We worked diligently across each of our divisions to improve efficiency and to manage our SG and A cost structure.
R and D expenses in Q3 were $18,600,000 or 4.2% of revenues compared to $17,100,000 also representing 4.2% of revenues in the same prior year quarter. We continue to dedicate considerable resources to R and D, particularly in our security and our healthcare divisions, as we remain focused on innovative product development, which we view as vital to the long term success of our businesses. Moving to interest and taxes. While net interest and other expenses decreased sequentially in Q3, On a year over year basis, they increased to $8,200,000 from $7,400,000 in Q3 of fiscal ’twenty four, primarily due to a higher amount of borrowings associated with the investment in working capital and acquisition completed in Q1 and the stock buyback we did earlier this year as well. This was 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 14.3% in Q3 of fiscal twenty five, compared to 22.6% in Q3 last year. Excluding the impact of discrete tax benefits, our normalized effective tax rate, which is the rate reflected in the calculation of non GAAP adjusted EPS was 23.7% in Q3 of fiscal twenty twenty five compared to 23% in Q3 of twenty twenty four. I’ll now turn to a discussion of our non GAAP adjusted operating margin. Overall, our adjusted operating margin in the third quarter of fiscal twenty twenty five was a solid 14.2%, up from 13.9% in Q3 last year. The Q3 fiscal twenty twenty five non GAAP adjusted operating margin in the Security Division was 18.1%, down year over year from 18.6% due to a less favorable product mix and increased R and D investment.
The Opto division’s adjusted operating margin increased to 14% in the third quarter of fiscal twenty twenty five from 12.2% in last year’s Q3 on economies of scale associated with higher revenues and efficiencies. The Healthcare division’s adjusted operating margin, while lighter than we would like, was pretty comparable year over year. Moving to cash flow. Q3 marked the second consecutive quarter of significant cash flow, with record cash provided by operations of $82,000,000 CapEx in the twenty five third fiscal quarter was $4,500,000 while depreciation and amortization expense in fiscal Q3 was 10,600,000.0 Solid collections in fiscal Q3 led to a 10% reduction in DSO from Q2, which followed a 16 reduction in DSO in the previous quarter. This reflected more than $100,000,000 received in the third quarter related to our security contracts in Mexico.
Our balance sheet is solid with net leverage of approximately 1.8 as calculated under our credit agreement. Our credit facility requires $7,500,000 in annual principal payments under the term loan with the remainder of our bank debt maturing in fiscal ’twenty seven. Now turning to guidance. We are increasing our guidance for fiscal ’twenty five revenues and non GAAP diluted EPS. For fiscal year ’twenty five, we anticipate revenues in the range of $1,690,000,000 to 1,715,000,000.000 representing an increase in guidance on year over year revenue growth to a range of 9.8% to 11.5%.
We are also increasing fiscal ’twenty five non GAAP adjusted earnings per diluted share guidance to a range of $9.15 to $9.45 or 12.5% to 16.2% growth. This fiscal ’twenty five non GAAP diluted EPS guidance excludes any impact of potential impairment restructuring and other charges, amortization of acquired intangible assets and their associated tax effects and discrete tax and other non recurring items. We currently believe this guidance reflects reasonable estimates. The actual impact on the company’s financial results of timing changes on the expected conversion of backlog to revenues and new bookings among other factors is difficult to predict and could vary significantly from the anticipated impact currently reflected in our guidance. Actual revenues and non GAAP EPS 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 and continuing to provide innovative products and solutions. As Ajay mentioned, we’d like to take this opportunity to again thank the global OSI team for his continued dedication and supporting our customers and our partners. And at this time, we’d like to open the call to questions.
Conference Call Operator: And our first question comes from the line of Jeff Martin from Roth Capital. The line is open.
Jeff Martin, Analyst, Roth Capital: Thanks. Hello, Alan and A. J. Hope you’re doing well. I was curious if you could expand a little bit on the tariff situation, how that may be affecting each segment and what gives you the notion that you won’t have any impact in the fourth quarter, but the outlook beyond that is unclear?
Thanks.
A.J. Mera, President and CEO, OSI Systems: So, as mentioned in my prepared remarks, no impact on Q4. We obviously were anticipating this and so we feel very comfortable with that. I really don’t need to go into any further. Going forward, we’re talking to our customers just like everybody else. We’re looking to see what we can do with some of the suppliers.
But we have very limited exposure on the largest two divisions with China. And in healthcare, somewhat a little bit more, but we feel that there are a lot of ways to mitigate it. So, like I said, as we go through, we talk to it with customers, suppliers, We’ll have a little bit more clarity, and we’ll talk about it in our next earnings call.
Jeff Martin, Analyst, Roth Capital: Thank you. Appreciate that. Alan, could you maybe elaborate on the strength in services revenue in the quarter? It was up significantly year over year and also sequentially.
Alan Edrick, Executive Vice President and Chief Financial Officer, OSI Systems: Sure. Yeah, good question, Jeff. As we alluded to on a couple of our past calls, as we get the larger and larger installed base of security products out in the field, and as they begin to roll off of warranty, we expected to see an acceleration of our service revenue growth. And that’s exactly what we saw in Q3. The increase in our service revenues is almost entirely related to our security division.
And it’s really the large sales that we’ve had over the last several years. Many of those deliveries are now rolling off of warranty and rolling into routine field service and field service contracts. So as a result, we saw a nice increase in our service revenues, which is great because that’s excellent recurring revenue. And that recurring revenue generally comes at higher margin.
Jeff Martin, Analyst, Roth Capital: Great. And then could you expand a little bit on the RF Solutions acquisition? Sounds like you’re getting some good traction there. Do you expect that to be a long runway of growth? And how meaningful is that to the overall growth of the business?
A.J. Mera, President and CEO, OSI Systems: Well, I think that we feel very good about the acquisition. As you may know, one of the main products are over horizon radars. They’ve been in prominence for several years with the US government. In fact, you know, NORAD has been using over the horizon radar. It’s more economical.
The technology is field proven. And we feel with some of the things going on right now with the Golden Dome and other things that there are a lot of opportunities as we move forward, and really taking the company and putting the financial might, as well as the other things that OSI can provide as a larger company, been really helping them. And we are actively talking to customers as we move forward.
Jeff Martin, Analyst, Roth Capital: And then last one for me, Alan. What can you give us in terms of sense of cash flow for maybe fourth quarter and then as we head into ’twenty six. Nice to see a record operating cash flow number in the quarter. Just curious if you anticipate that to continue.
Alan Edrick, Executive Vice President and Chief Financial Officer, OSI Systems: Thanks, Jeff. Good question. Yeah, we’re really pleased with our cash flow in Q3 as we were in Q2 as well. There’s certainly opportunity for strong cash flow in Q4 as well. Always some timing of when certain collections come in.
What I can say is that whether it’s Q4 or fiscal ’twenty six overall, we anticipate strong cash flow here over the next twelve months.
Jeff Martin, Analyst, Roth Capital: I’ll pass it on. Thank you.
Conference Call Operator: Thank you. Our next question comes from the line of Larry Solow from CJS Securities. The line is open.
Larry Solow, Analyst, CJS Securities: Great. Good morning, gentlemen, Alan. Hope you’re feeling better. Guess just a follow-up on the question about on the service revenue, which I think grew over 30%, as Jeff mentioned there. And generally, as you said, Alan, that’s usually higher margin.
Just curious on the security division, what kind of drove that? You mentioned mix. But I guess from a high level, clearly services were substantially higher than they were last year in Q3. So any more specifics on the mix that kind of drove that margin down? And then I guess the R and D, is that a R and D, I’m sure bounces around from quarter to quarter.
So was it heavier this quarter for one particular reason? Or any more color there would be great.
Alan Edrick, Executive Vice President and Chief Financial Officer, OSI Systems: Sure. Good question. So I think you’re saying on our overall adjusted operating margin going from 18.6% to 18.1% in security, wiping down a little bit. So the security service revenues definitely contributed to some margin expansion associated with it. When we look at the mix of our product revenues, which included more in Mexico last year, which probably carried a bit more favorable product related margin than the product mix we showed in Q3 that had a little bit of an adverse impact.
We also made some strategic decisions to invest some considerable resources and some R and D programs. So our R and D was at a little bit more of an elevated level, which we think will normalize as we move into fiscal twenty six. So I think that those are really the factors that contributed to the change in the operating margin.
A.J. Mera, President and CEO, OSI Systems: Yeah, and think that to Alan’s point earlier, as our service revenues grow, overall they do tend to have higher margins than our product. And yes, there are going be ups and downs in the service, but overall, we expect that trend to be going up. And we feel very good about it.
Larry Solow, Analyst, CJS Securities: Got it. So it sounds more like an aberration. Listen, I know the margins quarter to quarter could bounce around. It sounds like it’s more that, but the trend overall should continue to be positive, at least to your expectation. On the bookings continue to be strong.
Can you give us any color there? I feel like ports and borders were really strong when you got these big multi year several hundred million dollar orders. It feels like now you’re still getting those, but maybe there’s even a little more diversification. I know aviation, it sounds like it’s really picking up. Just any more color on sort of where the strengths are coming from in the orders?
A.J. Mera, President and CEO, OSI Systems: I think you said it very well, that the backlog is much more diversified than it was previously. We had some large orders in there. Those orders were shipping. And now we’ve received some large orders and there’s the pipeline looks very good, but the diversification of backlog, not just on the cargo, but also on the aviation side and other areas in the security, gives us very good confidence as we move forward.
Larry Solow, Analyst, CJS Securities: Great. Lastly, just a follow-up on tariff question. Sounds like short term, not a great impact. Mid to longer term, obviously anybody’s guess. But again, from a high level on the demand side, it sounds like the direct impact to you guys probably won’t be very significant.
But the indirect impact on the economy and whatnot feels like maybe that could potentially hurt the Opto division more. But maybe there are some offsets there too as more and more tariffs maybe drive more onshoring and US manufacturing. So any color on that would be great. Thanks.
A.J. Mera, President and CEO, OSI Systems: So I think we’re all looking at it to a certain degree. Everybody is guessing what’s going to happen next. But specifically, as I mentioned on the Opto side, we do have manufacturing around the world, U. S, Canada, Mexico. And I think, again, who knows, but it might present an opportunity for us, especially with USMCA content product, both in our Mexico facility, and we do have facilities up in Canada.
So, we’re talking actively to customers to see, hey, what do you want? Well, how can we help you? And having the different manufacturing facilities gives us that flexibility to talk to customers as the tariff environment changes and evolves.
Larry Solow, Analyst, CJS Securities: Gotcha. Thanks. I appreciate it.
Conference Call Operator: Thank you. Our next question comes from the line of Matt Akers from Wells Fargo. Your line is open.
Matt Akers, Analyst, Wells Fargo: Hey, guys. Thanks for the question. I wanted to ask about the Mexico contract. I mean, you mentioned in the prepared remarks a little bit of a headwind year over year. Is there a way we should think about how that kind of trends going into next year?
And I guess, do you think security continues to grow next year, given that maybe those are a little bit lower level? Or do you have enough work backfilling that part of the business can continue to grow?
Alan Edrick, Executive Vice President and Chief Financial Officer, OSI Systems: Hey, Matt, this is Alan. Great question. And we are, of course, getting that question quite a bit a year ago, recognizing that Mexico revenues had hit a peak in fiscal ’twenty four and how do we fill that hole. And we’ve done just that as we’ve seen with our excellent bookings for the first nine months of the year and the record backlog we’ve had. Q3 is an excellent example.
Our revenues for related to Mexico were half of what they were last year just as the contracts wind down a bit. Nonetheless, we grew 10% in the security division during the quarter. And we would anticipate sort of the same type of thing going forward. Q4, we’ll see sort of the same dynamic, lower revenues related to Mexico compared to Q4 of last year and the same in the fiscal twenty twenty six. But our sales teams have done such an outstanding job on the bookings in the cargo arena and the aviation and checkpoints arena that we feel quite confident that we’ll be able to continue to grow our security business going forward as well.
These are just new baseline levels. And as Mexico becomes a smaller proportion of our overall revenues, although we’ll start to see the service revenues kick in at even a higher rate. And of course, are great recurring revenues at a higher margin.
Matt Akers, Analyst, Wells Fargo: That’s great. Thank you. And then I guess I wanted to ask about I guess just what you’re seeing with the new administration, if you’ve had any discussions on what the upcoming opportunity like border security definitely seems like a big priority. So as we get closer to maybe the ’26 budget coming out, just if you’ve sort of had any indications of what that opportunity could look like?
A.J. Mera, President and CEO, OSI Systems: So I think that it’s been on the open quite a bit where obviously the ’25 budget was a continuing resolution, same as last year, and they’re still working on ’26. But what’s really exciting out there is this budget reconciliation that House and Senate are going through. And there’s almost $1,100,000,000 in there for the borders, for NII equipment and associates works and integration, etc. We feel good that we are in decent shape. It’s not one year money, it’s all repaired of probably three years, and this is on top of what we have, so it will give us visibility not just per year, but multi year visibility.
So, we have a good relationship with CBP and others. So let’s wait and see what happens, but everything we’re hearing is they’re gonna pass the reconciliation by sometime before July. People even saying May, But it bodes well for us. And let’s see what happens in Congress. That’s great.
Thank you.
Conference Call Operator: Thank you. Our next question comes from the line of Josh Nichols from B. Riley. The line is open.
Josh Nichols, Analyst, B. Riley: Yes. Thanks for taking my question. Good to see a lot of records being set for this quarter. I think a few of my questions have already been answered. But just to touch on it or take a little bit deeper dive.
I know you’re not giving guidance, right, for fiscal year twenty twenty six. But given that you already have a record backlog here, any context you could provide of how much of the stuff you already have today is likely to be recognized next fiscal year, excluding any new wins that you guys continue to win?
Alan Edrick, Executive Vice President and Chief Financial Officer, OSI Systems: Hey, Josh, this is Alan. Good question. Just from consistent with past practice, that is an information that we publicly disclose at this point yet. By the time we get to our next earnings call, there will be ample opportunity to do that. But suffice it to say with our record backlog and strong pipeline of opportunities, we’re encouraged as we approach fiscal twenty twenty six here in a couple of months.
Josh Nichols, Analyst, B. Riley: And then just as a follow-up to another question that was asked, great to see this higher margin services revenue now north of $100,000,000 I assume, is there any one time items? Or is there a reason to think is that a new baseline, I guess, is a good question for how to think of that $100,000,000 per quarter of services revenue going forward? And that you could potentially build on that from here? Or is that going to fluctuate from quarter to quarter?
Alan Edrick, Executive Vice President and Chief Financial Officer, OSI Systems: Josh, really good question. This is Alan again. We believe it very well could be a new baseline. And our goal is to grow it from here. Our goal is to grow the service revenue as a percentage of overall OSI revenue over the next several years.
And we think we have every opportunity to do that. So our belief as we sit here today is, yes, we’ll continue to grow that service revenue. It may ebb and flow from certain quarters. But overall, should see a solid growth in service revenues.
Josh Nichols, Analyst, B. Riley: Good to hear. Appreciate it. And I hope you feel better soon, Alan. Thanks.
A.J. Mera, President and CEO, OSI Systems: Thank you.
Conference Call Operator: Thank you. Our next question comes from the line of Seth Seifman from JPMorgan. Your line is open.
Seth Seifman, Analyst, JPMorgan: Thanks very much, and good morning.
Alan Edrick, Executive Vice President and Chief Financial Officer, OSI Systems: So wanted to dig in a little
Seth Seifman, Analyst, JPMorgan: bit more. $1,100,000,000 that’s in the Homeland Security reconciliation proposal, whether you think about do you think about that being kind of 100% additive to sort of whatever the buying plan was kind of before the reconciliation bill? And then whether you saw any incremental opportunity associated with some of the stuff they put around that in terms of our artificial intelligence and whether that opens a path for any of your software solutions?
A.J. Mera, President and CEO, OSI Systems: So, good question. I mean, like I mentioned, the baseline for ’25, the continuing resolutions of the past, the numbers are roughly $300,000,000 in that budget for CBP or NII. And this $1,100,000,000 is on top of that. So lot of opportunity from our end, and obviously, like I said, it will be multiyear money. And then fiscal ’twenty six, you’ll have another budget passing for CBP at, we’ll see at what levels, but we imagine it will be at similar levels as last year.
So, far as the opportunity is concerned, I think that there’s obviously the equipment, civil works, and really a lot of the artificial intelligence integration, machine learning, everything else, it’s stuff that we’re already doing is kind of part of it. So we’ll see how they segregate it. We feel that not just over here, but also with some of the money that’s going into biometrics and other areas to combat drug interdiction gives CertScan, our software, an opportunity as well. So, right now it’s in big buckets. As the buckets get more clear, we’ll probably be able to give you a much better answer at the next earnings call once we start looking at the details.
Seth Seifman, Analyst, JPMorgan: Okay, great. Thanks. And then on the cash flow side, do you see Q4 as being a period when that presents significant opportunity for receivables to come down? I know they’re still fairly elevated and I guess to a lesser degree inventory grown a fair amount this year. Or not that much, but modestly.
But particularly the receivables is Q4 a period where we could see some liquidation?
Alan Edrick, Executive Vice President and Chief Financial Officer, OSI Systems: Hey, Seth, this is Alan. Good question. Yeah, we do see some opportunity for, again, some working capital enhancements there. I think there is an opportunity for inventory to come down further in Q4. On the receivable side, yes, there’s great opportunity for it to come down in Q4.
That being said, sometimes some of the collections could shift from one quarter to the next. But I would say over the next six months, there’s an opportunity to really see our DSO further improve, which could be a major source of additional free cash flow.
Seth Seifman, Analyst, JPMorgan: Okay. And then if I could sneak in maybe one more on security side. What did the RF acquisition contribute on the top line in the quarter?
Alan Edrick, Executive Vice President and Chief Financial Officer, OSI Systems: It contributed $29,000,000 up from 17,000,000 in Q2. So nice growth.
Seth Seifman, Analyst, JPMorgan: Okay. Excellent. Well, I’ll leave it there, Alan. I hope you feel better soon.
Larry Solow, Analyst, CJS Securities: Thank you.
Conference Call Operator: Thank you. Our next question comes from the line of Mariana Perez Mora from Bank of America. The line is open.
Mariana Perez Mora, Analyst, Bank of America: Good afternoon, everyone. Thank you. I’m going to do a question on tariffs but from a different angle. As part of this evolving tariff matter, the de minimis exception for China and Hong Kong has been eliminated. And it’s not only a tariff implication, but also all those packages should be screened now for opioids, sentinel staff.
And I understand this is an evolving tariff situation, but have you seen any early interest for increased screening solutions in order to be able to absorb this increased volume of packages to be screened?
A.J. Mera, President and CEO, OSI Systems: Great questions. I think you come and sit in our strategy sessions. But we already work very closely with the freight forwarders. We do business with UPS, Federal Express and all the large freight forwarders. So, depending on what their requirements are, not just for scanning, but I would say it gives us an opportunity not just, they might need more machines, but also some kind of artificial intelligence to be able to see what, which packages are allowed or not allowed.
So we’re going to talk to them, we’re, I think everybody just waiting for everything to settle. But you’re right, I mean, I think that may very well present us an opportunity as we go forward. And if they require that, we are one of the major players in that area.
Mariana Perez Mora, Analyst, Bank of America: Great, thank you. And then a little bit on health. With Wilson now leading this, and you mentioned about a little bit of this early mood change, where do you see the business unit three, five years from now? What he wants to do and how much money you need to invest in order to do that turnaround or capture those opportunities?
A.J. Mera, President and CEO, OSI Systems: So, think that as we pointed out, we had a solid quarter in healthcare from a revenue standpoint. And our goal is really to get the next generation, we’re spending money on R and D, to get our next generation platform in the next eighteen months or so, and see it grow from there. So, we expect our R and D spending to be at pretty much levels that we’ve had right now. And it’s just a matter of tightening everything and focusing everybody, and that’s what he’s doing. And we feel good about what we’ve seen so far.
Mariana Perez Mora, Analyst, Bank of America: Great, thank you so much.
Alan Edrick, Executive Vice President and Chief Financial Officer, OSI Systems: Thank
Conference Call Operator: Our next question comes from the line of Christopher Glynn from Oppenheimer. Your line is open.
Christopher Glynn, Analyst, Oppenheimer: Hey, thanks guys. So curious in security comment on the pipeline for projects there. You’re continuously pulling a lot out of that pipeline and I presume there’s some degree of refill there. Is stable? Is it growing?
Or is conversion outpacing new inputs?
A.J. Mera, President and CEO, OSI Systems: So I think our pipeline of opportunities continues to be strong and growing. As I said, originally that I want to add that the diversity of the backlog really provide us with a lot of confidence in our ability to maintain and sustain growth as we move forward. So, we’re not we don’t have these just a big chunk. But the pipeline is growing, and we’re seeing more and more opportunities. And like I said, not just on the cargo side, but definitely on the aviation and other areas within the security business as well.
Christopher Glynn, Analyst, Oppenheimer: Sounds great. And then a quick one on Opto. The share gain idea there’s, I think it’s pretty compelling. And given that every company I cover is talking about shifting their supply chains and you’re well positioned in a number of favorable alternatives to China. It almost seemed matter of fact rather than theoretical that you have something coming your way.
I’m curious if you’re having a different tone of wallet share discussions with customers than historically. I guess to understand the question and answer, it might be helpful to comment on degree of single source versus sole source. I suspect usually it’s multiple sourced.
Alan Edrick, Executive Vice President and Chief Financial Officer, OSI Systems: So, I
A.J. Mera, President and CEO, OSI Systems: guess short answer is that there was already movement away from China. And I think what’s happened is that the questions and answers from questions are more urgent and things are getting accelerated. And we’ll see over the next few months how that goes, but definitely a lot of interest. And like I said, having the different facilities around the world, including Mexico and The US is definitely beneficial from customers getting an ability to manufacture in different places. And we really give them a menu, what do you want to do and go from there.
So yes, I think the sense of urgency has definitely gone up.
Christopher Glynn, Analyst, Oppenheimer: Great, thank you.
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