OSI Systems, Inc. Q4 FY2025 earnings call

Management Statement and Operational Highlights

• Security Division: Maintained strong momentum in core markets such as ports, orders, aviation, and critical infrastructure. Advanced major programs, including large-scale contracts in Mexico (though Mexico revenues became a lower percentage of total). Turnkey projects worldwide performing well, using CertScan platform for integrated multisite operations.
• Optoelectronics Division: Achieved double-digit revenue growth in Q4. Announced a $7 billion order from a healthcare innovator. Mexico operations gained traction for near-shore production to minimize U.S. tariff impact.
• Healthcare: Plans to improve performance with product innovation and operational efficiencies, focusing on next-generation patient monitoring and predictive health solutions.

Segment Performance

• Security Division: Q4 revenues were $367 million, a 7.1% year-over-year increase. Full-year revenues surged 14.7%. Growth driven by broad-based demand in markets like airports and international borders. Excluding Mexico contracts and acquisitions, security revenues grew ~50% in Q4. Service revenues in Q4 were up 28% year-over-year.
• Optoelectronics Division: Q4 revenues, including intercompany sales, were $113 million, a 10% year-over-year increase. Third-party Opto sales reached $95 million, a new Q4 record, driven by growth in Flex contract manufacturing and core Optoelectronics operations.
• Healthcare Division: Disappointing Q4 sales, but plans are in place to improve performance with next-generation patient monitoring and operational efficiencies.

Guidance

• Revenue: Fiscal '26 revenue expected in the range of $1.805 billion to $1.85 billion, representing 5.4% to 8% year-over-year growth.
• Non-GAAP Adjusted EPS: Expected to be in the range of $10.11 to $10.39, a 8% to 11% year-over-year growth.
• Backlog: Record year-end backlog of over $1.8 billion, with strong pipeline of opportunities.

Risks

• Receivables Timing: Mexico customer payments pushed into fiscal '26 affected Q4 accounts receivable, but collections expected to improve.
• Supply Chain and Tariffs: Margins could fluctuate due to supply chain costs, tariffs, and other factors.
• Regulatory Uncertainty: Timing of government funding for programs like the Big Beautiful Bill and Golden Dome could impact revenue recognition and growth.

Question and Answer

Q: Revenue guidance for fiscal '26 and Security division growth ex Mexico A: Alan states pro forma out Mexico, OSI Systems would have double-digit top-line growth. Service revenue growth is likely to continue and be accretive to margins.

Q: Mexican backlog and receivables A: Security backlog is ~$1.5 billion. Receivables increase was due to Mexico revenue timing and strong overall revenues; collections improving with audits going well.

Q: M&A pipeline and CapEx A: Ajay mentions dry powder for M&A, looking at strategic opportunities in security and complementary technologies for growth.

Q: RF business and Golden Dome A: RF business performed well, expects growth. Golden Dome project offers significant opportunities for the RF business due to government funding needs.

Q: Cash flow timing and growth drivers A: Alan believes cash flow can be strong throughout fiscal '26. Double-digit growth ex Mexico driven by international markets and domestic funding from initiatives like the Big Beautiful Bill