OSI Systems, Inc. Q1 FY2026 earnings call

• OSI Systems achieved strong first quarter financial results with revenues up 12% to a Q1 record, non-GAAP adjusted EPS at a record $1.42, and strong bookings with a book-to-bill ratio of approximately 1.1 and a record Q1 backlog near $1.9 billion. - The Security division had 13% y-o-y revenue growth, strong bookings, and record security backlog, with robust growth across other areas of the security portfolio. - The Optoelectronics and Manufacturing division had record Q1 revenues, including intercompany, with strength across product lines in North America and a robust global manufacturing footprint. - The Healthcare division saw 10% y-o-y sales growth, with ongoing improvement plans and continued R&D investments to drive product innovation and operational efficiencies.

Revenues increased 12% year-over-year to a Q1 record of $385 million. Each division achieved double-digit top line growth. The Security division had Q1 revenues of $254 million, a 13% year-over-year increase. The Optoelectronics and Manufacturing division had sales, including intercompany, of $110 million, a 12% year-over-year increase. The Healthcare division saw Q1 sales rise 10% year-over-year. Excluding contributions from Mexico contracts and acquisitions from fiscal '25, underlying consolidated revenues grew roughly 26% in Q1.

• Raised fiscal '26 revenue guidance to $1.825 billion to $1.867 billion, representing a growth rate of 6.5% to 9%, up from the previous range of 5.4% to 8%. - Raised non-GAAP adjusted earnings per diluted share guidance to a range of $10.20 to $10.48, representing 9% to 12% year-over-year growth. - Guidance factors in an approximate 60% headwind from a reduction of revenues from Mexico contracts in fiscal '26 for the Security division.

• Uncertainty in the timing of backlog conversion to revenues. - Variability in cash collections due to factors like timing of new bookings and government shutdowns. - Impact of tariffs, government shutdowns, and other external factors on financial results.

Q: Could you provide just a little bit more granularity on what products and markets or geographies are really driving that strength in the Security business, particularly since 1Q is usually a little bit slower?

A: We saw really quite diversified broad growth. We saw both on the revenues and the bookings side throughout the regions when we were looking at the EMEA region, looking at the Americas and even Asia Pac, strength, whether it be in revenues or bookings across the board. Service revenues, of course, were exceptionally strong for us. We had the contribution for a full quarter worth of the RF products versus a partial quarter in the prior fiscal year. And we saw our aviation products doing quite well as well.

Q: When you look at the guidance, the top line guidance for this year, you're guiding to around 8% growth. But I would assume that the services revenue growth would be significantly higher than that. Any kind of additional detail you could provide around that?

A: When it comes to our guidance, though we don't provide guidance on service versus product specifically, directionally, you're absolutely right. We're expecting faster growth than our recurring service revenue in this particular year. Product revenues will be quite strong as well. But remember, we're coming off of a very difficult comp with heavy Mexico product revenues in fiscal '25. So we expect to see very solid revenue growth, both on product and service, but at a more accelerated rate on the service side in this fiscal year.

Q: My first question is on Mexico. You mentioned some partial payments and improvement there and also a significant reduction on the revenue side. How should we think about the level of unbilled receivables so far? And how are those unbilled receivables progressing?

A: Really some good progress on the unbilled receivables. We've seen the unbilled receivables in Mexico at September 30 come down nicely from June 30, and we expect to see that continued progress throughout the fiscal year. And the nice part is, of course, as it moves from unbilled into billed, we can then start collecting the cash. So as we look at fiscal '26, we expect some very significant cash flow from Mexico specifically, but from overall business more generally as well, which will lead to very strong free cash flow conversion.

Q: I wanted to ask about the profitability, especially in Security since some of the mix items you talked about offset the increase in the services mix. And so margin was down year-on-year. At what point do you see margin being able to expand again in the security business?

A: Yes, the final quarter of the difficult Mexico comps when it comes to a margin perspective, particularly is this upcoming quarter, the December quarter, which is, of course, built into our guidance and much more akin to what we've been seeing in the last couple of quarters. So as we get past the end of this calendar year and move into January, the comps get much more normalized from a Mexico perspective. And we believe that there's ample opportunity to start showing margin expansion again. There'll be quarters where it's very robust and quarters where there might be a different mix going the opposite direction as well. But really, as we move into the next calendar year and beyond, we should be in good shape to start focus on margin expansion again.