OSI Systems, Inc. Q2 FY2026 earnings call

• The company had a record-breaking Q2 with $464 million in revenues, 11% y-o-y growth.
• Security division delivered double-digit revenue growth, with a $20 million award for a radiological threat detection solution and selection for security screening at a global sporting event.
• Optoelectronics division had double-digit top line growth, strong book-to-bill ratio, and expanded production capacity in Mexico and other regions.
• Healthcare division is focusing on long-term value creation with intensified sales efforts and investment in next-gen product development.
• Announced a $30 million international order for RF-based communication and surveillance systems and selection for the Golden Dome IDIQ contract.

The company's revenues increased 11% year-over-year to $464 million in Q2. The Security division had revenues of $335 million, a 15% year-over-year increase, driven by higher service revenues, RF business integration, and aviation product revenues. Excluding Mexico contracts, security revenue surged 31%. The Optoelectronics and Manufacturing division had sales of $113 million, a 12% year-over-year increase, achieving a Q2 record for revenues and adjusted operating income. The Healthcare division had soft sales in Q2.

• Raised non-GAAP EPS guidance to a range of $10.30 to $10.55 for fiscal 2026, maintaining revenue guidance.
• Anticipates Q3 revenue headwind over $50 million due to Mexico contract revenue reduction, with stronger Q4 expected as Mexico receivables normalize.
• Guidance excludes potential impairment, restructuring, and other charges, and discrete tax items.

• Potential impact of government shutdowns on order timing.
• Uncertainty in timing of backlog conversion to revenues.
• Effect of tariffs on margins.
• Impact of potential impairment, restructuring, and other charges on financial results.

Q: How to describe the softer than expected orders in Security?

A: Orders were expected to be strong, but some were pushed due to government shutdown and international factors, but all are in the pipeline with strong next 6 months expected.

Q: When could orders from the Golden Dome IDIQ contract start coming in?

A: Dependent on funding and government timing, but the company is in a good position with its products, and they are actively pursuing opportunities though timing with government can be longer.

Q: How should we think about interest expense going forward?

A: With revolver paydown, interest expense is expected to decrease from Q2 to Q3, with Q3 and Q4 relatively comparable.

Q: What's the potential for additional share repurchases?

A: Stock buyback is an option, with a sizable buyback in Q2, and the opportunity to buy back further shares available.

Q: Details on Mexico DSO and free cash flow?

A: Mexico receivable is the largest, with expected significant free cash flow conversion in fiscal '26 and '27 as it normalizes, reducing DSO.

Q: Margin outlook and service revenue growth?

A: Service revenues grow faster than products and have higher margins, with good room for operating margin expansion, more tilted to Q4.

Q: Pipeline for Golden Dome contract and CBP opportunities?

A: Golden Dome is a large contract with $151 billion, company is in a good position, and CBP opportunities continue with efficient equipment orders despite civil works complexities.

Q: Sports event pipeline and aviation orders?

A: Pipeline for sports events is strong, with European event and FIFA World Cup, Olympics also in consideration; aviation orders are strong with a strong pipeline though sometimes taking longer due to construction etc.

Q: Impact of Mexico on margins and bookings?

A: Mexico plays a role in margin headwind, with impact subsiding after Q3; bookings were below expected, but overall business is strong.