Q2 2025 OSI Systems Inc Earnings Call

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Speaker Change: Hello everyone and welcome to the OSI Systems Inc. second quarter 2025 conference call. At this time all participants are in a listen-only mode.

Speaker Change: After the speaker's presentation, there will be a question and answer session. To participate, you will need to press star 1 1 on your telephone. You will then hear a message advising your hand is raised.

Speaker Change: To withdraw your questions, simply press star 11 again, and please be advised that today's conference is being recorded. Now it's my pleasure to turn the call over to the Executive Vice President and Chief Financial Officer of OSI, Alan Edrick. Please proceed.

Thank you. Good morning and thank you for joining us.

Speaker Change: I'm Alan Edrick, Executive Vice President and CFO of OSI Systems and I'm here today with AJ Mehra, OSI's new President and CEO.

Speaker Change: Welcome to the OSI Systems Fiscal 25 second quarter conference call. We are pleased that you can join us as we review our financial and our operational results.

Speaker Change: Earlier today, we issued a press release announcing our fiscal 25 second quarter financial results.

Speaker Change: Before we discuss these results, however, I would 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.

Speaker Change: 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 upon subsequent events or new information or otherwise.

Speaker Change: During today's call, we will refer to both GAAP and non-GAAP financial measures when describing the company's results.

Speaker Change: 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.

Speaker Change: I will begin with a high-level summary of our financial performance for the second quarter of fiscal 25, and then turn the call over to AJ for a discussion of our business and our operational performance.

Speaker Change: We will then finish with more detail regarding our financial results.

Speaker Change: and a discussion of our updated outlook for fiscal year 2025.

Speaker Change: Our second quarter financial results were excellent, with record Q2 revenues and operating income at the Security Division and solid performance by the Opto Division.

Speaker Change: We are excited by the momentum across our business and are confident that we are well positioned for the second half of the fiscal year.

Speaker Change: So, let's start with a high-level summary of our FYSBAL 25-Q2 results.

First,

Speaker Change: Revenues increased 12% year-over-year to a Q2 record of 420 million dollars with growth in each of the three divisions highlighted by the 16% year-over-year revenue increase in our security division.

Speaker Change: Second, the strong revenue growth led to record Q2 non-GAAP adjusted earnings per share of $2.42.

Speaker Change: And fourth, we generated operating cash flow of $53 million in Q2, a $76 million jump over the same quarter in the last fiscal year.

Speaker Change: This performance was driven by strong profits and an improvement in working capital metrics.

Speaker Change: As you may know, we had mentioned in our previous call that our strong operating cash flow dynamics was expected to return in 2025.

Speaker Change: Before diving more deeply into our financial results and discussing our updated outlook for the full fiscal year, I will turn the call over to AJ.

AJ Mehra: Thank you, Alan, and thank you everyone for joining us today.

AJ Mehra: I'm pleased to join this call as CEO for the first time after assuming the role on January 1st.

AJ Mehra: It is gratifying to report another record-breaking second quarter for fiscal 2025, where we achieved revenues of $420 million, representing a 12% growth year-over-year and strong earnings.

AJ Mehra: The quarterly performance was driven primarily by excellent execution in security and solid results from the Optoelectronics and Manufacturing Division.

Speaker Change: Our continued healthy backlog, as Alan pointed out, an expanding opportunity pipeline provides us confidence for robust growth in the second half in a fiscal year and positions us well for the future.

Let me discuss each division's performance starting with security.

Speaker Change: The Security Division delivered Q2 revenues of $290 million, representing a 16% growth over Q2 in the prior year.

Speaker Change: Bookings were also excellent as we achieved a book-to-bill ratio of approximately 1.2 for the quarter.

Speaker Change: During Q2, we continue to deliver on programs and numerous locations including airports, ports, borders, and critical infrastructure.

Speaker Change: In addition, our turnkey projects are performing well in Albania, Puerto Rico, Guatemala, and Uruguay, which as we mentioned before, commenced earlier last quarter.

Speaker Change: During the quarter we received significant orders for both aviation and cargo products and announced a few of these wins shortly after the quarter ended.

First we announced a $27 million award

Speaker Change: to provide checkpoint and whole baggage inspection products for an international airport.

Speaker Change: The products to be provided include RTT-110 Explosive Detection Systems for screening

Speaker Change: Orion 920 CT checkpoint screening systems which are integrated with our RapidScan tray return systems.

Speaker Change: In addition, we will supply our trace and other screening systems for air cargo.

Speaker Change: This award is the latest in a string of major international airport awards received in the past few quarters.

Speaker Change: which indicates promising growth for our aviation security product revenues going forward.

Speaker Change: Second, we announced an 81 million dollar order from an international customer for EGLE M60 mobile high-energy cargo and vehicle inspection systems for border security applications.

Speaker Change: Third, we announced a $32 million award from an international customer for M60s, including service and support for port and border security applications.

Speaker Change: Expanding our install base among aviation and border security customers not only broadens our hardware install base, but also significantly boasts our potential for future recurring service revenues.

Speaker Change: Our aviation contracts open up avenues for additional revenue through follow-up training, hardware maintenance, spare parts, and upgrades to our automated threat detection algorithms.

Speaker Change: Similarly, some of our border and cargo security clients, aside from seeking these types of services mentioned, also utilize a proprietary surge scan multi-site integration platform.

Speaker Change: This platform allows us to increase future revenues through new user licenses and software upgrades.

Speaker Change: Our inspection systems have a typical life cycle of 7 to 10 years, thereby creating a predictable stream of ongoing recurring service revenues.

Lastly,

Speaker Change: We announced a $23 million order to support deploying and integrating long-range radiofrequency critical communication systems.

Speaker Change: As part of the award, we expect you to provide essential hardware and technical services to enhance the U.S. government's strategic RF communication capabilities in a critical region.

Speaker Change: This is an excellent win for us in our recently acquired RF Solutions business.

Speaker Change: Furthermore, we are optimistic that we can enhance this business in the marketplace by utilizing our global reach across regions.

Speaker Change: and offering solutions to customers with critical security communication and surveillance requirements.

Speaker Change: Our security pipeline includes a wide range of opportunities, both internationally and domestically.

Speaker Change: Moreover, domestic growth could accelerate driven by the new administration's national security policies.

with both major political parties supporting enhanced border security

Speaker Change: We are well positioned to play a key role. Our non-intrusive inspection technologies are ideally suited to bolster security at airports, ports, borders, and other critical infrastructure points.

Thank you.

Moving on to optoelectronics.

Speaker Change: Optoelectronics delivered another Achieving a quarterly record with $101 million in revenues.

Speaker Change: This record was in part driven by a flex circuit operation which serves consumer and medical technology customers

was a major contributor to Q2 growth.

based on Opto's recent trends and our

Speaker Change: We believe that the phase where many customers were adjusting inventory levels and tempering demand forecasts is now mostly in the past.

Speaker Change: During the quarter, we announced an $11 million order to provide critical electronics sub-assemblies for a long-standing healthcare OEM customer.

Speaker Change: We also announced an order for $6 million from a different healthcare OEM to provide optical sensors for its patient care devices.

Speaker Change: These orders exemplify the kind of repeat business we consistently secure from established customers.

accounting for approximately 80% of this division's total revenue.

Speaker Change: We are actively working with clients looking to diversify away from China by relocating component or value-added manufacturing to our international facilities.

Speaker Change: Given our current demand visibility, we anticipate the OptoDivision will deliver a robust performance in the second half of the fiscal year.

And finally, let's discuss the healthcare division.

Speaker Change: It was nice to see a return to growth in health care, indicative of a pickup in order activity from hospitals and solid execution of a sales strategy built around a clinical workflow and predictive analytics solutions.

Speaker Change: During the quarter, we announced a $6 million order from a U.S.-based hospital system to provide patient monitoring solutions and related supplies.

Speaker Change: We expect to provide a range of patient monitoring solutions and accessories to support this customer and others.

Speaker Change: While we continue to invest in developing new products, including our next generation platform, we are intently focused on driving growth and improving the overall operating performance of our security division.

Speaker Change: On a personal note, I'm honored and excited to begin the president and CEO CEO role at OSI.

Speaker Change: The company has a critical mission to support the global community's safety, security, and well-being.

Speaker Change: Having been part of this company's journey, I have seen the potential in all of our operational divisions.

Speaker Change: and the talented individuals who have been key to our success.

I look forward to continuing OSI's growth.

Speaker Change: Overall, we are pleased with OSI's first half look and look forward to an even stronger performance in the second half.

Speaker Change: I will now return the call to Alan to discuss our financial performance further before we open the call for questions. Thank you.

Alan Edrick: Thank you, AJ. Now I will review in greater detail the financial results for the fiscal 25 second quarter.

Alan Edrick: As previously mentioned, our Q2 revenues were up 12% compared with revenues in the second quarter of the prior fiscal year.

Alan Edrick: This increase was primarily driven by our largest division's security. The 16% year-over-year increase in Q2 Security Division revenues was fueled by growth in aviation and checkpoint product sales, including strong growth in trace detection system sales.

Alan Edrick: Q2 revenues included continued shipments from the $200 million plus cargo contract and also from our two contracts with Sedena in Mexico.

Alan Edrick: In addition, the business acquired at Disco 2-1 is gaining momentum and contributed to the Security Division revenues nicely.

Alan Edrick: Third-party Opto sales were solid, delivering a 4% year-over-year increase, driven by growth from our Flex business as well as others.

Alan Edrick: The right sizing of inventory levels, as A.J. mentioned, with our Opto customers is largely complete, and we anticipate an acceleration of the revenue growth rate in the Opto division as early as Q3.

Alan Edrick: and the Health Care Division return to growth, reporting a 7% increase in year-over-year sales in Q2.

Speaker Change: The Fiscal 25 Q2 gross margin of 35.1% was solid. Our gross margin in Q2 last year of 37.9% was the strongest in any quarter of Fiscal 24 due to very favorable product mix and security.

Moving to operating expenses.

Speaker Change: Q2 SG&A expenses were $71 million, or 16.8% of sales, compared to $72 million, or 19.2% of sales in Q2 of the prior year. The 240 basis point improvement resulted from leveraging our fixed cost structure and maintaining strong discipline in managing such costs.

We work diligently across each of our

Speaker Change: Research and development expenses in Q2 of fiscal 25 or 18 million or 4.3% of revenues compared to 16 million or 4.4% of revenues in the same prior year quarter.

Speaker Change: We continue to dedicate considerable resources to R&D, particularly in our security and healthcare divisions, as we remain focused on innovative product development, which we view as vital to the long-term successes of our businesses.

Speaker Change: We recorded $0.2 million restructuring other charges in Q2, Fiscal 25, compared to $1 million in the same quarter of the prior year.

Moving to interest and taxes.

Speaker Change: Net interest and other expenses in Q2 Fiscal 25 increased to $8.6 million from $6.5 million in Q2 Fiscal 24, primarily due to a higher amount of borrowings associated with the investment in working capital for the sales growth.

Speaker Change: Our reported effective tax rate under GAAP was 23.3% in Q2 of fiscal 25 compared to 20.2% in Q2 of last year.

Speaker Change: However, excluding the impact of discrete tax benefits, our normalized effective tax rate, which is the rate reflected in our calculation of non-GAAP-adjusted EPS, was 24.0% in Q2 fiscal 25 compared to 25.8% in Q2 of 24.

Speaker Change: I'll now turn to a discussion of our non-gap adjusted operating margin.

Speaker Change: Overall, our adjusted operating margin in the second quarter of fiscal 25 was a solid 15.0%, up sequentially from 10.3% in Q1.

Speaker Change: This quarter faced a tough comp, as Q2 and Fiscal 24 was 15.5%, which was the strongest adjusted operating margin quarter of FY24.

Speaker Change: The Q2 Adjusted Operating Margin in the Security Division was 19.9%, although down year over year due to this tough comp, this represented the second strongest Adjusted Operating Margin in the Security Division's history.

Speaker Change: Due to a ramp up of newer Opto operations, the Opto Division's adjusted operating margin was 12.8% in the second quarter of Fiscal 25, compared to 13.4% in last year's Q2.

Speaker Change: We anticipate nice adjusted operating margin expansion in Opto in the second half of Fiscal 25.

Speaker Change: The health care division's adjusted operating margin, while lighter than we would like, still increased 300 basis points year over year.

Moving to cash flow.

Speaker Change: Q2 marked a return to significant cash flow with cash provided by operations of 53 million.

Speaker Change: CapEx in the 25 second fiscal quarter was $5.5 million while depreciation and amortization expense in fiscal Q2 was $10.6 million.

Speaker Change: We saw a nice improvement in DSO in Q2, as solid collections led to a 16% reduction in DSO from Q1.

Speaker Change: As we mentioned last quarter, our receivables and DSO are both above typical levels, mainly because of the timing of billings and collections for our significant international security cargo contracts.

For these contracts, billing is triggered

Speaker Change: by the achievement of significant project milestones which are highly influenced by the customer's timeline and sign-off.

Speaker Change: So under GAAP, we record and unbill receivable for revenue earned and then bill and collect cash subsequent to the achievement of the relevant milestone.

Speaker Change: Note, while unbilled receivables are elevated relative to historical levels and represent a significant source of future cash flow, the balance decreased by 19% at the end of Q2 versus the end of Q1.

Speaker Change: We continue to anticipate operating cash flow could be significant in the second half of fiscal 25.

Speaker Change: Aside from 7.5 million of annual required principal payments under our bank term loan, the bulk of our bank debt matures in fiscal 27. We estimate over 70% of our debt was fixed versus floating at the end of Q2 of fiscal 25. And finally, turning to guidance.

Speaker Change: We are increasing our Fiscal 25 Revenues and Non-GAAP Diluted DPS Guidance.

Speaker Change: For the full fiscal year, we anticipate revenues in the range of $1.685 billion to $1.710 billion, increasing our guidance on year-over-year revenue growth to a range of 9.5% to 11.1%.

Speaker Change: We are also increasing FY25 non-GAAP adjusted earnings per diluted share guidance to a range of $9.10 to $9.40 per share, representing 11.9 to 15.6% growth.

Speaker Change: This Fiscal 25 non-GAAP diluted EPS guidance excludes potential impairment restructuring and other charges, amortization of acquired intangible assets and their associated tax effects, as well as discrete tax and other non-recurring items.

Speaker Change: The actual impact on the company's financial results of timing changes on the expected conversion of backlog to revenues and new bookings is difficult to predict.

Speaker Change: and could vary significantly from the guidance. Actual revenues and non-GAAP earnings per diluted share could also vary from the guidance indicated above due to other risks and uncertainties discussed in our SEC filings.

Speaker Change: We continue to remain focused on the growth of our businesses. We believe our efforts will enable OSI to continue providing innovative products and solutions. We'd like to take this opportunity to thank the global OSI team for its continued dedication in supporting our customers and partners. And at this time, we'd like to open the call to questions.

Speaker Change: Thank you and as a reminder to ask a question simply press star 1 1 on your telephone and wait for your name to be announced. To remove yourself press star 1 1 again. One moment for our first question.

Speaker Change: It comes from the line of Josh Nichols with B. Riley. Please proceed.

Josh Nichols: Yeah, thanks for taking my question. And AJ, congratulations on the new role. Things are off to a great start.

You touched on it briefly, I think, but...

Josh Nichols: While it's early days, the new administration clearly has an increased focus on border security.

Josh Nichols: Any context you could provide around the potential increase in opportunity versus what you're currently doing on the U.S. border front and how that could change if there's some increased allocations to budgets for some of these.

Josh Nichols: three-letter agencies that are going to be doing a lot of the border security as there's an anticipated ramp-up over the next few years, presumably.

Josh, this is AJ. Thank you.

Josh Nichols: So, you know, great question. You know, it's been three, not even three days, but I think as you know, that border security really is a bipartisan issue.

Josh Nichols: and there's been a lot of there's been a lot of movement both on the House and on the Senate trying to reconcile the bills which are substantially higher than what they were previously in terms of total funding.

Josh Nichols: So we think with the new emphasis, with the new administration, it's positive.

We believe that the technology that we provide

Josh Nichols: and not just the technology, but some of the software, like Search Can.

which we're able to really go in and look.

Josh Nichols: to see if drugs, the wrong people are coming in, is really a plus for us. We are the dominant player with CBP.

Josh Nichols: and we feel very good as we go forward and I think that you know we'll see more and more over the next three six months but all indications from our end are positive.

Speaker Change: Thanks for the context. And then just a little bit deeper, I mean,

Josh Nichols: on the the recent acquisition, the RF Solutions business. Seems to be

Josh Nichols: that that business is already doing pretty well. I noticed the company secured, I think, a $23 million award already. Could you talk a little bit about

Josh Nichols: Some of the opportunities that you see layering this into OSI systems given that you have a much larger global sales infrastructure and the opportunity to kind of expand the revenue base relative to what it was currently doing before you acquired the business.

Josh Nichols: I think you you kind of answered your question over there because

Yes.

Josh Nichols: One of the advantages that this company has now is it's got the OSI's financial muscle as well as You know the different areas that we are in all over the world

Josh Nichols: So, you know, we definitely are going to help them. We are integrating them, working very closely. I mean, just keep in mind, they're in the defense sector, but also they're over the horizon radar. It's really crucial for border security.

Josh Nichols: and drug interdiction. Keep in mind that, you know, these radars provide broad range-based surveying systems that enables tracking of aircraft, drones,

Josh Nichols: surface ships in designated zones around the U.S. water, and we feel that's an opportunity as we go forward, besides obviously their traditional opportunities in defense.

Josh Nichols: So we are talking to the customers and we have had a very positive response.

Also, I think from an OSI perspective,

Josh Nichols: We have customer base which is very similar to theirs, but it's got us deeper into those customers and More and more we have more to discuss with them. So we're not just discussing Scanning, but we're discussing how we protect the overall border for example

Sounds good. Thank you.

Thank you. One moment for our next question, please.

Speaker Change: It comes from the line of Mariana Perez Mora with Bank of America. Please proceed.

Hello everyone and thank you for taking my question.

Speaker Change: So the first one is going to be around Mexico and I appreciate the details you you give in the prepared remarks but like you please describe how much of a contribution Mexico was to the quarter and how should we think about

Hi, Mariana. This is Alan. Good question.

Speaker Change: You know, the Mexico contract was a significant contributor to us in the in the first half of the year.

Speaker Change: In the second half of the year it's anticipated to continue to be a significant contributor but at a lighter amount than we saw in the second half of fiscal 24.

Speaker Change: with a very robust backlog in the Strong Opportunity Pipeline were effectively replacing the strong Mexico revenues that we had in Q3 and Q4, a portion thereof, with non-Mexico contracts. And we feel extremely, extremely confident about that.

Speaker Change: So, really a robust opportunity set. Mexico is important to us, but as we have said, you know, we shipped a significant amount last year, shipping a significant amount this year, but we are really well positioned for the future because we have such a strong

Speaker Change: backlog of non-Mexico business and such a strong opportunity set as well.

Speaker Change: Thank you. And then when you think about this transition, right, especially because the early stages of this contract were mostly products, how should we think about the products versus services mix?

Speaker Change: second quarter and like probably in the like the trend towards like the next 12 months

Speaker Change: So this is AJ, you know, I think that if you look at the product that's getting shipped, you know, we always say that one of the things, the products that we ship leads us to recurring service revenue.

Speaker Change: So we feel really into 26 and really 27 and beyond

Speaker Change: We're going to see some very good recurring revenue for service. All these products have to be serviced in Mexico, for example. So that revenue will continue, and as I mentioned earlier, that service revenue has very good margins.

Alan Edrick: So, so we're fully expecting that and maybe to supplement that this is Alan

you know we've had significant product revenue growth

over the last few years and as those

Alan Edrick: now beginning to roll off a warranty and create service revenue.

AJ Mehra: As AJ described, we expect to see real strong service revenue growth.

AJ Mehra: At the higher contribution margins, you know, beginning as early as

AJ Mehra: Now this, you know, sort of Q3, so it's a nice position to be in with a strong install base that we put out there moving to this more recurring revenue at higher margin is a nice position to be in.

Thank you and one more from from my end.

Speaker Change: I was curious like part of this like radio frequency critical communications award that you got, how much of that is like incremental to the portfolio you you acquired and how much is more like a recompute of like what the existing portfolio was?

Speaker Change: Well, I think this is uh, you know, there's always incremental business, but this one is new As we move forward, so we're actually looking not just to get the incremental business, but get the growth

Speaker Change: As I mentioned earlier, with having the OSI muscle behind us,

Speaker Change: and being able to not just get into the defense side but maybe also

Speaker Change: The Border Security side, where we can see new business, and we're very focused on maintaining the business that we have, getting that business, but looking at new opportunities.

Perfect. Thank you so much for the color.

Speaker Change: Thank you. One moment for our next question. That comes from Larry Solo with CJS Securities. Please proceed.

Larry Solo: Great, thank you. AJ, I welcome you, congratulate you on your new role as well. I guess first question for you AJ, you mentioned sort of this expanding opportunity pipeline and you know you've spoken a lot about most of your kind of end markets and verticals. I'm just curious

Speaker Change: maybe headlines sound like it will change but you know maybe just the question is the new administration driving you to expand opportunities or where you're seeing kind of you know outsized opportunity growth

Larry Solo: So I think, you know, thank you first of all Larry, but you know the growth is across the board.

Larry Solo: So, yes, we talk about borders, security, that's in the news. Sure, we're going to see we think we're going to see growth. A lot of it is just.

Speaker Change: starting, and as Alan pointed out, it's not just about the initial product, but it's about what else can we do, can we integrate some of it with our SurScan software, get recurring revenues, get the service revenue. Aviation is huge.

Speaker Change: Internationally, you know, we have a lot of opportunities. We've announced a couple of orders.

Speaker Change: and we feel on the check baggage as well as the checkpoint.

for a lot of opportunities.

TSA

Speaker Change: As you know, they've had some changes there with a new administrator coming in. We don't know who that's going to be.

But their checked baggage, which...

We have an excellent product in our RTG.

Speaker Change: Those are, you know, in some cases, 20 plus years old, so they have to replace those probably in the next, you know, two, three, four years when they start.

their tray systems where we participate in.

Speaker Change: And these are huge opportunities, not just in the U.S., but internationally. And I think as you look at...

Yaap Kosai

You know, we keep on, we talk about security.

But the anti the the moving away from China

Speaker Change: manufacturing, we as a company are uniquely situated with a lot of international facilities that we have around the world, where we can accommodate that.

and really...

Speaker Change: You know, we do business with a lot of defense companies.

on the security side.

at OptoSci, and I think we can really merge those.

Speaker Change: opportunities and go talk to the customers as a large company who's unique in providing obviously the security side but the ability to manufacture on the opto side and you know and medical for us we're investing a lot of money

in the next generation products.

Speaker Change: looking at how we broaden that product line, just like we're doing in security. So, you know, we feel very good about all the growth opportunities, so I would not just say it's just on ports and borders, that's one very significant pillar, but there's a lot more out there.

Speaker Change: Right, and on the ports and borders in particular, it feels like you've announced several larger-sized deals. Most of them were actually international. I'm just curious, is the, you know, do you feel like

Speaker Change: you got a bigger opportunity now, well obviously international is a bigger geographical region, but is the U.S. seems to me seems like maybe it's lower on your proportion of what's driving ports and borders today. Is that a fair statement?

Speaker Change: You know, I think that the U.S. is just as important, if not the most important to us. As you look at it, we've been driven a lot internationally, but we have these IDIQs.

with CBP.

Speaker Change: for example, and I think there are going to be new IDIQs coming in. We have worked very closely with CVP and other organizations where we develop new products. They're coming out.

and we feel as...

the next generation products come out, which we've

Speaker Change: developed very closely, talking to our customers, so it's not just something we're coming out with, and integrating the hardware with the software, where it makes it easier for people to look for contraband, etc.

Speaker Change: And keep in mind, a lot of people just look at security as an expense.

But at the end of the day,

Speaker Change: When we introduce these products, and I'm not going to go into some specifics for competitive reasons

but it really facilitates the trade.

coming through.

Speaker Change: the borders and in the end it's really cheaper overall for the consumer at the end of it.

Speaker Change: So a lot going on, but the U.S. is important, and I think there's a good opportunity for the next several years.

Speaker Change: And if I may just squeeze in, Alan, a question for you, just on the margin security. Like you said, the gross margin was down year over year because of the mix, but if we just look sequentially, it looks like your services revenue were about flat and your margin went up like 550 bits. Is that mostly just on the SG&A leverage on the higher revenue? Is that, I guess, the biggest driver or the predominant driver?

Alan Edrick: Yes, Larry, it really is. You know, the economy is a scale as we leverage our fixed-cost structure, so that is really kind of what drove it on a sequential basis for OSI systems overall.

Speaker Change: And then just lastly, on the optional division up 4% in the quarter, a nice return to growth in the first half. You mentioned a lot of qualitative things, you know, obviously onshoring. I know you have a new facility in Mexico. What's the kind of driver of, you mentioned,

Speaker Change: Margin expansion the back half of the year that also just on operating leverage or any color on that would be great. Thanks

Alan Edrick: Good question Larry, this is Alan. So I'd say really what's going to drive the accelerated growth in Opto as we expect in the second half of the year is a twofold. One

Alan Edrick: is kind of the right sizing the inventory levels is largely behind us. So we're now seeing customers return to their their normal ordering patterns and in fact our book to bill in Opto in our second quarter was north of one.

as well.

Alan Edrick: So, you know, we expect that to drive accelerated growth. You mentioned the new operation that we have in the...

Alan Edrick: in Mexico. That is gaining momentum also, which will certainly help. The mix of business is expected to be favorable for us in the second half, which should also drive some margin expansion. So all in all, we expect to see some nice top-line growth coupled with operating margin expansion in the second half for the opto division.

Great, thanks Alan, I appreciate it.

Thank you.

Speaker Change: Our next question comes from the line of Christopher Glynn with Oppenheimer. Please go ahead.

Yeah, thanks. I'm curious.

Christopher Glynn: Just wanted to dive into the aviation sector a little bit. And welcome, Ajay. Good to hear you on the call.

Speaker Change: Curious, you know, would you call the global kind of replacement and upgrade cycle in aviation in its early days? I know the U.S. is sort of

Speaker Change: lagging the international but maybe kind of an innings rating for the international and the total global on that. And are you seeing improving win rates in aviation versus historical?

Thanks, Chris.

Speaker Change: You know, it's it's an interesting question because You know aviation is such a big market and when you look at aviation, you've got checkpoints

Speaker Change: Within Checkpoints, you have, you know, your Checkpoint CT systems where you put your baggage through, you have people screening, you have trace, you have so many different products out there, and then obviously you have your checked baggage.

Speaker Change: So, coming to the U.S., the U.S. has been focused on

Checkpoint CT

I think as we move forward

Speaker Change: They are definitely going to look to see what they do in Trace, which we are a very significant player and I believe one of the leaders.

RTT on the check baggage.

Speaker Change: is definitely a big opportunity for us as well and we feel that you know TSA is going to have to

Speaker Change: look at Potentially, you know upgrading replacing some of these products starting a couple years from now So that's that's you know, maybe three years from now, but that's where the market is And we feel that we're in a good position to participate

Speaker Change: Internationally, you know, we're winning a lot of orders. It's a big market. Obviously, we are in the checkpoint as well as check baggage as well as trace.

Speaker Change: You know, we have bundled some of the products. You know, customers know us very well. And then market is, you know, in some places, it's starting, some places it's in the middle. And as, you know, keep in mind, as you get...

Speaker Change: towards the end, another cycle starts. So it's the continuing cycles, not just

Speaker Change: You know, you fill this up and it's going to go away.

Speaker Change: It's a continuing business and the key thing over there is as we get into this business

Speaker Change: there is recurring service revenue as we move forward. So it is really, there's no one answer beginning and middle. It's really a continuing business, the best way to answer.

Great, that's really helpful for understanding that and then

Speaker Change: You mentioned the bulk of the debt coming due, and I'm not sure if you said fiscal 27 or calendar 27, but you know, when are you, what are you anticipating for, you know, pricing or timing as you redo that? How, you know, far ahead are you interested in addressing that?

The End.

Speaker Change: Hey Chris, this is Alan. So yeah the credit facility which is sort of our natural five-year credit facility matures in December of 26 which is our fiscal 27. Throughout the course of you know calendar 25 we'll be we'll be working with our banks as we've done numerous times in the past.

Speaker Change: to likely amend and extend the credit facility. As you may know, even though we're not an investment grade company due to our size, we have investment grade pricing as it comes to the credit facility, so quite favorable for us.

Great. Thanks. That's all I got.

Thank you.

Speaker Change: Our next question comes from the line of Matt Akers with Wells Fargo. Please proceed.

Matt Akers: Hey, good morning, guys. Thanks for the question. And congrats, AJ, on the new role. I wanted to ask about cash. You know, good to see, you know, positive cash flow in the quarter, some of that working capital reversing. I know, Alan, you mentioned the back half.

Yeah, Matt, good question. This is Alan.

Matt Akers: It'll never be a sort of a steady pace of cash flow in the likes of our business We'll always have some quarters that are there much stronger and some quarters that are there a little bit lighter

We have an opportunity

Matt Akers: to continue to sort of outperform on a cash flow basis with a strong free cash flow to net income conversion rate, given that we have some money sort of tied up in working capital. So as the.

Del Reynoso, CEO AlphaleteSolutions.io

Matt Akers: In our in our second half and as we move into fiscal 24 and forward so we think we'll continue to have a good free cash flow conversion rate so it's never going to be perfectly smooth due to kind of the nature of our business and some of the international contracts that we have.

Speaker Change: Yeah, got it. Okay. I wanted to ask about tariffs, you know, given that that's been kind of a topic with a new administration. Just just curious how you think about any risk associated with either, you know,

Matt Akers: prices due to terrorists or, you know, customers, you know, guys have a lot of international business, you know, Mexico, for example, just how you're kind of thinking about the risk around that.

Matt Akers: I think it's a little too early to tell you know what's going to happen but I will say

you know from a

OSI perspective.

Matt Akers: You know, we're well-situated because, you know, we have manufacturing facilities in the U.S.

Matt Akers: We have manufacturing facilities in Europe, Asia, and, you know, we have the flexibility to turn things around and really work closely with our customers on, you know, what their needs are and, you know, if they need to address

any tariff situation.

Matt Akers: So, you know, I think at this point, you know, it's a wait-and-see attitude

but I think it's much more of a challenge for

companies.

Matt Akers: the U.S. and importing into the U.S. For us, you know, like I said, it's much more flexible and we have the ability to really switch manufacturing to different locations. So, you know, we'll watch it just like everybody else is watching it.

Speaker Change: Yeah, great. Thank you. And then if I could squeeze one last one in. I guess maybe any way to think about the seasonality between Q3, Q4. I think, Alan, as you mentioned, Q2 last year, margins kind of unusually strong. Is there anything to think about it as we go into the back half?

Speaker Change: Yeah, Matt, good question. We would see the back half weighted a bit more to Q4 as we typically do. Q4 tends to be our our strongest quarter at the end of the fiscal year.

Speaker Change: As a result we would see our revenues stronger there and from a margin mix perspective we would expect to see the operating margins stronger in Q4 than in Q3.

Great, all right, thank you.

Speaker Change: Thank you again. And as a reminder, if you do have a question, please press star 11 to get in the queue.

for our next question.

Speaker Change: We have a follow-up from the line of Mariana Pérez with a Bank of America. Please proceed.

Speaker Change: Hi Mariana, it's Alan. So we would expect that our DSO is going to improve going forward. Of course we expect to grow the top line so in absolute dollars receivables could grow from from time to time but we'd expect to see our DSO down.

With respect to unbilled receivables, we are really pleased

Speaker Change: from the end of Q1 to Q2, which is what we were anticipating.

Speaker Change: I believe as we get to the end of the fiscal year in June, we'll see those unbilled receivables significantly down from where they are today, and as we

Speaker Change: Move the unbilled receivables to billed receivables and therefore cash collection That's what should drive sort of this outsized free cash flow for us as well. So a real nice position to be in for us

Speaker Change: Thank you and one more on the contribution from the acquisition have you measured how much was it or shared?

Speaker Change: Not per share. We did roughly $17 million of revenues in the quarter, so it performed quite nicely for us.

Thank you so much.

Speaker Change: And thank you for a moment for our next question please.

Thank you very much.

Jeff Martin: and he comes from the lineup of Jeff Martin with Roth Capital Partners. Please proceed.

Thanks. Hi, Alma, AJ.

Somehow I got mixed up in the queue apparently.

Speaker Change: I wanted to dive into the surveillance business that you acquired in September a little more. In terms of the product portfolio, are there things you can do to enhance that offering? Is it where it should be? Do you need to invest significantly in R&D? And are there complementary products that are either in your existing security product portfolio or that you might?

look to acquire in the future to enhance that.

Speaker Change: So, Jeff, I think I went into it a little bit, but just to re-emphasize why this made sense was, number one, the customer base that they have in the U.S. with DoD and obviously internationally.

Speaker Change: is really something that we're very familiar with and we're able to go and talk to those customers and really expand our offering.

Speaker Change: drones and missiles, like what's going on in Ukraine. Everybody was looking at ballistic missiles coming through, and that's where satellites would pick up. But cruise missiles and drones are causing just as much

These radars can be used for

Speaker Change: You know, ships, vehicles, drones coming across the border, carrying all kinds of drugs and anything else. And the capabilities of drones from a payload is going to get bigger and bigger, so I think that's going to become definitely more and more of a threat.

Speaker Change: And then traditionally, you know, they're in other defense areas like their ULF, which is ultra low frequency, which are only for communication off, you know, for submarines, when they're underwater. That's the only form of communication that they really have.

and there are opportunities in space and others, but really...

The key opportunity for us is

providing them with the capabilities.

Speaker Change: From a financial standpoint, from a reach standpoint, and really, you know, working much closer with some of the larger companies, defense contractors out there.

Speaker Change: As far as the question on R&D, they spend money on R&D, but a lot of that R&D is funded by their customers.

Speaker Change: So, you know, we think it's a very good fit and the opportunities are definitely there and we'll keep you informed over the next several quarters, but we feel good about it.

Speaker Change: That's helpful, I appreciate that. So the security and the opto have been covered pretty extensively, so you know I'll throw a health care division question out there. I know you've been working on, you know, a next generation patient monitoring system for

Speaker Change: a timeline on, you know, what the rollout of that new platform.

looks like, and, you know,

Speaker Change: You also have mentioned in the past that you're evaluating the leasing model within the industry, which could be a differentiator. Just maybe give an update if that's gained much traction or if that's more pinning the launch of the new patient monitoring platform.

Hello.

Speaker Change: You know, I think that we're actually spending considerable resources on the new platform with our R&D team.

Speaker Change: I'm not going to give you an exact timing more for competitive reasons than anything else, but we think that it's you know

Speaker Change: 26 and beyond, but we feel good about what we're hearing, what progress we're making.

from that standpoint and and really it's not just

over there, but some of the some of the other

Ian's and other products.

Speaker Change: that we're able to offer besides our next generation platform, whether it's remote monitoring, whether it's predictive analysis, etc. So, all that really goes together and, you know, the objective is...

Speaker Change: that, you know, we've become from a technology as well as from a sales standpoint, it gives us a good boost down the road. But exact timing, like I said, you know, as we start introducing the products, we'll give you more color on that.

Speaker Change: Great, and the last question for me on the turnkey side you mentioned, you know, the existing...

Speaker Change: Customers are happy, things are going well there. Are you seeing much opportunity to expand the customer base within turnkey solutions offering?

Speaker Change: You know, in some cases you have to work with a...

Speaker Change: You know, you have to work with the international governments, you have to basically, you know, go through and educate them on the whole process. So it's, you know, I'd say it takes quite a while to get through it, but we are actively working on several opportunities right now.

Excellent, thank you.

Speaker Change: Thank you so much. And I do not see any further questions in the queue. Back to you guys.

Speaker Change: Well, thank you. Once again, thank you for participating in our conference call and we look forward to speaking with you at our next earnings call.

Speaker Change: And thank you everyone for participating in today's program. You may now disconnect.

The

Christopher Glynn, Michael Nichols

Music

Speaker Change: E League Football Club All Around America E-League Right Baduk All Around America

Alan Edrick: Christopher Glynn, John

and Alan Edrick

Alan Edrick: Hello everyone and welcome to the OSI Systems Inc. second quarter 2025 conference call. At this time all participants are in a listen-only mode.

Alan Edrick: After the speaker's presentation, there will be a question and answer session. To participate, you will need to press star 1 1 on your telephone. You will then hear a message advising your hand is raised.

Alan Edrick: To withdraw your questions, simply press star 11 again. And please be advised that today's conference is being recorded. Now it's my pleasure to turn the call over to the Executive Vice President and Chief Financial Officer of OSI, Alan Edrick. Please proceed.

Thank you. Good morning and thank you for joining us.

Alan Edrick: I'm Alan Edrick, Executive Vice President and CFO of OSI Systems, and I'm here today with A.J. Mehra, OSI's new President and CEO.

Alan Edrick: Welcome to the OSI Systems Fiscal 25 second quarter conference call. We are pleased that you can join us as we review our financial and our operational results.

Alan Edrick: Earlier today, we issued a press release announcing our fiscal 25 second quarter financial results.

Alan Edrick: Before we discuss these results, however, I would 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.

Alan Edrick: During today's call, we will refer to both GAAP and non-GAAP financial measures when describing the company's results.

Alan Edrick: 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.

Alan Edrick: I will begin with a high-level summary of our finance performance for the second quarter of fiscal 25, and then turn the call over to AJ for a discussion of our business and our operational performance.

Alan Edrick: We will then finish with more detail regarding our financial results.

Alan Edrick: and a discussion of our updated outlook for fiscal year 2025.

Alan Edrick: Our second quarter financial results were excellent, with record Q2 revenues and operating income at the Security Division and solid performance by the Opto Division.

Alan Edrick: We are excited by the momentum across our business and are confident that we are well positioned for the second half of the fiscal year.

So let's start with a high-level summary

First.

Alan Edrick: Revenues increased 12% year-over-year to a Q2 record of 420 million dollars with growth in each of the three divisions highlighted by the 16% year-over-year revenue increase in our security division.

Alan Edrick: Second, the strong revenue growth led to record Q2 non-GAAP adjusted earnings per share of $2.42.

Alan Edrick: Third, bookings were significant, and with a book-to-bill ratio of 1.2 in the quarter, we finished the quarter with a record backlog of more than 1.8 billion. Our strong backlog and robust pipeline of opportunities provide good visibility going forward.

Alan Edrick: And fourth, we generated operating cash flow of $53 million in Q2, a $76 million jump over the same quarter in the last fiscal year.

Alan Edrick: This performance was driven by strong profits and an improvement in working capital metrics.

Alan Edrick: As you may know, we had mentioned in our previous call that our strong operating cash flow dynamics was expected to return in 2025.

AJ Mehra: Before diving more deeply into our financial results and discussing our updated outlook for the full fiscal year, I will turn the call over to AJ.

AJ Mehra: Thank you, Alan, and thank you, everyone, for joining us today.

Speaker Change: I'm pleased to join this call as CEO for the first time after assuming the role on January 1st.