Q3 2025 OSI Systems Inc Earnings Call
Thank you for standing by Hello, and welcome to the OSI Systems, Inc. Third quarter 2025 conference call I would now like to turn the call over to our executive Vice President and Chief Financial Officer, Although Egypt. Mr. Eject. Please go ahead.
Speaker Change: Alright. Thank you very much good morning, and thank you for joining us today.
Alan Edric: Alan Edric, Executive Vice President and CFO of OSI systems and I'm.
AJ mirror: Here today with AJ mirror, OSI as president and CEO.
Alan Edric: Welcome to the OSI systems fiscal 'twenty, five third quarter conference call.
Alan Edric: We are pleased you can join us as we review our financial and operational results.
Speaker Change: Please excuse my voice today, but I am.
Alan Edric: I'm a bit under the weather.
Alan Edric: Earlier today, we issued a press release announcing our fiscal 'twenty five third quarter financial results.
Alan Edric: 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 1095 with respect to such forward looking statements.
Alan Edric: All forward looking statements made on this call are based on currently available information.
Alan Edric: And the company undertakes no obligation to update any forward looking statement.
Alan Edric: Based on subsequent events.
Alan Edric: Information or otherwise.
Alan Edric: During today's call, we'll refer to both GAAP and non-GAAP financial measures when describing the company's results.
Alan Edric: For further information regarding non-GAAP measures.
Alan Edric: Comparable GAAP measures of the company's results.
Alan Edric: Pontificate, a reconciliation of those figures please refer to today's earnings press release.
Alan Edric: I will begin with a high level summary of our financial performance for the third quarter of fiscal 'twenty fives.
Speaker Change: And then turn the call over to a J.
Speaker Change: A discussion of our business and our operational performance.
Speaker Change: We will then finish with more detail regarding our financial results and a discussion of our updated outlook for fiscal year 'twenty five.
Speaker Change: Our third quarter financial results were strong.
With multiple Q3 records across different financial metrics.
Speaker Change: We are excited by the momentum across our businesses.
Speaker Change: As we conclude fiscal 'twenty five over the next two months and get ready to kick off fiscal 'twenty six.
Speaker Change: Now for the high level summary of our Q3 results.
Speaker Change: First <unk>.
Speaker Change: Revenues increased 10% year over year to a Q3 record of $444 million.
Speaker Change: With growth in each of the three divisions highlight.
Speaker Change: Highlighted by a 10% year over year revenue increase in our security division in a 15% year over year increase in our Opto division, including intercompany sales.
Speaker Change: Second the.
Speaker Change: The strong revenue growth led to a record Q3 non-GAAP adjusted earnings per share of $2 44.
Speaker Change: Third book.
Speaker Change: Bookings were significant.
Speaker Change: With a book to Bill ratio exceeding one point out in Q3, we finished the quarter with a record backlog of more than $1 8 billion.
Speaker Change: This backlog and a robust pipeline of opportunities provides good visibility going forward.
Speaker Change: And fourth.
Speaker Change: We generated record Q3 operating cash flow of $82 million, representing a $134 million jumped over the negative cash flow of $52 million in 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: Before diving more deeply into our financial results.
Ajay: And discussing our updated outlook for the full fiscal year 'twenty five year, I will turn the call over to Ajay.
Ajay: Thank you Alan and welcome to the OSI systems earnings call for the third quarter of fiscal 2025.
Ajay: We are pleased to report another record breaking quarter with numerous financial metrics as Alan described.
Speaker Change: For the quarter and record backlog of over $1 8 billion. We are focused on finishing fiscal 'twenty five strong and continuing to build the foundation for fiscal 'twenty six.
Speaker Change: 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.
Speaker Change: With significant revenue generated from international markets were not immune to these challenges.
Speaker Change: 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.
Speaker Change: We're actively pursuing cost optimization and engaging in strategic pricing discussions with customers and suppliers.
Speaker Change: 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.
Speaker Change: As we speak we do not anticipate any meaningful P&L impact from tariffs on our Q4 results.
Speaker Change: Given the ongoing volatility in this area. It is difficult at this time to assess impact on periods further out on the calendar. We will update you further on our earnings call next quarter.
Speaker Change: This quarter performance was fueled by exceptional execution and the security division and robust growth in.
Speaker Change: The optoelectronics and manufacturing division.
Speaker Change: Healthcare, we are encouraged by the positive momentum positioning us well for long term growth.
Speaker Change: Let's discuss each division in more detail starting with security.
Speaker Change: While revenues increased 10% year over year.
Speaker Change: This topline 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.
Speaker Change: Even with a sizable backlog conversion to revenue the division ended the quarter with a record backlog reinforcing our confidence in sustained positive momentum.
Speaker Change: Our performance at ports and borders was powerful this quarter with.
Speaker Change: With significant new orders, and we announced a few of them, including a $12 million order for Eagle and <unk> systems with advanced imaging capabilities at <unk>.
Speaker Change: $17 million or from a north American customer for Eagle and 60 systems under our multiyear framework.
Speaker Change: And a $24 million order for Z portal high throughput drive through inspection systems for scanning large vehicles and cargo containers.
Speaker Change: Recently, we announced another award received during Q3 for orders totaling $15 million from an existing U S customer to support the ongoing deployment of our cargo inspection systems.
Speaker Change: These awards highlight the global demand for our innovative and high performance inspection solutions designed to secure borders and critical infrastructure.
Speaker Change: Our aviation and checkpoints business remains robust.
Speaker Change: As ongoing investments continue to be funded by airport and air cargo customers upgrading or expanding security infrastructure.
Speaker Change: During the quarter, we announced a $76 million order for a major international airport to deploy <unk> 110 explosive detection systems and <unk> five X for hold baggage and trace detection.
Speaker Change: This is our largest award for a major airport in the history of the company.
Speaker Change: Our broad portfolio of technology leadership, and we continue to be recognized by customers worldwide.
Speaker Change: Our security services business, including turnkey operations continues to perform as anticipated demonstrating our experience and capability to deliver highly customized solutions.
Speaker Change: 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 do.
Speaker Change: During Q3, we secured a $32 million order international order for long range secure communication systems with integration and deployment support.
Speaker Change: 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.
Speaker Change: Overall, we anticipate that global focus funding and funding for defense and security will continue to trend in our favor over the long run.
Speaker Change: Moving on to the Optoelectronics and manufacturing division, which delivered a standout quarter with revenues growing 15% year over year, surpassing $100 million in sales for another quarter.
Speaker Change: And achieving.
Speaker Change: Nine months sales the.
Speaker Change: The division saw strong operation operating margin expansion.
Speaker Change: Growth was driven by sales to multiple Oems across industries, including medical and consumer technology with flexible circuit products performing exceptionally well.
Speaker Change: <unk> continues to benefit from our vertically integrated structure and is well positioned for future growth opportunities.
Speaker Change: Although bookings remained steady in the face of global tariff uncertainties, we will remain vigilant to address any potential challenges in the upcoming months.
Speaker Change: Our global manufacturing footprint, and 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.
Speaker Change: Sure.
Speaker Change: We expect opto to maintain its momentum into Q4.
Speaker Change: Now, let's move to the health care Division.
Speaker Change: Which had encouraging sales growth in the quarter.
Speaker Change: In Q3, we welcomed a new president Wilson, Constantine and industry veteran to lead the healthcare Division.
Speaker Change: We have already seen a positive impact on the team's focus and energy in the brief time he has been here.
Speaker Change: Shortly after quarter end, we announced a significant award we received during Q3 for approximately $4 million to provide patient monitoring solutions and related supplies and accessories to a U S based hospital.
Speaker Change: We acknowledge the substantial work ahead and are confident that the business is now guided by strong capable leadership.
Speaker Change: In summary, OSI is poised for continued success as we leverage our global footprint.
Speaker Change: Innovative technologies and strategic acquisitions like the RF based solutions business to deliver exceptional value to customers worldwide.
Speaker Change: With anticipated growing attention and funding for defense and security, we are well positioned to size.
Speaker Change: The margin opportunities.
Speaker Change: Although the tariff environment is currently unstable, we will proactively work to mitigate negative impacts from international trade frictions.
Speaker Change: Had a strong three quarters and look forward to finishing the year strong.
Speaker Change: As always I would like to thank our employees.
Customers and stockholders for their continued support and dedication.
Speaker Change: 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. Thank you.
Alan Edric: Thank you AJ.
Alan Edric: Now, let's review in greater detail the financial results for our third quarter.
Alan Edric: As previously mentioned, our Q3 revenues were up 10% compared with revenues in the third quarter of the prior fiscal year.
Alan Edric: Fueled by growth in service revenues aviation and checkpoint product sales, including trace detection systems secure.
Alan Edric: The security Division revenues in the third fiscal quarter increased 10% year over year to $350 million.
Alan Edric: In addition, the RF business acquired in fiscal Q1 gains momentum and contributed nicely the security Division revenues.
Alan Edric: Q3 revenues included continued shipments from our contracted Mexico contracts in Mexico.
Alan Edric: Though as expected.
Alan Edric: Adam at a lesser rate as Mexico revenues were $69 million in Q3 of fiscal 25 compared to $137 million in the same quarter of the prior year.
Alan Edric: Revenues not directly related to acquisitions or our Mexico contracts.
Alan Edric: Increased at a solid double digit clip in the quarter.
Alan Edric: Driven by growth in our flex business and also the performance of our core optoelectronics and contract manufacturing operations.
Alan Edric: Third party off to a sales increased 10% year over year to $86 million, representing a new Q3 record.
Alan Edric: And in the third quarter, our health care Division achieved a second back to back quarters of top line growth with a 5% year over year increase.
Alan Edric: The fiscal 'twenty five Q3 gross margin of 33, 8% was up 20 basis points from the 33, 6% reported in Q3 last year.
Alan Edric: Our gross margin fluctuates from period to period based on revenue mix and volume impacts of changes in supply chain cost FX tariffs and inflation among other factors.
Alan Edric: Moving to operating expenses.
Alan Edric: Q3, SG&A expenses were $73 2 million.
Alan Edric: Our 16, 5% of sales compared to $66 6 million or 16, 4% of sales in Q3 of the prior year.
Alan Edric: We worked diligently across each of our divisions to improve efficiency.
Alan Edric: And to manage our SG&A cost structure.
Alan Edric: R&D expenses in Q3 were $18 6 million or four 2% of revenues.
Alan Edric: Compared to $17 1 million also representing four 2% of revenues in the same prior year quarter.
Alan Edric: We continue to dedicate considerable resources to R&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.
Alan Edric: Moving to interest and taxes.
Alan Edric: While net interest and other expenses decreased sequentially in Q3 on.
Alan Edric: On a year over year basis, they increased to $8 2 million from $7 4 million in Q3 of fiscal 'twenty four.
Alan Edric: 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.
Alan Edric: This was partially offset by the favorable impact of the convertible notes issued during Q1, which were partially used to repay higher cost borrowings.
Alan Edric: Our reported effective tax rate under GAAP was 14, 3% in Q3 of fiscal 'twenty five.
Alan Edric: Compared to 22, 6% in Q3 last year.
Alan Edric: 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 25 compared to 23, 8% in Q3 of 'twenty four.
I'll now turn to a discussion of our non-GAAP adjusted operating margin.
Alan Edric: Overall, our adjusted operating margin in the third quarter of fiscal 25 was a solid 14, 2%.
Alan Edric: Up from 13, 9% in Q3 last year.
Alan Edric: The Q3 fiscal 'twenty five non-GAAP adjusted operating margin in the security Division.
Alan Edric: Was 18, 1%.
Alan Edric: Down year over year from $18 18, 6% due to a less favorable product mix and increased R&D investment.
Alan Edric: The opto division's adjusted operating margin increased to 14, 8% in the third quarter of fiscal 'twenty five.
Alan Edric: From 12, 2% in last year's Q3.
Alan Edric: On economies of scale associated with higher revenues and efficiencies.
Alan Edric: The healthcare division's adjusted operating margin, while lighter than we would like was pretty comparable year over year.
Alan Edric: Moving to cash flow.
Alan Edric: Q3 marked the second consecutive quarter of significant cash flow.
Alan Edric: With record cash provided by operations of $82 million.
Alan Edric: Capex in the 25 third fiscal quarter was $4 5 million, while depreciation and amortization expense in fiscal Q3 was $10 6 million.
Alan Edric: 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.
Alan Edric: This reflected more than $100 million received in the third quarter related to our security contracts in Mexico.
Alan Edric: Our balance sheet is solid.
With net leverage of approximately one eight as calculated under our credit agreement.
Alan Edric: Our credit facility requires $7 5 million in annual principal payments under the term loan.
Alan Edric: With the remainder of our bank debt maturing in fiscal 2007.
Alan Edric: Now turning to guidance.
Alan Edric: We are increasing our guidance for fiscal 'twenty Fi revenues.
Alan Edric: And non-GAAP diluted EPS.
Alan Edric: For fiscal year 'twenty five we anticipate revenues in the range of $1 69 billion to $1 71 5 billion representing.
Alan Edric: Representing an increase in guidance on year over year revenue growth to a range of nine 8% to 11, 5%.
Alan Edric: We are also increasing fiscal 'twenty five non-GAAP adjusted earnings per diluted share guidance to a range of $9 15 to $9 45.
Alan Edric: Or 12, five to 16, 2% growth.
Alan Edric: This fiscal 'twenty five non-GAAP diluted EPS guidance.
Alan Edric: 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 nonrecurring items.
Alan Edric: We currently believe this guidance reflects reasonable estimates.
Alan Edric: The actual impact on the Companys financial results, so timing changes on the expected conversion of backlog to revenues and new bookings among other factors.
Alan Edric: At bolt to predict and could vary significantly from the anticipated impact currently reflected in our guidance.
Alan Edric: 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.
Alan Edric: We can continue to remain focused on the growth of our businesses.
Alan Edric: And continuing to provide innovative products and solutions.
Alan Edric: As a J mentioned wed like to take this opportunity to again, thank the global OSI team towards.
Alan Edric: For his continued dedication in supporting our customers and our partners.
Alan Edric: And at this time, we'd like to open the call to questions.
Alan Edric: Okay.
Alan Edric: Thank you.
Alan Edric: If you would like to ask a question. Please press star and the number one on your telephone keypad again that is star and the number one on your telephone keypad.
Speaker Change: And our first question comes from the line of Jeff Martin from Roth Capital.
Alan Edric: Your line is open.
Alan Edric: Thanks.
Alan Edric: Alan and a J I hope you're doing well.
Speaker Change: I was curious if you could.
Speaker Change: Spanned a little bit on the tariff situation how.
Speaker Change: That may be affecting each segment.
Speaker Change: And.
Speaker Change: What.
Speaker Change: What gives you the notion that you won't have any impact in the fourth quarter, but the outlook beyond that.
Speaker Change: Unclear.
Speaker Change: So either as I mentioned in my prepared remarks.
Speaker Change: No impact on Q4.
Speaker Change: We obviously are anticipating.
Speaker Change: And.
Speaker Change: So we feel very comfortable that I really don't need to go into any further going forward.
Speaker Change: 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.
Speaker Change: We have very limited exposure on the largest two divisions.
Speaker Change: 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.
Speaker Change: With customers suppliers.
Speaker Change: We'll have a little bit more clarity and we will talk about it.
Speaker Change: And our next earnings call.
Speaker Change: Thank you I appreciate that Alan could you maybe elaborate on the strength in services revenue in the quarter.
Speaker Change: Yeah, It was up significantly year over year and also sequentially.
Jeff Martin: Sure Yes, good question Jeff.
Jeff Martin: As we alluded to on a couple of our past calls as we get larger and larger install 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.
Jeff Martin: And that's exactly what we saw in Q3.
Jeff Martin: 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.
Jeff Martin: Many of those.
Jeff Martin: Deliveries are now rolling off of warranty.
Jeff Martin: 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 thats excellent recurring revenue and that recurring revenue generally comes at higher margin.
Jeff Martin: Great and then could you expand a little bit on the RF solutions acquisition.
Jeff Martin: Like you're getting some good traction there or do you expect that to be a long runway of growth.
Jeff Martin: How meaningful is that to the overall growth of the business.
Jeff Martin: Well I think that.
Jeff Martin: We feel very good about the acquisition.
Jeff Martin: As you May know.
Jeff Martin: One of the main products are open to horizon.
Jeff Martin: Radars.
Jeff Martin: They have been in prominence for several years with the U S government in fact.
Jeff Martin: As you know Norad as been using over the horizon radar it's more.
Jeff Martin: It's more economical technologies field proven.
Jeff Martin: And we feel with some of the things going on right now with the.
Jeff Martin: The Golden Dome, and and other things that there are a lot of.
Jeff Martin: Opportunities as we move forward and really.
Jeff Martin: <unk> taken the company and putting the.
Jeff Martin: The financial might as well as the other.
Jeff Martin: Other things that OSI can provide as a larger company has been really helping them and we are actively talking to customers.
Jeff Martin: As we move forward.
Jeff Martin: Okay, and then last one for me Alan.
Jeff Martin: Yeah.
Speaker Change: What can you give us in terms of sense of cash flow for.
Speaker Change: Maybe fiscal fourth quarter, and then as we head into fiscal 2000, and nice to see a record operating.
Speaker Change: Operating cash flow number in the quarter just curious if you anticipate that to continue.
Speaker Change: Thanks, Jeff. Good question, Yes, we are really pleased with our cash flow in Q3, as we were in Q2 as well.
Speaker Change: There is certainly opportunity for strong cash flow and in Q4 as well.
Speaker Change: Always.
Speaker Change: Arming of when certain collections come in but I can say is that whether it's Q4 or fiscal 'twenty six overall, we anticipate.
Speaker Change: Strong cash flow year over over the next 12 months.
Speaker Change: I'll pass it on thank you.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Larry Solow from CJS Securities.
Speaker Change: Your line is open.
Larry Solow: Great Good morning, gentlemen, and I hope you're feeling better.
Speaker Change: I guess just to follow up on the on the question about.
On the services revenue, which I think grew over 30%.
Speaker Change: Jeff mentioned there.
Speaker Change: Generally as you said, Alan it's usually higher margin just curious.
Speaker Change: On the security Division.
Speaker Change: What kind of drove that you mentioned mix, but I guess from a high level clearly services were.
Speaker Change: Substantially higher than they were last year in Q3, so what what was with any more specifics on the mix that kind of drove that margin down.
Speaker Change: And then I guess the R&D.
Speaker Change: R&D I am sure it bounces around from quarter to quarter. So that was it heavier this quarter. If one particular reason or any more color there would be great.
Speaker Change: Sure. Good question, So I think youre, saying on our overall adjusted operating margin going from 18, six to 18, 1% and security while its down a little bit.
Speaker Change: So the security service revenues.
Speaker Change: Definitely contributed to some margin expansion associated with it when we look at that.
Speaker Change: The mix of our product revenues, which included.
Speaker Change: More in Mexico last year, which probably carry a bit more favorable product related margin than the product mix. We showed in Q3 that had a little bit of a of an adverse impact.
Speaker Change: We also made some strategic decisions to invest some considerable resources and some R&D programs. So our R&D was at.
Speaker Change: A little bit more of an elevated level, which we think will 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 yes.
Alan Edric: And I think that to Alan's point earlier as our service revenues grow overall, they do tend to have higher margins than our product.
Speaker Change: <unk>.
Speaker Change: Yes, they are going to be ups and downs in the service, but overall, we expect that trend to be going up.
Speaker Change: And we feel very good about it.
Speaker Change: Got it so it sounds more like an aberration listen I know the margin quarter to quarter could bounce around it sounds like it's more of that.
Speaker Change: But the trend overall should continue to be positive.
Speaker Change: We see your expectation.
Speaker Change: Okay.
Speaker Change: The bookings continued to be strong.
Speaker Change: Give us any color there.
Speaker Change: Feel like ports and borders were really strong when you got this big bulk.
Speaker Change: Multiyear several hundred million dollars.
Speaker Change: It feels like now you're still getting those but maybe there is even a little more diversification aviation it sounds like it's really picking up.
Speaker Change: Any more color on sort of where this.
Speaker Change: The strength coming from and the orders.
Speaker Change: I think I think you said it very well.
Speaker Change: You know that the backlog is much more diversified than it was previously we had some large orders in there.
Speaker Change: Those orders are those orders, we're shipping and now we received some large orders in theirs.
Speaker Change: The pipeline looks very good but the diversification of the backlog not just on the cargo, but also on the aviation side and other areas in the security.
Speaker Change: Gives us.
Speaker Change: Very good confidence as we move forward.
Speaker Change: Great Lastly, just a follow up on the tariff question.
Speaker Change: It sounds like short term not a great impact.
Speaker Change: Mid to longer term, obviously anybody's guess.
Speaker Change: But again from a high level.
Speaker Change: On the demand side it sounds like the direct impact that you guys would probably won't be.
Speaker Change: Very significant but the indirect impact on the economy and whatnot it feels like maybe that would.
Speaker Change: Potentially hurt the Opto division more but maybe there is some offsets there too.
Speaker Change: As more and more tariff maybe drive more onshoring in U S.
Speaker Change: Manufacturing, so any color on that with great. Thanks.
Speaker Change: So I think overall, we're all looking at it to a certain degree everybody's guessing what's going to happen next specifically.
Speaker Change: Specifically as I mentioned on the opto side.
Speaker Change: We do have.
Speaker Change: Manufacturing around the world.
Speaker Change: The Us, Canada, Mexico, and I think.
Speaker Change: Again, who knows but it might prevent might present, an opportunity for us, especially with U S. MCA.
Speaker Change: Content product.
Speaker Change: Both in our Mexico facility.
Speaker Change: We do have facilities up in Canada. So we are talking actively to customers to say 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.
Speaker Change: And evolves.
Speaker Change: Gotcha. Thanks I appreciate it.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Matt Akers from Wells Fargo.
Speaker Change: Your line is open.
Speaker Change: Hey, guys. Thanks for the question.
Speaker Change: Wanted to ask about.
Speaker Change: The Mexico contracts I mean, you mentioned in the prepared remarks.
Speaker Change: 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 do you think security continues to grow next year given that maybe those are a little bit lower.
Speaker Change: Level or do you have enough work sort of back filling that that that that that part of the business can continue to grow.
Alan Edric: Hey, Matt This is Alan a great question and we are of course getting that question quite a bit of a year ago recognizing that.
Speaker Change: Mexico revenues.
Speaker Change: At the peak.
Speaker Change: In fiscal 'twenty, four and how 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 a record backlog. We've had Q3 is an excellent example, our revenues for related to Mexico, we are.
Speaker Change: Or half of what they were last year.
Speaker Change: As the contracts wind down a bit.
Speaker Change: Nonetheless, we grew 10% in.
Speaker Change: In the security division during the quarter and we would anticipate sort of the same type of thing going forward Q4, we'll see this sort of the same dynamic lower revenues related to Mexico compared to Q4 of last year and the same into fiscal 'twenty six but our sales teams have done such an outstanding job on the bookings.
Speaker Change: And the cargo arena.
Speaker Change: Aviation and checkpoints arena.
Speaker Change: We feel.
Speaker Change: 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 is as Mexico becomes a smaller proportion of our overall revenues, although we will start to see the service revenues kick in at even a higher rate and of course those are great recurring revenues.
Speaker Change: A higher margin.
Speaker Change: That's great. Thank you and then I guess I wanted to ask about.
Speaker Change: I guess, just what youre seeing with the New administration, if you've had any discussions on.
Speaker Change: Sort of what the upcoming opportunity like border security definitely seems like a big priority.
As we get closer to maybe the 26th budget coming out just have you.
Speaker Change: <unk> had any any indications of what that opportunity could look like.
Speaker Change: So.
Speaker Change: I think that.
Speaker Change: It's been it's been.
Speaker Change: Aldi opened quite a bit where obviously the 25 budget was a continuing resolution same same.
Speaker Change: As as last year and they are still working on 'twenty six but what's really exciting out there is this budget reconciliation that debt.
Speaker Change: The house and Senate are going through and there is almost $1 1 billion.
Speaker Change: And therefore for the borders for NII.
Speaker Change: <unk> and associated simply works and integration et cetera.
Speaker Change: And we feel we feel good that we are in decent shape.
Speaker Change: Not one year money, it's all repaired off.
Speaker Change: Probably three years and this is on top of what we have so youll give us visibility not just for a year, but multi year visibility so.
Speaker Change: We have a good relationship with with CVP and others.
Speaker Change: So, let's wait and see what happens, but everything we're hearing is that going to passed a reconciliation by some time in before.
Speaker Change: Before July do you believe are saying and debate but.
Speaker Change: It's a bodes well for us.
Speaker Change: And let's see what happens in Congress.
Speaker Change: Alright.
Speaker Change: Great. Thank you.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Josh Nichols B Riley.
Speaker Change: Your line is open.
Josh Nichols: Yeah. Thanks for taking my question good to see a lot of records being set for this quarter.
Speaker Change: I think a few of my questions have already been.
Speaker Change: Been answered, but just to touch on that take a little bit deeper dive I know youre, not giving guidance right for fiscal year 'twenty six but given that you already have a record backlog here.
Speaker Change: Any context, you could provide how much of the stuff you already have today is likely to be recognized.
Speaker Change: Next fiscal year, excluding any new wins that you guys continue to win.
Speaker Change: Hey, Josh This is Alan good question, just from consistent with past practice.
It is an information that we publicly disclose at this point yet.
Speaker Change: By the time, we get to our next earnings call there will be ample opportunity to do that but suffice it to say with a record backlog and strong pipeline of opportunities.
Speaker Change: We are encouraged as we as we approach fiscal 'twenty six here in a couple of months.
Speaker Change: 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 million.
Speaker Change: Is there any onetime 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 million per quarter of services revenue going forward that you could potentially build on that from here or is that going to fluctuate.
Speaker Change: Fluctuate from quarter to quarter.
Josh Good question. This is Alan again.
Speaker Change: We believe that very well could be a new baseline and our goal is to grow from here. Our goal is to grow the service revenue as a percentage of overall OSI revenue.
Speaker Change: Over the next several years and we think we have.
Speaker Change: Every opportunity to do that so our belief as we sit here today is yes, we will continue to grow that service revenue may ebb and flow from certain quarters, but overall, we should see solid growth in service revenues.
Speaker Change: Good to hear I appreciate and I hope you feel better soon.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Seth.
Speaker Change: <unk> from Jpmorgan Your line is open.
Speaker Change: Thanks, very much and good.
Speaker Change: Good morning.
Speaker Change: <unk>.
Speaker Change: So wanted to dig in a little bit more of the $1 1 billion.
Speaker Change: The homeland security.
Speaker Change: Reconciliation proposal.
Speaker Change: Whether you think about do you think about that being kind of a 100% additive to sort of whatever the buying plan was.
Speaker Change: Kind of before the reconciliation Bill and then whether you saw any incremental opportunity associated with some of the.
Speaker Change: Some of the stuff that they put around that in terms of.
Our artificial intelligence and.
Speaker Change: Whether that is the.
Speaker Change: Pat for any of your <unk>.
Speaker Change: Software solutions.
Speaker Change: So good question I mean, I can mention the baseline for 25.
Speaker Change: The continuing resolution passed the numbers are roughly $300 million in their budgets for CVP for NII.
Speaker Change: And this $1 $1 billion is on top of that.
Speaker Change: So lots of opportunity from Lorraine, and obviously like I said, it will be multi year money and then fiscal 'twenty six you'll have another budget passing or.
Speaker Change: Flora CVP.
Speaker Change: <unk>.
Speaker Change: We will see at what levels, but we would imagine it would be at similar levels.
Speaker Change: As last year, so as far as the opportunities concerned I think that there is there is obviously the equipment civil works and really a lot of the Artefill artificial intelligence integration machine learning and everything else is stuff that we're already doing as kind of part of it.
Speaker Change: So we'll see how this segregate it we feel that not just over here, but also with.
Speaker Change: Some of the money that's going into biometrics.
Speaker Change: And other areas to comeback drug interdiction give search scan our software and opportunity as well so right now it's in big buckets as the buckets get more clear.
Speaker Change: We'll probably be able to give you a much better answer on the next earnings call.
Once we start looking at the details.
Speaker Change: Okay, Okay, great. Thanks, and then.
Speaker Change: On the on the cash flow side.
Speaker Change: Do you see Q4, and as being a period when that presents significant opportunity for receivables to come down and are there still.
Speaker Change: Fairly elevated and I guess to a lesser degree inventories grown a fair amount this year.
Speaker Change: We are not that much but modestly.
Speaker Change: But particularly the receivables is Q4, a period, where we could see some liquidation.
Alan Edric: Hey, this is Alan good question.
Speaker Change: Yes, we do see some opportunity for <unk>.
Alan Edric: Some.
Alan Edric: Working capital at enhancements there I think there is an opportunity for for inventory to come down further in.
Alan Edric: In Q4 on the receivable side.
Speaker Change: Hi, Yes, theres, great opportunity for it to come down in Q4 that being said sometimes.
Speaker Change: Some of the collections could could shift from one quarter to the next but I would say over the next six months there is an opportunity to really see our DSO.
Speaker Change: Further improves which could be.
Speaker Change: A major source of additional free cash flow.
Speaker Change: Okay. Okay. Okay.
Speaker Change: And then if I could.
Speaker Change: Okay.
Speaker Change: Maybe one more on the.
Speaker Change: On the security side, what would be the RF acquisition contribute on the top line in the quarter.
Speaker Change: It contributed $29 million up from $17 million in Q2 so.
Speaker Change: Thanks Robert.
Speaker Change: Okay. Okay. Okay.
Alan Edric: I'll leave it there Alan I hope you feel better soon.
Thank you.
Yeah.
Alan Edric: Thank you.
Speaker Change: Our next question comes from the line of money all of that that is Mauro.
Bank of America.
Speaker Change: Your line is open good afternoon, everyone. Thank you.
Speaker Change: So I am going to do it.
Speaker Change: From that from a different angle as part of these evolving tariff mater.
Speaker Change: The minimus exception.
Speaker Change: Caption for China, and Hong Kong has been eliminated and it's not only an RF application, but also all of those packages should be screened now for opioid centennial staff like and I understand this is an evolving.
Speaker Change: S situation, but like have you seen any early interest for increased screening solutions in order to be able to absorb this increased volume of packages.
Debt to the screen.
Speaker Change: Great Great questions I think you come and sit in our strategy sessions.
But.
We already we already work very closely with the freight forwarders.
Speaker Change: Do business with.
Speaker Change: UBS Federal Federal Express.
Speaker Change: And all of the large all the large straightforward errors so depending on depending on what their requirements are not just for scanning, but I would say.
Speaker Change: It gives us an opportunity not just they might need more machines, but also some kind of.
Speaker Change: Some kind of artificial.
Speaker Change: <unk> intelligence to be able to see what.
Speaker Change: Which packages are allowed or not allowed.
Speaker Change: So we're going to talk to them.
Speaker Change: Sure.
Speaker Change: I think everybody just waiting for everything to settle but.
Speaker Change: But youre right I mean, I think that may very well present us an opportunity as we go forward and as they require that we are one of the major players in that area.
Speaker Change: Alright, Thank you and then a little bit.
Speaker Change: Health.
Speaker Change: With Wilson now likely in this I mean, you mentioned about like a little bit of like these early.
Speaker Change: Good change.
Speaker Change: Where do you see the debt.
Speaker Change: CNS three five years from now what key wants to do and how much money you need to invest in order to do that like turnaround our capture those opportunities.
Speaker Change: So I think that as we pointed out we had a.
Speaker Change: Solid quarter in health care from a revenue standpoint.
And our goal is really to get the next generation, we're spending money in R&D.
Speaker Change: Next generation platform in the next 18 months or so and.
Speaker Change: <unk>.
Speaker Change: See it grow.
Speaker Change: Growth from there. So we expect our R&D spending to be at pretty much levels that we've had right now.
Speaker Change: And it's just a matter of.
Speaker Change: Tightening everything and focusing everybody and that's what he is doing and we feel good about what we've seen so far.
Speaker Change: Alright, thank you so much.
Speaker Change: Okay.
Speaker Change: Thank you.
Speaker Change: Again, if you'd like to ask a question. Please press star and the number one on your telephone keypad.
Speaker Change: Our next question comes from the line of Christopher Glynn from Oppenheimer.
Your line is open.
Christopher Glynn: Hey, Thanks, guys.
Christopher Glynn: So curious in security.
Christopher Glynn: On the pipeline for projects there.
Christopher Glynn: Continuously pulling a lot out of that pipeline.
Christopher Glynn: Presume there is some degree of refill there.
Christopher Glynn: Is it stable is it growing or is conversion outpacing new inputs.
Christopher Glynn: So I think our pipeline of opportunities continues to be strong and growing.
Christopher Glynn: As I said originally that.
Christopher Glynn: I want to add to the diversity of the backlog really provide us with a lot of confidence in our ability to maintain and sustained growth as we move forward. So we're not we don't have <unk>.
Christopher Glynn: A big chunk.
Christopher Glynn: But.
Christopher Glynn: 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: It sounds great and then quick one on <unk>.
Christopher Glynn: The share gain.
Christopher Glynn: I think it's pretty compelling.
Speaker Change: Given that every company I cover is talking about shifting their supply chains and you are well positioned in a number of favorable alternatives to China almost seem matter of fact, rather than theoretical that you have something coming your way I'm curious if you are having.
Arent tone of wallet share discussions with customers than historically.
Speaker Change: I guess to under stand.
Speaker Change: And the question and answer it might be helpful to comment on degree of single source versus sulfur RSA suspect usually it's multiple sourced.
Speaker Change: So.
Speaker Change: Yes.
Speaker Change: I guess I guess the short answer is that there was already a movement.
Speaker Change: Away from China, and I think what's happened is that it's a questions and answer some questions are more urgent and things are getting accelerated and we will see over the next.
Speaker Change: Just a few months how that goes but definitely a lot of interest and like I said, having the different facilities around the world, including Mexico.
Speaker Change: In the U S.
Speaker Change: It's definitely beneficial.
Customers getting an ability to manufacture in different places.
Speaker Change: 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.
Speaker Change: Great. Thank you.
Speaker Change: Thank you no further questions.
Speaker Change: Okay. Once again, thank you all for attending our conference call. We look forward to speaking with you during our next earnings call. Following the completion of the fiscal year. Thank you very much.
Speaker Change: The meeting is now concluded. Thank you all for joining you may now disconnect.
Speaker Change: [music].