Electronic components and systems provider OSI Systems (NASDAQ:OSIS) beat Wall Street’s revenue expectations in Q3 CY2024, with sales up 23.2% year on year to $344 million. The company’s full-year revenue guidance of $1.68 billion at the midpoint also came in 3% above analysts’ estimates. Its non-GAAP profit of $1.25 per share was also 16.3% above analysts’ consensus estimates.

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Deepak Chopra, OSI Systems’ Chairman and Chief Executive Officer, stated “We are pleased to kick off fiscal 2025 with a strong first quarter in which we posted record Q1 revenues and non-GAAP earnings per share led again by outstanding growth in the Security division. Given our robust backlog and high visibility into the opportunity pipeline, we anticipate a strong fiscal year.”

Company Overview

With a name reflecting its initial focus on optical sensors, OSI Systems (NASDAQ:OSIS) is a designer and manufacturer of specialized electronic systems and components.

Electrical Systems

Like many equipment and component manufacturers, electrical systems companies are buoyed by secular trends such as connectivity and industrial automation. More specific pockets of strong demand include Internet of Things (IoT) connectivity and the 5G telecom upgrade cycle, which can benefit companies whose cables and conduits fit those needs. But like the broader industrials sector, these companies are also at the whim of economic cycles. Interest rates, for example, can greatly impact projects that drive demand for these products.

Sales Growth

Examining a company’s long-term performance can provide clues about its business quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Regrettably, OSI Systems’s sales grew at a tepid 5.9% compounded annual growth rate over the last five years. This shows it failed to expand in any major way and is a rough starting point for our analysis.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. OSI Systems’s annualized revenue growth of 17% over the last two years is above its five-year trend, suggesting its demand recently accelerated. OSI Systems’s recent history shows it’s one of the better Electrical Systems businesses as many of its peers faced declining sales because of cyclical headwinds.

We can better understand the company’s revenue dynamics by analyzing its most important segment, Security . Over the last two years, OSI Systems’s Security revenue (inspection systems) averaged 30.3% year-on-year growth. This segment has outperformed its total sales during the same period, lifting the company’s performance.

This quarter, OSI Systems reported robust year-on-year revenue growth of 23.2%, and its $344 million of revenue topped Wall Street estimates by 8%.

Looking ahead, sell-side analysts expect revenue to grow 1.6% over the next 12 months, a deceleration versus the last two years. This projection is underwhelming and indicates the market thinks its products and services will face some demand challenges. At least the company is tracking well in other measures of financial health.

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Operating Margin

OSI Systems has managed its cost base well over the last five years. It demonstrated solid profitability for an industrials business, producing an average operating margin of 10.6%. This result isn’t too surprising as its gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, OSI Systems’s annual operating margin rose by 3.7 percentage points over the last five years, showing its efficiency has improved.

This quarter, OSI Systems generated an operating profit margin of 8.8%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

Earnings Per Share

We track the long-term growth in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth was profitable.

OSI Systems’s EPS grew at a remarkable 13.9% compounded annual growth rate over the last five years, higher than its 5.9% annualized revenue growth. This tells us the company became more profitable as it expanded.

We can take a deeper look into OSI Systems’s earnings quality to better understand the drivers of its performance. As we mentioned earlier, OSI Systems’s operating margin was flat this quarter but expanded by 3.7 percentage points over the last five years. On top of that, its share count shrank by 9.8%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

Like with revenue, we analyze EPS over a more recent period because it can give insight into an emerging theme or development for the business. For OSI Systems, its two-year annual EPS growth of 23.5% was higher than its five-year trend. We love it when earnings growth accelerates, especially when it accelerates off an already high base.

In Q3, OSI Systems reported EPS at $1.25, up from $0.91 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects OSI Systems’s full-year EPS of $8.46 to grow by 9.1%.

Key Takeaways from OSI Systems’s Q3 Results

We were impressed by how significantly OSI Systems blew past analysts’ revenue and EPS expectations this quarter, driven by outperformance in its Security segment. We were also glad it lifted its full-year revenue and EPS guidance. Zooming out, we think this "beat-and-raise" quarter featured some important positives. The stock traded up 8% to $153.47 immediately following the results.

OSI Systems put up rock-solid earnings, but one quarter doesn’t necessarily make the stock a buy. Let’s see if this is a good investment.If you’re making that decision, you should consider the bigger picture of valuation, business qualities, as well as the latest earnings. We cover that in our actionable full research report which you can read here, it’s free.