• Revenue: Increased 12% year-over-year to $420 million, a Q2 record.
• Security Division Revenue: Grew 16% year-over-year to $290 million.
• Optoelectronics Revenue: Achieved a quarterly record with $101 million.
• Healthcare Division Revenue: Increased 7% year-over-year.
• Non-GAAP Adjusted Earnings Per Share: Record Q2 figure of $2.42.
• Book-to-Bill Ratio: 1.2, with a record backlog of over $1.8 billion.
• Operating Cash Flow: $53 million, a $76 million increase from the previous year.
• Gross Margin: 35.1% for Q2 fiscal '25.
• SG&A Expenses: $71 million or 16.8% of sales, improved from 19.2% in the prior year.
• R&D Expenses: $18 million or 4.3% of revenues.
• Adjusted Operating Margin: 15.0% for Q2 fiscal '25.
• Fiscal '25 Revenue Guidance: $1.65 billion to $1.710 billion, 9.5% to 11.1% growth.
• Fiscal '25 Non-GAAP EPS Guidance: $9.10 to $9.40 per share, 11.9% to 15.6% growth.

• Warning! GuruFocus has detected 8 Warning Signs with OSIS.

Release Date: January 23, 2025

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• OSI Systems Inc (NASDAQ:OSIS) reported record Q2 revenues of $420 million, marking a 12% year-over-year increase, driven by strong performance across all divisions.
• The Security division achieved a 16% year-over-year revenue increase, contributing significantly to the company's overall growth.
• The company reported a record backlog of over $1.8 billion, providing strong visibility and confidence for future growth.
• Operating cash flow improved significantly to $53 million in Q2, a $76 million increase compared to the same quarter last fiscal year.
• OSI Systems Inc (NASDAQ:OSIS) increased its fiscal 2025 revenue and non-GAAP EPS guidance, reflecting confidence in continued growth and performance.

Negative Points

• The Security division's adjusted operating margin, while strong, was down year-over-year due to a tough comparison with the previous year's Q2.
• Gross margin decreased to 35.1% from 37.9% in the same quarter last year, influenced by revenue mix and supply chain costs.
• Net interest and other expenses increased to $8.6 million from $6.5 million in the prior year, primarily due to higher borrowings.
• The Healthcare division's operating margin, although improved, remains wider than desired, indicating room for further efficiency improvements.
• The company faces challenges with unbilled receivables, although there was a 19% decrease from Q1 to Q2, indicating ongoing management efforts.

Q & A Highlights

Q: Can you provide context on the potential increase in opportunities for border security with the new administration's focus? A: Ajay Mehra, Executive Vice President, President - Cargo Scanning and Solutions, explained that border security is a bipartisan issue with increased funding. OSI Systems is well-positioned with its technology and software like CertScan, which aids in detecting drugs and unauthorized entries. The company is a dominant player with CBP and anticipates positive developments in the next three to six months.

Q: How does the recent acquisition of the RF solutions business fit into OSI Systems' strategy? A: Ajay Mehra noted that the acquisition benefits from OSI's global sales infrastructure and financial strength. The RF solutions business, crucial for border security and drug interdiction, provides broad-range surveillance capabilities. OSI plans to leverage its existing customer base to expand opportunities in defense and border security.

Q: How significant was Mexico's contribution to the quarter, and what is the outlook for the second half of the year? A: Alan Edrick, Chief Financial Officer, stated that Mexico was a significant contributor in the first half and will continue to be important, though at a lighter level than the previous year. OSI is effectively replacing Mexico's strong revenues with non-Mexico contracts, supported by a robust backlog and opportunity pipeline.

Q: What is the outlook for the product versus services mix, especially with the transition in Mexico contracts? A: Ajay Mehra highlighted that shipped products lead to recurring service revenue, which is expected to grow significantly in 2026 and beyond. Alan Edrick added that as products roll off warranty, service revenue, which has higher margins, will increase, starting as early as Q3.

Q: Can you discuss the opportunities in the aviation sector and the global replacement cycle? A: Ajay Mehra explained that the aviation market is vast, with opportunities in checkpoint CT, trace detection, and checked baggage. The US is focused on checkpoint CT, while internationally, OSI is winning orders across various segments. The replacement cycle is ongoing, with recurring service revenue opportunities.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.