OSI Systems, Inc. (NASDAQ:OSIS) Q3 2025 Earnings Conference Call May 1, 2025 12:00 PM ET Company Participants Alan Edrick - EVP & CFO Ajay Mehra - President & CEO Conference Call Participants Jeff Martin - Roth Capital Partners Larry Solow - CJS Securities Matt Akers - Wells Fargo Josh Nichols - B. Riley Seth Seifman - JP Morgan Mariana Perez Mora - Bank of America Christopher Glynn - Oppenheimer Operator Thank you for standing by. Hello and welcome to the OSI Systems Inc. Third Quarter 2025 Conference Call ...

Financial Performance - Revenues increased 10% year over year to a record $444 million in Q3, with growth in all three divisions, including a 10% increase in the Security division and a 15% increase in the Opto division [6][20] - Non-GAAP adjusted earnings per share reached a record $2.44, and the company finished the quarter with a record backlog exceeding $1.8 billion [6][27] - Operating cash flow for Q3 was a record $82 million, a significant improvement from negative cash flow of $52 million in the same quarter last year [6][25] Business Line Performance - Security division revenues increased 10% year over year to $315 million, driven by strong demand and significant new orders, including a $76 million order for explosive detection systems [20][12] - Optoelectronics and Manufacturing division achieved a 15% revenue growth year over year, surpassing $100 million in sales, with strong operating margin expansion [14][15] - Healthcare division saw a 5% year-over-year increase in revenues, with a new president leading efforts for long-term growth [16][17] Market Data - The company is actively addressing challenges posed by evolving global trade environments, particularly U.S. tariff policies, while maintaining strong international revenue generation [9][10] - The backlog is diversified across various sectors, including cargo, aviation, and security, providing confidence for sustained growth [49][90] Company Strategy and Industry Competition - The company is focused on cost optimization and strategic pricing discussions to mitigate impacts from trade frictions, leveraging a diversified portfolio and strong customer relationships [9][10] - Anticipated growth in defense and security funding is expected to benefit the company, with ongoing investments in R&D to support innovative product development [18][24] Management Commentary on Operating Environment and Future Outlook - Management expressed confidence in the company's ability to navigate tariff impacts and highlighted a strong pipeline of opportunities for future growth [10][18] - The company is increasing its revenue and non-GAAP EPS guidance for fiscal year 2025, reflecting a positive outlook based on current performance and backlog [27][28] Other Important Information - The effective tax rate under GAAP was reported at 14.3%, down from 22.6% in the previous year, while the adjusted operating margin improved to 14.2% [24][25] - The RF Solutions acquisition contributed $29 million to the top line in Q3, indicating strong growth from this segment [79] Q&A Session Summary Question: Impact of tariffs on segments - Management indicated no anticipated impact from tariffs on Q4 results, with limited exposure in the largest divisions [30][31] Question: Strength in services revenue - Services revenue saw significant growth due to an increasing installed base of security products rolling off warranty, leading to higher recurring revenue [32][34] Question: RF Solutions acquisition growth potential - The acquisition is expected to provide a long runway for growth, particularly with established products like over-the-horizon radars [36][37] Question: Cash flow expectations - Strong cash flow is anticipated to continue into Q4 and fiscal year 2026, with opportunities for improvement in working capital [38][39] Question: Mexico contract trends - Revenue from Mexico is expected to decline year over year, but overall security division growth is anticipated due to strong bookings in other areas [57][59] Question: Opportunities in border security funding - The upcoming budget reconciliation includes significant funding for border security, which is expected to provide multi-year visibility for the company [61][75] Question: Pipeline for security projects - The pipeline of opportunities is strong and growing, with increased diversification in backlog across various sectors [90]

OSI Systems (OSIS) reported $444.35 million in revenue for the quarter ended March 2025, representing a year-over-year increase of 9.6%. EPS of $2.44 for the same period compares to $2.16 a year ago.The reported revenue compares to the Zacks Consensus Estimate of $435.5 million, representing a surprise of +2.03%. The company delivered an EPS surprise of +2.52%, with the consensus EPS estimate being $2.38.While investors closely watch year-over-year changes in headline numbers -- revenue and earnings -- and ...

Group 1: Earnings Performance - OSI Systems reported quarterly earnings of $2.44 per share, exceeding the Zacks Consensus Estimate of $2.38 per share, and up from $2.16 per share a year ago, representing an earnings surprise of 2.52% [1] - The company posted revenues of $444.35 million for the quarter ended March 2025, surpassing the Zacks Consensus Estimate by 2.03%, compared to year-ago revenues of $405.41 million [2] - OSI has surpassed consensus EPS estimates for four consecutive quarters [2] Group 2: Stock Performance and Outlook - OSI shares have increased approximately 22.3% since the beginning of the year, while the S&P 500 has declined by 5.3% [3] - The future performance of OSI's stock will depend on management's commentary during the earnings call and the earnings outlook for upcoming quarters [4][6] - The current consensus EPS estimate for the next quarter is $3.20 on revenues of $497.04 million, and for the current fiscal year, it is $9.26 on revenues of $1.7 billion [7] Group 3: Industry Context - The Electronics - Miscellaneous Components industry, to which OSI belongs, is currently ranked in the bottom 42% of over 250 Zacks industries, indicating potential challenges ahead [8] - Empirical research suggests a strong correlation between near-term stock movements and trends in earnings estimate revisions, which can impact OSI's stock performance [5]

Financial Performance - Q3 FY25 revenues reached $444.4 million, a 10% increase from $405.4 million in Q3 FY24[3] - Q3 FY25 net income was $41.1 million, or $2.40 per diluted share, compared to $34.0 million, or $1.95 per diluted share in Q3 FY24[3] - For the nine months ended March 31, 2025, revenues totaled $1.208 billion, up from $1.058 billion in the same period last year[4] - Total revenues for the three months ended March 31, 2025, were $444,354 thousand, representing a 9.6% increase from $405,406 thousand in the same period of 2024[18] Backlog and Guidance - The Company's backlog exceeded $1.8 billion as of March 31, 2025, with a book-to-bill ratio above 1.0 for Q3 FY25[5] - The Company has increased its fiscal 2025 revenue guidance to $1.690 billion - $1.715 billion, up from the previous range of $1.685 billion - $1.710 billion[8] - Non-GAAP diluted EPS guidance for fiscal 2025 is now projected at $9.15 - $9.45, an increase from the previous guidance of $9.10 - $9.40[8] Division Performance - The Security division reported a 10% year-over-year revenue increase, contributing to operating income growth despite challenging comparisons[6] - The Optoelectronics and Manufacturing division experienced a 15% revenue growth in Q3 FY25, benefiting from a vertically-integrated structure[6] - The Security division generated revenues of $314,908 thousand for the three months ended March 31, 2025, up from $285,960 thousand, reflecting a growth of 10.5%[18] - The Healthcare division reported revenues of $43,722 thousand for the three months ended March 31, 2025, a 5.4% increase from $41,493 thousand in the same period of 2024[18] - The Optoelectronics and Manufacturing division's revenues rose to $100,860 thousand for the three months ended March 31, 2025, up from $87,974 thousand, indicating a growth of 14.5%[18] Operating Income and Cash Flow - Operating cash flow for Q3 FY25 was $81.6 million, a significant improvement from cash used in operations of $52.1 million in Q3 FY24[5] - Operating income for the total company for the three months ended March 31, 2025, was $56,217 thousand, an increase of 9.4% compared to $51,363 thousand in the same period of 2024[18] - Non-GAAP net income for the three months ended March 31, 2025, was $41,865 thousand, translating to diluted earnings per share of $2.44, compared to $37,660 thousand and $2.16 per share in the same period of 2024[22] Assets and Liabilities - Total assets increased from $1,936,008 thousand as of June 30, 2024, to $2,080,997 thousand as of March 31, 2025, marking an increase of 7.4%[20] - The company’s total liabilities increased from $1,072,525 thousand as of June 30, 2024, to $1,201,672 thousand as of March 31, 2025, reflecting a rise of 12%[20] Operating Margins and Charges - The Security division's operating income margin was 17.5% for the three months ended March 31, 2024, and decreased to 16.4% for the same period in 2025[23] - Restructuring and other charges for the nine months ended March 31, 2024, totaled $2,496, which is 0.2% of sales[25] - For the nine months ended March 31, 2025, restructuring and other charges were $3,648, accounting for 0.3% of sales[25] - Amortization of acquired intangible assets for the nine months ended March 31, 2024, was $12,268, or 1.2% of sales[25] - The amortization of acquired intangible assets for the nine months ended March 31, 2025, increased to $13,226, which is 1.1% of sales[25] Healthcare Division Performance - The Healthcare Division reported a GAAP operating income of $2,157, representing 1.8% of sales for the nine months ended March 31, 2024[25] - The Healthcare Division's GAAP operating income for the nine months ended March 31, 2025, was $3,830, accounting for 3.0% of sales[25] - The Healthcare division is expected to gain positive momentum with new leadership introduced during the quarter[6] Future Strategies - The company plans to continue investing in new technologies and market expansion strategies to drive future growth[18]

Core Insights - Moore Law, PLLC is investigating potential claims against OSI Systems, Inc. following a report from Culper Research that raises serious allegations about the company's financial disclosures and growth claims [1][2]. Group 1: Allegations and Investigations - Culper Research published a report on March 13, 2025, alleging that OSI's reported growth in Mexico revenues is "largely an illusion" [2]. - The report accuses OSI of downplaying U.S. Department of Justice investigations by providing "deliberately vague and misleading disclosures" [2]. - Following the report's publication, OSI's stock price fell by $6.35 per share, or 3.5%, closing at $175.31 per share on the same day [2]. Group 2: Company Background - OSI Systems, Inc. is publicly traded on NASDAQ under the ticker OSIS [1]. - Moore Law, PLLC specializes in holding corporate officers and directors accountable for various forms of corporate misconduct, including breaches of fiduciary duty and fraud [3].

Core Viewpoint - The Schall Law Firm is investigating OSI Systems, Inc. for potential violations of securities laws, particularly concerning misleading statements and undisclosed information related to the company's operations and financial performance [1][2]. Group 1: Investigation Details - The investigation centers on whether OSI Systems issued false or misleading statements and failed to disclose critical information to investors [2]. - A report by Culper Research claims that OSI Systems' reported revenue growth in Mexico is "largely an illusion" and suggests that the company has minimized the significance of a Department of Justice (DOJ) investigation through vague disclosures [2]. Group 2: Legal Representation - The Schall Law Firm offers free consultations for shareholders who believe they have suffered losses due to the alleged misconduct of OSI Systems [3]. - The firm specializes in securities class action lawsuits and shareholder rights litigation, representing investors globally [3].

Core Viewpoint - The article compares Nidec Corp. (NJDCY) and OSI Systems (OSIS) to determine which stock is more attractive to value investors [1]. Valuation Metrics - Both NJDCY and OSIS hold a Zacks Rank of 2 (Buy), indicating positive earnings estimate revisions and improving earnings outlooks [3]. - NJDCY has a forward P/E ratio of 16.17, while OSIS has a forward P/E of 20.88 [5]. - NJDCY's PEG ratio is 0.54, compared to OSIS's PEG ratio of 1.62, suggesting NJDCY may be undervalued relative to its expected earnings growth [5]. - NJDCY has a P/B ratio of 3.34, while OSIS has a P/B of 3.93, indicating NJDCY's market value is more favorable compared to its book value [6]. - Based on these valuation metrics, NJDCY earns a Value grade of B, while OSIS receives a Value grade of C [6]. Investment Recommendation - Despite both companies having solid earnings outlooks, NJDCY is considered the superior value option based on the discussed valuation figures [7].

Revenue and Profit Growth - Total net revenues increased to $763.8 million for the six months ended December 31, 2024, up from $652.4 million in the same period in 2023[11] - Net income rose to $55.8 million for the six months ended December 31, 2024, compared to $49.4 million in the same period in 2023[11] - Earnings per share (diluted) increased to $3.27 for the six months ended December 31, 2024, up from $2.87 in the same period in 2023[11] - Net income for the six months ended December 31, 2024 increased to $55.8 million from $49.4 million in the same period in 2023[18] - Basic earnings per share for the six months ended December 31, 2024 increased to $3.33 from $2.92 in the same period in 2023[22] - Diluted earnings per share for the six months ended December 31, 2024 increased to $3.27 from $2.87 in the same period in 2023[22] - Total consolidated revenues for the six months ended December 31, 2024, were $763.827 million, up from $652.445 million in the same period of 2023, a 17% increase[89] - Total net revenues for Q2 fiscal 2025 increased by $46.7 million (12.5%) compared to Q2 fiscal 2024, reaching $419.9 million[112] - Total net revenues for YTD Q2 fiscal 2025 increased by $111.5 million (17.1%) compared to YTD Q2 fiscal 2024, reaching $763.9 million[122] Cash and Liquidity - Cash and cash equivalents decreased to $95.4 million as of June 30, 2024, down from $101.6 million as of December 31, 2024[10] - Cash and cash equivalents totaled $101.6 million at December 31, 2024, with approximately 77% held by foreign subsidiaries[24] - Cash and cash equivalents totaled $101.6 million at December 31, 2024, an increase of $6.2 million (7%) from June 30, 2024[132] - Cash provided by operating activities for YTD Q2 fiscal 2025 was $15.4 million, compared to cash used in operations of $6.4 million in the prior-year period[135] - Net cash used in investing activities for YTD Q2 fiscal 2025 was $97.6 million, including $75.5 million for a business acquisition in September 2024[136] - Net cash provided by financing activities for YTD Q2 fiscal 2025 was $89.2 million, driven by $340.5 million net proceeds from the 2029 Notes[137] - Cash and cash equivalents totaled $101.6 million at December 31, 2024, with 77% held by foreign subsidiaries[139] Balance Sheet Changes - Accounts receivable, net decreased to $648.2 million as of June 30, 2024, down from $703.9 million as of December 31, 2024[10] - Inventories decreased to $397.9 million as of June 30, 2024, down from $441.8 million as of December 31, 2024[10] - Total current liabilities increased to $814.6 million as of June 30, 2024, up from $703.7 million as of December 31, 2024[10] - Long-term debt, net decreased to $129.4 million as of June 30, 2024, down from $466.6 million as of December 31, 2024[10] - Accounts receivable, net increased from $648,155 thousand as of June 30, 2024, to $703,933 thousand as of December 31, 2024[41] - Intangible assets increased from $139,529 thousand as of June 30, 2024, to $181,954 thousand as of December 31, 2024[43] - Contract assets decreased by $59.8 million due to a $85.2 million decrease in unbilled revenue, partially offset by a $25.4 million increase from a business acquisition[50] - Remaining performance obligations as of December 31, 2024, were approximately $776.1 million, with 61% expected to be recognized within the next 12 months[51] - Operating lease liabilities totaled $29.9 million as of December 31, 2024, with a weighted average remaining lease term of 3.6 years and a weighted average discount rate of 4.6%[54] Expenses and Costs - Research and development expenses increased to $36.0 million for the six months ended December 31, 2024, up from $32.3 million in the same period in 2023[11] - Comprehensive income decreased to $46.3 million for the six months ended December 31, 2024, down from $49.7 million in the same period in 2023[13] - Restructuring and other charges for the six months ended December 31, 2024, totaled $1.4 million, including $0.6 million for acquisition-related costs and $0.6 million for employee terminations[56] - Research and development expenses increased by $2.0 million (12.3%) in Q2 fiscal 2025, primarily due to new product development initiatives in the Security division[117] - Selling, general and administrative expenses increased by $11.5 million (8.8%) in YTD Q2 fiscal 2025, primarily due to increased employee compensation[126] - Gross profit increased by $5.8 million in Q2 fiscal 2025, but gross margin decreased to 35.0% from 37.9% in Q2 fiscal 2024[114] - Gross profit for YTD Q2 fiscal 2025 increased by $28.7 million, but gross margin decreased to 35.2% from 36.8% in YTD Q2 fiscal 2024[125] Debt and Financing - Long-term debt, net decreased to $129.4 million as of June 30, 2024, down from $466.6 million as of December 31, 2024[10] - The company had $236 million of borrowings outstanding under the revolving credit facility, $78.6 million under the letters of credit sub-facility, and $131.9 million under the term loan as of December 31, 2024[59] - In July 2024, the company issued $350.0 million principal amount of 2.25% convertible senior notes due in 2029, with net proceeds of $340.4 million[60] - The 2029 Notes have a principal amount of $350,000, with a net carrying amount of $341,245 and a fair value of $380,069 as of December 31, 2024[65] - Total interest expense for the 2029 Notes was $2.4 million for the three months ended December 31, 2024, consisting of $2.0 million in contractual interest and $0.4 million in amortization of debt discount and issuance costs[66] - Long-term debt as of December 31, 2024, totaled $474.8 million, with $341.3 million attributable to the 2029 Notes[68] - Credit facility includes a $600 million revolving credit facility with $300 million sub-facility for letters of credit, with $131.9 million outstanding under the term loan and $236.0 million under the revolving credit facility as of December 31, 2024[134] Acquisitions and Investments - The company acquired a provider of critical military, space, and surveillance solutions for approximately $76.0 million, plus up to $24.0 million in potential contingent consideration in September 2024[38] - The preliminary acquisition date fair value of total assets acquired was $114.0 million, including goodwill of $31.7 million and other intangible assets of $43.9 million[38] - Revenue from the acquired business was $21.7 million from the acquisition date through December 31, 2024[38] - The company acquired a contract manufacturer for approximately $6.3 million in cash in December 2023[39] - The company acquired a provider of radiation detection technology for approximately $2.8 million in cash, plus up to $3.6 million in potential contingent consideration in October 2023[40] - Capital expenditures for YTD Q2 fiscal 2025 were $13.2 million, up from $8.7 million in the prior-year period[136] - Expenditures for intangible and other assets for YTD Q2 fiscal 2025 were $9.1 million, compared to $8.4 million in the prior-year period[136] Stock and Equity - The company repurchased 531,314 shares of common stock for approximately $80 million during the six months ended December 31, 2024, with 1,190,556 shares remaining available for repurchase[74] - Stock-based compensation expense for the six months ended December 31, 2024, was $14.9 million, with $20.6 million in unrecognized compensation cost related to restricted stock units (RSUs)[70] - The company granted 80,682 performance-based RSUs during the six months ended December 31, 2024, with potential payouts ranging from zero to 376% of the original award[72] - Repurchase of common stock during YTD Q2 fiscal 2025 totaled $80.4 million[137] - Taxes paid related to net share settlement of equity awards were $22.6 million during YTD Q2 fiscal 2025[137] - No shares of common stock were repurchased during the second quarter of fiscal year 2025[140] Contingent Liabilities and Warranty - The company's contingent consideration liabilities were $23.6 million as of December 31, 2024[27] - The company has a contingent consideration liability of $23.6 million as of December 31, 2024, related to acquisition-related earnout obligations[77] - Warranty provisions increased to $11.4 million as of December 31, 2024, up from $10.5 million at the end of 2023[82] - The company has a remaining maximum potential payment of $56.5 million for capped contingent consideration obligations related to acquisitions as of December 31, 2024[76] Division Performance - Security division revenues increased to $289.987 million in Q4 2024, up from $249.975 million in Q4 2023, representing a 16% growth[89] - Optoelectronics and Manufacturing division revenues grew slightly to $100.743 million in Q4 2024, compared to $98.097 million in Q4 2023[89] - Healthcare division revenues rose to $44.854 million in Q4 2024, up from $41.850 million in Q4 2023, a 7.2% increase[89] - Security division accounted for 67% of total consolidated revenues for the six months ended December 31, 2024, up from 64% in the same period of 2023[100] - Optoelectronics and Manufacturing division accounted for 22% of total consolidated revenues for the six months ended December 31, 2024, down from 24% in the same period of 2023[101] - Healthcare division accounted for 11% of total consolidated revenues for the six months ended December 31, 2024, down from 12% in the same period of 2023[102] - Security division revenues increased by $40.0 million (16.0%) in Q2 fiscal 2025, driven by growth in checkpoint screening systems and trace detection systems[112] Tax and Currency Impact - The effective tax rate for the six months ended December 31, 2024, was 22.9%, up from 21.0% in the same period of 2023[87] - Currency exchange rates negatively impacted reported sales by approximately 0.8% for the six months ended December 31, 2024, due to the strengthening of the U.S. dollar[110] Customer Concentration - One customer in the Security division accounted for 12% of consolidated net revenues for the six months ended December 31, 2024[91] - Two customers in the Security division accounted for 37% and 13% of accounts receivable, net as of December 31, 2024[91] Derivatives and Hedging - The company held foreign currency forward contracts with notional amounts totaling $79.4 million as of December 31, 2024[29] - The fair value of the company's interest rate swap contract was $2.7 million as of December 31, 2024[27] - The company's interest rate swap agreement matures in December 2026 and is considered an effective cash flow hedge[30] - The notional amount of derivative instruments designated as an interest rate swap hedge was $175 million as of June 30, 2024, and December 31, 2024[31] - The fair value of the interest rate swap contract was recorded in Other assets within the consolidated balance sheet as of June 30, 2024, and December 31, 2024[31] - The effect of cash flow hedges on other comprehensive income (loss) and earnings for the six months ended December 31, 2024, was a loss of $15,978 thousand[31] Credit Facilities and Letters of Credit - The company has $68.0 million outstanding under letter-of-credit facilities, with $22.8 million available under these credit facilities as of December 31, 2024[67] - Credit facility includes a $600 million revolving credit facility with $300 million sub-facility for letters of credit, with $131.9 million outstanding under the term loan and $236.0 million under the revolving credit facility as of December 31, 2024[134]

Momentum Investing Overview - Momentum investing focuses on following a stock's recent trend, aiming to buy high and sell even higher [1] - The Zacks Momentum Style Score helps identify stocks with strong momentum potential [2] OSI Systems (OSIS) Momentum Analysis - OSIS currently has a Momentum Style Score of B and a Zacks Rank of 2 (Buy) [3][4] - Stocks with Zacks Rank 1 or 2 and Style Scores of A or B tend to outperform the market over the following one-month period [4] Price Performance - OSIS shares are up 8 61% over the past week, outperforming the Zacks Electronics - Miscellaneous Components industry's 1 74% gain [6] - Monthly price change for OSIS is 8 96%, compared to the industry's 0 22% [6] - Over the past quarter, OSIS shares have increased 46 02%, and have gained 43 65% in the last year, significantly outperforming the S&P 500's 5 86% and 27 32% gains, respectively [7] Trading Volume - OSIS's average 20-day trading volume is 181,755 shares, indicating strong investor interest [8] Earnings Outlook - Over the past two months, 1 earnings estimate for OSIS has moved higher for the full year, boosting the consensus estimate from $9 12 to $9 13 [10] - For the next fiscal year, 1 estimate has moved upwards with no downward revisions [10] Conclusion - OSIS is a strong momentum pick with a Zacks Rank of 2 (Buy) and a Momentum Score of B, making it a promising near-term investment [12]