Summary of OSI Systems Conference Call Company Overview - OSI Systems operates in three divisions: Security, Health Care, and Optoelectronics [3][4] - The Security division, RapidScan Systems, accounts for over two-thirds of revenues and is a leader in security detection [4][5] Key Points and Arguments Security Division - The Security division is primarily known for aviation products but is experiencing rapid growth in cargo and border solutions, particularly in the U.S. and internationally [4][5][10] - The U.S. government has significantly increased funding for non-intrusive inspection (NII) technology, with a proposed budget of $1.1 billion, quadrupling previous expectations of $300 million [12][14] - International growth remains strong, with notable opportunities in the Middle East, Latin America, Asia, and Europe [10][12] Revenue and Growth - Recent contracts in Mexico have matured, leading to a 50% decline in revenues from that region, but overall security revenues increased by 10% [15][16] - The service revenue from the installed base in Mexico is expected to increase as products roll off warranty, leading to higher margins [16][21] - The life cycle of security products is approximately 7-10 years, with aftermarket service revenues potentially doubling the initial product sale [20][21] Optoelectronics Division - The Opto business has shown resilience during a destocking period, with a 15% growth in the last quarter [30][31] - Companies are increasingly looking to shift manufacturing away from China, presenting opportunities for OSI Systems due to its global manufacturing footprint [32] Health Care Division - A new patient monitoring platform is set to launch in summer 2024, which is expected to drive significant growth [34][36] - The health care division has the highest contribution margins, and improvements in top-line revenue could lead to higher operating margins [36] Cash Flow and Financial Outlook - Free cash flow conversion is expected to be strong, with significant cash generation anticipated in fiscal 2026 [41][42] - The company has a disciplined approach to capital allocation, focusing on M&A, stock buybacks, and debt reduction [52][53] Market Position and Competition - OSI Systems is the largest security detection company and continues to gain market share, particularly in ports and borders [66][68] - The company is exploring acquisitions primarily in the security and optoelectronics sectors, with a focus on bolt-on opportunities [62][63] Leadership Transition - A new CEO has been appointed from within the company, ensuring continuity in strategy and operations [69][70] Margins and Future Expectations - Margins in the aviation sector are expected to be comparable to those in the cargo and border sectors, with no anticipated negative impact on overall operating margins [72] Additional Important Points - The company is actively managing costs, with SG&A as a percentage of sales decreasing as revenues grow [49][50] - Tariffs are not expected to have a material impact on the business, with the health care division being the most exposed [56][57] - The company has adequate manufacturing capacity to meet growing demand without significant new investments [60][61]

Core Viewpoint - Investors in the Electronics - Miscellaneous Components sector should consider TE Connectivity (TEL) and OSI Systems (OSIS) as potential value stocks, with TEL appearing to be the more attractive option based on valuation metrics [1][7]. Valuation Metrics - Both TEL and OSIS have a Zacks Rank of 2 (Buy), indicating a positive earnings outlook due to favorable analyst estimate revisions [3]. - TEL has a forward P/E ratio of 18.66, while OSIS has a forward P/E of 24.03, suggesting TEL is more undervalued [5]. - The PEG ratio for TEL is 2.01, compared to OSIS's PEG ratio of 2.04, indicating TEL's expected earnings growth is more favorable relative to its price [5]. - TEL's P/B ratio is 3.75, while OSIS has a P/B of 4.27, further supporting TEL's position as the superior value option [6]. Value Grades - TEL has a Value grade of B, while OSIS has a Value grade of C, reflecting TEL's stronger valuation metrics [6].

Group 1: Momentum Investing Overview - Momentum investing involves following a stock's recent trend, with the aim of buying high and selling higher, capitalizing on established price movements [1] - The Zacks Momentum Style Score helps investors identify effective metrics for assessing momentum in stocks [2] Group 2: OSI Systems (OSIS) Performance - OSI Systems currently holds a Momentum Style Score of B and a Zacks Rank of 2 (Buy), indicating strong potential for outperformance [3][4] - Over the past week, OSIS shares increased by 11.49%, significantly outperforming the Zacks Electronics - Miscellaneous Components industry, which rose by 3.47% [6] - In a longer timeframe, OSIS shares have gained 8.59% over the past quarter and 65.88% over the last year, while the S&P 500 has moved -5.55% and 13.72%, respectively [7] Group 3: Trading Volume and Earnings Outlook - The average 20-day trading volume for OSIS is 222,060 shares, indicating a bullish sign with rising stock prices [8] - Recent earnings estimate revisions for OSIS show 2 estimates moving higher for the full year, increasing the consensus estimate from $9.26 to $9.29 [10] - For the next fiscal year, 1 estimate has moved upwards with no downward revisions, supporting a positive earnings outlook [10] Group 4: Conclusion - Given the strong performance metrics and positive earnings outlook, OSI Systems is positioned as a promising investment opportunity with a Momentum Score of B [12]

Core Viewpoint - OSI Systems (OSIS) has been upgraded to a Zacks Rank 2 (Buy), indicating a positive outlook on its earnings estimates, which significantly influence stock prices [1][2]. Earnings Estimates and Stock Price Impact - Changes in a company's future earnings potential, reflected in earnings estimate revisions, are strongly correlated with near-term stock price movements [3]. - Institutional investors utilize earnings estimates to calculate the fair value of a company's shares, leading to stock price movements based on their buying or selling actions [3]. Zacks Rating System - The Zacks Rank stock-rating system classifies stocks into five groups based on earnings estimates, with a strong historical performance, particularly Zacks Rank 1 stocks averaging a +25% annual return since 1988 [6]. - The Zacks rating system maintains a balanced distribution of 'buy' and 'sell' ratings, ensuring that only the top 20% of stocks receive favorable ratings based on earnings estimate revisions [8][9]. OSI's Earnings Estimate Revisions - OSI is projected to earn $9.29 per share for the fiscal year ending June 2025, reflecting a year-over-year increase of 14.3% [7]. - Over the past three months, the Zacks Consensus Estimate for OSI has risen by 0.7%, indicating a positive trend in earnings estimates [7].

Financial Performance - Total net revenues for the three months ended March 31, 2025, increased to $444,354, up 9.8% from $405,406 in the same period of 2024[11]. - Net income for the three months ended March 31, 2025, was $41,134, representing a 20.5% increase from $34,043 in the prior year[13]. - Earnings per share (diluted) rose to $2.40 for the three months ended March 31, 2025, compared to $1.95 for the same period in 2024, reflecting a 23.1% increase[11]. - Gross profit for the nine months ended March 31, 2025, was $418,944, up from $376,141 in the same period of 2024, indicating an increase of 11.4%[11]. - For the nine months ended March 31, 2025, total revenues increased to $1,208,181 thousand, up from $1,057,851 thousand in the same period of 2024, representing a growth of approximately 14.2%[90]. - Total net revenues for Q3 fiscal 2025 increased by 9.6% to $444.3 million compared to $405.4 million in Q3 fiscal 2024[111]. - Gross profit for Q3 fiscal 2025 was $150.3 million, representing a gross margin of 33.8%, compared to $136.1 million and 33.6% in Q3 fiscal 2024[113]. Assets and Liabilities - Total current assets decreased to $1,215,524 as of June 30, 2024, down from $1,272,529 as of March 31, 2025, a decline of 4.5%[10]. - Total liabilities decreased to $1,072,525 as of June 30, 2024, compared to $1,201,672 as of March 31, 2025, a reduction of 10.7%[10]. - The total stockholders' equity as of March 31, 2025, was $879,325, a decrease from $863,483 as of June 30, 2024, reflecting a decline of 1.8%[10]. - Cash and cash equivalents stood at $95,353 as of June 30, 2024, slightly down from $95,830 as of March 31, 2025[10]. - As of March 31, 2025, total unrecognized compensation cost related to share-based compensation grants was estimated at $18.6 million[69]. - Long-term debt as of March 31, 2025, totaled $473.196 million, with a long-term portion of $465.051 million[66]. Cash Flow - Cash flows from operating activities provided $97,030 thousand in the nine months ended March 31, 2025, compared to a cash outflow of $58,458 thousand in the same period of 2024[17]. - Cash and cash equivalents at the end of the period totaled $95,830 thousand, with approximately 83% held by foreign subsidiaries, primarily in India and the United Kingdom[23]. - Cash provided by operations for YTD Q3 fiscal 2025 was $97.0 million, compared to cash used in operations of $58.5 million in the same prior-year period[131]. - Net cash used in investing activities was $106.4 million for YTD Q3 fiscal 2025, compared to $24.9 million in the same prior-year period, with $75.5 million used for a business acquisition in September 2024[132]. - Net cash provided by financing activities was $10.4 million for YTD Q3 fiscal 2025, a decrease from $110.7 million in the same prior-year period, primarily due to net repayment of $228.0 million on the credit facility[133]. Expenses - Research and development expenses for the three months ended March 31, 2025, were $18,570, a 8.3% increase from $17,144 in the prior year[11]. - Operating expenses increased by 11.2% to $94.2 million in Q3 fiscal 2025, with selling, general and administrative expenses rising by 10.1% to $73.3 million[114]. - Research and development expenses increased by 8.8% to $18.6 million in Q3 fiscal 2025, reflecting higher compensation costs for new product development initiatives[115]. - Interest and other expense, net, increased to $8.2 million in Q3 fiscal 2025 from $7.4 million in Q3 fiscal 2024, driven by higher borrowings[117]. Acquisitions and Investments - The company acquired a privately held provider of military, space, and surveillance solutions for approximately $76.0 million, with total purchase consideration reaching $85.7 million, including contingent consideration[36]. - Revenue from the acquired business was $50.7 million from the acquisition date through March 31, 2025[37]. - The preliminary acquisition date fair value of total assets acquired was $115.9 million, including $31.5 million in goodwill and $46.2 million in other intangible assets[36]. - The company had net borrowings of $134,000 thousand on bank lines of credit during the nine months ended March 31, 2025, while there were repayments of $228,000 thousand in the same period of 2024[17]. Taxation - The effective tax rate for the nine months ended March 31, 2025, was 19.5%, a decrease from 21.7% in the same period of 2024[87]. - The effective tax rate for Q3 fiscal 2025 was 14.3%, down from 22.6% in Q3 fiscal 2024, with a provision for income taxes of $6.9 million[118]. - The company recognized net discrete tax benefits of $4.0 million for changes in prior year tax estimates during the nine months ended March 31, 2025, compared to $2.3 million in the prior year[87]. Legal and Compliance - The company is currently involved in various legal proceedings, but management believes that the ultimate disposition is not likely to have a material adverse effect on its financial condition[84]. - The company is in compliance with applicable financial covenants under the indenture governing the 2029 Notes as of March 31, 2025[63]. Market and Economic Factors - The company continues to face uncertainties related to global economic factors, including supply chain disruptions and geopolitical tensions, which may impact future performance[103].

Core Viewpoint - OSI Systems Inc. is conducting its fiscal '25 third quarter conference call to review financial and operational results, with key executives present [1][3]. Financial Results - The company has released its fiscal '25 third quarter financial results, which will be discussed during the call [4]. - Both GAAP and non-GAAP financial measures will be referenced in the discussion of the company's results [5].

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 [7][22] - 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 [7][8] - 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 [8][29] 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 [12][22] - Optoelectronics and Manufacturing division saw revenues grow 15% year over year, surpassing $100 million in sales, with strong operating margin expansion [16][22] - Healthcare division achieved a 5% year-over-year revenue increase, with new leadership expected to drive future growth [18][19] Market Data - The company is actively addressing challenges posed by evolving global trade environments, particularly U.S. tariff policies, while maintaining strong international revenue streams [10][11] - The backlog is diversified across various sectors, including cargo, aviation, and security, providing confidence for sustained growth [51][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 [10][20] - The acquisition of an RF-based solutions business is expected to enhance capabilities in defense and security markets, with significant growth opportunities anticipated [39][40] Management Commentary on Operating Environment and Future Outlook - Management expressed confidence in the ability to navigate tariff impacts, with no anticipated meaningful P&L impact from tariffs in Q4 [11][35] - The company is increasing guidance for fiscal year 2025 revenues and non-GAAP diluted EPS, reflecting strong performance and a robust pipeline of opportunities [29][30] Other Important Information - The gross margin for Q3 was 33.8%, up from 33.6% in the same quarter last year, with operating expenses managed effectively [24][25] - The company anticipates strong cash flow in Q4 and beyond, with opportunities for working capital enhancements [41][77] Q&A Session Summary Question: Can you expand on the tariff situation and its impact? - Management indicated no impact on Q4 and limited exposure to tariffs in the largest divisions, with ongoing discussions with customers and suppliers to mitigate risks [34][35] Question: What drove the strength in service revenue? - The increase in service revenues is attributed to a growing installed base of security products rolling off warranty, leading to higher recurring revenue [36][38] Question: What is the outlook for the RF Solutions acquisition? - The acquisition is expected to provide a long runway of growth, particularly with established products like over-the-horizon radars [39][40] Question: How do you see cash flow trends for Q4 and fiscal 2026? - Management anticipates strong cash flow in Q4, with opportunities for further improvement in DSO and working capital [41][77] Question: What is the expected trend for the Mexico contract? - Revenue from Mexico is expected to decline year over year, but strong bookings in other areas are anticipated to support continued growth in the security division [60][61] Question: What opportunities are anticipated with the new administration's budget? - There is potential for significant funding for border security, with a multi-year budget expected to provide visibility for future opportunities [62][74]

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]

Core Insights - OSI Systems reported revenue of $444.35 million for the quarter ended March 2025, marking a year-over-year increase of 9.6% and an EPS of $2.44 compared to $2.16 a year ago, exceeding Zacks Consensus Estimates [1] - The company achieved a revenue surprise of +2.03% and an EPS surprise of +2.52% compared to analyst expectations [1] Revenue Breakdown - Healthcare division revenue was $43.72 million, exceeding the estimated $43.38 million, reflecting a year-over-year increase of +5.4% [4] - Intersegment eliminations reported a revenue of -$15.14 million, slightly worse than the estimated -$15.08 million, but showing a significant year-over-year change of +51% [4] - Optoelectronics and Manufacturing division revenue, including intersegment revenues, was $100.86 million, surpassing the estimated $99.90 million, with a year-over-year change of +14.7% [4] - Security division revenue reached $314.91 million, exceeding the estimated $308.89 million, representing a year-over-year increase of +10.1% [4] Operating Income Analysis - Non-GAAP operating income for the Security Division was $56.91 million, above the average estimate of $55.79 million [4] - Non-GAAP operating loss for Corporate/Elimination was -$10.09 million, worse than the average estimate of -$9.85 million [4] - Non-GAAP operating income for the Healthcare Division was $2.23 million, slightly above the average estimate of $2.07 million [4] - Non-GAAP operating income for the Optoelectronics and Manufacturing Division was $14.09 million, exceeding the average estimate of $13.29 million [4] Stock Performance - OSI shares have returned +3.3% over the past month, contrasting with a -0.7% change in the Zacks S&P 500 composite [3] - The stock currently holds a Zacks Rank 3 (Hold), indicating potential performance in line with the broader market in the near term [3]

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]