OSI Systems (OSIS) Q4 2025 Earnings Call August 21, 2025 12:00 PM ET Company ParticipantsAlan Edrick - EVP & CFOAjay Mehra - President, CEO & DirectorMariana Pérez Mora - DirectorConference Call ParticipantsJosh Nichols - Senior Research AnalystLarry Solow - Partner & Managing director - Equity AnalystJeff Martin - Co-Director - Research & Senior Research AnalystRocco Barbero - Equity Research AnalystOperatorAs a reminder, today's program is being recorded. And now I'd like to introduce your host for today' ...

Financial Performance - OSI Systems reported a 5% year-over-year increase in revenues for Q4, reaching $500 million, driven by a 28% increase in security division service revenues and a 10% increase in optoelectronics division revenues [5][20] - The company achieved record non-GAAP adjusted earnings per share of $3.24 for Q4, marking the highest quarterly adjusted EPS in its history [6][20] - The year-end backlog reached over $1.8 billion, with a book-to-bill ratio of approximately 1.0 in Q4, indicating strong future revenue visibility [6][8] Business Segment Performance - The Security division's Q4 revenues increased by 7.1% year-over-year, with full-year revenue growth of 14.7%, driven by demand from airport and international border security customers [8][20] - Optoelectronics division achieved a record Q4 revenue of $113 million, with a 10% increase in third-party opto sales year-over-year [14][21] - The Healthcare division experienced disappointing financial performance in Q4, but management anticipates stronger results moving forward due to ongoing investments in next-generation patient monitoring solutions [16][21] Market Dynamics - The U.S. government's focus on enhancing security for major events like the 2026 FIFA World Cup and 2028 Summer Olympics is expected to drive demand for OSI's solutions [12][14] - The Big Beautiful Bill Act provides significant funding for U.S. water security agencies, which is anticipated to create procurement opportunities for OSI's non-intrusive inspection equipment [11][12] Strategic Direction - OSI Systems is focused on organic growth and strategic acquisitions, leveraging a robust balance sheet to support growth initiatives [17][30] - The company is actively exploring M&A opportunities in security and complementary technologies, emphasizing that any acquisition must create significant value [68] Management Commentary - Management expressed confidence in the company's ability to overcome challenges posed by declining revenues from Mexico contracts, highlighting strong core business growth [45][50] - The anticipated cash inflow from accounts receivable is expected to bolster operating cash flow in fiscal '26, with a focus on maintaining strong free cash flow conversion [28][56] Other Important Information - The gross margin for Q4 was 33.3%, an increase from 32.1% in the prior year, attributed to a favorable revenue mix and improved efficiencies [22] - Operating expenses were well-controlled, with SG&A expenses at 14.8% of sales, reflecting ongoing efforts to manage costs efficiently [23] Q&A Session Summary Question: Revenue guidance for fiscal year '26 and growth expectations - Management indicated that excluding Mexico, the overall growth rate for OSI Systems could be double digits in fiscal '26 [36] Question: Service revenue growth and margin implications - Management confirmed that strong service revenue growth is expected to continue, potentially outpacing product revenue growth, which should positively impact gross margins [38] Question: Concerns about security division growth in the back half of the year - Management clarified that core security revenues, excluding Mexico, grew over 50% in the last quarter, indicating strong underlying demand [45] Question: Accounts receivable increase and cash flow expectations - Management explained that the increase in accounts receivable was primarily due to timing and strong revenue performance, with expectations for significant cash collections in fiscal '26 [52][56] Question: Update on M&A pipeline and strategic investments - Management emphasized a strong balance sheet and ongoing exploration of M&A opportunities, while maintaining a focus on organic growth [68]

Core Insights - The U.S. administration is conceptualizing the Golden Dome program to counter the increasing threat from next-generation strategic weapons, particularly cruise and hypersonic missiles [1][2] - Leidos Holdings Inc. (LDOS) is well-positioned to contribute to the Golden Dome mission with its advanced sensor and missile defense capabilities [1][2] Company Positioning - The Golden Dome program aims to provide a next-generation missile defense shield for U.S. citizens, utilizing a layered network of sensors, interceptors, and command and control technologies [2] - Leidos has extensive expertise in radar systems, threat detection, and AI-driven command-and-control platforms, enhancing its chances of securing a contract from the U.S. Department of Defense (DoD) [2][4] - The company's next-generation mission command solutions, such as the Rapid Command and Control Enhancement (RC2E) microservices, improve decision-making speed and accuracy [3] - Advanced surveillance sensors like GroundAware enable real-time threat detection and actionable information [3] Competitive Landscape - Leidos is a strong contender for future contracts related to the Golden Dome initiative, given its experience in developing layered air and missile defense systems [4] - Other defense stocks, such as Lockheed Martin (LMT) and RTX Corp. (RTX), are also competing for contracts associated with the Golden Dome program [5] - Lockheed Martin leads the Missile Defense Agency's National Team for Command, Control, Battle Management, and Communications (C2BMC), with systems that could position it well for Golden Dome contracts [6] - RTX has a strong competitive edge due to its collaboration with Rafael Advanced Defense Systems on Israel's Iron Dome, which inspired the Golden Dome concept [7] Financial Performance - Leidos shares have increased by 0.9% year to date, contrasting with the defense industry's loss of 6.1% [8] - The company is trading at a forward 12-month earnings multiple of 13.19X, which is approximately 56% lower than the industry average of 29.76X [10] - The Zacks Consensus Estimate for LDOS' sales in 2025 and 2026 indicates year-over-year growth of 2.7% and 3.2%, respectively, with EPS estimates trending higher over the past 60 days [11]