What OSI Systems (OSIS) Said on Its Q1 Earnings Call

Key Points

• Record quarter and higher earnings outlook: Fiscal Q1 revenue rose 5% to $403 million and adjusted EPS increased 17% to $1.66. OSI raised its full-year non-GAAP EPS guidance to $11.28–$11.64 while maintaining revenue guidance of $1.875–$1.930 billion.
• Backlog reached a record $2.1 billion: A 1.4 book-to-bill ratio was supported by new U.S. Customs and Border Protection contracts and major RF awards, providing visibility into fiscal 2028 and beyond. However, geopolitical uncertainty and the Mexico program transition are expected to weigh on near-term revenue.
• Mixed segment performance and margin pressure: Security and Optoelectronics grew, while Healthcare revenue declined 14%, contributing to lower company-wide gross and operating margins. Management expects Healthcare recovery, accelerating high-margin service revenue and stronger second-half growth to support future performance.

OSI Systems NASDAQ: OSIS reported record first-quarter revenue and adjusted earnings per share for fiscal 2027, while bookings lifted backlog to a record $2.1 billion. The company raised its full-year non-GAAP earnings outlook but maintained its revenue forecast, citing geopolitical uncertainty and an expectation that growth will be weighted toward the second half of the fiscal year.

First-quarter revenue rose 5% year over year to $403 million, while adjusted diluted earnings per share increased 17% to $1.66. Operating cash flow more than doubled to $37 million, and free cash flow was about $30 million, or roughly 120% of GAAP net income, according to Chief Financial Officer Alan Edrick.

Quarterly bookings produced a 1.4 book-to-bill ratio, increasing backlog from approximately $1.9 billion at the end of June to $2.1 billion at the end of September. Edrick said the company believes its backlog provides support for fiscal 2028 and beyond, though management retained its existing revenue outlook because of continuing conflict in the Middle East and other geopolitical factors.

Guidance Raised on Share Repurchases

OSI reaffirmed fiscal 2027 revenue guidance of $1.875 billion to $1.930 billion. It raised its non-GAAP EPS forecast to a range of $11.28 to $11.64, representing expected year-over-year growth of 9% to 12.5%.

Edrick said the higher earnings outlook primarily reflects the favorable EPS impact of first-quarter stock repurchases. During the quarter, OSI repurchased about 306,000 shares at an average price of approximately $204 per share, spending roughly $62 million. Diluted shares outstanding fell 7% year over year to 16.3 million.

The company expects second-quarter revenue to be modestly lower than the prior-year period. Management cited a difficult Middle East comparison, as the prior-year quarter included sizable regional revenue before conflicts began, as well as the ongoing transition of the company’s Mexico program.

The Mexico transition reduced first-quarter revenue by approximately $8 million, consistent with the company’s prior outlook for a fiscal-year headwind of less than $25 million. OSI expects an approximately $11 million impact in the second quarter. Management continues to expect the strongest revenue growth in the second half, supported by backlog conversion, new opportunities and faster Security service-revenue growth.

Security Backlog and RF Opportunities

Security division revenue increased 4% to $264 million despite the Middle East environment and the Mexico program transition. The division ended the quarter with record backlog, according to President and CEO Ajay Mehra.

During the quarter, the company announced two five-year indefinite-delivery, indefinite-quantity contracts from U.S. Customs and Border Protection. One contract has a ceiling of approximately $200 million for relocatable Rapiscan passenger vehicle inspection systems, while another has a ceiling of about $85 million for van-mounted mobile X-ray inspection systems. Initial delivery orders totaled approximately $21 million. Mehra noted that only firm orders, rather than total contract ceiling values, are included in backlog.

OSI’s RF business also continued to contribute to bookings and revenue. The company is executing on its homeland defense over-the-horizon radar contract, which has a not-to-exceed value of approximately $235 million and is the company’s largest RF award to date. Management said it recognized some revenue from that contract during the first quarter and expects continued contributions through the fiscal year.

The company also announced approximately $90 million in additional RF bookings during the quarter. Mehra said OSI has products that are viewed favorably by customers and are unique in certain areas, though he said the company is limited in what it can disclose about the business. He added that the company has expanded into two new facilities and believes it has sufficient capacity to support its current RF pipeline, with the ability to add shifts or another facility if needed.

Margins Affected by Mix and Healthcare Decline

First-quarter gross margin declined to 30.7% from 32.0% a year earlier. Edrick attributed the decline primarily to lower Healthcare sales, which carry the company’s highest gross margin, as well as stronger Optoelectronics sales, which have the lowest gross margin among OSI’s divisions, and a less favorable mix within Security.

Non-GAAP operating margin was 9.5%, compared with 10.3% a year earlier. By division, non-GAAP operating margins were 12.6% in Security, 12.1% in Optoelectronics and negative 1.8% in Healthcare.

Healthcare revenue fell 14% year over year, driven mainly by lower patient-monitoring sales as hospitals continued to manage capital spending carefully. Mehra said the company is working to support its installed base, improve operating efficiency and complete development of its next-generation monitoring platform. OSI expects the division to return to growth in upcoming quarters.

Optoelectronics and Manufacturing revenue, including intercompany sales, rose 9% to a first-quarter record of $120 million. Sales to third-party customers increased 16%. The division recorded operating-margin expansion and ended the quarter with its highest backlog, supported by demand across electronic manufacturing services, flex circuits and optoelectronics products.

Service Growth Expected to Accelerate

Service revenue increased 4% to $114 million in the first quarter, but management expects strong double-digit service growth for the full year, led by the Security segment. Edrick said growth should accelerate beginning in the second quarter as products roll off warranty and as aviation services, software-as-a-service offerings, RF activity and other service streams expand.

The company expects higher service revenue, generally viewed by management as a higher-margin source of sales, to contribute to margin expansion through the balance of fiscal 2027. OSI also reiterated its expectation that full-year free cash flow will exceed net income.

At quarter-end, OSI had approximately $236 million of cash and cash equivalents and $66 million of short-term investments, against about $1.0 billion of total debt. More than 90% of its debt was at fixed rates, Edrick said.

About OSI Systems (NASDAQ:OSIS)

OSI Systems, Inc is a vertically integrated technology company that designs and manufactures specialized electronic systems and components for security, healthcare and aerospace and defense applications. Headquartered in Hawthorne, California, the company serves government agencies, transportation authorities, hospitals and commercial customers in the United States and international markets.

Through its security division, OSI Systems provides inspection and screening systems used at airports, borders, ports and other facilities.

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