On Monday, OSI Systems (NASDAQ:OSIS) discussed third-quarter financial results during its earnings call. The full transcript is provided below.
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The full earnings call is available at https://edge.media-server.com/mmc/p/esihax8t/
Summary
OSI Systems achieved a fiscal Q3 record with revenues of $453 million and non-GAAP earnings per diluted share of $2.60, despite challenging year-over-year comparisons.
The company reported strong security revenues, excluding Mexico, with a 25% year-over-year growth, and the optoelectronics and manufacturing division also saw a 10% increase.
A significant backlog of approximately $1.9 billion was noted, driven by a Homeland Defense award valued at around $235 million.
Operating cash flow was $14 million in Q3, but post-quarter collections of $74 million from Mexico are expected to boost Q4 cash flow.
The company maintained its fiscal 2026 guidance for revenues and non-GAAP earnings per share, despite potential impacts from the DHS shutdown and Middle East conflicts.
Management highlighted the potential for future growth in security solutions for upcoming major events and continued investments in R&D to foster innovation.
Full Transcript
OPERATOR
Ladies and Gentlemen, thank you for standing by. At this time, I would like to welcome everyone to the osi Systems Inc. Third quarter 2026 conference call. All lines have been placed on mute to prevent any background noise. After the Speaker’s remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press STAR followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I will now turn the conference over to Alan Edrick, the Chief Financial Officer. You may begin.
Alan Edrick (Executive Vice President and CFO)
Thank you. Good afternoon and thank you for joining us. I’m Alan Edrick, Executive Vice President and CFO of OSI Systems, and I’m here today with AJ Mehra, OSI’s President and CEO. Welcome to the OSI Systems Fiscal 2026 third quarter conference call. We are pleased that you can join us as we review our financial and in our operational results. Before we discuss these results, I would like to remind everyone that today’s discussion will include forward looking statements and the Company wishes to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 with respect to such forward looking statements. All forward looking statements made in this call are based on currently available information and the Company undertakes no obligation to update any forward looking statements based upon subsequent events, new information or otherwise. We will also reference both GAAP and non-GAAP financial measures. Applicable reconciliations are available. In today’s earnings release, we delivered solid third quarter financial results, setting fiscal Q3 records across multiple metrics. Despite facing the most challenging year over year comparison of fiscal 2026 primarily driven by our Mexico contracts, the Company’s revenues reached a fiscal Q3 record of $453 million million and non GAAP earnings per diluted share set a fiscal Q3 record of $2.60 per share. Importantly, excluding revenues generated by the large Mexico security contracts in both periods, security revenues grew 25% year over year. Our optoelectronics and manufacturing division also performed well, posting 10% growth and a Q3 record for that division. Bookings were strong with a 1.3 book to bill ratio driven by both security and opto, resulting in a record backlog highlighted by the previously announced Homeland Defense Award, about which AJ will provide more information shortly. On the cash side, we generated $14 million in fiscal Q3 operating cash flow despite limited collections in the quarter on the receivables in Mexico. Shortly after quarter end we collected approximately $74 million of the largest Mexico receivable, a strong start to Q4 cash flow. Before diving more deeply into our financial results and discussing our outlook for fiscal 26, I will turn the call over to AJ for our business and operational discussion.
AJ Mehra (President and CEO)
Thanks Alan and thank you everyone for joining us today. I’m pleased to be here to discuss our third quarter results for fiscal 2026. We delivered another quarter of solid execution and ended the quarter with a backlog of approximately 1.9 billion, the highest in the company’s history. We remain focused on execution, leveraging our strengths in key markets and utilizing our global operating model. As we finish Q4 and head into fiscal 2027, let’s turn our businesses to discuss Q3 performance in more detail, starting with security. As expected, Q3 performance was up against difficult year over year comparisons, primarily due to our Mexico programs transitioning from significant product sales to long term related service and support revenues. Despite that, Security performed well with solid bookings, top line growth and operating margin expansion. Furthermore, we continue to be very active with customers across aviation, ports and borders and defense related applications. Bookings were highlighted by a sizable award from Homeland Defense of an Undefinitized contract action or UCA with a not to exceed value of approximately 235 million for the production and integration of Homeland Defense over the Horizon Radar Transmit subsystem. We continue to build strong traction with our RF engineered solutions and are hopeful that there may be additional opportunities in this area of future business. In addition, these capabilities position us well to further support more Golden Dome initiative, the US Initiative to create an Integrated Missile Defense System. As you know, we are a participant in the 151 billion SHIELD IDIQ which we announced last quarter and we look forward to the opportunities that may arise from this initiative. During Q3, we also received several international awards for cargo and vehicle inspection systems and airport screening solutions. In addition, we were an integral part of the security at the Milan Winter Olympic Games, providing our products to screen participants, officials, fans as well as their baggage and cargo. Towards the latter half of Q3, we began to see initial impacts from conflict in the Middle East. Certain programs activities have been delayed by factors such as logistic constraints, travel restrictions and heightened security protocols. Certain customers in the region are facing pressure from disruptions tied to the conflict. If the situation persists, we could see further impact on the timing of order intake and project completion timelines. That said, once the region stabilizes, we could potentially see even stronger demand for security solutions in the us. The order activity for security products was impacted during the quarter by the shutdown at DHS which delayed the procurement of our products and services to support US Border initiatives. Now that the shutdown has ended, we are hopeful for order patents to normalize over the coming weeks and months and I want to emphasize here that these are timing related dynamics rather than changes in the underlying demand. In the US we’re also excited about the potential of our security solutions for high profile upcoming events such as the FIFA World Cup 26 soccer tournament and the 2028 Olympics. Furthermore, in the US the roughly 1 billion outlined in the One Big Beautiful Bill for NII equipment remains a significant growth opportunity. And of course during the shutdown the spending resulting from this bill was delayed in Q3. Turning to optoelectronics and manufacturing, Q3 performance was again strong as revenues increased 10% year over year with the book to bill ratio well exceeding one. In March, Opto received a $40 million award for the electronic sub assemblies from a medical OEM, a significant award in a division where most orders are under 5 million customers continue to value a vertically integrated model and global manufacturing footprint as it diversify supply chains and launch new products. A global manufacturing footprint across Malaysia, Indonesia, India, Canada, Mexico, the UK and the US Allows us to offer customers attractive combinations of value and scalability. Opto’s backlog remains at record levels, providing great long term visibility across aerospace, defense, medical, industrial and other end markets. And finally, our healthcare division which continues its path of improving operations and focusing on new product development in Q3 health care was adversely impacted by order timing, most notably in the US Resulting in lower sales and profitability. On the flip side, we did see growth in the EMEA region during the quarter. As you may know, healthcare’s products generally carry the highest contribution margins at osi, so even modest revenue growth has an outsized impact on profitability. Looking at OSI systems overall, our financial position remains strong. The robust and growing backlog year to date, cash flow generation and a healthy balance sheet give us continued confidence in the company’s prospects. In addition to large program opportunities highlighted earlier, we remain focused on increasing our mix of recurring revenues through expanded service and support agreements. As always, I would like to thank our employees, customers and stockholders for the continued support and dedication. With that, I will turn the call over to Alan to discuss our financial results in more detail before we open the call for questions. Thank you.
Alan Edrick (Executive Vice President and CFO)
Well, thank you aj. Now let’s review in greater detail the financial results for Q3. Let’s begin with a look into our revenues by Division security. division revenues in Q3 came in at $319 million million, driven by higher service revenues and increased contribution from the RF business, which has been effectively integrated into our overall operations and increased aviation product revenues.. As expected, revenues from our large Mexico security contracts decreased to 11 million in Q3 fiscal 26 from 69 million in Q3 of the prior year. Excluding the Mexico contracts, securities revenues surged 25% year over year, reflecting healthy growth across the broader security portfolio. Fiscal Q4 is expected to experience a reduced revenue impact from Mexico in comparison to Q3, with the magnitude of this headwind expected to largely roll off as the company enters fiscal 27. Our Opto electronics and manufacturing division had another excellent quarter. Opto sales, including Intercompany, increased 10% year over year to $111 million million, a new Q3 …
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