OSI Systems (NASDAQ:OSIS) reported fiscal 2026 second-quarter results that management described as record-setting across multiple metrics, driven by double-digit revenue growth in its two largest divisions and solid cash generation. The company also raised its full-year non-GAAP earnings outlook while maintaining its revenue guidance, citing improved profitability expectations despite a difficult year-over-year comparison tied to large Security programs in Mexico.
Second-quarter results highlight revenue growth and record non-GAAP EPS
For the fiscal second quarter, OSI Systems posted revenue of $464 million, up 11% year over year and a second-quarter record for the company. CFO Alan Edrick said the strong top-line performance came even though the prior-year quarter included substantial revenue from large Security programs in Mexico.
Segment performance led by Security and Optoelectronics; Healthcare remained soft
Security revenue rose 15% year over year to $335 million, driven by higher service revenue, increased RF business revenue, and increased aviation product revenue. Edrick highlighted that revenue tied to Mexico Security contracts fell to $27 million from $54 million in the year-ago quarter; excluding Mexico, Security revenue increased 31% year over year.
Optoelectronics and Manufacturing delivered another record fiscal second quarter, with sales (including intercompany) up 12% to $113 million. CEO Ajay Mehra said the division’s performance was driven by broad demand across its diversified product and customer base, with growth spanning industries from medical diagnostics to semiconductors. Management also said Opto had a strong book-to-bill ratio during the quarter and is seeing an expanding pipeline as OEMs diversify away from China and shift production to other low-cost manufacturing regions. The company pointed to expanded production capacity at its newer facility in Mexico and operations across Southeast Asia, India, and North America as positioning it to meet demand.
Healthcare sales were described as soft, and Mehra called the quarter “challenging” for the division. He said the company has intensified sales efforts and is focusing its pipeline of new products while continuing to invest in next-generation product development, acknowledging it will take time to improve results.
Bookings delays in Security, but management cited active pipeline and notable program activity
Mehra said Security bookings were lower than expected due mainly to delays in receiving anticipated orders, citing the U.S. government shutdown and some pushouts from international customers. He characterized these as high-probability opportunities that remain in the pipeline and said the company expects stronger order activity over the next six months.
During the quarter, the company announced a $20 million award to deliver a radiological threat detection solution to an international customer, involving a continuously operating wide-area radiation monitoring network. Management also said it was informed during the quarter that it had been selected to support security screening at a major global sporting event in Europe this winter, though the formal announcement came after quarter-end.
In RF, management referenced an international order announced after the quarter valued at approximately $30 million for RF-based communication and surveillance systems for naval operations. Mehra also discussed OSI’s participation as one of 2,400 awardees on the Missile Defense Agency’s “Shield” multiple-award IDIQ contract, which has a ceiling value of $151 billion over 10 years and is tied to the U.S. “Golden Dome” missile defense initiative. He said OSI believes delivery orders could be received in the foreseeable future, but did not provide timing specifics, noting government processes can take longer.
As part of positioning for growth in RF, Mehra said OSI is expanding into new facilities in Texas to increase production capacity and improve operational efficiency.
Margins, expenses, and cash flow: mix pressures and improved collections
Gross margin was 33%, down year over year. Edrick attributed the decline to a less favorable mix on product sales, which outweighed an increase in gross margin from higher service revenue. He also emphasized that margins can fluctuate based on product and service mix, volume, supply chain costs, foreign exchange, tariffs, and other factors.
Operating expenses reflected tighter cost control alongside increased R&D:
- SG&A was $70.2 million, down 1% year over year, and 15.1% of sales versus 16.8% a year ago.
- R&D rose to $19.8 million (4.3% of revenue) from $18.3 million, which management linked to continued investment in innovation, particularly in Security.
On a non-GAAP basis, adjusted operating margin was 14%, up sequentially from Q1 but down year over year due to what management described as a “tough comp.” Security’s adjusted operating margin was 17.8% versus 19.9% a year ago, with higher-margin service growth offset by product mix and increased R&D. Opto’s adjusted operating margin was 12.9%, up slightly from 12.8%, and the company said it anticipates efficiencies at its newer Opto manufacturing facility will contribute to margin expansion in the second half. Healthcare’s adjusted operating margin was “rather negligible” given sales levels.
Cash collection was a central topic in the Q&A. Edrick said days sales outstanding decreased 17% from Q1 and is expected to decline further by fiscal year-end. He noted OSI continued receiving payments from a major Security customer in Mexico and expects “substantial” cash inflows in the second half of fiscal 2026 and beyond as Mexico receivables are collected, supporting operating cash flow and free cash flow conversion.
Balance sheet actions and updated fiscal 2026 outlook
OSI ended the quarter with net leverage of approximately 2.2 under its credit agreement. Edrick highlighted a convertible notes transaction completed in November in which the company raised $575 million at a 0.5% coupon. He said the transaction increased liquidity and reduced interest expense through revolver paydown. The company also repurchased approximately 547,000 shares at an average price of $267 per share in connection with the transaction.
For fiscal 2026, OSI raised non-GAAP EPS guidance while maintaining its revenue outlook. The company now expects non-GAAP diluted EPS of $10.30 to $10.55, which management said would represent 10% to 13% year-over-year growth. Edrick said the year-over-year headwind from reduced Mexico Security contract revenue is expected to be most pronounced in fiscal Q3, with an anticipated revenue headwind of over $50 million compared with the prior year, and that fiscal Q4 growth is expected to be “significantly stronger” than Q3 as the Mexico comparison eases and backlog converts.
Management also cautioned that results could vary due to factors such as backlog conversion timing, new bookings, timing of cash collections, tariffs, and potential future government shutdowns. The non-GAAP EPS guidance excludes impacts from potential impairment, restructuring and other charges, amortization of acquired intangible assets and related tax effects, and discrete or other non-recurring items.
About OSI Systems (NASDAQ:OSIS)
OSI Systems, Inc (NASDAQ: OSIS) is a publicly traded technology company founded in 1987 and headquartered in Hawthorne, California. The company designs, develops and manufactures advanced security and inspection systems, optoelectronic devices and medical imaging equipment. Over its history, OSI Systems has grown its product offerings through internal research and development as well as strategic acquisitions, expanding its capabilities in mission-critical sensing and inspection technologies.
OSI Systems operates three primary business segments.
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