OSIS Q2 Deep Dive: Services Outperformance and Security Pipeline Drive Guidance Upside

Security and healthcare technology company OSI Systems (NASDAQ:OSIS) reported Q2 CY2025 results beating Wall Street’s revenue expectations, with sales up 5% year on year to $505 million. The company’s full-year revenue guidance of $1.83 billion at the midpoint came in 2% above analysts’ estimates. Its non-GAAP profit of $3.24 per share was 1.6% above analysts’ consensus estimates.

Is now the time to buy OSIS? Find out in our full research report (it’s free).

StockStory’s Take

OSI Systems reported Q2 results that exceeded Wall Street expectations, but the market response was negative, reflecting investor concerns about future growth drivers. Management highlighted double-digit service revenue growth in the Security division and robust demand across aviation and international border markets as central to the quarter’s outcome. CEO Ajay Mehra noted, “Our Security division maintained strong momentum in core markets like ports, orders, aviation and critical infrastructure, with Optoelectronics achieved double-digit revenue growth.” The company also faced a decline in Healthcare segment performance, which management acknowledged as a drag on consolidated growth.

Looking forward, OSI Systems’ guidance is shaped by expectations for sustained Security division strength, increased service revenue mix, and a robust backlog supported by international and U.S. government demand. Management pointed to opportunities from new U.S. legislation supporting border and infrastructure security, and recurring service contracts. CFO Alan Edrick emphasized, “We anticipate that our service revenue growth will continue to be strong…and may outpace the product revenue in terms of overall growth percentage.” Management also discussed potential upside from large-scale programs like the Golden Dome project and turnkey security contracts, while cautioning that timing of government awards and customer payments could affect results.

Key Insights from Management’s Remarks

Management emphasized that Security service revenue growth and a diversified backlog offset headwinds from major contract wind-downs in Mexico, while Optoelectronics saw demand normalization and Healthcare underperformed.

• Security division momentum: Demand for aviation, port, and border security solutions drove strong growth, with management citing notable contract wins in the Middle East and U.S. These included large orders for Eagle M60 ZBx inspection systems and service contracts for ongoing system maintenance, supporting recurring revenue streams.
• Services revenue outperformance: Service revenues in the Security division increased 24% year over year, driven by an expanding installed base and more systems moving out of warranty. Management highlighted that service revenues carry higher margins than product sales and anticipate this trend to continue, improving overall profitability.
• Backlog diversification: The company’s $1.8 billion backlog is now dominated by non-Mexico security contracts, reflecting successful global customer diversification. Management explained that core security revenue, excluding Mexico and acquisitions, grew over 50% in the quarter, indicating underlying demand resilience.
• Optoelectronics stabilization: Management reported that key OEM customers in the Optoelectronics segment have largely stabilized inventories, providing a firmer foundation for future demand. Growth was attributed to Flex contract manufacturing and increased near-shoring to Mexico, which helps minimize U.S. tariff exposure.
• Healthcare segment challenges: The Healthcare division underperformed, impacting consolidated growth. Management remains focused on product innovation and operational efficiencies in this segment, with investments in next-generation patient monitoring and predictive health solutions expected to improve future performance.

Drivers of Future Performance

OSI Systems expects Security division service growth, new government funding, and improved cash flow to drive results, while timing of awards and collections remain key variables.

• Service revenue mix shift: Management expects service revenues to continue growing faster than product sales within Security, supported by a larger installed base and new long-term maintenance contracts. This should lead to sustained margin expansion, given the higher profitability of service work.
• Government funding and pipeline: The company anticipates significant revenue contributions from new U.S. legislation supporting border security, port upgrades, and the Golden Dome defense program. However, management cautioned that most funding is expected to convert into orders in the latter part of the year or beyond, so the timing of revenue realization is uncertain.
• Cash flow and receivables: OSI Systems projects strong cash generation in the coming year as delayed payments from major customers—especially in Mexico—are collected. CFO Alan Edrick stated the company expects free cash flow conversion to exceed net income, though collection timing could cause quarterly variability.

Catalysts in Upcoming Quarters

Looking ahead, the StockStory team will monitor (1) the pace of Security service revenue growth and margin improvement, (2) conversion of U.S. and international government funding into new contracts, and (3) cash flow normalization from timely customer payments—especially in Mexico. Progress in the Healthcare segment and updates on large turnkey and Golden Dome opportunities will also be watched closely.

OSI Systems currently trades at $215.64, down from $223.25 just before the earnings. Is the company at an inflection point that warrants a buy or sell? Find out in our full research report (it’s free).

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