OSIS Q3 Deep Dive: Diversified Growth Offsets Mexico Headwinds, Services Drive Recurring Revenue

Security and healthcare technology company OSI Systems (NASDAQ:OSIS) reported Q3 CY2025 results topping the market’s revenue expectations, with sales up 11.8% year on year to $384.6 million. The company’s full-year revenue guidance of $1.85 billion at the midpoint came in 1.1% above analysts’ estimates. Its non-GAAP profit of $1.42 per share was 3.1% above analysts’ consensus estimates.

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StockStory’s Take

OSI Systems delivered a third quarter that outperformed Wall Street’s revenue expectations, with management attributing results to broad-based strength across all divisions and continued growth in high-margin service revenues. CEO Ajay Mehra emphasized the company’s ability to offset reduced contributions from large Mexico security contracts with robust performance in aviation, cargo, and radio frequency detection product lines. CFO Alan Edrick pointed to a record backlog and accelerating demand from recurring service agreements as key contributors.

Looking forward, management raised its full-year revenue and adjusted EPS guidance, citing ongoing momentum in recurring service revenues and an expanding pipeline of global security and integration projects. Ajay Mehra highlighted that investments in technology innovation and SaaS-based offerings, such as the CertScan platform for government clients, are expected to underpin sustainable growth. CFO Alan Edrick cautioned that margin expansion will likely reaccelerate as Mexico contract headwinds normalize later in the year, while strong cash flow from receivable collections is projected to improve financial flexibility.

Key Insights from Management’s Remarks

Management credited the quarter’s performance to strong execution across all business units, with notable growth in recurring service revenues and a diversified product mix mitigating declines from Mexico contracts.

• Service revenue acceleration: Management noted that service revenues grew 23% year-over-year, reflecting a shift toward higher-margin, recurring revenue streams as more installed products require ongoing support and maintenance.
• Security division momentum: The Security division achieved 13% revenue growth, driven by demand for aviation, cargo, and RF detection solutions. New contract wins, including over $75 million in nonintrusive inspection and $60 million in RF product orders, boosted backlog.
• Product mix impact on margins: While service growth supported profitability, a less favorable mix in product sales led to flat operating margins year-over-year. Management expects margin improvement as product mix normalizes and efficiencies ramp in new manufacturing facilities.
• Optoelectronics and Manufacturing strength: This segment posted record revenues, with notable expansion in North America as customers seek nearshoring options amid global tariff uncertainties. The Mexico manufacturing base is increasingly strategic for supply chain flexibility.
• Healthcare division progress: Sales grew 10%, benefiting from international market activity and operational improvements under a new leadership team. Management signaled further investments in R&D and efficiency initiatives to drive long-term growth in this segment.

Drivers of Future Performance

OSI Systems expects recurring service revenue growth, technology innovation, and robust global security demand to drive performance in the coming quarters, though margin expansion depends on normalization of Mexico contract dynamics.

• Recurring service revenue growth: Management expects service revenues to continue outpacing product sales, benefiting from increased installations and multi-year support contracts, which provides better visibility and stability for future earnings.
• Pipeline of government and security projects: The company anticipates heightened demand for security and integration solutions driven by geopolitical tensions, new government funding (including U.S. border security initiatives), and expanded adoption of SaaS-based offerings like CertScan. Timing of government contract awards could affect quarterly results.
• Margin improvement as mix normalizes: CFO Alan Edrick highlighted that margin pressures from Mexico contract revenue declines should ease after the next quarter, setting the stage for operating leverage and efficiency gains—though management cautions supply chain costs and product mix can introduce variability.

Catalysts in Upcoming Quarters

In future quarters, we will focus on (1) the pace of recurring service revenue growth and its contribution to margin stability, (2) the timing and scale of new government security and integration contract awards, and (3) progress on collecting outstanding Mexico receivables to drive free cash flow. Additionally, the normalization of product mix and effective R&D investments will be important markers for sustained profitability.

OSI Systems currently trades at $243.82, in line with $243.35 just before the earnings. At this price, is it a buy or sell? Find out in our full research report (it’s free for active Edge members).

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