Executive Summary

Record Q2 revenue of $419.8M (+12% YoY) and GAAP EPS of $2.22; non-GAAP EPS $2.42; strong bookings drove book-to-bill of 1.2 and backlog >$1.8B . Gross margin was 35.1% versus 37.9% last year due to mix; adjusted operating margin rose sequentially to 15.0% from 10.3% in Q1 .
Security division revenues +16% YoY to ~$290M with non-GAAP operating margin of 19.9% (second strongest in history), supported by aviation checkpoint and cargo programs; Opto returned to growth; Healthcare +7% YoY .
FY25 guidance raised: revenue to $1.685B–$1.710B (from $1.670B–$1.695B) and non-GAAP EPS to $9.10–$9.40 (from $9.00–$9.30) .
Cash flow inflected: Q2 cash from operations $52.5M (press release) and ~$53M on the call; DSO improved 16% sequentially and unbilled receivables down 19% QoQ, pointing to stronger 2H cash generation .

What Went Well and What Went Wrong

What Went Well

Security division strength: “adjusted operating margin for the division was 19.9%... second strongest... in our history,” with quarter-end backlog at a record high, supporting continued momentum .
Bookings and pipeline: CEO cited “record-breaking” quarter, robust backlog, and “high visibility into our opportunity pipeline,” anticipating a strong 2H FY25 .
Cash flow and working capital: “cash provided by operations of $53 million,” improved DSO by 16% sequentially; unbilled receivables down 19% QoQ, setting up strong free cash flow in 2H .

What Went Wrong

Gross margin compression: Q2 gross margin 35.1% versus 37.9% last year due to prior-year favorable security mix; management noted margin will fluctuate with mix and supply chain factors .
Higher interest expense: Net interest and other expense increased to $8.6M from $6.5M last year due to higher borrowings for working capital, acquisition, and buybacks (partly offset by convertible notes) .
Healthcare margins “wider than we would like,” albeit improved by 300 bps YoY; management continues to invest in next-gen platform with benefits expected in FY26 and beyond .

Financial Results

Consolidated Performance vs Prior Year and Prior Quarter

Metric	Q2 FY24 (older)	Q1 FY25	Q2 FY25 (newest)
Revenue ($USD Millions)	$373.2	$344.0	$419.8
GAAP EPS ($)	$2.11	$1.05	$2.22
Non-GAAP EPS ($)	$2.21	$1.25	$2.42
Gross Margin (%)	37.9%	35.3% (computed from $121.5M/$344.0M)	35.1%

Notes: Q2 cash from operations reported as $52.5M in the press release and ~$53M on the call due to rounding.

Segment Breakdown (Revenue and Operating Income)

Segment	Revenue Q2 FY24 ($MM)	Revenue Q2 FY25 ($MM)	GAAP Op Inc Q2 FY24 ($MM)	GAAP Op Inc Q2 FY25 ($MM)	Non-GAAP Op Margin Q2 FY24	Non-GAAP Op Margin Q2 FY25
Security	$250.0	$290.0	$51.9	$54.1	22.1%	19.9%
Optoelectronics & Manufacturing	$98.1	$100.7	$11.6	$12.3	13.4%	12.8%
Healthcare	$41.9	$44.9	$0.4	$1.7	1.7%	4.7%
Corporate/Eliminations	N/A	N/A	$(11.6)	$(10.1)	N/A	N/A

KPIs and Balance Sheet Highlights

KPI	Q2 FY24	Q1 FY25	Q2 FY25
Book-to-Bill	N/A	~1.0+ (Opto book-to-bill >1 cited)	1.2
Backlog ($B)	N/A	~$1.8	>$1.8
Cash from Operations ($MM)	$(23.5)	$(37.2)	$52.5
Capital Expenditures ($MM)	$3.5	$7.7	$5.5
Net Debt ($MM)	N/A	Total debt $736.3; cash $85.1	Total debt $710.8; cash $101.6

Guidance Changes

Metric	Period	Previous Guidance	Current Guidance	Change
Revenue ($B)	FY 2025	$1.670–$1.695	$1.685–$1.710	Raised
YoY Growth (%)	FY 2025	8.5%–10.2%	9.5%–11.1%	Raised
Non-GAAP Diluted EPS ($)	FY 2025	$9.00–$9.30	$9.10–$9.40	Raised
EPS YoY Growth (%)	FY 2025	10.7%–14.4%	11.9%–15.6%	Raised

Management does not reconcile forward non-GAAP EPS due to forecasting complexity .

Earnings Call Themes & Trends

Topic	Previous Mentions (Q-2 and Q-1)	Current Period (Q2 FY25)	Trend
Border security and U.S. policy	Q1 FY25: Security +36% YoY; raised FY25 guidance; acquisition for military/space/surveillance	CEO: bipartisan border focus; dominant CBP position; RF Solutions expands over-the-horizon capabilities	Strengthening pipeline; policy tailwinds
Aviation upgrade cycle	Q1 FY25: Security momentum and bookings	International wins; TSA replacement cycle in coming years; bundled checkpoint/checked baggage/trace	Building cycle; improving win rates
Services mix and recurring revenue	Q1 FY25: Backlog up; bookings solid	Higher-margin service rev expected to grow as warranties roll off; starting as early as Q3	Mix shift to services, margin accretive
Opto onshoring/China diversification	Q1 FY25: Solid results despite inventory adjustments	Inventory “rightsizing” largely behind; Mexico facility ramp; book-to-bill >1; margin expansion expected in 2H	Recovery and expansion
Tariffs/macro	Q1 FY25: Convertible notes; deleveraging; global footprint	Flexible multi-region manufacturing mitigates tariff risk; wait-and-see	Manageable risk
Cash flow and working capital	Q1 FY25: CFOA $(37.2)M; working capital build	CFOA ~$53M; DSO down 16% QoQ; unbilled receivables down 19% QoQ	Improving trajectory
Healthcare R&D/platform	Q1 FY25: Improved margins; focus on patient monitoring	Next-gen platform targeted FY26+; exploring leasing/remote monitoring/predictive analytics	Investment phase, future catalysts

Management Commentary

“We are pleased to report a record-breaking second quarter for revenues and earnings, led by continued strong execution in the Security division and solid performance in the Optoelectronics and Manufacturing division.” — Ajay Mehra, CEO .
“The adjusted operating margin for the [Security] division was 19.9%… representing the second strongest adjusted operation margin in our history… quarter-ended backlog increased to a record high.” — Ajay Mehra .
“Our gross margin in Q2 last year of 37.9% was the strongest in any quarter of fiscal ’24 due to a very favorable product mix in security… adjusted operating margin… 15.0%, up sequentially from 10.3% in Q1.” — Alan Edrick, CFO .
“We announced an $81 million order… mobile high-energy cargo and vehicle inspection systems… [and] a $32 million award… M60s… for port and border security applications.” — Ajay Mehra .
“We are increasing our fiscal ’25 revenues and non-GAAP diluted EPS guidance… $1.685–$1.710 billion and $9.10–$9.40.” — Alan Edrick .

Q&A Highlights

Border security policy tailwinds: CEO emphasized bipartisan support and OSI’s dominant CBP position; expanding software like CertScan enables drug interdiction and screening enhancements .
RF Solutions acquisition: Leveraging OSI’s global sales infrastructure; over-the-horizon radar applicable to border/drug interdiction; incremental new business beyond recompetes .
Mexico contracts: Significant 1H contributor; expected lighter than 2H FY24 but replaced by non-Mexico backlog; services to ramp as installed base exits warranty .
Opto trajectory: Inventory normalization, Mexico ramp, favorable mix; margin expansion in 2H; book-to-bill >1 in Q2 .
Cash flow seasonality: Milestone billing causes lumpiness; DSO improvement and unbilled declines support strong 2H FCF; unbilled receivables expected “significantly down” by June .
Tariffs: Diversified manufacturing footprint mitigates risk; flexible relocation across U.S./Europe/Asia .
Debt maturity: Credit facility matures Dec ’26 (FY27); plan to amend/extend in calendar ’25; investment-grade pricing on facility .

Estimates Context

Wall Street consensus (S&P Global) for Q2 FY25 EPS and revenue was unavailable due to data-access limits at time of analysis. As a result, we cannot quantify beats/misses vs S&P consensus for Q2 FY25. We will update when S&P data becomes accessible.
Management raised FY25 guidance, which typically prompts upward estimate revisions for revenue and non-GAAP EPS ranges .

Key Takeaways for Investors

Security division momentum, record backlog, and rising services mix underpin margin durability; aviation and border programs remain catalysts, with services providing higher-margin recurring revenue .
Sequential margin improvement and working capital normalization support stronger 2H cash generation; DSO and unbilled receivables trends are positive .
Raised FY25 revenue/EPS guidance and robust backlog (> $1.8B) indicate confidence in conversion and pipeline; watch Q4 seasonality and mix benefits .
Opto recovering with onshoring and Mexico ramp; expect 2H margin expansion and demand normalization, aided by favorable mix and >1 book-to-bill .
Healthcare is investing for FY26+ platform launch; near-term margin improvement continues but pacing below target; leasing/analytics could differentiate .
Policy tailwinds in U.S. border security and TSA replacement cycles offer multi-year opportunities; international wins broaden installed base and service annuity .
Near-term trading: narrative supports strength on guidance raise and cash flow inflection; monitor proof points in Q3 on service revenue growth and Opto acceleration; medium-term thesis benefits from services mix, policy-driven demand, and disciplined SG&A leverage .

Citations: Financials and guidance from Q2 FY25 8-K and press release ; prior quarter Q1 FY25 press release ; earnings call transcript for qualitative themes, margins, cash flow, and Q&A .

OSI SYSTEMS INC (OSIS)·Q2 2025 Earnings Summary