OSI Systems (NASDAQ:OSIS) outlined its business mix, near-term growth drivers, and margin and cash flow expectations during a conference discussion featuring Chief Financial Officer Alan. The company described a portfolio built around three divisions—Security, Optoelectronics, and Healthcare—with Security representing the largest share of revenue and profit and increasingly supported by recurring service revenue.
Three-division structure and vertical integration
Management described OSI Systems as operating across:
- Security, the largest division at “over two-thirds” of revenue and a higher percentage of profit, focused on security detection for cargo and vehicle inspection at ports and borders as well as aviation screening under the Rapiscan brand.
- Optoelectronics, about a quarter of revenue, which produces sensors, detectors, and electronic components sold to OEM customers across aerospace and defense, industrial, automotive, technology, and medical markets. The unit also supplies components used in OSI’s Security and Healthcare products, which the CFO said supports margin and supply chain control through vertical integration.
- Healthcare, less than 10% of revenue, selling patient monitoring and cardiology equipment primarily to medium and large hospitals. About half of the Healthcare business is recurring revenue in nature, the CFO said.
Security: international strength, shifting domestic opportunities
Looking ahead, management expects incremental growth to skew more toward the U.S. The CFO highlighted border initiatives with U.S. Customs and Border Protection (CBP) and said the “One Big Beautiful Bill” is expected to be a “nice windfall,” with substantial orders anticipated for border deployments. The CFO also pointed to “tremendous opportunities” tied to “Golden Dome,” citing an acquisition completed about 18 months ago that added radio frequency (RF) technology.
CBP funding, competitive landscape, and AI-driven product differentiation
Discussing the “One Big Beautiful Bill,” the CFO said it includes funding for non-intrusive inspection (NII) scanning equipment—OSI’s core offering. He cited approximately $1.0 billion to $1.1 billion allocated for NII and said the company is seeing momentum to move quickly. He also referenced additional funding areas including Border Patrol, biometrics (where OSI believes it is well-positioned), and security for major events such as the Los Angeles Olympics and the World Cup, noting OSI’s work at the Paris Olympics and the Qatar World Cup.
On historical CBP awards, management said OSI has previously won about 40% to 45% of overall awards and believes it is well-positioned for future awards. The CFO described the competitive set in cargo inspection as limited, naming Leidos and U.K.-based Smiths Detection as major competitors, along with a private company that has received a smaller share.
Technologically, the CFO said OSI differentiates itself by supporting a broad range of scanning technologies—low, medium, and high energy—and by offering combinations such as low-energy backscatter with high-energy X-ray in a single product. The company also emphasized its AI roadmap, noting it acquired a small AI company 4 to 5 years ago and has been incorporating AI into products, alongside investments in R&D and cybersecurity.
Golden Dome exposure and capacity expansion
OSI characterized Golden Dome as “extremely real” for the company, tied to RF technology obtained through an acquisition about 18 months ago. The CFO said OSI is on a recent $151 billion IDIQ vehicle and believes it is well-positioned to win business in the near to medium term, particularly related to “Over-the-Horizon Radar.”
To support anticipated growth, OSI said it has been expanding manufacturing capacity into a new location in the Texas area, a process that began in November and is expected to be completed during calendar 2026.
Margins, recurring revenue, and free cash flow priorities
Management emphasized a mix shift in Security toward services. The CFO said Security revenue comes from products and services, with services growing at an accelerated rate and carrying “north of 10 percentage points higher” margin than product revenue. He noted near-term margin comparisons have been affected by high-margin Mexico revenue, but said the final difficult comparison ends in the March quarter, setting up potential margin expansion as the company enters fiscal 2027.
In addition to traditional post-warranty service, OSI detailed a “security as a service” model (also described as turnkey), where the company owns and operates equipment at customer sites under long-term contracts ranging from 6 to 15 years and charges per scan or per site per month. The CFO said OSI was the first to offer this model and remains the only company to do the “whole thing together.” He also highlighted CertScan, proprietary software developed from OSI’s installed base and image database, and said the company has launched CertScan as a standalone software offering.
The CFO said service revenue in Security is currently about 30% of divisional revenue and that OSI has goals to increase that meaningfully. He also described inflation clauses within service arrangements and said a growing installed base supports service revenue expansion over time.
On cash generation, management said it sees an “inflection point” for free cash flow through calendar 2026 and into 2027, supported by profits and working capital release. The CFO said accounts receivable and days sales outstanding have been elevated due to Mexico contracts, but as those programs wind down on the product side, the company expects cash collections to drive normalization during the year. OSI’s capital allocation priorities were described as M&A, share repurchases, and paying down debt, with the CFO noting these are not mutually exclusive.
Finally, OSI described Healthcare as undergoing meaningful operational change under a new business president nearing a one-year tenure, including leadership turnover and increased R&D investment aimed at new patient monitoring platforms. The CFO said Healthcare has the highest contribution margins among OSI’s divisions, making incremental growth potentially meaningful to the bottom line despite the segment’s smaller size.
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.
