OSI Systems (NASDAQ:OSIS) Posts Better-Than-Expected Sales In Q2, Provides Encouraging Full-Year Guidance

Electronic components and systems provider OSI Systems (NASDAQGS:OSIS) reported Q2 CY2024 results beating Wall Street analysts’ expectations, with revenue up 16.8% year on year to $480.9 million. The company’s full-year revenue guidance of $1.64 billion at the midpoint also came in 1% above analysts’ estimates. It made a non-GAAP profit of $2.84 per share, improving from its profit of $2.66 per share in the same quarter last year.

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Deepak Chopra, OSI Systems’ Chairman and Chief Executive Officer, stated, “We are pleased to report strong fourth quarter financial results as outstanding performance in the Security division led to record revenues and record adjusted earnings per share. Fiscal 2024 was a great success for the Company. With a backlog near all-time highs and visibility into a robust pipeline of opportunities, we believe we are well positioned for a strong fiscal 2025.”

With a name reflecting its initial focus on optical sensors, OSI Systems (NASDAQGS:OSIS) is a designer and manufacturer of specialized electronic systems and components.

Electrical Systems

Like many equipment and component manufacturers, electrical systems companies are buoyed by secular trends such as connectivity and industrial automation. More specific pockets of strong demand include Internet of Things (IoT) connectivity and the 5G telecom upgrade cycle, which can benefit companies whose cables and conduits fit those needs. But like the broader industrials sector, these companies are also at the whim of economic cycles. Interest rates, for example, can greatly impact projects that drive demand for these products.

Sales Growth

A company’s long-term performance can give signals about its business quality. Even a bad business can shine for one or two quarters, but a top-tier one tends to grow for years. Over the last five years, OSI Systems grew its sales at a weak 5.4% compounded annual growth rate. This shows it failed to expand in any major way and is a rough starting point for our analysis.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. OSI Systems’s annualized revenue growth of 14% over the last two years is above its five-year trend, suggesting its demand recently accelerated.

We can dig further into the company’s revenue dynamics by analyzing its most important segment, Security . Over the last two years, OSI Systems’s Security revenue (inspection systems) averaged 25.4% year-on-year growth. This segment has outperformed its total sales during the same period, lifting the company’s performance.

This quarter, OSI Systems reported robust year-on-year revenue growth of 16.8%, and its $480.9 million of revenue exceeded Wall Street’s estimates by 2.9%. Looking ahead, Wall Street expects sales to grow 5% over the next 12 months, a deceleration from this quarter.

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Operating Margin

Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling them, and, most importantly, keeping them relevant through research and development.

OSI Systems has managed its expenses well over the last five years. It demonstrated solid profitability for an industrials business, producing an average operating margin of 10.6%. This result isn’t too surprising as its gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, OSI Systems’s annual operating margin rose by 3.3 percentage points over the last five years, showing its efficiency has improved.

This quarter, OSI Systems generated an operating profit margin of 13.1%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

EPS

We track the long-term growth in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth was profitable.

OSI Systems’s EPS grew at a remarkable 13.5% compounded annual growth rate over the last five years, higher than its 5.4% annualized revenue growth. This tells us the company became more profitable as it expanded.

Diving into OSI Systems’s quality of earnings can give us a better understanding of its performance. As we mentioned earlier, OSI Systems’s operating margin was flat this quarter but expanded by 3.3 percentage points over the last five years. On top of that, its share count shrank by 6.9%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

Like with revenue, we also analyze EPS over a more recent period because it can give insight into an emerging theme or development for the business. For OSI Systems, its two-year annual EPS growth of 18% was higher than its five-year trend. We love it when earnings growth accelerates, especially when it accelerates off an already high base.

In Q2, OSI Systems reported EPS at $2.84, up from $2.66 in the same quarter last year. This print beat analysts’ estimates by 1.7%. Over the next 12 months, Wall Street expects OSI Systems to grow its earnings. Analysts are projecting its EPS of $8.12 in the last year to climb by 8.5% to $8.81.

Key Takeaways from OSI Systems’s Q2 Results

We were impressed by how significantly OSI Systems blew past analysts’ Security revenue expectations this quarter. We were also excited its revenue outperformed Wall Street’s estimates. Zooming out, we think this was a solid quarter. The stock remained flat at $146 immediately following the results.

OSI Systems may have had a good quarter, but does that mean you should invest right now? When making that decision, it’s important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it’s free.