OSI Systems (OSIS), which makes baggage screening machines for airports and patient monitoring equipment for hospitals, is trading sharply higher today (+12%) after reporting Q2 (Dec) earnings well ahead of market expectations. Non-GAAP EPS jumped 23% YoY to $1.19 while revenue rose 9.3% YoY to $303.2 mln.
The top line growth was driven by its Security division, its largest division by far. This segment saw revenue increase 10% YoY to $188.7 mln. OSIS saw strong sales activity in key markets, such as aviation, port and border security. In particular, OSIS saw significant growth in RTT and cargo equipment sales.
In terms of new products for its Security unit, OSIS introduced a trace product, the Itemiser 4DN, which uses a non-radioactive ionization source and is optimized for narcotics detection and ideal for drug interdiction applications across a variety of markets such as customs and border, prisons and critical infrastructure, among others.
In its smaller segments (Healthcare and Optoelectronics), results were mixed. Its Healthcare segment saw revenue decline 2% YoY to $51.6 mln. While still a decline, the segment improved significantly from Q1 (Sep), when revenue declined 16% YoY. Bookings for Healthcare accelerated leading to stronger sales. With an enhanced focus on profitable product lines and channels coupled with a reduced cost structure, the division returned to double digit operating margins.
With new leadership and cost improvements, Healthcare is seeing better results. OSIS reduced its cost base and exited an unprofitable sales channel and a product family. This not only adds enhanced focus to its core patient monitoring, cardiology and supplies business, but adds to operating margins as these are higher margin products.
Its Optoelectronics and Manufacturing division continued to perform well in the quarter delivering sales growth of 13% YoY to $72 mln. The segment also saw operating margin expansion and strong cash flow.
In sum, this was a very nice quarter for OSIS. Investors are pleased with its Security performance and the Healthcare segment seems like it's starting to turn a corner. Another notable thing is that the stock had been stuck in a $70-80 trading range since early June 2018. And this report caused a high volume breakout on good volume. That's often a positive sign for potentially another leg higher in the stock. OSIS is not well known, but it's a name worth keeping on the radar.