Conference Transcript - OSIS 2026-09-10

Operator

Thank you for standing by and welcome to the OSI Systems Inc.'s fourth quarter 2026 conference call. At this time, all participants are in a listen-only mode. After the speaker's prepared remarks, there will be a question and answer session. To ask a question during this session, you'll need to press star 11 on your telephone. If your question has been answered and you'd like to remove yourself from the queue, simply press star 11 again. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Alan Edrick, Chief Financial Officer. Please go ahead, sir.

Speaker 3

Thank you. Good afternoon and thank you for joining us. I'm Alan Edrick, Executive Vice President, OSI's President and CEO. Welcome to the OSI Systems Fiscal 2026 Fourth Quarter and Year-End Conference Call. We are pleased that you can join us as we review our financial and our operational results. I'd like to remind everyone that today's discussion will include forward-looking statements, and the company wishes to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 with respect to such forward-looking statements. All forward-looking statements made on this call are based on currently available information, and the company undertakes no obligation to update any forward-looking statement based on subsequent events, new information, or otherwise. We will also reference both GAAP and non-GAAP financial measures. Applicable reconciliations are available in today's earnings release. I will begin with a high-level summary of our financial performance for the fourth quarter and the full fiscal year, and then turn the call over to AJ for a discussion of our business and operational performance. We will then finish with more detail regarding our financial results and our outlook for fiscal 27. Before I discuss our fourth-quarter records, let me address the revenue results. Full-year revenues of $1.79 billion finished below our guidance range, and fourth-quarter revenues of $484 million were down approximately 4% year-over-year. Importantly, these results were affected by the timing of approximately $50 million of planned security deliveries that moved beyond our June 30th fiscal year end because of conflict related delays and site access constraints in the middle east i want to emphasize that these expected revenues are deferred not orders lost they remain firmly in our backlog and are expected to be delivered on a later schedule setting this aside we were really pleased with the overall performance as multiple key performance metrics for q4 and the full fiscal year were extremely strong. We closed fiscal 26 with exceptional cash generation and strong profitability driven by solid adjusted operating margin expansion. We delivered record fourth quarter operating cash flow of $182 million. We grew fourth quarter non-GAAP earnings per share by 17% to a record $3.78. And we ended the year with a record backlog of approximately $1.9 billion. For the full year, Revenues reached a record $1.79 billion, up 4% year-over-year, and adjusted earnings per share grew to a record $10.35, up 11% year-over-year. Bookings were solid across the three divisions, and we finished the year with a record backlog and solid visibility as we enter fiscal 27. We also have a significant opportunity pipeline, and we have recently secured several important program wins. Our cash conversion was outstanding, allowing us to strengthen the balance sheet while continuing to return capital to shareholders. During the fourth quarter, we repurchased approximately 565,000 shares at an average price of about $219 per share for a total of $123.6 million. Our board recently authorized an additional 1 million shares, leaving approximately 1.1 million shares available under our stock buyback program. Before diving more deeply into our financial results and discussing our outlook for Fiscal 27, I'll turn the call over to AJ.

A.J. Mara, CEO

Thank you, Alan, and thank you to everyone for joining us today. I am pleased to be here to discuss our fourth quarter and full fiscal year 2026 results. Fiscal 2026 was a strong year for OSI Systems, capped by record annual revenues of $1.79 billion record q4 and annual non-gap earnings for share and record q4 and annual operating cash flow that said as alan pointed out as well we finished 2026 with revenues below expectations mostly due to delays with the situation in the middle east overall i am proud of our how our team has performed across the portfolio, delivering solid bookings that translated into a record backlog of approximately $1.9 billion, which gives us good visibility as we enter fiscal 2027. While the security division faced revenue headwinds in the quarter from the Middle East conflicts that have shifted the timing of certain deliveries, Optoelectronics delivered strong growth on broad-based demand and healthcare posted an improved quarter. The security-related deliveries that were pushed out remain in backlog and are expected to be completed in future quarters. So let's discuss our business in more detail, beginning with security. With DHS reopening in April following the shutdown, we have seen procurement activity accelerate. Since the close of our fiscal year, CBP was awarded, has awarded us two five-year IDIQ contracts, one with a ceiling of approximately $200 million for relocatable RAPISCAN passenger vehicle inspection systems, and a second with a ceiling of roughly $85 million for van-mounted mobile x-ray inspection systems. We have already received delivery orders under both these IDIQs, including a task order valued at about $21 million. These IDIQs represent continued funding provided under one big, beautiful bill. We expect to see some revenues contribution from these awards later in fiscal 2027, but significant contributions are expected in fiscal 2028 and beyond as well we have also made growing recurring revenue a priority across the security division and with the size of our install base today we expect that effort to translate into substantial service revenue growth in fiscal 2027. recently we entered into an agreement with la28 to establish a rapid scan as an official supporter of team usa and the official physical screening and security technology hardware and software solutions provider of the LA28 Olympic and Paralympic Games. This strategic partnership builds upon our security efforts at major recent events, such as the FIFA World Cup, the Paris Olympics, and the Milan Winter Games. Few companies have a comparable track record at this scale, and our experience is real advantage as we pursue future large venue and event security opportunities. We continue to see strong momentum in our radio frequency, also known as RF business and homeland security defense business. Our over-the-horizon radar programs and involvement in multiple Golden Dome initiatives position us at the forefront of some of the nation's most significant defense priorities. Fiscal 2026 was an outstanding year for the RF business. During fiscal 26, we were awarded an undefinitized contract action with a not-to-exceed value of approximately $235 million for the production and integration of a homeland defense over-the-horizon radar transmit subsystems our largest RF award today and we continue to see fall on opportunities related to this program we are also a participant in the shield IDIQ which supports much of the golden dome related initiatives and gives us a vehicle to pursue additional programs as they're defined over the next few years all that said the current level of customer engagement across our RF portfolio is the highest we have seen for this product line. Turning to optoelectronics and manufacturing, which delivered another strong performance in fiscal 2026 as full-year revenues grew 9% to $451 million with strong margins. The bookings in Q4 reflected the strength and breadth of our ad markets, and we expect these underlying trends to continue in fiscal 2027. Our ability to support customers with our highly engineered products, precision manufacturing, and global reach continues to differentiate us across the aerospace, defense, healthcare, and industrial customer base. Our vertically integrated model and global manufacturing footprint helps us continue to capture business as customers diversify supply chains and our backlog gives us strong visibility heading into fiscal 2027. Finally, our healthcare division delivered an improved fourth quarter as revenues grew approximately 5% year over year and operating margin expanded to 10% from 1% compared to last year's Q4. These results reflected the operational improvements we've been implementing throughout the year. We remain focused on expanding our install base, supporting providers with innovative clinical solutions, and advancing the product development initiatives behind our next generation patient monitoring platform. we are encouraged by the opportunities ahead as we enter fiscal 2027 our record backlog robust pipeline and discipline execution give us confidence for the coming years as always I would like to thank our employees customers and stockholders for the continued support and dedication with that I will turn the call over to Alan to discuss our

Speaker 3

financial results and our fiscal 2027 guidance in more detail before we open the call for questions thank you thank you AJ let's begin with our revenue performance by division revenues in each of our opto and healthcare divisions increased 5% year-over-year. In security, revenues declined 7%, reflecting the impact of the conflict in the Middle East, which delayed certain deliveries beyond our fiscal year end, along with a difficult comparison against higher Mexico program revenues in the prior year quarter. We closed the year with approximately $1.9 billion in backlog. Deliveries that shifted out of the quarter remained in backlog, while certain expected bookings in the affected region were deferred. As expected, we reported nearly $150 million lower Fiscal 26 revenues related to the Mexico security contracts compared to the prior year, which included about a $20 million adverse impact in Q4. As we move into Fiscal 27, we expect this headwind to moderate to less than $25 million for the full year, which is expected to be concentrated in the first half. Turning to services. For the full year, service revenues grew 13% to $441 million, though were fairly flat in Q4. Similar to Q3, fourth quarter service revenues in the prior year benefited from significant installation activity related to the Mexico contracts. Excluding those installation revenues, security service revenues increased 9% year-over-year in Q4. Looking forward, in fiscal 27, we expect strong double-digit growth in service revenues for the full year. Our Q4 fiscal 26 gross margin expanded to 34.7% from 33.3% in the same quarter in the prior year. As a more favorable revenue mix on product sales, more than offset the benefit in Q4 of the prior year received from higher installation-related service revenue. Our margins can fluctuate based on product and service mix and volume, supply chain cost, foreign exchange, tariffs, and other factors. Moving on to operating expenses. We continue to work diligently across all divisions to manage our SG&A cost structure efficiently. SG&A expenses in the 2026 Q4 were $70 million, down 7% from the prior year, Q4, representing 14.4% of sales, compared to 14.8 percent of sales in the prior year. R&D expenses in Q4 were 19.5 million or 4 percent of revenues up from 18.8 million or 3.7 percent of revenues in the same quarter last year. This increase stems from our commitment to investing in innovation resulting in market-leading offerings and positioning OSI well for the future. We expect to continue our heightened R&D efforts to advanced key initiatives. Even with these R&D investments, our combined SG&A and R&D expenses as the percentage of sales have decreased annually for each of the past eight years, underscoring our ability to drive operating efficiencies while still funding growth initiatives. Now let's move below the operating line. Net interest and other expenses in Q4 were $4.1 million, down from $7.2 million in the same quarter of the prior year, primarily due to reduced borrowing costs, coupled with increased interest income on higher cash balances. Our effective tax rate under GAAP was 20.8% in Q4 of 26 versus 19.8% in Q4 last year. Excluding discrete tax items, our normalized effective tax rate, which is the one used in calculating non-GAAP EPS, was 21.5% in Q4, compared to 21.9% in the same prior year quarter. On a non-GAAP basis, our Q426 adjusted operating margin was 17.7%, up 200 basis points from the 15.7% reported in the prior year fourth fiscal quarter, with each of the three divisions reporting growth. The security division's adjusted operating margin expanded from 20.4% to 20.8% in Q4 this year, driven by a stronger gross margin combined with reduced operating expenses. The opto-adjusted operating margin increased to 14.7% in Q4 of 26, from 13.6% in last year's fiscal Q4, primarily from the benefits of economies of scale and a more favorable mix of revenues. And, on the heels of stronger revenues, the adjusted operating margin of our health care division, as A.J. said, increased to 10% in Q4 this year from 1% in Q4 the last fiscal year, reflecting the operating leverage. And while we would not extrapolate one quarter, it shows what this division can do as volumes grow. Moving to cash flow and the balance sheet. We generated a record $182 million of operating cash flow in Q4 and $276 million for the full fiscal year, driven by strong collections across the businesses. This included collecting $159 million from our largest customer in Mexico in Q4. On that customer specifically, the balance stood at $345 million at the end of Q3, representing 40% of the company's total accounts receivable, and declined to $190 million, or 25%, of the company's total AR as of the end of Q4. This balance should significantly decrease further throughout fiscal 27 as substantial payments are expected to be received, contributing to the strength in the anticipated fiscal 27 operating cash flow and free cash flow conversion. DSO in Q4 decreased 18% from third quarter DSO. CapEx in Q4 was $9.3 million, while depreciation and amortization expense in the quarter was $13.3 million. Our balance sheet remained solid, providing us great flexibility. We ended the year with $360 million in cash, up from $106 million a year ago, and with no amounts drawn under our lines of credit. During the year, we refinanced our credit facility and extended its maturity while adding low-cost, long-term debt. Gross debt increased with these moves, and with the capital we returned to shareholders, our net leverage at the end of Q4 of fiscal 26 was approximately 2.1, as calculated under our credit agreement. This leaves us ample capacity for both organic investment and acquisitions. During the fiscal year, we repurchased and retired 1.1 million shares, reflecting our conviction in the intrinsic value of our business. Our board recently authorized an additional 1 million shares for a purchase with no expiration on this authorization. Now turning to our guidance. We are introducing our fiscal 27 guidance for revenues and non-GAAP earnings per share. We currently expect revenues of 1.875 billion to 1.93 billion or 5 to 8.1 percent year-over-year growth and adjusted earnings per share of $11 dollars and thirteen cents to eleven dollars and forty nine cents or seven point five percent to eleven percent year-over-year growth this guidance factors in the expected impact from the conflicts in the Middle East which have affected near-term bookings though over a longer horizon the resolution of these matters could represent future opportunities for the company and although we are pleased with some notable wins with the Department of Homeland Security over the past few months and expect more, we believe a substantial amount of such bookings will lead to revenue in Fiscal 28 and beyond. Thus, we have included a portion of the delivery orders from CBP already in hand rather than the full ceiling value of those programs and assumed a later delivery schedule in the Middle Given the timing of each of these items, we currently expect Fiscal 27 growth to be strongest in the second half. We note that our Fiscal 27 non-GAAP diluted EPS guidance excludes any impact of potential impairment, restructuring, and other costs, amortization of acquired intangible assets and their associated tax effects, and discrete tax and other non-recurring items. We currently believe this guidance reflects reasonable estimates. The actual impact on the company's financial results of timing changes on the expected conversion of backlog to revenues, new bookings, timing of cash collections, tariffs, the conflicts in the Middle East, and supply chain disruptions, among other factors, is difficult to predict and could vary significantly from the anticipated impact currently selected in our guidance. actual revenues and non-GAAP earnings per diluted share could also vary from the guidance indicated above due to other risks and uncertainties discussed in our SEC filings in summary fiscal 26 was a year of record cash generation record backlog and strong earnings quality we strengthen our liquidity and we return capital to shareholders we are committed to operational excellence as we continue to grow our businesses and provide innovative products and solutions to our customers we aim to invest in key strategic areas with the goal of driving long-term value for our shareholders once again we thank the entire global OSI team for their dedication to supporting our customers and our partners their efforts are what makes these results possible and at this time we'd like to open the call to questions certainly and our first question for today.

Operator

It comes from the line of Josh Nichols from B. Riley Securities. Your question, please.

Josh Nichols, Analyst — B. Riley Securities

Yeah, thanks for taking my question. I understand, you know, the push out, not lost orders regarding the Middle East timing, but, you know, free cash flow generation was pretty phenomenal. I was curious, one, on that, do you expect that, you know, free cash flow generation in fiscal year 27 could similarly exceed net income generally, and how you think about the pace of collections going to drive that this year?

Speaker 3

Josh, thank you. This is Alan, and good question. We are anticipating a strong cash flow year in fiscal 27, strong free cash flow, and we do anticipate that our free cash flow could exceed 100% of net income and fully expect that to occur. With respect to the, you know, the pace of collections, we expect to, you know, be collecting nicely over the course of the fiscal year. We're hoping it's more front loaded than back loaded, but we do anticipate a good, strong overall year.

Josh Nichols, Analyst — B. Riley Securities

I think, you know, I think the timing, look, it's understandable, right, for some of the orders and millions, but there's been a flirt just over a while. I'm curious, like, how much of that, are you being conservative when you think about how much of that gets factored into the guidance for this fiscal year, given the ongoing conflict, and are you assuming most of that gets pushed out to fiscal year 28 and beyond? I'm just trying to get a little bit better grasp on how you're thinking about these newer awards and IDIQs and the timing in your guidance for this year.

A.J. Mara, CEO

So this is AJ. You know, like we pointed out, you know, there's a portion in 27, but the vast majority is in, you know, 28 and beyond. You know, these are multiple-year IDIQs. I do want to point out both the $200 million and the $85 million IDIQ with CBP is we're the only awardee on there. So, you know, it gives us very good confidence that as we look at not just 27, but 28, 29 and beyond, and the visibility really is there for us.

Josh Nichols, Analyst — B. Riley Securities

Thanks for clarifying. I'll hop back in the queue.

Operator

Thank you. And our next question comes from the line of Don Gooden from Citigroup. Your question, please.

Don Gooden, Analyst — Citigroup

Hey, guys. Thanks for taking my question. You know, obviously it's a complex situation in the Middle East. I was hoping to revisit, just maybe offer a little more detail on kind of what's going on there from your perspective on the ground just to kind of give us a better feel for things. And in the release, you used the phrase that demand for products and services remains encouraging. You know, in the prepared remarks, I felt like you used the word strong a few different times when talking about the shape of the business. I'm not trying to wordsmith this, but, you know, maybe just revisiting the Middle East and exactly how you see the demand, you know, today, a bit of a temperature check would be helpful.

A.J. Mara, CEO

Sure. And I think when we talk about strong demand, you know, you've got to look at the overall business, you know, the security, the opto, and even the improvements we've had on the healthcare side. But specifically on security, you know, we have a lot of strong demand. Finally, you know, like I pointed out, DHS is starting to release orders. It's been, it's been a flurry of activity. We've also had some strong orders, like we pointed out on the RF side, and international orders, you know, continue to be strong. Now, specifically on the Middle East, yes, I think there's been a, I guess, a delay, deferment of some orders. You know, they're more interested, you know, making sure they protect their people with incoming missiles, et cetera. And, you know, we are a partner. We work with them, make sure that, you know, whatever they need in the short run, we provide. But we believe in the long run, it's actually an opportunity for us, not just for the Middle East, but really with the DOD and other places where force protection is going to get more and more important, not just an overall security business and perhaps even including RF. So it's a complicated situation, but we've got to look at it as an overall business in the entire world, and we remain very confident there.

Don Gooden, Analyst — Citigroup

Got it. That's helpful. And for the RF product line, I think you used the phrase that customer engagement was the highest you've ever seen and certainly understandable given everything we're seeing in the defense complex and Golden Dome, et cetera. But I was hoping to talk a little bit more about that. And how are you kind of baking in the outlook for RF and the guidance for 27? And might it continue to grow in 28 as well?

A.J. Mara, CEO

So, you know, we don't really break it down, but I will say on the RF side, We see very strong growth, and we see that growth continue into 28. And I think, you know, you talk about the conflict of the Middle East. If anything, what's been going on there, when you talk about the Golden Dome, it only further strengthens the idea of why we need a Golden Dome going forward.

Don Gooden, Analyst — Citigroup

Got it. Appreciate the color. Thank you.

Operator

Thank you.

Speaker 4

And our next question comes from the line of Jeff Martin from Roth Capital Partners. your question please thanks good afternoon um not to belabor the middle east but just was curious if you could clarify whether these were deliveries to customers in the middle east or whether there was shipments going through the strait that perhaps were intended for non-middle eastern you know customers of other kind of other nations that were also impacted These were mostly, if not all, customers in the Middle East. And then in terms of, you know, what you kind of were assuming in your, you know, your updated fiscal 26 guidance after the third quarter, were you assuming that all of these orders would be delivered in Q4, or was the assumption that some of them would be and some of them would be pushed out further?

Speaker 3

Jeff, this is Alan. So, following the Q3 release, we assumed a significant portion of these Middle East orders would be delivered in Q4. Not all of them, but a significant portion.

Speaker 4

And it sounds like your assumption is that a good portion of these will be delivered in the second half of fiscal 27. Is that fair to say?

Speaker 3

That is fair to say. Not all of it, but a substantial portion in the second half of fiscal 27. Okay.

Speaker 4

And then my other question is on the bookings. Could you speak to book-to-bill for the full year and then also kind of give us a sense on Q4? I know there were delays that impacted bookings in the second half in general, but just some contextual reference would be helpful.

Speaker 3

Sure, Jeff. So for Q4, our book to bill was just shy of one. It was very strong in our opto division, solid in our security division as well, and healthcare. So giving us a very good book to bill in our highest revenue quarter. And for the full year, the bookings were quite solid as well. So the book to bill was a little bit north of one for the full year, which led to our highest overall backlog at the end of June.

Speaker 4

Excellent. Thank you.

Operator

Thank you. And our next question comes from the line of Christopher Glenn from Oppenheimer. Your question, please.

Christopher Glynn, Analyst — Oppenheimer

Hey, thanks. Just want to talk a little bit about the mechanics of phasing from uh large project awards idea iq and rf into backlog uh you know it was clear that the recent 285 million were subsequent to the quarter end and i think you talked about 21 million firm order plus others uh should we think about the the delivery orders as what goes into backlog and then also using that framework for the $235 million RF. I think most of that did go in backlog in the prior quarter. So, you know, I guess the implication would be those delivery orders were more coincident with the award, if you could clarify those points.

Speaker 3

Sure, Larry. Excuse me. Happy to do so. So with respect to the RF order, the $235 million that you referred to that we won in Q3, roughly 80% of that was booked into backlog in the third quarter, meaning we have it and a substantial portion of that is going to get delivered over the next couple of years. With respect to the two large IDIQs that we just won with CBP, the $285 million that you referred to, those are ceiling values where the sole awardee, as A.J. mentioned, what goes into our backlog is not the IDIQ value, it would be the firm fixed order, the delivery order, or the task order, that $21 million that A.J. referred to. So, over the course of time, we expect that to significantly increase and, you know, move into our backlog and then convert into revenue.

Christopher Glynn, Analyst — Oppenheimer

Okay, great. And my understanding is historically that those ceilings have essentially been realized and well within the IDIQ timeframe. And in particular, the context here is there's a much bigger funding than these amounts. so they've got to get through, you know, these, executing these portions in order to further exercise through the overall funding, which I think approximates a billion. Is that about the right understanding?

A.J. Mara, CEO

Yeah, that's the right understanding. I mean, keep in mind, these are orders that are being, you know, released. There are more orders that will be released in different products as we move along as part of the billion-dollar funding. So these are specifically for the two types of systems that I pointed out in my prepared remarks. Okay, great.

Christopher Glynn, Analyst — Oppenheimer

And last one was the, I wanted to ask about the OPTO segment profitability approaching 15%. I know you've brought on some new capacity. You're continuously expanding that business given the share opportunity with customers securing their supply chains. So as you utilize new capacity, are we talking about consistently higher margin opportunities for the O&M than over the past few years?

Speaker 3

Yeah, Chris, this is Alan. Really good question. And, you know, the Opto business has been bringing on a stronger customer profile that is leading to improved margins. You know, our plan for fiscal 27 is to continue to, you know, pair revenue growth with operating margin expansion. It will vary from, you know, quarter to quarter based upon the revenue mix that we see and what products and which customers we happen to be selling to in that quarter. But we do believe that we'll see further operating margin expansion through the course of fiscal 27. Great. Thanks for the answers.

Operator

Thank you. And our next question comes from the line of Larry Solo from CGS Securities. Your question, please.

Larry Solo, Analyst — CGS Securities

Great. Thank you. I guess the first question, just better frame the outlook for revenue guidance. So it sounds like you are including most of that 50 to come in, but just how about qualitatively from the Middle East? Are you assuming that there's still – sounds like there's still impact obviously going on there. So what are your high-level expectations for the Middle East? And also what's incorporated in the growth outlook from the United States? Not specifically, but is there some delays? Bookings obviously were delayed a lot. So it sounds like most of the benefits from Big Beautiful Bill and the acceleration in the U.S. that everybody's looking for, you're not building most of that in until 28. Is that all fair to say?

Speaker 3

Larry, I should probably flip-flop and call you Chris for the moment. Chris works. Good questions, Larry. So with respect to the Middle East, we've taken a conservative approach in our guidance for fiscal of 27, both with the planned deliveries that got deferred out of Q4 as well as for future orders. for obvious reasons while the conflict is taking place. With respect to the United States, the really exciting part for us is, yeah, we're getting nice bookings. We expect to get significantly more bookings. And you're exactly right. There's a portion built into fiscal 27, but a smaller portion. The much, much larger portion is in the fiscal 28, 29, and even beyond that. So it really gives us some excellent visibility into real nice growth beyond this fiscal year. So, you know, quite exciting for us. Was there a third element to it, or did I capture that?

Larry Solo, Analyst — CGS Securities

No, I think you got it. I just, the question, you know, a couple of follow-ups, just on the, so I know the big, beautiful bill, I think it was a little over $6 billion authorization, and obviously I think a billion of that and the heart of that was kind of in the heart of your non-obtrusive equipment. But I know that the Secure America Act came out. I think there was another, like, $3 billion or a little more than that, maybe north of that. Any clarity on how much of that could be funneled down into your kind of sweet spots?

A.J. Mara, CEO

So, you know, it's a great question. You know, we're aware of it. We're working with a customer very closely. Obviously, they're trying to make sure that they award, with all the delays, they award the billion dollars. at the fastest pace possible. I think there is still some clarity to be had with what the next $2 or $3 billion would be. And I would add on the big, beautiful bill, you know, we talk about customs, but there's substantial funding for the RF side as well, which is obviously helping us as well.

Larry Solo, Analyst — CGS Securities

If I can just squeeze one more, just on the margins, you're you're forecasting uh five to eight percent revenue growth and a little bit higher on the earnings seven to ten not much but but you're also getting a pretty good benefit from your your repurchases right you cut down your share count by like three percent so you're you're actually building in adjusted wise a little bit less earnings growth versus sales growth is there um any am i missing something any reason for that yeah larry we're we're just being a little bit modest and conservative coming out of the gate here.

Speaker 3

We're doing a little bit more investments and some OpEx and positioning ourselves for the future as well and some of the new innovative products that are coming out in the associated infrastructure sort of associated with it, but that's the general tone of it.

Larry Solo, Analyst — CGS Securities

Okay, since there's no structural change or anything, I mean you still, I know healthcare which we've talked about much smaller and opto, moderate size, but those, you know, we've talked about margins going up in those segments over the next few years. Any reason to believe that security shouldn't have upward trends in the margins as well? Maybe not so much this year, but just in general.

Speaker 3

Yeah, that's our plan. You know, our plan is to pair the top-line growth with operating margin expansion from a contract to contract basis. That may change a little bit, so it may change things from a quarter to quarter, But over the long term, structurally, our goal is to continue to improve our margins. We expect our service revenues to be growing at a faster clip than our product revenues, and our service revenues inherently carry a higher margin. So as we start to look out beyond 27, 28, 29, and 30, as service revenues become a bigger and bigger proportion of our overall revenues, that can really drive some nice operating margin expansion and security as well.

Larry Solo, Analyst — CGS Securities

Great.

Speaker 3

All right.

Larry Solo, Analyst — CGS Securities

I appreciate it.

Operator

Thank you. As a reminder, ladies and gentlemen, if you do have a question at this time, please press star 11 on your telephone. Our next question comes in the line of Seth Seifman from J.P. Morgan. Your question, please. Thanks.

Speaker 1

Hi, guys. This is Rocco on for Seth. Hi, Rocco. Building on the prior comment on the services revenue growth, should we think about a driver of that growth being the transition of the work in Mexico towards services? And does the services revenue in Mexico carry a stronger margin relative to OSI's typical services revenue, kind of similar to the product revenue being a pretty strong margin?

Speaker 3

Yeah, Rocco, so nice questions. So our service revenues, the Mexico service revenues are more or less in line with overall service revenue margins, which are quite strong to begin with. So we're encouraged by that. In terms of the service revenue growth, what's driving it, it's kind of multifold. Part of it is the Mexico product revenue rolling off of warranty and more and more of that moving into service revenues, that helps. The larger installed base, though, that we have throughout our cargo and vehicle inspection products, throughout our aviation and checkpoint products, and even some of the RF products will all drive more service revenues with strong margins. We're also looking at some of the SaaS-type work that we do for our security as a service, our turnkey products, and we think there's some good opportunities going forward there. and also our software as a service, our TrueSaaS for CertScan and otherwise, which carry substantial margins, and we see some nice growth opportunities there as well. So the top-line growth of service could be quite substantial for us at a much higher margin.

Speaker 1

Great. That makes sense. And then kind of looking ahead, are there any updates on the TSA check-back scanner contract that's expected in 27, and when should we start thinking about that kind of coming into focus?

A.J. Mara, CEO

You know, I think, you know, we're looking at it, and TSA basically is, you know, trying to get their checkpoint taken care of first, and, you know, we think it's still a few years away, but it'll go on for several years, so the opportunity definitely is still there.

Speaker 1

Okay, great.

Operator

Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to management for any further remarks.

A.J. Mara, CEO

Once again, thank you all for attending our conference call. We look forward to speaking with you during our next earnings call following the completion of our first fiscal quarter. Thank you.

Operator

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.