OSIS - NASDAQ

Good day, and welcome to the OSI Systems, Inc. Second Quarter 2026 Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mr. Alan Edrick, Chief Financial Officer. Please go ahead.

Good afternoon, and thank you for joining us. I'm Alan Edrick, Executive Vice President and CFO of OSI Systems. And I'm here today with Ajay Mehra, OSI's President and CEO. Welcome to the OSI Systems Fiscal 2026 and second quarter conference call. We are pleased that you can join us as we review our financial and our operational results. Earlier today, we issued a press release announcing our fiscal second quarter financial results. . Before we discuss these results, I would 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 statements based upon subsequent events or new information or otherwise. During today's call, we will be discussing the company's results using both GAAP and non-GAAP financial measures. For more details on these non-GAAP measures, their comparable GAAP measures and a quantitative reconciliation of the 2, please refer to today's earnings press release. I will begin with a high-level summary of our financial performance for the second quarter of fiscal 2016 and then turn the call over to Ajay for a discussion of our business and operational performance. We will then finish with more detail regarding our financial results and a discussion of the increased non-GAAP EPS guidance for fiscal year '26. We delivered strong second quarter financial results. setting Q2 records across multiple metrics, and we are excited about the momentum across our biggest divisions. The company's revenues increased 11% year-over-year to a Q2 record of $464 million. Our 2 largest divisions achieved double-digit top line growth with Security up 15% and Opto up 12%. This top line performance is particularly impressive, given that last year's Q2 included substantial revenue from large security programs in Mexico. The solid revenue growth led to a record Q2 non-GAAP adjusted EPS and of $2.58. These results included a step-up in R&D, reflecting our commitment to innovation. Additionally, cash flow was solid as we generated $62 million in operating cash flow, and while this number is notable, we believe calendar 2016 cash flow may be even stronger. Before diving more deeply into our financial results and discussing our outlook for fiscal 2016. I will turn the call over to Ajay.

Thank you, Alan, and thank you, everyone, for joining us today. I'm excited to discuss our business and share our Q2 fiscal '26 results with you in more detail. We had another record-breaking quarter in Q2, and with revenues of $464 million, representing 11% year-over-year growth and strong earnings reflecting our continued momentum. Our Security division performed well. and our Optoelectronics and Manufacturing division delivered another solid quarter. Overall, we continue to see nice demand across many of our markets, and our backlog remains healthy providing confidence for a strong second half of fiscal '26 and visibility going beyond that. Let's discuss each division's performance, starting with security. In our Security division, we delivered overall double-digit revenue growth, driven by increases in both product and service revenues as we continually innovate to drive market leadership. We also continue to introduce new innovative product features. Security bookings were lower than expected during the quarter, primarily due to delays in receiving anticipated orders in part due to the U.S. government shutdown and some pushout from international customers. These high probability opportunities are still in the pipeline. During the quarter, we announced a $20 million award to deliver a comprehensive radiological threat detection solution to an international customer. This project involves deploying a wide are radiation monitoring network that operates continuously to detect and track radioactive threats. Also, while the formal announcement came after the quarter, we were informed in Q2 that we were selected to support security screening at a major global sporting event in Europe this winter. These wins further reinforce OSI's position as a trusted global printer of critical security infrastructure supporting national security and high-profile mission-critical environments worldwide. Switching to RF. We announced shortly after the end of the quarter and international order valued at approximately $30 million to deploy advanced RF-based communication and surveillance systems for naval operations. We are also gaining traction on Golden Dome, the U.S. initiative to create an integrated missile defense system. To that end, our RF business was selected to participate on a massive U.S. missile defense agency contract, known as Shield. This is a multiple award, indefinite delivery, indefinite quantity contract to support the development of Golden Dome. The contract has a ceiling value of $151 billion over a 10-year period making it one of the largest IDIQ contracts ever issued by the U.S. Department of Defense. We were one-off 2,400 awardees and believe delivery orders from the Shield IDIQ could be received in the foreseeable future. As a result of the Golden dome potential and other growth opportunities for RF solutions, including the recent International naval order, we're enhancing our RF operational footprint. We are expanding into new facilities in Texas, which significantly increases production capacity improves operational efficiency and further demonstrates our commitment to our customers and long-term innovation in this space. Our overall security pipeline includes a wide range of opportunities, both internationally and domestically, and we are well positioned with a broad range of security offerings. Moving on to Optoelectronics. This division delivered another impressive quarter with double-digit top line growth, achieving a second quarter record for revenues and adjusted operating income. This performance was driven by broad demand across our diversified product and customer base. We are seeing growth across industries ranging from medical diagnostics to semiconductors, driven by the breadth of our offerings. Opto also had a strong book-to-bill ratio this quarter. This division continues to see an expanding opportunity pipeline as OEMs are active in diversifying away from China and derisking their supply chains by shifting to other low-cost manufacturing regions. By expanding our production capacity with our newest manufacturing facility in Mexico and leveraging our operations across Southeast Asia, India and North America, we are poised to meet rising global demand and continue benefiting from this trend. Given strong bookings and consistent performance, we believe Opto is well positioned to build upon this momentum. And finally, let's discuss the Healthcare division. While Q2 was a challenging quarter for our Healthcare division, we remain focused on long-term value creation. We have intensified our sales efforts and are focusing our pipeline of new products by continuing to invest in next-generation product development. While it will take time to regain our footing. We are confident that these actions, along with the broader market recovery will improve health care's performance in the coming quarters. Overall, we are pleased with OSI's Q2 and first half results. We grew revenues and profits significantly and continue to drive efficiencies in our business. I will now return the call to Alan to discuss our financial performance further before we open the call for questions. Thank you.

Thank you, Ajay Now I will review in greater detail the financial results for Q2 and then discuss our increased fiscal 2016 non-GAAP EPS guidance. As mentioned, our Q2 revenues were up 11% compared to the second quarter of the prior fiscal year, with strength across our 2 largest segments. Security division revenues in Q2 were $335 million, an increase of 15% year-over-year. This growth was driven by significantly higher service revenues, increased revenues from the RF business, which continues to be effectively integrated into our overall operations and increased aviation product revenues. As expected, and directionally similar to last quarter's trend, revenues related to our large Mexico security contracts decreased 50% to $27 million in Q2 fiscal '26 from $54 million in Q2 of the prior year. Excluding the Mexico contracts, securities revenue surged 31% year-over-year reflecting healthy demand across the broader security portfolio. Meanwhile, our Optoelectronics and Manufacturing division had another excellent quarter. Opto sales, including intercompany increased 12% year-over-year to $113 million, which is a new Q2 record for this division. This was driven by growth across our diversified product and customer portfolios and as a just suggested, Healthcare division sales were soft. Our Q2 fiscal 2016 gross margin was 33%, and down from the same quarter in the prior year as a less favorable revenue mix on product sales, outweighed an increase in gross margin from higher service revenues. Our margins can sutuate based on product and service mix and volume, supply chain costs, FX, tariffs, among other factors. Moving on to operating expenses. Expenses in the second fiscal quarter were $70.2 million, down 1% from the prior year Q2 and representing 15.1% of sales compared to 16.8% of sales in Q2 of last fiscal year. We continue to work diligently across all of our divisions to manage our SG&A cost structure efficiently. R&D expenses in Q2 were $19.8 million or 4.3% of revenues, up from $18.3 million in the same quarter last year. This increase stems from our commitment to investing in innovation, resulting in market-leading offerings, particularly in security and positioning OSI well for the future. We expect to continue our heightened R&D efforts to advance key initiatives through the remainder of the fiscal year. Even with these investments, our combined SG&A and R&D expenses as a percentage of sales have decreased annually for each of the past 8 years. and this trend is anticipated to continue for fiscal '26, underscoring our ability to drive operating efficiencies while still funding growth initiatives. Now moving below the operating line. Net interest and other expense in Q2 was $10.7 million, up from $8.6 million in the same quarter of the prior year, while net interest expense decreased from $8.6 million to $6.4 million on reduced borrowing costs, this was offset by a $4.4 million nonrecurring cost for a retirement plan amendment of the former CEO. Our effective tax rate under GAAP was 19.5% in Q2 of fiscal '20 and versus 23.3% in Q2 last year. However, excluding discrete tax items, our normalized effective tax rate, which is the rate used in calculating non-GAAP EPS was approximately 23.3% this quarter compared to 24.0% in the same prior year quarter. On a non-GAAP basis, our Q2 FY '26 adjusted operating margin of 14% and was up sequentially from Q1, but down from the prior year second quarter as expected due to the tough comp. The Security Division's adjusted operating margin was 17.8% in Q2 of fiscal '20. And compared to 19.9% in the same prior year period. Strong growth in higher-margin security service revenues was offset by a less favorable mix of product sales and the growth in R&D. The Opto adjusted operating margin increased 100 basis points to 12.9% from 12.8% in last year's fiscal Q2. We continue to anticipate efficiencies in our newest manufacturing facility in Opto to contribute to expanding margins in the second half of the fiscal year. Lastly, the adjusted operating margin of our Healthcare division was rather negligible given the sales level. Moving to cash flow and the balance sheet. Our operating cash flow improved in fiscal Q2 on a year-over-year basis. DSO in Q2 decreased 17% from Q1 and is expected to further decrease by the end of the fiscal year. We continue to receive payments from a significant Security division customer in Mexico during the quarter, marking progress, albeit at a slower pace. We expect substantial cash inflows in the second half of fiscal 2016 and beyond as we continue to collect on the Mexico receivables, which should lead to sizable operating cash flow and strong free cash flow conversion. In Q2 of this year was $7 million, while depreciation and amortization expense in the quarter was $9.6 million. Our balance sheet remains solid. Our net leverage at the end of Q2 fiscal '26 was approximately 2.2 as calculated under our credit agreement. We completed a highly successful convertible notes transaction in November in which we raised $575 million at a coupon of 0.5%. This transaction increased our liquidity and financial flexibility for future growth initiatives while simultaneously reducing interest expense through the pay down of our revolver. In connection with the transaction, we bought back approximately 547,000 shares at an average price of $267 per share under our stock buyback program. Now turning to our updated guidance. We are raising our fiscal 2016 guidance for non-GAAP EPS and while maintaining our revenue guidance. We now anticipate non-GAAP earnings per diluted share to be within a range of $10.30 to $10.55 and which would represent 10% to 13% year-over-year growth. This updated outlook factors in a challenging comp from a significant reduction of revenues from our Mexico contracts in fiscal 2016 in our Security division. This should be more prevalent in Q3 than Q2 with an expected Q3 revenue headwind of over $50 million to year-over-year revenue growth which is expected to be the highest quarterly variance of fiscal '26. Based upon the expected timing of the backlog conversion, Mexico and other factors, we anticipate the growth in our fiscal 2016 Q4 and to be significantly stronger than the growth in Q3. We note that this fiscal 2016 non-GAAP diluted EPS guidance excludes any impact of potential impairment, restructuring and other charges, amortization of acquired intangible assets and their associated tax effects and discrete tax and other nonrecurring 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 and potential future government shutdowns, among other factors, is difficult to predict and could vary significantly from the anticipated impact currently reflected in our guidance. Actual revenue 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, we are committed to operational excellence. As we continue to grow our businesses and provide innovative products and solutions to our customers. We are pleased with our performance in the first half of fiscal 2016, and we expect a solid second half as we continue to generate significant cash flow and utilize our financial strength 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 partners, their efforts are what make our results possible. And at this time, we would like to open the call to questions.

[Operator Instructions] And we do have our first question from Mr. Jeff Martin.

I wanted to dive into the orders activity in Security comment, softer than expected. The overall backlog was essentially unchanged at $1.8 billion. So is it better to phrase it as the orders were not as strong as you expected rather than soft?

I think -- this is Ajay. The best way to describe it, I think we said it that we expected strong orders. And some of them got pushed to the right because of the government shutdown and a little bit some internationally, but all those are very much alive in our pipeline, and we expect a strong next 6 months.

Great. And then I was curious if you could expand on the IDIQ contract of Golden dome. It sounds like you're expecting something could materialize in the relatively near future. Is this something you could theoretically see orders start to come in, in fiscal '26?

A lot of this is dependent, obviously, the funding came in for the big beautiful bill, and there's a substantial amount of funding in there. Like I said, it's the largest contract one of the largest contracts out there at $151 billion, but there are 2,400 people there. But we feel that we're in a good position with the products that we provide, especially our over the horizon radar. And we are talking to customers. We are actively pursuing opportunities really can give you a feel for when this will happen. Obviously, timing, dealing with the government sometimes takes longer. But we feel good about the foreseeable future that we'll get some orders and -- like I said, we have also expanded our facilities in Dallas, Texas, and we feel -- we feel positive.

Excellent. And then Alan, how should we think about interest expense on a quarterly basis going forward from here?

Yes, Jeff, good question. With the paydown of our revolver mid-Q2, we would anticipate that the level of interest expense will decrease from Q2 to Q3 a little bit. We got some of the benefit, about half a quarter benefit in Q2. And then Q3 and Q4 should be relatively comparable to one another.

Okay. And then you're going to have quite a bit of excess cash comp on the balance sheet, particularly with Star anticipated free cash flow over the next 12 months, call it. What's the potential for additional share reports received from here?

Well, Jeff, you're right. We have a strong balance sheet. We have nice cash on the balance sheet as of 12/31. And and with the strong expected free cash flow over the period of time you mentioned, that should only increase. Our capital allocation has always consisted of kind of 3 things: M&A, stock buyback, and any paydown of revolver, which we've already done at this point in time. And they're not mutually exclusive necessarily. So stock buyback is certainly an option for us. We did a sizable buyback in Q2 of about 546,000 shares, but the opportunity to buy back further shares is certainly available to us.

And one moment for our next question. And that will come from the line of Josh Nichols with B. Riley Securities.

Great to see the strong cash flow during the quarter. Just want to dive in a little bit. Obviously, we have the government shutdown that impacted things a little bit. But can you provide a little bit more detail about what you're seeing in terms of the big beautiful bill and RFP timing? Are you seeing some RFPs already in calendar '26? Or do you expect the award activity maybe pick up in like calendar 2Q or 3Q or some of those like procurement time line shifted a bit?

So I think that the shutdown definitely move stuff to the right. We are starting to see some money flow in. We expect some money will flow in, in the first 6 months of this year. But I would say most of it will be towards the latter part of calendar '26 and beyond. So it's really been more of an effect of timing than anything else.

Got it. That makes sense. And then, Alan, I know you mentioned, look, the receivables on the DSO have been improving. You said Mexico was part of that. Like can you just elaborate a little bit more maybe on where we stand in terms of Mexico DSO? Or is that going to continue to be a significant free cash flow driver in the fiscal second half relative to where the rest of the business is?

Yes, Josh. Good question. And you're absolutely right. though we collected some nice payments from Mexico in Q2, it still represents, by far, our largest receivable at the overall company. And we would expect, based on the due dates and when we think cash is coming in, that really over the course of the balance of fiscal '26 and really part of fiscal '27 to kind of have some potential outsized free cash flow conversion as the Mexico receivable normalizes, which will drive down our DSO quite significantly, resulting in the cash flow.

And then last question for me. I know the comps aspect, right, with Mexico for the margins have been a little bit challenging, but they are easing. I think by the time we get to like the end of this fiscal year, you're probably in a pretty good position, particularly with the service revenue trajectory that we have seen. Any more detail you can provide about like the guidance outlook in terms of the margin and the growth potential for the service revenue relative to hardware from where we stand today?

Yes, Jeff -- excuse me, Josh, this is Alan. Good question again. Absolutely. We're highly encouraged about where we're heading on margins. Our service revenues growth has been outstanding. Of course, we started seeing real strong service revenue growth in the third quarter of last fiscal year. So we'll start coming on to a little bit more difficult comps on the service revenue growth. but we still expect it to be growing at a much faster rate than that of products in most cases. And the service revenues carry a higher margin than our product revenues. So as a result, we see some real nice room for operating margin expansion. We see that more tilted to Q4 for the reasons I outlined during sort of the prepared remarks. But yes, we see some good opportunity for operating margin expansion in Q4 and beyond.

Thank you. One moment for our next question. And that will come from the line of Christopher Glynn with Opheimer.

Alan, just was hoping you could revisit that kind of tilt to 4Q that you just referenced outlined in the prepared remarks. I missed a little bit of it. And then just in terms of a finer point, the midpoint of your guidance basically gives us exactly $1 billion revenue in the back half. Should we think about that as like 55% across the remaining 2 quarters? Or is that a little extreme.

Good question, Chris. Really kind of what's driving a much stronger Q4 than Q3 are a couple of things. One, of course, is the U.S. government shutdown, which pushed a few things a little bit to the right. But the much bigger impact is Mexico. I had mentioned that the Mexico revenue variance between last year and this year of the 4 quarters is most prevalent in Q3 itself. So there's a big headwind, if you will, on the Q3 revenues related to Mexico. That then begins to subside substantially in Q4 and of course, as we move into the next fiscal year. So yes, I would anticipate when you're looking at the splits, the revenues being significantly higher in Q4 than Q3, and therefore, the same would hold true to the bottom line.

Okay. Great. And then on the expected strong second half bookings, is that essentially a CBP factor that we're talking about there?

Well -- this is A.J. Obviously, CBP is one of them. We get a lot of orders from the rest of the government. And like I said, we're pursuing a lot of international orders as well. So it's a combination of a few customers.

Okay. Great. And then I know you don't announce everything. But aviation orders, I think if we're tracking correctly been a little bit quiet. So just wondering if you could comment on the pipeline for the aviation market. And might there be some announcements in the second half in that vertical?

Well, the aviation market remains strong for us. The pipeline remains strong. And just bear in mind with Aviation. Sometimes it takes a little longer. The airport sometimes are not ready because of construction, et cetera. But we feel good about the pipeline right now.

And maybe to add on to that, Chris. This is Alan. The aviation business has been very good for us. The aviation orders, we tend to get a large volume of aviation orders but sometimes they're of a lesser amount, not necessarily to the rise to the level of a press release, if you will. But the overall business has been [indiscernible].

Okay. And sorry, if I could fit in a bookkeeping one. Someone already asked about the interest expense bridge from the refi there and the converts. Could you level set the shares, how to think about those or even give us a plug for the third quarter? I know option exercise is probably up a little bit with the really strong stock performance.

Yes. So from the diluted shares perspective, with the stock buyback, it came down a bit in Q2. We'll probably see a little bit more impact of that in Q3 and then stabilize. Of course, with the rising stock price, that will have a little bit opposite effect countering that a little bit on diluted shares. But overall, we would anticipate the diluted share count will be reducing a little bit in Q3 and Q4 should be pretty comparable to Q3.

One moment for our next question. And that will come from the line of Mariana Perez Mora with Bank of America.

Thank you so much. Good afternoon, everyone. I wanted to touch base on the radio frequency business. And you mentioned opportunities for Golden dome, and investments being made to expand to new facilities in Texas. Like could you mind given us some color around like how large is that business today? And how should we think about when we look at that business like 3 to 5 years from now?

Well, great question. I think the best way for us to answer that is you've heard in the news, what they're looking to do in Golden Dome. We have a portion of it. So we think we have a good opportunity over the next 2, 3, 4 years to really get some very good solid growth as this program continues. So I can't really get into specifics, maybe 6 months down the road, 3 months down the road, whatever as we get more color on what they're doing, we'll be able to answer that question. But right now, we feel very good about the growth prospects in that business, and that's one of the reasons we decided to expand and move into a brand-new facility that gives us the opportunity to be able to meet that demand and really showcase to the customer all the innovative technologies that we have.

And then I wanted to tap or like dig a little bit deeper as well on CBP opportunities. there has been like all this government accountability office reports about like how CBPs lagging in their effort to have large noninterest inspection systems, putting like the land ports. And they are -- they have been progressing just like, I don't know, 40% over the last 10 years on a goal that was like due next year. And they say that there is a problem with the civil works and that's why they have a lot of like systems in inventory. Like how that affects orders for you guys, how that affects your market share as you take care of both the systems and the civil works, how should we think about like opportunity from those efforts in the next couple of years?

So great question. I mean, keep in mind, if you've been down to the border, how complicated the border crossings can be and civil works is not an easy thing. You need to go through as far as the government is concerned, a lot of different agencies and through GSA and others. Having said that, we have been, I think, the most efficient supplier to the CBP in terms of equipment. We continue to see some of that equipment orders that we think are going to come in, not just for water crossings, but for ports for other areas, such as airports. And so we think it's going to continue. Is it going to speed up. The best way to put it is, as you put new systems in on both sides, not just from us, but from the government, you learn. So things get things get more efficient. And that's what we're hoping as we move forward.

Great. And last one from me is sports event. So you mentioned a European one and an award on that end, but could you mind reminding us how is the pipeline of opportunities for the FIFA World Cup this summer? And then how should we think about the Olympics as well.

So we definitely are a premier player over there, and we feel very good about the announcement we made. We feel very good about the upcoming major events in the U.S. and internationally. And as you know, we won the -- we did another major event 1.5 years ago in the summer in Europe. So we feel very good. And I think that we are uniquely qualified to do it because we've done it so many times, number one. And number two, we have a breadth of technology that is really unmatched with other people.

One moment for our next question. And that will come from the line of Seth Seifman with JPMorgan.

This is Rocco on for Seth. There's been a lot of conversation of increasing international demand for the security products. Are there any specific kind of regions or countries that are leading the pack on either urgency or size of the opportunity?

Well, U.S., obviously, is one. We see a lot internationally and, frankly, in the Middle East. And we're seeing a lot of countries starting to pay more attention, especially with some of the trade issues that are going on to see can they scan more, to be able to potentially if they want share information with the U.S., so the trade becomes a little easier. So it really -- it's really across the board, but it varies depending on year by year, one country might do it and another country will do it. But it's all -- it's still in the second, third inning. It's not in the -- it's not a mature market yet.

Great. That makes sense. And then funding around DHS and CBP has become a bit more contentious after the events of last weekend ahead of the CR expiration on Saturday. Does the near-term funding have a notable impact in either the revenue or cash outlook heading into the back half of the year?

No. I think the issues there are, I'm not going to get into it, but it's really not a by border security. It's about other things related to ICE and other issues.

[Operator Instructions] One moment for our next question, and that will come from Larry Solow with CJS Securities.

All right. Just a couple of follow-ups. So the bookings and security, was that essentially close to flat, about 1%. Is that about right? I know it feels like it. Do you actually give a number there. .

Larry, this is Alan. They were -- it was a bit below 1.0 this quarter.

Okay. And I'm just curious, and you kind of -- I think I answered my question in your remarks, but does the somewhat less-than-expected orders and it sounds like timing related. Does that actually impact your sales in the back half, I guess, a little bit because you had a strong quarter, but you didn't raise guidance and your -- you kind of mentioned a little slower Q3, Q4 year-over-year because of Mexico, but also what you already knew about, but maybe a little bit because maybe some of these bookings would have trickled through that fast? Or I'm just kind of curious if the if there's any slower -- you have your guidance the same on a revenue basis, but would you have increased it at all if bookings matched your expectations?

Yes, Larry, we -- this is Alan. We might have. We just thought it was prudent to maintain our revenue range at this time given the items that you just mentioned with some things moving a little bit to the right and any potential shutdowns and the like. But yes, overall, we feel very strong about our business.

And just the margin -- I know mix -- there's a lot of moving parts there. But I guess, is it fair to say that Mexico obviously is a driver of that. Is that the substantial driver Mexico is just better, higher-margin revenue? I know last year, Q2, you had a substantially good quarter. So I'm not necessarily looking year-over-year, but just curious with a nice revenue jump, service revenue up really nice, and you're still below full year margins from last year versus this quarter. So curious, is it really just Mexico? Are there a lot of factors? Any way you could kind of help with that?

Larry, it's Alan. Yes, there are multiple factors, but Mexico plays a role in it. Of course, given the size of that contract and when we are manufacturing the same product over and over and over again, there's inherent operational efficiencies, which drive the margin up quite nicely, which is fantastic. And we recognize coming into the year that we'd be facing that sort of margin headwind. And despite that, the company has been growing quite nicely. That big impact of Mexico year-over-year comparison subsides after the third quarter, so really after the March quarter. So as we move forward in Q4 and beyond, I think that's really where you see the real opportunity for margin expansion for the business again. So only 2 months away from that.

That's fair. And on the Golden dome age, I know you can't really give much specifics and maybe there's some things you just don't know. But it feels like -- I mean, is this something that could be a over a 3- to 5-year period, a several hundred million dollar potential opportunity for you. Obviously, the $151 billion divided by 2,400 would be but I'm sure we can't do that math. But -- any color there magnitude potential size without you actually -- without putting words in amount?

Yes. I mean I think that we feel it's a substantial opportunity that's going to be meaningful overall to the company. What that number is going to be. I mean it's substantial. I don't want to get into specifics, but you may not be that far off. But at the end of the day, we'll give more color on that as we get closer on what those opportunities are.

Got you. And just switching gears real fast, if I may, just on Opto. I think it was up like 9% externally. You said the book-to-bill was greater than 1. Is it -- the same driver still onshore and companies getting out of Mexico out of China, excuse me. Is that the drivers? Any color there would be great.

Yes, Larry, it's Alan. The drivers remain similar to what you just mentioned. Just a good diverse customer base, strong demand from business within our existing customers and new business within our existing customers as well as gaining traction with some new customers who are trying to move out of different parts of the world and into the manufacturing locations that we have. So we're really pleased with seeing overall 12% revenue growth in each of Q1 and Q2, which included the 9% external that you mentioned in this past quarter, and we see strong demand continuing in this business as we move forward in the next couple of quarters, the balance of the fiscal year.

Great. And just cash flow, obviously, a nice quarter. and it sounds like you have expectations for the nicer quarters in the back half. Do you think on a full year basis that could come close or even exceed net income?

Larry, I think that's entirely possible. in the event that the DSOs come down to the place that we believe it could, that could very well be the case. And yes, we think there's every opportunity for that to occur.

I'm showing no further questions in the queue at this time. I would now like to turn the call back over to management for any closing remarks.

Well, I want to thank our shareholders, of course, our customers. And last but not least, all our employees for everything that we've been able to accomplish the last months and looking forward to the next 6 months. And once again, thank you all for participating in our conference call. We look forward to speaking with you at our next earnings call. Thank you.