OSI 시스템즈(OSIS) 2027 회계연도 1분기 실적 발표회: 사상 최대 수주잔고, EPS 가이던스 상향

핵심 요약

• OSI 시스템즈는 2027 회계연도 1분기 매출이 전년 동기 대비 5% 증가한 4억 300만 달러로 역대 최대치를 기록했으며, 조정 희석주당순이익(EPS)은 17% 증가한 1.66달러로 1분기 기준 역대 최고치를 기록했다고 발표했다.
• 수주 실적은 수주출하비율(book-to-bill ratio) 1.4배를 기록했다. 수주잔고는 6월 30일 기준 약 19억 달러에서 증가해 역대 최대치인 21억 달러를 기록했다.
• 영업활동 현금흐름은 1,700만 달러에서 3,700만 달러로 증가했다. 잉여현금흐름은 약 3,000만 달러로, 일반회계기준(GAAP) 순이익의 약 120%에 달했다.
• 조정 영업이익률은 헬스케어 부문의 실적 둔화와 보안 부문의 불리한 매출 믹스를 반영해 10.3%에서 9.5%로 하락했다. 경영진은 2027 회계연도 남은 기간 동안 이익률이 개선될 것으로 예상하고 있다.
• OSI 시스템즈는 2027 회계연도 매출 가이던스를 18억 7,500만 달러~19억 3,000만 달러로 재확인했으며, 주로 1분기 자사주 매입에 힘입어 조정 EPS 가이던스를 11.28달러~11.64달러로 상향 조정했다.
• 경영진은 수주잔고의 매출 전환과 보안 서비스 매출의 성장 가속화에 힘입어 매출 성장이 하반기에 집중될 것이라는 기존 전망을 유지했다.

주요 재무 데이터

판매관리비(SG&A)는 6,900만 달러로 매출의 17.0%를 차지하며 전년 동기의 17.4% 대비 감소했다. 연구개발비(R&D)는 1,940만 달러로 매출의 4.8%를 기록했다. 구조조정 및 기타 비용을 제외한 총 영업비용은 매출의 22.7%에서 21.8%로 감소했다.

이자 및 기타 비용은 차입 비용 감소와 투자 수익 증가를 반영하여 740만 달러에서 330만 달러로 감소했다. 경영진은 이자 비용 감소와 주식 수 감소가 EPS 성장에 의미 있게 기여했다고 덧붙였다.

OSI 시스템즈는 현금 및 현금성 자산 2억 3,600만 달러, 단기 투자 자산 6,600만 달러, 부채 약 10억 달러로 이번 분기를 마감했다. 부채의 90% 이상은 고정금리였다. 회사는 평균 주가 약 204달러에 약 30만 6,000주를 약 6,200만 달러에 매입했다.

사업 및 영업 실적

보안 부문

중동 분쟁과 멕시코 프로그램 전환에도 불구하고 보안 부문 매출은 4% 증가한 2억 6,400만 달러를 기록했다. 멕시코 프로그램 전환은 경영진의 회계연도 전망과 부합하게 1분기 매출을 약 800만 달러 감소시켰다.

해당 부문은 사상 최대 수주잔고로 이번 분기를 마감했다. OSI 시스템즈는 미국 관세국경보호청(CBP)으로부터 5년 만기의 IDIQ(무기한 수량 미정) 계약 2건을 수주했다. 한 건은 약 2억 달러 한도의 이동식 신속 스캔 승용차 검색 시스템 계약이고, 다른 한 건은 약 8,500만 달러 한도의 밴 탑재형 이동식 X-선 검색 시스템 계약이다. 초기 인도 주문액은 총 약 2,100만 달러다. 수주잔고에는 계약 상한액이 아닌 확정 주문액만 포함된다.

RF 사업 부문은 최대 약 2억 3,500만 달러 규모의 국토방위 초수평선 레이더 계약 사업을 지속해서 수행했다. OSI 시스템즈는 또한 약 9,000만 달러 규모의 추가 RF 수주를 발표했다. 경영진은 2억 3,500만 달러 규모의 계약이 1분기 매출에 기여했으며 2027 회계연도 내내 계속 기여할 것으로 예상되는 반면, 신규 주문은 2027 회계연도와 그 이후 연도 실적을 모두 뒷받침할 것으로 기대된다고 밝혔다.

보안 부문의 조정 영업이익률은 12.6%를 기록했다. 경영진은 시간이 지남에 따라 마진이 높은 서비스 매출의 비중이 확대될 것으로 예상하고 있다. 또한 회사는 2028 로스앤젤레스 올림픽 및 패럴림픽(LA28)의 공식 물리적 검색 및 보안 기술 하드웨어/소프트웨어 솔루션 공급업체로 참여할 준비를 하고 있다.

광전자기기 및 제조 부문

사내 거래를 포함한 광전자기기 부문 매출은 9% 증가해 1분기 역대 최대인 1억 2,000만 달러를 기록했다. 외부 고객 대상 매출은 16% 증가했다.

이러한 성장과 함께 영업이익률도 확대되어 조정 영업이익률이 12.1%에 달했다. EMS, 연성 회로 기판(flex circuit) 및 광전자기기 제품군 전반에서 신규 수주가 호조를 보였으며, 해당 부문은 분기말 기준 역대 최대 수주잔고로 이번 분기를 마감했다.

헬스케어 부문

헬스케어 부문 매출은 주로 병원들이 자본 지출을 계속 신중하게 관리하면서 환자 모니터링 장비 매출이 줄어든 영향으로 14% 감소했다. 해당 부문은 마이너스(-) 1.8%의 조정 영업이익률을 기록했다.

경영진은 기존 설치 제품군 지원, 운영 효율성 개선, 차세대 모니터링 플랫폼 완성에 집중하고 있다. 회사는 다가오는 분기에 헬스케어 부문이 성장세로 돌아설 것으로 예상한다.

경영진 가이던스

OSI 시스템즈는 2027 회계연도 매출 가이던스를 18억 7,500만 달러~19억 3,000만 달러로 재확인했다. 조정 EPS 가이던스는 전년 대비 9%~12.5% 성장을 의미하는 11.28달러~11.64달러로 상향 조정되었다. 경영진은 이번 상향 조정이 영업 전망 변화보다는 주로 1분기 자사주 매입 효과에 따른 것이라고 설명했다.

경영진은 전년 동기 중동 기저효과와 약 1,100만 달러 규모의 멕시코 프로그램 역풍으로 인해 2027 회계연도 2분기 매출이 전년 동기 대비 소폭 감소할 것으로 예상하고 있다. 매출 성장은 수주잔고의 매출 전환과 보안 서비스 활동 가속화에 힘입어 하반기에 가장 강력할 것으로 전망된다.

회사는 2027 회계연도에 2분기부터 시작되어 하반기에 더욱 강화되는 강력한 두 자릿수 서비스 매출 성장을 예상하고 있다. 성장 동인으로는 보증 기간이 만료된 설치 제품, 항공 서비스, SaaS 제공 및 RF 활동 증가 등이 꼽힌다.

매출이 증가하고 마진이 높은 서비스 매출 비중이 확대됨에 따라 2027 회계연도 남은 기간 동안 매출총이익률과 영업이익률이 개선될 것으로 예상된다. 경영진은 또한 연간 잉여현금흐름이 순이익을 상회할 것이라는 기존 전망을 유지했다.

리스크 및 주요 관전 포인트

• 중동 지역의 지속적인 분쟁과 지정학적 불확실성은 매출 인식 시점과 고객 활동에 영향을 미칠 수 있다.
• 수주잔고의 매출 전환, 신규 수주, 정부 조달 일정은 2027 회계연도 전망의 중요한 변수로 남아 있다.
• 경영진은 단기 프로그램들이 이미 상당한 자금 지원을 확보하고 있다고 밝혔으나, 미국 정부의 자금 집행 시점이 CBP, 골든 돔(Golden Dome) 및 기타 국방 또는 국토안보 프로그램에 영향을 미칠 수 있다.
• 보안 부문의 이익률은 제품 및 프로그램 믹스에 따라 변동될 수 있으며, 헬스케어 부문의 부진은 연결 수익성에 지속적으로 부담을 줄 수 있다.
• 경영진이 제시한 기타 리스크로는 대금 회수 시점, 관세, 금리, 환율, 공급망 차질 및 프로그램 이행 등이 포함된다.

애널리스트 Q&A 주요 내용

경영진은 역대 최대 수주잔고가 2027 회계연도 매출의 추가 상향 가능성을 제공하며 2028 회계연도 및 그 이후에 대한 가시성을 높여준다고 밝혔다. 그러나 지정학적 불확실성으로 인해 기존 매출 가이던스 범위를 유지했다고 설명했다.

이전 4분기에서 지연되었던 약 5,000만 달러의 중동 매출 중 약 800만 달러가 2027 회계연도 1분기에 인식되었다. 경영진은 나머지 금액의 대부분이 2027 회계연도 하반기 및 2028 회계연도에 인식될 것으로 계속 기대하고 있다.

서비스 매출 성장은 2분기부터 본격적으로 가속화될 것으로 예상된다. 경영진은 보증 기간이 끝난 제품, 항공 서비스, SaaS 매출 및 RF 활동을 비교적 가시성이 높은 분야로 꼽았다.

RF 생산 능력과 관련해 경영진은 신규 시설 2곳과 2교대 근무 추가 옵션을 통해 현재 파이프라인을 충분히 지원할 수 있다고 밝혔다. 필요한 경우 추가 시설을 확보할 수도 있다. 회사는 또한 RF 연구개발(R&D)에 대한 투자를 지속할 계획이다.

자본 배분의 우선순위는 자체 성장 투자(organic investment), 전략적 인수합병(M&A), 기회주의적 자사주 매입, 재무건전성 강화로 유지된다. 경영진은 인수합병이 시장 침투력을 높이거나 보완적 역량을 더할 수 있어야 한다고 언급했다.

실적 발표 컨퍼런스 콜 전문

전체 실적 발표 컨퍼런스 콜 녹취록

경영진 발표

Operator

Thank you. Good day and thank you for standing by. Welcome to the OSI Systems, Inc. First Quarter Fiscal 2027 Earnings Conference Call.

[Operator Instructions]

I would now like to hand the conference over to your speaker today, Alan Edrick, Chief Financial Officer. Sir, please go ahead. Thank you.

Alan Edrick

Well, thank you. 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 '27 First Quarter Conference Call. We are pleased to join you as we review our financial and our operational results. Today's discussion will include forward-looking statements, and the company wishes to take advantage of the safe harbor provision of the Private Securities Litigation Reform Act of 1995 with respect to such statements. All forward-looking statements made in this call are based on currently available information, and the company undertakes no obligation to update any forward-looking statement based on subsequent events or new information or otherwise. We will also reference both GAAP and non-GAAP financial measures.

Applicable reconciliations are available in today's earnings release. On our August call, we told you three things about fiscal '27: that we had built our guidance factoring in the situation in the Middle East, that we expected growth to be strongest in the second half, and that we expected free cash flow to exceed net income. These three factors will frame our discussion this quarter. First quarter revenues were $403 million, representing a Q1 record up 5% year-over-year. And adjusted earnings per diluted share grew to a first quarter record of $1.66, up 17% year-over-year. Operating cash flow was $3.7 million, more than double the same prior year quarter, and free cash flow, which is operating cash flow less capital expenditures, was approximately $30 million, about 120% of GAAP net income. Q1 bookings were strong. Our book-to-bill ratio was 1.4, and our backlog increased to a record $2.1 billion from approximately $1.9 billion at June 30th. I also want to be direct about certain reported figures for the first fiscal quarter.

A meaningful part of our EPS growth this quarter came from below the operating line, with lower net interest expense and a lower share count, and I'll quantify those for you later in this call. Margins were impacted by a revenue decline in the Healthcare division and the mix of revenues and Security, both of which Ajay and I will address. But before diving more deeply into our financial results and discussing our outlook for fiscal '27, I'm going to turn the call over to Ajay.

Ajay Mehra

Thank you, Alan, and thanks to all of you for joining us today. As Alan mentioned, we achieved record fiscal first quarter revenues and earnings per share. Our activity was strong, resulting in a book-to-bill ratio of 1.4, which increased our backlog to a record $2.1 billion. The first quarter played out largely as we outlined on our last call. Bookings were strong, backlog grew to a new all-time high, and we remain on track for a stronger second half of fiscal 2027. Now, let me turn to our three divisions, starting with Security. Q1 revenues were $264 million, up 4% year-over-year, despite a challenging geopolitical environment, including the conflict in the Middle East, which continues to affect activity in the region.

We continue to work closely with our customers there to support their ongoing needs. As anticipated, the transition of our MEXCO program affected year-over-year comparisons consistent with our initial fiscal '27 outlook. That said, Securities bookings were strong and the division ended the quarter with a record backlog. Let me share a few highlights from the quarter. During the quarter, we announced two five-year IDIQ contracts awarded by U.S. Customs and Border Protection, one with a ceiling of approximately $200 million for our relocatable rapid scan passenger vehicle inspection systems, and a second with a ceiling of about $85 million for van-mounted mobile x-ray inspection systems. We have received initial delivery orders totaling approximately $21 million under these contracts and expect more orders as we start delivering.

To be clear, only firm orders rather than ceiling values are included on the backlog figures. Our RF business is performing exceptionally well. We continue to execute on our Homeland Defense over the Horizon radar contract that was awarded last fiscal year, which has a not-to-exceed value of approximately $235 million and is our largest RF award to date. Together with our participation in the SHIELD IDIQ, which supports a number of Golden Dome-related initiatives, this award positions us well to compete for additional contracts in the future. In Q1, we announced further bookings in this business line, totaling approximately $90 million. Also, customer engagement across our RF portfolio remains at very high levels. Growing recurring revenues remains a priority.

We continue to expect strong double-digit service revenue growth in fiscal 2027, with growth accelerating throughout the year. Given the size of our install base, we expect service to become a larger part of our revenue mix over time, which should support margin expansion. While Security margins can vary from quarter to quarter with product and program mix, our long-term objective continues to focus on pairing growth with margin expansion as higher margin service revenue becomes a larger part of our business. We are also preparing for a role as an official physical screening and security technology hardware/software solutions provider of the LA28 Olympic and Paralympic Games and an official supporter of Team USA. This is expected to be the largest sporting event in history. Furthermore, our experience at the FIFA World Cup, the Paris Olympics, and Milan Winter Olympics, among many other global events, is vital to our success here. And we also see LA28 as a platform to showcase our offerings and compete for future large venue and event security opportunities.

Turning to our Optoelectronics and Manufacturing Division. Opto delivered another strong quarter. Revenues, including intercompany sales, were at a first quarter record of $120 million, up 9% year-over-year, with sales to third-party customers up even higher at 16% year-over-year. During the quarter, revenue growth was paired with operating margin expansion. Bookings were robust across our EMS, flex circuit, and Optoelectronics product lines, and the division closed the quarter with its highest quarter end backlog. Our long-standing OEM relationships, vertically integrated model, customized offerings, and global manufacturing footprint across North America, Europe, and Southeast Asia continue to serve customers well in aerospace, defense, healthcare, and industrial markets, particularly as they further diversify their supply chains. Finally, Healthcare faced a challenging quarter. Revenue declined 14% year-over-year, primarily due to lower patient monitoring sales as hospitals continued to manage capital spending carefully. We remain focused on supporting our install base, improving operational efficiency, and completing the development of our next-generation monitoring platform.

We expect Healthcare to return to growth in the upcoming quarters. In summary, our demand remains robust with a 1.4 book-to-bill ratio, a well-diversified $2.1 billion backlog, established CBP contract vehicles, promising additional U.S. government opportunities, a growing RF pipeline, and continued expansion in our Optoelectronics Division. Looking forward, we are focused on disciplined execution, converting our backlog into revenue, improving Healthcare, and driving margin expansion across our business. I want to thank our employees, customers, and stockholders for their continued support. With that, I will turn the call back over to Alan to discuss our financial results and updated fiscal 2027 guidance in more detail before we open the call for questions. Thank you.

Alan Edrick

Thank you, Ajay. So let's begin with our revenue performance. Product revenues grew 5% year-over-year to $290 million, and service revenues grew 4% to $114 million. By division, as Ajay mentioned, Opto grew 9%, including inter-segment sales, and 16% to external third-party customers. Security grew 4% and Healthcare declined 14%. We said on the last call that we expected the Mexico program transition would be a headwind of less than $25 million in fiscal '27, concentrated in the first half. In the first quarter, that headwind was approximately $8 million, consistent with that outlook.

And we anticipate in Q2, this amount to be approximately $11 million. And although service revenue growth was modest in Q1, but in line with our expectations, as Ajay said, we expect strong double-digit growth in fiscal '27 service revenues, led by the Security division, driven by a significant number of products rolling off warranty, aviation service, SAS, and increasing RF business, among other items. Our Q1 fiscal '27 gross margin was 30.7% compared to 32.0% in the first quarter of last year. The variance was primarily driven by the decline in Healthcare division sales, which carry the highest gross margin of our three divisions. In addition, the strength of Opto division sales, which carry the lowest gross margin of the three divisions, though operating margins are solid, impact us, and a less favorable mix of revenues this quarter within the Security division. As we noted in the past, our margins can fluctuate based on product and service mix, volume, supply chain costs, foreign exchange, tariffs, and other factors. We expect gross margin to increase over the balance of the year on higher overall revenues, including greater growth in higher margin service revenues. Moving on to operating expenses. We continue to work diligently across all divisions to manage our SG&A cost structure efficiently.

In Q1, SG&A was $69 million, or 17.0% of sales, compared with 17.4% of sales a year ago. R&D expenses in Q1 were $19.4 million, or 4.8% of revenue. We continue to invest substantial resources consistent with our commitment to innovation and positioning OSI well for the future. Total operating expenses, excluding restructuring and other costs, declined to 21.8% of sales in Q1 this year from 22.7% in the same quarter of the prior year. Now, moving below the operating line, interest and other expenses in fiscal Q1 were $3.3 million compared with $7.4 million in the same quarter of the prior year. This $4.1 million improvement was primarily due to reduced borrowing costs, coupled with increased investment income on higher cash and short-term investment balances. Our effective tax rate under GAAP was 18.8% in Q1 of fiscal '24, compared to 19.9% in Q1 last year. Excluding discrete items, the normalized effective tax rate, which is the rate we use in calculating non-GAAP EPS, was 22.9% in Q1 compared to 23.3% in the same prior year quarter.

On a non-GAAP basis, our Q1 fiscal '27 adjusted operating margin was 9.5% compared to 10.3% in the prior year first fiscal quarter. By division, non-GAAP operating margin was 12.6% in Security, 12.1% in Opto, and negative 1.8% in Healthcare. While we saw adjusted operating margin expansion in the Opto division, the operating loss in the Healthcare division and less favorable Security division mix drove the consolidated change. We anticipate stronger operating margins for the balance of fiscal '27 in each division and for OSI overall. Moving to cash flow in the balance sheet. We generated $37 million of operating cash flow in Q1 this year, compared to $17 million in last year's Q1. Accounts receivable at September 30th were $18 million lower than at June 30th, given Q1 revenues are historically lighter than in Q4.

While unbilled receivables rose $34 million, as we recognized revenue on certain Security contracts ahead of billing milestones. The receivable balance from our largest customer in Mexico slightly declined from June to September, as collections modestly outpaced revenue following significant Q4 collections. We continue to expect this receivable to decrease significantly by the end of fiscal '27, contributing to expected strong annual free cash flow conversion. Inventories increased $48 million during the quarter to $463 million to support strong second half scheduled deliveries from our backlog. CapEx in the first quarter was $7.7 million, while depreciation and amortization in the quarter was $9.0 million. During Q1, we repurchased approximately 306,000 shares at an average price of about $204 for approximately $62 million. Our board in August increased the authorization for stock repurchases by an additional 1 million shares.

And at the end of Q1, approximately 773,000 shares were available under the repurchase program. Our priorities remain organic investment, strategic acquisitions, opportunistic repurchases, and maintaining a strong balance sheet. Q1 diluted shares were 16.3 million, compared with 17.5 million a year ago, a 7% reduction, reflecting the repurchase and retirement of shares over the past year. Our balance sheet remains solid, providing us with significant flexibility. We ended the quarter with $236 million in cash and cash equivalents and $66 million in short-term investments, approximately $302 million in total, with total debt of approximately $1.0 billion and no amounts drawn under our bank lines of credit. With the capital returned to shareholders during Q1 through stock buybacks, net leverage under our credit agreement was approximately 2.3. Over 90% of our debt is at fixed rates, which limits our borrowing cost sensitivity to higher short-term interest rates.

Now, turning to our guidance. We are raising our fiscal 2027 non-GAAP EPS guidance, while reaffirming our fiscal '27 revenue guidance of $1.875 billion to $1.930 billion. We now expect non-GAAP EPS of $11.28 to $11.64, representing 9% to 12.5% year-over-year growth. The expected increase primarily reflects the favorable impact to EPS of stock repurchases made in Q1. As we said in August, we continue to expect revenue growth to be strongest in the second half of the fiscal year. We expect second quarter revenues to be modestly down year-over-year as Q2 represents the toughest Middle East comp with sizable revenues in the prior year period before the conflicts began along with the Mexico impact previously discussed. H2 revenue growth is underpinned by the timing of the expected conversion of our sizable backlog and a healthy funnel of new opportunities, coupled with the significant year-over-year growth expected in Security service revenues that we have previously discussed. We also continue to expect free cash flow to exceed net income for the full fiscal year.

Our guidance excludes potential impairment, restructuring, and other costs, amortization of acquired intangible assets and their associated tax effects, and discrete tax and other non-recurring items. Actual results could vary from guidance due to the timing of backlog conversion, new bookings, cash collections, tariffs, the conflicts in the Middle East, U.S. government funding and procurement timing, interest rates and supply chain disruptions, among other factors discussed in our SEC filings. In summary, we began fiscal '27 with record first quarter revenues, strong bookings, a record backlog, and cash generation running ahead of last year. We thank the entire global OSI team for their dedication. And at this time, we'd like to open the call to questions.

Operator

Thank you.

[Operator Instructions]

Our first question is going to come from the line of Josh Nichols with B. Riley Securities. Your line is open. Please go ahead.

Unknown Speaker

Yes, thanks for taking my question and great to see the backlog well above $2 billion for the first time with a strong book-to-bill. You know, EPS obviously moving up higher. I know you're reiterating the top-line revenue guidance, but just with the backlog increase, I was just curious as part of that just being some conservatism given that there's already a second half weighting to the outlook? Or is this something that you think these new orders that you got are really just going to increase visibility for the company when you think about fiscal '28, '29 and the timing of those deliveries?

Alan Edrick

Josh, this is Alan. Great question, and we're really pleased with the record level of backlog that we have. Going into our guidance, we're still seeing conflicts going on in the Middle East and other geopolitical events. We just thought it prudent to maintain that revenue guidance at this time. Surely there is upside. And it sets us up quite nicely as we enter fiscal '28 and beyond as well.

Unknown Speaker

Yep, and then just for a little bit more context, I'm guessing probably not, but was any of those Middle East orders that caused the one-time hiccup in last quarter, was any of that shifted or are you still expecting that to come in in the second half? And is there anything else big that you guys have been working on that you expect may come to fruition in terms of the order pipeline generally?

Alan Edrick

Yes, another good question, Josh. It's Alan. So, yes, we mentioned last time there was roughly $50 million pushed out of our fourth quarter. During our Q1, we shifted and recognized revenue about $8 million of that. I think that's the first quarter. Last time we said we expected the balance to mostly be in the second half of this year and even into fiscal '28. And that's still currently our expectation.

Ajay Mehra

Yeah, you know, just this is Ajay, just to add on in terms of orders. Even with the Middle East situation, we had a great book-to-bill ratio. Orders are materializing at other places. And as I said, I think previously as well, as hopefully when the conflict ends, usually in the long run, it's an opportunity for us to get a lot more orders as people become more and more conscious of security around infrastructure and military facilities.

Unknown Speaker

Yes, I appreciate that. That's a good point we're taking note of. I'll jump back into the queue and let someone else take a turn. Appreciate it. Thanks, guys. Good to see the progress here.

Operator

Thank you. And one moment for our next question. Our next question will come from the line of John Godyn with Citigroup. Your line is open. Please go ahead.

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John Godyn

Hey, guys. Thanks for taking my question. I wanted to just talk a little bit about or hope you can elaborate a little bit on what's going on with services revenues. I think everybody is excited on the growth there, what it means for margins over time. It seems like there is a little bit of a blip, but you guys are confident that that mix is going to improve through the balance of the year and the Security division, any color you could provide would be great.

Alan Edrick

Sure, John. This is Alan. Good question. Yes. While our service revenue growth was modest at around 5% in Q1, we see a significant pickup year-over-year at each of Q2, Q3, and Q4. That's really underpinned by looking at the rollout of or products that we've installed coming off of warranty. That's a big part of it. Some of the aviation service revenue that we're doing, some of the SAS revenue such as SIRS-CAN, increasing revenue with our RF business and some various other items. So we actually have some very good visibility into the service revenue growth, which gives us a high degree of confidence for that strong double-digit growth in service revenue commencing really this quarter in Q2 and getting even stronger in the second half.

John Godyn

Got it. Great. That's very helpful. And if I could ask one more on the Middle East, you know, just reflecting what's out there in the news, you know, there is this concern of an escalation after the midterms. I just was hoping to think through that with you guys. If there was a dramatic escalation event, how might that impact your thinking? How might you guide investors to kind of think through the impact on the business?

Ajay Mehra

So, I think, you know, as I said, in the long run, obviously, any, unfortunately, any conflict does benefit us with increased Security requirements. I think we've taken into account as much as possible what we think is going to happen, but obviously we don't have a crystal ball like anybody else. So we'll wait and see, but from what we know right now, we feel confident and we're looking what we think is going to happen over the next three quarters.

John Godyn

Excellent. Appreciate the color, guys.

Operator

Thank you and one moment for our next question. Our next question will come from the line of Christopher Glynn with Oppenheimer & Co. Your line is open. Please go ahead.

Christopher Glynn

Hey, thanks. Good afternoon, guys. I want to ask a little bit about the RF business. You talked about growing RF pipeline and notwithstanding the large bookings you've had. You know, I know there's a lot of classified work you do there, but I'm curious if you could talk about the competitive landscape a little bit more about the differentiation that's winning, how unique is the offering and how dependent are the SERV programs on.

Ajay Mehra

You guys singularly? So this is Ajay, you know, as we said previously, you know, it's the kind of business where it's pretty restricted what we can say or not say, but I will tell you that, you know, our offerings are regarded very favorably by customers. We have some very unique products that others do not have. And in certain areas, we definitely do dominate the market. So I think that without getting into specifics, we feel very good about our prospects going forward. And as I said in my prepared remarks, we are definitely very much talking to customers and discussing opportunities as we move forward.

Christopher Glynn

Great. And just in terms of those large orders, the $235 million and the $90 million, curious how you know that's pacing to orders. I think it's a little more upfront than the CBP orders but just kind of curious.

Alan Edrick

Chris, this is Alan. Yes, so exciting for us. We are recognizing revenue on that $235 million contract as we speak. So we saw some nice revenues for that in Q1 and we'll continue to see it through the balance of this fiscal year. The new orders that we got for $90 million. We'll see some contribution this year and more contributions in out years as well.

Ajay Mehra

It gives us great visibility in '27 and beyond.

Christopher Glynn

Okay, great. Thanks very much. I'll move it along.

Operator

Thank you and one moment for our next question. Our next question will come from the line of Lawrence Solow with CJS Securities. Your line is open. Please go ahead.

Lawrence Solow

Great, good afternoon. I guess a couple questions on the backlog, composition of the backlog. It sounds like most things are United States and U.S. focused, right? But they go there in August and then the $90 million on the golden dome on the RF side, I guess that's mostly U.S.. And is that, you know, no Middle East this year, you know, in your, in your guidance on sales and I'm sure in bookings, but is the carton, you know, majority or vast majority of bookings you expect this year domestic or is there some international, um, you know, stuff in the queue? Are close in the queue?

Ajay Mehra

So, this is Ajay. I mean, bear in mind that we do business in 150 countries, so international business, we expect to continue. Obviously, Middle East is, you know, a blip right now, and hopefully that turns around. And we have, you know, domestic orders as well. So it really depends on a quarter by quarter, you know, whether it's domestic or international.

Lawrence Solow

All right. And I guess the other question I have really is more importantly just in the U.S., is there any risk? You know, we're always looking over our shoulder on the Middle East and Iran. I'm just curious, the U.S., the reconciliation bill, reconciliation 3.0 I guess they call it. I guess after the midterms that that's supposed to be hopefully hashed out before year end, but is there a funding risk, particularly on Golden Dome, and maybe even, I don't think, I think that that's a separate funding for them, right? There's no actual funding in the, um in the traditional appropriations there. So I'm just curious, you know, is that something you guys are watching, you know, particularly on Golden Dome, but just, you know, obviously we had a government shutdown last year that impacted stuff for quite a while. So any thoughts on that would be great.

Ajay Mehra

So, you know, a lot of this is out of our control, obviously, but keep in mind with the big, beautiful bill, a lot of the funding for, you know, for DHS, as well as the Golden Dome programs was already, you know, was already there. So that'll continue and we're still waiting for with CBP and others for that funding to be awarded. They've started the programs, but there's still a long ways to go. So I think that, you know, really from the original reconciliation bill, we're still waiting for orders to be released. I think that as far as the future is concerned, we feel even on the RF business that a lot of the funding is already there. Obviously, everybody looks for future funding, so we'll see what happens. But at this point, the programs we're in in the near term to short term, we feel pretty good.

Lawrence Solow

Okay, great. Lastly, just for my take, just to summarize it, it sounds like obviously Q1 is a light Top line or mix was a top line was fine. Mix was a little bit light. I hurt your margins a little bit, but it doesn't sound like, you know, from an operating standpoint, much has really changed for your outlook this year. The increasing guidance is more because of your share buyback than anything else. Is that kind of fair to say?

Alan Edrick

Yes, Lawrence, this is Alan. That would be a fair statement at this point in time, yes.

Lawrence Solow

All right. I'm all set then. Thanks. I appreciate it, guys.

Operator

Thank you. And one moment for our next question, which will come from the line of Seth Seifman with JP Morgan. Your line is open. Please go ahead.

Seth Seifman

Yes, thanks very much and good afternoon. Um, I wonder, you gave us some some helpful commentary about the the revenue in Q2, just so we're all kind of properly calibrated in terms of, you know, how we get to the year. Um, how do we think about the mix evolving? In Q2. I think, you know, you mentioned or recovery in services growth and, you know, the degree of sequential margin expansion that we might think about.

Alan Edrick

Yes, Seth, this is Alan. So you're correct. We tried to give some color for modeling purposes for Q2 that we give annual guidance. Revenue accelerating meaningfully in Q2, probably that type of growth, you know, doubling if not more than doubling in Q2 with continued acceleration in the second half of the year as well. So we would anticipate that will contribute nicely to expanding margins throughout the balance of the year.

Seth Seifman

Okay. And then maybe I guess as you think about capital deployment, we saw some good share purchase this quarter. Kind of the way that you think about that going forward, you know, still with good cash on the balance sheet and nice conversion this year. Are there interesting things to look at in M&A right now? Is that part of the outlook? Is it kind of more focused on executing this kind of growing backlog that you have and maybe we'll see some more share purchases? Maybe just some updated thoughts on capital deployment.

Ajay Mehra

So, you know, we're, this is Ajay, we're always looking at organic growth. That's always our, you know, number one priority. And we think there are a lot of opportunities out there. So it's not that, you know, we absolutely need an acquisition, but we obviously look at acquisitions. We've done them in the past. And we need to look at acquisition that's strategic. That builds on our momentum and then really increases our market penetration or gives us some complementary markets that we're going after. And, you know, we're always looking at all those opportunities to think about share repurchases.

So there's no set rule here or there, but we look at all three opportunities and we still are.

Seth Seifman

Excellent. Thank you very much.

Operator

Thank you. And as a reminder, to ask a question, please press star 11 on your telephone. Our next question will come from the line of Jeffrey Martin with Ross Capital Partners. Your line is open. Please go ahead.

Jeff Martin

Thanks. Good afternoon, Ajay and Alan. Wanted to dig into, you know, how you're thinking about future investment in the RF business with the success that you're having. I know that you've built out overseas manufacturing, you know. Do we have significant capacity at this point, or are you going to have to look to expand capacity? And then could you also touch on, you know, either R&D or future investment and further in the our business?

Ajay Mehra

So, you know, great question. And obviously, we want to make sure, and I'll address the R&D first, that, you know, we start and keep on investing in future products. You obviously want to invest when times are good. And we're actively looking at opportunities there. In terms of expansion. I think we mentioned before we moved into a new facility. We've actually moved into a second new facility. We feel that we have a very robust pipeline that we can meet with the current requirements that we have. And we can always go into a second shift and meet in.

And as we actively talk to customers, that's one of the things we're able to demonstrate that, yes, we have the ability to get more orders and grow and get them in a timely manner. And really, if necessary, it's the kind of business that if you have to add another facility, it will be fairly straightforward for us to do.

Jeff Martin

Great. I think that's the first time I've gotten a great question out of you, Ajay. Thank you. That's all I had. Thank you.

Operator

Thank you. And I'm showing no further questions at this time and I would like to hand the conference back over to Ajay for any closing remarks.

Ajay Mehra

Once again, thank you all for joining our call. We look forward to speaking with you during our next earnings call following the completion of our fiscal 2027 second quarter. Hopefully all of you have an upcoming great holiday season. Thank you very much.

Operator

This concludes today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.

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