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    Novanta Inc (NOVT)

    Business Description

    Novanta Inc. is a global supplier of core technology solutions that empower medical and advanced industrial original equipment manufacturers (OEMs) with precision and performance. The company specializes in engineering components and subsystems for demanding applications, leveraging expertise in photonics, vision, and precision motion technologies. Novanta's offerings cater to critical markets such as healthcare, robotics, and advanced manufacturing.

    1. Medical Solutions - Develops and supplies medical insufflators, pumps, visualization solutions, video processing technologies, touch panel displays, and machine vision systems for minimally invasive surgery, medical imaging, and patient monitoring.

      • Sub-products: RFID technologies, barcode identification systems, thermal chart recorders, and light/color measurement devices.

    2. Precision Medicine and Manufacturing - Provides photonics-based solutions, including laser scanning systems, laser beam delivery, CO2 lasers, solid-state lasers, ultrafast lasers, and optical light engines for advanced industrial processes, medical imaging, and DNA sequencing.

    3. Robotics and Automation - Offers optical and inductive encoders, precision motors, servo drives, motion control solutions, integrated stepper motors, robotic end-of-arm technology, and air bearing spindles for robotics, automation, and microelectronics applications.

    Q3 2024 Summary

    Initial Price$163.11July 1, 2024
    Final Price$174.81October 1, 2024
    Price Change$11.70
    % Change+7.17%

    What went well

    • Strong Growth Expected from New Product Launches in 2025: Novanta anticipates approximately $50 million in incremental revenue from new product launches in 2025, including in DNA sequencing, DUV and EUV lithography, and robotic surgery. These launches represent significant growth opportunities as they are scheduled despite recent deferrals. 
    • Not Losing Market Share Despite Macroeconomic Challenges: The company is not losing any market share and remains designed into customers' platforms. Novanta expects business to improve alongside the macroeconomic environment, effectively benefiting from its customers' growth expectations. 
    • Positive Momentum in Short-Cycle Businesses: Novanta's short-cycle businesses are experiencing an uptick in bookings and growth, which is expected to continue. While longer-cycle businesses remain subdued, any faster recovery could favorably impact the company's outlook. 

    What went wrong

    • Significant Reduction in Q4 Revenue Guidance Due to Customer Delays: The company reduced its fourth-quarter revenue outlook by approximately $25 million because customers have rescheduled shipments into 2025, especially in DNA sequencing products and delays in DUV and EUV lithography applications.
    • Key Product Launches Deferred, Indicating Potential Demand Weakness: Several important product launches, including those in DNA sequencing, lithography, and robotic systems, have been postponed to 2025 due to customer-specific challenges and market conditions, suggesting potential underlying demand softness.
    • Earnings Per Share Expected to Decline More Than Revenue: Despite a slight sequential decline in Q4 revenue, the company anticipates a more substantial drop in EPS due to a higher tax rate and increased operating expenses, indicating margin pressures and potential cost control issues.

    Q&A Summary

    1. Revenue Guidance and 2025 Growth Outlook
      Q: Why is 2025 growth guidance only up to 10%?
      A: Management explains that despite deferring an additional $25 million into 2025, they are being cautious due to macroeconomic and geopolitical uncertainties, including a contentious election and customers' reluctance to commit amid uncertainty. However, they emphasize they are not losing any market share, and product launches are still scheduled for 2025.

    2. Gross Margin Decline in Precision Manufacturing
      Q: Why did gross margin drop significantly in Precision Manufacturing?
      A: The significant gross margin decline is due to lower volumes in a facility with largely fixed costs, primarily caused by a decrease in DNA sequencing orders. To avoid impairing their ability to ramp up in early 2025, they maintained the cost structure, resulting in higher-than-expected decrementals.

    3. Status of New Product Launches
      Q: Has any new product launch slipped from 2025 into 2026?
      A: Management confirms that no new product launches have been delayed into 2026. While launches like EUV/DUV slipped from 2024 into 2025, the overall expected incremental revenue of $50 million remains the same, with a full-year ramp expected in 2025.

    4. Advanced Industrial Market Outlook
      Q: Why do you think advanced industrial is bottoming?
      A: They observe multiple indicators, including customer conversations and an uptick in short-cycle industrial business, which typically signals a bottoming and potential recovery ahead. This gives them optimism, though timing on longer-cycle business recovery remains uncertain.

    5. Motion Solutions Revenue Expectations
      Q: Is Motion Solutions still expected to be down $10 million?
      A: Yes, they maintain the expectation that Motion Solutions revenue will be around $80 million, down from the previous $90 million, impacted by market dynamics in life sciences tools.

    6. Industrial Backdrop in 2025 Guidance
      Q: What industrial environment is assumed in 2025 guidance?
      A: Management expects a more subdued industrial environment in 2025, assuming short-cycle business growth continues but long-cycle business remains subdued. Recovery in the longer-cycle industrial market would positively impact their outlook if it happens faster than expected.

    7. Earnings Per Share Decline in Q4
      Q: Why is Q4 EPS expected to drop more than revenue?
      A: The EPS decline is due to a higher tax rate from increased medical sales in Germany and a sequential uptick in operating expenses related to compensation changes and project timing.

    8. Technology Supplied for EUV/DUV Applications
      Q: What technology are you supplying for EUV/DUV applications?
      A: They are supplying a new type of technology not supplied before, solving a valuable problem for the customer. The delay is about launch timing and not related to the product itself.

    Key Metrics

    View all financials →
    Revenue by Segment - in Millions of USDFY 2013Q1 2014Q2 2014Q3 2014Q4 2014FY 2014Q1 2015Q2 2015Q3 2015Q4 2015FY 2015Q1 2016Q2 2016Q3 2016Q4 2016FY 2016Q1 2017Q2 2017Q3 2017Q4 2017FY 2017Q1 2018Q2 2018Q3 2018Q4 2018FY 2018Q1 2019Q2 2019Q3 2019Q4 2019FY 2019Q1 2020Q2 2020Q3 2020Q4 2020FY 2020Q1 2021Q2 2021Q3 2021Q4 2021FY 2021Q1 2022Q2 2022Q3 2022Q4 2022FY 2022Q1 2023Q2 2023Q3 2023Q4 2023FY 2023Q1 2024Q2 2024Q3 2024
    Photonics--------
    Vision--------
    Precision Motion--------
    Laser Products--------
    Vision Technologies--------
    Precision Medicine and Manufacturing69.574.371.2867.92283.065.23463.95260.6
    Medical Solutions77.683.383.3880.92325.2102.452104.525103.8
    Robotics and Automation72.071.866.8562.85273.563.23067.38780.0
    Total Revenue219.1229.5221.50211.6881.7230.916235.864244.4
    Revenue by Geography - in Millions of USDFY 2013Q1 2014Q2 2014Q3 2014Q4 2014FY 2014Q1 2015Q2 2015Q3 2015Q4 2015FY 2015Q1 2016Q2 2016Q3 2016Q4 2016FY 2016Q1 2017Q2 2017Q3 2017Q4 2017FY 2017Q1 2018Q2 2018Q3 2018Q4 2018FY 2018Q1 2019Q2 2019Q3 2019Q4 2019FY 2019Q1 2020Q2 2020Q3 2020Q4 2020FY 2020Q1 2021Q2 2021Q3 2021Q4 2021FY 2021Q1 2022Q2 2022Q3 2022Q4 2022FY 2022Q1 2023Q2 2023Q3 2023Q4 2023FY 2023Q1 2024Q2 2024Q3 2024
    United States103.842107.59110.4696.41418.3117.08123.39124.33
    Germany34.86232.1033.2627.98128.233.1831.9233.56
    Rest of Europe29.36534.5434.2638.84137.030.9732.5330.58
    China17.79820.8515.6819.0773.417.0719.0124.62
    Rest of Asia-Pacific28.11127.3924.0625.84105.427.2625.3327.15
    Japan--------
    Other5.1486.993.783.3819.35.363.684.16
    Total Revenue219.126229.46221.50211.61881.7230.92235.86244.41

    Executive Team

    NamePositionStart DateShort Bio
    Matthijs GlastraChair of the Board and CEOMay 13, 2021 (Chair), September 1, 2016 (CEO)Matthijs Glastra has served as Chair of the Board of Directors at Novanta since May 13, 2021 and as Chief Executive Officer and Director since September 1, 2016. He joined Novanta in 2012 as a Group President and was later appointed Chief Operating Officer in February 2015. Prior to Novanta, Mr. Glastra had an 18-year career at Philips, where he held various leadership roles in advanced industrial and medical end markets, including CEO of Philips Entertainment Lighting and COO of Philips Lumileds. He holds a Master of Science in Applied Physics from Delft University of Technology, an Advanced Engineering Degree from ESPCI in Paris, and an MBA from INSEAD in France.
    Robert J. BuckleyChief Financial OfficerMarch 31, 2011Robert J. Buckley has served as the Chief Financial Officer of Novanta Inc. since March 31, 2011. He initially joined the company in an advisory capacity earlier that year and transitioned to the CFO role on the specified date. His employment agreement includes provisions for annual reviews and adjustments to his compensation.
    Michele WelshGeneral Counsel and Corporate SecretaryJuly 11, 2022Michele D. Welsh joined Novanta as General Counsel and Corporate Secretary on July 11, 2022. She has extensive experience working with global, public companies across multiple industries. Before joining Novanta, she was Vice President, Assistant General Counsel & Legal Compliance at Carlisle Companies Incorporated from May 2018 to May 2022. Prior to that, she held various senior legal roles at Aon plc from September 2007 to April 2018. Ms. Welsh holds a B.S.B.A. from the University of North Carolina – Chapel Hill and a J.D. from Boston College Law School.
    Brian YoungChief Human Resources OfficerDecember 2016Brian S. Young joined Novanta Inc. in April 2015 as Vice President of Human Resources and was appointed Chief Human Resources Officer in December 2016. He has over 20 years of human resources leadership experience in both public and private companies, particularly in sectors such as medical devices, industrial control technologies, and advanced materials. Prior to Novanta, Mr. Young held various HR leadership roles, including Global Human Resource Leader at Hollingsworth & Vose Company and Vice President & Human Resource Officer at CIRCOR International, Inc. He holds a Bachelor of Science degree in Administration of Justice from Pennsylvania State University.
    John BurkeChief Accounting OfficerAugust 22, 2024John Burke was appointed as the Chief Accounting Officer of Novanta Inc. on August 22, 2024, succeeding Peter Chang. He has been with Novanta since 2011, holding roles such as Assistant Corporate Controller (2011–2017), Vice President of Accounting (2017–2021), and Vice President of Global Accounting (2021–2024). Prior to Novanta, he worked at MilliporeSigma as Manager of Technical Accounting and Reporting and at PricewaterhouseCoopers LLP as an audit manager. Mr. Burke is a Certified Public Accountant and holds a Bachelor of Business Administration in Accounting from the University of Massachusetts-Amherst.

    Questions to Ask Management

    1. Your precision medicine and manufacturing segment experienced a 15% sales decline in Q3, with adjusted gross margins down due to lower factory utilization ; what specific steps are you taking to mitigate the impact of this decline on overall company margins, and how confident are you in a rebound in 2025 given the current market dynamics ?

    2. Given that nearly all shipments of your DNA sequencing products originally expected in Q4 have been rescheduled to 2025 due to customer challenges , how are you addressing the risks associated with customer delays, and what assurances do you have that these delays won't extend further into 2025 ?

    3. Despite deferring approximately $25 million in revenue into 2025, your guidance for 2025 remains at up to 10% organic growth ; can you elaborate on why the deferred revenue isn't translating into a higher growth rate for 2025, and whether there are other factors offsetting this potential increase ?

    4. With the decremental gross margin in your precision medicine and manufacturing segment being almost 100% due to maintaining fixed costs despite lower volumes , what is your strategy to improve margins if volume recovery in 2025 is slower than anticipated ?

    5. You've mentioned that macroeconomic and geopolitical uncertainties are causing customers to defer purchases ; how resilient is your business model to prolonged uncertainties, and what contingency plans do you have if the anticipated market recovery in 2025 does not materialize as expected ?

    Share Repurchase Program

    Program DetailsProgram 1
    Approval DateFebruary 2020
    End Date/DurationNo specific end date; may be suspended or discontinued at any time
    Total Additional Amount$50.0 million
    Remaining Authorization$49.5 million (as of 2024-09-27)
    DetailsPurpose is to offset dilution from equity awards; repurchases are discretionary and funded through cash on hand and operations

    Past Guidance

    1. Q3 2024 Earnings Call

    • Issued Period: Q3 2024
    • Guided Period: Q4 2024 and FY 2024

    Guidance for Q4 2024:

    1. Revenue: Expected to be slightly weaker due to customer-specific timing issues and macroeconomic factors, but no specific dollar amount provided.
    2. Adjusted Gross Margin: Approximately 46%.
    3. Adjusted EBITDA: Expected to be in the range of $50 million to $52 million.
    4. Adjusted EPS: Expected to be in the range of $0.70 to $0.74.
    5. Interest Expense: Expected to be slightly above $7 million.
    6. Non-GAAP Tax Rate: Approximately 20%.
    7. Organic Growth: Expected to sequentially improve, returning to low single-digit growth.
    8. Cash Flow: Expected to return to year-over-year growth.

    Guidance for FY 2024:

    1. Revenue: Expected to be in the range of $948 million to $953 million.
    2. Adjusted Gross Margin: Approximately 46%.
    3. Adjusted EBITDA: Expected to be in the range of $208 million to $210 million.
    4. Adjusted EPS: Expected to be in the range of $3.02 to $3.06.
    5. Non-GAAP Tax Rate: Approximately 19%.
    6. Cash Flow: Expected to demonstrate double-digit growth.
    7. Gross Leverage Ratio: Expected to reduce to 2 or below, with net leverage closer to 1.5x.
    8. New Product Revenue for 2025: Reconfirmed $50 million incremental new product revenue.
    9. Capital Equipment Market Recovery: Expected to improve in mid-2025, particularly in life sciences and bioprocessing markets.

    2. Q2 2024 Earnings Call

    • Issued Period: Q2 2024
    • Guided Period: Q3 2024 and FY 2024

    Guidance for Q3 2024:

    1. Revenue: Expected to be in the range of $241 million to $244 million, representing organic revenue growth of 1% to 2% year-over-year and sequential growth of 3% to 4%.
    2. Adjusted Gross Margin: Expected to be in the range of 47% to 47.5%.
    3. Adjusted EBITDA: Expected to be in the range of $56 million to $58 million, representing a greater than 23% EBITDA margin.
    4. Adjusted EPS: Expected to be in the range of $0.85 to $0.89.
    5. Interest Expense: Expected to be approximately $8 million.
    6. Non-GAAP Tax Rate: Expected to be around 18%.
    7. Operating Expenses:
      • R&D and SG&A Expenses: Approximately $68 million to $69 million.
      • Depreciation Expense: Approximately $4 million.
      • Stock Compensation Expense: Approximately $7 million.

    Guidance for FY 2024:

    1. Revenue: Expected to be at the bottom of the previously communicated range of $975 million, representing reported revenue growth of greater than 10%.
    2. Adjusted Gross Margin: Expected to be in the range of 46.6% to 47%, with the bottom end of the range raised by 60 basis points compared to February guidance.
    3. Adjusted EBITDA: Expected to be in the range of $215 million to $222 million, representing double-digit growth year-over-year.
    4. Adjusted EPS: Expected to be in the range of $3.20 to $3.35, with the bottom end of the range raised by $0.10 compared to prior guidance.
    5. Interest Expense: Expected to be approximately $8 million in both Q3 and Q4 2024.
    6. Non-GAAP Tax Rate: Expected to be around 18%.
    7. Gross Leverage Ratio: Expected to reduce to 2.0x or below by year-end 2024.

    3. Q1 2024 Earnings Call

    • Issued Period: Q1 2024
    • Guided Period: Q2 2024

    Guidance for Q2 2024:

    1. Revenue: Expected to be in the range of $230 million to $235 million, representing an organic revenue decline of 6% to 8% year-over-year and sequentially flat.
    2. Adjusted Gross Margin: Expected to be in the range of 46% to 46.3%.
    3. Adjusted EBITDA: Expected to be in the range of $48 million to $50 million.
    4. Adjusted EPS: Expected to be in the range of $0.68 to $0.74.
    5. Interest Expense: Expected to be nearly $8.5 million.
    6. Non-GAAP Tax Rate: Expected to be around 18%.
    7. Operating Expenses:
      • R&D and SG&A Expenses: Approximately $68 million to $69 million.
      • Depreciation Expense: Slightly below $4 million.
      • Stock Compensation Expense: Slightly below $7 million.

    4. Q4 2023 Earnings Call

    • Issued Period: Q4 2023
    • Guided Period: Q1 2024 and FY 2024

    Guidance for Q1 2024:

    1. Revenue: Expected to be in the range of $225 million to $230 million, representing organic revenue declines of 4% to 6% year-over-year.
    2. Adjusted Gross Margin: Approximately 45.5% to 46%.

    Guidance for FY 2024:

    1. Revenue: Expected to be in the range of $975 million to $1 billion, representing low single-digit organic growth.
    2. Adjusted Gross Margin: Approximately 46% to 47%.
    3. Adjusted EBITDA: Expected to be in the range of $215 million to $225 million.
    4. Adjusted EPS: Expected to be in the range of $3.10 to $3.35.
    5. Interest Expense: Approximately $31 million.
    6. Non-GAAP Tax Rate: Around 18%.