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.
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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.
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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.
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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.
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Q3 2024 Summary
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
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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. -
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. -
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. -
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. -
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. -
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. -
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. -
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
Revenue by Segment - in Millions of USD | FY 2013 | Q1 2014 | Q2 2014 | Q3 2014 | Q4 2014 | FY 2014 | Q1 2015 | Q2 2015 | Q3 2015 | Q4 2015 | FY 2015 | Q1 2016 | Q2 2016 | Q3 2016 | Q4 2016 | FY 2016 | Q1 2017 | Q2 2017 | Q3 2017 | Q4 2017 | FY 2017 | Q1 2018 | Q2 2018 | Q3 2018 | Q4 2018 | FY 2018 | Q1 2019 | Q2 2019 | Q3 2019 | Q4 2019 | FY 2019 | Q1 2020 | Q2 2020 | Q3 2020 | Q4 2020 | FY 2020 | Q1 2021 | Q2 2021 | Q3 2021 | Q4 2021 | FY 2021 | Q1 2022 | Q2 2022 | Q3 2022 | Q4 2022 | FY 2022 | Q1 2023 | Q2 2023 | Q3 2023 | Q4 2023 | FY 2023 | Q1 2024 | Q2 2024 | Q3 2024 |
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Photonics | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
Vision | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
Precision Motion | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
Laser Products | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
Vision Technologies | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
Precision Medicine and Manufacturing | 69.5 | 74.3 | 71.28 | 67.92 | 283.0 | 65.234 | 63.952 | 60.6 | ||||||||||||||||||||||||||||||||||||||||||||||
Medical Solutions | 77.6 | 83.3 | 83.38 | 80.92 | 325.2 | 102.452 | 104.525 | 103.8 | ||||||||||||||||||||||||||||||||||||||||||||||
Robotics and Automation | 72.0 | 71.8 | 66.85 | 62.85 | 273.5 | 63.230 | 67.387 | 80.0 | ||||||||||||||||||||||||||||||||||||||||||||||
Total Revenue | 219.1 | 229.5 | 221.50 | 211.6 | 881.7 | 230.916 | 235.864 | 244.4 | ||||||||||||||||||||||||||||||||||||||||||||||
Revenue by Geography - in Millions of USD | FY 2013 | Q1 2014 | Q2 2014 | Q3 2014 | Q4 2014 | FY 2014 | Q1 2015 | Q2 2015 | Q3 2015 | Q4 2015 | FY 2015 | Q1 2016 | Q2 2016 | Q3 2016 | Q4 2016 | FY 2016 | Q1 2017 | Q2 2017 | Q3 2017 | Q4 2017 | FY 2017 | Q1 2018 | Q2 2018 | Q3 2018 | Q4 2018 | FY 2018 | Q1 2019 | Q2 2019 | Q3 2019 | Q4 2019 | FY 2019 | Q1 2020 | Q2 2020 | Q3 2020 | Q4 2020 | FY 2020 | Q1 2021 | Q2 2021 | Q3 2021 | Q4 2021 | FY 2021 | Q1 2022 | Q2 2022 | Q3 2022 | Q4 2022 | FY 2022 | Q1 2023 | Q2 2023 | Q3 2023 | Q4 2023 | FY 2023 | Q1 2024 | Q2 2024 | Q3 2024 |
United States | 103.842 | 107.59 | 110.46 | 96.41 | 418.3 | 117.08 | 123.39 | 124.33 | ||||||||||||||||||||||||||||||||||||||||||||||
Germany | 34.862 | 32.10 | 33.26 | 27.98 | 128.2 | 33.18 | 31.92 | 33.56 | ||||||||||||||||||||||||||||||||||||||||||||||
Rest of Europe | 29.365 | 34.54 | 34.26 | 38.84 | 137.0 | 30.97 | 32.53 | 30.58 | ||||||||||||||||||||||||||||||||||||||||||||||
China | 17.798 | 20.85 | 15.68 | 19.07 | 73.4 | 17.07 | 19.01 | 24.62 | ||||||||||||||||||||||||||||||||||||||||||||||
Rest of Asia-Pacific | 28.111 | 27.39 | 24.06 | 25.84 | 105.4 | 27.26 | 25.33 | 27.15 | ||||||||||||||||||||||||||||||||||||||||||||||
Japan | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
Other | 5.148 | 6.99 | 3.78 | 3.38 | 19.3 | 5.36 | 3.68 | 4.16 | ||||||||||||||||||||||||||||||||||||||||||||||
Total Revenue | 219.126 | 229.46 | 221.50 | 211.61 | 881.7 | 230.92 | 235.86 | 244.41 |
Executive Team
Questions to Ask Management
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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 ?
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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 ?
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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 ?
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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 ?
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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 ?
Past Guidance
1. Q3 2024 Earnings Call
- Issued Period: Q3 2024
- Guided Period: Q4 2024 and FY 2024
Guidance for Q4 2024:
- Revenue: Expected to be slightly weaker due to customer-specific timing issues and macroeconomic factors, but no specific dollar amount provided.
- Adjusted Gross Margin: Approximately 46%.
- Adjusted EBITDA: Expected to be in the range of $50 million to $52 million.
- Adjusted EPS: Expected to be in the range of $0.70 to $0.74.
- Interest Expense: Expected to be slightly above $7 million.
- Non-GAAP Tax Rate: Approximately 20%.
- Organic Growth: Expected to sequentially improve, returning to low single-digit growth.
- Cash Flow: Expected to return to year-over-year growth.
Guidance for FY 2024:
- Revenue: Expected to be in the range of $948 million to $953 million.
- Adjusted Gross Margin: Approximately 46%.
- Adjusted EBITDA: Expected to be in the range of $208 million to $210 million.
- Adjusted EPS: Expected to be in the range of $3.02 to $3.06.
- Non-GAAP Tax Rate: Approximately 19%.
- Cash Flow: Expected to demonstrate double-digit growth.
- Gross Leverage Ratio: Expected to reduce to 2 or below, with net leverage closer to 1.5x.
- New Product Revenue for 2025: Reconfirmed $50 million incremental new product revenue.
- 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:
- 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%.
- Adjusted Gross Margin: Expected to be in the range of 47% to 47.5%.
- Adjusted EBITDA: Expected to be in the range of $56 million to $58 million, representing a greater than 23% EBITDA margin.
- Adjusted EPS: Expected to be in the range of $0.85 to $0.89.
- Interest Expense: Expected to be approximately $8 million.
- Non-GAAP Tax Rate: Expected to be around 18%.
- 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:
- Revenue: Expected to be at the bottom of the previously communicated range of $975 million, representing reported revenue growth of greater than 10%.
- 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.
- Adjusted EBITDA: Expected to be in the range of $215 million to $222 million, representing double-digit growth year-over-year.
- 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.
- Interest Expense: Expected to be approximately $8 million in both Q3 and Q4 2024.
- Non-GAAP Tax Rate: Expected to be around 18%.
- 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:
- 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.
- Adjusted Gross Margin: Expected to be in the range of 46% to 46.3%.
- Adjusted EBITDA: Expected to be in the range of $48 million to $50 million.
- Adjusted EPS: Expected to be in the range of $0.68 to $0.74.
- Interest Expense: Expected to be nearly $8.5 million.
- Non-GAAP Tax Rate: Expected to be around 18%.
- 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:
- Revenue: Expected to be in the range of $225 million to $230 million, representing organic revenue declines of 4% to 6% year-over-year.
- Adjusted Gross Margin: Approximately 45.5% to 46%.
Guidance for FY 2024:
- Revenue: Expected to be in the range of $975 million to $1 billion, representing low single-digit organic growth.
- Adjusted Gross Margin: Approximately 46% to 47%.
- Adjusted EBITDA: Expected to be in the range of $215 million to $225 million.
- Adjusted EPS: Expected to be in the range of $3.10 to $3.35.
- Interest Expense: Approximately $31 million.
- Non-GAAP Tax Rate: Around 18%.