Q4 2020 Novanta Inc Earnings Call
Good morning, My name is Andrea and I will be your conference operator today.
At this time I would like to welcome everyone to the Novatel Incorporated's fourth quarter and full year 'twenty 'twenty earnings call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
To withdraw your question. Please press Star then two.
Please note this event is being recorded.
I would now like to turn the conference over to Ray Nash Corporate Finance leader for nobody on top of please go ahead.
Thank you very much good morning, and welcome to an event of this fourth quarter and full year 2020 earnings Conference call I Am Ray Nash corporate Finance leader of Nevada with me on today's call is our Chief Executive Officer, the tightest, Gloucester, and our Chief Financial Officer, Robert Buckley.
Not received a copy of our earnings press release issued today you may obtain it from the Investor Relations section of our website at Www Dot no vantage the dotcom.
Please note this call is being webcast live and will be archived on our website shortly after the call.
Before we begin we need to remind everyone of the safe Harbor for forward looking statements that we've outlined in our earnings press release issued earlier today and also of those in our SEC filings. We may make some comments today, both in our prepared remarks and in our responses to questions that may include forward looking statements. These involve inherent assumptions with known and unknown.
Risks and other factors that could cause our future results to differ materially from our current expectations any forward looking statements made today represent our views only as of this time, we disclaim any obligation to update forward looking statements in the future even if our estimates change.
So you should not rely on any of these forward looking statements as representing our views as of any time after this call.
During this call we will be referring to certain non-GAAP financial measures a reconciliation of such non-GAAP financial measures to the most directly comparable GAAP measures is available as an attachment to our earnings press release to the extent that we use non-GAAP financial measures. During this call that are not reconciled to GAAP measures in the earnings press release, we will provide.
Reconciliations promptly on the Investor Relations section of our website. After this call.
I'm now pleased to introduce the Chief Executive Officer of Nevada, The tightest cluster.
Thank you Ray good morning, everybody and thanks for joining our call I'd be for restart our normal review of the Companys results I would like to thank all of them No Panther employees again for everything they're doing to deliver to our customers. Our operations teams are doing a great job and being agile in this environment and I admire how are.
R&D teams are finding creative ways to bring innovations to market.
All while maintaining a relentless focus on keeping our teams safe it's great to see that they know about the spirit is alive and that our culture has been a strong foundation to help water describes this.
We take great pride in knowing that our mission critical technologies are embedded into the diagnostic and anti body pass the equipment detecting COVID-19.
Into ICU and patient monitoring of equipment used in hospitals to help in the fight against the pandemic or in DNA sequencing equipment, helping to detect and monitor of new virus variants.
Now, let's move on to our normal results review I will focus my remarks on the overall company and Robert will speak to more specifics from the segments and then our overall financial results.
We are pleased with the performance into the fourth quarter of 2000 of 'twenty, our teams executed very well in the face of challenging circumstances and delivered above our expectations for revenue and profit with.
With record cash flows.
Our company delivered approximately 140.
$7 million in revenue, representing an 8% year over year revenue decline on a reported basis and a 10% decline on an organic basis.
For the full year of 2000 of 'twenty, we delivered $591 million in revenue, which represents a year over year revenue decline of 6% on a reported basis and an 8% decline on an organic basis.
We are extremely pleased with how our teams drove exceptional operating performance throughout the year using the Nevada growth system tools.
Adjusted EBITDA was $32 million or 22% of sales in the fourth quarter, expanding nearly 300 basis points versus 2019.
For the full year 2020, our adjusted EBITDA was $121 million or 20 per cent of sales, which was flat versus 2019 on a dollar basis, yes, yet expanding 100 basis points on lower sales.
Our teams delivered record free cash flow performance in the fourth quarter at over $43 million up 32% year over year at a ratio of over 300 of 40% of GAAP net income.
Our free cash flow for the full year of 2020, it was $130 million up 147% versus 2019 at a ratio of over 290% of full year GAAP net income.
This is record performance and has a terrific reflection of the rigorous management of buyer teams of the company's operations and working capital.
We saw bookings momentum improved throughout the fourth quarter with sequential bookings growth of 26% versus the third quarter, driven by our photonics and precision motion segments.
In the fourth quarter, our book to Bill was one point O nine of our full year 2020 book to Bill ratio was about one.
We're starting to see some very nice momentum building in some of our advanced industrial end markets and also across multiple regions. There's improvement in the man has continued in January and February of this year and we expect another positive book to Bill in the first quarter of 2021.
Furthermore, our backlog supports the strong sequential revenue improvement versus the fourth quarter, and we expect to return back to year over year revenue growth with performance trending towards the upper end over guidance range.
Robert will discuss our guidance for the first quarter in more detail later in this call.
Now, let's turn to what we're seeing in our markets, 56% of an event of <unk> total sales went into medical and Mark is in the fourth quarter as well as on a full year basis or the full year base of sales to medical end market has experienced mid single digit declines versus 2019 as a consequence of the deferral of elective surgical procedures and deferrals of.
High throughput instrumentation for clinical and research laboratories.
Considering the significant impact of these macro events, we were actually very pleased with the resilience of our business.
We continue to see pockets of strength during this downturn such as in our medical consumables business with integrated smoke evacuation and our integrated data collection of products for clinical test equipment.
Looking forward for 2021 overall large medical Oems have shown a temporary pause in the recovery of the demand signals in the short term.
Corresponding to the rise in Covid cases in multiple regions. The associate of deferral of elective medical procedures, along with solid inventory positions for some key platforms.
We do expect to see sequential improvement of elective procedures towards pre COVID-19 levels in the second half of 2021 and are seeing initial signs of sequential improvement in our DNA sequencing and market as labs are learning how to operate during a pandemic and sequencing of Covid variance is driving some near term momentum.
The vendor sales to advance industrial markets were 44% of total sales in the fourth quarter and for the full year sequentially in the fourth quarter, our sales into these markets started to rebound across multiple applications areas.
This was consistent with the very strong bookings momentum that I commented on earlier. We also continue to experience higher demand specific to microelectronics investments, Inc. <unk> high speed networking and cloud based infrastructure as well as higher demand from <unk> based applications.
We expect the increased microelectronics demand that we saw in 2020 to be sustained heading into 2021.
Our vitality index, which is revenue from new products launched end of the last for years continues to be healthy at about at above 25% of sales for both the fourth quarter and the full year versus mid single digit percentages, just a few years ago.
Moving forward, we expect significant growth in our total MPI sales from 2021 versus 2020, we will be launching approximately 25, new products in 2021, which is double that of 2020 and a record number of launches for November and of single year.
As we have said throughout the past year. We've stayed the course on our innovation investments despite the downturn caused by the pandemic.
To believe that the long term secular growth drivers are even more relevant close pandemic with particular focus on industrial and surgical robotics minimally invasive surgery precision medicine of diagnostics and industry for the though.
While we've seen some customers or NPI programs experienced delays as a result of Covid most of our NPI programs continued to be very active and on track and we are extremely excited about the new launches that will be happening this year.
We also saw significant MPI success in this most recent quarter and the fourth quarter of 2020, we launched for new products in a position of motion group further strengthening our value proposition for pulled back high precision motion control and industrial in surgical robotics applications.
Design wins in the fourth quarter grew over feared for 50% versus the prior year with multiple wins in most of our businesses.
This was in line with our expectations and it is another encouraging sign of future growth as our customers continue to partner with us to bring new innovations and platforms to the market.
We expect to see continued momentum with our design win activity during the first quarter of 2021.
The November the growth system is developing rapidly with the core goal of enabling higher performance of an event of teams in all our sites worldwide and in 2020, we conducted over 3700 individual trainings R.
Our vision is to transform November into the lunar learning culture anchored in continuous improvement apply to all business all business areas, including but not limited to structurally improving customer satisfaction gross margin inventory management and the efficiency of our manufacturing sites.
In short it means growth and benefits for our customers our employees and our shareholders.
The results of the Nevada gross system are already appearing in our financial results as evidenced by our strong cash flow reduce the inventory and gross margin improvement in the fourth quarter of 2020.
Robert will speak to more specifics of these financial results, but we are very pleased with how our teams of lean in to adopt this common way of working and we see excellent opportunities in 2021 and beyond to continue to transform our operations and customer engagement using the November growth system.
We also continue to work at making the event of an employer of choice in the marketplace as we've spoken of in previous calls during 2020, we gave of onetime equity grant to our employees as a way to keep them motivated and engaged during the economic downturn.
Is it extremely positive results and we saw significant employee engagement and a record low employee turnover, even despite the difficult circumstances and remote work situations.
In 2021, our board of Directors has improved the similar equity grant as the way to continue to support and motivate our employees.
This grant will be smaller than the one issued in 2020 and will be coupled with the more traditional bonus plan as an overall package to incentivize our leaders and employees.
In addition to the is no event that is working hard to make significant strides in our environmental sustainability and corporate governance or ESG as we strongly feel we need to do our part in being a responsible corporate citizen.
We will be publishing our first ESG reported in the coming weeks, which will include multiple topics, including environmental protection product quality and safety and also diversity equity and inclusion in our work force.
In summary of fourth quarter played out slightly better than expected and we remain very confident about our long term strategic positioning.
We are experiencing sequential recovery in our emerging from the surprises with a strong balance sheet and an exciting innovation pipeline.
These results show that no that does very very well positioned with exposure to the long term secular trends in robotics, and automation health care productivity and precision medicine.
You can also expect us to lean in on acquisition opportunities, which is the primary focus of our capital deployment provided they fit our stringent financial returns of strategic criteria.
We are very actively engaged in pursuing M&A opportunities even within the constraints imposed by the pandemic.
So with that I will turn the call over to Robert to provide more details on our financial performance Robert.
Thank you for <unk> and good morning, everyone I'll start by giving some details on our operating segments starting with the vision segment. This segment predominantly serves the medical end market and saw a revenue decline of 9% year over year in the quarter. The book to Bill in our vision segment in the fourth quarter was zero point 92 of.
A large medical Oems experienced a temporary pause of demand corresponding to the rise in COVID-19 hospitalization rates and the resulting deferral of elective medical procedures.
Clearly this is a temporary impact, but we anticipate this will put pressure on the first half of this year.
However, the vitality index of this segment remained above 30% of sales with new products being a key driver of the resilience we have been seeing in this business unit.
Within the vision segment, we continue to see solid sales from our smoke evacuation technology and from the associated the medical consumables offering.
Smoking evacuation continues to be in high demand in today's climate, where medical staff around the world of antigen safe Covid free work environment during laparoscopic procedures.
We remain very excited about the continued progress with this product offering and continue to see this platform as the long term growth opportunity, particularly as we work with a multitude of customers on the next generation platform.
We are also very pleased with our detection of analysis business, which continued fantastic performance in the fourth quarter. This business unit predominantly serve the diagnostic testing and patient monitoring markets with RFID Barcoding of machine vision technologies. This business benefited from the rapid uptake in PCR molecular testing as well as patient monitor.
Training equipment purchases tied to the pandemic.
Turning to our precision motion segment.
This segment saw 6% growth in revenue in the fourth quarter of 2020 bookings growing 50% sequentially versus the third quarter and up 19% year over year with the book to Bill of 1.17 in the quarter.
The fourth quarter continues to experience strong demand for microelectronics markets, particularly investments in <unk> infrastructure and cloud based infrastructure.
These near term trends continue to remain robust as we enter 2021.
In addition, we began to see strength in robotics and automation space, both with our existing customers and new product introductions.
While the medical portion of this business remains under near term pressure, we are seeing signs of growth returning in 2021.
Finally, the segment experienced more than 50% growth year over year from its customers in China, giving us confidence in the sustained recovery from the pandemic.
Within the precision motion segment in the fourth quarter, new product revenue more than doubled and now comprises of double digit percentage of total sales for the segment.
Turning to the performance of the Photonics segment in the fourth quarter of 2020 of our revenue was down 14% in line with our expectations, but up 8% sequentially.
Throughout the fourth quarter and now into January and February we have seen significant positive signals of sequential recovery from our customers.
Bookings in the fourth quarter were up 50% sequentially and were up low single digit year over year.
Book to Bill in the fourth quarter was an impressive 126, reflecting a rebound in a multitude of industrial applications, giving us confidence and our positive outlook for this segment in 2021.
We continue to feel very confident of the robust innovation pipeline in our photonics segment. As the result, we continue to invest into the headwinds and we anticipate introducing multiple new product platforms in 2021, which are expected to help us gain share in adjacent high growth application areas exam.
Examples of markets, we expect to grow share in our via hole drilling for <unk> mobile devices laser additive manufacturing.
The material battery material processing for electronic vehicles for.
<unk> material processing of microelectronics for industrial medical applications at the high speed automation of processing of sustainable packaging notice converting markets.
New product revenue stayed strong at greater than 20% of sales in the fourth quarter and total MPI sales were up mid single digit year over year.
Design wins were up 60% year over year in the quarter sales to China were also up mid single digits. Despite the overall sales for the segment being down double digits year over year.
But most importantly, we're on track to launching nine new products in 2021, which is a record for this segment of single year and double the number of launches we had in 2020.
Turning to the operating results, we delivered 147 5 million of revenue in the fourth quarter of 2020, a decrease of 8% year over year on a reported basis and 10% decline on an organic basis for the full year of 2020, we delivered $590 6 million of revenue, which is down 6% year over year on a reported basis and 8%.
On an organic basis.
Despite the year over year decline, we are pleased with our sales performance in the fourth quarter and for the full year of beating our own expectations and our previously issued guidance.
Turning to our operating results our fourth quarter non-GAAP adjusted gross profit was $65 million of 44, 3% of sales compared to $70 million of 43, 6% in the fourth quarter of 2019 for the full year 2020, adjusted gross profit was $2 56, or 43 four percentage of sales.
Compared to $2 74 were 43 eight percentage of sales in 2019.
In the fourth quarter adjusted growth margins increased 100 basis points sequentially, and 70 basis points year over year.
The strong result was encouraging and comes as a result of the significant work of our operating teams to drive the Nevada growth system deeper into our day to day work.
In addition, this performance came despite the continued pressure from high operating costs in our factories that were caused by the pandemic.
To maintain a safe working environment, we continue to incur significant temporary cost the pressured our gross margins in spite of these incremental costs and the difficulty of operating our facilities. During the pandemic. We have some extremely proud of our teams in the developed a strong acumen managing through these risks and disruptions.
And while we are implementing tools and processes. The presumed the virus is here to stay in the elevated cost levels. We also feel we can manage these costs going forward, while driving gross margin expansion in 2021.
Moving onto the operating expenses for.
Fourth quarter, R&D expenses for $60 million of 11% of sales compared to $15 million of 9% of sales in the fourth quarter of 2019 for the full year R&D expenses for $61 million of 10% of sales compared to $56 million of 9% of sales in the prior year we.
We continue to have confidence in our innovation pipeline and therefore, we continue to invest into the economic climate is.
The Tiger said earlier, we view the current pandemic as an opportunity to take market share and capture significant customer platforms. Our new product pipeline is strong and we feel our new product launches in 2021 will contribute meaningful to <unk> overall growth trajectory.
Fourth quarter, SG&A expenses were $27 million of 19% of sales compared to $29 million of 18% of sales in the fourth quarter of 2019.
For the full year SG&A expenses were $110 million of 19% of sales compared to $118 million of 19% of the prior year for <unk>.
Very pleased with the flexibility of our business teams of demonstrated and responding to the current market conditions.
Moving on to other financial results GAAP GAAP operating income was $17 million in the fourth quarter of 2020 compared to $13 million in 2019 for.
For the full year GAAP operating income was $56 million or $55 million in the prior year.
Non-GAAP operating income in the fourth quarter was $22 million of 15% of sales compared to $25 million of 16% of sales from the prior year for the full year non-GAAP operating income was $85 million of 14% of sales compared to 100 million of 16% of sales in the prior year.
Adjusted EBITDA was $32 4 million in the fourth quarter of 2020 of 22% EBITDA margin compared to $30 5 million in the fourth quarter of 2019 or 19% EBITDA margin.
We are very proud of achieving flat EBITDA year over year, despite the 8% drop in organic revenue and the significant headwinds from the economic pandemic economic and pandemic environment. We see this as a huge testament of the commitment of our employees of our culture.
On the tax front GAAP tax rate was 14% in the fourth quarter of 2020. It differed from the Canadian statutory rate of 29% driven mainly by jurisdictional mix of income along with tax credits related to higher R&D spending of.
Full year GAAP tax rate was 8% of a non-GAAP basis, our tax rate in the fourth quarter was 8% and the full year was 12%. This was driven largely by jurisdictional mix of income and higher tax credits from R&D spending of.
GAAP diluted earnings per share was <unk> 35.
In the fourth quarter of 2020 and of $1 25 for the full year.
This compared to diluted earnings per share of <unk> 26 in the fourth quarter of 2019 and 115 for the full year of 2019.
On a non-GAAP basis adjusted earnings per share was <unk> 53 in the fourth quarter and of $1 95 for the full year.
Our adjusted earnings per share were down year over year, primarily from higher stock compensation expense from the all employee equity grant.
Stock based compensation expense was $7 million in the fourth quarter or $22 5 million for the full year.
Fourth quarter operating cash flow was $47 million compared to $35 million in the fourth quarter of 2019, a 31% increase year over year.
Full year operating cash flow was $140 million, which is up more than 120% year over year.
The event is free cash flow generation for 2020 was clearly a highlight representing the strongest year of free cash flow in the last 10 years. This represents this result was driven by strong profit continued improvement in net working capital in a variety of actions we took to preserve cash in response to the pandemic.
We ended the year with gross debt of $205 million, our gross leverage ratio was one seven times, our net debt was $80 million as of the end of the fourth quarter of 2020 or roughly zero of <unk> seven times.
Turning now to guidance as we look at the first quarter. We are seeing good signals of an industrial capital spending markets are beginning to rebound from the downturn caused by the pandemic the near term strength in the industrial sector will help us overcome the short term weakness in the medical markets caused by a drop in elective medical procedures caused by the high.
The hospitalization rates from Covid cases, while this will impact our business in the first half of 2021 is clearly a temporary impact of our confidence continues to build around the recovering demand environment.
The demand shaping up largely as we expected we are seeing some green shoots of opportunities. The single largest near term challenge is expected to be electronic materials shortages in our supply chain and logistics disruptions caused by the pandemic.
While we continue to build muscle memory around these topics and continues to represent a near term challenge.
Given all of these dynamics, we feel we have sufficient visibility to guide the current quarter, but we're going to refrain from providing full year guidance for another quarter.
For the first quarter of 2021 as we stand here today, we expect GAAP revenue in the range of $155 million to $157 million as we discussed earlier on this call. We are expecting to see of strong sequential improvement in revenue.
This will be driven largely by of sequential and year over year revenue growth in our precision motion and photonics segments.
Similarly to our end market commentary, we expect these segments will see strength in industrial capital spending microelectronics and continued robust in vitro diagnostic growth.
Whereas our vision segment will experience weakness from the short term downturn in elective medical procedures, which is already showing signs of stabilization.
Moving on to adjusted gross margins, we expect growth margins to be nearly flat sequentially versus the fourth quarter.
The improvement from ongoing productivity programs and cost leverage from higher volumes will be dampened somewhat by a seasonal uptick in compensation expense, which is in part caused by the reintroduction of incentive compensation structures and in part from higher payroll taxes.
We remain committed to delivering upwards of 150 basis points of gross margin expansion in 2021.
Driven by continued progress on the <unk> of growth system productivity program.
Strong cost controls and better volumes. So we expect gross margins decline sequentially starting in the second quarter.
R&D expenses in the first quarter will be approximately $17 million to $18 million. This increased sequentially and year over year reflects seasonal uptick in compensation expense, which again is the reintroduction of incentive compensation structures and also payroll taxes as well as increased project spending to support the execution of our planned MPI.
The projects.
We expect R&D expenses to stay at a slightly higher level for the next few quarters to ensure we have successfully launched our new products across a variety of segments.
SG&A expenses in the first quarter of 2021 will be approximately $31 million to $32 million increasing sequentially on a dollar basis predominantly driven by the seasonal uptick in compensation expense, which again is from the reintroduction of incentive compensation and higher payroll taxes and from the uptick in selling expenses related to the higher revenue.
Moving onto the remainder of our guidance depreciation expense, which was about $3 5 million in the fourth quarter of 2020 will be similar in the first quarter.
Amortization expense, which was $6 4 million of the fourth quarter will be similar in the first quarter.
Stock compensation expense, which was about $7 million in the fourth quarter will be similar in the first quarter.
In addition, as a result of the new equity grants in 2021, our stock compensation expense will continue to be higher than it was historically a step down from the 2020 levels of something closer to $18 million for the full year of 2021.
For adjusted EBITDA, We expect a range of 27 million to $29 million interest expense, which was about $1 5 million of the fourth quarter of 2020 is expected to be similar in the first quarter.
We expect our first quarter non-GAAP tax rate to be around 18% absent significant changes from jurisdictional mix of income.
And other variability of our eligible tax benefits diluted weighted average shares outstanding for the first quarter will be approximately $36 million.
For adjusted diluted earnings per share, we expect the range of 35 to 39.
In the first quarter.
Finally, we expect our cash flows in the first quarter of 2020 will be lower than what we saw in the last few quarters.
This is primarily driven by higher net working capital needs caused by the higher revenue and from building of inventory to Derisk, the global material shortages occurring around electronics parts as well as from higher cash taxes in the first quarter the.
The inventory buildup is expected to affect us in the first half of the year, but we will subside by the second half of the year.
Ultimately, it's very encouraging to see.
That's the view that we've had throughout the pandemic is starting to be realized the effects of the pandemic were temporary and a rebound of demand is beginning to occur.
We are thankful that during these difficult economic times, our customers have shown tremendous partnership with US both with current sales and the delivery of product as well as with our innovation pipeline, where we're partnering with our customers to bring a record number of innovations to market in 2021.
Do we expect the full year to show solid organic growth.
Both margin expansion and our balance sheet to continue to strengthen we.
We look forward to giving more details around this in our first quarter earnings release.
We're very proud of the performance of our employees their commitment to helping us whether the difficult environment and most importantly, we remain excited about our future and look forward to continuing to deliver on our commitments of our employees our customers and our shareholders.
This concludes the prepared remarks, we'll now open the call for questions.
We will now begin the question and answer session.
Ask the question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
Our first question will come from Lee Jagoda of CJS Securities. Please go ahead.
Hi, good morning good.
Good morning Lee.
So starting with the new product introductions and sort of the cadence of those this.
This year of next year, how should we think about that in terms of additions to organic growth and obviously COVID-19 will impact the organic growth in terms of of catch up in 2021, but given that these new products don't usually hit revenue for call of 12 to 18 months after launch.
<unk>.
You know kind of putting COVID-19 aside.
Shouldn't that accelerate your core organic growth in 2022 and 2023.
Versus what has historically been just given the the ramp of these new products.
Yeah. Thanks, Lee, Yes, we're very excited for the launches we've lined up and as I mentioned, it's approximately 25 different products that we're bringing to market and these products are.
Our spread nicely across our three segments with some significant opportunities in beam steering machine vision and motion control integrated or technologies.
And so while we're not going to specifically quantify the amount of 2021 sales.
You know I'll repeat what we said in our prepared remarks that we feel these launches will contribute to the overall trajectory of the company starting in 2021 and beyond and so like you said, it's important to keep in mind that debt with the normal product lifecycle of capital equipment that year, one of any lounge is typically smaller as the Oems.
Start to seed the market and then gradually ramp up production. So you are right that that from that NPI perspective.
The larger contribution in the sales is more often seen in year, two and beyond right. So so so.
We expect that our auditors this year will follow a similar pattern.
Share while these largest contributor of growth of more significant opportunity indeed will be the.
The visibility of the outer years Thats, we agree with that but we're not going to be specific at this stage on the amounts.
Okay, one more on new products and I'll hop back in and let others ask some but in terms of the product the new product portfolio. That's coming can you talk to sort of the percentage of products that are geared towards sub systems versus components and maybe speak to how the percentage has shifted towards sub systems over the last couple of years.
And if you could maybe speak to the margin differential between a component in the sub system that you guys would sell yes.
Yes, so heading into let's say the Covid pandemic. What we commented on is so so of pre COVID-19 call of that way, we commented on the 30% of our revenue.
It was originating from intelligent subsystems, and that's up versus 5% lets say in 2016. So so we've gradually increased our exposure to intelligent subsystems and.
Yes, I am not going to get into specifics in terms of the.
The exact percentages of the NPI, but bidders or the law.
A large chunk that is geared towards intelligent subsystems, particularly around beam steering, but also the other things we've commented on so strategically.
You are correct that debt that is where we're gearing of large chunk of our investment dollars because we see the opportunity there and we also I think we've said in the past that we expect gross margins to be accretive.
<unk> intelligent subsystems.
And I lied because I have one more based on that answer just do you have of long term target for percentage of revenue from intelligent subsystems. If we're at 30 today or 30 pre COVID-19 versus five in 2016.
Yes also there we have not given a number of <unk> will be our target is to be substantially higher than that 30% for sure.
I would say, it's also part of the path to of a multitude of levers that we can pull but as we migrate more and more new products into the marketplace and migrate into more intelligent subsystems that helps us get to the ultimate target of 50% gross margins.
Yeah.
Sure none of that that makes sense, thanks, very much alright.
Alright, Thanks Lee.
The next question comes from Richard Eastman of Robert W. Baird. Please go ahead, yes.
Yes, good morning, and thanks, Thanks for the questions.
Just a quick question around the the.
The gross margin in the vision business could you just maybe dissect that just a little bit and speak to.
Maybe the opportunity there from a cost standpoint for some mixed standpoint, as we as we move forward.
You mean, why would the gross margins lower in the segment or not.
Yes.
The more straightforward question, but I guess I'm kind of thinking about just the the benefit here as we see elective procedures start to pick up.
Is that volume going to be significantly incremental to the gross margin or just maybe talk about the opportunity set envision from a gross margin standpoint of what's volume driven versus mix driven.
Yeah, So I would say that the majority of the gross margin expansion that occurs in this segment will be less from.
Of volume uptick and more from some of the cost actions that we're taking as well as driving additional leverage in our consumables production. So I think the combination of those things really kind of drive the gross margin expansion in 2021.
From a volume perspective. This is it's fair to say that elective procedures will be a little bit weaker in the first half of the year there'll be stronger in the second half of the year and so we wouldn't necessarily bank on that for our gross margin expansion.
And if you think about.
And the <unk> I know you think of that kind of speak specifically to any kind of revenue guide, but if I. If I think about 'twenty. One here I look at photonics and some of the momentum there, but certainly precision motion and the momentum there.
Vision would one expect division the.
Vision business to be kind of plus mid single digit type of revenue growth in 'twenty, one with again some headwinds in the first half, but the second half rebound more strongly or because you're going to get a fair amount of gross margin leverage out of.
The growth rates here between the segments I presume in in 'twenty one.
Yeah, well the there is multiple.
Things at play of course.
Right right. So you have some some tougher comps.
Potentially at the at the medical consumables side and the also the diagnostic.
The equipment side, yes, but then of course then the positive as you have of recovery in the markets as you as you suggest in the second half of the year and that's going to be of positive. So so how exactly thats play out in kind of the overall segment. Yeah, we're probably in the prepared for calling but I think the overall drivers that youre.
Highlighting we agree with and yes, and then on top of that we have in the second half some momentum from new products as.
As well that hopefully will further support that the acceleration in the second half so yes definitely to Robert's point.
A stronger second half and the bit of choppy waters.
In the kind of medical marks in the first half okay. Okay fair enough and just just for my last question.
Robert.
Think of of the Opex here in the first quarter.
When you load the incentive comp in there the the.
The options.
The expense number.
It does it does the first quarter represent a REIT.
Reasonably kind of straight line operating expense number for the balance of the year or is there some loading issues there around the first quarter being bigger or smaller than.
The first quarter will generally be a little bit bigger.
Then the preceding quarters and Thats, mostly tied to some of the taxes that are paid out as well as the loading of the the incentive comps gains, but I would say that the.
It will tick down a little bit as we get into the second quarter.
Non non us mostly in the SG&A perspective.
Okay.
It's probably the way you should think about it.
Okay fair enough great. Thank you.
Alright, Thanks, Rick.
The next question comes from Brian Drab with William Blair. Please go ahead.
Hey, Brian Good morning, Hey, good morning.
Brian drab.
The first quarter guidance, obviously indicates the.
The sequential improvement.
Can you.
And did you I don't know if you did say, but should all three segments improved sequentially and <unk>.
That implies still may be a year over year slightly.
Slightly down and maybe photonics and vision year over year in and of pretty strong year over year growth rate in precision motion for the first quarter is that right.
Well, we didn't get that specific what we said was photonics of precision motion would certainly continue to trend upwards of that Youll see.
The result of that obviously in precision motion is that it will demonstrate some year over year of growth in the first quarter.
In the case of photonics.
If it's kind of if it's going to trend up I don't want to get kind of two specific.
Can trend itself into into growth as well the <unk>.
Vision segment is where there'll be some <unk>.
<unk> on a year over year basis, you could actually have a little bit better.
Top line on a sequential basis, but the reality is on the year over year, it's going to be a tough comp.
Right, Okay recall that in the first quarter of last year of dose quiet had been of the.
The same point, but pull for it.
From just the secure the supply chain, particularly in the vision segment.
This call and for a little Thunder.
Right Yeah. Okay. Yeah. Thanks for that reminder, and then as you move through.
The the balance of 'twenty one.
Tonight I hesitate I guess, because you can probably just say, we're not guiding here, but.
It sounds like from the what we're talking about sequential improvement.
Is the expectation, though across the three segments as you move through 'twenty, one it might kind of.
Connecting the dots correctly there.
I think what we're saying of the business will from a from a growth perspective. The overall company will continue to get better.
So as we migrate into the second quarter, you'll start to get into organic growth profiles again, and I think the gross margins will also continue to perform so I think theres a lot of positives from a demand environment. There's a lot of momentum that we have on the Nevada growth system on some of the programs there the one <unk>.
<unk>, which is why we've kind of steered clear of the full year guide right now is that the disruptions in logistics continues to to stay with US and then the electronic materials shortages now we are working hard to counter of that and was.
<unk> understanding where the potential risks might lie in the pre buying or building up safety stock of any sort of parts that we're worried about but those are of disruptions that we need the plant on in the first half of the year.
Net ourselves.
Better.
We get all of more confidence around that I should say before.
Before we go out of the full year comparison, so its not of demand perspective that we have right. Now is just more dealing with with the hand to hand comp out of route by the right materials and getting the product out to our customers without any sort of logistics disruptions.
Right, Okay, and then just the last question around M&A.
With the market, where it is where valuations where they are.
I'm just wondering are you.
Are you seeing still of pipeline of opportunities with reasonable valuation that you can execute on because I would imagine some of the <unk>.
Companies that were in your pipeline.
18 months ago, the same companies probably adds two to three ex the valuation that they had.
Given what's going on in the market.
Yeah, I mean listen we're actually very active.
In terms of discussions.
And we have a strong pipeline of opportunities, which we feel has good potential.
Yeah, you're right that we foresee in some cases valuation expectations to be.
To be high and the market overall, you can characterize as maybe hot.
And so it's really important to stay disciplined and focused and where you want to move and where you maybe need to pause and wait.
The other thing that I would say is of course, yes cultivation of diligence efforts are not necessarily straightforward.
In this environment right, because you cannot meet easily face to face now we're using.
Value, adding all kinds of creative ways on how to keep progress these cultivation of Essex Bank.
But yes, so that's another.
Note to keep the yes.
To keep in mind, but overall, Brian listen I think we feel good about about the the amount of conversations we're having.
Yes versus the let's.
Let's say.
What is it the first part of last year. So you clearly see intensity increasing.
It remains the top capital allocation priority.
But you can also expect us to stay very disciplined in this environment. So that we can meet our returns are for us right. So it's.
So yes, so nothing necessarily different from I think our approach we have for share with you in the past.
Okay. Thanks very much.
This concludes our question and answer session I would like to turn the conference back over to Mr. Matthias Gloucester for any closing remarks.
Thanks, operator, so for.
To summarize it's fair to say that the year 2020 was an unprecedented year with the global pandemic, causing a significant economic downturn.
Pleased to see early signs of markets rebounding in the economies of the world beginning to return to growth. Despite this very difficult macro environment in event of delivered a very solid performance. We're extremely pleased with our positioning and performance of the portfolio I'm proud of the performance in the agility of our teams.
No Vince as balance sheet is strong.
We have an exciting innovation pipeline our portfolio is diversified with exposure to long term secular macro trends that we share it with you before such as robotics and automation of precision medicine, minimally invasive surgery and industry photo though.
And we continue to invest in our innovation pipeline and are very excited about the record number of product launches that will be happening in 2021, which we believe will contribute meaningfully to our growth trajectory this year and beyond so in closing I would like to thank our customers our employees and our shareholders for their ongoing support.
Port I'm, particularly grateful for the dedication and strong contribution over teams of committed in event of employees, they're showing such tremendous agility and resilience during these difficult times.
We appreciate your interest in the company of your participation in today's call and look forward to joining all of you in several months on our first quarter 2021, the ornish call. Thank you very much and his call is now adjourned.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.