Q3 2024 Novanta Inc Earnings Call

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Gary: Good morning, my name is Gary and I will be your conference operator today. At this time I would like to welcome everyone to Novantan Incorporated's 3rd Quarter 2024 earnings call. All lines have been placed on mute to prevent any background noise.

Gary: After the speakers are marks, there will be a question and answer session. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded.

Gary: I would now like to turn the conference over to Ray Nash, Corporate Finance Leader for Novanta. Please go ahead.

Ray Nash: Thank you very much.

Good morning and welcome to Novanta's third quarter 2024 earnings conference call. This is Ray Nash, Corporate Finance Leader for Novanta. With me on today's call is our Chair and Chief Executive Officer, Matthijs Glastra, and our Chief Financial Officer, Robert Buckley.

Ray Nash: If you have 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.novanta.com. Please note this call is being webcast live and will be archived on our website shortly after the call.

Ray Nash: 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 those in our SEC filings.

Gary: 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.

Gary: 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.

Gary: 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.

Gary: 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 Chair and Chief Executive Officer of Novanta, Matthijs Glastra.

Matthijs Glastra: Thank you, Ray. Good morning, everybody, and thanks for joining our call on this election day.

Matthijs Glastra: Noventa delivered strong third quarter results at the top end of our guidance range.

Matthijs Glastra: The quarter showed continued sequential improvement in our growth rate, driven by the building momentum of our new products and the strength of our diversified business model.

Matthijs Glastra: This operating performance reflects solid execution by our teams in a difficult macroeconomic environment.

Matthijs Glastra: For the third quarter, we delivered $244 million in revenue, which represents reported growth of 10% and flat growth on an organic basis.

Gary: Adjusted gross margins were 46%, as our core businesses expanded margins by roughly 70 business points year-over-year, helping offset the dilutive effect of the motion solutions acquisition.

Gary: Adjusted EBITDA was $57 million, growing 9% year over year. Our bookings grew 13% year over year as major OEM customers are confirming the 2025 new product launches.

Gary: Looking beyond the third quarter, we continue to remain excited and are reconfirming the $50 million incremental new product revenue for 2025.

Gary: We are on track to complete our planned product launches for 2024, up more than 50% versus 2023, with more scheduled for 2025.

Gary: We're also encouraged that Noventa will be returning to organic growth in the fourth quarter of 2024, albeit at a lower growth rate than previously expected.

Gary: We remain bullish on the mid- and long-term secular growth trends in precision medicine, minimally invasive and robotic surgery, and robotics in automation markets, where Noventa has a strong technology position with leading OEMs.

Gary: At the same time, short-term timing of our customers' new product launches and overall industry investments in life science and bioprocessing equipment, markets are choppier than we and our customers expected just a couple of months ago.

Gary: While clearly macroeconomic and geopolitical factors are clouding our customers' confidence, ultimately our fourth quarter revenue guidance is best explained by three factors.

Gary: First, fourth quarter DNA sequencing product shipments were rescheduled into 2025 due to customer-specific challenges.

Gary: Second, we are seeing new product launch timing shifts. Specifically, one semiconductor lithography customer and one surgical robotic customer have rescheduled their ramp-up of shipments into 2025.

Gary: Both product launches will drive substantial growth for Noventa in 2025, and we have received the first batch of orders supporting this.

Gary: And finally, we're broadly seeing OEM customers in life sciences markets defer shipments because of weak capital equipment market demand from their customers.

Gary: However, there is a clear indication capital spending will improve in lifetimes in mid-2025, as our customers are seeing an uptick in demand for consumables and services spending with their end-user customers, which is a traditional leading indicator of equipment demand.

Speaker Change: Robert will go into more details on each of these items when he covers guidance.

Gary: While we are adjusting to these short-term timing changes for the fourth quarter of 2024, it's important to emphasize that these issues are related to customer timing and not fundamental business weaknesses.

Gary: We reconfirm our optimism for strong business growth in 2025 based on, first, our new product outlook for 2025, which remains intact even with these near-term changes in customer timing.

Gary: We and our customers are reconfirming the $50 million incremental new product revenue for 2025.

Gary: Our customers are excited to be launching their innovations in the marketplace with mission-critical content provided by Novanta. So new product growth remains a very strong driver for overall company growth next year and the years thereafter.

Gary: Next, from an end market perspective, in the short term, we appear to be at the bottom of the cycle for industrial microelectronics and life science capital equipment markets.

Gary: This makes us optimistic for an improving environment in 2025. We are already seeing early positive signs in some of our shorter cycle businesses, such as microelectronics, which is already confirming this view of an improving environment.

Gary: This gives us confidence in the mid- and long-term growth drivers over end markets, and we expect organic growth to continue to improve in 2025.

Gary: Based on these dynamics and customer demand signals, the second half of 2025 revenue is clearly expected to demonstrate strong double-digit organic growth under a number of scenarios, and we expect a much stronger full-year organic growth on the back of these trends.

Gary: Because of this, we continue to invest with confidence in our business to remain on track with all our new product launches while maintaining the needed capacity to ramp with our customers in 2025.

Gary: Here's a brief update on the broader themes we see in our end markets. First, medical device technology markets continue to be very robust and appear likely to stay strong all this year and throughout 2025.

Gary: Next.

Gary: around geopolitical and market economics events. We're not expecting a broad-based market recovery until 2025. However, there are some near-term bright spots, such as in certain robotics and automation applications.

Gary: Finally, microelectronics end markets are showing early signs of a rebound, with some early cycle product categories already gaining traction in 2024, as evidenced in our third quarter results.

Gary: A stronger and broader recovery in the Zen market is likely to happen in 2025.

Gary: Going into more detail, for the third quarter of 2024, sales to medical markets made up approximately 54% of total Noventa sales and grew mid-single-digit versus the prior year on a reported basis.

Gary: but were down year-over-year on an organic basis. We saw growth in multiple applications, particularly minimally invasive surgery. However, this was offset by the softness in DNA sequencing, other precision medicine and life science tools, and continued headwind from discontinuing our surgical displays products.

Gary: We expect the surgical display headwind to fully disappear in early 2025.

Gary: We continue to be very bullish on the long-term secular growth trends in minimally invasive surgery, robotic surgery, and precision medicine markets, which we believe all have a long runway in the adoption cycle as they drive foundational productivity improvements for the healthcare system.

Gary: Turning to our advanced industrial markets, which make up the remaining 46% of total Noventa third quarter sales.

Gary: For the quarter, sales growth in these markets, excluding our microelectronics applications, were up low single digits versus the prior year on a reported basis and roughly flat on an organic basis. The subdued sales performance across this end market was in line with our expectations.

Gary: While these trends are expected to continue in the fourth quarter of 2024, a recovery later in 2025 remains likely.

Gary: We remain confident in our long-term exposure to these end markets. Noventa is positioned in many attractive applications which are driven by secular growth trends such as industry 4.0, robotics and automation, and precision manufacturing.

Gary: Finally, speaking to our microelectronics applications, our business experienced strong double-digit growth in the third quarter, both year-over-year and sequentially. This growth rate is partially driven by the easy comparisons to the third quarter of 2023.

Gary: which was when sales to this end market hit their bottom. For now, this improvement is mainly from shorter cycle products and does not yet reflect a broader recovery of this market.

Gary: But as mentioned, our new product launch in next-generation lithography systems will be a further driver of growth in 2025.

Gary: Now, let me touch on some of Noventa's strategic growth metrics. For our design wins, we saw solid design win activity in multiple businesses in both industrial and medical end markets.

Gary: Overall design wins grew by greater than 20% in the third quarter versus prior year, excluding large wins in minimally invasive surgery recorded in 2023.

Gary: For new product metrics, we continue to confidently lean in to complete our planned product launches for 2024, up more than 50% versus 2023, with more scheduled for 2025.

Gary: As discussed earlier, despite the delays in our customers ramp up timing, we remain well positioned to deliver our goal of $50 million of revenue in 2025 from new product launches, which are incremental to Noventa's current product offerings.

Gary: Our fatality index in the third quarter was still at about mid-teens percent of sales, but showed sequential improvement as we continue to see the early impact of new product launches in secular growth markets.

Gary: such as Minimally Invasive Surgery, Robotic Surgery, Warehouse Automation, Humanoid, and Field Robots, where Noventa is gaining share.

Gary: Finally, I'd like to give a brief update on Aventus acquisition activities. The integration of motion solutions remains on track.

Gary: Our teams are fully integrated and we continue to be excited with their innovation capabilities and the depth of their customer relationships.

Gary: Although the softness in the life science and markets continue to have a near-term impact on motion solutions product sales, the thesis for the transaction is progressing nicely and we are excited to see this business realize its growth potentials as the markets eventually recover.

Gary: Beyond motion solutions, new acquisitions continue to remain Noventa's top priority for capital allocation. We have doubled our pipeline of potential targets.

Gary: which adds up to more than 20 billion dollars in potential revenue and have multiple active conversations in parallel. Our balance sheet is strong, positioned as well to execute additional transactions. Therefore, you should expect us to lean in to close transactions the remainder of 2024 and 2025.

Gary: In summary, in the third quarter of 2024, Noventa delivered strong results. We hit the high end of our guidance range and had sequential improvement in our organic growth.

Gary: Our new product launches continue to build momentum, helping us deliver solid performance this year and setting us up for better end market growth in secular end markets next year.

Gary: These results would not have been possible without the dedicated efforts of our team using the Noventa Growth System execution model to overcome significant challenges and deliver on their promises in this environment.

Gary: We remain steadfast in our focus on our top three priorities.

Gary: One, launching and ramping a record set of new products. Two, expanding margins and cash flows through the Noventa Growth System. And three, acquiring additional companies that align with our strategy and offer attractive returns.

Speaker Change: With that, I will turn the call over to Robert to provide more details on our operations and financial performance.

Robert Buckley: Thank you, Matthijs, and good morning. Our third quarter 2024 non-GAAP adjusted gross profit was 113 million or 46 percent adjusted gross margin, compared to 105 million or 47 percent adjusted gross margin.

Robert Buckley: Adjusted gross margins were down year over year. However, excluding the impact of motion solutions acquisitions, our adjusted gross margins were up roughly 70 basis points.

Robert Buckley: Our growth margin performance was lower than expected in the quarter as a result of unplanned decline in sales volume in our precision medicine and manufacturing segment.

Gary: This brought down overall company margins versus expectations. Despite the decline in sales volume in this segment, we have chosen to maintain our current level of factory capacity and costs in anticipation of sales rebounding in 2025.

Gary: Therefore, we expect this unfavorable margin impact to continue into the fourth quarter, but ultimately be rebounded as sales volumes improve next year.

Gary: For the third quarter, R&D expenses were roughly $23 million, or approximately 10% of sales. And third quarter SG&A expenses were approximately $44 million, or 18% of sales. SG&A expenses were sequentially lower in the quarter due to adjustments in incentive compensation based on the revised full year outlook.

Gary: Adjusted EBITDA was approximately $57 million in the third quarter of 2024, or a 23% adjusted EBITDA margin versus $52 million in the prior year.

Gary: On the tax front, our non-GAAP tax rate in the third quarter was 21 percent. Our tax rate for the full year now appears likely to end at around 19 percent.

Gary: Our non-gap adjusted earnings per share was $0.85 in the third quarter, flat versus the prior year. Our EPS growth remains muted due to the higher interest rate on higher debt balance.

Gary: Their quarter operating cash flow was approximately 23 million dollars

Gary: Our cash flow performance of the quarter was impacted by the timing of monthly revenue shipments, with more product getting shipped in the last month versus normal, resulting in a higher than normal increase in accounts receivable.

Gary: This is a temporary timing impact that is expected to correct in the fourth quarter. Year-to-date, we are still seeing very strong cash flow performance with operating cash up 20%, and we expect to finish the year with very strong cash flows.

Gary: We ended the third quarter with a gross debt balance of $460 million and a gross leverage ratio of approximately 2.3 times. Our net debt was $368 million. We remain on track to reducing gross leverage to $2 or below and net debt closer to $1.5 by year end.

Gary: For the third quarter, Novanta's book-to-bill was $0.89.

Gary: Weakness caused by customers deferring purchases in life science and advanced industrial applications was partially offset by booking strength in our minimum evasive surgery business line, which had a book to bill of nearly 1.4 in the quarter as our OEM customers have started to place larger orders for their product launches in 2025.

Gary: turn to the operating segments.

Gary: Precision Medicine and Manufacturing, third quarter sales declined by 15%, which was weaker than our prior expectations.

Gary: due to softness in the precision medicine markets. The book to bill in this segment was 0.73, which reflects the revised outlook for our DNA sequencing applications as we see our customers pushing out demand into 2025, affecting near-term bookings.

Gary: Adjusted growth margins in this segment were down year-over-year driven by lower factory utilization, which I commented on.

Gary: Design wins in this segment. We're up 30% year-over-year, driven by good execution of our sales team to win new sockets in upcoming customer platforms. New product revenue was approximately mid-teens percent of sales in line with expectations.

Gary: Our robotics and automation segment experienced a revenue increase of 20% year-over-year in the quarter, and bookings grew 25% year-over-year.

Gary: Our outlook for the second half of 2024 is playing out largely as expected, with end markets improving versus the first half of the year, both in the U.S. robotics market and the microelectronics applications.

Gary: The book to build was 0.83, in line with expectations, and we expect sales to continue to gradually further improve into 2025. Trusted growth margins increased 120 basis points year-over-year, driven by better factory efficiency on increased volumes.

Gary: New product revenue in this segment grew a strong double digit and was roughly 12% of total sales for the segment.

Gary: Design wins in this segment, are up strong double-digit in the quarter and year-to-date.

Gary: Finally, Medical Solutions experienced reported revenue growth of 24% year-over-year and declined on an organic basis 1%. This was slightly better than expected, as strong sales from our new product launches almost fully offset the near-term impact of discontinuing our surgical displays products.

Gary: The segment saw a book-to-bill of 1.04 and bookings were up 50% year-over-year.

Gary: As I already mentioned, our Minimum Evasive Surgery business line had a book-to-bill of nearly 1.4 as we started to see customers placing large orders for new product launches. This strong result was partly offset by continued market weakness in the Precision Medicine business line, which saw a book-to-bill below 1.

Gary: The weakness in precision medicine continues to come from weaker than anticipated capital spending environment in life sciences, multiomics, and bioprocessing markets.

Gary: Vitality index in this segment increased to high teens percent of sales which is in line with expectations as we start to ramp our new products.

Gary: Design wins in this segment are down year-over-year, driven by large wins in minimum evasive surgery business in the third quarter of 2023, but excluding those larger platform wins in the prior year, design win growth in this segment is strong double-digit year-to-date.

Gary: Adjusted growth margins in this segment increased roughly 60 basis points year over year. Excluding the motion solutions acquisition, the margin expansion in this segment was over 440 basis points.

Gary: Now turning to guidance.

Gary: with organic growth continues to sequentially improve.

Speaker Change: To get into a bit more detail, first, in our DNA sequencing products, nearly all shipments originally expected to ship in the fourth quarter were rescheduled by our customers in the first half of 2025 due to customer-specific challenges.

Gary: However, we expect this issue to be resolved in early 2025 and resume shipments at a normal rate in the first quarter.

Gary: The long-term prospects of this application and our products continue to remain strong and even accelerating.

Gary: Next we expect the launch of a new product within DUV and EUV lithography applications.

Gary: However, while our new product is designed in now, unfortunately due to end market conditions,

Gary: Our customer deferred the ramp into the second half of 2025. Similar to my prior comment, the long-term prospects of this application, and our position in it, continue to remain strong and accelerating.

Gary: as EUP lithography is in the early adoption and remains a critical enabler of Gen-AI electrification and smaller, more powerful and efficient electronic devices.

Gary: Third, one of our customer launching a robotic system with a new integrated smoke evacuation insufflator rescheduled shipments into early 2025 after updating FDA filings to make enhancements to their overall system.

Gary: This product has broad market acceptance and is expected to see stronger than expected demand, which is expected to materialize in our results in 2025.

Gary: And finally, our customers and the overall life science and bioprocessing market broadly continue to see deferrals in capital spending by their customers.

Gary: despite the uptick in consumables and service spending by their customers.

Gary: Based on this activity, demand for capital equipment is clearly returning, but is most likely recovering.

Gary: in early 2025. Unfortunately, this implies that the fourth quarter revenue will be weaker from this dynamic, compounded by customers' desires to manage their inventory balances down in the fourth quarter.

Gary: The net impact of all these customer market changes has led us to revise our sales outlook in the fourth quarter by approximately $25 million.

Gary: Despite this rescheduling of revenue into 2025, we do expect to demonstrate sequentially increasing organic growth in the fourth quarter versus the third quarter.

Gary: Based on these dynamics, as well as customer demand signals, second half 2025 revenue is clearly expected to be strong double-digit growth under a number of scenarios, which leads us to expect up to 10% organic growth for the full year of 2025.

Gary: For the fourth quarter of 2024, we expect gap revenue in the range of $237 million to $242 million, which represents reported revenue growth of 12% to 14% and organic revenue growth between 2% and 4% on a year-over-year basis.

Gary: This revenue range is a bit wider than normal given the near-term macroeconomic and geopolitical uncertainty.

Gary: and how that continues to impact the life science and industrial capital spending markets and our OEM's customers' behavior, particularly as it comes to managing year-end inventory levels.

Gary: For the full year of 2024, we now expect GAAP revenue to be in the range of $948 million and $953 million. This represents reported revenue growth of approximately 8%.

Gary: Revenue from current year acquisitions is expected to be slightly above $80 million.

Gary: On a segment level in the fourth quarter, we expect precision medicine and manufacturing revenue to decline double-digit percent year over year, impacted by the pushout in demand in the DNA sequencing applications.

Gary: A robotic and automation segment continues to expect to grow greater than 20% in the fourth quarter as end markets continue to improve and also from easier year-over-year comparisons. This growth comes from an improvement in demand of robotic applications as well as an improvement in microelectronics applications.

Gary: And our medical solutions segment is expected to show approximately 30% year-over-year reported revenue growth in the fourth quarter. On an organic basis, we expect mid-single-digit growth year-over-year.

Gary: While this growth outlook is solid, it's less than we previously expected from the before-mentioned rescheduling of a surgical robotics customer.

Gary: Moving on to Adjusted Gross Margin in the fourth quarter, we expect

Gary: to be approximately 46 percent. This outlook includes the impact of lower factory utilization and as we maintain the capacity of our factories to help us be ready for the growth that our customers are seeing in their end markets as the demand environment improves in 2025.

Gary: In the segments, we expect gross margins to be roughly flat compared to gross margins that we delivered in the third quarter.

Gary: For the full year of 2024, we now expect adjusted gross margins to be approximately 46%.

Gary: For the full year, excluding diluted impact of the motion solutions acquisition, we expect to deliver approximately 100 basis points of margin expansion in our core business.

Gary: We expect R&D and SG&A expenses in the fourth quarter to be approximately $70 to $71 million. This represents a sequential increase in third quarter due to timing of R&D project spend and also a set of compensation adjustments.

Gary: For the full year, these expenses will be approximately $271 million to $272 million.

Gary: depreciation expense, which is roughly $4 million in the third quarter, will be similar in the fourth quarter, and stock compensation expense, which was approximately $6 million in the third quarter, should be approximately $7 million in the fourth quarter.

Gary: For adjusted EBITDA in the fourth quarter, we expect a range of $50 million to $52 million, which represents double-digit growth year-over-year. For the full year of 2024, the adjusted EBITDA, we now expect a range of $208 million to $210 million.

Gary: Interest expense, which was $8 million in the third quarter, is expected to be slightly above $7 million in the fourth quarter. We expect our non-GAAP tax rate to be around 20% in the fourth quarter and approximately 19% for the full year.

Speaker Change: Justin, earnings per share will be in the range of $0.70 to $0.74 in the fourth quarter.

Gary: and $3.02 and $3.06 for the full year.

Gary: Finally, we expect cash flow to return to year-over-year growth in the fourth quarter, and we expect to demonstrate double-digit growth for cash flows for the full year of 2024.

Gary: These efforts have allowed us to substantially pay down our debt balance so far this year.

Gary: As always, this guidance does not assume any significant changes to foreign exchange rates, nor does it include any anticipated acquisitions at this time.

Gary: In summary, we remain optimistic about our long-term prospects and we continue to work diligently to support our customers with their successful launch of multiple new product platforms.

Gary: The long-term secular growth outlook of our end markets remains intact, and we feel well positioned to grow and gain share as the market recovers in 2025.

Gary: The fundamentals of business is strong, and we're impressed with the team's adoption of the Romantic Growth System operating model, which is giving us the ability to consistently execute and deliver on our promises, as evident in the strong results in the third quarter.

Gary: which were delivered at the high end of the guidance despite our challenging marketplace.

Gary: In addition, we also continue to work to compound our cash flows through a combination of organic growth and deployment of capital towards acquisitions. As Matthijs mentioned, our acquisition pipeline has more than doubled in revenue and number of potential targets.

Gary: But we also remain disciplined on the cash-on-cash returns, which means being disciplined about pricing. We remain focused on controlling what we can control and in executing with excellence, no matter the business environment. This concludes the prepared remarks. I'll now open the call up for questions.

Speaker Change: We will now begin the question and answer session.

Speaker Change: To ask a question, you may press star then 1 on your touchtone phone.

Speaker Change: If you're using a speakerphone, please pick up your handset before pressing the keys.

Speaker Change: To withdraw your question, please press star then 2.

Speaker Change: The first question is from Lee Jagoda with CJS Securities. Please go ahead.

Lee Jagoda: Hi, good morning.

Speaker Change: Good morning, Lee.

Lee Jagoda: I guess just starting with the Q4 revenue guidance and that 25 or so million dollar delta relative to our expectations, can you speak to how much of that delta is the macro and then how much of that delta is specific customer launches into 2025? And then I've got a follow-up.

Speaker Change: Thank you.

Speaker Change: Yeah, good morning, Lee. So yeah, as you can imagine, giving detailed specifics is a bit sensitive as it pertains specific customers. But if you read through the guidance per segment, you can actually calculate the impacts. It's fair to say that it's a mix of customer-specific and market challenges.

Speaker Change: Yeah, for customer specific, it's really primarily DNA sequencing, DUV, EUV lithography and robotic surgery. And of these, DNA sequencing was the biggest single impact, which we expect to rebound in 2025.

Speaker Change: And the biggest end market deferral is in life sciences tools. So hopefully that's helpful.

Lee Jagoda: Yeah, and then I guess the follow-up is on last quarter's call I think there was a lot of talk around sort of a 10% ish growth rate for 2025 and Sitting here today. We're talking about deferring

Speaker Change: an additional $25 million into 2025, yet the guidance is only up to 10% growth in 2025. So is there something else moving, or are you just building in more conservatism for the macro, or how should we think about this?

Speaker Change: Yeah, so nothing else is moving. We're not losing any market share anywhere. Those product launches are still scheduled to be launched in 2025, as we talked about. And as you heard, the DNA sequencing side will start to normalize into the first quarter already.

Speaker Change: We are being cautious. Obviously, there's a very contentious election happening today, and there continues to be a lot of uncertainty around the geopolitical, as well as macroeconomic environment. And our customers are kind of unwilling to...

Speaker Change: to have deeper discussions around that until this cycles through. So we are planning on the fourth quarter being what it is.

Speaker Change: But, you know, if the environment improves from macro and geopolitical perspectives, then our business should improve because we're not losing any market share, and we're effectively free-riding off of our customers' growth expectations.

Speaker Change: Just one more for me and I'll hop back in queue. It sounds like some of your comments sort of pointed to

Speaker Change: A faster growth inflection in the back half of 2025 versus the front half as we look out to next year. What's your visibility look like into your Q1 deliveries? And relative to your Q4 organic growth, how should we think about organic growth in Q1?

Speaker Change: Thanks for watching!

Speaker Change: and a couple other situations kind of unfold. But I would just say that the reason why the back half is definitely stronger is obviously there's some easier comparisons, but then we have new product launches happening more in mass.

Speaker Change: We talked a little bit about EUV, DUV being scheduled for the back half of the year. We're starting to get the purchase orders on that. And so we're starting to feel more and more confident about what that looks like.

Speaker Change: It is possible there's a bigger shift into the first half, but we don't want to get into that at this page. We'll have another discussion around that in January.

Speaker Change: Got it. Appreciate it. Thanks very much.

Speaker Change: The next question is from Brian Drab with William Blair. Please go ahead. Hi, good morning. Thanks for taking the question. Good morning, Brian.

Brian Drab: Morning. Just a simple question first, and I might have missed the information that would explain this, but so revenues down in the guidance just slightly sequentially in the fourth quarter?

Speaker Change: And, you know, I'm wondering, in addition to any impact from, you know, slight negative operating leverage, I guess, and that slight sequential decline, why would EPS be down more materially in the fourth quarter? What's happening there?

Speaker Change: and then you have a sequential uptick in your operating expenses as well that I kind of guided on that that is some expenses kind of ramping up for changes of compensation as well as a project timing

Speaker Change: Okay. All right. Thank you. And then you mentioned an EUV, DUV, I think I caught that you said our new product is designed in. Can you just talk about... Correct.

Speaker Change: Can you talk about what type of technology?

Speaker Change: You were supplying for that application and what the new product is, is it a different type of technology or just more of the same technology?

Speaker Change: Any comments?

Speaker Change: Of course, this is Matthijs. Brian, good morning. Yeah, so what we have commented on in the past is that we are supplying a new type of technology that we did not supply before. So that's the incremental part that is being deferred.

Speaker Change: and I think it's pretty widely reported.

Speaker Change: kind of how that particular player is seeing the world.

Speaker Change: lately, and so it's basically consistent with that view. Again, the customer is excited because we are solving a particular problem that is very valuable to them.

Speaker Change: were designed in, and this is really about lunch timing and nothing else.

Speaker Change: Okay, and then just one more for now, I guess, on motion solutions.

Speaker Change: I think on the second quarter, we talked about lowering the expectation for motion solutions revenue for the year by $10 million, right? And I'm just wondering, did you comment today on whether that's...

Speaker Change: change to some some of the you know softness that you're seeing in the fourth quarter related motion solutions or should we still think about that is down 10 million from you know just like it was last quarter

Speaker Change: No, it's still the same. So you're absolutely right. It's and I kind of got into about 80 million dollars is the expectation. So it used to be 90 and it went down to 80 million dollars.

Speaker Change: Okay. All right. Thank you. But clearly impacted by the same market dynamics in life sciences tools, right?

Speaker Change: Understood. Okay. Thank you very much.

Speaker Change: All right. Thank you, Brian.

Speaker Change: The next question is from Rob Mason with Baird. Please go ahead.

Rob Mason: We had been talking about $50 million of incremental revenue there and still $50 million. So I guess just to confirm, was there anything that you're now assuming on the new product launch side that slips from $25 million into $26 million?

Speaker Change: No, not from a new product at all, no. Those things are, so if you think about

Rob Mason: how we laundry list them a little bit. So the EUV, DUV, we talked about that, launching, slipping out of 2024 into 20...

Speaker Change: and the surgical player, that shifted into early 2025 as they finalized their 510K on their system and then began normalizing shipments again for us.

Speaker Change: And then lastly, on the DNA sequencing side, we see orders coming back into the first quarter.

Speaker Change: the ramp of that a little less uncertain does the timing and so we've been more conservative there. So what I think what we have done is we've taken the life science industry and we've said all right you know in that area of the marketplace until customers start giving us

Speaker Change: firm orders and commitments around that. We're going to anticipate that's a little bit later than we originally planned.

Speaker Change: but eventually is coming back. And you can see that, as Matthijs talked about, as the leading indicator is they're consumable in service spend in their factories. So our customers' customers are seeing significant upticks.

Speaker Change: in their consumables and services, which is indicating the capacities being utilized and their customers are starting to spend money. And that generally, you will have capital spending follow that in somewhere in the range of six to nine months. And so that's what we're carefully monitoring at this point.

Speaker Change: And maybe another way, Rob, so while let's say EUV has shifted to the second half, the overall number is staying the same.

Speaker Change: because other parts are doing slightly better. And we've also, I think, been very consistent that, you know, the start of that rent timing...

Speaker Change: is tricky, right? And we actually never formally guided a 2024 number because of the dynamics that we're actually, you know, today see playing out. So the 25 is just a full year.

Speaker Change: ramp, and that's why we maintain confidence there. So nothing really has changed other than the Q4 timing of the start of that ramp.

Speaker Change: I see, okay. Just in the precision manufacturing and medicine segment, the

Speaker Change: I can understand where sales mix may have had an impact here, but the decremental and gross margin, at least sequentially, was really high, like almost 100%. So I was just curious if there's anything else going on there and is that...

Speaker Change: gross margin recovery back to maybe where it was in the first half.

Speaker Change: Is that entirely dependent on DNA sequencing?

Speaker Change: So, it partially will be two factors, obviously DNA sequencing coming down, and then the second is we do have a facility that is largely fixed cost.

Speaker Change: and so when volume in that facility drops below a certain level then yes it does kind of bleed through dollar for dollar.

Speaker Change: That facility manufactures optics for a lot of our products, and so it was below normal volumes in that quarter. If we were to take out the costs associated with that, we'd effectively impair our ability to ramp the business in early 2025. We'd have to push out.

Speaker Change: that even further. And so what we decided to do is leave that cost structure in place knowing demand is coming back in. And so that results in a higher decremental than we anticipated because we weren't anticipating the drop off in volumes.

Speaker Change: in that factory supplying optics for both our DNA sequencing products as well as some industrial products.

Speaker Change: Makes sense. Okay. Just last question.

Speaker Change: Matthijs I mean you talked about bottoming in the industrial areas as well as microelectronics it sounds like you know orders cut maybe support the microelectronics commentary just why are you thinking we're at a bottom on the industrial advanced industrial side

Matthijs Glastra: Well, I mean, you look at multiple indicators, right, it's a combination of customer conversation as well as the kind of short cycle business, right, returning. So, within our industry, we actually have one other short cycle business that is starting to turn. So, that is kind of a leading indicator for us, right? So, typically microelectronics is the first to go down.

Matthijs Glastra: followed by the short-cycle industrial business, followed by the longer-cycle industrial business. And so the return is, of course, the inverse of that. So we see microelectronics turn.

Speaker Change: the short cycle version of it. We see the short cycle version of the industrial starting to turn, but it's too early to say, of course, what the exact timing of the longer cycle return is, but it gives us optimism that we're seeing the first signs.

Speaker Change: of that bottoming out, right? Otherwise, these short-cycle businesses would have stayed stable or further decline, and that's not happening.

Speaker Change: I see. Okay. Helpful. Thank you.

Speaker Change: All right.

Speaker Change: The next question is a follow-up from Brian Drabb with William Blair. Please go ahead.

Brian Drab: Well, I guess, I think my question was just answered.

Brian Drabb: Yeah, I think my question was just answered. My question was maybe slightly different. As you're looking at the guidance for 2025 and the revenue expectation, are you saying, you know, up to 10 percent?

Brian Drabb: organic revenue growth.

Brian Drabb: I'm wondering what is embedded in terms of your expectation for the industrial backdrop? Obviously, we're, you know, like 22 months or something of ISM below 50. I just wonder, is there an expectation for...

Brian Drabb: improved industrial environment globally there or more of the same?

Speaker Change: No, we do have a little bit more subdued there, so what we do have is, as Matthijs just talked about, is the short cycle business is starting to see the uptick in bookings, is starting to see the uptick in growth, so we presume that that kind of carries forward. The longer cycle, we presume, is more of a subdued environment, and so to the degree that that recovers faster, it would have a more favorable impact on our outlook.

Speaker Change: there's a lot of things obviously going on and so we're trying to be a little cautious at this stage.

Speaker Change: do we clear the year? And I think our customers are demonstrating the same behavior. A lot of them are trying to manage inventory down and not overextend themselves in the fourth quarter and get better position for a more positive 2025.

Speaker Change: Okay. Thanks very much.

Speaker Change: Thanks, Brian. This concludes our question and answer session. I would like to turn the conference back over to Mr. Matthijs Glastra for any closing remarks.

Matthijs Glastra: Thank you, operator. So, to recap, Noventa had strong operating performance in the third quarter. We achieved the high end of our guidance for sales and profit, and we made good progress on our top priorities.

Speaker Change: Despite near-term macroeconomic dynamics, Noventa remains well-positioned in the medical and advanced industrial end markets with diversified exposure to long-term and secular macro trends in robotics and automation, precision medicine, minimally invasive surgery, and Industry 4.0.

Matthijs Glastra: Looking ahead, while the macroeconomic and geopolitical climate are weighing on capital equipment purchases in 2024, we believe we are in a strong position to deliver on a recovering investment climate in industrial, microelectronics, life science, and multi-elements markets.

Matthijs Glastra: We continue to see accelerating momentum for Noventa on the back of our new product launches as we work through the fourth quarter and into 2025.

Speaker Change: We will continue to focus on additional design wins in high growth applications, as well as doubling down on the vendor growth system to continue to drive strong cash flows and gross margin expansion.

Speaker Change: In closing, as always, I would like to thank our customers, our employees, and our shareholders for their ongoing support. I continue to be especially grateful for the dedicated efforts of all our Noventa employees who work so diligently every day, taking on new challenges and striving to make the company a great place to work.

Speaker Change: We appreciate your interest in the company and your participation in today's call. I look forward to joining all of you in several months on our fourth quarter and full year 2024 earnings call. Thank you very much. This call is now adjourned.

Speaker Change: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.