Novanta Q2 2025 Earnings Call Transcript

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Provided by Quartr
August 5, 2025

Key Takeaways

  • Positive Sentiment: Novanta delivered solid Q2 results with revenue of $241 million (+2% YoY reported, –2% organic) and maintained adjusted gross margin at 46% and EBITDA margin at 22%, meeting or exceeding expectations.
  • Positive Sentiment: New product revenue grew over 50% YoY and company-wide design win activity jumped over 150% YoY, underpinning strength of the Novanta Growth System and customer partnerships.
  • Positive Sentiment: Secured a $50 million contract with a leading e-commerce warehouse robotics OEM and anticipates physical AI robotics applications to double in 2026 and again in 2027, expanding a $1 billion addressable market by 2030.
  • Negative Sentiment: Global tariff headwinds added approximately $4 million in cost year-to-date, and about $35 million of anticipated China orders remain at risk pending manufacturing shifts under the regional manufacturing strategy.
  • Neutral Sentiment: For FY25, Novanta reaffirmed guidance of $970 million–$985 million in revenue (+2%–4%) with ~46% adjusted gross margin and 23% EBITDA margin, acknowledging ongoing tariff mitigation and ERP implementation costs.
AI Generated. May Contain Errors.
Earnings Conference Call
Novanta Q2 2025
00:00 / 00:00

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Operator

Good morning. My name is Andrea, and I will be your conference operator today. At this time, I would like to welcome everyone to Novanta Incorporated Second Quarter twenty twenty five 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.

Operator

Please note this event is being recorded. I would now like to turn the conference over to Ray Nash, Corporate Finance Leader for Novanta. Please go ahead.

Ray Nash
Ray Nash
Corporate Finance Leader at Novanta

Thank you very much. Good morning, and welcome to Novanta's second quarter twenty twenty five 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. If you've 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.

Ray Nash
Ray Nash
Corporate Finance Leader at Novanta

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 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.

Ray Nash
Ray Nash
Corporate Finance Leader at Novanta

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.

Ray Nash
Ray Nash
Corporate Finance Leader at Novanta

I'm now pleased to introduce the Chair and Chief Executive Officer of Novanta, Matthijs Kwastra.

Matthijs Glastra
Matthijs Glastra
Chair, CEO & Director at Novanta

Thank you, Ray. Good morning, everybody, and thanks for joining our call. Novanta delivered solid second quarter results meeting or exceeding expectations for sales, margins, and profit. Revenue reached $241,000,000, which represents reported revenue growth of 2% and organic revenue declines of 2% through passing guidance. New product revenue grew by over 50% year over year.

Matthijs Glastra
Matthijs Glastra
Chair, CEO & Director at Novanta

Customer orders grew 10% year over year and 20% sequentially, reflecting a strengthening outlook. We also saw significant design win activity grow more than 150% year over year. Adjusted gross margins held at 46% and adjusted EBITDA margin was 22%, both in line with expectations. These results reflect the strength of Novanta's business model, team and culture, and the power of using the Novanta growth System to optimize company performance in a very fluid macroeconomic and trade environment. And I'm proud of the team's strong execution of our tariff response strategy.

Matthijs Glastra
Matthijs Glastra
Chair, CEO & Director at Novanta

Our long term growth strategy remains focused on winning in markets with long term secular tailwinds, such as precision and AI driven robotics and automation, advancement of minimally invasive and robotic surgery, and precision medicine. We build trusted long term collaborative partnerships with the world's leading OEM customers by solving their most challenging needs with our proprietary technology solutions, securing up to ten years of exclusive and sticky designing platforms. While our products typically represent no more than 10% of our customers' bit of material, they enable differentiation and innovation in their systems for their customers, in terms of clinical outcome, throughput, yield, cost per procedure or part, or never before possible performance. In the last decade, our portfolio has evolved significantly. We've expanded into health care growth markets, which are now approximately 55% of our business.

Matthijs Glastra
Matthijs Glastra
Chair, CEO & Director at Novanta

We have increased our recurring consumables revenue to approximately 15% of sales. And we have increased our revenue from intelligence subsystems with embedded software to approximately 30% of sales, which is margin accretive for Novanta. We intend to continue to expand our portfolio into these areas. Now let me provide an update on the customer demand and market dynamics that we're seeing. Our sales to medical device markets remain exceptionally strong with patient procedure growth rates, hospital spending and our share gains, driving sustained double digit growth in our advanced surgery business in the second quarter and year to date.

Matthijs Glastra
Matthijs Glastra
Chair, CEO & Director at Novanta

Our new product launches in surgical robotics and minimally invasive surgery applications are ramping very successfully. These products are designed to significantly enhance patient safety, improve surgical throughput, and help meet new regulatory requirements as US states and countries around the world pass legislation regarding surgical smoke evacuation. Novanta is on track to reach $50,000,000 of incremental new product revenue for 2025, mainly due to the strong outlook for the next generation medical devices. Rapid adoption of these products supports our confidence that the advanced surgery business revenue will nearly double by 02/1930, up from $200,000,000 in 2024. Medical consumables, a strategic focus for Novanta are expected to account for approximately 15% of sales in 2025, with ongoing double digit growth rates.

Matthijs Glastra
Matthijs Glastra
Chair, CEO & Director at Novanta

Our success stems from long term innovation investment and strong customer relationships. And we believe we now have the expertise and scale to expand into adjacent recurring medical consumable segments. We're also very excited to announce two major design wins in the second quarter in the minimally invasive surgery market. First, we won a new product program with one of the largest medical OEM customers to develop a third generation insufflating insufflator device and consumables, which will be launched in the next few years. This design win shows our strong long term partnership with winning OEMs and our ability to provide leading edge innovations over multiple generations of our products.

Matthijs Glastra
Matthijs Glastra
Chair, CEO & Director at Novanta

Second, with a separate medical OEM customer, we want a contract to develop a next generation pump for their upcoming endoscopy tower. Our product will provide multifunctional pump capabilities along with proprietary sensing and seamless integration with other devices on the customer's towers. This represents our second major win of next generation pumps with more in progress. Moving on, our robotics and automation applications continue to see strong demand despite the global trade disruptions, as evidenced by the strong double digit revenue growth in the second quarter. Growth in this business is driven by demand for our products that support physical AI applications, such as warehouse automation, precision robotics, and humanoids.

Matthijs Glastra
Matthijs Glastra
Chair, CEO & Director at Novanta

We expect sales into these applications to double in 2026 versus 2025, and then to double again in 2027. We believe these physical AI applications represent an incremental $1,000,000,000 addressable market for Novanta by 2030. To that point, we're excited to announce a significant contract signed in July with a leading ecommerce and warehouse robotics company. This represents a $50,000,000 revenue opportunity over the next three years. Because of the timing, this design win will be included in our third quarter metrics, and revenue will start in '26.

Matthijs Glastra
Matthijs Glastra
Chair, CEO & Director at Novanta

Taking a step back, the warehouse automation space is booming because of AI, labor shortages, and latest advancement advancements in physical AI sensor technologies. As a result, leading OEM players are aggressively deploying high conviction use cases. The Ventas proprietary technology offers precise touch and safe movement for robots, enabling smarter, faster, and more efficient goods handling, critical capabilities for more modern warehouse operations. I'm also pleased to share progress in humanoid robotics. This emerging field is in early development, and we're collaborating with over 10 leading humanoid players across North America and Europe.

Matthijs Glastra
Matthijs Glastra
Chair, CEO & Director at Novanta

We're working with these players on multiple slots with significant content. We hope to announce specific design wins in the future as this market matures, and these players finalize their product architectures. The same unique, know, that the sensing and server drive capabilities that are used in warehouse automation and surgical robotics are also relevant to humanoids. So we have a competitive advantage with platform technologies relevant for multiple physical AI robotics applications. This advantage has been built up over years with our growth playbook.

Matthijs Glastra
Matthijs Glastra
Chair, CEO & Director at Novanta

Consistent investment in innovation, combined with in-depth application know how, targeted acquisitions, and customer intimacy. Turning to other markets, sales to industrial capital equipment saw declines year over year. This market is mainly served by our precision manufacturing business, which was affected by the impact of trade disruptions and customer demand, particularly in China. However, revenue has now stabilized at this lower level and bookings are rising at double digit pace, both year over year and sequentially, as customer inventories are mostly depleted and visibility improves. Coupled with the new design wins more than doubling year over year for the second consecutive quarter, this positions us well for sequential revenue growth through the 2025 and beyond.

Matthijs Glastra
Matthijs Glastra
Chair, CEO & Director at Novanta

We're gaining traction in additive manufacturing for medical and aerospace applications and applications supporting AI investments like advanced packaging and on device AI computing, which demand extreme precision, throughput, miniaturizations, areas where Noveta's scan head subsystems excel. Also, as supply chains regionalize, we see growth opportunities in new markets such as India, where we are expanding our commercial presence, and have had recent success winning new customers. Next, in advanced semiconductor applications, in the near term, this market continues to show mixed signals, but appears to be in the early phases of an up cycle, albeit at a slow pace. Our short cycle sales are still strong on the back of capacity build out for new data centers and other AI related infrastructure. As for our new content in deep UV and EUV applications, we're shipping small amounts of early units, and we will be ramping up as our customer ramps in the marketplace.

Matthijs Glastra
Matthijs Glastra
Chair, CEO & Director at Novanta

We're designed in on exclusive basis with this new content, and we expect significant sales growth over the next few years. Finally, speaking to life science equipment markets, which is mainly served by our physician medicine business. This area saw a year over year decline caused by weak end market dynamics, including further disruptions at The US NIH and FDA, lead biotech funding cutbacks in pharma CapEx, and trade disruptions. Due to these market disruptions, we're starting to see customers accelerate a replacement cycle away from barcoding and older instruments, as they focus their new product development on more advanced technologies such as RFID and machine vision. Over the last two years, we've been aggressively shifting our product offering into these new technologies.

Matthijs Glastra
Matthijs Glastra
Chair, CEO & Director at Novanta

For RFID, we feel that with the key on acquisition, we've successfully positioned ourselves at the leading edge of new RFID solutions offerings. And as for machine vision, we're happy to announce that in the second quarter, we entered into a new commercial partnership with a global leader in machine vision technologies to sell their embedded machine vision to OEM customers in the life sciences sectors. This partnership leverages our partner's leading machine vision technology combined with Novanta's deep domain application knowledge of medical and life science applications, including our ability to provide tailored support to our OEM customers. And so while the recent decline in revenue has been more than expected, we were encouraged to see precision medicine business grow double digit sequentially in the second quarter, largely because of our accelerated transition to these more advanced technologies. Based on this, we believe the revenue will stabilize over the next several quarters, and expect it to grow sequentially the remainder of this year.

Matthijs Glastra
Matthijs Glastra
Chair, CEO & Director at Novanta

We continue to believe in the long term secular opportunities in the life science equipment market. Early detection of root cause of disease will continue to be a big driver of productivity in the healthcare industry. And we will continue to execute our long term growth playbook in this market. Albeit that in the near term, we're managing the profit flow through of this business and shifting our capital allocation plans. Now I'll provide an update on our acquisition activities.

Matthijs Glastra
Matthijs Glastra
Chair, CEO & Director at Novanta

The key on integration is on track, and the business performance is already beating our initial expectations. Our short time with this team has proven their leading expertise in software development and RFID technology solutions. And they also have succeeded at winning a large new customer, which we believe will offer excellent near term growth for the business, helping the second half sales outlook of 2025 with continued double digit growth in 2026. Looking beyond, key on acquisitions remain a top priority for our team to continue to evolve our portfolio towards high growth medical, more recurring, consumable based, and more embedded software and intelligence subsystems. We continue to have a large and exciting pipeline of targets, valuation levels are more attractive, and we believe that the near term macroeconomic environment is an added catalyst to increase actionability.

Matthijs Glastra
Matthijs Glastra
Chair, CEO & Director at Novanta

Our balance sheet is well positioned for additional transactions, while maintaining our historical discipline of both cash returns and financial leverage. You should expect us to lean in hard to pursue additional transactions in the 2025. So to conclude, I'm very pleased with our second quarter performance. We met or exceeded our expectations for sales, margins and profit, driven by double digit growth in our advanced surgery and robotics automation businesses, underscoring our strategic focus on high growth markets and the diversity of our portfolio. Our new product launches continue to ramp, and we remain confident in achieving our goal of 50,000,000 incremental new product sales.

Matthijs Glastra
Matthijs Glastra
Chair, CEO & Director at Novanta

We also had 10% year over year growth in bookings, which combined with the new product ramps sets us up for steadily increasing sequential growth in 2025. We're also well positioned for growth in 2026, based on multiple significant new design wins in high growth end markets, such as minimally invasive surgery, and also physical AI applications like warehouse robotics. And finally, the Kion acquisition is off to a great start, and we have an additional large pipeline of exciting actionable acquisition targets. We remain focused on our top three priorities for Nodentia in 2025. First, ramp all our planned new products and achieve the $50,000,000 growth from new products this year.

Matthijs Glastra
Matthijs Glastra
Chair, CEO & Director at Novanta

Second, deliver strong profit margin and cash flow performance while driving NGS deep into our culture and operations and successfully execute on our tariff response playbook. And third, acquire additional companies that fit our strategy at attractive returns and in a matter that evolve our portfolio to secular growing and resilient markets and business models. So with that, I will turn the call over to Robert to provide more details on our operations and financial performance. Robert?

Robert Buckley
Robert Buckley
Chief Financial Officer at Novanta

Thank you, Matthijs. Our second quarter twenty twenty five non GAAP adjusted gross profit was $111,000,000 or 46.1% adjusted gross margin compared to $110,000,000 or 46.6% adjusted gross margin in the 2024. Adjusted gross margins were down year over year, but flat sequentially and in line with our expectations despite the increased cost of tariffs. For the second quarter, R and D expenses were $25,000,000 or approximately 10% of sales. Second quarter SG and A expenses, excluding ERP design costs, were $45,000,000 or approximately 19% of sales.

Robert Buckley
Robert Buckley
Chief Financial Officer at Novanta

The ERP design costs for the quarter were approximately $1,000,000 Adjusted EBITDA was $52,000,000 in the second quarter or 22% adjusted EBITDA margin, demonstrating growth of 2% year over year. On the tax front, our non GAAP tax rate for the 2025 was 21% versus 20% in the prior year. Our tax rate increased year over year mainly due to changes in jurisdictional mix of pretax income. Our non GAAP adjusted earnings per share was $0.76 in the second quarter, up 4% versus the prior year. Operating cash flow for the 2025 was $15,000,000 compared to $41,000,000 in the 2024.

Robert Buckley
Robert Buckley
Chief Financial Officer at Novanta

The year over year decrease in operating cash flow was primarily driven by the timing of tax payments, an increase in inventory purchases to mitigate the global trade dynamics, which were at their peak in the second quarter, and from the acquisition of KEON. We expect cash flow conversion rates to return closer to historical averages in the third quarter. We ended the second quarter with gross debt of $465,000,000 with a gross leverage ratio of 2.2 times and our net debt was $355,000,000 giving us a net leverage ratio of approximately 1.7 times. In the quarter, we acquired Keon Technologies for approximately $75,000,000 As a reminder, KEYOND combines proprietary RFID hardware with AI enhanced cloud based software to offer real time inventory and asset management, filling a crucial software integration gap for better penetration into the medical markets, including hospitals. We also amended our credit facility in the June, increasing its size to approximately $1,000,000,000 and adding a $350,000,000 accordion feature, giving us nearly 1,400,000 of borrowing capacity over the next five years.

Robert Buckley
Robert Buckley
Chief Financial Officer at Novanta

This new pro rata bank facility gives us borrowing capacity to pursue our acquisition strategy while maintaining the debt leverage discipline we have practiced over the last decade. Now I'll share some additional performance metrics and some details on our operating segments. For the second quarter, Novanta had a 10% growth year over year in bookings and 20% growth sequentially and a book to bill ratio of 1.02, reflecting strengthening backlog and a strengthening outlook. We saw a continued strong pace of bookings in both our segments demonstrating not only stabilization of demand, but also increased demand outlook for 2026 and the continued strong momentum of new product launches. In the second quarter, medical market sales represented 54% of total Novanta sales and advanced industrial markets represented 46% of total sales.

Robert Buckley
Robert Buckley
Chief Financial Officer at Novanta

New product sales grew by more than 50% year over year, and our vitality index climbed to 21% of total sales. We are seeing growth in new product sales across all businesses, but especially the medical solutions segment. Through the first half of the year, we launched over a dozen new products, mainly focused on high growth end markets in advanced surgery and robotics and automation. Also in the quarter, as we mentioned, we saw excellent design win activity with the company wide design wins growing over a 150% year over year. The second quarter automation enabling technology segment revenue grew by 4% year over year, beating expectations and driven by continued strength in the robotics and automation business unit, which was up nearly 16% year over year.

Robert Buckley
Robert Buckley
Chief Financial Officer at Novanta

The book to bill in this segment was 1.05, and bookings were up 8% year over year and 17% sequentially, giving us improving customer visibility. Adjusted gross margin in this segment were approximately 49%, up 40 basis points year over year, driven by favorable mix, but partially offset by the increase in tariff cost. Both new product revenue and customer design wins doubled year over year on the back of both our innovation and stronger commercial execution by our teams. In addition, vitality index was in the high teens percent of sales, up significantly versus the prior year. Moving on to medical solutions, revenue in this segment was roughly flat year over year.

Robert Buckley
Robert Buckley
Chief Financial Officer at Novanta

This segment saw a book to bill of one in the second quarter, and bookings were up 13% year over year, but up 26% sequentially on the back of record new product launches. New product sales in this segment grew by over 30 year over year, and the vitality index in this segment was over 25% of sales in the second quarter. Our advanced surgery business experienced 17% growth year over year, driven by both strong patient procedural growth rates in healthcare on a global basis and from the launch of our second generation smoke evacuating insufflators, which has received overwhelming market acceptance and adoption. These growth dynamics are expected to continue for the remainder of the year and well into 2026. Conversely, our precision medicine business, which serves the life science and multiomics markets, experienced a 13% decline in sales year over year.

Robert Buckley
Robert Buckley
Chief Financial Officer at Novanta

However, sequentially the business grew 10% and is expected to continue to improve sequentially in subsequent quarters. Adjusted gross margins in this segment were approximately 44% in the quarter, flat sequentially and in line with the expectations, but slightly higher tariff costs, which we expect to mitigate further in the third quarter. Finally, moving to guidance, let me give you an update on our tariff response plan. Speaking first, the impact of tariffs on our supply chain. Our cost mitigations are largely on track, we continue to work on efforts to accelerate our plans.

Robert Buckley
Robert Buckley
Chief Financial Officer at Novanta

With some of the recently announced trade deals at higher than expected permanent tariff rates, we are seeing approximately a $4,000,000 net impact from tariffs year to date on our cost of sales. However, we continue to make strong progress with both tariff mitigation strategies and cost mitigation strategies to further reduce the impact in the second half. Next, to address the matter of impacts on tariffs between The United States and China, while tariffs have remained paused between two countries, there is optimism of trade agreement being reached quickly. Our customers in China continue to be cautious with placing committed purchase orders on goods from our US factories. As such, we are working with them on accelerating our plans to shift production to non tariff regions and are exploring further short term mitigation strategies to minimize their risk of ordering products from us.

Robert Buckley
Robert Buckley
Chief Financial Officer at Novanta

While Chinese customers ordering product from our US factory has been muted, Design win activities with our Chinese customers have accelerated, which we believe signals to us that our Chinese customers have confidence that we have the right tariff mitigation strategies to reduce their costs and risks, and that they are excited about our new product innovation and what it can do for them in their markets. In addition, demand for our products manufactured in China, which is our in China for China strategy, accelerated in the quarter, which drove our total China sales up 15% year over year in the quarter. And finally, due to the fluid and ever changing nature of the global trade environment and the resulting implications on end market demand at the June, we launched our cost reduction plans that we had previously announced, including changes that support the regional manufacturing strategy. Over the long run, we expect these actions to structurally improve our cost by simplifying our operating model, allowing further expansion of our gross margins while permanently minimizing the disruptions from tariffs on our products and for our customers. The total restructuring charges related to this program are expected to be in the 20,000,000,000 to $25,000,000,000 range, with the bulk of the savings run rating in the 2025 and into 2026.

Robert Buckley
Robert Buckley
Chief Financial Officer at Novanta

Novanta is committed to deliver sequential revenue and profit growth driven by our innovation pipeline, robust customer demand in secular growth markets, and operational discipline, including our cost reduction efforts and the regional manufacturing strategy. Despite the rapid changes in tariffs and trade agreements, we believe we have navigated this well and have quickly adapted to the environment. After several years of investing heavily in R and D to deliver breakthrough innovations to our customers, the results of those efforts are materializing in our financials, in our design wins, and in our new product revenue. And with a stabilizing demand environment as evident by our bookings growth, we believe we are well positioned to accelerate our organic growth initiatives further when the macroeconomic tailwinds improve. While trade dynamics could further disrupt our outlook, increased visibility from our customers is giving us confidence to reissue full year guidance, albeit with some caution.

Robert Buckley
Robert Buckley
Chief Financial Officer at Novanta

As such, we now expect full year 2025 GAAP revenue to be approximately $970,000,000 to $985,000,000 which represents overall revenue growth of 2% to 4%. For adjusted gross margins, we expect to achieve approximately 46%. This outlook includes the cumulative impact of expected tariff costs and the associated temporary redundancy in costs from our regional manufacturing strategy. Excluding those extra costs, we would be on track to achieving our goal of 100 basis points of gross margin expansion this year. This resilient margin performance is thanks to the Novanta growth system, the business system that is allowing us to maintain our financial commitments despite the cost headwinds.

Robert Buckley
Robert Buckley
Chief Financial Officer at Novanta

We expect R and D and SG and A expenses for the full year to be approximately 28% of sales or between $274,000,000 and $278,000,000 This guidance excludes expected costs associated with the design and planning phase of a standard ERP system, which is scheduled for a phased deployment starting in 2026 and taking place over multiple years, further supporting our footprint consolidation and our regional manufacturing strategy. Besides improved scalability and resiliency benefits, this also supports our gross margin expansion plans and operating expense reduction plan. Depreciation expense should be approximately 16,000,000 for the full year. Stock compensation expense should be approximately 37,000,000 for the full year, which includes the change in incentive compensation plans which we made for all our incentive based employees, aligning them tightly with our strategy, driving strong employment engagement, and aggressively driving shareholder value while also reducing near near term cash needs. For adjusted EBITDA and for the full year of 2025, we expect to be $225,000,000 to $230,000,000 or approximately a 23% EBITDA margin.

Robert Buckley
Robert Buckley
Chief Financial Officer at Novanta

This represents year over year growth of 7% to 10%. Interest expense is expected to be roughly 23,000,000 for the full year of 2025, excluding any material changes in debt balances. We expect our non GAAP tax rate to be around 22 for the full year. We are still analyzing the effects of the new corporate tax law changes, and as such have not incorporated these changes fully into our full year rate. Diluted weighted average shares outstanding will be between 36,000,000 and 37,000,000 shares.

Robert Buckley
Robert Buckley
Chief Financial Officer at Novanta

For the full year 2025, our adjusted diluted earnings per share, we now expect to be approximately $3.22 and $3.36 representing growth of 5% to 9%. Finally, we expect strong cash flow for the full year from both lower cash taxes in the second half as well as better inventory management and stronger profit. Moving to the 2025, we expect GAAP revenue in the range of $244,000,000 to $247,000,000 which represents a year over year change in reported revenue growth of flat to up 1% and sequential growth of 1% to 2%. At the segment level in the third quarter, we expect Automation Enabling Technologies segment to flat to low single digit decline year over year caused largely by lower exports from US factories to Chinese customers, something we expect to better mitigate in the fourth quarter. We expect this segment to grow sequentially 1% to 2%.

Robert Buckley
Robert Buckley
Chief Financial Officer at Novanta

Our medical solutions segment is expected to demonstrate mid single digit growth year over year, and up sequentially approximately 3% from continued strength in advanced surgery at growth rates comparable to those demonstrated in the second quarter, and from a sequentially improving precision medicine business. Moving on to adjusted gross margin for the third quarter, we expect to be at nearly 46%. This outlook includes the cumulative impact of expected announced tariffs as well as some near term redundancy and costs from our regional manufacturing strategy, which we expect to overcome in the fourth quarter. We expect R and D and SG and A expenses in the third quarter to be approximately $68,000,000 to $69,000,000 Similar to our full year guidance, we have excluded expected costs associated with design and planning phase of our standard ERP system. Depreciation expense, is approximately 4,000,000 in the second quarter, will be similar to the third quarter.

Robert Buckley
Robert Buckley
Chief Financial Officer at Novanta

Stock compensation expense was 7,500,000.0 in the second quarter, will be nearly 11,000,000 in the third quarter. This increase in quarterly stock compensation expense is driven by both the retention and incentive equity awards associated with the Keyon transaction, as well as the in quarter impact of the change of incentive compensation plans, which we discussed earlier. Adjusted EBITDA for the third quarter, we expect a range of $57,000,000 to $60,000,000 Interest expense, which was $6,000,000 in the second quarter, will be similar in the third quarter, and we expect our non GAAP tax rate to be around 22%. For adjusted earnings per share, we expect a range of $0.78 to $0.85 for the third quarter. Finally, expect third quarter cash flows to rebound versus the second quarter and return to a cash conversion rate closer to the historical averages we have demonstrated.

Robert Buckley
Robert Buckley
Chief Financial Officer at Novanta

This updated outlook considers our latest view of the end markets, the continued successes of our new product launches, foreign exchange rates based on the second quarter, and the signed tariff agreements trade agreements between The US and its trading partners as of July month end. However, in this environment, the dynamics of both trade and foreign exchange, as well as government sponsored funding and regulatory disruptions is ever evolving and therefore subject to change. But we continue to have confidence in our ability to navigate these dynamics and adapt quickly. And finally, with improvements to both our core business and long term visibility to customer demand, along with a strong balance sheet and strong credit facility, we are well positioned to accelerate our acquisition pipeline with more meaningful and impactful acquisitions. Given our current acquisition pipeline, we feel confident executing a transaction by year end.

Robert Buckley
Robert Buckley
Chief Financial Officer at Novanta

In summary, we are confident in the fundamentals of our business, the long term strategy, and our business model remains intact. We are excited about our new customer wins and the success of new product launches. We continue to make strong progress in high growth markets, particularly in medical markets and physical AI robotic markets. As a company, we remain focused on controlling what we control and executing with excellence on our strategy and top priorities no matter what the market environment brings. This concludes our prepared remarks. We'll now open the call up for questions.

Operator

We will now begin the question and answer session. If you are using a speakerphone, And our first question will come from Lee Jagoda of CJS Securities. Please go ahead.

Lee Jagoda
Senior Managing Director at CJS Securities

Hey. Good morning, guys.

Matthijs Glastra
Matthijs Glastra
Chair, CEO & Director at Novanta

Morning, Lee.

Lee Jagoda
Senior Managing Director at CJS Securities

I guess, Robert, just to start, can you break down your revenue guidance? And then you can use the midpoint, I guess, in terms of growth from Kian, the impact of FX, and then the true organic growth underlying?

Robert Buckley
Robert Buckley
Chief Financial Officer at Novanta

It's for the second half or for the full year?

Lee Jagoda
Senior Managing Director at CJS Securities

Full full year is full full year or second half, either either one or both.

Robert Buckley
Robert Buckley
Chief Financial Officer at Novanta

Okay. Well, for the full year, you know, it gives you the reported on a organic basis, it will likely be down 1% to up 1%, somewhere in that range.

Lee Jagoda
Senior Managing Director at CJS Securities

And then the what and what's the FX implied impact for benefit?

Robert Buckley
Robert Buckley
Chief Financial Officer at Novanta

The same FX impact that we have in the second quarter, so we just carry that forward for the full year.

Lee Jagoda
Senior Managing Director at CJS Securities

Got it.

Robert Buckley
Robert Buckley
Chief Financial Officer at Novanta

So the delta is really the key on acquisition.

Lee Jagoda
Senior Managing Director at CJS Securities

Gotcha. Perfect.

Robert Buckley
Robert Buckley
Chief Financial Officer at Novanta

To be fair, it's done significantly better than expected.

Lee Jagoda
Senior Managing Director at CJS Securities

Got it. And then I it was hearing all the color around the new products over the next several years was really good and interesting earlier. Given you kinda have pretty good visibility about your product road map, what do you think are the biggest drivers of organic growth in 2026 in terms of the new products independent of whatever the market's gonna do?

Matthijs Glastra
Matthijs Glastra
Chair, CEO & Director at Novanta

Yeah. Hi, Lee. This is this is Matthijs. So, basically, a continuation of the advanced surgery product ramps. Right?

Matthijs Glastra
Matthijs Glastra
Chair, CEO & Director at Novanta

Because we are basically having the first year of ramps this year, and that will that will continue to to expand. So that's one. Secondly, the physical AI. So basically, the AI enabled robotics market. So warehouse automation, you heard us comment about a $50,000,000 contract what we've won there, where we see, yeah, rapid deployment of robotics in advanced warehouse automation applications.

Matthijs Glastra
Matthijs Glastra
Chair, CEO & Director at Novanta

And these robots need a sense of touch and a sense of fast and safe movement, and we have a unique capabilities to help in that application. And and third, we see, let's say, applications. Humanoid still will be small, but we what we commented on is that the overarching industrial physical AI applications will double in 26 versus 25. And then again, double again, be it from a small base, but that kind of tells you that we're growing. And then finally, we we are seeing, let's say, very very strong design wins.

Matthijs Glastra
Matthijs Glastra
Chair, CEO & Director at Novanta

That will start to ramp. Yeah. So for at the company level, a 150% year over year. Now they they won't all ramp in '26 fully, but they will start to ramp and that's a visibility we have. Again, a wide wide variety of applications.

Matthijs Glastra
Matthijs Glastra
Chair, CEO & Director at Novanta

I commented on, let's say, additive manufacturing driven by aerospace and and medical. What you see is that, of course, with the whole tariffs and trade environment, people wanna produce locally. And actually additive manufacturing is a very good way to do that. And so we're seeing some some significant traction there. And we've won some business, some significant business there.

Matthijs Glastra
Matthijs Glastra
Chair, CEO & Director at Novanta

But also, what I would call advanced material processing applications that are actually supporting some of the on device AI investments and advanced packaging related to events AI or related related markets. So those are a few areas that we see we're excited about, that we commented on, and that we see growing, despite whatever whatever the environment will bring. And it shows you that we're staying laser focused on the secular growth markets no matter the environment. And then with the innovation and customer intimacy, we're we're we're we're very encouraged by by everything that is happening there.

Lee Jagoda
Senior Managing Director at CJS Securities

Then within life sciences

Robert Buckley
Robert Buckley
Chief Financial Officer at Novanta

One thing I'd add there. Yep. Sorry. Yeah.

Lee Jagoda
Senior Managing Director at CJS Securities

Go ahead.

Robert Buckley
Robert Buckley
Chief Financial Officer at Novanta

Sorry, Lee. Go ahead.

Lee Jagoda
Senior Managing Director at CJS Securities

No. No. Go ahead.

Robert Buckley
Robert Buckley
Chief Financial Officer at Novanta

The only thing I was gonna add is that the advanced surgery business should continue to demonstrate the same level of growth, which is kind of the the mid teens type growth as we get into next year. Our robotics and automation business should should continue to participate as a consequence of new design wins and new product introductions, somewhere in that 10% type of range. And then if you just factor in that you're not gonna see the same level of declines in our industrial precision manufacturing business nor the precision medicine business. That that would give you a pretty good indicator of what 2026 is gonna look like.

Lee Jagoda
Senior Managing Director at CJS Securities

Well, and that and that's sort of where I was gonna go next. So industrial and precision medicine, it it sounds like you're seeing certainly some signs of improvement in the industrial and and maybe, you know, at a minimum bouncing along the bottom in life sciences. So I guess have we seen the low point for the year in your mind in those two areas? And sitting here today, are we looking at sort of a flattish 2026 for those end markets, or could they still decline further?

Matthijs Glastra
Matthijs Glastra
Chair, CEO & Director at Novanta

Well, based on what we see today, and again, you you never know with, of course, the the the trade changes. But based on what we see today, based on the bookings and the customer outlook, which is actually improving. Right? Customer inventories on the industrial side have been depleted. And so we see 2026 backlog actually building on the industrial side, and we see the business sequentially improving in the second half of the year.

Matthijs Glastra
Matthijs Glastra
Chair, CEO & Director at Novanta

So based on that, yeah, we see that business has reached its bottom and then sequentially improving from here. The precision medicine also we commented that that's more of a technology shift in addition to market dynamics. The market dynamics we don't necessarily see improving in the near term, but we do see the technology shift based on the the machine vision as well as the RFID transitions that we're making. We see that having a sequential improving effect on the business, and therefore, we see that business sequentially improving as well. So, yes.

Matthijs Glastra
Matthijs Glastra
Chair, CEO & Director at Novanta

And then the outlook for life science is a little bit unclear, but but what we what we do is we just focus on what we can control, which is those new technologies as well as we're aggressively managing profit flow through as well as capital allocation, of course, to these areas that have really strong tailwinds like physical AI advanced surgery.

Lee Jagoda
Senior Managing Director at CJS Securities

Perfect. I'll hop back in queue. Thanks.

Robert Buckley
Robert Buckley
Chief Financial Officer at Novanta

Thanks, Lee.

Operator

The next question comes from Brian Drab of William Blair. Please go ahead.

Brian Drab
Co-Group Head - Industrials at William Blair

First, Robert, you touched on China and tariffs. Did you say specifically status of did you talk about in the same context about the $35,000,000 that was held up? And is that still 35 at risk for the year?

Robert Buckley
Robert Buckley
Chief Financial Officer at Novanta

Yeah. I that's the $35,000,000 that's factored into our guidance right now, so we haven't assumed that we're going to recover that yet. So I I would take that's where we issue the guidance that I made a comment around with some caution. So we're not seeing the order behavior yet from our customers in the second quarter. And as we enter the month of August, you know, the same holds true.

Robert Buckley
Robert Buckley
Chief Financial Officer at Novanta

And that's largely just because the uncertainty with how those tariffs would unfold. So when you're ordering products from a US factory with a ninety day lead time, you know, they can get themselves stuck in a position on a non cancelable purchase order where they'll be importing at an unknown expense to them because they don't know what the tariff cost is going to be. Now that being said, what I what I see as an offset is the local, first and foremost, we're growing in China for China. So that strategy which represents 50% of our our sales into overall exposure of China sales is growing. And as a consequence, we saw total China sales up 15% year over year.

Robert Buckley
Robert Buckley
Chief Financial Officer at Novanta

So despite missing the we got some we still got some impressive growth happening. And then second, the design win activities with our Chinese customers did accelerate. So we are seeing signals from them to design our technology into new products, which effectively you would not do if you thought the situation was gonna be permanent. So effectively, our strategy of how we're going to mitigate tariffs is being well received by our customers and they're being as patient as they can until we get those fully implemented. So now could we get that turned around by the fourth quarter?

Robert Buckley
Robert Buckley
Chief Financial Officer at Novanta

Yes. It's possible. Not third quarter, but definitely by the fourth quarter. It's possible to get that get that rectified and start clawing back some of that revenue, but we haven't factored that in at this time until we have better visibility around the execution of that plan.

Matthijs Glastra
Matthijs Glastra
Chair, CEO & Director at Novanta

Yeah. And of course, it's driven, Brian, by the by the transfer of manufacturing. Right? So our customers, we shared those plans. They're confident in our plans.

Matthijs Glastra
Matthijs Glastra
Chair, CEO & Director at Novanta

That's why the design wins are continuing. And of course, the the actual transfers are starting to happen in the fourth quarter, which is really the the mitigation. Right? So then then it really depends how quickly can you rectify and ramp from there. Yeah.

Matthijs Glastra
Matthijs Glastra
Chair, CEO & Director at Novanta

But structurally, we're addressing it. It's really a timing issue that we're working through.

Brian Drab
Co-Group Head - Industrials at William Blair

Understood. Are those design wins in China medical, industrial, robotic surgery, did you say?

Robert Buckley
Robert Buckley
Chief Financial Officer at Novanta

Mostly industrial. Mostly industrial and robotics. So our robotics and automation business, of course, Matthijs went into some details around that. There's a lot of new products launched around that, but we're also seeing, you know, nice design win activities in our precision business.

Brian Drab
Co-Group Head - Industrials at William Blair

Okay. Can you say if any of those humanoids?

Robert Buckley
Robert Buckley
Chief Financial Officer at Novanta

All our we've mentioned 10 humanoids from vendors or customers that we have. Those are we're very specific in the language saying that there are US and European exposures. I would say the bulk of our humanoid exposure today is in The US and European markets. We'd be reluctant to say that, you know, there's anything in China at this point in junction.

Matthijs Glastra
Matthijs Glastra
Chair, CEO & Director at Novanta

Yeah. And, you know, some, but but not not a lot, I would just say. And then and we're not banking on that, but there are other precision robotics markets, both surgical as well as kind of adjacent to warehouse automation that that are getting traction and where we where we feel we got, you know, a very good offering.

Brian Drab
Co-Group Head - Industrials at William Blair

So

Brian Drab
Co-Group Head - Industrials at William Blair

Okay. Thanks. And then just one one more for now, I guess. Can you can you talk a little bit more about the the maybe the specific use case within the warehouse for the warehouse robotics win? And what what type of technology are are you winning with?

Brian Drab
Co-Group Head - Industrials at William Blair

Like, is it force torque or servo drives, haptic? And then I've got one more piece to this question. Could this be much bigger than 50,000,000 down the road?

Matthijs Glastra
Matthijs Glastra
Chair, CEO & Director at Novanta

Yeah. So let me thanks, Brian. Let let me kind of try to parse that So first and foremost, what you see is that vision alone is not will will not do the trick in these really advanced rouser automation markets where you gotta almost process goods faster than humans. And so you gotta mimic humans in terms of touch. And so it's proven by one of the leader players that the touch is actually essential.

Matthijs Glastra
Matthijs Glastra
Chair, CEO & Director at Novanta

And then the fast and safe reaction to what you're sensing and then that turning that into motion. And doing that safely is actually very complicated if you do that in a small form factor at the edge, meaning at the end of factor at where the the action happens. And so Novanta has unique capabilities to do this in a small form factor very precisely and reliably to the extent that the the the tremendous demands on these applications where you basically cannot drop a package for you know, maybe you can drop a package like once in twenty four hours, which means extreme accuracy. That's what we bring to the table. And that then provides that high conviction of these warehouse automation players to start deploying this because now it's actually possible to replace humans.

Matthijs Glastra
Matthijs Glastra
Chair, CEO & Director at Novanta

So that is that is what that is. Of course, there is a massive amount of capital that is being deployed, that's all public. So what we like about it is, of course, the the the use case is there, it's proven in the warehouses, the capital is there, and so it will be a multiyear deployment cycle. We've commented on and you know us, we're kind of conservative. We're only we'll we'll quote things that we have won and and that we've contract signed.

Matthijs Glastra
Matthijs Glastra
Chair, CEO & Director at Novanta

So that's the 50,000,000. I do believe, and we do believe that down the line, if you combine all these physical AI applications and you look at the served available market for us based on conservative estimates. That's about a billion dollar market in 02/1930. And, you know, we will we're aiming, of course, to get a decent chunk of that. So that's so we think it's a sizable opportunity down the line.

Matthijs Glastra
Matthijs Glastra
Chair, CEO & Director at Novanta

We're allocating and deploying resources aggressively to both ramp and continue our our new product innovations, which we feel, you know, are leading in the industry. So and yes, so that is four stroke sensing, that is server drives, but it's also including encoders, let's say, all in a subsystem package that works in the different use cases for these OEM players. And whether it's warehouse automation or humanoids or related applications. Right? These robots don't necessarily have to stand on two feet.

Matthijs Glastra
Matthijs Glastra
Chair, CEO & Director at Novanta

That's maybe the the last the last thing I will say. You see a lot of application specific related applications that, you know, you see robots on wheels or you didn't see them fixed in a location. We're doing very similar smart tasks. Yeah. So, hopefully, that answers the question.

Brian Drab
Co-Group Head - Industrials at William Blair

Yeah. That was really interesting, and congrats on on the warehouse win and all the other wins you announced this quarter. Thanks.

Matthijs Glastra
Matthijs Glastra
Chair, CEO & Director at Novanta

Thanks, Brian.

Operator

The next question comes from Rob Nathan of Baird. Please go ahead.

Robert Mason
Senior Research Analyst at Robert W. Baird & Co

Hi. Good morning. Maybe just to follow on your last response, Matthias. The you know, when you were talking about the entire package of, you know, your your offering in into this market, forced torque and servo drives and encoders. Was that the case for this particular warehouse automation contract, or was that just forced torque because you mainly were referencing sensing?

Matthijs Glastra
Matthijs Glastra
Chair, CEO & Director at Novanta

Well, the it's the sensing and their reaction. So it's actually it has the both the server drives as well as the sensing capabilities. And again, we're commenting on this this one player, but we've won multiple warehouse automation design wins that are that are a bit smaller than this, where we use basically the whole gamut of the different capabilities. And it depends a little bit on the player, how much of one versus the other is being used. But I would say holistically, it's true that Bogenbrowser automation and humanoids, as well as surgical robotics, actually, these capabilities are getting more important going forward.

Matthijs Glastra
Matthijs Glastra
Chair, CEO & Director at Novanta

Now so the the the sense of haptic feedback in surgical robotics is a key capability. It's basically the same kind of capability that gives the robot in the warehouse a sense of touch, as well as the humanoid. Right? Then in all these applications as well, the low latency, meaning fast response safely. So humans can work side by side with these robots safely.

Matthijs Glastra
Matthijs Glastra
Chair, CEO & Director at Novanta

Embedded safely is not not trivial. And we do that embedded into our servo drives, which is unique at a very small form factor and super precise, very high power density, which means that small form factor, yes, very powerful. So it's all these things combined makes us uniquely qualified for these applications. So the the short answer is is both capabilities are included in these applications.

Robert Mason
Senior Research Analyst at Robert W. Baird & Co

I I see. I see. And just, you know, as you've talked about kinda the ramp in these products in '26 and '27, are you needing to add additional capacity? Do you have, you know, current capacity to serve this?

Matthijs Glastra
Matthijs Glastra
Chair, CEO & Director at Novanta

Yeah. No. We we do. On the other hand, this is and I'm glad you asked this question. It's a unique example of how the Novanta Growth system can really help to increase capacity very efficiently.

Matthijs Glastra
Matthijs Glastra
Chair, CEO & Director at Novanta

So just we just completed a Kaizen with over 20 people and just cutting lead times down by a factor of three, increasing capacity by a factor of four to five without adding major capacity. And now down the line, we see this ramp growing beyond that, and there, yes, we will have to automate and, you know, eat our own dog food, so to speak. Right? Put automation in our lines to kind of get to these really high volumes. So the answer is yes, and we're using the Novarenthagro system to do this efficiently and reliably.

Robert Mason
Senior Research Analyst at Robert W. Baird & Co

I see. Maybe just last question. You know, one of the end markets you touched on, you said was mixed, was around the semiconductor electronics area. I'm just curious, I mean, we have seen, really over the past year, I guess, some pushes to the right in that industry. How does that factor into your second half guide, around new products, whether that you know, gets into the lithography space you're talking about.

Robert Mason
Senior Research Analyst at Robert W. Baird & Co

I'm just curious if, you've had to shuffle some of the plans again around that.

Robert Buckley
Robert Buckley
Chief Financial Officer at Novanta

Yeah. I would say that, you know, any sort of risk associated with that those applications has been factored into our second half guidance as well as the before mentioned China situation where we are not anticipating that revenue in our guidance to come back. Although, you know, that's looking more and more possible as, you know, as we get particularly as we start to look at q four. We are shipping units into those applications in the fourth quarter. So there are some units going out.

Robert Buckley
Robert Buckley
Chief Financial Officer at Novanta

They're not at the volumes that we were hoping for before. But we are we feel very good because we're still designed in on a sole source basis into those applications. We've doubled the content that we've had in in from a from a per unit basis than we've had in prior periods. And then we have some backward compatibility with some of our technology. So we feel very good that we have the right technology, the right application position, those sole source basis that's positioned for growth.

Robert Buckley
Robert Buckley
Chief Financial Officer at Novanta

We're just waiting, anticipating as as that market works through some dynamics to allow those shipments to really ramp up to the volumes that we're hoping for and that have been communicated.

Robert Mason
Senior Research Analyst at Robert W. Baird & Co

I see. Very good. Thank you.

Matthijs Glastra
Matthijs Glastra
Chair, CEO & Director at Novanta

Thanks, Ralph.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Mr. Matthijs Glastro for any closing remarks.

Matthijs Glastra
Matthijs Glastra
Chair, CEO & Director at Novanta

Thank you, operator, and thank you, everyone, for your questions. In closing, as always, we would like to thank our customers, our shareholders and especially our dedicated employees for their ongoing support. We appreciate your interest in the company, your participation in today's call. I look forward to joining all of you soon at our third quarter twenty twenty five earnings call. Thank you very much. This call is now adjourned.

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