Novanta Inc. (NOVT) Earnings

Management highlights

### Overall Q1 2026 Performance - Novanta beat consensus expectations, delivering 10% reported revenue growth and 3% organic growth, an acceleration from the prior quarter. - Total bookings grew 37% year-over-year, with a company-wide book-to-bill ratio of 1.10; all business segments achieved double-digit bookings growth and year-over-year revenue growth. - Adjusted EBITDA grew 14% year-over-year, adjusted EBITDA margin expanded 70 basis points to 22%, and adjusted diluted EPS grew 9% year-over-year to 81 cents. - Operating cash flow grew 63% year-over-year to $52 million, with cash flow conversion to net income exceeding 200% in the quarter. - New product revenue grew 50% year-over-year, making up 27% of total sales (the company's vitality index), while company-wide design wins grew nearly 30% year-over-year. - Medical end markets accounted for 53% of total Q1 sales, and advanced industrial end markets accounted for 47%. ### Long-Term Strategic Positioning - The company focuses on high-growth end markets with durable secular tailwinds: AI-driven robotics and automation, minimally invasive and robotic surgery, digital AI-driven manufacturing, and precision medicine, representing a $4 billion incremental market opportunity by 2030. - Novanta builds long-term collaborative partnerships with leading global OEMs through proprietary technology solutions, creating sticky, designed-in product relationships that typically last up to 10 years on customer platforms. - The company maintains its innovation edge through ongoing investment in key growth platforms: next-generation insufflators and pumps, robotic surgery technologies, intelligent physical AI solutions for connected care and precision robotics, and intelligent subsystems for laser beam steering and digital manufacturing. - Total exposure to Gen AI data center infrastructure applications across multiple end markets (including DUV/EUV lithography, advanced packaging, probe card production, precision robotics, GPU drilling, and advanced semiconductor metrology) reached approximately 15% of total company revenue in Q1, growing 20% year-over-year with expected acceleration through 2026. ### 2026 Core Priorities - **1. Deliver organic growth**: Achieve mid-single-digit organic growth or higher for the full year, backed by record bookings, new product momentum, and broad-based demand. - **2. Disciplined acquisitions**: Deploy balance sheet capacity for mid-to-large sized acquisitions in targeted areas (medical technologies, medical consumables, embedded software, and adjacencies like bioprocessing) to accelerate strategic growth; management expects to deploy meaningful capital in 2026. - **3. Complete manufacturing transformation**: Advance regionalization of manufacturing footprint, with two facility closures on track to complete in Q2 2026. Consolidation into fewer centers of manufacturing excellence improves capability, enables in-region-for-region supply, deepens customer relationships, and expands gross margins sustainably. ### Financial Position - The company ended Q1 with $389 million in cash and $249 million in gross debt, for a net cash position of $139 million (negative 0.6x net leverage), providing strong capacity for acquisitions and growth investment. - While acquisitions are the top capital allocation priority, the company opportunistically repurchases shares when market dislocations create compelling returns; $18 million in shares were repurchased in Q1.

Guidance

- Full year 2026 GAAP revenue guidance was raised to $1,040 million to $1,055 million, up from the prior range, representing over 7% reported growth and up to 6% organic growth. The full-year adjusted EBITDA guidance of $245 million to $250 million (11% to 13% year-over-year growth) and adjusted EPS guidance of $3.50 to $3.65 (6% to 11% year-over-year growth) were reaffirmed at their prior ranges. - Q2 2026 GAAP revenue is expected to be $259 million to $264 million, representing 6% to 8% organic year-over-year growth and up to 10% reported growth, an increase from prior expectations driven by strong bookings and growing backlog. The automation-enabling technology segment is expected to accelerate to 10% to 12% year-over-year growth, while the medical solutions segment is expected to deliver high single-digit year-over-year growth. - Q2 2026 adjusted gross margin is expected to be 45.5% to 46%, roughly flat to modestly up from Q1, with meaningful sequential margin expansion expected in the second half of 2026 as price increases, surcharge updates, and manufacturing consolidation cost benefits fully take effect. Adjusted EBITDA for Q2 is expected to be $58 million to $62 million, with an adjusted EBITDA margin of ~23% (over 100 basis points higher than the prior year). Q2 adjusted diluted EPS is expected to be $0.81 to $0.86, representing 6% to 13% year-over-year growth. - Full year 2026 cash flow conversion of 100% or more of GAAP net income is maintained as the target.

Segment performance

1. Automation-enabling Technology Segment: Grew 7% year-over-year, with bookings up 35% year-over-year and a book-to-bill ratio of 1.15. Within this segment: the precision manufacturing sub-segment achieved 6% year-over-year revenue growth and double-digit bookings growth, while the robotics automation sub-segment grew 7% year-over-year revenue with 50% year-over-year bookings growth. The segment's adjusted gross margin was approximately 49%, flat sequentially and down 60 basis points year-over-year. New product revenue grew over 70% year-over-year, and design wins grew 25% year-over-year. 2. Medical Solutions Segment: Grew 15% year-over-year revenue, with bookings up 40% year-over-year and a book-to-bill ratio of 1.04. Within this segment: the advanced surgery sub-segment grew 11% year-over-year, and the precision medicine sub-segment grew 18% year-over-year (18% growth driven primarily by the Keyon acquisition, with 2% core organic growth). The segment's adjusted gross margin was approximately 43%, flat year-over-year and up 80 basis points sequentially. New product sales grew nearly 45% year-over-year, and design wins grew at a strong double-digit rate. Medical consumables, which are part of the advanced surgery business, represent 15% of total company revenue and maintain a double-digit growth trajectory.

Risks & headwinds

- Rapidly shifting geopolitical and trade dynamics caused unexpected near-term increases in freight, tariff, and material input costs in Q1, which outpaced the company's ability to implement surcharges and reprice existing orders, creating a 60 basis point year-over-year headwind to adjusted gross margins. - Persistent macroeconomic and geopolitical uncertainty could impact demand, supply chains, and future cost dynamics, leading management to maintain a disciplined approach to guidance increases despite strong bookings momentum. - Adoption of new emerging applications like NVIDIA ecosystem-certified precision robotics for humanoids and warehouse automation remains in the early prototype phase, with meaningful revenue contribution not expected until 2027. - The company's exposure to Gen AI infrastructure is spread across multiple small niche applications rather than concentrated in one large business, though diversification also reduces single-application risk.

Analyst Q&A

• Q: Management identified 15% of total Q1 revenue tied to Gen AI infrastructure applications spread across multiple segments. How should investors understand this exposure, and what is the strategic value of the NVIDIA Halos AI Systems Inspection Lab partnership?

  A: The 15% figure is the collective total of all Gen AI-driven applications across the precision manufacturing and robotics and automation businesses, including DUV/EUV lithography, GPU drilling, probe card production for GPU testing, and precision metrology for advanced semiconductor wafer nodes. This portfolio grew 20% year-over-year in Q1, and management expects this growth rate to accelerate through 2026. Novanta is the only server drive manufacturer certified for the NVIDIA ecosystem, which provides significant credibility to OEM customers developing robotics applications and reduces verification work for clients. Meaningful revenue contributions from this opportunity are expected in 2027, with prototype orders already increasing.

• Q: How do you reconcile 37% year-over-year bookings growth with the more modest organic growth guidance for the full year? Will some of these strong bookings ship in 2027 instead of 2026?

  A: The vast majority of Q1 2026 bookings will ship within the next 12 months. Q1 2026 bookings benefited from a easy year-over-year comparison to a lower Q1 2025 base, plus some full-year annual orders that customers customarily place in the first quarter. There is a typical two to three quarter lag between bookings and revenue recognition, so the fifth consecutive quarter of double-digit bookings growth supports confidence in accelerating growth through the back half of 2026. Management maintains a disciplined approach to guidance, preferring to lock in another strong quarter of results before further raising outlooks given ongoing macro uncertainty.

• Q: Can you elaborate on the GPU drilling opportunity that has generated investor interest, including its current size and why Novanta is uniquely positioned for this market?

  A: GPU drilling is part of the company's semiconductor business, which makes up roughly 10% of total company sales overall, within the robotics segment. Modern GPU boards require 40+ layers of thickness that cannot be penetrated by laser drilling, so mechanical drilling with high-speed air bearing spindles is required. Novanta is the clear market leader in this niche application, with unique capabilities to deliver the required throughput, precision, and form factor that no other competitor can match. This business has grown meaningfully from the ~$2 million per quarter level it was at in 2023, and it will contribute to faster growth in the semiconductor segment relative to other industrial businesses, but will not dramatically change the company's overall segment mix.

• Q: What drove the unexpected Q1 price-cost headwind, and when will the impacts be fully mitigated?

  A: The primary driver was rapid, unexpected changes to U.S. tariff rates: within a four-week period, tariffs on categories like aluminum jumped from 25% to 50% and applied immediately to incoming shipments, which the company could not pass through quickly to customers. Freight costs also rose faster than the company could update surcharges. New product surcharges reflecting current and expected future tariff increases have been implemented, along with broad product price increases, and teams are currently repricing the existing backlog. Management expects the tariff impact to be fully neutralized by the end of Q2, with a positive price-cost ratio driving gross margin expansion starting in Q3. The manufacturing footprint consolidation will also add margin benefit in the second half, and potential U.S. tariff refunds not included in guidance act as an upside contingency.