Earnings Call Transcript - BRKR Q4 2023

Operator, Operator

Good morning, everyone, and welcome to the Bruker Corporation Fourth Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Justin Ward, Senior Director of Investor Relations and Corporate Development. Please go ahead.

Justin Ward, Senior Director of Investor Relations and Corporate Development

Thank you, and good morning. I would like to welcome everyone to Bruker Corporation's fourth quarter 2023 earnings conference call. My name is Justin Ward, and I'm Bruker's Senior Director of Investor Relations and Corporate Development. Joining me on today's call are Frank Laukien, our President and CEO; and Gerald Herman, our Executive Vice President and CFO. In addition to the earnings release we issued earlier today, during today's conference call, we will be referencing a slide presentation that can be downloaded from the Events and Presentations section of the Bruker Investor Relations website. During today's call, we will be highlighting non-GAAP financial information. Reconciliations of our non-GAAP to GAAP financial measures are included in our earnings release and are posted on our website at ir.bruker.com. To begin, I would like to reference Bruker's safe harbor statement, which is shown on Slide 2 of the presentation. During this conference call, we will make forward-looking statements regarding future events and the financial and operational performance of the company that involve risks and uncertainties, including those related to geopolitical risks and wars as well as to supply chain logistics and inflation. The company's actual results may differ materially from such statements. Factors that might cause such differences include, but are not limited to, those discussed in today's earnings release and in our Form 10-K for the period ending December 31, 2023, and as updated by our other SEC filings, which are available on our website and on the SEC's website. Also, please note that the following information is based on current business conditions and our outlook as of today, February 13, 2024. We do not intend to update the forward-looking statements based on new information, future events, or for other reasons, except as may be required by law, prior to the release of our first quarter 2024 financial results expected in early May 2024. You should not rely on these forward-looking statements as necessarily representing our views or outlook as of any date after today. We will begin today's call with Frank providing an overview of our business progress. Gerald will then cover the financials for the fourth quarter and full-year 2023 in more detail and share our newly established full-year 2024 financial outlook. Now I'd like to turn the call over to Bruker's CEO, Frank Laukien.

Frank Laukien, President and CEO

Thank you, Justin. Good morning, everyone, and thank you for joining us on today's fourth quarter 2023 earnings call. Bruker finished 2023 with another quarter of excellent revenue growth including 15.9% organic revenue growth year-over-year. For the full-year 2023, we delivered industry-leading 14.5% organic revenue growth, which shows remarkable resiliency and consistency under difficult market conditions. Moreover, 2023 was our third consecutive year of double-digit organic revenue growth, a testament to the strong execution of our Bruker colleagues across the globe and to our differentiated innovation strategy and culture of disciplined entrepreneurialism. Importantly, in fiscal 2023, we also delivered a solid 10.3% non-GAAP EPS growth year-over-year, all while investing significantly in R&D, capacity, and productivity and in selected strategic bolt-on acquisitions. For those keeping track of our new Bruker cellular analysis business, which we refer to as BCA and formerly known as PhenomeX. As forecasted in fiscal '23, we had a fourth quarter bolus of $0.10 of non-GAAP EPS dilution. Excluding BCA, our fiscal year '23 pro forma non-GAAP EPS grew 14.5%. In Q4 of '23, we did major restructuring and cost cutting at BCA almost immediately after the acquisition closed on October 2, 2023. Accordingly, in fiscal year '24, we expect the quarterly BCA non-GAAP EPS dilution to be significantly reduced to just $0.02 to $0.03 per quarter with a significant further drop in dilution expected in fiscal year '25 and BCA profitability anticipated in fiscal year '26. As we look at fiscal year 2024, we entered the year with solid bookings momentum, a strong backlog and a positive outlook for Bruker to emerge as a leader of the post-genomic era and financially to again achieve above-market organic revenue and non-GAAP EPS growth. Accordingly, we are today announcing our fiscal year '24 guidance for organic revenue growth of 5% to 7% and non-GAAP EPS growth of 5% to 7%, both compared to fiscal year '23. Turning now to Slide 4. In the fourth quarter of '23, Bruker delivered excellent organic revenue growth of 15.9% and solid pro forma non-GAAP EPS growth. Bruker's Q4 '23 reported revenues increased 20.6% year-over-year to $854.5 million, which included a currency tailwind of 2%. On an organic basis, revenues increased 15.9%, which included 15.5% organic growth in BSI, our Scientific Instruments segment and 20.3% in our best segment. Net of intercompany eliminations, while growth from acquisitions added 2.7%. This implies constant exchange rate, or CER, revenue growth of 18.6% year-over-year. Our fourth quarter '23 non-GAAP operating margin was 18.1%, which was down 290 basis points, primarily due to the dilutive PhenomeX acquisition in Q4 '23, as well as headwinds from other M&A and currency. Altogether, this combined effect more than offset our organic operating margin expansion of plus 270 basis points. Our strong organic operating margin expansion is evidence of the success of our Project Accelerate and operational excellence initiatives. In Q4 of '23, Bruker reported GAAP diluted EPS of $1.41 compared to $0.66 in Q4 of '22. Our Q4 '23 included an acquisition gain of $0.99 from our PhenomeX acquisition. On a non-GAAP basis, Q4 '23 diluted EPS was $0.70, down 5.4% from $0.74 in the fourth quarter of '22, primarily due to the PhenomeX acquisition in Q4 '23. Excluding the initial minus $0.10 BCA dilution in Q4 '23, Bruker delivered pro forma non-GAAP EPS growth of plus 8.1% year-over-year in Q4 of '23. Moving to our full-year '23 performance. On Slide 5, you can see Bruker's strong performance and excellent execution in 2023 with industry-leading organic revenue growth of 14.5%, solid non-GAAP EPS growth of plus 10.3%, and excluding BCA, even pro forma non-GAAP EPS growth of plus 14.5%. More specifically, for fiscal year '23, revenues increased by 17.1% to $2.96 billion. On an organic basis, revenues grew 14.5% year-over-year, consisting of 14.5% organic growth in scientific instruments and 14.7% organic growth at BEST net of intercompany eliminations. Our 2023 non-GAAP gross and operating margin and GAAP and non-GAAP EPS performance are all summarized on Slide 5. And you can see solid non-GAAP EPS growth of 10.3% despite a $0.10 headwind from BCA in the fourth quarter. I'll also note that our 2023 free cash flow increased by $98 million year-over-year. Our trailing 12 months return on invested capital, a non-GAAP measure was 20.6%, a metric that highlights our differentiated Bruker management process and focus on disciplined entrepreneurial innovation and organic growth supplemented by selected strategic bolt-on or early-stage technology acquisitions. Please turn to Slide 6 and 7, where we highlight the fiscal year '23 constant exchange rate, or CER performance of our three scientific instruments groups and of our BEST segment year-over-year. In '23, BioSpin Group revenue was $799 million and grew in the teens percentages in constant exchange rate. BioSpin saw growth across biopharma, academic government, industrial research and applied markets as well as in our new integrated data solutions or IDS division. We had revenue from four gigahertz class NMR systems each in fiscal '23 and fiscal '22. And in the fourth quarter of '23, we installed the first 1.2 gigahertz NMR in the United States at the Ohio State University and the 1.1 gigahertz NMR at the University of Wisconsin at Madison. For '23, our CALID group had revenue of $960 million and constant exchange rate growth in the high teens percentage with strong growth in life science mass spectrometry driven by the timsTOF platform and aftermarket business as well as strong growth in applied mass spectrometry and our optics infrared, near-infrared, and Raman business. Microbiology and Infectious Disease revenue was up slightly as solid demand for MALDI Biotyper Consumables was offset by a final drop of our modest COVID-19 molecular diagnostics revenue to near zero. Please turn to Slide 7 now. Fiscal year '23, Bruker Nano revenue was $942 million, and in constant exchange rate, Nano grew in the high teens percentage with strong revenue growth across markets, including academic government, industrial, and semiconductor metrology. The artificial intelligence megatrend is a strong tailwind for our semiconductor metrology and advanced packaging tools. Revenues for our advanced X-ray solutions and Nano surfaces, core tools also showed strong growth. Fluorescence microscopy revenue was up on solid growth in academic government research as well as contributions from our Q4 '22 acquisition of the Inscopix neuroscience research tools. Finally, 2023 best revenues grew in the mid-teens percentage net of intercompany eliminations, driven by share gains and superconductor demand by our MRI OEM customers as well as by growth in big science, fusion research, and key new extreme ultraviolet EUV technologies for semiconductor lithography tools by large OEM customers, all in support of the strong AI or artificial intelligence demand. Let me now move to Slide 8, which is a slide that's familiar to those of you who saw our presentation at the JP Morgan Healthcare Conference, where we're outlining what we mean by leadership, emerging leadership in the post-genomic era, which of course, includes many different fields of multiomics beyond genomics, including genomics, as well as solutions for single cell, spatial, structural, quantitative, and interaction biology. I will not dwell on this, but I invite you to read this slide in more detail at your leisure. On Slide 9, you have a quick summary of two technology acquisitions that we closed in early February and which both fill gaps that we had in our portfolio and therefore strengthen our portfolio. On the left, you will see that we acquired Nanophoton in Osaka, Japan, a company with about $5 million in fiscal year '23 revenue. They are a specialist in research Raman microscopy systems so far, primarily only offered in Japan and Korea. But we think these products will do very well outside of Japan and Korea as well since they're really performance-leading with exceptional speed, sensitivity, spatial resolution, and user-friendly workflows in research Raman microscopy. Applications are going from inspecting semiconductors to nanomaterials, battery research as well as academic and industrial research. Differently, here in the United States in Tucson, Arizona, we acquired Spectral Instruments, Imaging LLC to complement our preclinical product lines with preclinical optical imaging for bioluminescent and fluorescent in vivo imaging and optional X-ray imaging. This enhances our preclinical imaging, or PCI solutions for in vivo disease research and should be welcomed by our customers. So let me wrap things up. In summary, Bruker delivered excellent organic revenue growth and solid EPS growth in '23. Even as we have accelerated our strategic investments in the Project Accelerate 2.0 for transformation as well as in production capacity and productivity to meet our growing demand. Bruker's strong growth is a result of its fundamental commitment to innovating in high-value solutions, as well as our ongoing portfolio transformation. Our technology and biological applications leadership in many areas combined with world-class execution and an excellent Bruker management process position us well for continued outperformance as a leader in the emerging post-genomic era. Now, given our strong growth in '23, our healthy fiscal year '24 guidance, as well as our recent selected strategic bolt-on acquisitions, we are now optimistic that we can achieve our previously communicated fiscal year '26 medium-term outlook for revenue and non-GAAP EPS already one year earlier in fiscal year '25. With that, let me now turn the call over to our CFO, Gerald Herman, who will review Bruker's Q4 and full-year '23 financial performance in more detail and provide our fiscal year '24 outlook and assumptions.

Gerald Herman, CFO

Thank you, Frank, and thank you, everyone, for joining us today. I'm pleased to provide some more detail on Bruker's fourth quarter and full-year 2023 financial performance, starting on Slide 11. In the fourth quarter of 2023, Bruker's reported revenue increased 20.6% to $854.5 million, which reflects an organic revenue increase of 15.9% year-over-year. In the fourth quarter of '23, Bruker's reported GAAP diluted EPS of $1.41 compared to $0.66 in the fourth quarter of 2022. The fourth quarter 2023 GAAP EPS includes a $0.99 per share non-taxable line cash gain from the acquisition of PhenomeX, now called Bruker Cellular Analysis division, or BCA. This gain for GAAP reporting represents a bargain purchase gain and reflects the excess of identifiable net assets acquired over the purchase consideration paid. Included in the acquired assets are deferred tax assets related to acquired net operating losses, or NOLs. While the present value of these NOLs is very significant for GAAP accounting, the tax benefits of these NOLs going forward are expected to be much more modest annually. On a non-GAAP basis, Q4 2023 diluted EPS was $0.70, down 5.4% from $0.74 in the fourth quarter of '22, primarily due to the $0.10 dilutive effect of our PhenomeX acquisition in the fourth quarter as well as a challenging tax rate comparison year-over-year. Excluding BCA, Bruker delivered pro forma non-GAAP EPS growth of 8.1% year-over-year in the fourth quarter of '23. Non-GAAP gross margin performance was down 80 basis points year-over-year in the fourth quarter of '23 negatively impacted by foreign exchange and M&A headwinds, partially offset by organic gross margin expansion of about 40 basis points year-over-year. Our fourth quarter 2023 non-GAAP operating income increased 3.8%, while non-GAAP operating margin decreased 290 basis points year-over-year to 18.1%, as foreign exchange and acquisition headwinds, primarily from BCA, more than offset very strong organic operating margin expansion of 270 basis points year-over-year in the fourth quarter of '23. Our fourth quarter 2023 pro forma non-GAAP operating margin, excluding the PhenomeX acquisition, was 20.6%. We finished the fourth quarter with cash, cash equivalents, and short-term investments of approximately $488 million. During the fourth quarter, we used cash to fund selected Project Accelerate 2.0 investments, capital expenditures, and share repurchases of approximately $50 million. We generated $205.5 million of operating cash flow in the fourth quarter of 2023. Our capital expenditure investments were $31.5 million, resulting in free cash flow of $174 million in the fourth quarter of '23. This reflects an improvement in cash flow of about $37 million over the fourth quarter of '22, driven by better working capital performance in the quarter. Slide 12 shows the revenue bridge for the fourth quarter of '23. We delivered solid revenue growth in the fourth quarter of '23 in BSI with 18.5% organic revenue growth in systems and 8.2% organic growth in aftermarket revenue, all year-over-year. Geographically and on an organic basis in the fourth quarter of '23, our Americas revenue grew in the teens percentage. Asia-Pacific revenue grew in the 20% range, while European revenue grew in the mid-teens percentage all year-over-year. For our EMEA region, fourth quarter 2023 revenue was up high single-digit percentage year-over-year. Slide 13 shows our fourth quarter 2023 P&L performance on a non-GAAP basis. Non-GAAP gross margin of 51.8% decreased 80 basis points from 52.6% in the fourth quarter '22 impacted by foreign exchange and acquisition headwinds, partially offset by organic gross margin improvements of about 40 basis points year-over-year. Fourth quarter 2023 non-GAAP operating margin of 18.1% was 290 basis points lower than the 21% margin performance we posted in the fourth quarter of '22 as foreign exchange and acquisition headwinds primarily from BCA more than offset strong organic operating margin expansion of 270 basis points. For the fourth quarter of 2023, our non-GAAP effective tax rate was 31.3% compared to an unusually low 20.6% in the fourth quarter of '22 driven mostly by a one-time discrete favorable item in the prior year period. Weighted average diluted shares outstanding in the fourth quarter of 2023 were 146 million, a reduction of 1.9 million shares or 1.3% from the fourth quarter of '22, resulting from our share repurchases over the trailing 12 months. Finally, fourth quarter 2023 non-GAAP EPS of $0.70 was down 5.4% compared to the fourth quarter of '22, with a $0.10 headwind from BCA. Excluding BCA, our non-GAAP EPS was up 8.1% year-over-year. In fiscal year 2024, we expect BCA to be much less dilutive after our major cost actions in the fourth quarter of '23, and our full-year 2024 non-GAAP EPS guidance incorporates a $0.10 non-GAAP EPS headwind from BCA. Slide 14 shows the year-over-year revenue bridge for the full-year of 2023. Revenue was up $434 million to 17.1%, reflecting organic growth of 14.5%. Acquisitions added 2.2% to our top-line, while foreign exchange was at a 0.4% tailwind resulting in constant exchange rate revenue growth of 16.7% year-over-year. Non-GAAP P&L results for the full-year of 2023 are summarized on Slide 15 with the drivers similar to the fourth quarter of 2023 as explained on the slide. Turning to Slide 16. In the full-year of 2023, we generated $350.1 million of operating cash flow, up about $76 million from 2022 on improved working capital performance. We generated $243 million of free cash flow in 2023, up about $98 million from 2022 on higher operating cash flow and lower capital expenditures. Turning now to Slide 18. We entered the year with solid backlog and an even stronger portfolio to again achieve above-market growth. Our outlook for fiscal year 2024 includes, we are initiating a guidance range of reported revenue of $3.23 billion to $3.29 billion, representing growth of 9% to 11% compared to 2023. This guidance assumes organic revenue growth of 5% to 7% year-over-year, an estimated foreign exchange tailwind of 1% with acquisitions contributing 3% to revenue growth. That excludes any announced potential acquisitions that have not yet closed. This guidance implies constant exchange rate revenue growth of 8% to 10% in the full-year of 2024. For operating margins in 2024, following strong organic operating improvement of about 130 basis points in 2023, we expect 2024 organic operating margin improvement of about 50 basis points. For non-GAAP operating margins, all in, we expect about an 80 basis point decline from the prior year due to a combined 130 basis point headwind from foreign exchange and acquisitions. On the bottom line, we're guiding to non-GAAP EPS for 2024 in the range of $2.71 to $2.76 or non-GAAP EPS growth of 5% to 7% compared to 2023. Other guidance assumptions are listed on the slide. Our full-year 2024 ranges have been updated for foreign currency rates as of January 31, 2024. One additional note on quarterly phasing for the year. We expect first-quarter organic revenue to be sequentially below the fourth quarter of '23 and only modestly above the first quarter of 2023, which was an exceptionally strong first quarter. We also expect softer operating margin performance in the first quarter of 2024 driven by BCA dilution and other acquisition and foreign exchange headwinds. Our organic revenue and operating margin performance is expected to strengthen in the remainder of 2024. Finally, at our Investor Day in June 2023, I shared financial targets for the medium-term fiscal year 2026 outlook for Bruker. Our strong 2023 financial performance, healthy 2024 guidance and our portfolio strength gives you confidence that we will likely reach our full-year 2026 medium-term targets for revenue and non-GAAP EPS a year earlier in 2025. To wrap up, Bruker delivered differentiated organic growth and financial results in 2023, and we're well positioned to deliver above-market revenue and non-GAAP EPS growth again in 2024. And with that, I'd like to turn the call over to Justin to start the Q&A session. Thank you very much.

Justin Ward, Senior Director of Investor Relations and Corporate Development

Thank you, Gerald. I'd now like to turn the call over to the operator to begin the Q&A portion of the call. As a reminder, to allow everyone time for questions, we ask that you limit yourself to one question and one follow-up. Operator we're ready for Q&A.

Operator, Operator

Ladies and gentlemen, we'll now begin the question-and-answer session. Our first question today comes from Patrick Donnelly from Citi. Please go ahead with your question.

Patrick Donnelly, Analyst

Good morning, everyone. Thank you for taking my question. Frank and possibly Gerald, I wanted to discuss the LRP pull-forward comment, which is encouraging to see. Can you elaborate on the earnings aspect? It seems to suggest nearly 30% growth in '25. Are some of these deals contributing positively? The margin challenges we've faced last year and this year have been significant. Can you provide more details on these factors and your confidence in achieving this, especially concerning the earnings side? I'm interested in understanding how we might reach that $350 million to $355 million target a year earlier.

Frank Laukien, President and CEO

Yes. Thank you, Patrick. We're optimistic that we can achieve our revenue and non-GAAP EPS targets a year earlier, which is great. This is a result of our strong performance in 2023 and effective execution. We're also pleased to provide solid guidance for 2024. As some of the current challenges ease, we've shown healthy organic gross margin improvements and over 100 basis points in organic operating margin improvements. These trends are ongoing as temporary currency issues and strategic M&A impacts diminish. While I won't go into exact figures, we anticipate a significant increase in EPS for 2025 and 2026.

Patrick Donnelly, Analyst

Okay. That's helpful. And again, encouraging to see that. And Frank, maybe just on the overall backdrop. We've gotten a lot of questions on just the academic market, the health of it between continuing resolution in the U.S. and China noise. Can you just maybe talk about what you're seeing out there, expectations? Obviously, you have the order book that should help in the near term. But even on the order trends, how you're thinking about the near term and how you're thinking about that academic market, given at least what appears to be some high-level pressures out there? Thank you so much.

Frank Laukien, President and CEO

Yes, gladly. So academic government revenue growth was great and bookings growth was also pretty good. I mean in Q4, we had a bit of an air pocket in bookings, nothing dramatic in Q3 after a very strong Q1 and Q2 bookings in China, in particular. In Q4, it wasn't super strong, but it was solid. And from what I can see, better than what other peers, larger peers may have reported in Q4. So our Q4 book-to-bill for BSI was not far from 1.0. So pretty solid and even China was okay, not so academic government, not only backlog but bookings all the way to revenue growth over the various geographies looks solid. It's one of the very defensible areas at a time when for others at least, biopharma went down, COVID, of course, went down. So it's been one of the strong areas along with diagnostics and many other areas. Actually, just about all of our businesses are doing really quite well in most of our markets.

Patrick Donnelly, Analyst

Okay, great. Thanks, Frank.

Operator, Operator

Our next question comes from Josh Waldman from Cleveland Research. Please go ahead with your question.

Joshua Waldman, Analyst

Hey, good morning guys. Thanks for taking my question. Two for you. Maybe Gerald, starting on the margin side, wondering if you could unpack the margin guide a bit more curious the puts and takes on the organic margin of 50 bps. Is that about what you would normally expect on 5% to 7% organic growth? Just wondering how mix, price, maybe other moving pieces within the cost structure are impacting that number?

Gerald Herman, CFO

Yes, I would say that the impact of the PhenomeX acquisition is significant. We are continuing to adjust our pricing and have several other initiatives in progress that contribute to this. While there are some fluctuations, they are not very substantial, but the acquisition is probably the most important factor.

Frank Laukien, President and CEO

Just about the organic expense of 50 bps.

Justin Ward, Senior Director of Investor Relations and Corporate Development

Yes. So just to clarify, there's a lot of distortion on the margin related to the timing of PhenomeX. So recall that we acquired it basically at the beginning of Q4 of '23 and there was quite a drag on margins. That will become a margin or an organic operating margin tailwind next year because you're anniversarying that acquisition beginning of Q4. So in the early part of the year, where most of the PhenomeX operating loss will still be taking place, that will be characterized as an acquisition margin drag. So it really just has to do with the categorization of PhenomeX and the timing of that acquisition, Josh. Does that make sense?

Joshua Waldman, Analyst

Yes. Yes, I think that makes sense. And I guess one more, Gerald, on the margins. I mean it sounds like you're pulling forward the revenue and EPS '26 target by a year. Is the margin target kind of off the table at this point?

Frank Laukien, President and CEO

No, it's not off the table, but I'll take that, Josh. It's just that we don't think we can pull forward. That looks more likely to be a '26 non-GAAP operating margin target. But it's not at all off the table. We think we can reach that in '26 without pull forward with plenty of room to advance the operating profit margin and further into the mid-20s in subsequent years.

Joshua Waldman, Analyst

Got it. Okay. And then my follow-up, Frank, was on BioSpin. Just wondering how many 1 gig systems are included in the guide for '24? And then curious any thoughts or context you can provide on how the non-1 gig class or the sub-1 gig class is performing?

Frank Laukien, President and CEO

Yes. I think in for '24, we're again looking at three to four gigahertz class systems. And so again, three to four basically same as in '23 and in '22. And I'm sorry, what was the second part of your question?

Joshua Waldman, Analyst

Yes. I was just wondering how the non-1 gig class, so maybe something like 300 up to a certain point?

Frank Laukien, President and CEO

Yes, that's doing great. Most of the growth in Q4 came from the ultra-high field, which was very strong. As a reminder, in 2023, several systems faced delays or required rework. Out of the four systems planned for 2023, three were delivered in the last quarter, and we anticipate a more balanced distribution in 2024. The bookings and revenue growth in BioSpin have been excellent, primarily driven by the health of applied markets and clinical research in biopharma, as well as core academic structural biology and other preclinical imaging applications. BioSpin is performing well, and it's not solely reliant on the ultra-high field segment. The ultra-high field segment is akin to Formula 1 in its ability to showcase the systems, which is interesting. However, the bulk of our business is not centered on the ultra-high field market.

Joshua Waldman, Analyst

Got it, okay.

Frank Laukien, President and CEO

Thank you, Josh.

Operator, Operator

Our next question comes from Puneet Souda from Leerink Partners. Please go ahead with your question.

Puneet Souda, Analyst

Yes, Frank. Thanks for taking the questions. So I just wanted to clarify on the pull forward of the fiscal '26 targets. How much of that is sort of just the acquisitions that have been announced so far, they should become organic in FY '25. And I wanted to ask about the ELITech acquisition as well. Is that included in those assumptions? It's not materialized yet and pending regulatory approval. So could you update us on that, that's a sizable acquisition for you?

Frank Laukien, President and CEO

Yes. To clarify, Chemspeed and ELITech's potential acquisitions that are not finalized are not factored into our guidance for 2024 or our revenue expectations for 2025. Additionally, they do not influence our medium-term revenue and non-GAAP EPS targets for 2026. The anticipated growth is primarily attributed to strong organic growth, margin improvements, and significant EPS growth in 2025 and 2026, which is mainly driven by organic development. Revenue will also receive a boost from the BCA or PhenomeX acquisition, with a goal of around $60 million in revenue for 2024, although this is not the main driver. We have engaged in several selective acquisitions with companies we've been in contact with for many years, and the current timing has allowed us to find fair valuations for both parties.

Puneet Souda, Analyst

Got it. Helpful. Then on timsTOF, if I may ask. What is the expectation for growth this year? Maybe, Frank, could you maybe highlight at a high level, just given there is a higher resolution high-end competitor launch that was announced last year? And sort of the question is how that competes with timsTOF. What's your growth expectation for timsTOF's overall portfolio this year? Thank you.

Frank Laukien, President and CEO

Yes. Since the Astra launch by a competitor, that's a competitive product. We've continued to grow our timsTOF business, but there is a competitive product on the market. And our product, our new Ultra and of course, the various other price and performance and capabilities point of the timsTOF platform including the flex version with MALDI Imaging, in glycomics and other imaging applications. And they really are all performing well, but we acknowledge there is new competition, and that's getting some traction as well. Of course, the traditional Orbitrap franchise is probably see most of that internal competition, but that's not our issue. So we expect continued steady growth in a growing proteomics market. Unfortunately, this is not a zero-sum game, but a growing market as far as we can tell with very healthy fundamental dynamics, and we expect to continue to do well and that in 2024.

Puneet Souda, Analyst

Okay, fair. Thanks.

Operator, Operator

Our next question comes from Dan Arias from Stifel. Please go ahead with your question.

Daniel Arias, Analyst

Hi, good morning, guys. Thanks for your question. Gerald or Frank, on the deals that you've done here, it looks like you're guiding to a three-point contribution from M&A. How conservative or nonconservative would you say that is? I mean, you've got a half a dozen or so assets. So when you kind of look at the growth expectations that you have for them, I'm just curious what you've modeled relative to 2023. Did you pump the brakes because of the macro? Have you assumed some acceleration because now you're able to support them? Just trying to put some context to the growth expectation there.

Frank Laukien, President and CEO

No, we are in a balanced position, not overly cautious or overly optimistic. The figure we are discussing is simply a result of these acquisitions. Besides the PhenomeX and BCA acquisitions, the other closed acquisitions do not contribute significant revenue collectively; they add a little, which is why we project a 3% contribution. This represents a balanced estimate. So, I believe it is neither too conservative nor overly optimistic.

Gerald Herman, CFO

Hey, Dan. Most of these transactions took place at the end of last year or the very beginning of this year. This creates a comparison situation. As Frank mentioned, we do not have aggressive assumptions regarding the underlying revenue growth of those acquired businesses.

Frank Laukien, President and CEO

And most of these are healthy businesses, of course, the one that we're working through, of course, is the PhenomeX issue.

Operator, Operator

Our next question comes from Daniel Arias from Stifel. Please go ahead with your question.

Daniel Arias, Analyst

Correct. Okay. Helpful. And then, Frank, maybe just sort of in the spirit of Patrick's question on academic, can you do a similar thing on Europe just in the way that you're thinking about things and what's under the outlook? I mean tough macro conditions, academic funding may be down a bit to your prior point. But you guys are doing well there. I think on a reported basis, you're up 20% in 4Q. So what should we expect if we compare 2024 in Europe to '23?

Frank Laukien, President and CEO

Yes, we have visibility into this situation. Academic government funding tends to be relatively stable, especially in Europe, while there can be more fluctuations in places like Japan, China, and the U.S. depending on political circumstances. In Europe, this is generally not a contentious issue; countries, whether large economies or smaller stable nations, do not frequently debate their governmental or academic R&D budgets, which typically show steady increases. At the European level, the focus is on the allocation of these budgets. The drivers are clearly shifting towards the post-genomic era, which should remain influential for the next decade or two. We are increasingly well positioned in fields like proteomics, lipidomics, metabolomics, and glycomics. Overall, the post-genomic era represents a significant secular trend that supports growth in academic government funding, which is expected to outpace the general growth seen at the national level. This reallocation, along with advancements in artificial intelligence, highlights two major megatrends for Bruker over the next decade.

Daniel Arias, Analyst

Okay. Okay. So Frank, just to close the loop on the thought. Germany macro conditions, recessionary conversation, not something that you see as a red flag right now.

Frank Laukien, President and CEO

No, but a yellow flag. I mean, Germany is bumbling along and strong growth has not been all that strong. And yes, it's not one of the growth engines of Europe in '24, probably either pretty clear.

Operator, Operator

Our next question comes from John Sourbeer from UBS. Please go ahead with your question.

John Sourbeer, Analyst

Thanks. Good morning and congrats on the quarter. I just want to follow-up on the BSI book-to-bill. I know you don't break it out by region, but was China the real region there that drove that below one on the book-to-bill? And I guess, if you were to exclude China, was book-to-bill greater than one and any additional color just around expectations for that?

Justin Ward, Senior Director of Investor Relations and Corporate Development

Maybe to clarify, so overall BSI book-to-bill was actually above 1. That includes China. Now China obviously is below 1 because of the bolus in orders we got from the stimulus. And again, that bolus was really focused in Q1, but we did have some in Q4 of last year as well. But overall BSI book-to-bill was above 1, including China.

Gerald Herman, CFO

And I would just say China had, I would say a bit of a recovery in the fourth quarter where we saw some challenges in the third quarter relative to that particular market. So from a bookings perspective, there was some improvement there.

John Sourbeer, Analyst

And I guess as a follow-up, just on China there. Any expectations on the outlook for that market for the year, what sentiment are you hearing from customers there and just visibility into the backlog here starting the year?

Frank Laukien, President and CEO

We have good visibility on our backlog. However, China remains the market with the least visibility for 2024 across the entire industry. We observe that the academic government and investment in China are quite strong, indicating ongoing commitment. Therefore, we believe we are well positioned. While there was some recovery in China BSI orders in Q4 compared to Q3 after a very strong first half, our visibility into China is not better than that of our peers.

Justin Ward, Senior Director of Investor Relations and Corporate Development

But we do have quite a different mix in China as a reminder. So our end market mix in China is about 50% academic and government, which as Frank just mentioned, is one of the bright spots. Our biopharma revenue mix in China is only about 10%. That's really where the weakness is concentrated on.

Frank Laukien, President and CEO

And we did not exceed that. Biopharma go away in China in Q4.

Operator, Operator

Our next question comes from Doug Schenkel from Wolfe Research. Please go ahead with your question.

Douglas Schenkel, Analyst

Good morning. Thank you for taking my questions. The first topic I wanted to touch on is backlog. I believe at some point over the course of Q4, you talked about having eight to nine months of backlog. I think the norm is closer to 6%. So I'm just curious if you can comment on where that is now? And is there an assumption embedded into guidance that this comes down a bit?

Frank Laukien, President and CEO

Yes. Our backlog has decreased slightly to approximately 7.5 months, which is still above normal levels. We anticipate it will continue to decline over the next two to three years, and this expectation is factored into our guidance for fiscal year '24. This is primarily supported by solid order momentum due to various long-term trends we have discussed. While we cannot specify exact numbers, we do expect our backlog to further decrease. As mentioned, it was at 7.5 months at the end of '23, showing a slight reduction.

Douglas Schenkel, Analyst

That's helpful to clarify that while it contributes, it's not a major driver of growth. Can I ask about M&A briefly? There are many questions and a lot of focus on that area. I'd like to take a broader view and understand how you are identifying these opportunities. Why have there been so many so quickly? Are these acquisitions filling gaps in your portfolio or moving you into new markets? There's a lot to unpack, but I would appreciate hearing the philosophy and reasoning behind this rapid activity. Thank you.

Frank Laukien, President and CEO

Thank you for the questions. The answer is a bit nuanced. Most of these deals were negotiated toward the end of 2023, with some closing in January or February, but we've been engaged in discussions since the latter half of 2023. In some cases, we've been in multiple rounds of negotiations with these companies that we've known for years. Recently, circumstances aligned in a unique way, allowing us to establish fair valuations and arrangements with both sellers and buyers. This situation is rare, and I don’t anticipate this pace to continue. We typically pursue selected strategic acquisitions aimed at filling specific gaps in our offerings, such as with Tornado, SII, or even Nanophoton. I don’t mean to undermine these companies; they have impressive products, technology, and proven market presence. However, they often lack a fully global reach, which we can help address. The acquisition of Chemspeed will expand our footprint into new areas like biopharma, chemicals, cosmetics, and R&D automation, which are adjacent to our current focus. Although we've been involved in infectious disease biology, mainly through the MALDI Biotyper, our acquisition of ELITech represents a larger presence in molecular diagnostics. While we won't become a top-tier competitor, we will strengthen our position as a solid tier-two player, enhancing our infectious disease portfolio. This opportunity complements the MALDI Biotyper, which focuses on bacterial detection, while ELITech addresses viral detection. Overall, while we are filling essential gaps in our product lineup, I do not expect this accelerated pace to persist, as it is quite uncommon. This situation is influenced by market conditions in late 2023, allowing reasonable compromises on valuations that support long-term returns on invested capital while providing fair valuations for the companies involved, especially as founders consider their exits.

Douglas Schenkel, Analyst

That's great. Thank you very much.

Operator, Operator

Our next question comes from Derik De Bruin from Bank of America. Please go ahead with your question.

Derik De Bruin, Analyst

Hi, good morning. Thanks for taking my question. Hey, Gerald, just to clarify, just I got a couple of questions from clients. You said the book-to-bill in Q4 was not far from one and then your comment about being greater than one was for the full-year?

Gerald Herman, CFO

Actually, both the fourth quarter and the full year had a book-to-bill ratio greater than one.

Derik De Bruin, Analyst

Thank you for the clarification. Regarding the Chemspeed and ELITech deals, we have a general understanding of the revenues since you've provided that information. How profitable are these businesses? When these revenues come in, we shouldn't expect a significant decline in the margin, correct? Your current guidance seems to indicate that those revenues are included. Could you elaborate on the profitability of those businesses?

Frank Laukien, President and CEO

They are not included in our guidance or in the anticipated results for 2025, as I mentioned earlier, Derik. We have confirmed that both of them are profitable. Once we finalize the deals, we will provide more information through a detailed press release about each one. We just want to avoid jumping ahead of ourselves.

Derik De Bruin, Analyst

Got it. I just wanted to clarify the profitability comment. And then just one final one. You've called out geopolitical risks a couple of times. I'm starting to get some questions from investors about, obviously, what's going on with China and your sales into the semiconductor market, and people are starting to worry about competition and just pushbacks. I guess, how do you sort of like think about the geopolitical risk in China right now? And just what's going on there, just sort of your broad thoughts.

Frank Laukien, President and CEO

Geopolitical risks for us refer specifically to the conflicts such as the Ukrainian-Russian war and the Israel-Hamas war, as well as the potential for increased tensions around Taiwan. These risks are more about ongoing wars and conflicts rather than the pace of China's economic growth. We are highlighting these concerns due to the rise in military spending and the heightened risk of conflict over Taiwan, which could potentially occur within the next decade. This represents an unprecedented level of geopolitical risk that the entire industry is confronting. We are focusing on these conflicts rather than broader economic growth or decline, which may provide some clarity.

Derik De Bruin, Analyst

Yes. Well, I was thinking more about trade, just in terms of restricting R&D, restricting instrumentation sales. So I'm getting some questions from investors on your metrology tools into China and things like that, just the sense that there might be some trade pushback. That's where I was going.

Frank Laukien, President and CEO

Yes. Remember, you may remember that about two years ago, there were some additional restrictions on selling certain semiconductor, most advanced semiconductor metrology tools in China. And so of course, that was implemented a couple of years ago, if I recall. And that's long baked into our model. But of course, if there was a conflict there on Taiwan, if there were new restrictions, those are some of the geopolitical risk that the industry is facing. And so that's what we mean by that, Derik.

Justin Ward, Senior Director of Investor Relations and Corporate Development

Operator, I think we'll take one final question, operator.

Operator, Operator

Our final question comes from Brandon Couillard from Jefferies. Please go ahead with your question.

Brandon Couillard, Analyst

Hi, thanks. Good morning. Frank, you mentioned the IDS business within BioSpin. Just curious what else you think you need to I guess, accelerate the vision you have around software? And how do you differentiate in lab software in what seems like a pretty crowded space?

Frank Laukien, President and CEO

Yes, the market is competitive, but some of the assets we've acquired haven't performed very well or have outdated concepts. We believe we can introduce fresh ideas into the scientific and lab software sector. The assets we have acquired are currently being integrated, providing us with a strong portfolio of vendor-agnostic software solutions for scientific and lab digitization that we see as having significant growth and margin potential. Our automation acquisitions, such as Optimal in the U.K. about a year and a half ago and the potential additions from Chemspeed, also include software components, enhancing our existing offerings. We believe we have assembled the necessary assets for a robust lab and quality control software business. While it's still early, we are optimistic about potential growth and the opportunity to enhance our revenue, as well as gross and operating margins.

Brandon Couillard, Analyst

And then one more for Gerald. For the year, what are you embedding for interest expense in the guide? And we've done a couple of debt rounds in the last few weeks? And how do you think about free cash flow conversion for the year? Thank you.

Gerald Herman, CFO

Our cash flow position significantly improved in 2023 compared to 2022, with nearly $100 million added to that figure. I'm optimistic about our current status. This improvement is partly due to better working capital management, and we have implemented several initiatives to enhance that performance. We expect to continue making progress, especially throughout 2024. Additionally, regarding our interest expense for 2024, we are projecting it to be around $17 million or slightly higher for the entire year.

Justin Ward, Senior Director of Investor Relations and Corporate Development

Yes. So interest expense will come up a little bit, obviously, right? So last year, it's closer to $10 million, it will come up a little bit into that.

Gerald Herman, CFO

Yes. For those who might have missed it, we have announced some additional financing activities, particularly with institutional investors, and the overall interest rate picture is quite favorable. While these are larger figures, the overall effect is not as substantial as some might assume.

Frank Laukien, President and CEO

And maybe a final comment, Brandon, some of these things only get funded or we only need to pull from them for funding if and when we close, for instance, the ELITech acquisition, which is the larger one. So we can time that to some extent that the additional interest expense only kicks in if and when we achieve additional profitability from these businesses.

Gerald Herman, CFO

We draw them as required.

Justin Ward, Senior Director of Investor Relations and Corporate Development

All right. With that, we want to thank everyone for joining us today. Bruker's leadership team looks forward to meeting with you at an event. We're speaking with you directly during the first quarter. Please feel free to reach out to me if you have any follow-ups. Have a great day.

Operator, Operator

Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We thank you for joining. You may now disconnect your lines.