Earnings Call Transcript - BRKR Q3 2024

Operator, Operator

Good day. And welcome to the Bruker Corporation Third Quarter 2024 Earnings Call. All participants will be in listen-only mode. After today’s remarks, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Joe Kostka, Director of Investor Relations. Please go ahead.

Joe Kostka, Director of Investor Relations

Good morning. I would like to welcome everyone to Bruker Corporation's third quarter 2024 earnings conference call. My name is Joe Kostka, and I am the Director of Bruker Investor Relations. Joining me on today’s call are Frank Laukien, our President and CEO; and Gerald Herman, our EVP 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 Presentation section of Bruker’s 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. Before we 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 or may make forward-looking statements regarding future events and the financial and operational performance of the company that involve risks and uncertainties. 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. Also, please note that the following information is based on current business conditions and our outlook as of today, November 5, 2024. We do not intend to update our 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 fourth quarter 2024 financial results expected in early February 2025. 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 third quarter and the first nine months of 2024 in more detail and share our updated fiscal 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, Joe. Good morning, everyone. And thank you for joining us on today’s third quarter 2024 earnings call. Bruker continues to grow rapidly, and we have once again posted double-digit year-over-year constant exchange rate revenue growth and above market organic revenue growth in Q3 and year-to-date. Our Q3 2024 constant exchange rate revenue growth was 15.7% year-over-year, including several strategic acquisitions that have closed earlier in the year. Our Q3 2024 organic revenue growth of 3.1% and Bruker Scientific Instruments segment organic revenue growth of 3.8% year-over-year were above market and come on top of our strong organic growth of 10.9% in the prior year, Q3 2023, which made for a tougher year-over-year comparison than what our peers typically face in Q3. This is a testament to our multiyear project to accelerate the transformation into a fast growth company with increased exposure to many of the most powerful secular trends in our industry. Equally importantly, our Bruker management process and operational excellence programs are now driving rapid performance improvements in our recent strategic acquisitions in single cell biology, Spatial Biology, molecular diagnostics, and lab automation and digitization. We have already delivered sequential operating improvements in Q3, which was our first full quarter including all acquisitions, and we also expect further sequential margin improvements in Q4. In this fourth quarter, we expect low-single-digit organic revenue growth in comparison to an exceptional quarter Q4 2023 when Bruker grew revenues 15.9% organically year-over-year. Despite delayed recoveries in biopharma and China demand, orders for our differentiated post-genomic, multiomics, cleantech, semiconductors, and infectious disease diagnostic solutions are gradually improving, with upper mid-single-digit BSI organic bookings growth in Q3 year-over-year. This has been the strongest organic order growth for BSI in over a year, and we anticipate that this trend will continue, supplemented by our first China stimulus orders in Q4 2024. There is typically a two-quarter lag between orders and systems revenue, so China stimulus orders could begin to benefit our financials in the second half of 2025. However, nascent recoveries in biopharma, emerging biotech, CRO, and China demand will not significantly benefit our fiscal year 2024 anymore, and accordingly, we are lowering our fiscal year 2024 guidance. Integrating and improving our recently acquired businesses is making good progress and will further accelerate Bruker’s transformation. We are confident in our ability to drive above-market organic revenue growth with significant margin expansion in 2025 and beyond. If you turn to Slide 4 now, Bruker’s Q3 2024 reported revenues increased 16.4% year-over-year to $864.4 million, with a currency tailwind of 0.7%. Our Q3 2024 non-GAAP operating margin was 14.9%, up 110 basis points sequentially, but down 510 basis points year-over-year due to our recent strategic acquisitions, diluting our margin. In Q3 2024, Bruker reported GAAP diluted EPS of $0.27, compared to $0.60 reported in Q3 2023. Non-GAAP diluted EPS for Q3 2024 was $0.60, down 19% from $0.74 in Q3 2023. We continue to focus on driving improvements in our recently acquired businesses and core operations, on providing high value solutions for the post-genomic era. We expect that our strategic expansion into single-cell spatial molecular diagnostics and lab automation will further contribute to profitable above-market growth and significant margin expansion in 2025 and in the years to come. So, with that, let me turn the call over to our CFO, Gerald, who will review Bruker’s financial performance and updated outlook in more detail.

Gerald Herman, EVP and CFO

Thank you, Frank, and thank you everyone for joining us today. I’m pleased to provide more detail on Bruker’s third quarter and year-to-date 2024 financial performance, starting with Slide 11. In the third quarter of 2024, Bruker’s reported revenue increased 16.4% to approximately $864 million, reflecting an organic revenue increase of 3.1% and BSI organic growth of 3.8% year-over-year. Q3 2024 non-GAAP operating margin decreased 510 basis points year-over-year to 14.9% due to expected dilution from our strategic acquisitions and significant R&D investments in our post-genomic tools. We reported GAAP EPS of $0.27 per share, down from $0.60 in Q3 2023. Non-GAAP EPS in Q3 2024 was $0.60 per share, a decrease of 18.9% from $0.74 in Q3 2023. We generated $38.4 million of operating cash flow in Q3 2024, compared to $44.1 million in the prior year. Capital expenditure investments were $32.6 million, resulting in free cash flow of $5.8 million. Slide 12 shows the revenue bridge for Q3 2024. Our organic growth in BSI was up in the low double-digit percentage range, driven by strength in our magnetic resonance and services businesses. Bruker NANO organic revenue was up mid-single digits percentage. CALID organic revenue declined low-single digits percentage due to softness in biopharma. In terms of geographic revenue growth, our Americas revenue grew in the low-single digits percentage, Asia-Pacific revenue, excluding China, was up double-digit percentage, while China declined low double-digits percentage. For our EMEA region, Q3 2024 revenue was up mid-teens percentage year-over-year. Our non-GAAP gross margin decreased to 51.2% from 52.7% in Q3 2023. The Q3 2024 P&L performance showed non-GAAP EPS of $0.60 down 18.9% from the prior year. We expect to see improved cash flow in the fourth quarter, the largest and most profitable quarter of the year. Regarding our fiscal year 2024 guidance, we now expect revenues in the range of $3.34 billion to $3.37 billion and organic revenue growth of 3% to 4% for FY 2024. We also expect the contribution from acquisitions to be approximately 9.5% year-over-year. Our fiscal year 2024 ranges have been updated for foreign currency rates as of September 30, 2024. To add context to the fourth quarter 2024 expectations, we anticipate organic revenue growth in the low-single digits. To wrap up, Bruker delivered above-market organic revenue growth in Q3 2024. We also saw signs that demand for our innovative solutions is gradually improving. We look forward to providing an update on our fourth quarter and full-year results next February.

Operator, Operator

Thank you. And our first question comes from Puneet Souda from Leerink Partners. Please go ahead.

Puneet Souda, Analyst

Hi, Frank. Thanks for the questions. You pointed out the biopharma and China won’t help you in 2024. But how much of that guidance cut is due to the push out of orders into the first quarter of 2025 versus orders that simply won’t materialize? And you talked about high end of the mid-single-digit bookings in BSI, but did you see any cancellations there in the backlog?

Frank Laukien, President and CEO

Okay, Puneet. No. We have not had any material cancellations. I’m not aware of any material cancellations. Biopharma and biotech have shown some signs of improvement in funding, but the market remains preoccupied with cost cutting and restructuring. As for China, the cumulative effect of weaker orders is around 20% decline year-over-year. We thought we would gain some lift from biopharma in the second half of this year, but we’ve only seen some green shoots, not a trend yet. With regards to China stimulus orders, we are beginning to see some activity. We expect that it will primarily benefit our BioSpin business.

Puneet Souda, Analyst

Okay. Got it. And then I have to ask about 2025. I mean, you gave $3.10 EPS expectations before on the acquisitions update call. Just wondering, any change to that or any additional thoughts on 2025, just given the weakness that you’re seeing from biopharma China and some academic too?

Frank Laukien, President and CEO

Yeah. We are starting from a lower base and I expect to lower estimates for 2025. We’re not providing guidance for 2025 today as Q4 will be crucial. We will offer more clarity on our 2025 outlook based on Q4 results in early February.

Michael Ryskin, Analyst

You made a strong point in the prepared remarks that you are confident in above-market growth and significant margin expansion in 2025. What’s driving that confidence this early, given there’s still visibility issues? What do you see as the biggest swing factors?

Frank Laukien, President and CEO

Good question, Michael. We still have significant backlog, around seven months, which is higher than normal. We are satisfied with the diagnostics business’ performance and semiconductor metrology demand has been strong. Additionally, while biopharma is weak, we anticipate recovery and stimulus funding to contribute positively next year, although there’s uncertainty regarding the extent of order fulfillment.

Michael Ryskin, Analyst

If the backlog is so strong, why aren’t you able to backfill some of those orders? Is that due to timing issues?

Frank Laukien, President and CEO

The sequential step up from Q3 to Q4 is substantial, indicating we are set for a strong performance in Q4, but this does not mean we will reach a billion dollars in revenue this quarter. The $100 million increase from Q3 reflects that, but it’s a prudent guide for the fourth quarter.

Patrick Donnelly, Analyst

Gerald, can you just talk about the dilution from the acquisitions and margin impacts related to them?

Gerald Herman, EVP and CFO

The acquisition integration activities are on track. We are not modifying our dilution expectations for 2024 or 2025 right now. We expect to bring the NanoString and Cellular Analysis businesses to break even by 2026.

Frank Laukien, President and CEO

The Cellular Analysis and NanoString businesses will help diversify our revenue sources, especially in biopharma. We target an increased exposure from around 15% to over 20% of our total revenues from biopharma.

Operator, Operator

Thank you. Our next question comes from Rachel Vatnsdal from JPMorgan. Please go ahead.

Rachel Vatnsdal, Analyst

You reduced the topline organic growth guidance for the year by 250 basis points. Can you break down that reduction and clarify whether the biopharma and China markets actually got worse sequentially?

Frank Laukien, President and CEO

The effect of China is stronger than biopharma, approximately two-thirds to one-third. The slowdown is primarily due to the lack of orders coming in for the remainder of the year. We expect activity to pick up in Q4 but do not predict significant improvements in 2024 anymore.

Dan Brennan, Analyst

How should we think about China stimulus? Are we tracking the RMB500 billion monetary stimulus, and do you expect more money for instruments from the government?

Frank Laukien, President and CEO

We expect some funding from the previous stimulus to come through, especially for big ticket items. However, we cannot quantify the total impact as response rates to applications for stimulus tenders are uncertain.

Operator, Operator

With that, I’d like to turn the call now over to the Operator to begin the Q&A portion of the call. Thank you very much.