Earnings Call Transcript
NOVANTA INC (NOVT)
Earnings Call Transcript - NOVT Q3 2024
Operator, Operator
Good morning. My name is Gary, and I will be your conference operator today. At this time, I would like to welcome everyone to Novanta Incorporated's Third Quarter 2024 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. 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, Corporate Finance Leader
Thank you very much. Good morning, and welcome to Novanta's third quarter 2024 earnings conference call. This is Ray Nash, Corporate Finance Leader for Novanta. With me on today's call is our Chair and Chief Executive Officer, Matthijs Glastra; and our Chief Financial Officer, Robert Buckley. If you have not received a copy of our earnings press release issued today, you may obtain it from the Investor Relations section of our website at www.novanta.com. Please note, this call is being webcast live and will be archived on our website shortly after the call. 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 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. 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 the 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. I'm now pleased to introduce the Chair and Chief Executive Officer of Novanta, Matthijs Glastra.
Matthijs Glastra, CEO
Thank you, Ray. Good morning, everybody, and thanks for joining our call on this election day. Novanta delivered strong third quarter results at the top end of our guidance range. The quarter showed continued sequential improvement in our growth rate, driven by the building momentum of our new products and the strength of our diversified business model. This operating performance reflects solid execution by our teams in a difficult macroeconomic environment. For the third quarter, we delivered $244 million in revenue, which represents reported growth of 10% flat growth on an organic basis. Adjusted gross margins were 46% as our core businesses expanded margins by roughly 70 basis points year-over-year, helping offset the dilutive effect of the Motion Solutions acquisition. Adjusted EBITDA was $57 million, growing 9% year-over-year. Our bookings grew 13% year-over-year as major OEM customers are confirming the 2025 new product launches. Looking beyond the third quarter, we continue to remain excited and are reconfirming the $50 million incremental new product revenue for 2025. We are on track to complete our planned product launches for 2024, up more than 50% versus 2023, with more scheduled for 2025. We're also encouraged that Novanta will be returning to organic growth in the fourth quarter of 2024, albeit at a lower growth rate than previously expected. We remain bullish on the mid- and long-term secular growth trends in precision medicine, minimally invasive and robotic surgery, and robotics and automation markets, where Novanta has a strong technology position with leading OEMs. At the same time, short-term timing of Novanta's core new product launches and overall industry investments in life science and bioprocessing equipment markets are choppier than we and our customers expected just a couple of months ago. While macroeconomic and geopolitical factors are clouding our customers' confidence, ultimately, our fourth quarter revenue guidance is best explained by three factors. First, fourth quarter DNA sequencing product shipments were rescheduled into '25 due to customer challenges. Second, we are seeing new product launch timing shifts, specifically one semiconductor lithography customer and one robotic customer have rescheduled their ramp-up of shipments into 2025. Both product launches will drive substantial growth for Novanta in 2025, and we have received the first batch of orders supporting this. And finally, we're broadly seeing OEM customers in life sciences markets defer shipments due to weak capital equipment market demand from their customers. However, there is a clear indication that capital spending will improve in life science in mid-2025 as our customers are seeing an uptick in demand for consumables and services with their end-user customers, which is a traditional indicator of equipment demand. Robert will go into more details on each of these items when he covers guidance. While we are adjusting to these short-term timing changes for the fourth quarter of 2024, it's important to emphasize that these issues are related to customer timing and not potential business weaknesses. We reconfirm our optimism for strong business growth in 2025 based on first, our new product outlook for 2025, which remains intact even with these near-term changes in customer timing. We and our customers are reconfirming the $50 million incremental new product revenue for 2025. Our customers are excited to be launching their innovations in the marketplace with mission-critical content provided by Novanta, so new product growth remains a very strong driver for overall company growth next year and in the years thereafter. Next, from an end market perspective, in the short term, we appear to be at the bottom of the cycle for industrial, microelectronics, and life science capital equipment markets. This makes us optimistic for an improving environment in 2025. We are already seeing early positive signs in some of our shorter-cycle businesses, such as microelectronics, which is already confirming this view of an improving environment. This gives us confidence in the mid- and long-term growth drivers of our end markets, and we expect organic growth to continue to improve in 2025. Based on these dynamics and customer demand signals, the second half of 2025 revenue is clearly expected to demonstrate strong double-digit organic growth under a number of scenarios, and we expect a much stronger full year organic growth on the back of these trends. Because of this, we continue to invest with confidence in our business to remain on track with all our new product launches while maintaining the needed capacity to ramp with our customers in 2025. Here's a brief update on the broader themes we see in our end markets. First, medical device technology markets continue to be very robust and appear likely to stay strong all this year and throughout 2025. Next, life science and industrial capital spending markets continue to remain muted due to the persistent interest rate impact and increased uncertainty around geopolitical and market economics events. We're not expecting a broad-based market recovery until 2025. However, there are some near-term bright spots in certain robotics and automation applications. Finally, microelectronics end markets are showing early signs of a rebound with some early cycle product categories already gaining traction in 2024, as evidenced in our third quarter results. The stronger and broader recovery in this end market is likely to happen in 2025. Going into more detail. For the third quarter of 2024, sales to medical markets made up approximately 54% of total Novanta sales and grew mid-single digits for the prior year on a reported basis, but were down year-over-year on an organic basis. We saw growth by applications, particularly minimally invasive surgery. However, this was offset by softness in DNA sequencing, other precision medicine, life science tools, and continued headwind from discontinuing our surgical display products. We expect to see the display headwind fully appear in early 2025. We continue to be very bullish on the long-term secular growth trends in minimally invasive surgery, robotic surgery, and precision medicine markets, which we believe all have a long runway in the adoption cycle as they drive foundational productivity improvements for the health care system. Turning to our advanced industrial markets, which make up the remaining 46% of total Novanta third quarter sales. For the quarter, sales growth in these markets excluding our microelectronics applications were up low single digits versus the prior year on a reported basis and roughly flat on an organic basis. The subdued sales performance across this end market was in line with our expectations. While these trends are expected to continue in the fourth quarter of 2024, a recovery later in 2025 remains. We remain confident in our long-term exposure to these end markets. Novanta is positioned in many attractive applications driven by secular growth trends such as Industry 4.0, robotics, and automation manufacturing. Finally, speaking to our microelectronics applications, our business experienced strong double-digit growth in the third quarter, both year-over-year and sequentially. This growth rate, partially driven by easy comparisons to the third quarter of 2023, which was when sales through this end market hit their bottom. For now, this improvement is mainly from shorter cycle products and does not yet reflect a broader recovery of this market. But as mentioned, our new product launch in next-generation lithography systems will be a further driver of growth in 2025. Now let me touch on some of Novanta's strategic growth metrics. For our design wins, we saw solid design activity in multiple businesses in industrial and medical end markets. Overall design wins grew by greater than 20% in the third quarter versus the prior year, excluding large wins in minimally invasive surgery recorded in 2023. For new product metrics, we continue to confidently lean in to complete our planned product launches for 2024, up more than 50% versus 2023, with more scheduled for 2025. As discussed earlier, despite the delays in our customers' ramp-up timing, we remain reliant to deliver our goal of $50 million of revenue in 2025 from new product launches, which are incremental to Novanta's current product offerings. Our Vitality Index in the third quarter was still at about mid-teens percent of sales but showed sequential improvement as we continue to see the early impact of new product launches in secular growth markets, such as minimally invasive surgery, robotic surgery, warehouse automation, humanoid, and field robots, where Novanta is gaining share. Finally, I'd like to give a brief update on our acquisition activities. The integration of Motion Solutions remains on track. Our teams are fully integrated, and we continue to be excited with our innovation capabilities and the depth of their customer relationships. Although the softness in the life science end markets continues to have a near-term impact on Motion Solutions' product sales, the thesis for the transaction is progressing nicely, and we are excited to see this business realize its growth potential as the markets eventually recover. Beyond Motion Solutions, new acquisitions continue to remain Novanta's top priority for capital allocation. We have doubled our pipeline of potential targets, which adds up to more than $20 billion in potential revenue and have multiple active conversations in parallel. Our balance sheet is strong, which positions us well to execute additional transactions. Therefore, you should expect us to lean in to close transactions through the remainder of 2024 and 2025. In summary, in the third quarter of 2024, Novanta delivered strong results. We hit the high end of our guidance range and had sequential improvement in our organic growth. Our new product launches continue to build momentum, helping us deliver solid performance this year and setting us up for better end market growth in secular end markets next year. These results would not have been possible without the dedication of our team using the Novanta Growth System execution model to overcome significant challenges and deliver on their promises in this environment. We remain steadfast in our focus on our top three priorities: one, launching and ramping a record set of new products; two, expanding margins and cash flows through the Novanta Growth System; and three, acquiring additional companies that align with our strategy and offer attractive returns. Now I will turn the call over to Robert to provide more details on our operations and financial performance.
Robert Buckley, CFO
Thank you, Matthijs, and good morning. Our third quarter 2024 non-GAAP adjusted gross profit was $113 million or a 46% adjusted gross margin compared to $105 million or 47% adjusted gross margin. Adjusted gross margins were down year-over-year. However, excluding the impact from the Motion Solutions acquisition, our adjusted gross margins were up roughly 70 basis points. Our gross margin performance was lower than expected as a result of an unplanned decline in sales volume in our precision medicine and manufacturing segment. This brought down overall company margins versus expectations. Despite the decline in sales volume in this segment, we have chosen to maintain our current level of factory capacity and costs in anticipation of sales rebounding in 2025. Therefore, we expect this unfavorable margin impact to continue into the fourth quarter, but ultimately, we anticipate a rebound as sales volumes improve next year. For the third quarter, R&D expenses were roughly $23 million or approximately 10% of sales, and third quarter SG&A expenses were approximately $44 million or 8% of sales. SG&A expenses were sequentially lower in the quarter due to adjustments in compensation based on the revised full-year outlook. Adjusted EBITDA was approximately $57 million in the third quarter of 2024, a 23% adjusted EBITDA margin versus $52 million in the prior year. On the tax front, our non-GAAP tax rate in the third quarter was 21%. Our tax rate for the full year now appears likely to end at around 19%. Our non-GAAP adjusted earnings per share was $0.85 in the third quarter, flat versus the prior year. Our EPS growth remains muted due to the higher interest rates on our higher debt balance. Third quarter operating cash flow was approximately $23 million. Our cash flow performance for the quarter was impacted by the timing of monthly revenue shipments, with more products getting shipped in the last month as opposed to normal, resulting in a higher-than-normal increase in accounts receivable. This is a temporary timing impact that is expected to correct in the fourth quarter. Year-to-date, we are still seeing very strong cash flow performance, with operating cash up 20%, and we expect to finish the year with very strong cash flows. We ended the third quarter with a gross debt balance of $460 million and a gross leverage ratio of approximately 2.3x. Our net debt was $368 million. We remain on track to reduce gross leverage to 2 or below and net closer to 1.5% by year-end. For the third quarter, Novanta's book-to-bill was 0.89. Weakness caused by customers deferring purchases in life science and advanced industrial applications was partially offset by booking strength in our minimally invasive surgery business line, which had a book-to-bill of nearly 1.4 in the quarter as our OEM customers have started to place larger orders for their product launches in 2025. Turning to the operating segments. Precision Medicine and Manufacturing third quarter sales declined by 15%, which was weaker than our prior expectations due to the miss in the precision medicine markets. The book-to-bill in this segment was 0.73, which reflects the revised outlook for our DNA sequencing applications as we see our customers pushing orders into 2025, affecting near-term bookings. Adjusted gross margins in this segment were down year-over-year driven by lower factory utilization, which I commented on. Design wins in the segment were up 30% year-over-year, driven by good execution of our sales team to win new stock in upcoming customer platforms. New product revenue was approximately mid-teens percent of sales in line with expectations. Our robotics and automation segment experienced a revenue increase of 20% year-over-year in the quarter, and bookings grew 25% year-over-year. Our outlook for the second half of 2024 is playing out largely as expected, with end markets improving versus the first half of the year, both in the U.S. robotics market and the microelectronics applications. The book-to-bill was 0.83, in line with expectations, and we expect sales to continue to gradually improve into 2025. Adjusted gross margins increased by 120 basis points year-over-year, driven by better factory efficiency on increased volumes. New product revenue in this segment grew strong double digits and was roughly 12% of total sales for the segment. Design wins in this segment were up strong double digits in the quarter and year-to-date. Finally, medical solutions experienced reported revenue growth of 24% year-over-year and declined on an organic basis 1%. This was slightly better than expected as strong sales from our new product launches almost fully offset the near-term impact of discontinuing our surgical display products. The segment saw a book-to-bill of 1.04, and bookings were up 50% year-over-year. As I already mentioned, our minimally invasive surgery business line had a book-to-bill of nearly 1.4 as we started to see customers placing large orders for new product launches. This strong result was partly offset by continued market weakness in the Precision Medicine business line, for which we saw a book-to-bill below 1. The weakness in Precision Medicine continues to come from a weaker-than-anticipated capital environment in life sciences, multiomics, and bioprocessing markets. The Vitality Index in this segment increased to high teens percent of sales, which is in line with expectations as we start to ramp our new products. Design wins in this segment are down year-over-year, driven by large wins in the minimally invasive surgery business in the third quarter of 2023. But excluding those larger platform wins in the year, design win growth in this segment is a strong double digits year-to-date. Adjusted gross margins in this segment increased roughly 60 basis points year-over-year. Excluding the Motion Solutions acquisition, the margin expansion in this segment was over 450 basis points. Now turning to guidance. With organic growth continuing to sequentially improve, returning to low single digits in the fourth quarter, the stronger ramp in demand that we expected in the fourth quarter is being deferred into 2025. To get into a bit more detail. First, in our DNA sequencing products, nearly all shipments originally expected to ship in the fourth quarter were rescheduled by our customers to the first half of 2025 due to customer-specific challenges. However, we expect this issue to be resolved in early 2025 and resume shipments at a normal rate in the first quarter. The long-term prospects of this application and our products continue to remain strong and even accelerating. Next, we expect the launch of a new product within DUV and EUV lithography applications. However, while our new product is designed in now, unfortunately, due to end market conditions, our customer deferred the ramp into the second half of 2025. Similar to my prior comment, the long-term prospects of this application and our position in it continue to remain strong and accelerating, as EUV lithography is in the early adoption and remains a critical enabler of GenAI, electrification, and smaller, more powerful and efficient electronic devices. Third, one of our customers launching a robotic system with a new integrated smoke evacuation insufflator rescheduled shipments into early 2025 after updating FDA filings to make enhancements to their overall system. This product has broad market acceptance and is expected to see stronger-than-expected demand, which is expected to materialize in our results in 2025. And finally, our customers and the overall life science and bioprocessing market broadly continue to see deferrals in capital spending by their customers, despite the uptick in consumables and services spending by their customers. Based on this activity, demand for capital equipment is clearly returning, but is most likely recovering in early 2025. Unfortunately, this implies that the fourth quarter revenue will be weaker from this dynamic, compounded by customers' desires to manage their inventory balances down in the fourth quarter. The net impact of all these customer and market changes has led us to revise our sales outlook in the fourth quarter by approximately $25 million. Despite this rescheduling of revenue into 2025, we do expect to demonstrate sequentially increasing organic growth in the fourth quarter versus the third quarter. We continue to be optimistic about an improving environment in 2025 and are very confident that our new products will drive better-than-market growth with more attractive secular growing end markets. Based on these dynamics as well as customer demand signals, second half 2025 revenue is clearly expected to be strong double-digit growth under a number of scenarios, which leads us to expect up to 10% organic growth for the full year of 2025. For the fourth quarter of 2024, we expect GAAP revenue in the range of $237 million to $242 million, which represents reported revenue growth of 12% to 14%, and organic revenue growth between 2% and 4% on a year-over-year basis. This revenue range is a bit wider than normal given the near-term macroeconomic and geopolitical uncertainty, and how that continues to impact the life science and industrial capital spending markets and our OEM customers' behavior, particularly as it comes to managing year-end inventory levels. For the full year of 2024, we now expect GAAP revenue to be in the range of $948 million and $953 million. This represents reported revenue growth of approximately 8%. Revenue from current year acquisitions is expected to be slightly above $80 million. On a segment level, in the fourth quarter, we expect precision medicine and manufacturing revenue to decline double-digit percent year-over-year, impacted by the pushout in demand in the DNA sequencing applications. Our robotics and automation segment continues to expect to grow greater than 20% in the fourth quarter, as end markets continue to improve and also from easier year-over-year comparisons. This growth comes from an improvement in demand in robotic applications and an improvement in microelectronic applications. And our medical solutions segment is expected to show approximately 30% year-over-year reported revenue growth in the fourth quarter. On an organic basis, we expect mid-single-digit growth year-over-year. While this growth outlook is solid, it's less than we previously expected from the aforementioned rescheduling of a surgical robotics customer. Moving on to adjusted gross margin in the fourth quarter. We expect to be approximately 46%. This outlook includes the impact of lower factory utilization, and we maintain the capacity of our factories to help us be ready for the growth that our customers are seeing in their end markets as the demand environment improves in 2025. In the segments, we expect gross margins to be roughly flat compared to the gross margins that we delivered in the third quarter. For the full year 2024, we now expect adjusted gross margins to be approximately 46%. For the full year, excluding the dilutive impact of the Motion Solutions acquisition, we expect to deliver approximately 100 basis points of margin expansion in our core business. We expect R&D and SG&A expenses in the fourth quarter to be approximately $70 million to $71 million. This represents a sequential increase in the third quarter due to the timing of R&D project spend and also incentive compensation adjustments. For the full year, these expenses will be approximately $271 million to $272 million. Depreciation expense, which was roughly $4 million in the third quarter, will be similar in the fourth quarter. And stock compensation expense, which was approximately $6 million in the third quarter, should be approximately $7 million in the fourth quarter. For adjusted EBITDA in the fourth quarter, we expect the range of $50 million to $52 million, which represents double-digit growth year-over-year. For the full year 2024, the adjusted EBITDA is now expected to run $208 million to $210 million. Interest expense, which was $8 million in the third quarter, is expected to be slightly above $7 million in the fourth quarter. We expect our non-GAAP tax rate to be around 20% in the fourth quarter and approximately 19% for the full year. Adjusted earnings per share will be in the range of $0.70 to $0.74 in the fourth quarter and $3.02 to $3.06 for the full year. Finally, we expect cash flow to return to year-over-year growth in the fourth quarter, and we expect to demonstrate double-digit growth for cash flows for the full year 2024. We continue to use the Novanta Growth System to help improve our net working capital levels as evidenced by the strong improvement in inventory levels in the third quarter. These efforts have allowed us to substantially pay down our debt balance so far this year. As always, this guidance does not assume any significant changes to foreign exchange rates, nor does it include any anticipated acquisitions at this time. In summary, we remain optimistic about our long-term prospects, and we continue to work diligently to support our customers with their successful launch of multiple new product platforms. The long-term secular growth outlook of our end markets remains intact, and we feel well-positioned to grow and gain share as the market recovers in 2025. The fundamentals of the business are strong, and we're impressed with the team's adoption of the Novanta Growth System operating model, which is the ability to consistently execute and deliver on our promises as evident in the strong results in the third quarter, which were delivered at the high end of the guidance despite our challenging marketplace. In addition, we also continue to work to compound our cash flows through a combination of organic growth and deployment of capital towards acquisitions. As Matthijs mentioned, our acquisition pipeline has more than doubled in revenue and number of potential targets, but we also remain disciplined on the cash-on-cash returns, which means being disciplined about pricing. We remain focused on controlling what we can control and executing with excellence, no matter the business environment. This concludes the prepared remarks. We'll now open the call up for questions.
Operator, Operator
The first question is from Lee Jagoda with CJS Securities. Please go ahead.
Lee Jagoda, Analyst
I guess just starting with the Q4 revenue guidance and that $25-or-so million delta relative to our expectations. Can you speak to how much of that delta is the macro and then how much of that delta is specific customer launches into 2025? And then I've got a follow-up.
Matthijs Glastra, CEO
Yes. So yes, as you can imagine, giving detailed specifics is a bit sensitive as it pertains to specific customers. But if you read through the guidance per segment, you can actually calculate the impact. It's fair to say that it's a mix of customer-specific and market challenges. Yes, for customer-specific, it's primarily DNA sequencing, DUV, EUV lithography, robotic surgery. And among these, DNA sequencing was the biggest single impact, which we expect to rebound in 2025. And the biggest end market is in life sciences tools. So hopefully, that's helpful.
Lee Jagoda, Analyst
Yes. And then, I guess the follow-up is, on last quarter's call, I think there was a lot of talk around sort of a 10%-ish growth rate for 2025. And sitting here today, we're talking about deferring an additional $25 million into 2025, yet the guidance is only up to 10% growth in 2025. So is there something else moving? Or are you just building in more conservatism for the macro? Or how should we think about this?
Robert Buckley, CFO
Yes. Nothing else is changing. We're not losing market share anywhere. The product launches are still set for 2025, as we mentioned. The DNA sequencing side is expected to normalize in the first quarter. We are being cautious due to the contentious election and the ongoing uncertainty in the geopolitical and macroeconomic landscape. Our customers seem reluctant to engage in deeper discussions until this situation resolves. We anticipate the fourth quarter will proceed as expected. However, if the macro and geopolitical conditions improve, our business should benefit since we are maintaining our market share and leveraging our customers' growth expectations.
Lee Jagoda, Analyst
Got it. Just one more for me, and I'll hop back in queue. It sounds like some of your comments suggested a quicker growth increase in the second half of 2025 compared to the first half as we look ahead to next year. How does your visibility look regarding your Q1 deliveries? And in relation to your Q4 organic growth, how should we approach expectations for organic growth in Q1?
Robert Buckley, CFO
Yes. So, I would just say organic growth should continue to sequentially improve and stay positive, right? So, we're not going to get into like the specific ramp at this time because we'll have detailed discussions with our customers in December after the election cycles and a couple of other situations kind of unfold. But I would say that the reason why the back half is definitely stronger is, obviously, there are some easier comparisons, but then we have new product launches happening more in mass. We talked a little bit about EUV, DUV being scheduled for the back half of the year. We're starting to get the purchase orders on that. And so, we'll start to feel more and more confident about what that looks like. It is possible there is a bigger shift into the first half, but we don't want to get into that at this stage. We can have another discussion around that in January.
Operator, Operator
The next question is from Brian Drab with William Blair. Please go ahead.
Brian Drab, Analyst
I have a simple question, and I may have missed the explanation. Revenue is slightly down in the guidance for the fourth quarter. In addition to any impact from minor negative operating leverage contributing to this decline, why would EPS be more significantly down in the fourth quarter? What is causing that?
Robert Buckley, CFO
You have an increase in the tax rate that is higher than we anticipated due to the jurisdictional mix. Essentially, there are more medical sales occurring in our German operations, which have a higher tax rate. That's one factor. Additionally, there is a sequential increase in operating expenses that I previously mentioned. This includes some expenses ramping up due to changes in compensation and project timing.
Brian Drab, Analyst
Okay. You mentioned EUV and DUV, and I believe you said our new product is designed in that space. Can you discuss the type of technology you're providing for that application and what the new product entails? Is it a different type of technology or just an enhancement of the existing technology? Any comments?
Matthijs Glastra, CEO
Yes, this is Matthijs, Brian. As we've mentioned in the past, we are providing a new type of technology that we hadn't supplied before. This is the additional part that's deferred. It's been widely discussed how that particular player is currently perceiving the market. Our view is consistent with that perspective. The customer is enthusiastic because we are addressing a specific problem that holds significant value for them. We're integrated into their plans, and this primarily revolves around the timing of the launch, nothing more.
Brian Drab, Analyst
Okay. And then just one more for now, I guess. On Motion Solutions, I think in the second quarter we talked about lowering the expectation for Motion Solutions revenue for the year by $10 million, right? I'm just wondering if you commented today on whether that's changed with some of the softness you're seeing in the fourth quarter related to Motion Solutions, or should we still think about that as down $10 million from just like it was last quarter?
Robert Buckley, CFO
No, it's still the same. You're absolutely right. I got it to about $80 million as the expectation. It used to be $90 million, but it went down to $80 million.
Matthijs Glastra, CEO
But clearly impacted by the same market dynamics in life sciences tools, right?
Operator, Operator
The next question is from Rob Mason with Baird. Please go ahead.
Rob Mason, Analyst
I don't want to belabor the point here, but just want to be clear. So, around the revenue that shifted out of the fourth quarter related to new product launches and into '25, we had been talking about $50 million of incremental revenue there, and still $50 million. So, I guess just to confirm, was there anything that you're now assuming on the new product launch side that slips from '25 into '26?
Robert Buckley, CFO
No, not from a new product at all. If you consider the situation a bit, the EUV and DUV launches are now projected to slip out of 2024 into 2025, specifically into the latter half of the year. We are designed in and beginning to see the progress on that. Regarding the next-generation insufflator in the surgical area, that has also shifted to early 2025 as they finalize their 510(k) and start normalizing shipments for us. On the DNA sequencing front, we expect orders to return in the first quarter, but the timing of that ramp is less certain, so we are being more conservative there. Essentially, we've analyzed the life science industry and concluded that until we receive solid orders and commitments from customers, we should anticipate delays beyond our initial plans, though we do expect a bounce-back eventually. As Matthijs mentioned, leading indicators show that there is an increase in consumables and service spending at their factories. Our customers' clients are showing significant upticks in their consumables and services, indicating that capacity is being utilized and spending is starting to happen. Typically, capital spending follows that within approximately six to nine months, and that's what we're monitoring closely right now.
Matthijs Glastra, CEO
Yes. And maybe another way to say it, Rob, so while, let's say, DUV, EUV has shifted into the second half, the overall number is staying the same because other parts are doing slightly better. And we've also, I think, been very consistent that the start of that timing is tricky, right, and we actually never formally guided a 2024 number because of the dynamics that we're actually seeing playing out. So, the '25 is just a full year ramp, and that's why we maintain confidence there. So, nothing really has changed other than the Q4 timing of the start of that ramp.
Rob Mason, Analyst
I see. Okay. Regarding the precision manufacturing and medicine segment, I understand that the sales mix may have influenced things. However, the sequential decrease in gross margin was quite significant, nearly 100%. I'm curious if there are other factors at play. Will the gross margin recover to the levels it reached in the first half, and is that recovery entirely reliant on DNA sequencing?
Robert Buckley, CFO
There are two main factors to consider. First, the costs associated with DNA sequencing are decreasing. Second, we have a facility with mostly fixed costs. When the volume at that facility falls below a certain threshold, the costs directly affect our finances. This facility produces optics for many of our products, and during that quarter, the volumes were lower than normal. If we disregard the costs from that facility, it would have hindered our ability to grow the business in early 2025, forcing us to delay our plans further. Therefore, we chose to maintain that cost structure, anticipating that demand will return. This decision led to a higher decrease in our margins than we expected, largely because we did not foresee the reduction in production volumes at the factory that supplies optics for both our DNA sequencing and some industrial products.
Rob Mason, Analyst
Makes sense. Okay. Just last question. Just Matthijs, I mean, you talked about bottoming in the industrial area as well as microelectronics. It sounds like orders maybe support the microelectronics commentary. Just why are you thinking we're at a bottom on the advanced industrial side?
Matthijs Glastra, CEO
Well, I mean, you look at multiple indicators, right? It's a combination of customer conversation as well as the kind of short-cycle business, right, returning. So that is kind of a leading indicator for us, right? So typically, microelectronics is the first to go down, followed by the short-cycle industrial business, followed by the longer-cycle industrial business. And so, the return is the, of course, the inverse of that. So, we see microelectronics turn, the short-cycle version of it. We see the short-cycle version of the industrial starting to turn. But it's too early to say, of course, what the exact timing of the longer cycle return is, but it gives us optimism that we're seeing the first signs of that bottoming out, right? Otherwise, the short-cycle businesses would have stayed stable or further declined, and that's not happening.
Operator, Operator
The next question is a follow-up from Brian Drab with William Blair. Please go ahead.
Brian Drab, Analyst
Well, I guess I think my question was just answered. Yes, I think my question was just answered. My question was maybe slightly different. Just as you're looking at that guidance for '25 and the revenue expectation, are you saying up to 10% organic revenue growth? I'm wondering, what is embedded in terms of your expectation for the industrial backdrop? Obviously, like 22 months or something ISM below 50. Just wondering, is there an expectation for improved industrial environment globally there or more of the same?
Robert Buckley, CFO
We do have a little bit more subdued there. So, what we do have is, as Matthijs just talked about is the short-cycle business is starting to see an uptick in bookings and is starting to see the uptick in growth. So, we presume that that kind of carries forward. The longer cycle, we presume is more of a subdued environment. And so, to the degree that that recovers faster, it would have a more favorable impact on our outlook. But it's, again, why today? It's a very unusual day to be reporting earnings. There's a lot of things obviously going on. And so, we're trying to be a little cautious at this stage. Do we clear the year? And I think our customers are demonstrating the same behavior. A lot of them are trying to manage inventory down and not overextend themselves in the fourth quarter and getting better positioned for a more positive 2025.
Operator, Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Matthijs Glastra for any closing remarks.
Matthijs Glastra, CEO
Thank you, operator. So, to recap, Novanta had strong operating performance in the third quarter. We achieved the high end of our guidance for sales and profit, and we made good progress on our top priorities. Despite near-term macroeconomic dynamics, Novanta remains well positioned in the medical and advanced industrial markets, with diversified exposure to long-term secular macro trends in robotics and automation, precision medicine, minimally invasive surgery, and Industry 4.0. Looking ahead, while the macroeconomic and geopolitical climate are weighing on capital equipment purchases in 2024, we believe we are in a strong position to deliver on our recovering in the uncertain climate in industrial electronics, life science, and multiomics markets. We continue to see accelerating momentum for Novanta on the back of our new product launches as we work through the fourth quarter and into 2025. We will continue to focus on additional design wins in high-growth applications as well as doubling down on the Novanta Growth System to continue to drive strong cash flows and gross margin expansion. In closing, as always, I'd like to thank our customers, our employees, and our shareholders for their ongoing support. I continue to be especially grateful for the dedicated efforts of all our Novanta employees who work so diligently every day, taking on new challenges, and striving to make the company a great place to work. We appreciate your interest in the company and your participation in today's call. I look forward to joining all of you in several months on our fourth quarter and full year 2024 earnings call. Thank you very much. This call is now adjourned.
Operator, Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.