Medicine and manufacturing technology provider Novanta (NASDAQGS:NOVT) reported Q2 CY2024 results exceeding Wall Street analysts' expectations , with revenue up 2.8% year on year to $235.9 million. On the other hand, next quarter's revenue guidance of $242.5 million was less impressive, coming in 3.4% below analysts' estimates. It made a GAAP profit of $0.38 per share, down from its profit of $0.58 per share in the same quarter last year.

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Novanta (NOVT) Q2 CY2024 Highlights:

• Revenue: $235.9 million vs analyst estimates of $233.6 million (small beat)

• EPS: $0.38 vs analyst expectations of $0.42 (9.5% miss)

• Revenue Guidance for Q3 CY2024 is $242.5 million at the midpoint, below analyst estimates of $251.1 million

• EBITDA guidance for the full year is $218.5 million at the midpoint, in line with analyst expectations

• Gross Margin (GAAP): 44%, down from 45.4% in the same quarter last year

• Adjusted EBITDA Margin: 21.7%, up from 16.2% in the same quarter last year

• Free Cash Flow of $36.16 million, up 36.9% from the previous quarter

• Market Capitalization: $5.62 billion

“Novanta delivered another quarter of outstanding operating results,” said Matthijs Glastra, Chair and Chief Executive Officer of Novanta.

Originally a pioneer in the laser scanning industry during the late 1960s, Novanta (NASDAQGS:NOVT) offers medicine and manufacturing technology to the medical, life sciences, and manufacturing industries.

Electronic Components

Like many equipment and component manufacturers, electronic components companies are buoyed by secular trends such as connectivity and industrial automation. More specific pockets of strong demand include data centers and telecommunications, which can benefit companies whose optical and transceiver offerings fit those markets. But like the broader industrials sector, these companies are also at the whim of economic cycles. Consumer spending, for example, can greatly impact these companies’ volumes.

Sales Growth

A company’s long-term performance can indicate its business quality. Any business can put up a good quarter or two, but many enduring ones tend to grow for years. Over the last five years, Novanta grew its sales at a decent 7.7% compounded annual growth rate. This shows it was successful in expanding, a useful starting point for our analysis.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Novanta's recent history shows its demand slowed as its annualized revenue growth of 6.3% over the last two years is below its five-year trend. We also note many other Electronic Components businesses have faced declining sales because of cyclical headwinds. While Novanta grew slower than we'd like, it did perform better than its peers.

This quarter, Novanta reported reasonable year-on-year revenue growth of 2.8%, and its $235.9 million of revenue topped Wall Street's estimates by 1%. The company is guiding for revenue to rise 9.5% year on year to $242.5 million next quarter, improving from the 0.7% year-on-year decrease it recorded in the same quarter last year. We also like to judge companies based on their projected revenue growth, but not enough Wall Street analysts cover the company for it to have reliable consensus estimates.

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Operating Margin

Novanta has been an optimally-run company over the last five years. It was one of the more profitable businesses in the industrials sector, boasting an average operating margin of 11.9%. This result isn't surprising as its high gross margin gives it a favorable starting point.

Looking at the trend in its profitability, Novanta's annual operating margin rose by 1.1 percentage points over the last five years, showing its efficiency has improved.

This quarter, Novanta generated an operating profit margin of 10.9%, down 3.7 percentage points year on year. Since Novanta's operating margin decreased more than its gross margin, we can assume the company was recently less efficient because expenses such as sales, marketing, R&D, and administrative overhead increased.

EPS

We track the long-term growth in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company's growth was profitable.

Novanta's EPS grew at a weak 3.3% compounded annual growth rate over the last five years, lower than its 7.7% annualized revenue growth. However, its operating margin actually expanded during this timeframe, telling us non-fundamental factors affected its ultimate earnings.

Diving into the nuances of Novanta's earnings can give us a better understanding of its performance. A five-year view shows Novanta has diluted its shareholders, growing its share count by 1.7%. This dilution overshadowed its increased operating efficiency and has led to lower per share earnings. Taxes and interest expenses can also affect EPS but don't tell us as much about a company's fundamentals.

Like with revenue, we also analyze EPS over a shorter period to see if we are missing a change in the business. For Novanta, its two-year annual EPS declines of 1.9% show its recent history was to blame for its underperformance over the last five years. These results were bad no matter how you slice the data.

In Q2, Novanta reported EPS at $0.38, down from $0.58 in the same quarter last year. This print missed analysts' estimates. We also like to analyze expected EPS growth based on Wall Street analysts' consensus projections, but there is insufficient data.

Key Takeaways from Novanta's Q2 Results

It was good to see Novanta beat analysts' revenue expectations this quarter. On the other hand, its EPS missed and its revenue guidance for next quarter fell short of Wall Street's estimates. Overall, this was a mediocre quarter for Novanta. The stock traded down 2.2% to $153.01 immediately after reporting.

Novanta may have had a tough quarter, but does that actually create an opportunity to invest right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.