Participants

Ray Nash; Corporate Finance Leader, Investor Relations; Novanta Inc

Matthijs Glastra; Chairman of the Board, Chief Executive Officer; Novanta Inc

Robert Buckley; Chief Financial Officer; Novanta Inc

Lee Jagoda; Analyst; CJS Securities

Brian Drab; Analyst; William Blair & Company

Rob Mason; Analyst; Robert W. Baird & Co., Inc

Presentation

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 the Novanta Inc. fourth quarter and full year 2024 earnings call. (Operator Instructions) 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

Thank you very much. Good morning, and welcome to Novanta's fourth quarter and full year 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 may 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 this 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

Thank you, Ray. Good morning, everybody, and thanks for joining our call. Novanta achieved solid financial results in 2024, effectively navigating a challenging environment. In the fourth quarter, we returned to organic growth as expected. We beat expectations for profit, and we achieved our best quarterly cash flow ever.
For the full year of 2024, we had strong operating performance despite the choppy market demand, demonstrating strong core gross margin expansion, adjusted EBITDA growth and record cash flow generation. We launched 50 new products and received initial orders from our customers, supporting our new product revenue ramp in 2025.
Overall, I'm incredibly proud of our team's resilience in managing today's volatile environment to deliver these results. The Novanta business model with diversified exposure to high-growth medical, life science and advanced industrial markets as proof of resilient under multiple geopolitical and market economic scenarios.
Our proprietary products and technologies are well positioned in medical and advanced industrial applications with long-term secular tailwinds such as precision manufacturing, robotics and automation, advanced surgery, and precision medicine. We feel that our winning growth strategy focused on where we play and how we win, combined with the strength of our portfolio and our deployment of the Novanta growth system is what drives our performance no matter the environment.
For the fourth quarter, we achieved $238 million in revenue, which was plus 3% organic growth year-over-year and plus 13% reported revenue growth. Our reported revenue would have been $2 million higher if exchange rates had stayed consistent with our fourth quarter guidance. Bookings grew 54% year-over-year and 5% sequentially driven by major OEM customers confirming their 2025 new product launches.
Adjusted gross margins were 47%, with core businesses which exclude the Motion Solutions acquisition, expanding margins by 125 basis points. Adjusted EBITDA grew 15% to $52 million and operating cash flow hit a record $62 million, up 58%.
For the full year of 2024, we delivered $949 million in revenue, with plus 8% reported revenue growth and a 2% organic decline. Adjusted gross margins were 47%, with our core businesses expanding margins by roughly 120 basis points year-over-year, and adjusted EBITDA grew 7% to $210 million. Operating cash flow reached a record $159 million, up 32%.
Looking ahead to 2025, we remain optimistic despite market uncertainties. Our sales to health care markets continue to thrive with strong patient procedure growth and hospital spending driving high single-digit growth in our Medical business.
In addition, we expect to grow faster than the health care market in 2025 from new product launches, allowing us to control our own destiny better. We are reconfirming $50 million of incremental new product revenue for 2025 mostly driven by new insufflators and pumps for hospitals and surgery centers as well as surgical and warehouse automation robotics. We are confident in the long-term growth outlook in our end markets, and we feel we have a strong technology position in segments with secular growth.
In the short term, it's fair to say that there's an increasing amount of change and uncertainty. We do see signs of growth slowly returning to all of our end markets as evident in certain robotics and automation applications in the fourth quarter as well as some short-cycle semiconductor applications.
At the same time, the geopolitical disruptions and market economic uncertainty that we saw throughout 2024 are now being compounded by disruptions from trade war uncertainty, including tit-for-tat retaliatory responses as well as uncertainty around government funding such as from the US National Institute of Health.
All of these factors create a more uncertain environment in 2025 for capital spending in industrial, semiconductor, bioprocessing and life sciences. Our teams, however, are already stronger and more resilient than ever to face these uncertainties. For example, our tariff and supply chain playbooks are in place. And thanks to the deeply embedded November growth system, you can expect us to deliver strong operating performance, no matter the environment.
All of this leads us to be confident in the fundamentals of our business and upbeat about a better year in 2025. At the same time, given the increase in uncertainty and volatility right now versus at the time of our last call, we will be prudent with our initial financial guidance for this year. Robert will cover guidance details in his section.
Now we'll turn to 2024 to give more detail on our results for the year. For 2024 medical market sales made up 55% of total Novanta sales growing high single digits on a reported basis. We saw strong growth in multiple application areas, particularly in minimally invasive surgery and robotics for surgery. This was offset by weakness in DNA sequencing, the headwind from discontinuing our surgical display products and general softness in life sciences applications.
Advanced Industrial markets made up 45% of total sales, growing low double digits on a reported basis. Despite the challenges we've seen in this space, we remain confident in our long-term exposure to [secular] growing niches in this end market. Novanta is well positioned in many attractive applications and trends, such as Industry 4.0, gen AI and onshoring and nearshoring, which is driving robotics and automation investments, particularly due to labor costs and shortages.
Now let me touch on some of Novanta's strategic growth metrics. We saw solid design win activity with overall design wins growing by over 40% in the fourth quarter. We launched 50 major new products in 2024 with over 50% more planned for 2025 as our innovation pipeline is starting to gain steam. Our Vitality Index was mid-teens percentage of sales expected to climb in 2025 as we ramp new products.
Some of our new product launch highlights from the past year are we launched multiple new next-generation smoke evacuation insufflator with leading medical device OEMs. These intelligent subsystems are in different phases of their launches. Some currently in soft lines and some now full ramp as we head into 2025. We launched one new endoscopic pump with a fast-growing OEM. We have more next generation pumps ready to enter market with large OEM customers in 2025.
We are investing to significantly expand our position here in the coming years, leveraging our insufflator competencies and playbook. We also launched multiple new products specifically designed for advanced robotics applications such as surgical robots, humanoid and warehouse automation roll-ups.
These new products include ultra compact server derived, newly configured four-store sensors and minertizing coaters. We have already received large initial purchase orders for these new products in the third quarter and fourth quarter of 2024 and additional orders in January and February of this year. So our backlog is already filling up for the year.
In addition, we received our first production order for a brand-new DUV EUV lithography intelligence subsystem product which is set to launch later in 2025. With all these launches and more planned throughout 2025, we remain on track to deliver our goal of $50 million of incremental NPI revenue in 2025.
Next, I'd like to give you a brief update on Novanta's acquisition activities. New acquisitions remain Novanta's top priority for capital allocation aligned with our operating model of being a cash flow compounder.
For 2025, closing new acquisition is our executive team's top priority. We have a large and exciting pipeline of potential targets and are managing multiple active conversations. In today's volatile marketplace, valuations are becoming more attractive. And our balance sheet is well positioned for sizable transactions. We aim to close multiple transactions in 2025, while at the same time maintaining discipline on price and returns.
To better prepare for scaling Novanta organically and inorganically, we also made some significant organizational changes. As of January 2025, we have appointed two Co-Chief Operating Officers or co-COOs, to the Novanta leadership team, reporting directly to me. Each of these co-CEOs will lead an operating segment, either automation enabling technologies, which will include the precision manufacturing and robotics and automation business units or medical solutions, which will include the advanced surgery and precision medicine business units.
In these roles, these leaders will be responsible for organic growth strategies and for creating a robust organization capability and capacity to receive new acquisitions. The Automation Enabling Technologies segment will be led by Chuck Ravelo. In addition to this role, Chuck will also lead the Novanta Growth System or NGS, across Novanta as we integrate it deeper into our culture and operations. We're also excited to welcome to Novanta. John as co-CEO, will be responsible for the Medical Solutions segment.
This segment will focus on Novanta's growth strategy for the health care industry with particular emphasis on surgical precision medicine and bioprocessing technology solutions. John brings extensive health care and life science markets experience from his 22-year career at Thermo Fisher Scientific, where he most recently led their $3.5 billion chromatography and mass spec division, serving biotech, academic and pharma customers in the high-growth proteomics and multiomic space as well as applied markets.
His expertise will be invaluable as he leads our organic growth and acquisition strategy in the medical, life science and bioprocessing markets.
Finally, let me also give an update on building the culture of Novanta, which we called the Novanta Way. We believe the Novanta Way has been a differentiator in attracting, retaining, and developing core talent. We continue to focus on giving our employees a sense of belonging within the company and on improving our employee engagement scores, and we have invested heavily into leadership development initiatives and employee training.
As we're entering the year, we have the strongest leadership team at bench since my tenure as CEO, a team that is ready and able to scale and further transform the company. One of the most critical aspects of our company culture is embedding the Novanta growth system known as NGS to drive excellence into the many ways we work together.
In 2024, we leveraged NGS to enhance performance across our factory teams, commercial organization, R&D, and product management. We hosted numerous Kaizen events and trained over 100 employees as NGS practitioners driving continuous improvement. These efforts significantly boosted our operations by speeding up product launches, reducing lead times in inventory, improving gross margins on medical consumables and expanding our commercial funnel with new OEM opportunities.
In 2025, we'll continue using NGS to optimize operations. This week, during our annual President's Kaizen Week, we're hosting multiple events at major sites across the globe, engaging over 200 employees from all levels to achieve our 2025 goals and long-term strategies. NGS is integral to Novanta's identity, fostering cross-functional teamwork and effective problem solving.
In summary, we're proud of the progress we made as an organization in 2024. Novanta achieved solid financial results in 2024 with strong operating performance, gross margin expansion, adjusted EBITDA growth and record cash flow generation. In the fourth quarter, we've returned to organic growth. We beat expectations for profit, and we achieved our best quarterly cash flow ever. Our new product ramps are on track for 2025 with plans to launch 50% more new products than 2024.
We've reorganized the skill better organically and through acquisitions, strengthened our leadership brands in tenant pool. We remain confident in our strategy, our business fundamentals and the resilience of our portfolio and teams. As we look at 2025, Novanta's top three priorities will be first, ramp our -- all our plant new products and achieve the $50 million of growth from new products this year.
Second, further expand our profit margins and cash flow by driving NGS deep into our culture and the way we work. And finally, acquire additional companies that fit our strategy at attractive returns to drive double-digit reported growth in the year.
With that, I will turn the call over to Robert to provide more details on our operations and financial performance. Robert?

Robert Buckley

Thank you. Our fourth quarter 2024 non-GAAP adjusted gross profit was $112 million or a 47% adjusted gross margin compared to $100 million or a 47% adjusted gross margin in the fourth quarter of 2023. Adjusted gross margins were flat year-over-year, but our core adjusted gross margins, which excluded the impact of the Motion Solutions acquisitions were up 125 basis points.
For the full year of 2024, non-GAAP adjusted gross profit was $442 million or a 47% adjusted gross margin compared to $413 million or 47% adjusted gross margin for the full year 2023. Our gross margin performance was better than expected in the quarter as a result of strong execution of our teams from embracing the Novanta growth system to better manage factory volumes, improve customer on-time performance and drive cost productivity deep into our supply chains and production processes.
For the full year, adjusted gross margins were nearly flat year-over-year, but core adjusted gross margins were up 120 basis points. For the fourth quarter, R&D expenses were $25 million. And for the full year, R&D expenses were $96 million or approximately 10% of sales. Fourth quarter SG&A expenses were $43 million and for the full year, $175 million or roughly 18% of sales. Adjusted EBITDA was $52 million in the fourth quarter, a 22% adjusted EBITDA margin versus $45 million in the prior year, demonstrating growth of 15% year-over-year.
For the full year 2024, adjusted EBITDA was approximately $210 million versus $196 million in the prior year. On the tax front, our non-GAAP tax rate in the fourth quarter was 24%. Our tax rate for the full year of 2024 was 20% versus 16% in the prior year. Our tax rate increased year-over-year due to changes in jurisdictional mix of pretax income, Pillar 2 implications and the increased geographical tax rates.
Our non-GAAP adjusted earnings per share was $0.76 in the fourth quarter, up 21% versus the prior year. For the full year of 2024, our non-GAAP adjusted earnings per share was $3.08. Fourth quarter operating cash flow was nearly $62 million, up 58% year-over-year and represents a record for cash flow in a single quarter.
For the full year 2024, operating cash flow was approximately $159 million, up 32% versus 2023 and up 75% from 2022. 2024 was our best-ever year for cash flow performance driven by solid improvements in reducing our net working capital needs, improving our profitability and delivering our more efficient manufacturing processes to enhance product quality and improve on-time delivery.
We ended the fourth quarter with gross debt of $419 million, with a gross leverage ratio of less than two times, and our net debt was $305 million, giving us a net leverage ratio of approximately 1.4 times. We achieved our goal of reducing our growth and net leverage by year-end, putting Novanta's balance sheet in a great position to execute on our acquisition pipeline.
For the fourth quarter, Novanta book-to-bill was 0.96. Bookings were up 54% year-over-year and 5% sequentially. We saw continued strength in bookings in our Advanced Surgery business, formerly known as the minimum invasive surgical business posting a 1.14 book-to-bill as we took orders for our new insufflators and endoscopic pump products that are ramping in 2025.
Offsetting this was further softness in demand in OEM customers in life sciences, DNA sequencing and advanced industrial applications. Now turning to our new operating segments. As Matthijs has just explained, we've updated our operating segments into two segments.
First, our automation enabling technology segment, which mainly serves our advanced industrial OEM customers and precision manufacturing and robotics and automation applications. And second, the Medical Solutions segment, which mainly serves our medical OEM customers serving the health care industry, our life science industry, and our bioprocessing OEM customers in the precision medicine space.
These updated segments also reflect our new leadership structure and also better consolidate our end market exposures into common groups. So now turning to the Automation Enabling Technologies segment. Fourth quarter sales grew 9% year-over-year, driven by continued recovery in robotics and automation applications.
For the full year, sales declined 2%. The book-to-bill in this segment in the fourth quarter was 0.89 and for the full year was 0.87, which reflects the continued softness in demand in industrial capital spending as evident in the Purchasing Managers Index.
This was somewhat offset by returning demand in robotic and automation applications from industry investments in warehouse automation, mobile robotics and other niche industrial robotic applications. Adjusted gross margins in this segment were 51% in the fourth quarter, up nearly 350 basis points year-over-year, driven by strong productivity in our factories. For the full year, the segment saw a 49% adjusted gross margin up 70 basis points year-over-year.
Design wins in this segment were up high single digits year-over-year in the fourth quarter, driven by solid execution of our sales team to win new sockets and upcoming customer platforms. New product revenues grew strong double-digit year-over-year in the fourth quarter with Vitality Index in the teen’s percent of sales, similar to the prior year and in line with expectations and guidance.
Next, the Medical Solutions segment experienced reported revenue growth of 17% year-over-year and declined on an organic basis, 4%. The organic decline was largely caused by a decline in sales into DNA sequencing applications, which we discussed on our last call as well as broader weakness in the life science applications.
This was partially offset by double-digit growth in our advanced surgery applications, which saw high levels of demand for minimum invasive surgical technologies as well as our new product sales from the launch of our next-generation insufflator.
For the full year, reported sales in this segment grew by 20% and saw an organic decline of 2% with revenue strength in advanced surgery being offset by declines in DNA sequencing and the end of life for surgical display products as well as some general weakness in the life science applications. This segment saw a book-to-bill of 1.05 in the fourth quarter, and core bookings grew 60% year-over-year.
For the full year, the book-to-bill was 0.98. As already mentioned, advanced surgery applications had a book-to-bill of 1.14 as we continue to see customers placing large orders for new product launches scheduled for 2025. This strong result was partially offset by continued weakness in our precision medicine business line, we saw a book-to-bill below one.
Design wins in the segment nearly tripled year-over-year in the fourth quarter driven by solid wins in Advanced Surgery business. The vitality index in the Sigma was above 20% of sales in the fourth quarter and on the full year.
Adjusted gross margin in this segment decreased roughly 500 basis points year-over-year in the fourth quarter, driven by a higher mix of revenue for our Motion Solutions acquisition and lower factory utilization in our Manchester facility caused by the before mentioned production stoppage of our products in the DNA sequencing market.
Excluding Motion Solutions, gross margins in the quarter decreased by approximately 280 basis points. And for the full year, adjusted gross margins declined roughly 160 basis points, but excluding the impact of Motion Solutions increased 130 basis points, mainly driven by the margin improvements in our Advanced Surgery business.
Now turning to guidance. We saw strong growth in our medical business and confidently reconfirm our outlook for $50 million of incremental new product sales in 2025. As mentioned in the past calls, the majority of these new products are targeting surgical equipment sales at the hospital operating rooms and surgical centers.
And although capital spending in industrial and semiconductor remains depressed in capital spending in life science and bioprocessing markets are volatile due to the evolving geopolitical environment impacting trade and government spending, we continue to see demand gradually improving. However, due to the volatility in customers' ordering behavior from these ever-changing policy decisions and associated retaliatory trade actions we would characterize our full year outlook as cautiously optimistic.
We are extremely confident in our ability to successfully launch new products into a strong demand environment for their specific application areas. This gives us confidence in delivering $50 million of incremental revenue from these products in 2025, which is the basis for our full year revenue outlook. Our full year forecast presumes capital spending in industrial semiconductors, life science and bioprocessing remains volatile and deferred.
Effectively, we are pursuing disruptions in line with the first quarter news cycle caused by tariffs and retaliatory trade actions such as China blacklisting of certain OEM customers. We are also incorporating for our outlook for long macroeconomic weakness in Europe and China, demand pressures with the US federal spending cuts, including the US National Institute of Health and overall customer order volatility in line with what we experienced in January and February.
However, despite these dynamics, there are still strong signs of growth solely recovery in these end markets. After experiencing a three-year recession in capital spending in industrial and semiconductor markets, customers are leaning in on new product launches and investments are gradually improving. We see good demand already from robotics and automation applications and some short-cycle semiconductor and industrial applications.
Furthermore, we continue to see excellent strength in our medical business for hospitals, specifically operating room surgical centers and critical care units. Patient volumes and hospital spending remain strong at upper single-digit growth despite creating a solid backdrop for our new product launches in this space, some of which are already contributing to our near-term financial performance.
So given these early positive signs, we are more optimistic of a better year in our end markets, but we believe it is prudent to be conservative with our initial full year 2025 guidance and to the growth trends strengthened enough to eliminate the risks associated with volatility. Therefore, our full year revenue guidance is based on delivering $50 million of incremental new product sales or 5% growth overall Novanta.
And so starting with the full year of 2025, we now expect GAAP revenue to be approximately $1 billion, which represents the overall revenue growth of approximately 5% just mentioned. For adjusted gross margins, we expect to deliver 100 basis points of margin expansion for the total company versus the full year results of 2024, which is approximately 47% to 47.5%.
We expect to continue to lean heavily on the Novanta growth system to drive strong operating results even in a difficult environment. We've demonstrated our ability to do this in 2024 and 2023, and we believe we have continued momentum to achieve this again in 2025.
We expect R&D and SG&A expenses for the full year to be approximately 29% of sales or between $285 million and $290 million, which is a similar percent of sales as to what they were in 2024. Depreciation expense should be approximately $17 million for the full year. Stock compensation expense should be approximately $28 million for the full year. For adjusted EBITDA for the full year 2025, we expect it to be between $225 million and $235 million or approximately a 23% EBITDA margin.
Interest expense, which was nearly $32 million in 2024 is expected to be roughly $24 million for the full year 2025. The lower interest expense year-over-year is driven by debt paydown and the current levels of market interest rates. This does not assume any future debt drawdown from potential acquisitions.
We expect our non-GAAP tax rate to be around 22% to 23% for the full year 2025. This guidance includes our current view of jurisdictional mix of pretax income, an increase in geographical tax rates and the impact of OECD Pillar 2 global minimum tax rates. Diluted weighted average shares outstanding will be approximately $36 million for the full year 2025 adjusted diluted earnings per share -- we expect approximately $3.35 and $3.55. This represents growth of 9% to 15% year-over-year.
Finally, we expect cash flows to demonstrate solid growth for the full year of 2025, and we expect to achieve a cash conversion rate greater than 100% of non-GAAP net income and a cash flow to EBITDA conversion at similar ratios or greater than we witnessed in 2024. As an acquisition compounder, Novanta's cash flow growth is essential component of this strategy.
Two years ago, we changed the compensation plans on our teams to incentivize cash flow compounding while training the entire manufacturing teams on NGS. And the last two years have seen the rewards of that change. Through the deployment of NGS and by maintaining these compensation incentives, we expect to maintain and even accelerate our progress here establishing a terrific foundation to deploy that capital towards acquisitions.
Moving now to guidance for the first quarter of 2025. We expect GAAP revenue in the range of $232 million and $236 million, which represents revenue growth of flat to plus 2%. The volatility in the market place from trade war actions, US government spending cuts, particularly at the NIH, China blacklisting certain OEM customers and other geopolitical disruptions is causing customers to be conservative and increases the volatility of their ordering and shipments.
Therefore, while customer sentiment has been improving, these factors had a significant impact on the near-term ordering and shipping a product, and therefore, we feel prudent to guide conservatively. At the segment level, in the first quarter, we expect Automation Enabling Technology segment revenue to grow low to mid-single-digit percent year-over-year driven by continued growth in robotics and automation category, offset by continued weakness in precision manufacturing.
Our Medical Solutions segment is expected to show flat to low single-digit growth as the ramp-up of new products in advanced surgery is mostly offset by continued weakness in precision medicine, where our customers are now being impacted by uncertainties surrounding the US and NIH funding and China retaliatory trade actions.
Moving on to adjusted gross margin. For the first quarter, we expect to be approximately 46% to 46.5%. As a reminder, our margins are typically lower in the first quarter due to seasonality of some expenses. In this segment, we expect gross margins to be flat to down for the automation enabling technologies due to normal seasonality, whereas we expect Medical Solutions to be flat to up as the segment sees better factory utilization than was witnessed in the fourth quarter.
We expect R&D and SG&A expenses in the first quarter to be $70 million to $71 million; depreciation expense of $4 million, stock compensation expense at $8 million. For adjusted EBITDA in the first quarter, we expect a range of $48 million to $51 million. Interest expense will be approximately $6 million in the first quarter, and we expect our non-GAAP tax rate to be 22% in the first quarter.
Higher tax rate is the increases in geographical tax rates, particularly in Europe and Pillar 2 changes and jurisdictional mix of income. For adjusted diluted earnings per share, we expect a range of $0.63 to $0.71. While we expect First quarter cash flows to be somewhat low due to timing of incentive compensation payments, equity compensation vesting events and the timing of seasonal tax payments. We also expect cash flow to strengthen as the year progresses, putting us in a great position to accelerate our acquisition strategy.
As always, this guidance does not assume any significant changes in foreign exchange rates as seen in the fourth quarter, FX markets had more volatility due in part to some of the geopolitical and trade policy dynamics. And so while it's difficult to predict the trend of exchange rates month-to-month may have a more meaningful impact on our reported revenue results than we have experienced in the recent past. Finally, our guidance does not include any anticipated acquisitions at this time.
In summary, we remain optimistic about our long-term growth prospects, and we continue to work diligently to support our customers with their successful launches in multiple new platforms. The long-term secular growth outlook of our end markets remains intact, and we feel we're well positioned to see 5% sales growth in 2025 on the strength of new product launches with more potential upside that depends on the resiliency of our customers and their end markets.
As a company, we are confident in our long-term strategy and the fundamentals of the business remains strong. We are pleased with the team's deeper adoption of the Novanta Growth System operating model, which is giving us the ability to consistently execute and deliver on our promises and as evidenced by the solid results in the fourth quarter and the full year 2024.
As a company remain focused on controlling what we can control and executing with excellence on our top priorities for 2025, no matter the business environment brings us. This concludes the prepared remarks.
I will now open the call up for questions.

Question and Answer Session

Operator

(Operator Instructions) Lee Jagoda, CJS Securities.

Lee Jagoda

So I guess just starting with the outlook versus the outlook you gave in November, there were some items that were not in the $50 million of new products and sort of not macro related that were expected to be resolved in 2025. And I guess, in particular, the DNA sequencing piece of the equation.
Could you comment on the DNA sequencing product lines and the issues that you faced and when we should expect the recovery there? And then if there's anything else like that maybe not explicitly being included in the guidance that could be a positive outside of the macro.

Matthijs Glastra

Yes. Thanks, Lee. Let me try to take this. Well, first off, in the short term, in the DNA sequencing were -- I mean, shipments are more or less normalized again. But obviously, this area has been substantially in the news and life sciences in general.
So what has changed, of course, is the funding cuts in the National Institute of Health, which is driving, let's say, research funding, which is actually an important end customer of our customers, right? So that's a change.
And customers are cautious, not fully knowing what that environment will bring them. And then, of course, there is some retaliatory responses as a result of tit-for-tat behavior as a result of trade policies that recently just got enacted -- all of these elements were, of course, not in our previous guidance.
And to be honest, have substantially changed the volatility and short-term uncertainty. I would also say maybe midterm DNA sequencing headwinds should be considered higher given that some of the elements could be more prolonged in that market. So those -- that's maybe the major drivers of the changes versus the last fall.

Lee Jagoda

Okay. And then, I guess, looking even further ahead because I might as well do that. If I look out to 2026, and I think about what's embedded in your guidance in '25 in terms of $50 million of new products. I think you've said previously that $50 million number because of the timing of the sell-in should at least be maintained, if not potentially grow over the next couple of years.
So if I take that as sort of a baseline assuming that's correct and then layer in the macro environment, either stabilizing or potentially improving. All of that to say, like, should we see accelerating organic growth in 2026 versus 2025 sitting here today?

Matthijs Glastra

Yes. I mean we remain very confident and consistent about the growth driver driven by innovation, right? So as we stated before, we're reconfirming the $50 million which we refill in this environment should say a lot about our ability to control our destiny there and the demand over -- for our innovation. So let's start with that.
Secondly, it's the first year of launch of these products. And therefore, the momentum around the demand for these products with our customers will only increase over time. So therefore, just on the back of that, we expect that new product revenue of this same base to increase.
Secondly, not any significant part of the future growth will be driven by the consumables part in the Advanced Surgery business. And as we're booking to a large extent, the capital goods piece of that business as systems of our customers are starting to get placed and introduce the procedure growth rate will go up, and therefore, the consumable parts of the business will compound in a not insignificant matter for the rest of the decade.
Third, we will launch additional new products that are not in the $50 million. We commented that we expect at least 50% more new products over the 15 that we've introduced last year to be introduced in 2025. The contribution of those products in the revenue is still modest, but you can, of course, expect that contribution to compound over the next years as well.
So in short, the answer to your question is yes, we expect the innovation and new product side to be a more significant impact to your growth going forward.

Operator

Brian Drab, William Blair.

Brian Drab

I wanted to first -- just wanted to first just clarify, make sure I heard this correctly. On the EUV and DUV side, I think that you talked about getting some initial orders for subsystem product. Is that expected to materially increase your content with your customer there?
And is that something that is going to be pretty broadly rolled out over their existing installed base? Or is it in new products? And how does the timing of that revenue look throughout the year?

Matthijs Glastra

Yes, Brian. Thanks for the question. Well, we're excited that we're starting to ramp this product or this product category rather. Yes, it's an intelligent subsystem. And yes, it will increase the content with -- in this particular category with this particular customer set.
And it will be the first year of ramp and it will be more geared towards the second half of the year, which is what we thought what would happen, but it's good to see that confirmed. We're resolving a major set of issues for this customer set and therefore, the value that we bring to their customers is actually quite significant.
So I won't go into, I think, further detail because it will then start to breach some, I think, confidentiality agreements that we have -- but it's fair to say that, yes, we and our customers are excited about it. The impact of these -- those launch is part of the $50 million and we expect the contribution of that, of course, to grow in the coming years because we're just only starting to ramp in the latter part of this year. And then there is further opportunity to further expand content and expand scope and reach, but I'd rather not comment on that at this stage, but it looks promising.

Brian Drab

Okay. And then you commented again in the prepared remarks on Humanoids. And I wasn't sure if I was taking notes here, if you made a comment on orders picking up broadly? Or did you specifically say with humanoid these saw orders picking up in the fourth quarter and into January and February? So can you just clarify that?
And then can you elaborate on how that business is building. Is this really a revenue-generating business for you maybe 2025, 2026.

Matthijs Glastra

Yes. I mean the humanoid category is still small, but it's growing rapidly. I would just argue that what trying to message here is that we're getting a lot of questions like, hey, why are you growing robotics and automation, whereas the overall market seems to be more subdued.
And our answer is we're more geared towards specialty robotics, in high-performance robotics high-precision robotics that include surgical robotics, obviously, but also warehouse automation and humanoids, right? And as a result, of course, rapid advances in Gen AI, there's things possible in these precision robotics categories that will drive further adoption.
Now it's too early to say that this category will become a prevalent category in the world, and therefore, for Novanta's, let's say, portfolio. But it's fair to say, and this is why we're commenting on it, it's a testament to the incredible capability of Novanta's technology that is recognized by the majority of the humanoid players in terms of incredibly precise small form factor, high-power density extremely complex embedded safety, which is all incredibly important in these type of applications, and we're uniquely positioned to actually sell multiple products whether it's servo drives, whether it's actually for store expensing, whether it's the compacting coders all of which provide a sense of touch and precision motion at low latency that are an act.
That's why we're commenting on it because we do see demand there. Long term, I think on humanoid, let's kind of wait and see how the application evolves. But so far, we're working with all the key leaders.

Operator

Rob Mason, Baird.

Rob Mason

I wanted to -- you already touched Matthijs, just on EUV, EUV is probably more second half weighted, but just at a high level, around the $50 million of incremental revenue. I mean -- can you give us any help on just how we should think on cadencing. I don't know maybe even first half, second half, just around the contribution from that overall $50 million.

Matthijs Glastra

Yes. I mean let me start in and just give a high-level answer, and then Robert can provide more specifics. And when we -- as you would expect, you see the Crexendo, of course, increasing as the year progresses. So every quarter will get steadily better, right?
And as I also said, there's the launches -- I mean a large chunk is focused on the hospital and surgical center market, very robust market. So there's a lot of pool for the product, but there's, of course, also some timing of when, what, which OEM will launch, what products. Some of them are soft launches and it will becoming full launch kind of in the middle of the year.
Some of them are already launched and are starting to ramp right? So there's all these dynamics. But I think the upside is it's a gradually but very steadily increasing momentum throughout the year, quarter-over-quarter. Anything else?

Robert Buckley

Yes, I would say by the time you get to the third quarter, you're probably in the high single digit and then low double digit in the fourth quarter type of revenue, and that's consistent with the ramp of predominantly the insufflators and the pumps and then a little bit in the fourth quarter, you're picking up some semiconductor new product revenue as well.

Rob Mason

I see. Okay. And then just last quarter, we talked about some early signs in the short-cycle businesses picking up some of the electronics area, some of the precision manufacturing. I'm just around those early green shoots that you saw in the third quarter, how did those sustain or move around, I guess, as you've entered 2025 and -- I guess, the fourth quarter as well? Any update there?

Robert Buckley

Yes. I would say they are sustaining. They were still up strongly in the fourth quarter. They've sustained that growth for what we could see at least for the first half, bookings have come in to cover demand. for the first half around that.
So there are some positive signs like that right now that are holding that momentum forward. So I think it does get back to like we're trying to be prudent with the guidance here given the volatility of orders and shipments with people's disturbances around all the geopolitical changes that are occurring.
But I think for the most part, at the same time, we're seeing demand starting to fill in, and we're seeing that short-cycle business remains strong, and we're seeing the NPIs accelerate. And so there's more positives than there are negatives, but there's a new cycle that's very difficult to ignore.

Rob Mason

Sure. Just last question. Matthijs, you sound reasonably optimistic around actionability on M&A this year, pipeline sounds fairly robust as well. You just as you think about the opportunity set and understanding these opportunities are just episodic in the way that they play out. How are you thinking about your comfort level upper levels around leverage and just what you would be willing to commit to.

Matthijs Glastra

Yes. Well, first of all, I mean, if you're a cynic, to say, well, you were confident last so what happened. And I would just say, listen, we have multiple active conversations. We're actually very excited about them, but it doesn't mean we should just jump on any opportunity. We remain very disciplined on price. And some of the timing of these discussions where we don't want to have time be the determining factor -- so let me just start with that.
So a lot of these conversations are still ongoing. So that's one, and there is actually multiple news at it. We feel the overall environment for M&A is very supportive, is improving, and we see more and more assets coming on the market as well as founders and private owners becoming -- we're willing to have conversations.
That's not dissimilar from what we've seen when there is a lot of macro uncertainty, particularly for a prolonged period of time, that's actually the moment when people are becoming more willing to have conversations. We saw that with Brexit, for example.
We saw that with the previous trade wars, et cetera. So that, I would just say, provides -- all of that provides the support from our comments that we're very confident and excited about it while remaining disciplined on price and returns.
Then, of course, where we're looking and what type of spaces we're looking at wouldn't be a surprise that it just assures our strategy to either in secular markets that we're excited about, whether it's health care, particularly given the environment that is robust as well as intelligent subsystems or when possible, find consumables that have a high IP component.
So that's kind of the direction, and that's where kind of the majority of the conversations are happening, embedded software is part of that, too. So those are aspects that we're pushing. In terms of leverage, I mean, I think we've been very consistent about that. But Robert, you can reiterate or sort of comment on that.

Robert Buckley

Yes. I would say we don't have an interest in putting the company in a levered position. So we have been pretty consistent about that, saying below three times. You look at it on a net basis, we're 1.4 right now. So I think we're in a fairly good position to do what we want to do and more meaningful acquisitions within the bandwidth and within the scope of our parameters.
And I do reiterate what Matthijs said, we're focused on the returns. There are attractive returns out there. Most of the deals we pursue are proprietary in nature as a consequence, they're less predictable on closing because they're not run in some sort of process. And so -- but at the same time, we're going to make sure we do the right things and compound the cash flows of this business in the right way without putting any sort of jeopardy of risk, undue risk onto the business.

Operator

Brian Drab, William Blair.

Brian Drab

Just a question -- last quarter, there was a discussion of, I guess, a minor pause in your sales into robotic surgery with one customer. And I'm just wondering if you could comment on is that resolved. And then also, can you just talk about -- are you seeing continued diversification of your revenue into robotic surgery across a broader customer base at this point?

Robert Buckley

So the first is the shipments into the robotic surgery space have been resolved. They're back to normal in January. And so -- and there's no disruptions there. So we feel pretty good about the position there. Obviously, we've increased our content with that customer and done fairly well.
In terms of diversifying with additional players, it really comes down to the success of those additional players. We've been designed into a multitude OEMs. For a long period of time. They just haven't shipped with the volumes to be meaningful with one or two exceptions. And so it really comes down ultimately to their own commercial success in the marketplace.
We continue to work with a large variety of customers in that marketplace. We continue to be optimistic that there will be additional robotic plays in the hospital environment and into different modalities. It could be orthopedics, it could be into spine, it could be into neurological. It could be a number of different application areas, and we feel good about being a participant in all those areas that they begin to grow.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Matthijs Glastra for any closing remarks.

Matthijs Glastra

Thank you, operator. And so to recap, we're proud of the progress we've made in 2024 with strong operating performance, core gross margin expansion, adjusted EBITDA growth, record cash flow and a return to organic growth in the fourth quarter. Our new product ramps are on track for 2025, and we've reorganized the skill better organically and through acquisitions, our top leadership and strengthened our talent pool. I'm incredibly proud of our team's achievements.
Looking ahead, we remain focused on the three top priorities for 2025. First, ramp or all our planned new products and achieve our new product sales growth; second, further expand our margins and cash flow using the Novanta Growth System and finally, acquire additional companies that fit our strategy at attractive returns.
Despite the global macro dynamics, the Novanta remains extremely well positioned in the medical and advanced industrial end markets with diversified exposure to long-term secular macro trends in precision manufacturing, robotics and automation, Precision Mat is in an advanced surgery.
We feel that our winning strategy and our deployment of the Novanta Growth System to continuously improve our company operations. This what drives our performance no matter the environment. In closing, as always, I would like to thank our customers, our employees and our shareholders for their ongoing support.
I continue to be specifically grateful for the continued and persistent efforts of all Novanta employees who work together every day to take on new challenges and strive 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 -- for the first quarter of 2025 earnings call. Sorry. Thank you very much. This call is now adjourned.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.