Good morning. My name is Nicole, and I will be your conference operator today. At this time, I would like to welcome everyone to the Novanta Incorporated 2017 Q2 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. [Operator Instructions] It is now my pleasure to hand the conference over to Mr. Robert Buckley, Chief Financial Officer. Please go ahead, sir.

Thank you, Nicole. Good morning, and welcome to Novanta’s Second Quarter 2017 Earnings Conference Call. I’m Robert Buckley, Chief Financial Officer of Novanta, and with me on today’s call is Chief Executive Officer, Matthijs Glastra. If you’ve not received a copy of our press release issued earlier 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. 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 this morning and also those in our SEC filings. We may make some comments today, both in our prepared remarks and in 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 today. 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 today’s forward-looking statements as representing our views as of any date after today. During this call, we’ll 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’ll provide reconciliations promptly on the Investor Relations section of our website. I’m now pleased to introduce Chief Executive Officer of Novanta, Matthijs Glastra.

Thank you, Robert. Good morning, everybody, and welcome to our call. Novanta delivered a record second quarter, beating both our revenue and profit guidance. Our company delivered $119 million in revenue, representing 22% year-over-year reported revenue growth and 7.4% year-over-year organic revenue growth. In addition, we expanded our EBITDA margins year-over-year by 380 basis points to 21.5% of sales. Adjusted EBITDA was $25.6 million, which is up nearly 50% versus last year. Our adjusted earnings per share was $0.41, which was up 52% from $0.27 in the second quarter of 2016. In the quarter, we continued to see broad-based growth momentum across the company, with all three operating segments demonstrating double-digit year-over-year reported revenue growth. Bookings performance was solid with a book-to-bill of 1.13 for the quarter. We believe that the strength of our team, our robust business model of providing proprietary, mission-critical functionality in diversified end markets and our increasing exposure to medical markets are serving us well. You will hear more details on the quarter and the outlook for the year from Robert, but the strong first half results give us confidence to raise our full year 2017 outlook. We continue to make good progress on our strategic priorities. Year-to-date, our design wins increased by more than 40% year-over-year in dollars and number of design wins, while new product revenue increased by over 30% year-over-year. Our revenue year-to-date from China increased by more than 20% versus last year as we continue to expand our direct sales force in that region. We believe these indicators support our medium-term organic growth guidance of 5% to 7%. As we’ve announced before, we closed the WOM acquisition on July 3. This acquisition significantly advances our long-term strategy of expanding our presence in medical markets with a market-leading business in the minimally invasive…

Thank you, Matthijs, and good morning, everyone. We delivered $119 million in revenues in the second quarter of 2017, an increase of 22% on a reported basis. The net effect of acquisitions resulted in an increase in revenue of $15.4 million or 15.8%, whereas foreign exchange rates adversely impacted our revenue by negative $1.3 million or 1.3% in the second quarter of 2017. Consequently, organic growth was up 7.4% compared to the second quarter of 2016. Second quarter 2017 GAAP gross profit was $53.5 million or 44.9% of sales. This compares to $41.5 million or 42.5% gross margin in the second quarter of 2016. Included in gross profit for the second quarter of 2017 was the impact of $1.7 million or 1.4% of sales of amortization of purchased developed technologies and inventory fair value adjustments associated with the acquired businesses. On a non-GAAP basis, second quarter 2017 adjusted gross profit was nearly $55.2 million or 46.3% of sales compared to approximately $42.5 million or 43.5% in the second quarter of 2016. The increase in gross margins year-over-year was driven by higher revenues and more favorable mix of higher-margin products. R&D expenses were $9 million or 7.6% of sales versus $8 million or 8.2% of sales in the prior year. SG&A expenses were $23.9 million or 20% of sales. This compared to $20.2 million or nearly 21% of sales in the second quarter of 2016. While SG&A expenses as a percentage of sales declined, the SG&A dollars increased, primarily due to acquisitions and higher variable compensation expense associated with better financial performance. GAAP operating income was $15.6 million in the quarter compared to $7.6 million in the second quarter of 2016, whereas non-GAAP operating income was $22.2 million or 18.7% of sales compared to $14.3 million or 14.7% of sales in…

[Operator Instructions] Your first question comes from the line of Lee Jagoda with CJS Securities.

Hi good morning and good quarter.

Good morning, Lee.

Hi Lee.

So if I look at R&D spend, you're saying it's going to be higher in the back half. We've kind of looked at it for a while saying it was supposed to be around 9% and you never quite can spend enough, which, I guess, is a good thing. If I look at where the additional spend is going to be targeted, can you talk about some of the end markets you're going after or some of the new products you're looking at?

Yes I, good morning Lee. So thanks for the question. Yes I commented in my prepared remarks that one of the areas we're accelerating investments in is in the Celera Motion business or the Precision Motion business, which as I noted has been performing in a stellar way. That is driven by trends in automation and need for precise motion control in both medical markets or surgical robotics as well as advanced industrial automation-related markets. So we're excited about the prospects in that business. We're also investing more on the RFID side, given on the back of the acquisitions that we’ve made. And Laser Quantum is doing really well, and we’ll continue to invest in that business for future growth. So those are a few areas. But as we commented, we’re very pleased with the momentum across the company. And so we’re looking at R&D investments, engineering investments as well as sales investments in those areas where we see growth.

Okay. And then with regards to Laser Quantum, can you talk about the percent of that business that's currently tied to DNA sequencing today and then potential opportunities you see outside that market for Laser Quantum, specifically?

Yes. We're not splitting out the percentage, but it's a large chunk of their business, as you know. It's more than 50%. We're actively looking to invest and that's one of those investment areas outside the DNA sequencing area to accelerate growth there. And mind you, the business outside DNA sequencing and Laser Quantum has been growing very nicely as well just that the DNA sequencing growing at market and business has been growing much faster right? So it's almost like a luxury problem there. But yes, the reason why we bought the business is that we're bullish for - on their potential across many applications and yes you will see us over time in clinical analysis and other markets you will see us make some strides there.

Okay. And then again on Laser Quantum, it looks like based on your first six months results, you're on more of a run rate to be at $37 million of annual revenue versus the $25 million estimate when you consolidated the entity. Is there a lumpiness related to that that would hold back the run rate from continuing in the back half?

Yes. We did disclose in the Q that it did for the first six months around $18.6 million, which would definitely put them above the forecast that we initially gave on that business. And so yes, there’s an expectation that they’re going to be beating that. But one of the things I will say is that the first half of the year, they’re seeing a significant ramp-up as a consequence of one of their customers launching a new product platform. And so there will be a little lumpiness as a consequence of that. The typical process would be more product being built for that ramp-up and then will start to level off thereafter.

So should that continue with a similar rate in Q3 and then drop off in Q4? Or how should we think about it?

I wouldn't expect this business to be dropping off organically anytime soon. So in terms of the rate of growth rate, that will certainly slow from 100% right? So it's not going to correct itself. But I think - it won’t be as strong – it’s fair to say it won’t be as strong in the fourth quarter as it was in the first half.

Okay. I was more thinking about it in dollars on a sequential basis.

Yes.

So next, turning to the NDS business, it’s been a turnaround. And can you give us an update on where the profitability stands there? And over the next 12 to 18 months, where you could see that profitability going compared to sort of corporate average?

Yes. We’re more or less breakeven in that business and we show year-over-year organic growth. So we’re very pleased with that. So it’s a net profit and revenue contributor to the company. I think more importantly, they continue to win design wins with 4K displays and wireless solutions, differentiated proprietary technologies that they have and we’ve invested in over the last two, three years. So we’re seeing fruits of our labor with those technologies. Medical market adoption is slower than, let’s say, consumer electronics, but it’s steady, and we’re pleased with what we’re seeing. So we don’t think this business is going to be a drag anymore for the company.

Okay. One last one for me. You mentioned Cambridge Technology was held back a little bit in the quarter by some delays in, I guess, product. Can you quantify that? And has that been fixed and should we expect that in Q3?

Yes. So what I've said was material shortages as we - particularly around a product that I mentioned, the Lightning II Plus. The reception and the adoption of that product and market demand has been stronger than we expected. So our supply chain was kind of put on the back foot a little bit. And but we've resolved most of those shortages right now. And we're entering the third quarter with a record backlog, so yes we think this business will be returning to mid- to high single-digit growth in the second half.

Got it, that’s all from me. Thanks very much guys.

Great.

And there are no further audio questions. I would now like to hand the conference back to Mr. Matthijs Glastra for closing remarks.

Thank you, operator. So to summarize, it's a great time to be part of Novanta. Our focus on accelerating profitable growth was truly evident in our strong financial results this quarter and in our outlook. The diversity and strength of our businesses have served us well, and I'm proud of the execution by our team. We're well on our way now in executing on our 2020 strategic direction to double the company in revenue to $750 million with 20% EBITDA margin, growing organically 5% to 7% with market leadership positions in our businesses while generating more than 50% of the revenue from medical markets. Our growth strategy is focused on multiple growth drivers. We have leading positions in growth markets. We're expanding in served markets through innovation and disciplined M&A with focus on expanding our medical presence. We are achieving deeper market penetration globally through a stronger and larger sales force, and all of this while maintaining our commitment through disciplined execution and continuous improvement. In closing, I would like to thank our customers and our employees and our shareholders for their ongoing support. 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 in our third quarter earnings call. And thank you very much. And this call is now adjourned.

This does conclude today's conference call. We thank you for your participation and ask that you please disconnect your lines.