Novanta Inc. (NOVT) Q3 2021 Earnings Report, Transcript and Summary

Good morning. My name is Andrea, and I will be your conference operator today. At this time, I would like to welcome everyone to the Novanta 2021 Third Quarter 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.

Thank you very much. Good morning, and welcome to Novanta's Third Quarter 2021 Earnings Conference Call. I am Ray Nash, Corporate Finance Leader of Novanta. With me on today's call is our Chairperson 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 Chairperson and Chief Executive Officer of Novanta, Matthijs Glastra.

Thank you, Ray. Good morning, everybody, and thanks for joining our call. Novanta delivered another exceptional quarter. In the third quarter of 2021, we delivered above our expectations for revenue, bookings and profit. We again hit new all-time highs for revenue and bookings with excellent operating performance. And in addition, we were very pleased to close the ATI acquisition and the newly rebranded IMS acquisition in the quarter, both of which exceeded our expectations for the third quarter. Those two businesses are a great strategic fit for Novanta, and we are excited to have their teams and product offerings as part of the Novanta family. Speaking in more detail through our third quarter results, our company delivered approximately $178 million in revenue, representing 24% year-over-year revenue growth on a reported basis and 15% growth on an organic basis. This is the highest ever single quarter sales for Novanta due to exceptional execution by our teams hence the contribution of our new acquisitions in a difficult environment. In addition, in the third quarter, we had an excellent operating performance with adjusted EBITDA of $40 million, which is up 34% year-over-year. This represents an EBITDA margin of nearly 23% of sales, which is up 160 basis points year-over-year. We are extremely pleased with and proud of how our teams drove exceptional operating performance using the Novanta growth system tools despite widely reported supply chain challenges, which I'll speak to in a moment. Adjusted diluted earnings per share was $0.75, which is up 79% versus 2020. So all-in-all, very strong results. We saw another quarter of record-breaking bookings in the third quarter with sequential bookings growth of 2% versus a very strong second quarter and year-over-year bookings growth of 84% versus the third quarter of 2020. We saw strong demand across all our segments with each segment having a positive book-to-bill in the quarter. In the third quarter, our overall book-to-bill was 1.32. We saw very healthy orders in many of our advanced industrial applications as well as most medical applications. Before moving on to other operating results, let me take a moment to talk about the global supply chain dynamics and how they're impacting Novanta. The shortages and other disruptions that we commented on last quarter have increased in magnitude and impact during the third quarter and have challenged our ability to meet customer demand within promised lead times. In addition, we saw a major factory disruption at one of our manufacturing sites during the third quarter, which Robert will comment on in more detail in a few moments. However, despite these challenges, our teams delivered record results. And I could not be more proud of and impressed by the tireless and committed efforts of all of our team members throughout the organization who have again stepped up to deal with these supply issues and to fight hard to keep our customers happy. Now let's turn to what we're seeing in our markets, where continued strength in industrial and microelectronics is now joined by strong performance in medical. In the third quarter of 2021, 53% of Novanta's total sales went into medical applications. Overall sales to medical applications grew 21% versus the third quarter of 2020 and grew 7% sequentially. During the quarter, we saw a very healthy pickup in orders and shipments to many of our medical OEM customers with particular strength in surgical robotics and DNA sequencing, both of which nearly doubled in sales year ever. Despite the strength, we see minimally invasive surgical procedures still at approximately 90% of pre-pandemic levels due to the effects of the Delta variant, particularly in the U.S. We expect that medical sales and minimally invasive surgery procedures to continue to grow as we finish the year, barring any further setbacks in the global recovery from the virus. Novanta sales to advanced industrial applications were 47% of total sales in the third quarter, and our sales continued to rebound across multiple application areas with sequential growth of 5% and year-over-year growth of 28%. Within this area, we're seeing excellent growth in industrial automation and robotic applications, which saw 23% growth year-over-year. We also continued to experience higher demand specific to microelectronics investments in 5G and high-speed networking and cloud-based infrastructure as well as higher demand from EUV-based applications. We expect the increased microelectronics demand to be sustained through the end of 2021 and well into 2022. From a regional perspective, we saw strong demand across all major geographies in the quarter. We continue to see very strong growth from China, where sales grew 28% year-over-year. Sales in Europe grew 20% and sales in the United States grew 27% year-over-year. Now let me touch on some of Novanta's strategic growth metrics. Design wins in the third quarter were double the prior year with multiple design wins in most of our businesses. We saw another major win in our minimally invasive surgery business this time expanding our addressable market into arthroscopy pumps, which is in line with the growth strategy we've spoken to the past few years. We continue to have more customer project demand than forecasted in this area. We are adding R&D resources to help execute these opportunities and expect the impact of these wins and investments to start to impact our sales over the next 2 to 3 years. We also saw strong design wins in our Photonics and Precision Motion businesses in high-growth application areas such as surgical robotics, laser additive manufacturing, micro-machining and electric vehicle battery welding. Our vitality index, which is revenue from new products launched in the last 4 years, continues to be healthy at above 25% of sales for the third quarter, with new product sales growing over 30% year-over-year. We continue to invest in our innovation pipeline with terrific results. And for our NPI launches, year-to-date, we've launched 11 new products. And let me highlight one of the products launched in the third quarter, which is called Encoder Core. This product comes from our Precision Motion segment. It is a new variety of an inductive encoder, which is a type of a high-precision position sensor. The Encoder Core is very lightweight and compact specifically designed to be easy to install and activate inside the OEM system. This new product will be very beneficial for applications such as surgical and industrial robotics, and is well suited for robotic systems of the future, which are required to be more compact, but also weightless. As far our previously stated ambition to launch 25 products this year, we now expect we will fall short of this goal with five of the launches shifting into the first half of 2022. This change in timing is driven by supply chain shortages and related delays at our customers. However, we do not see any material effect on the long-term growth trajectory of the company as a result of these delays. Next, I'd like to give a brief update on the ATI and IMS acquisitions. As previously announced, these transactions closed at the end of August, and we are actively working through the integration of both businesses. We could not be more pleased about the high level of engagement of the ATI and IMS teams. These are both fantastic businesses, which are an excellent strategic addition to Novanta, expanding our positions in high-growth markets. The businesses are progressing very well with strong post-pandemic tailwinds in robotics and automation demand. As a reminder, ATI develops, manufactures and sells robotic changing systems, 4-stroke sensors and collision sensors for the industrial, collaborative and medical robotic application space. Their focus on robotic applications has positioned them to win in the marketplace with strong long-term secular tailwinds driven by continued penetration of new automation and robotics technologies. They offer proprietary intellectual property and unmatched expertise in their target applications, giving Novanta a significant foothold to allow us to expand content with our existing customers while also serving new customers and applications. As one example of their reason of success, the ATI team is winning multiple electric vehicle production lines this year and was recently informed that their 4-stroke sensor has been endorsed as a preferred technology solution by FANUC, a leading robotic OEM. And even after these two excellent transactions, acquisitions continue to be the primary focus of Novanta's capital deployment and we continue to work on an active pipeline of opportunities. So in summary, our third quarter was exciting and challenging with record sales and bookings and excellent operating results despite some significant disruptions in our supply chain and factory operations. Despite the short-term challenges, we feel very good about the rest of the year and again raising our guidance for the year. We also continue to feel good about our long-term strategic positioning in both medical and industrial applications with long-term secular trends in robotics and automation, health care productivity and precision medicine. So with that, I will turn the call over to Robert to provide more details on our operations and financial performance. Robert?

Thank you, Matthijs, and good morning, everyone. Matthijs discussed our revenue, so I'll start today by giving some additional details about the company results. Our third quarter non-GAAP adjusted gross profit was $80.3 million or 45% adjusted gross margin compared to $61.9 million or 43% adjusted gross margin in the third quarter of 2020. In the third quarter, adjusted gross margins increased 190 basis points year-over-year. The strong results comes as a result of ongoing work from our operating teams to drive the Novanta growth system deeper in our day-to-day work, allowing the factories to better leverage their costs and drive productivity. This improvement came in spite of the significant supply chain challenges and unexpected factory disruption in our Taunton optics facility, which resulted in a production stoppage. In relation to the Taunton facility, we have an aging infrastructure issue that caused our production in that facility to go down in the quarter. We have estimated the costs associated with this disruption at approximately 100 basis points to the overall Novanta gross margins. While production is now back up and running, we continue to expect to experience some additional costs impacting us in the fourth quarter. However, as we mentioned in the prior calls, we have made a more than $10 million capital investment in our new Taunton production facility. The keys to that facility were handed over to us last week. And we are preparing for a phased production move, which is expected to be completed by the end of the second quarter. In the meantime, we continue to make significant improvements in our existing production processes to minimize and mitigate future disruptions. In addition to the Taunton disruption and similar to other -- what other companies are reporting, we continue to experience disruptions in our supply chain. The overall impact of these supply chain constraints resulted in Novanta shipping less product than we had anticipated, and obviously below our customers' expectations. The overall impact of the Taunton disruptions the supply chain shortages had a negative impact to revenue in the mid-single-digit range. Despite this, we delivered more than 15% organic growth in the quarter, net of these reductions, and none of those sales were lost as they were rescheduled for future dates. While the disruptions continue to grow, we continue to find new ways to mitigate and minimize the impact to the company and our customers. That being said, we expect this theme to continue to stay with us through the next few quarters. Moving on, the third quarter R&D expenses were $17.5 million or roughly 10% of sales. And third quarter SG&A expenses were $31 million or 17.6% of sales. This quarter, R&D and SG&A expenses were artificially low on a dollar basis and as a percent of sales due to the partial quarter of the two acquisitions. Therefore, we're expecting a step-up in the fourth quarter related to having both acquisitions included for the full quarter. Adjusted EBITDA was $40 million in the third quarter of 2021 or 23% EBITDA margin. Our adjusted EBITDA performance beat our expectations and our previously issued guidance, mainly driven by the higher sales volume flowing through the profit and some effect from the partial quarter of operating expenses from the ATI acquisition. On the tax front, our non-GAAP tax rate for the third quarter of 2021 was 10%. This differed from the statutory rate driven mainly by jurisdictional mix of income, along with a significant windfall benefit from equity compensation. On a non-GAAP basis, adjusted earnings per share was $0.75 in the quarter compared to $0.42 in the third quarter of 2020, an increase of 79% year-over-year. The favorable results in our adjusted EPS were driven again by strong profit from higher sales and a more favorable tax rate versus the prior year. Third quarter operating cash flow was nearly $14 million, which was in line with our expectations. As a reminder, the third quarter operating cash flow was lower than we normally experienced because of two factors. The first was an $8 million earn-out associated with our Zettlex acquisition from a few years ago, which was paid out of operating cash flows versus financing cash flows. And the second reason was caused by the ATI and IMS acquisitions, where the income earned in the quarter from those deals did not yet generate the corresponding cash. The later issue is due to the timing of the transactions. We expect operating cash flow to normalize in the fourth quarter. In addition, CapEx was $6 million in the third quarter as a result of the progress in our new optics manufacturing facility in Taunton, United Kingdom. This new facility is the replacement manufacturing plant for the site that experienced the production line down issue, as we just discussed. Finally, in the quarter, we borrowed an additional $280 million on our revolving credit facility to close the 2 transactions. Since the deals were closed, we were able to use our cash balances to help start to pay down the debt by $20 million in the quarter, which resulted in ending the third quarter closed at $451 million and a net debt of $348 million. I will now turn to an update on the performance of the operating segments. Starting with the Photonics segment for the third quarter of 2021 our revenue was up 19% year-over-year were down 11% sequentially, despite the strong year-over-year performance the Photonics segment was hit hard by both the Taunton factory disruption and supply chain shortages. The sequential decline in revenue and gross margin was nearly all caused by the Taunton factor disruption. Despite the challenges the business continues to experience unprecedented customer demand in various industrial applications and DNA sequencing. Bookings were up 91% year-over-year and the book-to-bill ratio was 1.46 in the third quarter. In addition new product revenues stayed strong greater than 25% of sales in the third quarter and total NPI sales were up 47% year-over-year. Design wins were doubled year-over-year driven by excellent platform wins in applications such as laser additive manufacturing, e-mobility battery welding via hole drilling and micro-machining. Turning to the precision motion segment, this segment experienced 77% year-over-year revenue growth and approximately 37% sequential growth in the quarter. This was heavily impacted by the new acquisitions. In the third quarter these businesses contributed $11 million of sales, which represents the partial quarter and this beat our initial expectations. We're really cannot be happy with the potential lease businesses that tells the teams and the new product opportunities that they help bring Novanta excluding the acquisitions precision motion still grew an impressive 43% year-over-year. And booking more than double of the year-over-year excluding the impact of the acquisitions. The book-to-bill ratio on this segment was 1.22 in the quarter. Precision motion new product revenue doubled and was over 20% of sales for the segment. Design win activity in this segment also doubled year-over-year and was up 60% on year-to-date basis. And finally this segment saw more than 80% growth year-over-year from it's customers in China. Combined with the strong margin and profit performance it's fair to say the precision motion segment is having a fantastic year so far. Finally turning to the vision segment, this segment predominantly serves the medical end-market and experience revenue growth of plus 2% year-over-year in-line with the expectations of the business given the difficult comparisons the prior year. As Matthijs mentioned, the volume of elective surgical procedures remained below due to pre-pandemic levels following the spike of the Delta variant virus across the world. The deferral procedures is expected to continue to impact our revenue 2021 despite the significant uptick in design win activities. However, the vision segments saw bookings growth up 43% year-over-year and a book-to-bill of 1.30. The vitality index in this segment remained above 30% of sales with new products being a key driver of the resilience we've been seeing in this business. Design win activities were especially good in the quarter more than doubled the amount of activities from the prior year. As the business closed on some significant wins with several large medial OEM customers. This is a huge accomplishment and further solidifies the exciting growth prospects this segment has over the next several years. Turning to guidance, as we look at the fourth quarter, we continue to see strong demand from the advanced industrial sector with capital spending continuing a strong recovery. The medical sector is also recovering, although it is still somewhat dampered by the lingering effects of the pandemic. With the strong bookings and backlog progress, it remains very clear that our #1 challenge for the rest of 2021 would be with our supply chain disruptions caused by material shortages and third-party logistics constraints. We expect the increased complexity and challenges we experienced in the third quarter to continue into the fourth quarter. And we are using all resources and tools to minimize the impact on our customers and our expectations. While we expect this headwind to continue, we feel we have a solid visibility to again raise our full year guidance. Starting with revenue. For the fourth quarter of 2021. As we stand here today, we expect GAAP revenue in the range of $185 million to $195 million. For the full year 2021, this translates into GAAP revenue in the range of $693 million to $703 million. We are expecting to see year-over-year 25% to 32% revenue growth in the fourth quarter. This revenue range takes into account demand for our products, which remains strong as well as continued supply chain and logistics disruptions as we see them today. Energy disruptions currently affecting China and known disruptions with our customer production processes from their own supply chain challenges. In addition, the range also factors in some of the rescheduled demand from the third quarter, which we spoke too earlier. We expect continued strength with bookings, although we anticipate book-to-bill will gradually normalize. On a segment level, in the fourth quarter, we expect continued strong double-digit growth in Photonics, somewhere in the mid- to high teens organic growth range. The Precision Motion segment will have a significant growth driven by the continued strength of the core business as well as a full quarter of the acquisitions. As a consequence, we expect sales to be approximately 2x the prior year on a dollar basis. Finally, we expect our vision segment to see low to mid single-digit growth on a year-over-year basis, driven by continued strength in life sciences and in vitro diagnostics as well as gradual progress in our surgical sales. Moving on to adjusted gross margin. We expect gross margins in the fourth quarter to continue to hold at approximately 45% gross margins. Gross margins are impacted by the acquisitions with combined gross margins in the fourth quarter is slightly below the company average and from the higher costs associated with the Taunton production facility disruptions. Both issues are temporary in nature. Gross margins for the full year 2021 are expected to be between 45% and 45.5%, representing over a 150 basis point improvement over 2020. R&D will increase in the third quarter to approximately $19 million to $21 million in the fourth quarter, mainly as a consequence of having a full quarter of the acquisitions as well as timing of some project spend on our key NPI programs. SG&A expenses in the fourth quarter will be approximately $34 million to $35 million, again driven by a full quarter of the acquisitions. Depreciation expense in the fourth quarter will be in-line with the third quarter levels, at slightly more than $3 million, and stock compensation expense will be approximately $5 million in the fourth quarter. Amortization expense, which was $8 million in the third quarter, will be higher at nearly $10 million in the fourth quarter as a result of the newly acquired intangibles from the acquisitions. For adjusted EBITDA in the fourth quarter, we expect a range of $37 million to $41 million. For the full year of 2021, we expect adjusted EBITDA to be in the range of $147 million to $151 million. Interest expense, which was about $1.7 million in the third quarter will be approximately $3 million in the fourth quarter as a result of the higher average debt balances from the acquisitions. We expect our non-GAAP tax rate to be around 19%, absent significant changes in jurisdictional mix of income and other variability of our eligible tax benefits. The increase in the tax rate from the current quarter is the consequence of not expecting any stock-based compensation windfall benefit because there are no expected vesting events taking place in the period. Diluted weighted average shares outstanding will be approximately 36 million shares. For adjusted diluted earnings per share, we expect a range of $0.60 to $0.67 in the fourth quarter, translating in $2.55 to $2.62 for the full year of 2021. Finally, we're expecting operating cash flows in the fourth quarter to return to prior period ratios to EBITDA despite the significant investments in inventory and the continued investments in our Taunton-based operations. As always, this guidance does not assume any significant impacts from foreign exchange rates. By all measures, 2021 is shaping up to be a record year for Novanta. We will achieve a record level of sales, adjusted EBITDA and adjusted earnings per share. We also experienced record level of bookings activities, design wins and new product revenues. And the teams are accomplishing this amidst some of the most significant pandemic-related challenges. Given all this, we feel great about the company position, our ability to sustain the progress. We remain very proud of the performance of our employees and their tireless efforts to help us be successful in a very challenging environment. And most importantly, we remain excited about the future and look forward to continuing to deliver on our commitments to our employees, our customers and our shareholders. This concludes the prepared remarks. We'll now open the call up for questions.

[Operator Instructions]. And our first question comes from Lee Jagoda of CJS Securities.

So I just want to focus in on the Photonics segment for starters. And I think in the prepared remarks, you said that the impact of the facility issue was mid-single digit in total for the company. Was that mid-single digit percentage of sales or single digit millions of dollars? And I guess the follow-up to that would be, in terms of the margin guidance you gave for the Photonics segment, assuming we're up and running, what are the other issues impacting the margin there, if anything?

Sure. Let me break that into two questions. So the comment on the impact to revenue to overall Novanta related to not only the Taunton facility production line down, but also the supply chain challenges and shortages that we're seeing. So I combine the two issues, because there really the Taunton facility only supplies internally for us, and so we consider that as part of the overall supply chain shortages. So the impact to organic growth was somewhere in the mid-single-digit range on a percent basis. So take that in that 4% to 7% type of territory. And that's a high number, I would say. It's a step-up from the second quarter. We're expecting something very similar to that in the fourth quarter. Your second question on gross margins. The gross margins in Photonics will effectively be flat from the third quarter to the fourth quarter. We don't have the line down event in the fourth quarter. But what we do have happening in the fourth quarter is the higher expense associated with keeping the production running. And then the second is that we now have the new Taunton facility done yet empty. And so we're carrying the redundant cost of that new facility or the old facilities, depending upon how you want to look at it into the fourth quarter. So that's going to take a few quarters in order to phase the production in without causing any sort of revenue disruptions. So while we pick up revenue, and you'll see revenue pick up in the Photonics segment, pretty substantially on a -- not only a year-over-year basis, but on a sequential basis, it doesn't correspond necessary to margin expansion because we're carrying that extra cost.

And once we get past Q2 of 2022...

That will help us pick up gross margin.

Yes. I would say -- so the old facility coming off line, coupled with the new facility coming online, versus what the business did before sort of in that high 40s range. Is it additive to gross margin there in the back half of '22?

It would effectively bring the gross margins back up to what we experienced in the first half of the year. That's not -- that's ignoring any kind of expansion that you'd get with volume, but it would effectively bring things back up in there. The new Taunton facility wasn't meant for margin expansion as much as it was to meet the demands and volume.

Got it. And then just shifting gears to the acquisitions, obviously, ahead of plan so far, which is great. If we think about those two acquisitions and their organic growth once things ramp under your ownership, versus the organic growth that you would have expected from the legacy core business, is it same, faster or slower?

Yes. Lee, this is Matthijs. So I think what we've commented on in the past is that we expect these businesses to grow mid- to high single digits, particularly the ATI business is, of course, benefiting from a post-pandemic tailwind of investments in robotics and automation. And that expands into general industry, but of course, also surgical robotics as well as electric vehicle production that, as we all know, is ramping very aggressively. So all these robots or automation solutions need the solutions of ATI and therefore, we expect ATI to show some very strong growth in the next coming years. And I would say the other acquisition, IMS is predominantly in the lab automation and general automation space. So the lab automation is probably a mid-single-digit-ish growth. So overall, we expect both acquisitions to strongly contribute to our growth profile.

[Operator Instructions]. And our next question will come from Brian Drab of William Blair.

The gross margin -- I just want to be clear on this. Robert, you said the cost of the factory being down, I think it was 100 basis points headwind in the third quarter. There's obviously a lot of other things going on. I just want to understand if you total up everything that was -- that you think of as temporary in the third quarter in terms of headwind to gross margin, what was the aggregate headwind?

Yes. So the reason why we kind of focused on the Taunton facility predominantly is because that was truly like a surprise temporary issue in nature. So the margin would have been a little above 46% overall for Novanta had that not occurred. The supply chain disruptions, we haven't characterized them as short term temporary, right? They've been something that we -- I think we've been very clear that we'll stay with us not only through the remainder of 2021, but into 2022, and is not expected to subside, at least in our forecast until at least the back half of the year. So that, I wouldn't characterize as necessarily a temporary impact. It is having less of an impact on margin, more of an impact on just deliveries themselves. We would be delivering higher revenue growth than, frankly, the 15% organic growth that we're reported in the third quarter and we had more supply of products. And you can see that the book-to-bill remains strong in the third quarter. It will again remain strong in the fourth quarter. And so it's really about fulfilling customer demand. At this point, we're going to exit 2021 with the highest level of backlog that we've ever had. And so that firms up commitments as we -- and production schedules for 2022, but we have to be cognizant that that's a consequence of not having all the material on hand and not delivering completely to customers' expectations.

Got it. Okay. And I'm sorry if you made some specific comments here that I missed. But can you just talk about the DNA sequencing business, the Laser Quantum business, and that, over the last couple of years has been somewhat choppy. And I'm just wondering as you -- I mean, obviously, the underlying theme is still very positive. Just as you're looking in the fourth quarter and into 2022, it seems like some of the major customers and that -- players in that business are growing very nicely. But how do you see your business. Is there some catch-up that needs to happen still in that business? Or are you going to grow with the industry? How does that dynamic play out as we go through the next several quarters?

Yes. Thanks, Brian. So this is Matthijs. Yes, we commented in our prepared remarks that the DNA sequencing is catching up to pre-pandemic levels with a very healthy outread and outlook for the full year. And in the third quarter, it doubled year-over-year in terms of revenues. And the drivers underneath are, of course, yes, there's a reopening of the research lab. So that is catching up demand, basically. And of course, in addition, is the sequencing of the COVID variants, right? And that's more driving near-term momentum, I would say. But more structural and I think long term, which is very encouraging, is that oncology testing is becoming the standard of care in therapy/with DNA sequencing. So you see DNA sequencing starting to be to get more into clinical applications. So moving from research to clinical, which is what we've always commented on. And that transition is gradual but pronounced. And so if you look in terms of our guide for fourth quarter, which is including this positive momentum, we expect 2022 to be a positive year. And despite all this, I think the penetration of DNA sequencing is still fairly low, right? So we remain, long term, very positive about DNA sequencing but you sometimes see some short-term choppiness because of individual quarter or customer dynamics. But again, long term, we see increasingly encouraging drivers there. And so -- and then in terms of last year where basically our sales was a bit decoupled from the sales to our main customers I think, right now, we've caught that up. So basically, the selling out, what you see in the market, more and more aligns with our revenue. Yes, so we'll just sell as much as our customer sales basically. So hopefully, that's helpful context.

Yes. Yes. Super helpful. And can I just ask too, as you're talking to your customers and the -- thinking of your vision customers in the surgical market, you mentioned 90% -- they were back to like 90% of pre-pandemic levels. What are they planning for? Do you have a sense of what they're planning for, for 2022 in terms of where that goes relative to pre-pandemic? Is this expectation that we're going to get back to pre-pandemic and above that in '22?

Yes. I mean, that's what they publicly are commenting on. So that actually -- so Q3 was kind of a pullback a little bit as a result of the Delta variant in the third quarter, particularly in the U.S., but people have publicly commented or these customers have publicly commented that the fourth quarter and beyond, we'll see sequential growth as hospitals continue to get better in dealing with both COVID cases and helping other patients. And so we commented in our prepared remarks that we see a gradual recovery. I mean, long term, there's a tremendous backlog of patients that need to be helped. And therefore, that backlog will have to get addressed and that will drive additional investments. So we are, again, very positive about the mid- to long-term outlook in this part of the business. Short term, there might be some choppiness for all the reasons that we know. But again, we're managing the business for the mid and the long term. And we're winning business. We're winning content in this growing application. And so yes, we couldn't be more excited than we're actually adding investments as a result.

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

Thank you, operator. So to summarize, Novanta's performance in the third quarter of 2021 was superb. We had all-time highs for sales and bookings, and we beat our own expectations for profit. We closed the two new acquisitions, which are performing very well, with strong engagement from the local teams. We saw another quarter of fantastic growth in design wins and our innovation programs are healthy and progressing despite some minor delays. And all of this came in despite remarkable disruptions in supply chain and logistics, which our teams are fighting hard to manage every day. We're excited to see the continued strength and recovery in the global economy in the advanced industrial sector and also in the medical sector, and Novanta is just very well positioned in these sectors with diversified exposure to long-term secular macro trends in robotics and automation, precision medicine, minimally invasive surgery and Industry 4.0. And in closing, I would like to thank again our customers, our employees and our shareholders for their ongoing support. I'm very grateful for a dedication and strong contribution of our teams of committed Novanta employees, particularly our supply chain and operations teams, who are working so hard to successfully mitigating shortages. And we appreciate your interest in the company and your participation in today's call, and I very much look forward to joining all of you in several months on our fourth quarter and full year 2021 earnings call. Thank you very much. This call is now adjourned.

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