Bruker Corporation (NASDAQ:BRKR) Q3 2023 Earnings Call Transcript

Bruker Corporation (NASDAQ:BRKR) Q3 2023 Earnings Call Transcript November 3, 2023

Operator: Greetings, ladies and gentlemen. Thank you for attending today’s conference call. I would now like to turn the call over to Justin Ward, Head of Investor Relations. Please go ahead.

Justin Ward: Thank you and good morning. I would like to welcome everyone to Bruker Corporation’s third quarter 2023 earnings conference call. My name is Justin Ward and I am Bruker’s Senior Director of Investor Relations and Corporate Development. Joining me on today’s call are Frank Laukien, our President and CEO; Mark Munch, President of the Bruker Nano Group and Corporate Executive Vice President; and Gerald Herman, our Executive Vice President and CFO. In addition to the earnings release we issued earlier today, during today’s conference call, we will be referencing a slide presentation that can be downloaded from the Events & Presentations section of Bruker’s Investor Relations website. During today’s call, we will be highlighting non-GAAP financial information.

Reconciliations of our non-GAAP to GAAP financial measures are included in our earnings release and are posted on our website at ir.bruker.com. Before we begin, I would like to reference Bruker’s Safe Harbor statement, which is shown on Slide 2 of the presentation. During this conference call, we will be making forward-looking statements regarding future events and the financial and operational performance of the company that involve risks and uncertainties, including those related to geopolitical risks and wars as well as to supply chain logistics and inflation. The company’s actual results may differ materially from such statements. Factors that might cause such differences include, but are not limited to, those discussed in today’s earnings release and in our Form 10-K for the period ending December 31, 2022, as updated by other SEC filings, which are available on our website and on the SEC’s website.

Also, please note that the following information is based on current business conditions and to our outlook as of today, November 2, 2023. We do not intend to update our forward-looking statements based on new information, future events or for other reasons, except as maybe required by law, prior to the release of our fourth quarter 2023 financial results expected in early February 2024. You should not rely on these forward-looking statements as necessarily representing our views or outlook as of any date after today. We will begin today’s call with Frank providing an overview of our business progress. Gerald will then cover the financials for the third quarter and the first 9 months of 2023 in more detail and share our updated fiscal year 2023 financial outlook.

Now, I’d like to turn the call over to Bruker’s CEO, Frank Laukien.

Frank Laukien: Thank you, Justin and good morning everyone. Thank you for joining us on today’s third quarter 2023 earnings call. In the third quarter, Bruker has continued to deliver excellent revenue growth with three consecutive quarters of double-digit organic revenue growth year-to-date. For the fourth quarter of ‘23, we anticipate high single-digit organic revenue growth, which puts us on track for 3 years of double-digit organic revenue growth in 2021 to 2023. In the first 9 months of 2023, we have demonstrated great resilience in difficult market conditions with what we believe is industry leading organic revenue growth of 13.9% and non-GAAP EPS growth of 17.5% year-to-date. Given our strong year-to-date financial results, solid backlog and positive outlook for the fourth quarter, we are raising our organic revenue growth guidance for fiscal year 2023 again, this time by 150 bps at the midpoint.

We are pleased to report solid financial results in the third quarter of 2023. We attribute this resiliency to our innovation strategy, which yields products and solutions with unique capabilities as well as to our differentiated portfolio, which is now resulting from our ongoing Project Accelerate 2.0 transformation. These core elements of our strategy are to a significant extent shielding us from the present demand weakness, for example, in COVID testing, CROs, biopharma, bioprocessing, etcetera. We remain positive about demand for Bruker Scientific Instruments and Life Science Solutions, which gives us confidence in the fourth quarter and also for continued solid growth in 2024. In fiscal year 2023, we have accelerated our investments in our transformative Project Accelerate 2.0 initiatives as well as in operational excellence and productivity.

We are making further investments in recently acquired growth drivers in single cell biology. And my colleague, Mark will talk about that as well as in previously acquired proteomics consumables, proteomics drug discovery services, neuroscience research tools, applied solutions and scientific software. Right. Let’s get to it. Turning to Slide 4 now. In the third quarter of 2023, Bruker delivered another good quarter with excellent organic growth of 10.9% and non-GAAP EPS growth of 12.1% and year-over-year. Bruker’s third quarter ‘23 reported revenues increased 16.3% year-over-year to $742.8 million, which included an FX tailwind of 3.3%. On an organic basis, revenues increased 10.9%, which included 10.9% organic growth in our Bruker Scientific Instruments, BSI segment and 10.2% at BEST, net of intercompany eliminations, while growth from acquisitions added 2.1%.

This implies constant exchange rate growth of 13.0% year-over-year. Our third quarter ‘23 non-GAAP operating margin was 20.0%, which is a good level for our third quarter, albeit a decrease of 240 bps year-over-year compared to a very strong operating profit margin in the third quarter of 2022. In the third quarter of ‘23, Bruker reported GAAP diluted EPS of $0.60 compared to $0.59 in the third quarter of ‘22. On a non-GAAP basis third quarter ‘23 diluted EPS was $0.74, up 12.1% from $0.66 in Q3 ‘22. This had a $0.05 tax tailwind pretty much exactly offsetting a minus $0.05 currency headwind in the quarter. Gerald will discuss the drivers of margins and EPS later in more detail. Moving to the first 9 months on Slide 5, you can see Bruker’s strong performance and excellent execution in the first 9 months of 2023 with industry leading organic revenue growth of 13.9% and non-GAAP EPS growth of 17.5%.

More specifically, our first 9 months of 2023 revenues increased by 15.8% to $2.11 billion. On an organic basis, first 9 months revenues grew 13.9% year-over-year, consisting of 14.0% organic revenue growth in Scientific Instruments and 12.8% organic growth at BEST, net of intercompany eliminations. First 9 months 2023 order bookings for BSI grew in the upper mid single-digits year-over-year organically, driven by Bruker BioSpin and CALID. Also, our BSI book-to-bill ratio year-to-date remained above 1.0 and our backlog at the end of the third quarter remains strong and elevated in fact. Our first 9 months 2023 non-GAAP gross and operating margin and GAAP and non-GAAP EPS performance are all summarized on Slide 5. And you can see the strong non-GAAP EPS growth of 17.5% despite a $0.14 headwind from currency.

Our trailing 12 months return on invested capital, a non-GAAP measure was 23.2%, a metric that highlights our differentiated Bruker management process and focus on disciplined entrepreneurialism and organic growth supplemented by selected attractive acquisitions. Please turn to Slide 6 and 7, where we highlight the year-to-date third quarter ‘23 performance of our three scientific instruments groups and of our BEST segment, all on a constant currency and year-over-year basis. Year-to-date, the BioSpin Group revenue was $541 million and grew in the high single-digit percentage This included revenue from just 1 gigahertz class NMR so far this year and namely in Q3 ‘23. And for comparison, we also had one in Q3 of ‘22. In the fourth quarter of ‘23, we expect to book revenue on 1 or 2 gigahertz-class NMRs, by the way.

In the 9 months – in the first 9 months of 2023, Bruker saw growth across biopharma, academic and government markets, industrial research and applied markets as well as in the new integrated data solutions software division with its SciY scientific and lab software platform, something that’s relatively new to Bruker. Right. First 9 months of 2023, our CALID Group had revenue of $703 million and growth in the high-teens percentage with strong growth in life science mass spectrometry driven by the timsTOF platform and aftermarket business as well as strong growth in our applied mass spec business and the optics infrared near infrared Raman business. Our optics business – in our optics business, we know two recent tender wins, very nice for eventually over 250 so-called DE-tector explosive trace detectors for the Frankfurt and Zurich airports, both of which were explained in recent press releases.

At ASMS this year, we launched the timsTOF Ultra and at the HUPO Congress in Korea in September, we announced further advances in timsTOF methods, consumables and software for this next-generation unbiased high fidelity four-dimensional, 4D proteomics and 4D multiomics that’s quite unique on the timsTOF platform and very advantageous. Microbiology and infectious disease revenue was up slightly as solid demand for the MALDI Biotyper consumables was offset by a final drop of our modest COVID-19 molecular diagnostics revenue to now near zero. Please turn to Slide 7 now. Year-to-date, Bruker Nano revenue was $673 million and grew in the low-20s percentage with strong revenue growth across end markets, including ACA/GOV, industrial semiconductor metrology.

Revenues at advanced x-ray and Nano surface tools all delivered strong revenue growth in the first 9 months. Life science fluorescence microscopy was up on product innovation and now includes a strong contribution also from our fourth quarter ‘22 acquisition of the Inscopix neuroscience research tools. Finally, year-to-date ‘23, BEST revenues grew in the mid-teens percentage net of intercompany eliminations, driven by share gains and superconductor demand by our MRI OEM customers as well as from revenue growth in Advanced Technologies for big science, fusion research and key extreme UV, EUV semiconductor technologies for semiconductor lithography tools by other large OEM customers, again, often driven by strong growth in AI demand. Right.

Moving to Slides 8 and 9. I’ll take a pause, and we highlight the new Bruker Cellular Analysis business. And I’m delighted to take – hand this part over to Dr. Mark Munch, our Bruker Nano Group Presidents who drove the PhenomeX acquisition now renamed to Bruker Cellular Analysis and Mark now resetting the strategy and rightsizing the business. Over to you, Mark.

Mark Munch: Thank you, Frank. We’re excited about our acquisition of PhenomeX, this new business. As Frank mentioned, we now call Bruker Cellular Analysis, perfectly fits our Project Accelerate 2.0 initiative. PhenomeX was a Q1 2023 merger of Berkley Lights and IsoPlexis which brought together 2 unique and valuable platforms: the Beacon OptoFluidics platform and the ISOSpark platform. Together, these technologies address rapidly growing market segments in antibody discovery, cell line development, cell therapy and gene therapy, amongst others. This helps also our Project Accelerate 2.0 initiative and expanding our footprint in translational research, clinical research and biopharma. It is also complementary to our Bruker Cellular Analysis and [indiscernible] Tools.

For example, our Canopy Sellscape tool, which is an important tool for spatial biology as well as examining phenotypes and cell suspensions. And so this brings a lot of opportunity for commercial synergies. Moving to Slide 9, just to give some financial details on the acquisition PhenomeX was acquired for $122 million, which included a $14 million bridge loans, which therefore was an attractive valuation of roughly 2x revenue. We closed this transaction on October 2, 2023, and immediately started our work on rightsizing the business and optimizing cost structures, which is mostly going to happen here in Q4 2023. Initial run-rate is expected for the business to be greater than $60 million per year, given the strong attractive potential of the market segments that I spoke of and that we address with this.

Many of these segments are somewhat new to Bruker, and so we’re excited about that. And as mentioned, we see cross-selling opportunities with our existing spatial biology and cellar analysis tools. In terms of Bruker non-GAAP EPS impact, we anticipate $0.12 dilutive to Q4 2023, a one quarter significant impact as we work through the rapid rightsizing and cost structure optimization. And being slightly dilutive for 2024 and accretive by 2026, and we expect long-term double-digit ROIC. We encourage you to visit the links shown here to help get familiar with these businesses. We are very excited about the potential here in these very valuable technology platforms. Thank you, Frank. Back to you. .

Frank Laukien: Thank you very much, Mark. Yes, these links are actually has a really cool website. I would highly recommend that if you have a few minutes, I think it’s very informative. So thank you, Mark. We’re excited about this attractive acquisition of a leading single cell biology business, with key technologies for all the reasons that Mark explained well done. So in summary, Bruker is on track for its third year in a row of double-digit organic revenue growth and solid EPS growth even as we have accelerated our investments in the Project Accelerate 2.0 transformation as well as in operational excellence in capacity and productivity. Our dual strategy is working exceedingly well right now. So Bruker’s strong growth is the result of a fundamental commitment to innovating and high-value solutions for customers as well as the result of our ongoing portfolio transformation.

Our technology and biological applications leadership in many areas, combined with world-class execution via our Bruker management process position us well for continued outperformance. As in other years, we expect to give fiscal year ‘24 guidance when we report Q4 ‘23 financial results, so will be in early February. However, please note that we expect to deliver solid organic growth also in 2024, and we remain on track for our medium-term 2026 targets, which we issued at our June ‘23 Investor Day. So with that, let me turn the call over to our Chief Financial Officer, Gerald Herman, who will review our financial performance and our updated fiscal ‘23 outlook – outlook in much more detail, Gerald.

Gerald Herman: Thank you, Frank, and thank you, everyone, for joining us today. I’m pleased to provide some more detail on Bruker’s third quarter and the first 9 months of 2023’s financial performance starting on Slide 11 and – in the third quarter of 2023, Bruker’s reported revenue increased 16.3% to $742 million, which reflects an organic revenue increase of 10.9% year-over-year. We reported GAAP EPS of $0.60 per share compared to $0.59 in the third quarter of 2022. On a non-GAAP basis, Q3 2023 EPS was $0.74 per share, an increase of 12.1% from the $0.66 we posted in the third quarter of ‘22. Gross margin performance was down 50 basis points year-over-year in the third quarter of ‘23, negatively impacted by 100 basis points foreign exchange headwind and partially offset by organic and acquisition gross margin improvement by 50 basis points.

Our third quarter 2023 non-GAAP operating income increased 3.6% and while our non-GAAP operating margin decreased 240 basis points year-over-year to 20.0%, impacted by foreign exchange and acquisition headwinds as well as a challenging comparison from the strong Q3 of ‘22. We finished the third quarter with cash, cash equivalents and short-term investments of approximately $364 million. During the third quarter, we used cash to fund selected project Accelerate 2.0 investments, acquisitions of approximately $120 million and share repurchases of about $80 million in the third quarter. On October 2, we closed the acquisition of PhenomeX, which I’ll discuss later. We generated $44.1 million of operating cash flow in the third quarter of 2023.

Our capital expenditure investments were $26.9 million, resulting in free cash flow of $17.2 million in the third quarter of ‘23. This compares with operating cash flow of $69.5 million and free cash flow of $11.8 million in the third quarter of ‘22. Slide 12 shows the revenue bridge for the third quarter of ‘23, as Frank has reviewed earlier. Compared to the third quarter of ‘22, BioSpin’s third quarter ‘23 organic revenue was up high single digits. Both Q3 2022 and ‘23 had 1 gigahertz class NMR in revenue. We expect revenue from 1 or 2 gigahertz class NMRs in the fourth quarter ‘23 similar to the fourth quarter of ‘22. Nano organic revenue grew in the mid-teens percentage range, driven by strength in Nano’s industrial research, AI-driven semiconductor and advanced packaging metrology as well as academic markets.

CALID organic revenue grew high single-digit percentage with strong performance by our microbiology business. We delivered solid growth in the third quarter of ‘23 in BSI systems and aftermarket revenue with low teen’s percentage organic growth in systems and high single-digit organic growth in aftermarket. Geographically and on an organic basis in the third quarter of ‘23, our Americas revenue grew in the low single-digit percentage, Asia-Pacific revenue grew in the teens percentage range, while European revenue had low-teens percentage growth all year-over-year. For our EMEA region, third quarter ‘23 revenue was up mid-20% year-over-year. Slide 13 shows our third quarter ‘23 P&L performance on a non-GAAP basis. Non-GAAP gross margin of 52.7% decreased 50 basis points from the 53.2% in the third quarter of ‘22, impacted by 100 basis points of foreign exchange headwinds, partially offset by organic and acquisition-related gross margin improvements of 50 basis points.

The third quarter of 2023 non-GAAP operating margin of 20.0% was 240 basis points lower than the 22.4% margin we posted in the third quarter of ‘22, as we were impacted by foreign exchange and acquisition headwinds to margins and faced a difficult comparison from our strong third quarter ‘22 operating margin. For the third quarter of ‘23, our non-GAAP effective tax rate was 23.8% compared to 30.4% in the third quarter of ‘22, driven mostly by favorable jurisdictional mix. Weighted average diluted shares outstanding in the third quarter of ‘23 were $147.3 million, a reduction of 1.3 million shares or 0.9% from the third quarter of ‘22, resulting from our share repurchases over the trailing 12 months. Finally, third quarter 2023 non-GAAP EPS of $0.74 was up 12.1% compared to the third quarter of ‘22 and with a $0.05 tailwind from a favorable tax rate, offsetting a $0.05 foreign exchange headwind.

Slide 14 shows the year-over-year revenue bridge for the first 9 months of 2023. Revenue was up $288 million or 15.8%, reflecting organic revenue growth of 13.9%. The – Acquisitions added 2% to our top line, while foreign exchange was a 0.1% headwind, resulting in constant currency revenue growth of 15.9% year-over-year. Frank already covered the drivers for the first 9 months. Non-GAAP P&L results for the first 9 months of ‘23 are summarized on Slide 15, with the drivers largely similar to the third quarter of ‘23, and as explained on the slide. Turning now to Slide 16. In the first 9 months of 2023, we generated $144.6 million of operating cash flow, up about $42 million over the first 9 months of ‘22 on higher profitability and favorable other items.

We generated $69 million of free cash flow over the first 9 months of ‘23, up about $61 million over the first 9 months of ‘22 on higher operating cash flow and lower capital expenditures. Turning now to Slide 18. Given our strong year-to-date results, solid backlog and positive outlook for the fourth quarter, we’re again increasing our revenue guidance for the year. Our updated outlook for fiscal year 2023 includes raising our revenue guidance to a range of $2.88 billion to $2.91 billion. This implies organic revenue growth of 11.5% to 12.5% year-over-year, an increase of 150 basis points from the midpoint of our prior guidance. And by now, up 300 basis points from the initial fiscal year ‘23 guidance we gave in early February. We now expect foreign currency to be about neutral to revenue for the year and acquisitions contributions of about 2.5% to our revenue growth.

This leads to reported and constant currency revenue growth guidance in a range of 14% to 15%. Our operating margins in 2023, we now expect organic operating margin improvement of about 100 basis points, which is up from our prior expectation of 50 basis points. For non-GAAP operating margins, all in, we now expect a 150 basis point decline from the prior year due to a 250 basis points combined headwind from foreign exchange and acquisitions, now also including the cellular analysis business we acquired as of October 2, 2023. As previously discussed, we’re rapidly rightsizing the cellular analysis business with most cost actions expected in the fourth quarter of 2023, such that the cellular analysis business is expected to be only slightly dilutive during 2024 and accretive to non-GAAP EPS by 2026.

As you just heard from Mark, we believe that over time, Cellular Analysis could be another high ROIC business for Bruker. Cellular Analysis accelerates our entry into important biologics in cell and gene therapy tool markets, leveraging its differentiated research solutions with high revenue growth and margin potential. On the bottom line, excluding the new Cellular Analysis business, we’re actually increasing our estimated non-GAAP EPS guidance to a range of $2.60 to $2.65, which implies 11% to 13% year-over-year growth or up $0.05 from our prior guidance range of $2.55 to $2.60 for fiscal year 2023. In the fourth quarter of 2023, we expect Cellular Analysis to be about $0.12 dilutive to non-GAAP EPS as we work through rightsizing the business.

Accordingly, we overall expect non-GAAP EPS to be in the range of $2.48 to $2.53, down $0.07 compared to our prior guidance, including that acquisition. Our guidance assumptions – other guidance assumptions are listed on the slide. Our full year 2023 ranges have been updated for foreign currency rates as of September 30, 2023. Finally, at our Investor Day in June of 2023, I shared financial targets for the medium-term fiscal year 2026 outlook for Bruker. Our year-to-date 2023 financial performance and positive outlook for Q4 gives me confidence to reconfirm today our commitment to those targets, including solid growth for 2024. So to wrap up, Bruker delivered excellent organic revenue growth and strong EPS growth in the quarter and for the first 9 months of 2023.

And we remain confident in our fiscal year ‘23 outlook and beyond. With that, I’d like to turn the call over to Justin to start the Q&A session. Thank you very much.

Justin Ward: Thank you, Gerald. I’d now like to turn the call over to the operator to begin the Q&A portion of the call. [Operator Instructions] Operator, we are ready for the Q&A. Thank you.

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Q&A Session

Operator: [Operator Instructions] The first question comes from the line of Puneet Souda with Leerink Partners. Your line is now open.

Puneet Souda: Sure. Yes. So I was just saying congrats on a very strong quarter here versus the backdrop of industry and peers. So that’s really great to see. Just wanted to clarify a question that we’re getting here on the BSI book-to-bill year-to-date that you provided. But based on the mid-single-digit growth in bookings versus the sort of double-digit – high single-digit growth you had in the prior two quarters for bookings. Just wanted to check if the book-to-bill was lower in first – I mean, in the third quarter here? And just given, Frank, what you’re seeing in the end markets and in China, obviously, nervousness out there in the market. Could you maybe just help us frame is it still fair to think about 6% to 8% growth, the longer-term growth algorithm for 2024 as well?

Frank Laukien: Yes. Happy to do so, Puneet, we’re not giving ‘24 guidance, we’ve signaled solid organic revenue growth for next year. We will give guidance when we obviously give guidance. Anyway. So it is correct. In Q3, there was some weakness in bookings in China and in Japan. The rest of the world, which, of course, included Americas and Europe and so on, was fairly strong. And so our book-to-bill in Q3 was below 1 as we expected. year-to-date, it is about 1. Remember, in China, we have this unusual effect more than perhaps other peers that we had very strong Q1 bookings. We believe some of that was truly incremental as some big ticket items got funded that normally might struggle to get funding. But some of it was also pulled forward.

And so we have a bit of an uneven order pattern in China, but there is also weakness in China right now. And in Q3, we saw that in China and Japan. So book-to-bill year-to-date is about 1 in – and we also have a very good forecast for bookings in Q4. So we think we will maintain the book-to-bill of around 1 for the year. And our backlog always comes down a little bit in Q3 before our typically strong Q4. You’ve heard the outlook of high single-digit organic revenue growth and good bookings for Q4, so we will still be at a very significantly elevated backlog. Keep in mind, I know you like the term backlog conversion, but those are customer orders, that’s real demand, so anyway, we will still have a very, very healthy and extended backlog that will take us, in fact, a few years to work down going into ‘24.

I hope that addressed most of your or all of your questions.

Puneet Souda: Yes, absolutely, Frank. I appreciate it. And if I could follow-up, I mean, congrats on the PhenomeX and the Cell Analysis business. definitely attractive longer-term. But could you just talk a little bit about how you see that high-end capital equipment positioned within Bruker? You have significant experience with selling high-end equipment to both research and now with the Cell Analysis you’ll be positioning well into pharma. So maybe could you talk a little bit high level about that? And if I may just sneak in one on timsTOF, any changes in customer order behaviors or dynamics given the demos of a potential competitive high-res instrument ongoing in the market right now? Thank you.

Frank Laukien: Yes. So we love selling instruments. We have very innovative instruments. We keep them refreshed also in our core, which our core is really doing well as well, not only the Project Accelerate initiatives. The Beacon is another high-end instrument, the 1 that we just acquired with Cellular Analysis but it really depends if you’re addressing key markets in better, faster and antibody development or maybe antibody developments that without a tool like this, we just can’t develop very well by the traditional ways of doing it. And of course, for important markets, I know there is a bit of a weakness right now in biologics and cell and gene therapy, but we’re very happy to accelerate our push into those markets.