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Executives

Valentin P. Gapontsev - Chairman and CEO

Timothy P.V. Mammen - VP and CFO

Angelo P. Lopresti - VP, Secretary, General Counsel

Analysts

Zach Larkin - Stephens Inc.

Patrick Newton - Stifel, Nicolaus & Company

Krish Sankar - Bank of America Merrill Lynch

Joe Maxa - Dougherty & Company

James Ricchiuti - Needham & Company

Avinash Kant - D.A. Davidson & Co.

Jagadish Iyer - Piper Jaffray

Mark Douglass - Longbow Research

Mark Miller - Noble Financial Capital Markets

Jiwon Lee - Sidoti & Co

Tom Lloyd Hayes - Thompson Research Group LLC

IPG Photonics Corporation (IPGP) Q4 2012 Earnings Conference Call February 15, 2013 10:00 AM ET

Operator

Good morning and welcome to IPG Photonics Fourth Quarter and Year-End 2012 Financial Results Conference Call. Today’s call is being recorded and webcast. There will be an opportunity for questions at the end of the call. (Operator Instructions)

At this time, I’d like to turn the call over to Mr. Angelo Lopresti, IPG’s Vice President, General Counsel and Secretary, for introductions. Please go ahead, sir.

Angelo P. Lopresti

Thank you and good morning, everyone. With us today is IPG Photonics Chairman and Chief Executive Officer, Dr. Valentin Gapontsev, and Vice President and Chief Financial Officer, Tim Mammen.

Statements made during the course of this conference call that discuss management’s or the Company’s intentions, expectations or predictions of the future are forward-looking statements. These forward-looking statements are subject to known and unknown risks and uncertainties that could cause the Company’s actual results to differ materially from those projected in such forward-looking statements.

These risks and uncertainties include those detailed in IPG Photonics Form 10-K for the year ended December 31, 2011 and other reports are filed with the Securities and Exchange Commission. Copies of these filings may be obtained by visiting the Investors section of IPG’s website at investor.ipgphotonics.com/sec.cfm or by contacting the Company directly. You may also find copies on the SEC’s website at www.sec.gov.

Any forward-looking statements made on this call are the Company’s expectations or predictions only as of today, February 15, 2013. The Company assumes no obligation to publicly release any updates or revisions to any such statements.

We will post these prepared remarks on our website following the completion of the call. Please go to www.ipgphotonics.com and select Investors to review these remarks.

I’ll now turn the call over to Dr. Gapontsev.

Valentin P. Gapontsev

Good morning, everyone. IPG delivered solid financial and operational performance in 2012, even with a weak macroeconomic environment in certain geographic regions. Our revenues increased 19% for the year and we grew our bottom-line by more than 23%. Today one thing is clear, the acceptance of fiber laser technology is growing at a steady pace. Fiber lasers have made a major impact on the world wide materials processing market. The reliability has been proven on multiple material processing applications at all power levels in production environments. After 10 years of deployment in the field and the delivery of more than 5,600 fiber lasers with more than 500-watts power. IPG has proved beyond doubt the market acceptance of this technology in a wide range of applications. The performance of fiber lasers substantially exceeds previous laser technologies while offering substantial cost benefit to users. We believe that fiber lasers have expanded the market for laser material processing.

As the demand for fiber lasers continues to grow, we’re ensuring that we have the manufacturing capacity in place to keep up with orders. We are the only fiber laser company that can deliver thousands of high power, pulsed and medium power lasers with very short lead times. Our ability to ramp up production of existing and new products rapidly in response to customer demand has been a strong competitive factor for IPG as other laser manufacturers trying to enter the space cannot match this ability.

Our focus in 2013 will be on maintaining profitable growth by expanding our product portfolio and entering new applications and geographies. To accomplish this goal, we are introducing many new products this year that enhance our ability to serve customer needs and expand the markets we serve. Some of these products were demonstrated at the Photonics West show earlier this month. There, we announced a new generation of Kilowatt class fiber lasers designed to further enhance IPG’s industry leading performance.

We developed these products based upon our experience from delivering thousands of kilowatt fiber lasers to customers over the last decade. The new generation provides better value to the customer, more reliability and performance with industry-leading warranty protection to back it up.

In addition, we have seeded many efforts in the last two years with the hope that they will become substantial growth opportunities for IPG. We are seeing an increase in quote activity for our fiber laser systems business. We are demonstrating our UV fiber laser to select customers and have even run application trials with these products that have been well received. Also, we are increasing the power of our green laser making it more attractive and competitive with non-fiber laser alternatives.

Further, we will be introducing new ultra short pulse lasers and megawatt scale fiber lasers. These products will be released in the coming quarters. New products to us mean new customers, new applications, new markets and new opportunities for expansion. Starting with a strong bookings month in January, this is a very exciting time for IPG.

With that, I’ll turn the call over to Tim Mammen, our Chief Financial Officer.

Timothy P.V. Mammen

Thank you, Valentin and good morning, everyone. I’ll start with a review of our end markets, products and geographic regions. After that, I’ll provide highlights from our income statements and balance sheet and close with our guidance.

Fourth quarter revenue grew 17% to $145 million from a $123.5 million a year-ago. Fourth quarter materials processing sales increased 14% year-over-year to $126.6 million, accounting for 87% of total sales during the quarter. Materials processing applications continue to be the dominant use of fiber lasers, primarily in automotive, general manufacturing and heavy industries.

Other applications which includes telecom, advanced and medical, accounted for the remaining 13% of sales. Revenue from these other applications increased 48% year-over-year to $18.4 million, primarily driven by increasing demand for advanced applications.

Sales of high power lasers, which accounted for 48% of total revenue, increased 10% year-over-year to $71 million. Much of the growth was driven by sales of lasers for cutting applications, closely followed by welding. We believe that the use of high power fiber lasers for cutting is capable of growing from where it now stands at more than 20% of the total laser source market to somewhere between 50% and 75% of the market during the next three to five years. This represents a significant opportunity for IPG.

Pulsed laser sales were $30.9 million, which accounted for 21% of total revenues and increased 11% compared with last year. Growth is being driven primarily by higher demand from the consumer electronics market and continued demand in general manufacturing. Sales of medium power lasers increased to $10.3 million, or by 29% year-over-year. Medium power fiber lasers are being used more regularly for fine processing applications such as to cut and weld thin materials. This market is another opportunity for us and has a high margin profile.

We continue to be optimistic about our QCW lasers. Sales for these lasers increased 59% during the quarter to $2.6 million compared with last year. Unit sales of these devices increased by 74%, QCW medium power lasers are used for fine welding as well as cutting and drilling of holes. High power QCW lasers are used for drilling of aerospace products and other metal processing.

Sales of lower-power lasers were up 17% year-over-year to $4.4 million due to increased sales from a large medical OEM. Sales of other products, which include amplifiers, diode lasers, green lasers, mid-IR lasers, integrated laser systems and certain components were $10.7 million. Service, parts, lease and other revenue including accessories, totaled $15.1 million.

Now looking at our Q4 performance by geography. European sales increased 5% year-over-year to $54.2 million. The economic outlook in Europe remains uncertain, but IPG has experienced a strong start to the year in that region during January. Near-term growth for IPG in Europe will depend upon qualifications for new applications or adoptions of fiber lasers as the lead welding source by one or more major automotive manufacturers.

Sales to automotive manufacturers had been reasonably strong, particularly in North America, were sales increased to $25.6 million or by 17% on a year-over-year basis. A recent trend that is driving demand in the auto space worldwide is the move towards the use of lighter, high-strength steel, which increases fuel efficiency in new car models. Fiber lasers are ideal for cutting and welding of high strength steel.

Asian sales, which include Western Asia and the Middle East, increased to $64.7 million, or by 36% year-over-year. We expect that Asian market growth as a whole will be better in 2013 than in 2012. The continued penetration of major OEMs for high power laser sales drove better-than-expected sales in China in the fourth quarter. We are also seeing demand improving in China for micro-processing systems, although these markets can be a bit more lumpy.

We are excited by our near-term prospects in Asia having invested significantly in our sales and management capabilities in that geography. We recently hired new General Managers with significant industrial and technical expertise in China, Japan and Korea. In Korea, our new GM was most recently running a much larger business for a major competitor. And we believe he has the ability to really drive growth there over the next two years.

Now working our way down the income statement. Gross margins were 51.8% compared with 53.8% in Q4 2011. Gross margin in the quarter was impacted by a number of different items. As compared to Q4 2011, product mix and lower absorption of fixed manufacturing expenses reduced gross margin by 0.4% and 1% respectively. As compared to Q3 2012, product mix reduced gross margin by about 1.5% primarily due to the fact that the system sales were a higher percentage of total sales and sales of high margin advanced application lasers were lower in Q4 2012 as compared to Q3 2012.

In addition to this, absorption of fixed manufacturing costs in Q4 2012 reduced gross margin by 1.1%. Absorption of fixed costs was lower due to the decrease in sales and manufacturing activity as compared to Q3 2012 and an increase in manufacturing expenses related to the acquisition we closed in Q3.

Finally, gross profit and margin was reduced by $0.5 million and 0.3% respectively, due to the step-up to fair value of inventory acquired in the acquisition and which was sold in Q4 2012. Gross margin include stock-based compensation charges of $594,000 and $428,000 in the fourth quarters of 2012 and 2011 respectively. Sales and marketing expenses were $7 million or 4.9% as a percentage of sales, up from 4.3% as a percentage of sales in the year-ago quarter. The increase primarily relates to higher charges and expenses related to the amortization of demo units as well as an increase in expenses related to salaries, trade shows and travel.

General and administrative expenses increased slightly to $9.9 million, but were down as a percentage of sales to 6.9% from 8% in the year-ago quarter. The increased salaries and benefits and recruitment expenses were offset by lower accounting and legal expenses. Research and development expenses increased by 24% to $9.3 million. As a percentage of sales, R&D was 6.4% to total revenues, which is up from 5.3% in the fourth quarter of 2011. As we mentioned earlier, we’re investing significantly in the development of new innovative products to maintain our industry leadership position.

Operating expenses for the fourth quarter of 2012 include foreign exchange transaction losses of $1.6 million or $0.02 per share net of tax. Excluding the foreign exchange loss, total operating expenses increased by 21% or $4.5 million to $26.3 million as compared to Q4 2011. Operating expenses include stock-based compensation charges of $1.6 million and $1.4 million in the fourth quarters of 2012 and 2011 respectively.

Fourth quarter operating income was $47.3 million or 32.6% of sales, compared with $46.1 million or 37.3% of sales in the fourth quarter of last year. Operating margin, excluding the foreign exchange transaction loss was 33.7% of sales.

Net income attributable to IPG for the fourth quarter increased 12.3% to $34.9 million. On a diluted per share basis, we reported $0.67 for the quarter compared with $0.64 a year-ago. We estimate that if exchange rates had been the same as one year-ago, sales in Q4, 2012 would have been $1.3 million higher, gross profit would have been $0.8 million higher, and operating expenses would not have been substantially different.

Now turning to the balance sheet. We have a solid balance sheet with cash and cash equivalents, including short-term investments increasing by $11.5 million during the quarter to $384.1 million. At December the 31st, 2012, inventory was $139.6 million, an increase of 19.4% from year end 2011 and in line with our year-over-year increase in sales. Our current level of inventory on hand amounts to 182 days compared with our target range of less than 180 days.

If foreign currency exchange rates were the same level at the end of the fourth quarter 2012 as they were December the 31st, 2011, the translated value of inventory would have been $138.5 million. Accounts receivable were $96.6 million at the end of the fourth quarter was 61 days sales outstanding compared with $75.8 million at December the 31st, 2011 or 56 days sales outstanding. Our cash generated from operations during the quarter was strong at approximately $59 million.

Operating cash flow in the fourth quarter was expected to be reduced by approximately $30 million which related to cash payments for corporate taxes in Germany. However the final corporation tax assessments for 2011 was only recently issued and approximately $30 million of these payments would now be made in Q1, 2013.

Capital expenditures for the quarter totaled $17 million bringing us to approximately $68 million for 2012. We have made investments this year in the United States, Germany and Russia where we have significantly expanded our manufacturing facilities. For 2013 we're targeting capital expenditures in the range of between $60 million and $70 million.

Backlog which we report annually was $203 million, December the 31st, 2012 compared with $207.3 million a year ago. Our backlog includes $102 million of orders with firm shipment dates and $101 million of frame agreements that we expect to ship within one year. In 2011, our backlog included $124.4 million of orders with firm shipment dates and $82.9 million of frame agreements. While the book-to-bill for Q4, 2012 was less than one, it appears that customers were holding orders until the New Year because there has been a strong stream of incoming orders in January that has so far offset the softness from Q4.

And now for our expectation’s for the upcoming quarter. While first quarter revenues can be down on a sequential basis due to seasonality, given the strong start to the year in order flow we expect to report both sequential and year-over-year growth in the first quarter of 2013. We are optimistic about the future. We continue to penetrate major OEMs and have an exciting family of new products and systems to roll out during the next few months. Even with the increase in the system sales and new product introductions we intend to target to maintain gross margin in the range of 50% to 55%. It is our intention that any gross margin given up in the near term would be an exchange for a substantial growth in total sales that would result in an increase in gross profit while maintaining a healthy return on capital employed.

Geographically we will keep a watchful eye on Europe, but we cannot predict whether the economy will improve that or will impact our business. In all other major regions in which we operate we did not see signs for near term concern. We continue to asses targeted acquisitions that will enhance our technology and accelerate the development of our new products as well as establish our presence in new geographies more rapidly than we could otherwise do organically.

Finally we do not view the increased competition as a threat but more as a validation that’s why the laser technology will continue to be a rapidly disruptive technology for existing and new applications. We have a 10 year head start and tremendous cost economies over the kilowatt-class fiber laser competitors. IPG maintains its technological advantage and we look forward to continuing our lead in this industry.

With that, IPG currently expects Q1 revenues in the range of $145 million to $155 million. The Company anticipates Q1 earnings per diluted share in the range of $0.65 to $0.75. The mid-point of this guidance represents growth in revenue of 22% year-over-year.

The EPS guidance is based upon 52,116,000 diluted common shares, which includes 51,110,000 basic common shares outstanding and 1,006,000 potentially dilutive options at December 31, 2012. The basic common shares outstanding include the 3,250,000 common shares issued as a result of the follow-on offering in Q1 2012.

This guidance is subject to the risks we outlined in our reports with the SEC and assumes that the exchange rates remain at present levels. I want to reiterate that we do not attempt to forecast gains or losses related to exchange rates. We expect our tax rate to be in the range of 30% to 31%.

And with that, we’ll open the call up for your questions.

Question-and-Answer Session

Operator

Thank you. We’ll now be conducting a question-and-answer session. (Operator Instructions) Thank you. Our first question is from Zach Larkin of Stephens Incorporated. Please proceed with your question.

Zach Larkin - Stephens Inc.

Gentlemen, thanks for taking my call.

Timothy P.V. Mammen

Hi, Zach.

Zach Larkin - Stephens Inc.

Hey, Tim first off I wondered if you could may be talk through the gross margin and how we should think about that going forward, obviously no change in the range but with the impact on the manufacturing expenses in Q4, is it reasonable to assume that we should see an improvement in gross margins Q-over-Q going into next quarter?

Timothy P.V. Mammen

I think I went through some of the detail on what really impacted it this quarter. I think coming into the rest of the year to continue to be a lot of investments being made. The Company is coming off two years of extremely strong growth. When I generated my guidance just to give a little bit more clarity on the range of gross margins i.e. there is between 52.5% and 54%, and that really does continue to factor in at the lower end of the revenue range, some lighter absorption of manufacturing costs. At the higher end of the range we start to observe manufacturing a lot better and as we go through the year, as we hope to see revenue continue to pick-up, I would still expect to maintain a relatively strong gross margin profile. I think the issue is that, the Company faces in the near term are if revenue happens to be down in a quarter, but in the short-term that does not mean we’re going to hold on, on investments.

Zach Larkin - Stephens Inc.

Okay, thanks. That’s actually very, very helpful. And then maybe moving on to the OpEx line so the sales and marketing with the expense amortization charges in the quarter; is it reasonable to assume that does go back down to maybe something more similar with historic, but it sounds like the R&D investment the level we saw in 4Q might be a reasonable run rate on a quarterly basis to consider going forward?

Timothy P.V. Mammen

The total OpEx I think in Q1 we were using about in total about $26.5 million. There will be a little bit of moderation on sales and marketing into Q1. On the R&D side, it's absolutely the intention of the Company to continue to invest, and I think we’ve got a whole host and suits of products that are going to come on stream in the near term in the first six months of this year, and it's fundamentally important that we continue to maintain the advantages that we have. I think I’ve always been pretty clear that the Company is just not going to continue to see operating leverage increase margins up above like 39%, 40% because these investments need to happen.

On the sales and marketing side, we also articulated that some investment in sales and marketing will continue to be required through this year. Again, I think that’s very important that we add headcounts on sales people who specialize in different end-markets or geographic regions; for example, some of the new markets that we’re getting into, we’ve had some people who are real specialist in fine processing, but we’ll probably need to continue to expand that. We need to look at how we’re dealing with our penetration into South America. So, I think the Company has come off two very strong years of very good growth and we continue to invest in those areas, but we see this year as a year where we want to really solidify our position and show that the distribution and penetration into end-markets is very strong. I think more moderate additions to G&A; we did expand G&A a lot last year with investments and for example, our IT infrastructure and the required investments this year are a little bit more limited.

Operator

Thank you. Our next question is coming from the line of Patrick Newton with Stifel, Nicolaus. Please proceed with your question.

Patrick Newton - Stifel, Nicolaus & Company

Yeah, thank you Tim and Valentin for taking my question. On the gross margin side, thanks for the details around the fixed cost absorption and also around mix. Could you, I guess the two part question on this; one is that, help us understand the mix. Could you provide us with high-brightness advanced application revenue both in 3Q and 4Q, because I think that obviously had a pretty significant implication. And then, you kind of touched on this, but I’d love to hear you comment on it head on because the knee-jerk reaction is that this isn’t just fixed cost absorption and it's not just mix, but it could be competition or it could be pricing. I think you already alluded to that not being the case, but I’d love your thoughts on whether competition or pricing played any role at all in the gross margin impact on a sequential basis, and then I have a follow-up.

Timothy P.V. Mammen

The first answer to the question is, we’ve got the exact number here, but I think the high-brightness laser sales were down from about $7 million to about $3.5 million. The other side of the equation on the product mix was that we did have some of our system sales increasing in Russia, in the U.S. a bit there is a percentage of total sales are a little bit higher. In Q1, I don’t expect system sales to be as high as a percentage so there in fact would be less. On the other side I think no, we continue to believe that we really in terms of cost of the lasers are way ahead of everybody else and control pricing in the market. If I look at our P&L something that you don’t really see here is the gross margin of individual products outside of systems and for example, the high-brightness and on that side I don’t see any fundamental shift in the gross margin of individual products even as we’re still at the relatively early stage of introducing some of the new lower cost diode. So, some of the cost benefits that we’ve been working on are still not fully bled in there. And I think people are – now clearly we’re going to have to have a little bit of a show and tell here and demonstrate through Q1 and Q2 that we can still maintain healthy gross margins. I do draw attention to the fact that above – anywhere above 50% is still very substantially in excess of the industry.

Valentin P. Gapontsev

Okay. And that this year – last year we made very big progress with project decrease for many parts components for our regular product, and so up to 20% plus decrease of core manufacturing cost. But the impact of this, the real benefit of this we’ll have only this year. Last year only we started gradually, so it's a year we compensate any -- might be in part of system with this decrease of cost and higher gross margin from our regular laser products.

Patrick Newton - Stifel, Nicolaus & Company

Okay, that’s helpful. And I guess just moving to the --

Valentin P. Gapontsev

Not only diode, diode, module, price by module to the electronics power supplies new, a lot of it -- each of this improvement bring up to saving $10 million.

Patrick Newton - Stifel, Nicolaus & Company

Was that $10 million?

Valentin P. Gapontsev

Yes. We want only power supply, new power supply, these are high power lasers, but we will bring up per year up to $10 million saving, only this one, but we improved many other parts in components to start making how, for example even electronic PCB before we put just our cycle a lot of headache and plenty, now only we installed internal manufacturing all the PCBs is going to save us this year 2013 and go up to many million dollars, but it's only second but the same diode, the same price but the same new price but more, much more powerful, reliable and more – less expensive. So, we are going – working very hard, so if there’s optimization in the decreased cost of all parts.

Patrick Newton - Stifel, Nicolaus & Company

All right. Thank you for the details Valentin. And then I guess, on the R&D side Tim, you already touched on this, but the investments that you’re targeting, you talked about having a suit of products coming to market in the next -- or in the first six months of this year. Should we interpret that to mean that the R&D is slightly in Q4 and early in 2013, and that we should kind of see it trailing off as a percentage of revenue through the duration of the year assuming a growing revenue environment? And as we look at what you’re targeting, are these R&D investments largely targeting your traditional laser source market or should we see this as your initial push into penetrating the systems market?

Timothy P.V. Mammen

I think the R&D is across a wide array of areas, for example increasing the power of green lasers, developing the UV lasers, developing ultra-fast laser offerings, increasing the power of the QCW, so we’ve mentioned before that, that now …

Valentin P. Gapontsev

Mid infrared.

Timothy P.V. Mammen

… mid infrared, and of course on to the system side. In terms of R&D through this year, I think you’re still going to see an average about 6% of revenue through the year.

Operator

Thank you. Our next question is from the line of Krish Sankar with Bank of America Merrill Lynch. Please proceed with your question.

Krish Sankar - Bank of America Merrill Lynch

Yeah, hi, thanks for taking my question. Tim I had a couple of them, one is if I look at your overall gross margin and I look at it by products, can you give some color on what the gross margin for the high power medium low pulse lasers are competitive cost for average?

Timothy P.V. Mammen

I can give you some general trends, but I am not going to into specifics, so in general the high power and pulse lasers have a similar gross margin, the medium power lasers have a higher gross margin and the QCW is in line with high power and pulse, but we don’t go into giving anything more specific than that.

Krish Sankar - Bank of America Merrill Lynch

Got it. And then the 50% to 55% gross margin guidance for the longer term, that include system sales and that I am guessing, if you just -- what is just the system sales gross margin standalone?

Timothy P.V. Mammen

We don’t give in that number, we’re targeting, making sure that the systems gross margin is on average more than 50%.

Valentin P. Gapontsev

Perhaps product for example, so on any new product when we introduce the market cap on lower gross margin but with volume with optimization of supply chain all in installation in inside production of major parts, but we’re beginning to use outsourcers, but then when we optimize this gross margin growth, but now we’re not (indiscernible) with gross margin that was in 45%, but this time they will, machine will provide our targets with the same gross margin we have for fiber lasers work which we produced in high volumes.

Operator

Thank you. The next question is from the line of Joe Maxa with Dougherty & Company. Please proceed with your question.

Joe Maxa - Dougherty & Company

Thank you. I was just thinking about the growth where it's coming from in 2013, a lot of new applications and products. I am wondering what the existing markets particularly the auto which you had strength and do you see growth there, is that flattening out? Where should we see the majority of the growth this year?

Timothy P.V. Mammen

Yeah, I think definitely on the existing applications of that significant growth, the thing we mentioned on the call in cutting applications fiber should get to between 50% and 75%. The 50% plus is even accepted now by other people in the industry who would not have accepted that number even a year-ago. So, cutting in terms of order flow recently it has been pretty good in Europe. The traction we’re getting in Japan around cutting applications is very positive. That’s something we had highlighted previously, and some of the smaller OEMs in North America are good. On the automotive side we think we’ll get growth out of, particularly the welding applications that we directly fell into in China. Welding applications in North America this year so this is large investments by multiple companies in transmission welding for example. We’ll continue to see some good traction from the seam stepper, [Segon] replacing resistance spot welding, that’s becoming more and more compelling particularly because the seam stepper is very good or welding high strength steel where traditional resistance spot welding is weak. On some of the marking, engraving applications both the existing product light and the new UV we’ve have actually run marking applications with the new UV laser in house and the results have been extremely good. So, you’ll continue to see some of the more traditional applications perform well as well.

Joe Maxa - Dougherty & Company

Thank you. That’s all I have.

Valentin P. Gapontsev

We had some problem only with marking applications because we have now the competition from Chinese manufacturers which use all this absolutely low prices, but we have (indiscernible) done with new budget lasers, we also have (indiscernible) our position for this market also.

Operator

Thank you. Our next question is from the line of Jim Ricchiuti of Needham & Company. Please proceed with your question.

James Ricchiuti - Needham & Company

Thanks. Tim, I think you mentioned in the last call that you anticipated shipping on a large piece business to a Japanese customer, and you thought that delivery would take place in Q1 or possibly Q2. What's the status of that, is that …

Timothy P.V. Mammen

It's more likely at the moment to be, the beginning of April, and it's excluded from our guidance numbers at the moment.

James Ricchiuti - Needham & Company

Okay.

Valentin P. Gapontsev

Your financial year in Japan starting from April.

James Ricchiuti - Needham & Company

Got it, okay. And then if we look back at 2012 and look at some of the perhaps a newer areas that you focused on, I mean I think you guys spoke more about the consumer electronics market of late than you have in the past. Is some of these newer areas, is there any way to possibly aggregate that for us, for 2012 and for what extent do you see some of the newer areas really contributing to incremental growth in 2013?

Timothy P.V. Mammen

It's very difficult to aggregate some of these numbers out I think the number we talked about was some of the consumer electronics over the year benefiting revenue by about $30 million. Clearly that’s a very good application when we think we can continue to build on that particularly as we’re able to introduce more diverse plus lasers at different wavelengths. Some of the QCW applications are starting to get some real traction. I mentioned that unit sales on QCW had increased by 74% and we’re starting to see that really offset some of the price declines on QCW that happened at the beginning of 2012, so revenue was up 59%. Some of that’s also held by the fact that the average in peak power of the QCW lasers has increased quite dramatically, so we’re now seeing regular orders for six, nine and more power kilowatt QCW lasers. Those applications are in micro-processing for example a lot of welding in batteries as well as the aerospace for drilling of holes. I think those are a couple of the newer areas. Some of them work with the semiconductor companies, I think we’ll start to take – gain traction this year. It wasn’t a big driver in 2012. We did start to get orders though with some inspection type applications with high power lasers of 6 kilowatts. I think those are some of the main areas. On a more welding application area I think I am very optimistic about what we’re going to get out of Korea with our new general manager there. The change in order flow even through December and January points to very significant revenue growth in Korea for us this year. On the other Japanese and Chinese general managers well are contributing extremely strongly, but I think that we were very significantly underperforming in Korea and we’ll start to get back to a more normal position there, and there’s a very wide range of application there, welding, cutting, marking and engraving as well.

Valentin P. Gapontsev

(Indiscernible).

Operator

Thank you. Our next question is from the line of Avinash Kant of D.A. Davidson. Please proceed with your question.

Avinash Kant - D.A. Davidson & Co.

Good morning, Valentin and Tim. Two key questions actually; the first one, you talked a little bit about in your press release that bookings in the current quarter thus far have been good now. Could you give us some idea of how good, and what do you mean by good like, if I look at the revenue growth last year typically 20%. So, would it be much higher than the 20% growth that you have seen?

Timothy P.V. Mammen

Yeah the order flow through the first five, six weeks of the quarter has been very good. It's significantly greater than 20%, but yeah in fact to answer that, that the guidance really was flexed but strengthened in order flow coupled with the weaker opening backlog because of the weaker book-to-bill, but so the overall growth in orders for the first five weeks accelerated in excess of 20% on a year-over-year basis.

Avinash Kant - D.A. Davidson & Co.

Okay. And could you also talk a little bit about the capacity expansion plans. Now you had been expanding capacity in Russia, U.S, Germany have all those taken place already or that will continue to happen in 2013 also?

Timothy P.V. Mammen

No that continues to happen in 2013. Some of the buildings have been placed in service and some of the equipment, but overall investment plan that for example the new investment in the diode area and the diode buildings in the U.S. will only come on stream during the course of this year. There are additional buildings in Germany and manufacturing equipment that will be brought on-stream during the course of this year, it's a fairly lengthy build-out of capacity there, and then there’s a new building in Germany that will also be part of the plan this year. So, it's a continued investment really across the Board.

Valentin P. Gapontsev

Avinash, we want to tell you this year of about 300,000 square feet facility, high quality facility. And we were – its eight buildings and one building – three buildings we have now occupied in the end of last year in January of this year. However, we’ll finish after the summer of this year. It’s new opportunity, it's not just to increase the capacity of current products, this is the motto of this new facility to prepare mass production of new products which we introduced now in the market. It's our technology in the equipment base and so on. So, we prepare now much production of big line of different products starting from a new kind of laser (indiscernible) long and the finishing by machine systems.

Operator

Thank you. The next question is coming from the line of Jagadish Iyer of Piper Jaffray. Please proceed with your question.

Jagadish Iyer - Piper Jaffray

Yeah, thanks for taking my question. Two question, Tim and Valentin. First, if you look at how 2012 shaped up for you both in terms of your top and bottom-line. Now that you have your gross margin kind of your target model at 50% to 55%, how should we think about earnings growth going forward for this year and potentially for next year, given the backdrop that you remain offbeat on the top-line growth? And then I have a follow-up.

Timothy P.V. Mammen

I think probably as we’ve articulated limited leverage on the bottom-line during the course of this year. I think that with the investment that’s going on, and if we can drive strong revenue growth into the end of this year and then into 2014 you might see a little bit of leverage on the operating side, but again I’ll reiterate that we don’t think operating margins track from averaging 37% this year, they’re not going to track up to 39%, 40%, 41%. We continue to believe that these are much the best margins in the industry, and we need to maintain our leadership by continuing to invest in R&D and sales and marketing. So, I think I’ve been pretty -- over the last year I get a lot of questions about how much more leverage it is. We believe that this business model is really built out at the moment. There’s one offset, so this is if you suddenly win a huge amount of business from an end user and you layer-in a very strong amounts of revenue than you would see some leverage. But at this point in time we’ve got no indication that somebody’s going to place $50 million order and call that off in a year. So, until that actually happens we remain cautious about guiding to significant leverage on the model.

Jagadish Iyer - Piper Jaffray

But you remain updated on a double-digit top-line growth?

Timothy P.V. Mammen

I think, yeah, I mean, given the way that order flow has started we think that, and we think that the market assessments of the growth in fiber laser this year are very conservative and we expect the market to grow significantly more than some of the market estimates that are being put out there. I think I have highlighted areas where we’re going to get strong growth in older as well as new applications, and areas where we think just where -- we’re going to pick-up some business. So, I think 2012 was an extremely good year to report 19% revenue growth in a year in which the macroeconomic conditions were not exactly that strong. I think people were laughing at me when I said a year ago that we’re going to target 15% to 20%. There were a number of meetings I went into where people were very, very skeptical about our ability to do that.

Jagadish Iyer - Piper Jaffray

Okay, that’s fair enough. Then the second, it's a two part on, how much did your automotive grow in calendar ’12 versus ’11 and how do you expect that to trend in calendar ’13?

Timothy P.V. Mammen

I haven’t got any specific numbers, I want to disclose on that. I also noticed sales that we can identify are about 15% to 20% of total sales is a large part of automotive that we cannot identify. We expect to gain market share in China this year so, we think that we are further ahead on identifying opportunities in, on our direct sales is by manual welding than we were at the same point last year. In North America there’s very significant ongoing investments as people transition to producing more complicated transmissions, increase penetration on seat back welding. A lot of the welding applications on body and why we think we’ll start to increase as well as the tailor welded blanks. In Germany we know that there is potential for significant contracts to be signed with some of the major automotive manufacturers there, but we don’t have a lot of clarity on it yet. I think in the next three to four months we’ll get some more clarity on it, some of those contracts will be over a longer-term, some will give us some good visibility over the next two to three years in potential business. We think that some of the German automotive manufacturers are really considering a more broad replacement of some of their YAG lasers on the high power that they use in welding. So, I think automotive is going to have a good year.

Valentin P. Gapontsev

Yeah, to mention the German manufacturer, car manufacturer now (indiscernible) our new product is first time before they would use only for test, for valuation, (indiscernible) so now they go into mass production, fully qualified product. So a special within a seam stepper and so with absolutely a new unique product no competition at all, a change situation in body and weld of cars and so on and the biggest customer German qualifies it after that it was published and after that all practical manufacturer, car ask for the test sample after such a reference (indiscernible) implementation in all car industry.

Operator

Thank you. Our next question is from the line of Mark Douglass of Longbow Research. Please proceed with your question.

Mark Douglass - Longbow Research

Good morning, gentlemen.

Timothy P.V. Mammen

Good morning, Mark.

Mark Douglass - Longbow Research

Tim, can you highlight what China sales were in the fourth quarter?

Timothy P.V. Mammen

China sales were $30.5 million.

Mark Douglass - Longbow Research

Okay, thank you. And with that, what have you see out of China, and we heard a lot of people talk about, they think there’s going to be a recovery starting by the second half of ’13 in China. Are you hearing similar types of things and I assume you talked about your orders in China in January, but I guess, it was relatively easy comparison with the Chinese New Year being in January last year, right?

Timothy P.V. Mammen

Mark, let me just clarify, those were not $30.5 million, they’re about $35 million in Q4, not $30.5. In terms of the order flow, Chinese New Year last year fell in the last week of January, you’re right it's in the first week of February. But overall the order flow in China has been very good even through the first week in February, there’s a lot of activity around lasers for cutting applications, welding, some of the marking, engraving applications, new OEMs that are being qualified. I think I’ve stated on a number of different occasions that the general tone that we have out of China for our business is that’s coming into this year than it was exiting 2011 into 2012. So the order flow has been very good as well.

Operator

Thank you. Our next question is from the line of Mark Miller of Noble Financial. Please proceed with your question.

Mark Miller - Noble Financial Capital Markets

You, I think last year had indicated that people were rather disbelieving about a 15% to 20% growth on the top line, and I’m just wondering do you feel your top line will grow that much this year.

Timothy P.V. Mammen

We are certainly targeting growth in the double-digit. We’re not giving annual guidance on it, but I think Valentin has been pretty vociferous in stating that he believes the market will grow much more strongly than everyone else is. The start of the year in terms of order flow, if this carries on would point to a very strong year. So, yeah, we remain very optimistic about it, because we got new applications coming on, penetration into some different wavelength that I think will be a nice driver. I have just articulated a lot of the investment that we expect to see in the automotive. I’ve talked pretty widely about the penetration into the Japanese cutting market that could drive more than 200 units of sales alone.

Note some of the major Japanese automotive manufacturers are continuing to deploy lasers, they’re at an early stage of that. So our view on fiber laser penetration continues to be very bullish and while some people view it as increased competition, I think its why every single other laser company is trying to introduce a product. Albeit it said, that these are significantly inferior products with a higher price than IPG is at and it points to the fact that everybody believes that this will be a much more fundamental processing technology in the industry. And that’s the different mindset of people within the industry even had a year or two years ago. They were still trying to down play the importance of the fiber as a technology.

Operator

Thank you. Our next question is coming from the line of Jiwon Lee of Sidoti. Please proceed with your question.

Jiwon Lee - Sidoti & Co

Thank you. I just wanted to talk about some of the new product, except for the systems most of the new products are not high power, so wonder how does these new products specifically which end markets does these line up strengthen your growth outlook? Whether it is auto, heavy industry, consumer electronics, semi-con, give us a little bit of that please?

Valentin P. Gapontsev

I disagree with you. You’re talking high power, its not high power. So each of the product line parameter for UV in green and so on, a different power scale to compare to infrared lasers, but we provide now the best solution. Best solution for the high power, 10 times high efficiency, much more compact footprint, this will extremely important for all such application, much higher reliability and so on. Now the market for semi-con lasers is [UV], green UV and this ultra short pulse, its still not represent product in the market, absolutely not prepared. And customer demand for new line of product much better in performance and also price extremely high today not acceptable, practical with the most integration. We now hope and we target to change whole situation. We got to a market that require absolutely new generation grade of lasers and price level and we’re ready to meet this customer requirements. As far as nobody is able to from current supplies provide them such quality and pricing, which market need. So they (indiscernible) laboratory samples immediately, but on the (indiscernible) that’s perfect, there is a much, much better (indiscernible) but market acceptance going more because everyone with (indiscernible) most integrated, they don’t why change the making of (indiscernible) they don’t like to drop their project. But UV with short pulse its customers catch immediate because they’re not happy at all with the existing situation. And we’re ready now to go to this market not just, but to get the serious position of this new market for us.

Operator

Thank you. Our next question is from the line of Tom Hayes of Thompson Research. Please proceed with your question.

Tom Lloyd Hayes - Thompson Research Group LLC

Thank you. Good morning, gentlemen.

Timothy P.V. Mammen

Hi, Tom.

Tom Lloyd Hayes - Thompson Research Group LLC

I was just wondering kind of on the R&D side as well, if you can maybe give some level of magnitude as far as the number of new products you guys have in the pipeline this year versus maybe last year?

Timothy P.V. Mammen

There are number of new products in the pipeline.

Valentin P. Gapontsev

We have to count this, we count by families not by the number of product model. Because we introduced now let’s say, seven new families of lasers, each laser family contain from 5 to 10 models, with different power, different performance and so on. So the total is count by quantity of models this year we introduced, double-digit new products.

Operator

Thank you. Our next question is from the line of Patrick Newton of Stifel, Nicolaus. Please proceed with your question.

Patrick Newton - Stifel, Nicolaus & Company

Okay guys, I just want to jump in about seasonality, I think Tim one thing that you said that kind of struck me is on the guidance this quarter that you’re actually getting for roughly, I’m sorry, at the midpoint and on that much normal seasonality. But given the increased exposure to consumer electronics, could we be seeing IPG is seasonally shifting to perhaps peaking revenue in 3Q in a sequential requirement 4Q and then flat to growing revenue in the March quarter, in the future? And then I have a follow-up.

Timothy P.V. Mammen

Yeah, I think on the last call I alluded to that as well, I mean, the information that we have at hand over the last couple of years is that revenues do seem to be driving into a peak in Q3 and then I had suggestion from people who are modeling to be much more moderate on 4Q. In terms if we look at top line booking trends and forecast, I think that the seasonality may well be vary this year and I think it’s a very good thing to stop factoring in. The only caveat I put to that is seasonality is becoming more difficult to predict because we keep layering in, circuits of macroeconomic weakness that we don’t know when they’re going to arise. So, that had a – that’s certainly affected Q4 of 2012 with Europe being weak. Offsetting that we actually had a very nice quarter in China whereas Q4 in 2012 in China has been significantly down so – but in general I think this trend towards a peak of revenue in Q3 with more moderate in Q4, at the moment it looks like what we are – the profile that we’re experiencing.

Patrick Newton - Stifel, Nicolaus & Company

Perfect. Can I get forward on that seasonality trend, it seems like that seasonality has been mainly by the shift, potentially its been driven by exposure to the consumer electronics which I believe is largely through your pulsed laser business, which just had an incredible year in 2012. And if we look at that business and look at the numbers that you put up especially in the June and September quarters, how should we think about your positioning in that business to grow it on a year-over-year basis? I think there is some concern that you had relatively low penetration in certain consumer electronics customers and functions that could be difficult to replicate on a year-over-year basis? I would love any comments you have on that.

Timothy P.V. Mammen

So, I think it’s the standard way that IPG grows is you qualify new applications, they layer in an extremely solid base of revenue that happens to pick up very quickly of a small base and then you see that business growing on a more secular trend rather than quite as dynamically. I think this year that’s what we would expect for that underlying consumer business, but there are certain potential upside to that. There are major contracts we’re talking about at different wave lengths in some of the UV marking as all consumer based. And that could actually continue to layer in, the kind of new application a different wave length with significant benefit this year. Yeah, the underlying consumer business is certainly not going to grow at whatever it was more than a 100% than it did in 2012.

Just to come back, I think some of the – the benefit on Q1 is really it appears to be people having a bit more confidence around the world in some of the underlying macro number, so I mentioned that we talk to people who maybe holding some orders from Q4, they seem to be flushing those through now. That continuing to hold up with the order flow and that benefit us. And then some of the changes are really driven by the investments that IPG has continued to make in, in management, in sales around the world and that investment which I reiterated is very important for us to make really drive significant gains and benefits. And that’s what we’re seeing in places like Japan and Korea and China. We saw it in Italy three years ago when we made management changes there. Invested significantly in our Russian management, we expect to see some real growth out of that in 2013, while Russia was perhaps a little bit disappointing in 2012. So it’s a whole host of different factors.

Valentin P. Gapontsev

(Indiscernible) went and invested in corporate management now we knew the very high professional manager will join us shortly. So we – hopefully improve potential in (indiscernible) corporate management. That was my opinion, my personal opinion. Then the quarter four weaker than we expected was also impacted by change of our manager in three major far east company, China, Japan and Korea (indiscernible) time when they changed new management its always to – the way some contract has to shift their orders for first quarter this year, total (indiscernible). But now all the new management start to work very efficiently and we see immediate result of this improvement.

Operator

Thank you. At this time, we have reached the end of the Q&A session. I will now turn the conference back over to Dr. Gapontsev for any closing or additional remarks.

Valentin P. Gapontsev

Okay. Thank you for joining us. We look forward to speaking with you next quarter.

Timothy P.V. Mammen

Okay. Thanks very much everybody.

Operator

And that concludes our conference call. Thank you for joining us today.

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