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IPG Photonics Corporation (NASDAQ:IPGP)

Q1 2013 Earnings Call

May 1, 2013 10:00 AM ET

Executives

Angelo Lopresti – VP, General Counsel and Secretary

Valentin Gapontsev – Chairman and CEO

Tim Mammen – VP and CFO

Analysts

Krish Sankar – Bank of America

Jim Ricchiuti – Needham & Company

Patrick Newton – Stifel Nicolaus

Avinash Kant – DA Davidson

Mark Douglass – Longbow

Chris Scottie – Stephens

Sean Naughton – Piper Jaffray

Operator

Good morning and welcome to IPG Photonics’ First Quarter 2013 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 would 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 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, 2012, and other reports on file 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, May 1, 2013. The company assumes no obligation to publicly release any updates or revisions to 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. Valentin Gapontsev.

Valentin Gapontsev

Good morning everyone. Today we are reporting you a good quarter result with 50% revenue growth. Our quarter maturity growth in business grew 29% year-over-year. Now much of this represents 94% of our total business.

Our growth margin of 53.3% improved from Q4 on a lower level of revenue due to product mix benefit and our component cost and improved manufacturing efficiencies. We had seen good demand in most of our end market and we maintained – over the competition. Even so the revenue was slightly lower than expected, booking for the quarter end and book-to-bill was substantially in excess of one. Product flow has continued to be very strong in April.

Our pipeline for automotive product is strong. In fact, we recently signed a contract with a major European automotive manufacturer for per unit which we estimate will be delivered over the next 12 months. This is our largest auto contract dealers. We anticipate the deployment of contract growth in this market. There is potential to substantial increase with the number of fiber laser use for catching and welding application.

However, we had a strong quarter in materials processing applications, sales of fiber application, that application which now account for 6% of our total revenue on our year-upon-year.

Order for advanced application and even in typically for severance and several million dollars, so that they can both benefit and impart revenue depending upon the timing. As we continue to increase sales for we’ve didn’t catch in margin application, we are capitalizing on growing opportunities for additional application in new market.

Within the Aerospace market growing, both components is uniquely become a larger opportunity for our EBITDA. This split with reach our target is much faster than the work has been achieved by additional with auto lasers for mechanical process.

And other emerging opportunity for Aerospace market is using our fiber laser to paint off aircraft. We deliver it a large order to further develop this application during Q1. At the quarter, we have built 10 ships to customer our first 100 kilowatt fiber laser. It is in absolute record in feasible high-power for industry lasers. Despite weaker sales in application, we believe that you want applications including government research, could also drive sales more meaningfully in the future.

We remain confident in our prospects for possible growth. We will maintain our solid competitive relating in the fiber laser markets by continuing – worth in people, processes and technology. For example, we acquired Mobius Photonics in March of our entry into the UV market.

We have significant qualification of innovative, cost effective UV input, the fast fiber lasers to compete against existing ways of technologies. In addition, there is some significant management bench trends to support our strategic market acquisition and sales initiative.

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

Tim 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.

First quarter revenue grew 15% to $141.9 million from $123.2 million a year ago. It should be noted that unit volumes increase more than sales due to a decrease in average selling prices primarily results as a results of an increase in volume orders from OEMs which attracts deeper discounts.

I want to point out that this is primarily an IPG pricing strategy to drive adoption a new UV lasers rather than due to pricing pressure in the market. The greater increase in unit sales has helped to drive the manufacturing efficiencies balance in reference.

Materials processing sales increased 29% year-over-year, to $133 million accounting for 94% of total sales during the quarter. During the quarter, we saw a strength from industrial and aerospace markets for applications such as wielding, cutting, marking, cladding and percussion drilling.

Other applications, which include telecom, advanced and medical, accounted for the remaining 6% of sales. Revenue from these other applications decreased 56% year-over-year to $8.8 million.

As Valentin mentioned earlier, the orders for advanced applications sales can be uneven. Last year during Q1, we shift several large kilowatt high-brightness lasers for research.

Sales of high-power lasers which accounted for 53% of total revenue increased 19% year-over-year to $75.1 million. High-power fiber lasers for cutting applications continue to be more widely accepted and are continuing to gain significant market share and represent a large opportunity for IPG.

House laser sales were $33.3 million which accounted for 23% of total revenues and increased 21% compared with last year. We saw strong growth within the consumer electronics market, primarily in China, and continued growth for metal marking applications.

Sales of medium-power lasers increased to $10.4 million accounting for 7% of total revenues and increased 9% year-over-year. We had a record quarter for QCW laser sales, which increased by more than a 100% to 3.9 million compared with last year and accounted for 3% of sales. High-power QCW lasers are used for drilling aerospace parts and other metal processing tasks.

Sales of low-power lasers were up 6% year-over-year to $4 million. Sales of other products which include amplifiers, diode lasers, green lasers, mid-IR lasers, integrated laser systems and certain components were $5.8 million. Service, parts, lease and other revenue including accessories totaled $9.2 million.

Now, looking at our Q1 performance by geography, Asian sales which include western Asia and the Middle East increased to $71 million or by 29% year-over-year, driven by strong demand for cutting, welding and marking and engraving applications. We saw a good growth from China, Japan, Korea and Turkey.

European sales increased 8% year-over-year to 45.1 million, primarily driven by materials processing sales to cutting OEMs. We are pleased with the growth in Europe which we achieved despite a challenging economic environment and lower sales for other advanced applications.

North American sales are 25.4 million for the quarter were essentially flat year-over-year. In North America, a decrease again in laser sold for other advanced applications was offset by increases in both automotive and aerospace and growth in materials processing.

Now working our way down the income statements. Gross margins were 53.3% compared with 55.8% in Q1, 2012. This is within our target range of 50% to 55%. This year gross margins were impacted by capacity realities, acquisitions and volume pricing.

I want to note that gross margins improved sequentially even on lower revenues due to improved product mix, lower component cost and improved manufacturing efficiency.

Sales and marketing expenses were $5.9 million or 4.1% as a percentage of sales, essentially flat with 4.2% as a percentage of sales in the year ago quarter. General and administrative expenses increased to 11.8 million and as a percentage of sales were 8.3% compared to 8.1% a year ago. The increase was primarily due to increase salaries benefits and recruitment expenses. In particular we have invested in executive management and IT infrastructure.

Research and development expenses increased to $8.8 million. As a percentage of sales R&D was 6.2% of total revenues which is up from 5.8% in the first quarter of 2012. Again this represents our increased investments and product development to capitalize on future growth opportunities.

Operating expenses for the first quarter of 2013 include foreign exchange transaction gain of approximately $0.5 million or $0.01 per share, net of tax. Excluding the foreign exchange gain, total operating expenses were $26.5 million.

First quarter operating income was $49.6 million or 35% of sales, compared with $45.2 million or 36.7% of sales in the first quarter of last year. Operating margin, excluding the foreign exchange transaction gain was 34.7% of sales.

We also benefited from some discrete tax items in the quarter including the recognition of R&D credits related to 2012, because Congress did not renewed the R&D credit until January of 2013. Our tax rate in the first quarter was 29.27%, but we expect that our rate going forward would be in the range of 30% to 30.5%.

Net income attributable to IPG for the first quarter increased 17.4% to $35.1 million. On a diluted per share basis, we reported $0.67 for the quarter compared with $0.61 a year ago.

We estimate that if exchange rates had been the same as one year ago, sales in Q1, 2013 would have been $1.6 million higher, gross profit would have been $0.9 million higher and operating expenses would have been $0.1 million higher.

Now, turning to the balance sheet. We have a solid balance sheet and ended the quarter with cash and cash equivalents, including short-term investments of $355.7 million. This is down approximately 7.4% from year-end, due primarily to a $32 million payment for 2011 and 2012 corporation taxes in Germany, and capital and acquisition related expenditures of $23.3 million which were partially offset by other cash inflows.

At March 31, 2013, inventory was $142.1 million. Our current level of inventory on hand amounts to 195 days compared with a target range of less than 180 days. The foreign currency exchange rates were at the same level at the end of the first quarter 2013 as they were at March 31, 2012 the translated value of inventory would have been $146.1 million.

Accounts receivable were 102.7 million at the end of the first quarter, or 66 days sales outstanding, compared with 88.4 million at March 31, 2011, or 65 days sales outstanding. During our first quarter, we typically see an over weighting sales in March because January and February tend to be seasonally weak, so days sales outstanding tends to be higher. The timing of shipments in any quarter can benefit or impact the simple day’s outstanding calculation.

Cash used by operations during the quarter was approximately 11.3 million, represent the decline of approximately 38.3 million compared to March 31, 2012, again, primarily because of the tiny of tax payments in Germany.

Capital expenditures and acquisitions for the quarter totaled 23.3 million. During Q1, we began occupying a manufacturing facility that we constructed in Russia, continued construction of U.S. manufacturing expansion and began the planning stages to expand capacity in Germany. We are targeting capital expenditures in 2013 in the range of between $60 million and $70 million.

And now for expectations for the upcoming quarter, the fundamentals to drive our business remain strong. IPG enters the second quarter with record backlog and book-to-bill substantially better than one. For the first few weeks of Q2, order flow remained strong.

Going forward we expect to continue to drive profitable growth while maintaining our technological advantage while making investments to capitalize on the enormous opportunities we see to expand IPG’s business longer-term. Depending on the timing of investments relative to sales growth, these dynamics may temporarily affect operating margins from quarter-to-quarter.

Looking shorter-term, our guidance for the second quarter takes into consideration the same macro factors that have effect on our first quarter results.

IPG Photonics currently expects Q2 revenues in the range of $155 million to $165 million. The company anticipates Q2 earnings per diluted share in the range of $0.72 to $0.82. The midpoint to this guidance represents growth in revenue of 16% year-over-year, given the continued strength of order flow. We expect this momentum to continue into Q3.

The EPS guidance is based upon 52,350,000 diluted common shares, which includes 51,407,000 basic commons shares outstanding and 943,000 potentially dilutive options at March 31, 2013. This guidance is subject to the risks we outlined in our reports with the SEC, and assumes that exchange rates remain at present levels. I want to reiterate that we do not attempt to forecast gains or losses related to exchange rates.

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) Our first question is coming from the line of Krish Sankar of Bank of America. Please proceed with your question.

Krish Sankar – Bank of America

Yeah, hi. Thanks for taking my question. I have two of them. Tim, in terms of your guidance for Q2 what kind of gross margin and OpEx you are assuming?

Tim Mammen

For the range I’ve used on gross margin, it is between about 53% of the bottom of the range and closer to 55% on top of the range as we get a bit more leverage against the model and if we can get 155 and 165 million revenue operating margin should track between 35% and up to 37% of the trough. So I think we’ll get a little bit of leverage back in the model sequentially.

Krish Sankar – Bank of America

Got it. Got it. All right. And then another question is that, in terms of your Q1 your numbers came in below your expected guidance. In view of you, where was the missed coming from? Was it one of the product lines or was it a specific region which came in short?

Valentin Gapontsev

There is a couple of specific things that the factor is coming into the end of the quarter. We had a couple of large value systems which did not ship out of the U.S. We had another very high value laser against the installing and final acceptance was differed on in Europe. And then a little bit of timing and shipments into OEMs in Turkey related to ensuring how we had letters of credits and all prepayments in hand, I’d say those were the – probably the three main items that affected the last few weeks of the quarter.

Krish Sankar – Bank of America

Got it. Got it. Thank you very much.

Operator

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

Jim Ricchiuti – Needham & Company

Tim, just regarding that last point the last two items you said, presumably that benefits you in the June quarter. And I’m wondering if you could talk a little bit about the outlook for the consumer electronics market given the strength that you had last year in Q2 and Q3? Thank you.

Valentin Gapontsev

The overall – we look at the business in Q2 where we stand at the moment, the amount of orders we have in hand at the moment and already schedule to shift is a pretty high percentage of the revenue guidance. If we’re being cautious about anything it’s just around the logistics of getting product, for example, into China and then out the door to customers. But I think we feel pretty strongly that this is going to be another good quarter overall on materials processing.

It’s not anything to do – the range on guidance doesn’t reflect the strength of order flow. It’s more of a logistics consideration if there’s any quarter around the guidance range. The consumer electronics, but this is actually starting to diversify and was reasonably strong in Q1. We’re expecting it to remain strong in Q2. So, for example, we’re getting increasing number of orders not just from some of the main manufacturers in Japan, but also we’re seeing order pickup in Korea from some of the manufacturers there.

I think the application is starting to diversify, so not only is it the core materials marking and engraving applications, but we also got quite lot of welding applications related to the consumer electronics. And we believe that a few of our lasers shift to one of our main OEMs in Germany has started to be used on some of the newer glass cutting applications.

But we’re not certain about that. So, our business is continuing to grow and diversify.

Jim Ricchiuti – Needham & Company

Okay. Thanks a lot.

Operator

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

Patrick Newton – Stifel Nicolaus

Hey, good morning. Tim and Valentin. I guess that the consumer electronic, I appreciate the details about the diversifying business and potentially having some new applications outside is just market in welding.

But we think about that in absolute dollar terms, I think you had a 2000 unit pulsed lasers win to Taiwanese customer last year that may only shipped in 2Q and 3Q, and I think you had previously discussed this being a $30 million application win. So to boil it all down the numbers based on the diversification you are seeing and the applications that you are seeing, do you think it’s reasonable that your pulsed lasers business can grow year-over-year specifically in 2Q and 3Q?

Tim Mammen

I think in the second quarter we expect, we actually have some very significant orders for pulse lasers in the second quarter. In the third quarter last year, it was particularly strong in consumer electronics. So the growth will necessarily come in the third quarter from the pulsed product line. I think it’s going to come from all areas of the business, but its high power, QCW, medium power and the pulse.

So the third quarter last year was when the consumer electronics orders were particularly strong for the marketing and graving applications. It maybe a little bit of a drag on pulsed growth in Q3, but the overall order flows seen across the product line gives us some indication that we can carry on the momentum we have, rather like last year; Q3 will be a strong quarter.

Valentin Gapontsev

And for the first quarter to compare year ago grown, in the unit for 22% in revenue unless record some correctional price to your competition from new Chinese. Last month we covered more of that on huge quantity in order for about laser for quarter two and quarter three, so we don’t see any – open the business, unit quantities business growing very fast.

Patrick Newton – Stifel Nicolaus

All right. Thanks for the details. And then Tim, you did talk about High Brightness advanced application sales in the quarter being down year-over-year. I was wondering, if you could talk about how they fell sequentially and then how we should think about the growth profile of that specific product line on a go forward basis?

Tim Mammen

Sequentially, there was no sales of High Brightness Lasers recognized in the first quarter. It was compensate a little bit by this huge win on the 100 kilowatt laser being delivered, which was for research into materials processing and ultimately, hopefully it’s going to be developed a very deep penetration welding.

There would no sales of the channel 5 kilowatt single mode lasers in the first quarter. We did pick up an order in the first quarter that we expect shipping Q2 that’s about $4 million. Sales in to this area do continue to be very uneven, further it obviously being also some positive news in the press recently about potential deployment of some of these systems.

Patrick Newton – Stifel Nicolaus

And then I guess one more on the automotive and with this 100 unit, 4 kilowatt, fiber laser win, I am assuming this is replacing YAG lasers and I’m wondering is that correct and then two is out signed of this win, can you help us understand what material opportunities you still have in Europe in automotive in 2013? And then could you provide us on any updates on share pertain in to automotive in China?

Valentin Gapontsev

Its relative not to this order, is not for – this order for new application for this automotive company, but it’s not and where we also discussed now get in order for other biggest players in this market, the global market. And we have also watched closely now then automotive we’re going from a single a few piece order to the large quantity order. So it’s focused now on the practical fiber laser – competition in the automotive industry and we can expect in this year the very large order from many – the most players in this market.

Tim Mammen

So I think Pat, saying, we’re expecting to hear even in the next few weeks about another significant opportunity which would be the beginning of the retrofits in YAG lasers.

Valentin Gapontsev

And regarding – regarding this kilowatt lasers trend, it’s in spite of recession prices this year would be flat. We’ll have a normal growth in the book orders and energy for kilowatt laser. We can say for in unit from quarter – first quarter of this year to compare that to first quarter last year we have growth in power, optical power, kilowatt laser 49%, in units 36%. It’s much more than the revenue due to some correction of price.

Price correction, as Tim mentioned before, of course by, going from single unit orders to large – long-term contracts for large quantity. So large quantity, we have to provide customers of course quantity discount and we provide that discount for them. So, total cost of power going little down, but the quantity of units is growing fantastically. So we expect this year in total that we’ll sell 32%, maybe 40% more units than last year.

Patrick Newton – Stifel Nicolaus

And one last housekeeping question, Tim, on the model. G&A greater than 8% of revenue on the GAAP basis. You said hiring, you said obtaining the talent. I’m assuming there were some upfront benefits or bonuses paid with that or signing bonuses I guess. How should we think about that trending perhaps as a percentage of revenue absolute basis kind of go forward?

Valentin Gapontsev

The upfront bonuses are signing bonuses in the investments that happened were – some of them more in the first quarter of this year that we had invested in G&A throughout last year. So comparing it to the first quarter makes sure that – on absolute dollar terms quite a significant increase that should moderate going forward.

I think we have added a lot of executive management expertise, we have added quite a lot to IT clearly the business grows. We will continue to add bit more moderately. As I said, I think that as revenue get back up to the $160 million range, we’ll start to get some decent traction of G&A and even the R&D line.

I would like to see and when we are looking at further investments on the selling expenses this year hiring a several new high quality sales people around the world and continuing to investigate new geographic regions that we should have a presence in.

Patrick Newton – Stifel Nicolaus

Thank you. Good luck.

Operator

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

Avinash Kant – DA Davidson

Good morning, Valentin, and Tim. A few questions, so the automotive application the order that your received just trying to figure out how big an opportunity could this be? First, is this the first big volume order that you have received that means what percentage of the needs are served to that customer, that means would they come back and buy multiple of this again or is it kind of it satisfies their needs already?

Valentin Gapontsev

I think this is still very early stages in the potential adoption and use of lasers in welding applications. We’ve talked about how really the target is to go off to the resistance welding part of the market. These applications still what I would call, some of more advance, so welding aluminum on the door closures for example.

So, it’s still specialized applications and if the transitions and use of lasers in the automotive industry on welding continue over the next few years in the vain that we expect, even these 100 units orders we think represents a very small parts of the total opportunity.

Avinash Kant – DA Davidson

Could you elaborate a little bit how much time did the customer take to qualify this before they place these orders?

Valentin Gapontsev

This is – this customer already has, I think approximately 80 lasers in use, so they’ve been a major customer of ours since 2008. This was sort of the next big buy that they probably been working on over the last – discussion around that is probably been going on for several months.

But it wasn’t really the question of qualification or negotiation around price and supports and delivery. So, it’s an ongoing customers of ours that cementing the relationship. But I think the view of our sales people in Germany, this contract really, if they put us in the prime position with them for the next several years, which is the great thing about it.

Avinash Kant – DA Davidson

Okay. And the next order you talk about that you are expecting, is it for the same product – I believe these are Seam Stepper if I believe that?

Valentin Gapontsev

It still not Seam Stepper application. With Seam Stepper we still did not start much implementation. The reason was because we have to make full qualification of this product. And now we’ve seen such qualification. Before we use only practical ship only for Seam, they qualified in parallel. And both a while there were committed customer reaching now for when we’ll get, go ship them and now we totally see during few weeks we have to receive final certificate qualification. Without this we could ship the customer, it’s illegal.

So – but potentially it seems enormous, and our people use more in the field of between 50 to 100,000 spot welders mainly often and since its very successful with these has brought welders, even 10% of these spot welders would be replacing huge market, huge opportunities and – its excellent at all and price have set the competitor with spot welders.

Avinash Kant – DA Davidson

So Valentin basically these are not seen steppers, these are somebody more learning too that you are talking about, the automotive orders?

Valentin Gapontsev

Yes.

Tim Mammen

No, we give more than 50 such steppers, but our expectation is many thousand. It’s not only for automotive and now for example we qualify this for you with two very large refrigerator company and they had to replace before they have much better quality and the price saving opportunities so the way – if we start in touch application, many others within this.

Avinash Kant – DA Davidson

I had one other longer term question actually. There’s been a lot talked about the 3D printing industry. Now, do you see any opportunity in the 3D printing side from the laser’s perspective?

Tim Mammen

The main opportunity we focus on at the moment is metal sintering and deposition. We’ve got a major customer and OEM in Germany that’s been buying our lasers for very many years roundabout. A lot of the plastic processing there, Avinash, on the 3D side is using from what I understand some UV light sources for hardening the plastic after, see, manufactured. It’s not even UV laser. So I think in the 3D side at the moment the opportunities for the plastic side are pretty limited. We have not identified any very significant opportunities there at this time.

Operator

Thank you. In the interest of time it allows me to ask question if possible. (Operator Instructions) our next question is coming from the line of Mark Douglass with Longbow. Please proceed with your question.

Mark Douglass – Longbow

Hi, good morning gentlemen.

Valentin Gapontsev

Hi, Mark.

Mark Douglass – Longbow

Tim, you mentioned in the guidance, you expect sales momentum going at a 3Q. Are you talking about absolute dollars of sales or year-over-year growth or both?

Tim Mammen

Both relative to where we are guiding this year. So I think 3Q a year ago was $155 odd million.

Valentin Gapontsev

156, right.

Mark Douglass – Longbow

I guess really from 2Q to 3Q you said you have still momentum, so if you are guiding call it just 15% growth what have you year-over-year. Is that what you’re talking about or just kind of an absolute dollar figure?

Valentin Gapontsev

I’m just trying to give some – a little bit of additional color around given the order flow we’ve seen in April, which has been another very, very strong month. A fab momentum carries on through this quarter. We expect to have a good Q3. I’m not giving any other guidance around Q3. I think the overall strength of the business on order flow has been very good so far.

The expectation for total bookings this quarter based upon the pipelines that are being reviewed by the sales people points to a full quarter of good orders. And that should drive a strong Q3 for us. I’m not going to get into any more granularity than that around Q3.

Mark Douglass – Longbow

Yeah. I thought I try. And then on the automotive, can you talk about the evenness of deliveries on automotive order? And mostly we’re taking 2014 or the next 12 months, the next fourth quarter?

Valentin Gapontsev

We’re little bit in limits to what we can say more specifically on this order, but we’ve already received the first call-off that’s due to be delivered this quarter. We’re expecting another call-off in Q3. And then I would think it’s going to be fairly evenly spread going forward.

Mark Douglass – Longbow

Okay. Thank you.

Operator

Thank you. Our next question is coming from the line of Chris Scottie of Stephens. Please proceed with your question.

Chris Scottie – Stephens

Good morning. Thanks for taking my call.

Valentin Gapontsev

Hi Chris.

Chris Scottie – Stephens

I guess, first of all, could you maybe touch a little bit on what happened in the other segment? Again, I know it sounds like it was advance applications that drove the weakness there. But maybe what were your expectations going into the quarter and what you expect going forward?

Tim Mammen

We didn’t have any expectations advanced – the advanced segment has ended up exactly where we thought it would. We are now factoring in any significant single-mode lasers, High Brightness lasers for this application segment.

So year ago, total sales for some of those other advanced applications was over $8.5 million. The reasons for the slightly weaker revenue articulated earlier really related to materials processing, deliveries. I mentioned for Q2 the visibility that we have on some of the High Brightness lasers is for an order that we already have in hand for about $4 million.

Beyond that we don’t have much visibility for future business on the advance side. So it continues to be an uneven business. And as I mentioned it – benefit and help to drive growth in seven quarter’s and in other quarter’s it can drive that growth a little bit.

But very nice thing about this is that, its high ASP units and fairly profitable device. So it’s a business that I think will take another couple of years before it becomes more even.

Valentin Gapontsev

I do think this year with Tim, that we have some visibility not for them but we have because up to (inaudible) our large customers in U.S. and Europe and some other countries. We discussed with our specification for new phrase and to development discussion – apply in all the claims, they apply from locals from governments and so on forward. It states only time but it’s visible that we’ll get this order business running.

Chris Scottie – Stephens

Okay, great. Thanks for the color.

Valentin Gapontsev

But these applications, it’s not only the advanced application, are applications which we are working very hard to introduce in market very perspective way on new laser for micro electronics, material processing for like very perfect new generation of UV lasers, new ultra short pulse lasers to this business where we believe we’ll have very serious position in this market very shortly started from this year.

Chris Scottie – Stephens

Okay. Thanks for the color and a clarification there. And then shifting gears a bit, can you talk about your efforts been trading the Japanese auto market obviously you are in the early stages there, but are you trying to see any increase traction?

Valentin Gapontsev

Yes. I mean, we’re starting to get one the major, the very largest manufacturers in Japan last year made an announcement about internally that they were going to start adopting fiber lasers.

Tim Mammen

Except to fiber laser improved to use in all their production worldwide. For us its extreme step mainly as only we work practical with development range manufacturers. Now they qualify, approve to use in all the production line.

Valentin Gapontsev

And we’re getting orders.

Tim Mammen

We start to get orders and good for a cash flow business in future.

Operator

Thank you. Our next question is from the line of Peter (inaudible). Please proceed with your question.

Unidentified Analyst

Good morning guys. I had just one question. Would you mind discussing some of the competitive dynamics in your fiber laser business lines?

Valentin Gapontsev

I think the competition is – as evidence by the growth in the material processing sector over the last year is finally a very difficult to gain significant share. We’ve mentioned that on some of the lower power pulse lasers there is some increase competition and particularly in China, but in that area we picked up some market share that we’ve not lost anything significantly in addition to that.

We are actually looking at new designs of lower cost pulse lasers that will enable us to really compete even more strongly against them without impacting our margin, so that design is almost complete on the low cost pulse laser.

On the high power side, on QCW, on medium power, we’ve heard some of our competitors referencing, and for example weakness in China, lack of credit, that is really been driven by the fact that they are losing everything to IPG. There is no weakness in China. China is a very strong performer. It’s been an exceptional start to the year there, so anything one, who references fiber laser sales being weak due to the macro side, the underlying issue is they are not winning against IPG.

On the advance side, the unevenness in order flow there, nobody can produce these single mode lasers, so the unevenness in order flow depends upon the timing, through funding of projects. It’s got nothing to do with the competitor’s position at-all. I’d say also interestingly on the costing side, we’re seeing customer transitions are higher power lasers.

That’s going to make it more difficult for some of the new entrance. You’ve got one and two kilowatt lasers to actually gain tractions against those OEMs. And on the welding side, the primary sale of lasers is that the four and six kilowatt, so the competitor situation and trust is what we think and we are starting to prove it is over stated right now.

One of the most interesting things I told on some of our bills and material on that for high power lasers is that I think our cost of manufacturing these lasers now is getting to be lower than what the competition may be paying for diodes in the marketplace, the complete fully loaded cost of manufacturing.

And I think that’s really a testament to – you know the continued vertical integration, the integration of power supplies in the bills, even the expansion of the PC board manufacturing, continued expansion of the metal job shops so it’s – some of the things I am actually seeing on the cost side are fairly remarkable. And I think these are going to find a very difficult to get close to where we are.

Tim Mammen

We converted because in many cases our say price – sales price is cheaper than manufacturing cost for our major competition. They could not able to compete at all and sale without any profit and with loss on quarter. It’s not possible to make such business. They can’t sales such way – 10 ways of products but they could not make real business compared to this business.

Unidentified Analyst

Thank you.

Operator

(Operator Instructions). The next question is from the line of Sean Naughton of Piper Jaffray. Please proceed with your question.

Sean Naughton – Piper Jaffray

Hi. Good morning, everyone. Wondering if you could talk a little bit more about auto and give us an idea where some of other guys are. I know you had a good window in the quarter. You talked a little bit about an auto OEM in Japan that is look at your laser product, but any other that guys in the pipeline that are you know that could be moving towards your product? Thank you.

Valentin Gapontsev

Everybody is moving towards the product. I mean, we just mentioned the big win in Germany, we’re expecting another decision to be made over the next four weeks by one of the other German manufacturers that continued adoption in Japan by key people there.

I think a question that didn’t get answered earlier is what our market share on automotive in China, is it more than 60%? We think in the U.S. just about every single manufacturer has placed order this year. There’s some real growth on transmission welding applications, the seat back welding, some of the other remote welding applications for all of the major manufacturers in the U.S. So that story is very much intact and I think people are finding difficult to gain some traction.

So it’s a little bit of a – before this large order came in, in Europe there is a little bit of weakness in Q1 on the amount of lasers that have been called off, so we’re hoping that that’s going to transition to more positive trend in the second half of the year, even though there’ve been some negative news about the European automotive sales.

Sean Naughton – Piper Jaffray

Great. That’s a great color. Thanks a lot. If you could talk a little bit about any kind of pricing pressure you’ve seen in first quarter, anything that might be materializing in second quarter as well. How we should think about it this year, either cost of your products or geographies. Thanks.

Tim Mammen

The only problem was really not some pricing pressure; it’s this more commoditized end of the pulse laser business in China. Our margins still on that allegedly commoditized product line, very close to corporate average which I think is pretty good for an allegedly commoditized line with, and that’s before we introduced some of this new designed lower cost pulse lasers that are being developed and close to completion on development.

On the other side of the business, the IPG’s view is that we have to continue to drive pricing down of all products to really drive adoption and use and Valentin mentioned for example this desired start to see lasers displace resistance spot weld in. As probably some pricing discount that’s still required to make that replacement very compelling to the end user when you couple it with the improvements in world strength and the decrease in electrical consumption. That market for this company in a few years time if we can get slightly better competitive dynamics with the legacy technology could be enormous for the company.

So the distinction that really has to be drawn here is what IPG’s internal strategy on pricing is which is pretty clear cut and don’t get that confused with what people seem to be interpreting as the market driving IPG. It’s really – and by that I mean the competitive market. This is IPG’s strategy in when we pursued for the last almost decade to drive fiber laser sales and displays legacy technology as well as existing laser technology.

Valentin Gapontsev

One good example I would – give an example for obligation. When fiber laser was power, was higher than CO2 people said customers said, fiber is good but the CO2 is cheaper. When we drop price of fiber laser now for power, fiber laser is cheaper than CO2 laser. We started immediately very firstly much replacement of the CO2 laser by fiber laser CapEx.

The same for any application will arise the market a needs and throw one and try. We have such opportunities to develop our business such we’re doing and to beat competition not by the quality of the laser and quality by the better performance even material process technology process were good but also by the economical by the price. And we are going such way for each application specially.

Operator

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

Jim Ricchiuti – Needham & Company

Tim, did you actually give out the revenue that you saw in China in the quarter, what did it represent?

Tim Mammen

No. We did not specifically give that out.

Jim Ricchiuti – Needham & Company

Okay. Great.

Valentin Gapontsev

I haven’t here. I can give it to you later.

Jim Ricchiuti – Needham & Company

But the business overall in China, it sounds like it was – you got off clearly to a good start. How would you characterize the business as you went through the quarter?

Valentin Gapontsev

It’s very strong and it was a absolutely record quarter in bookings. The improve month on bookings again is very strong, its across multiple different applications, welding, cutting, the more basic marking and engraving, some of the consumer electronics, some of the medium 500 pulse lasers cutting thinner materials. Some good automotive wins. It was a very good start to the year and I’m probably using a little bit English under statement and that phrase relative to China.

Jim Ricchiuti – Needham & Company

Okay and Korea...

Valentin Gapontsev

Rather than we expect.

Jim Ricchiuti – Needham & Company

Thank you. Korea, you’ve also been optimistic about the potential for the Korean market with hiring of new General Manager, can you give us an update on that?

Valentin Gapontsev

We had a great quarter in Korea, both record quarters on bookings. Korean revenue was up single most, and also double compared to a year ago. In the second quarter, we’ve got another strong quarter. That will be sequential, little bit larger on revenue, but they are expecting a very strong quarter on bookings, so that should help them in Q3. The things that we expected to happen in Korea with that transition in management, so we’re already started to take to take hold.

Operator

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

Valentin Gapontsev

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

Operator

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

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