IPG Photonics' CEO Discusses Q2 2013 Results - Earnings Call Transcript

Jul.30.13 | About: IPG Photonics (IPGP)

IPG Photonics Corporation (NASDAQ:IPGP)

Q2 2013 Earnings Call

July 30, 2013 10:00 AM ET

Executives

Angelo Lopresti – General Counsel, Secretary and SVP

Valentin Gapontsev – Chairman and CEO

Tim Mammen – SVP and CFO

Analysts

Krish Sankar – Bank of America

Patrick Newton – Stifel

Jim Ricchiuti – Needham & Company

Avinash Kant – DA Davidson

Jagadish Iyer – Piper Jaffray

Tom Haynes – Thompson Research

Mark Douglass – Longbow Research

Jiwon Lee – Sidoti

Joe Maxa – Dougherty & Company

Operator

Good morning and welcome to IPG Photonics’ Second 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 Senior 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 Investor section of IPG’s website at investor.ipgphotonics.com/sec.cfm or by contacting the company directly. You may also find copy 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, July 30, 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 turn the call over to Dr. Gapontsev.

Valentin Gapontsev

Good morning everyone. IPG performed well during the second quarter with 22% year-over-year revenue growth much of our growth came from sales of material processing applications with a strong contribution from Asia and the U.S. Gross margins during the quarter were within our target range at 53.5% and we grew our bottom-line by 11% but still a real innovator. Our net income comparison was relatively impacted by (largely FX) gain in 2012 and in 2013 by increased cost from the investments we are making in R&D, selling and other areas will support and drive future growth of IPG.

We continue to see solid demand in both of our end markets and we maintain a strong technological advantage over our competition. Our fiber lasers continue to take market share from conventional laser technologies like CO2 and YAG particularly for cutting and welding applications. Material processing applications account for 94% of our total sales. Many of our OEMs are increasing the percentage of fiber laser they buy from us versus conventional lasers. Because of this success our cutting OEMs set with fiber lasers for thin steel cutting demand for high-power lasers to cut thick metal is increasing as for the thin and thick metal cutting has improved.

Another application which presents exciting opportunity is growth for additive manufacturing which includes 3D printing, (inaudible). In this application the IPG lasers are useful for manufacturing parts from powders made of metals or other materials. We continued this application for years and most of the (inaudible) metal, mobile manufacturers from metal additive manufacturing use IPG’s fiber laser with a unique performance of our fiber lasers, customers are developing terrific new applications. For example recently a customer in China manufactured a large – recast large and sophisticated part out of special (effects) with our entry level of laser.

Additive manufacturing is an exciting application site for IPG in future. We sell into many different industries and automotive is a large portion of this business, another significant portion of sales for material processing applications comes from general manufacturing. This can include anything from consumer product to elevators as well as heavy industry sectors like shipbuilding or for example contraction growth. We (came in 13) and increase in sales for the air freight industries where we are beginning to penetrate with the market for very high-speed in (inaudible) turbine rate improving fuel efficiency because it’s about the engines to operate at highest temperature. Welding of aluminum and other average in the air freight industry is another application which we are working on and which we think could drive future sales, the same with processing of parts from composite material.

Orders growth in the second quarter were strong and the book-to-bill were substantially a good one. To accommodate demand we are making continuing investment to support the expected growth of our business and strengthen our competitive valuations. We are investing in sales and marketing support around the globe. This year we invested in our application with in China, USA, Japan and Russia and expanded our overall sales headcounts. IPG has opened 140,000 square feet facility for – in new production R&D and administrative buildings in Russia and roughly 210,000 square feet will be added at our Russian facility before the end of this year for fiber and system manufacturing. This year we will expand also our Oxford, Massachusetts facility by two new high standard buildings, 80,000 square feet for 3 billion of tight production. Then for installation of manufacturer more visible in the UV lasers as well 50,000 square feet of electronic and metal process manufacturers. We’re opening a branch in Taiwan to support customers there in new opportunities and we’re expanding our Shanghai presence with a new and to larger portions.

Looking further out we expect to begin investing in new geographies including Eastern Europe and South America to leverage their material processing market there. Both are focused on increasing our own competitive less by continuously introducing innovative products and improvement of the existing products, for example we substantially increased the (inaudible) contribution of our high-power power generators from 28% to 35% and 25% improvement which not only reduce the electrical consumptions but also cost cooling requirements in our (inaudible) work.

Now with aggregated results and your first generation of our unique potential shift intervals mainly with Laser Seam Stepper. It has a great potential so it was a widely used for resistance port welders in the application where the customer needs a (inaudible) quality and productivity potentially it is enormous market for such devices. In June with changes in the qualification very few international certificate has go up to one device produced for distribution worldwide which have a most of the request from a commercial and other industries. As last with resources of the modern Photonics team reached various (inaudible) in the first quarter of this year to help our own effort to develop fiber laser UV lasers gradually. We expect to offer low cost more reliable and much better performance in the UV lasers then current lasers on the market.

We’ve also have developed new products to integrate by the lasers and it’s come off with our customers applications for them. We sort out I’ve taken that as consideration to blame that in spite of products cost of some market family IPG’s share in fiber laser material processing market isn’t impacted by (inaudible) it’s good overall year. Our year-over-year growth of 58% in the high-power revenue don’t remain any agreement for opponents. In the reality the growth was even larger in the units we raised our sequence this year more than 50%. The difference in the revenue is caused by product optimization of prices.

With that I’m pleased to 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.

As Valentin mentioned second quarter revenue grew 22% to $168.2 million from a $137.9 million a year ago primarily driven by growth in materials processing. Materials processing sales increased 26% year-over-year, to $157.6 million accounting for 94% of total sales during the quarter. We continue to make progress in penetrating OEMs for materials processing applications particularly in China, Europe, Turkey and the U.S. We believe we are continuing to win significant market share versus conventional

CO2 lasers used for cutting applications.

Other applications which include telecom, advanced and medical accounted for the remaining 6% of sales. Revenue from these other applications decreased 22% year-over-year to $10.6 million, much of the decline was due to weak telecom demand primarily in Russia.

Sales of high-power lasers which accounted for 51% of total revenue increased 38% year-over-year to $85.4 million. IPG’s high-power fiber lasers are being widely accepted for cutting and welding applications particularly in the auto industry as well as with OEMs who serve various general manufacturing needs. We have begun to penetrate additional markets like aerospace, heavy industry and construction as the benefit to using fiber laser technologies become more widely adopted. Recently IPG also started to market its laser seam stepper with potential new customers around the globe. This is the first time that IPG has marketed the newest version of this device on a more widespread basis not only to the automotive industry but also to companies producing other products such as kitchen appliances.

Pulsed laser sales were $40 million which accounted for 24% of total revenues and increased 5% compared with last year. Demand for pulsed lasers continues to be driven by marketing and engraving applications across a wide variety of different industries. We introduced new and more sophisticated shorter pulsed lasers which is starting to gain sales in more advanced marking applications. Sales of medium power lasers increased to $15.7 million accounting for 9% of total revenues and increased 41% year-over-year. We had a record quarter for QCW laser sales which increased by more than a 100% to $5.6 million compared with last year and accounted for 3% of sales. A noteworthy accomplishment is that our unit sales for QCW lasers more than tripled.

We have brought the manufacturing cost and sales price of QCW lasers down to make them an even more attractive replacement for lamp-pumped YAG lasers and welding and drilling applications. Also we sold more than 50 QCW lasers the glass cutting which is a new application developed by one of our customers. Sales of low-power lasers were down 14% year-over-year to $3.6 million primarily due to lowest sales of medical applications. Sales of other products which include amplifiers diode lasers, green lasers mid-IR lasers, integrated laser systems and certain components were $6.2 million. Service, parts, lease and other revenues including accessories totaled $9.6 million.

Now looking at our Q2 performance by geography. Asian sales which include Western Asia increased to $91 million or by 34% year-over-year. In China alone sales increased to $58.5 million or by 54% year-over-year. There has been some skepticism around the Chinese economy the Q2 was a record quarter for IPG in that country. We have been successful in penetrating the Chinese market for cutting, welding, marking and additive manufacturing applications. In Japan and Korea we have invested heavily in our management and are beginning to see the results.

Sales in Turkey which is included in Western Asia have been strong due to increased demand from cutting OEMs. European sales were flat year-over-year at $47 million. Although we have seen an increase in demand in Europe for cutting, welding and metal sintering the telecom industry in Russia has been week and ultimately offset some of the growth we’re experiencing in other areas. North American sales of $30.3 million for the quarter were up 34% year-over-year. The materials processing business in North America for automotive and other applications is continuing to perform well.

Now looking our way down the income statements. Gross margins were 53.5% compared with 54.3% in Q2 2012. This is within our target range of 50% to 55%. Margins were slightly impacted by geographic and customer mix, product mix and $0.5 million in fair value inventory charges related to acquisitions. Sales and marketing expenses were $6.8 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 $12.8 million and as a percentage of sales were 7.6% compared to 6.3% a year ago. The increase was primarily due to increased salaries, benefits and recruitment expenses driven in part by the addition of costs related to recent acquisitions and also our continued investments and resources and infrastructure to support and drive further growth.

Research and development expenses increased to $10.5 million. As the percentage of sales R&D was 6.2% of total revenues which is up from 5.2% on the second quarter of 2012. Again this represents our increased investments in product development to capitalize on future growth opportunities and includes the cost of the Mobius Photonics which we acquired in Q1 of 2013.

Operating expenses for the second quarter of 2013 of $30 million include a foreign exchange transaction gain of $0.1 million as compared to a $3.4 million gain in 2012. Second quarter operating income was $59.9 million or 35.6% of sales compared with $56.4 million or 40.9% of sales in the second quarter of last year. Excluding foreign exchange gains operating margins were 35.5% and 38.5% in 2013 and 2012 respectively. The effect of goodwill written-off net of contingent consideration payable related to acquisitions results in a net charge of approximately $350,000 during the quarter. Our tax rate in the second quarter was 30% we continue to expect that our rate going forward will be approximately 30%.

Our net income attributable to IPG for the second quarter increased 10.5% to $41.7 million on a diluted per share basis. We reported $0.80 for the second quarter compared with $0.72 a year ago. We estimate that if exchange rates have been the same as a one year ago sales in Q2 2013 would have been $0.1 million higher, gross profit would have been approximately the same and operating expenses would have been $0.2 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 $369.5 million. This is down approximately 3.8% from year end because of the large tax payment we made in Germany in Q1 plus our investments in other working capital, plants, equipments and acquisitions. At June 30, 2013 inventory was $154 million, the current level of inventory on hand amounts to 179 days compared with our target range of less than 180 days. If foreign exchange rates were at the same level at the end of the second quarter 2013 as they were on June 30, 2012 the translated value of the inventory would have been $152.6 million.

Accounts receivable were $114.5 million at the end of the second quarter was 62 days sales outstanding compared with $96.6 million at December 31, 2012 was 60 days sales outstanding. Cash provided by operations during the quarter was approximately $35.3 million. Capital expenditures and acquisitions for the quarter totaled $16.5 million and with $34.3 million year-to-date. There is a possibility that capital expenditures for 2013 made increase to a range of $75 million to $80 million from $65 million to $70 million in the event we purchased additional real estate in Moscow to support engineering and the sales efforts there.

And now for our expectations for the upcoming quarter. Looking ahead to Q3 demand is solid in most of our significant end markets. In the second quarter our book-to-bill was substantially greater than 1 meaning we have built some backlog. We remain committed to making investments where necessary to support our customer needs now and well into the future. We have significant opportunities and we are excited about our ability to capitalize on it. Our goal remains the same, drive profitable growth while extending our technological lead in the industry. IPG Photonics currently expects Q3 revenues in the range of $165 million to $175 million.

The company anticipates Q3 earning per diluted share in the range of $0.77 to $0.87. The midpoint of this guidance represents revenue growth of 9% year-over-year. The EPS guidance is based upon 52,385,000 million diluted common shares which includes 51,462,000 million basic common shares outstanding and 923,000 potentially dilutive options at June 30, 2013. This guidance is subject to the risks we outlined in our reports with the SEC and assumes with 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.

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

Question-and-Answer Session

Operator

Thank you. We’ll now be conducting the question and answer session. (Operator Instructions). Thank you. Our first question comes 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 had a couple of them, Tim in terms of your guidance can you tell what gross margin and OpEx are you forecasting in for September?

Tim Mammen

Gross margins we used on the guidance were in the range of 53% to 54% so pretty similar to Q2 and OpEx should be relatively stable between the second and third quarter so we didn’t change any assumptions around that fundamentally.

Krish Sankar – Bank of America

Got it, all right. And then it clearly seems like you guys are doing a pretty good job in China with the strength in June despite like the weakness that’s happening in the macro. If I look at the last couple of years should we assume normal seasonality in China in Q4?

Tim Mammen

It’s a little bit early to start talking about Q4 but I would expect yes normal seasonality for Q4 in China where it tends to be a weaker quarter there.

Krish Sankar – Bank of America

Got it. And then just final question, in terms of September quarter guidance can you just give us an idea of what you are forecasting for the different segments high-power, medium power pulsed laser either Q–over-Q or year-over-year?

Tim Mammen

We don’t go into that kind of granularity relative to guidance on specific product lines. So, we’ve never really gone to that detail Krish I am not going to go there right now.

Krish Sankar – Bank of America

Got it. Thank you.

Operator

Our next question comes from the line of Patrick Newton with Stifel. Please proceed with your question.

Patrick Newton – Stifel

Hey good morning. Thanks for taking my question. Just a couple of housekeeping items, I guess Tim could you provide us with Russia’s sales in the quarter and also what the contribution from Mobius was both from quarter and expectations baked for September quarter?

Tim Mammen

Russia is less than 10% of sales so we don’t disclose that. And Mobius is really an R&D team that was acquired so at the moment the sales from those UV lasers are negligible it’s a very much development program for the new product line and I will say that they’ve had a – starting to gain some traction in terms of accelerating that program I think Valentin is pretty pleased with how that acquisition is being integrated on a technology basis.

Valentin Gapontsev

Regarding Russia, I reckon we’re reporting that Russia it’s a very big manufacturer and 90% of the Russian practical of this. However what they’re making contribution is expert to the first and final products outside of Russia. And Russia is still business is low due to a very specific condition there. Our major problem with any American public company in such country like Russia indeed so we’re on very high level of corruption so could not use any distribution network there we have to walk build our own network it’s a large country it takes time by series of investments to build own distribution network to protect it against of any corruption. Other problem in the Russia that Russia doesn’t have integrated networks strong integrators practically for example India and China which have enormous integration network of companies but Russia and India do not have further problem there to have supply to cut the money and finish in view of the need for a pool of complete solutions. They don’t need only a waiver. In our targeted, we’re often, region and Russia because of the complete solution the way we’re presenting and the way of this we believe that for this year, we have reached, laid a more progress in this direction so probably in two, three years (inaudible) own portfolio of the system of products and also we’ve built network distribution, our national wide network how to provide servicing of the product into Europe.

Patrick Newton – Stifel

All right. Thank you. And then I guess, Tim it seems goodwill declined sequentially from about $3.3 million to $500,000 roughly sequentially in the June quarter. Did that have – was that write-down had any kind of impact on OpEx in the quarter?

Tim Mammen

As I mentioned in the script the goodwill write-down net of contingent consideration payable, which we don’t think we’re going to have to pay was about $350,000.

Patrick Newton – Stifel

Okay so nothing material. So, as we think about OpEx you kind of already alluded to this there was no – there was no uptick from the goodwill, no material uptick in the June quarter that isn’t kind of run through into the September quarter?

Tim Mammen

Correct. We don’t assume any fundamental changes in OpEx.

Patrick Newton – Stifel

Okay.

Tim Mammen

And continue into Q3.

Patrick Newton – Stifel

Okay. And then could you provide us with an update on that 100 unit automotive order. Can you kind of help us understand the contribution of the current quarter any updated thoughts around the linearity of deliveries over the next nine months plus or minus?

Tim Mammen

No. They started to call off units and there was several units delivered in June and units continue to be called off at this time. There is no specific update on exactly how many units are going to be delivered each quarter over the coming year or so.

Patrick Newton – Stifel

Still relatively linear I think was how you last – talked about it last quarter?

Tim Mammen

There was – we’ve said I don’t have any new information about it in terms of specifically what’s going to be called Patrick.

Patrick Newton – Stifel

Okay. And then I guess, just one last one on China just to kind of dig into the strength there I mean great quarter up 50% year-over-year and it looks like about 35% sequentially. How should we think about China specifically on a sequential basis how sustainable is that given some of the macro trends? I mean clearly you are able to buck them for a quarter but do you have any concerns of tightening credit situations or of the industrial productivity slowing at all in that geography?

Tim Mammen

First I get you with the comment that we can buck them for a quarter. I think we’ve bucking trends in China for about two years that business is growing very well. We’re strengthening the management team, diversification of applications, strong growth and real penetration on OEMs on the cutting business, where our market share and displacements of legacy technologies has been tremendous growth in the welding applications.

We still have a strong pipeline of potential automotive orders that which I think we’ve closed a number of automotive orders. We mentioned that we’re gaining some share on new additive manufacturing applications in Asia some of those were in China. We had very strong sales of QCW lasers for welding of consumer electronic frames so it’s a pretty diversified business.

Sequentially I don’t think, you are going to see any dramatic growth in China, but we’ve got a solid backlog coming into the quarter and that’s pretty much the trend that we see annually is that you ramp up into Q2 and Q3, Q2 and Q3 can be pretty similar and then you have a generally a bit of seasonal weakness into Q4.

We’re not seeing at this point and time significant impact related to credit tightening or lack of liquidity. It’s something that we monitor on an ongoing basis and clearly the situation can change pretty quickly. Often what would happen if that does tighten you are unable to collect some of the prepayments from customers and you may have to delay shipments but we’re not seeing any of that at this point and time.

Patrick Newton – Stifel

Great. Thank you for taking my questions.

Operator

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

Jim Ricchiuti – Needham & Company

Thank you and good morning. I just wanted to ask a question regarding the QCW and the glass cutting application is this for a display glass application and can you maybe elaborate on how you see that market developing for you?

Tim Mammen

We don’t believe the actual display is some smaller glass parts. It’s a relatively new application Jim. There were projects. I think it’s a typical example of applications, where projects will come and cycle in and cycle out. I think it is a potential key area of growth as more and more people try to cut different types of glass with lasers over the coming years. But this is not yet into the display side a lot of the display glass cutting applications are underdevelopments and using different types of technology. We can’t really disclose that much more about it.

Jim Ricchiuti – Needham & Company

Okay but it’s not – it’s so is it a consumer electronics application or is it something outside of consumer electronics?

Tim Mammen

We believe it’s within consumer electronics.

Valentin Gapontsev

It is – I’ll go with consumer. It’s not only glass, but ceramic glass for example using ceramic and glass with the way our lasers speak of this region and for this we’re minimum 10 times reported – to compare to technologies. But it’s not only consumer electronics. It’s also the contraction new fort them, new from market windows and our employing to contraction of (inaudible) our lasers very suitable and with not only laser for this, for the (inaudible) contraction wise.

Jim Ricchiuti – Needham & Company

Valentin thank you for that. And then question on pricing. Tim as you described the competitive landscape and I’m referring to the high power segment of the market it seems like you are still in a very strong position and I’m wondering if that is affecting the way you are thinking about pricing in terms of going after the market. You have obviously been moving down the price curve to spur adoption of the technology. But at this point is there any thought to taking the foot off the gas pedal temporarily. I wonder if you just talk about the pricing environment and how you view it.

Valentin Gapontsev

Well pricing point is, we’re all working very hard long time to decrease cost of manufacturing of our laser especially in March quarter and we’re very successful for instance high powering lasers every year with relative with the last quarter by 10% to 15% as minimum sometimes 20% per year. This year is not an exception. So, (inaudible) on how to control pricing. Our price policy based on the, for us to open door for used laser for more and more applications, which is very sensitive to the price from other site also (inaudible) to control the situation and markets (inaudible).

Jim Ricchiuti – Needham & Company

Okay. Thanks very much.

Operator

Our next question is 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. The first one, could you give us some idea how much exposure did you have to the automotive market in the quarter like what percentage of business it was exactly?

Tim Mammen

It wasn’t anything fundamentally different from previous quarters that once the orders being called off in Europe, we continue to see quite a number of lasers called off on a regular basis by some of the major Asian manufacturers and we had good orders and deliveries in North America Avinash as well. So, typically we can identify around 15% of sales and then there is some other portion of sales for cutting and marketing systems that goes into automotive that we can’t really identify. So, no fundamental change that I have noticed.

Avinash Kant – DA Davidson

Okay but any visibility in terms of getting some of the larger orders from other automotive players beyond what you’ve already received? There was at least one that you are expecting…

Valentin Gapontsev

It depends on the market situation. The Europe as we know is now this year sales in have done much companies it’s not increase and decrease (inaudible) biggest place in the market segment. Of course the delays in the print probably expansion of the production lines but in other regions there is still record situation, where we are working with companies and with production perhaps with for 2014 plan to increase to install a new production line and to increase production. In the case, there is more open for new technologies in current production line of costs, where you can say what you market in spite they recognize big advantage of new technology, IPG technology in particularly but they’re not very up to invest in this to replace old technology, if this is a major problem why did you go and go on a big potential but where you need to go especially market now is not as it was 10 years ago.

Avinash Kant – DA Davidson

Okay. I just want to check a number Tim, maybe what was the medium power sales, I may have missed it.

Tim Mammen

Medium power sales were $15.7 million.

Avinash Kant – DA Davidson

Thank you so much.

Operator

And our next question is from the line of Jagadish Iyer with Piper Jaffray. Please state your question.

Jagadish Iyer – Piper Jaffray

Yeah. Thanks for taking my question. Two questions Tim, first how should we be thinking about the gross margin trajectory, I think Valentin made some comments about expansion of capacities in Russia as well as in the U.S. as well as I guess in China in the backdrop of expanding capacity pricing that you’re seeing and your cost reduction initiatives. I’m not looking specifically for a number but I just wanted to see well how should we be thinking about it as we look at it for the second half of this year and into 2014? How sustainable could the gross margins be?

Valentin Gapontsev

As explained before that we are – our positive to hold gross margin we have between 50% and 55% well of course temporarily we can increase margin only for 60% 65% but for account to the increased sales that it might go with – we will prefer to increasing to our sales and production out of the distribute our lasers much more in many new applications then took hold just look for temporarily for gross margin because the strategic for a long time you could not exaggerate you have to invest, you have to invest, you have to develop new product, you have to prepare new manufacturing capacity (inaudible) into increased productivity and so it’s all cost money and we are working very seriously because we allot one year or a few years companies in market with that if you’re looking for long time to say in whole region for additional market for 50-50 pipe it’s enough for them we – but we cannot promise you to grow our gross margin deposits. But we’ll however we are very sure we have formed this level a long time.

Jagadish Iyer – Piper Jaffray

Okay. So another question is how should we be thinking about the systems business for the second half of this year in terms of contribution to the total revenue, please?

Tim Mammen

It depends when you’re talking out in the world to – for example there is a quite a lot of orders we’re working on in North America, there is a couple of orders in Europe these are actually fairly high value added systems, it still going to be a relatively small parts of total revenue. In Q4 you could see some pickup in the systems business in Russia but again it’s still going to be well below 10% of total revenue. So you can see it’s working hard in developing that business in specific geographies like Russia and outside of Russia we’re focused on very value added type applications there is a recent order we got for our cladding system that’s extremely high value add but it’s taking time to get some traction there I think that it’s going to take time to build that business up to say $50 million run rate is we’ve always maintained.

Jagadish Iyer – Piper Jaffray

Okay. And just a question for Valentin, I just had a quick question Valentin, I was wondering do you have any updated view in terms of the overall fiber laser growth for this year and any thoughts early for 2014. Thank you.

Tim Mammen

We haven’t updated you on the growth of the fiber laser market at the moment.

Valentin Gapontsev

But still fiber laser market still below 5 for first generation we expect next five year we’ll have very serious growth but want to grow limit this market it’s for many application well it’s starting to introduce all the ways of the test qualifications for customer only every month you also we will – we expect next quarterly year for revenue a year with a very big growth.

Jagadish Iyer – Piper Jaffray

Thank you.

Valentin Gapontsev

But we are not sleeping, we develop new and new products introduced for new application for example we have told them next year we’ll have serious contribution from UV lasers from new generation (inaudible) lasers and so on now which is players in this market as I said before still not sufficient for the market and not this market to grow it’s a very limited due to best quality of lasers which and very high cost of this laser which I think current place this market provided to customers, customer is not fit at all we expect new generation of lasers which will allow them to open door for (inaudible) of the laser for many application. We’re ready to provide to customers to meet their expectation.

Operator

Our next question comes from the line of Tom Haynes with Thompson Research. Please proceed with your question.

Tom Haynes – Thompson Research

Thanks. Good morning gentlemen.

Valentin Gapontsev

Hi, Tom.

Tom Haynes – Thompson Research

I was just wondering maybe you could elaborate a little bit on your involvement in the additive manufacturing space is that a new market, it sounds like it’s a new market for you but I don’t think we’ve talked about it all?

Tim Mammen

No, I think it’s – well first of all it’s a market we’ve been involved in for probably over 10 years one of our oldest customers in Europe, he’s been around doing this process for us considerable period of time. Just about all of the major manufacturers of additive manufacturing equipment to our customers of IPG or a small company in the UK, our view on that market is a lot of the growth has come out of the plastics additive manufacturing.

I think the view is that the plastic side is going to slow down and really the value add the engineered parts is much more on the metal side and that plays a much more favorably into IPG’s hands because most of the deposition technologies are laid to the used on their own on the metal side. So clearly there is a lot of interest in this area, we believe that we provide the unique fiber laser solutions out in the Gulf we’ve been sold into most of the major customers in those areas for a considerable period of time.

We also think that additive manufacturing expands beyond just the simple engineered parts put into strong growth for example for cladding which is another deposition technology historically we think more and more lasers will be used for high speed cladding and deposition processes as well.

Valentin Gapontsev

With all said now they’re used for the 1-micron in our lasers for this little more fleet but now we provide also highest quality and cheap this 2-micron laser which very suitable for plastic providing and the 3D printing and so we qualify lot of per calcium (inaudible) and now develop highest quality of high power they did laser for the first ten of this laser for some – by some customers that we have shown the results out of the many cases of more fine what we – this sintering and so it’s a new way of opening the opportunities of the before touch wave lengths were not available. Now we open door for such open lasers for market use.

Tom Haynes – Thompson Research

Is it mostly the high-power lasers which gets sold in the market?

Tim Mammen

Historically it supposed to be not medium power lasers so we’re now starting to see as we mentioned the customer had recently purchased a 10 kilowatt laser which is very high-power stat application to produce a pretty large part from different types of alloys. So some of the bigger parts of power of laser is increasing we’ve also heard from one of our oldest customers who is historically bought 2 to 400 watt lasers that’s starting to consider moving up into the kilowatt scale range so again probably to produce larger parts.

Valentin Gapontsev

Well it’s probably a much highest peak.

Tom Haynes – Thompson Research

Okay. Just a follow-up. It sounds like the seam stepper programs were way long nicely. Do you feel that the markets for the appliance is larger than the opportunity in the automobile sector for the same stepper?

Tim Mammen

It’s difficult to say immediately this time we have started marketing to couple of companies and the potential demand for welding on appliances and other general manufacturing is substantial, I can’t quantify whether it is big as the automotive or not but it’s pretty substantial in those areas as well with millions of units of products produced a year.

Tom Haynes – Thompson Research

Great. Thank you.

Operator

Thank you. (Operator Instructions). The next question is from the line of Mark Douglass with Longbow Research. Please proceed with your question.

Mark Douglass – Longbow Research

Hi, good morning gentlemen.

Tim Mammen

Good morning, Mark.

Valentin Gapontsev

Good morning.

Mark Douglass – Longbow Research

In the prepared remarks you talked about German automotive being down or at least weak. Do you see this is a more positive spending or they slowing down investments in general for the foreseeable future?

Tim Mammen

Generally gave an specific commentary about European automotive, the European automotive is recognized as being weak at the moment in terms of total output. We had call offs against on main agreement that we signed with one of the main companies as well as other orders placed. So, in terms of automotive end market has been it’s been relatively anemic for several quarters most of our growth on automotive is coming from Asia and – and North America. So, I think until you see a little bit of an improvement in the economic situation there you’re seeing a little bit of a pause in some of the deployments for different applications but we continue to work closely with just about every single company there and some of them are deploying outside of Europe for their new factories for example in Asia and we’ve got orders there as well.

Valentin Gapontsev

And now the largest Japanese company qualify our laser for market use in their production while also they are going very slow but now they’re finishing claim that performance have to by proof to use in these with Japanese automotive industry and Korea wants a new phase of penetration Korean market with our new product for automotive. The major our – the potential – we have now with seam stepper it’s a unique product with open and lot of new opportunities is there it’s new where we replaced other systems as spot welders. Now in the use only automotive industry up to 100,000 spot welders 100,000 where we replace our seam stepper much better provides much higher quality and also the better condition environment they have this in (inaudible).

So, the result even 10% to replace it from this out and it’s a huge business and we’re going successfully now with this direction now with many companies relating test and qualification of our seam steppers we started this process outperform what you see receptive occasionally couple of months ago where there was during next year it would be – we’ll start much penetration on the replacement of spot welders in mainly – not only automotive also different manufacturers of refrigerators mainly are when they produce it for new opportunity for them.

Mark Douglass – Longbow Research

Okay. With that seam stepper are those sales coming, well you already have a pretty good installed base or is it a – there is more growth available for the fiber lasers, is this going to be a mix of currently installed fiber lasers plus new installs or mostly going to come along with new fiber laser sales as well?

Valentin Gapontsev

Seam stepper – includes fiber laser very typical from total (inaudible) of what fiber laser inside of the seam steppers controller but also its the various special optical (inaudible) we sold largest capacity with major – if you press time where that could be used without any protection ISF installed once it open the reserve of their major problem with laser they now they have to put the laser automotive in large cabins very expensive each such cabin cost up to $1 million it’s all create a lot of problem addition of what, with our seam stepper first time which qualified to use without any protection against so far. It’s enormous step required but instead by would first introduce such technology in the market.

Operator

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

Jiwon Lee – Sidoti

Thank you. Just I wanted to get back to the second half quarter expectation. So, mainly the second half quarter is largely driven by the similar market dynamics or could you point to a couple of areas that might be a little bit different in the second half versus the first half?

Tim Mammen

I think the dynamics are broadly similarly and have another good quarter in China because there is strong backlog there. We actually had a very strong quarter in order flow out of Japan in Q2 whilst revenue was a little bit lighter there, that will be looking for a slightly changed dynamic we’re expecting growth in revenue out of Japan. Clearly in the second half of the year you expect Russian business to pick up because of the basing of capital expenditures. And then in Q3 we got strong backlog coming into the quarter end in North America so you’d expect a good quarter there. In terms of end markets and products with product lines I think you continue to see generally the same dynamics around areas.

Jiwon Lee – Sidoti

Okay, that’s helpful. And the second follow-up the pricing dynamics outside of your own initiatives and what’s not, did you guys observe any different dynamics within the laser industry into July?

Tim Mammen

We haven’t noticed anything in particular around the industry in general on pricing, nothing that I’ve heard reported to me or from our sales group, so no.

Jiwon Lee – Sidoti

And that include…

Tim Mammen

Have you noticed something Jiwon?

Jiwon Lee – Sidoti

Not that I can’t recall but I’m trying to think whether that includes sort of the Chinese market the Japanese market not just here but sort of globally your European market?

Tim Mammen

We haven’t really heard anything I mean I think there is a rumor out there that IPG was going to suddenly drop the price of pulsed lasers by 25% I think. I don’t know where that came from. We clearly are always introducing new product that has lower cost related to it so try and penetrate new applications. We’re looking at completely new designed pulsed lasers to try and get greater market share from very low cost YAG lasers but some of the rumors out there in the market I don’t think are with foundation.

Valentin Gapontsev

This is no way this is that you said problem we have the competitors won’t change these manufacturers for a low end pulsed laser and low end very low quality pulsed laser they provide cheaper price but now with the way open now we’re giving cheaper than they provide with the remainder for us the same high product. But our major – the where we’re looking for high grade pulsed laser we developed during the last year and this year new generation both high, much higher peak power the short pulsed lasers sophisticated, now with the wrong customers (inaudible) customer come to this new product even much more profitable – product in the high price also but so obviously we probably we are expecting that the performance with this new product there is many other people in the market. Only for consumer electronics throughout the year we’ve sold a large quantity of such laser for (inaudible) and other guys similar guys and so and they very (inaudible) laser.

Operator

Thanks. Our next question comes from the line of Joe Maxa with Dougherty & Company. Please proceed with your question.

Joe Maxa – Dougherty & Company

Thank you. In China you talked about what a diverse growth – growth and diverse application I wonder if there is just one or two that is all the majority of the sequential growth that you can point to or the driver was for such a big movement?

Tim Mammen

It’s across the main applications, that was strong growth in some welding particularly strong growth in cutting where we’ve highlighted I think this over the last year or year and a half Joe there is the way to which fiber laser technology is being adopted by the major OEMs, there as compared to C02 is even faster than around the rest of the world although we’ve actually seen a big pick up in some of the main OEMs in Europe as well. So people don’t seem to be so waited to some of the older technologies they want the latest and best and most efficient and most productive technology. So we haven’t lost any share against on the fiber laser competitors on cutting applications and we certainly seen our share of the cutting market grow very dramatically. We saw a strong growth for the QCW for some of the welding the micro welding applications I’d referenced with frames for consumer electronics and another good quarter on some of the marking applications both high quality marking applications as well as some of the more general manufacturing. So, it really was across the board on different applications with different OEMs and then also Joe of the very high power 10-kilowatt lasers on deposition manufacturing additive manufacturing applications.

Joe Maxa – Dougherty & Company

I see. And one other question on the advanced application side what you’re seeing there and how long or when do you expect that could be a growth driver again for you?

Tim Mammen

The advanced application just continues to be an uneven business quarter-to-quarter we did deliver several of the high-brightness lasers in Q2, there was an order that was taken in the first quarter, backlog there is a couple of units to go out in the third quarter. So to get to more even growth in that end market with or more even revenue with growth requires those applications to be commercialized. And I think we’re probably still 18 months away from having serious visibility into that. There are other orders that we expect to get from time to time but it’s just it continue to be an uneven business, we’re not losing that business to any of our competitors certainly no one else is capable of producing these high-brightness lasers at the parallel levels or even lower parallel levels as compared to IPG, it’s just a question of waiting for that market to develop more consistently.

Valentin Gapontsev

Well Joe we like to get our lasers in those they’re going around but they don’t have budget and most of these people don’t have budget, they’re asking budget but you understand the background, this is a problem with advanced application which is very slow business. But we don’t have any you can say only on the market value for all this.

Joe Maxa – Dougherty & Company

Thank you.

Operator

Thank you. At this time we’ve 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 Gapontsev

Thank you for joining us. We look forward to speaking with you next quarter with good news again.

Tim Mammen

Thank you, everyone.

Operator

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

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IPG Photonics (IPGP): Q2 EPS of $0.80 beats by $0.02. Revenue of $168.2M (+22% Y/Y) beats by $7.08M. (PR)