IPG Photonics Corp. (IPGP) CEO Valentin Gapontsev on Q2 2016 Results - Earnings Call Transcript

| About: IPG Photonics (IPGP)

IPG Photonics Corp. (NASDAQ:IPGP)

Q2 2016 Earnings Conference Call

July 28, 2016 10:00 AM ET

Executives

Angelo Lopresti - Senior Vice President, General Counsel and Secretary

Valentin Gapontsev - Chairman and Chief Executive Officer

Timothy Mammen - Senior Vice President and Chief Financial Officer

Analysts

Joe Wittine - Longbow Research

Joe Maxa - Dougherty and Company

Jim Ricchiuti - Needham & Company

Robert Burleson - Canaccord Genuity

Jagadish Iyer - Redstone Technology Research

Patrick Newton - Stifel

Chirag Odhav - Bank of America Merrill Lynch

Mark Miller - Benchmark

Brian Gesuale - Raymond James

Thomas Diffely - D. A. Davidson

Thomas Hayes - Northcoast Research

Operator

Greetings. And welcome to the IPG Photonics Second Quarter 2016 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Angelo Lopresti, Senior Vice President, General Counsel and Secretary for IPG Photonics. Thank you. You may begin.

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's discussed by the management for the company's intentions, expectations, 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, 2015 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 Photonics website or by contacting the company directly. You may also find copies on the SEC's website.

Any forward-looking statements made on this call are the company's expectations or predictions only as of today, July 28, 2016. 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.

I'll now turn the call over to Dr. Valentin Gapontsev.

Valentin Gapontsev

Good morning, everyone. Our second quarter results continue to demonstrate IPG's fiber laser technology leadership position. We achieved a record quarterly revenue of $252.8 million, gross margin of 54.5% and earnings per diluted share of $1.25, a 9% improvement over the same period last year. In addition, we completed the acquisition of Menara Networks, expanding IPG's telecommunications offerings.

IPG's [indiscernible] leadership position in our core market is the result of our advanced technology and performance advantages. Our ultra-high-grade proprietary components and vertical integration provide us with the best in the industry i.e., quality per quart.

In the same time, the unmatched scale of our manufacturing capabilities enables us to meet our customers' increasing demand for different types of lasers in high volumes. We have are also continuously pushed our technology forward and whereas the bulk of fiber laser innovation. These advantages are enabling us to bolster our leadership position in our existing markets.

We believe that we're, at least, maintaining market share is evidenced by the fact that total kilowatts of high-power and medium-power lasers increased, again, by more than 20% from Q2 2015 to Q2 2016. While revenue for this product lines increased by approximately 6% only. The difference between revenue growth and total kilowatts sold is due to our selling prices that are weighted in part to competition because we want to make sure that we maintain market share.

It is a significant achievement, but it does mean that we have to invest again in the production capacity and operating structure in order to support the growth in volume of products and to work hard to reduce cost and maintain target gross margins.

At our Investor Day in May, we underlined the breadth of IPG's growth opportunities. I would like to highlight a few of these new key products and market opportunities. We continue to work on diversifying our business and developing new products for new application. Year-to-date, our systems business has grown by slightly more than 50%. This growth has mostly come from the United States. While in Russia, we continue to work on numerous opportunities with our new or better ways of welding system, unique system for oil well casings, systems for welding continental gears that provides also unique technology for welding large titanium alloy parts and other machine systems.

Our welding system has recently been certified according to national standards during this quarter and proven to have significantly welding piece with a record world quality. We'll continue to walk on the way to [indiscernible] system for cinema projection and currently have several prototypes in long-term internal and continue to build fast-growing increase from numerous Tier 1 OEMs.

Our low-power UV marking system is now already for launch, and we are in discussion with several customers about evaluating the system. Some of these potential customers have many production lines around the world used in UV markets.

Similarly, we are building the first production batch of our ultrafast fiber lasers into a picosecond range and femtosecond range with the intention of providing this to prospective customers for testing and evaluation.

While the medical business is widely to take a longer time to qualify, we are continuing to work on several interesting applications in dental, urology, ophthalmology and aesthetic use. During this quarter, we also closed in the acquisition of Menara Networks, an innovator of enhanced optical transmission modules and system. Allowing IPG to offer more integrated telecom solutions and expanded our current telecom product offerings.

The acquisition is in line with our strategy to make bolt-on acquisitions that provide us with the talents, technology, and products to enter a new large complementary markets. I want to note the success we are having with the increase in adoption of our 8 to 10 kilowatt fiber wafers. We steer one system OEMs. Our commodity and reliability for these wafers are unique, which contributed to the adoption by several OEMs in the Europe and China. Also, our high power welding [indiscernible] are starting to gain traction in the location where we introduce them.

These new advanced [indiscernible] are a better solution for our customers. And we have developed a relationship with other companies to accelerate the adoption and improve their performance. Another product development news where we're looking forward to the testing [indiscernible] of our newly integrated marking system for plastics. This has lot of opportunity to IPG, this product will take advantage of the same value proposition that historically well with IPG to penetrate new and large applications namely, high quality beam, high uptime and lower price.

As we enter the second half of 2016, we remain focused upon improving our existing products, launching our way to new products and application that broaden IPG's presence beyond our core market, strengthening our technology lead and positioning IPG to expand our business with existing and new volumes by making significant progress on the testing and development of these new product lines and applications, and look forward to the launch to the world market.

With that, I will turn the call over to Tim.

Timothy Mammen

Thank you, Valentin, and good morning, everyone. Second quarter revenue grew 8% to a record $252.8 million from $235.1 million a year ago. Materials processing sales increased 6.5% year-over-year to $239.1 million, accounting for approximately 95% of total sales during the quarter. The increase was primarily driven by solid demand for IPG's core cutting and marking applications, as well as strength in emerging applications including laser sintering, annealing and ablation.

Sales to other markets including advance applications, telecom and medical applications, which accounted for approximately 5% of IPG's total revenue, increased by approximately 28.9% to $13.7 million. The increase was primarily due to improved telecom sales, driven by IPG's recent acquisition of Menara Networks. This was partially offset by lower sales of medical applications to one customer.

High-power laser sales, which accounted for 56% of total revenue, increased 7% year-over-year to $141.4 million. This growth, which demonstrates our continued leadership in this area of the market, was driven primarily by strong sales in cutting and welding applications. As Valentin mentioned, overall growth of high-power lasers was impacted by lower selling prices as kilowatts of power sold increased by more than 20%.

Pulsed laser sales increased by 14% year-over-year to $36.6 million. We continue to see strong growth in our high-power pulsed product with strong demand for marking and graving applications, as well as for cleaning and ablation. Medium-power laser sales increased 2% year-over-year to $27.1 million or 11% of total revenues. Higher demand for fine processing, additive manufacturing and laser-centric applications continues to be offset by increased pricing pressure in China and elsewhere due to greater competition.

Sales of QCW lasers, which are mostly used for fine welding and cutting, increased by 3% year-over-year to $16.2 million and accounted for 6% of total revenues. The increase is primarily related to increased sales for fine welding applications. Revenue from low-power lasers decreased 18% to $3.1 million due to lower medical sales year-over-year.

Other revenue including amplifiers, laser system, service parts, accessories change in deferred revenue increased by 13% year-over-year to $28.3 million, primarily as a result of higher telecom and laser system sales.

Now, looking at our Q2 performance by geography. Sales in Asia increased to a $143.1 million, up by 4% year-over-year. Within that region, sales from China increased 4% to $96.4 million, driven by continued demand for welding and cutting applications. On a constant currency basis, China was up double digits year-over-year. This growth was achieved despite increased pricing pressure in China and growing competition.

In Japan, sales increased 8% year-over-year to $20.3 million as we benefited a little bit from the stronger yen. In Western Asia, we saw sales decreased to $12.7 million from $14.7 million in Q2 2015 due to lower sales of lasers for cutting applications. European sales increased 9% year-over-year to $77 million driven by strength in cutting and ablation applications, and record sales in laser sintering.

We experienced good growth in Germany related to the increased demand for marking and engraving applications. We also saw a strong growth from countries where we have recently made investments or recently hired new mangers and sales personnel, including Poland, India, United Kingdom, Spain, and Eastern Europe.

North American sales grew 21% year-over-year to $32.3 million driven primarily by continued strength in cutting applications and increased sales in welding applications as we expand our presence with U.S. auto makers and their suppliers. This was partially offset by lower sales in medical and advanced applications.

Now, working our way down the income statement. Gross margins of 54.5% was strong and towards the top end of our guidance range of 50% to 55% as a result of the strong revenue performance and continued reductions in the cost of our components. These benefits were offset by an increase in unabsorbed and period manufacturing expenses and by inventory provisions which totaled approximately 2% of revenue or $5.8 million.

Sales and marketing expenses increased to $9.7 million from $8 million a year ago and with slightly higher percentage of sales at 3.8% from 3.4% respectively. We continue to invest in this area by expanding our geographic locations and hiring experienced sales specialist to cover some of our product and application introductions.

Research and development expenses increased to $18.4 million from $15.1 million a year ago. As a percentage of sales, R&D increased to 7.3% from 6.4% of sales in the same quarter last year. R&D continues to focus on improving existing products, developing new manufacturing processes and launching innovative new products and applications in order to strengthen our technology lead and allow us to penetrate new markets.

General and administrative spending in total dollars increased to $16.2 million from $15 million a year ago while they were flat as a percentage of sales at 6.4%. Operating expenses for the second quarter were $42.7 million including a foreign exchange gain of $1. 6 million compared with $41.3 million a year ago which include a foreign exchange loss of $3.2 million.

Q2 2016 operating expenses include approximately $1.4 million of operating expenses in amortization related to the Menara acquisition.

Second quarter operating income was $95 million or 37.6% of sales compared with $87.4 million or 37.2% of sales in the second quarter of last year. Excluding foreign exchange, operating margins were 37% and 38.5% in 2016 and 2015 respectively. Our tax rate in the second quarter was 29.75%.

Net income for the second quarter increased by 9% to $67.1 million. On a diluted per share basis, we reported $1.25 for the second quarter compared with $1.15 a year ago. In Q2 2016, the foreign exchange gain increased EPS by $0.02 while in the same quarter last year, it reduced EPS by $0.04.

This exchange rate relative to the U.S. dollar had been the same as one year ago, which were on average €0.9, RUB 53, ¥121 and CNY 6.12 respectively. We would have expected revenue to be $3.2 million higher, gross profit to be $1.1 million higher and operating expenses would have been $1 million higher.

Now, turning to the balance sheet. We continue to maintain a strong balance sheet, ending the quarter with $587.3 million in cash and cash equivalents. $126.8 million in short-term investments and $42.4 million of debt. During the quarter, we used cash of $46.5 million to complete the Menara acquisition. In addition, we purchased the Marlboro Valley factoring facility for approximately $23.8 million to increase capacity and support future growth. We financed that purchase with debt.

At June 30, 2016, inventory was $241.3 million, up 18.4% from $203.7 million at year-end 2015. Our current level of inventory on hand amounts to approximately 191 days compared to our target range of approximately 180 days. 7.3 million of the increase in inventory relates to the acquisition.

Accounts receivable were $151.5 million at June 30, 2016 or 55 days sales outstanding compared with $150.5 million at December 31, 2015 or 62 days sales outstanding. Cash provided by operations during the quarter was $41.3 million. Capital expenditures for the quarter totaled $45.9 million.

Now, a summary of our new share repurchase program. Today, we announced that our Board of Directors authorized the share repurchase program to mitigate the dilutive impact of shares issued under our various employee and director equity compensation and employee stock purchase plans. Under the new anti-dilutive program, aggregate share repurchases are limited to $100 million over a period ending June 30, 2018.

Also, shares of common stock repurchased in the new program cannot exceed the number of shares issued upon exercise or release to employees and directors under various employee and director equity compensation and employee stock purchase plans from January 1, 2016 through December 31, 2017.

Share repurchases will be made periodically in open market transactions using the company's working capital and are subject to market conditions, legal requirements, and other factors. In addition, management has been granted the authority to establish a trading plan under Rule 10b5-1 of the Securities and Exchange Act of 1934 as part of the repurchase program.

The share repurchase program authorization does not obligate the company to repurchase any dollar amount or number of its shares and repurchases may be commenced or suspended from time-to-time without prior notice.

Now for our expectations with the upcoming quarter. We currently expect revenues for the third quarter to be in the range $245 million to $260 million. We anticipate Q3 earnings per diluted share in the range of $1.12 to $1.27. The midpoints of this guidance represents quarterly revenue and EPS growth of approximately 4% and 1%, respectively, year-over-year.

In addition, based on the SM customer demand and macroeconomic factors, we continue to expect full-year 2016 revenue growth to be in the range of 5% to 10%. This guidance is based upon current market conditions and expectations and is subject to the risks we outlined in our reports with the SEC.

As a reminder, we do not attempt to forecast foreign exchange rate changes. The foreign exchange rate used for our guidance as well as the shares outstanding used to calculate EPS are disclosed in our press release. With that, Valentin and I will be happy to take your questions.

Question-and-Answer Session

Operator

Thank you. At this time, we'll be conducting a question and answer session. [Operator Instructions] Our first question comes from the line of Joe Wittine with Longbow Research. Please proceed with your question.

Joe Wittine

Hi. Thank you. Congrats on the [indiscernible]. You referenced price cuts in response to competition and I know directionally that's nothing new that the price per kilowatt has obviously been naturally easing over time. But I don't recall you specifically calling it out in response to competition in the past. So, maybe a little bit more details and including the power levels that we're referencing as a power, are you seeing it in higher power levels as well? Thanks.

Timothy Mammen

So, we did actually put some disclosure about this earlier in the year on our releases, so it's not anything that's particularly new. Probably, the most of the price decreases over the last six to nine months have come on the medium power, which is something we'd also called out as expecting to happen as newer entrants to the market are trying to gain market share. In some instances, we'll find people really just trying to get that share by substantially lowering prices or even dumping product into the markets. So, that's probably the most extensive.

And on the higher power level, that's more in line with expectations, although the decreases have been relatively substantial over the last year and probably more in the range of 1 kilowatt to 2-kilowatt power lasers.

Valentin Gapontsev

That will put us in pricing. It not only depends from competition and also we're trying to include new and new application now to make laser a [indiscernible] application, decrease cost of our product starting from component [indiscernible] complete systems. It's somehow, and able to build automotive market. You see we're growing in quantity of units. We are going to grow very fast. It's about three, four years, it's worth in the units between 25% to 40% each year.

Let's follow any our competition market growing, the penetration of fiber lasers at the market, they're very fantastic. And we probably hope to make the same. Our prices, we optimize for rich application where people don't have, up to now did not have other choices.

It's all competition with the other technology which currently people use in this application, other technologies, the price for laser technology is above – always the technology should provide not only better quality, higher speed it's all should be, available and can compete with price with other technology currently especially in [indiscernible] and so on. In that way you can give to variable watch market.

So, our competition who tried to do for a fiber laser market, now they receive more and more result for this. So, it eliminates even Chinese manufacturers-Chinese. We don't provide the end market with Chinese people. We beating them also increasing in our sales in China in spite of the damp in price.

Joe Wittine

Very helpful. Thanks. And then just on the P&L, Tim, flat revenues sequentially. But modeling it down, taking an EPS that has helped us kind of categorize that in the P&L. Is it mix or is it continued OpEx scaling, is that – I suspect.

Timothy Mammen

So, some increased investment in OpEx, but also probably, more around the sales and marketing side, a gradual increase there. But you've also got a full quarter of Menara expenses coming through on the P&L including amortization of the intangible. So, that reduces the range on EPS by about $0.02. Overall, at the top-end of the range, I'm using about 54% on gross margins in my modelings. So, I'm being a little bit conservative on that if you get to the top-end of the range. So, yeah, we'll continue to invest on the business, particularly sales and marketing. And then, you've got the effect of the acquisition coming through a little bit.

Joe Wittine

Good. Thanks very much.

Operator

Thank you. Our next question comes from the line of Joe Maxa with Dougherty and Company. Please proceed with your question.

Joe Maxa

Well, thank you. I wanted to talk a little bit more about the newer products you've been launching or in the process of launching and testing. If you take a look, maybe, a year or two from now, what would be your expectations of – what all these new products could contribute to the business? Maybe, as an aggregated look.

Valentin Gapontsev

Good question. So, I think, we, for example, [indiscernible]. This market is growing faster and so on but still have a normal problem. So, enormous prices in market quality of products so far, the other current ways in the market. It's not good at all, but it's still not [indiscernible] grade than industry grade. And so, it's used only in some applications.

We introduced it so the new unique from the point of [indiscernible] product. The [indiscernible] is now our product, family of products, not one product, family of pico and femtosecond on our estimation doubled at triple-digit time better than products existing in the market quality parameter or quality or total technical quality of product divided by cost.

So, we provide much, much higher quality products and also much less costly. This opened door for a lot of application and practical – probably industry-grade three years of introduction market because it was where it had qualification.

And so, now, we're ready to enter it to the market, many application and we started now mass product – started mass production of this product we call. During two, three years, we'll get market share of the current market, and we increased this market in order of 10 and more in volume. So, it really opened door for many new applications, but people [indiscernible], but still not able to [indiscernible] and cost.

The same with the UV market, also a new approach, unique technology which opened a lot of new application – making also UV market very, very practical in working market for mass application. The same green laser we developed green laser, unique and nobody have done similar in power, in efficiency, the reliability. And so, it's – also mid-infrared lasers, still we try to develop market. We develop unique line of products even with [indiscernible] product. Nobody have something similar. But it's new market at all for people with zero applications, still not really familiar with new opportunities. It takes time. What we do with mid-infrared market is also – would the [indiscernible] able to build during five years.

The problem also the way it's moving not so fast is the like – investor like because the qualification brought to each new products, especially when you have to pass very serious qualification. OEMs not able to introduce immediately to use [indiscernible] very widely because it's – when you're on the process of certification part in the – before they would be able to use this in the market.

For test, they can buy, of course, with [indiscernible] but for use in real production [indiscernible]. And so, on medical application, for us difficult quality certification, two, three years typical process. It's always the way. But we prepare all this new market from our views in near future.

Joe Maxa

All right. Thank you. That's a nice color.

Operator

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

Jim Ricchiuti

Thank you. Good morning. The question I had is two questions. Earlier in the year, we discussed the potential opportunity in the consumer electronics market and just wondering, did that ever materialize or has that been pushed out a little bit.

Valentin Gapontsev

Some started to come through, but that has been weaker than we expected. And it's really a result of the end use in consumer electronics market actually cycling, not just I think with IPG, but other types of lasers around into that new product line. So, those lasers were not old enough for them to replace them or they're looking out to use some of the stock on the existing product line. So, the expected investment for us on that has been less of a benefit this year than we would have hoped for.

Jim Ricchiuti

Okay. And Tim, I wondered if you could comment just in general tone of bookings particular I'm curious if you have seen any – as we went through the quarter, any fall out as it relates to Brexit. And just in general the tone of bookings geographically.

Timothy Mammen

So, the total booking is pretty reasonable. Book-to-bill was just about above – a little bit above one would have flow through the first weeks and July has held up. I think Q3 is always a bit of a challenge because you get into August which is particularly slow in Europe.

Brexit has had no effects so far. I think it's way too early to see what the potential impact on that has been. The other thing to note is that the sales in the UK was – they've grown strongly with the investments we've made there is still very small or about $3 million year-to-date. So, we continue to work on significant opportunities there.

The devaluation of the sterling, we have to look at some of the pricing in the UK given what's happened over there. It's just not a material part of the business and it's too early to call anything specific on Brexit. The tone geographically on bookings, I think one of the weaker areas that we've seen in terms of expectations for Q3 is Turkey. That's, perhaps, not surprising given what's going there. So, that's affected a little bit the expectations for the quarter. Turkish sales will be down about 50%, so sales into Western Asia were about $12.7 million to $13 million. So, that's a meaningful impact.

The tone in China has been good. The bookings expectations in Q3 for China are pretty solid. We've got a good expectation for bookings in Japan and the guidance in Japan is good. Europe's probably, overall, also a little bit weaker and the U.S. is reasonable. I wouldn't characterize the U.S. as growing massively. So, I think it actually covers all the different areas.

Jim Ricchiuti

Okay. That's helpful. Thank you.

Operator

Thank you. Our next question comes from the line of Bobby Burleson with Canaccord Genuity. Please proceed with your question.

Robert Burleson

Yeah. Good morning. Congratulations on the upside in the quarter. Just curious in terms of the pricing pressure and growing competition mentioned in China. Are there – is there anything incremental there in terms of what you're seeing a quarter ago? And, do you expect maybe some stability at some point in pricing and the amount of emerging competition or is this something that's going to be kind of ongoing?

Timothy Mammen

We believe that now our prices in China from low and mid-level so competitive [indiscernible] don't have any chance to beat them and to win this. It was there [indiscernible] our 10-year margin. But now, it's now a correction price [indiscernible].

Robert Burleson

Okay. And the wireline and telecom investment, North America looks very strong in general. And I'm wondering with your Menara acquisition, what the, kind of, share of total revenues could be, let's say, in 2017 or maybe at some point in the future. Could this communications be a 10% business? Or kind of, how big do you see this becoming for IPG?

Timothy Mammen

Menara needs to continue to develop their high-speed transmission capability, which would then put them firmly in the really emerging opportunities in the 25 gigs to 100 gig and above range. That product is continuing to be developed by then and, correct me if I'm wrong, Valentin, but over the next six to nine months. We'd expect to have further progress on that and potentially something ready to release to the market.

At this point in time, Menara doubles – more than doubles the size of our telecom business. Growing it about $40 million on an annualized basis. So, it puts it at about 5% of revenue. If we can continue to execute on that, difficult to put a timeframe on it, but we'd certainly like to grow it to be closer to 10% of the total business. But, again, putting time frames on this and driving the adoption into the end markets. It's probably the most complex thing to determine.

Valentin Gapontsev

I have to correct. We – Menara is not like separate unit, which would develop on the business. Menara [indiscernible] would be part of our team. We have distribute team in Eastern Russia, in the U.S., and now we'll also consider a couple other groups, which will shortly [indiscernible]. So, we create new technology base to jointly [indiscernible], with this team we won't be able during one year, two year compete with 25 to 100G and 200G with some major players, current players in the market with new and more advanced in a way.

Robert Burleson

Okay. Thank you for that. And then just curious on your legacy telecom business. That's been strong wondering whether or not you're expecting continued strong growth in the organic growth for telecom for the balance of the year.

Valentin Gapontsev

Yeah. There's a couple of deployments we're looking at around the world. They're expecting – what was the original telecom business with the existing telecom business should have a bit of a stronger second half of this year given those deployments they're working on.

Timothy Mammen

Okay. The growing quantity of customers which should be qualified started to use the telecom product finished system. Even in the U.S. we have [indiscernible] with the tier one series which was our component is not much of further purchase. We have the same in Vietnam. For example, Vietnam Telecom in [indiscernible] or now we're talking to India, and starting to also see talks in Brazil. But our major target is to get – see this market share in the telecom business in Russia.

Robert Burleson

Okay. Thank you.

Operator

Thank you. Our next question comes from the line of Jagadish Iyer with Redstone Technology Research. Please proceed with your question.

Jagadish Iyer

Yeah. Thanks for taking my question. Two questions, Tim and Valentin. First, I just wanted to understand on your magnitude, you have indicated that you're seeing some price erosion. How do you see gross margins evolving in the context of how much headroom you have in terms of cost reduction as we proceed through second half of this year and into next year? And then I have a follow-up.

Timothy Mammen

So, a couple of comments on that. First of all, just so it relates a little bit to the questions asked previously, the price erosion that we've seen is really relative to Q2 a year ago. Pricing has been more stable I'd say Q4, Q1 and Q2 of this year. So, you haven't seen another step down in pricing. Relative to that, the gross margins, if you look at the individual margin profile on the products, has continue to hold up pretty well. So, then you come back to the other part of the equation which is really how well we are absorbing and continuing to absorb the fixed cost and the ongoing investment.

So, certainly in Q3 at the bottom end of the revenue range, you would expect to have a weaker gross margin. And then similarly in Q4, you need to see a good quarter in Q4 in order to maintain this gross margin. So, it continues to come back to how well you're really absorbing the fixed cost base because the margin profile of an individual product continues to be pretty good.

And then, into the next year, it's going to be a combination of those factors. There's pricing hold up, can we continue to bring cost down and maybe get some benefit from it and then how well we can grow the business and absorb the fixed cost base. So, we have less room I think for maneuvering a little bit given the pricing pressure in the market. But we still remain in a very strong position relative to our cost in the profit margin of the product. It's really quite amazing what we've achieved on the cost reduction site.

Valentin Gapontsev

On point of cost of our products to decrease the cost of making automation and new solution which is more cheap and simple solution but provide higher quality. From point of laser, our gross margin growing, not going down, but growing despite the price decrease. But we introduced new more complicated systems like machines and so on. Of course, in the beginning, these new products will provide us – will make some impact on the gross margin, but still not so much to decrease cost from our 50% to 55%. We compensate this by increasing gross margin from laser sales.

From point on price, we don't see now a need for a drop the price of time this year, in second half this year or even next year, maybe some only local but not in impact. So, our price this time should [indiscernible] agenda would be stabilized the new product we introduced will have much higher prices, but this will provide new opportunities to customers. So, we don't see any impact of the pricing on our gross margin revenue.

Jagadish Iyer

That's very helpful. That's very helpful, Valentin. And just as a big picture question, Tim, you had, in prepared remarks, had said that you reiterate your 5% to 10% growth. Given all the new product rollouts in the markets and applications that you are targeting, some of them which you highlighted in your Analyst Day, can you get back to the historical growth rates of mid to high-teens possibly next year? Thank you.

Timothy Mammen

We're not going to give – it's way too early to call out what the growth rate is going to be next year, uncertain what the market is with product introductions are happening. The evaluations have to go on. So, there's a tremendous amount of work going on in that regard. I'm not going to get drawn into a longer-term guidance next year and – at this point in time, it's just way too early to do it, Jagadish.

Jagadish Iyer

Thank you, Tim. Thanks, Valentin.

Operator

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

Patrick Newton

Yeah. Good morning, Valentin and Tim. Thank you for taking my questions. Diving into Menara, is it right to think that it contributed about $4 million in the June quarter and should add about $5 million to $6 million in the September quarter?

And then just trying to understand the full-year guidance in regard to Menara. Is the 5% to 10% growth rate you're targeting an organic growth rate or is it also inclusive of the Menara contribution?

Valentin Gapontsev

The Menara in the second quarter was not $4 million. It was about $2.3 million, so less than 1% of revenue. I'm not going to break out specifically what it is in the guidance for Q3. We just don't get into breaking these things out. So, specifically it is included in the 5% to 10% annual guidance for the year.

Patrick Newton

Okay. And then I guess just looking at the annual guidance, if we take the midpoint of the revenue for the September quarter, we can back into implied guidance of about $260 million in the December quarter, just based on the midpoint of your growth rate – for your growth rate. Just thinking through kind of an implied 10% uptick in December, can you help us understand what drives that? I think that typically China is seasonally weaker in 4Q, did you see a downtick in the consumer electronic side of your business which I think you said wasn't as strong as expected to date. And then you see kind of a budget flush from North American, European types of vendors. But what is implicit in an uptick in the December quarter when – if we look back at prior years, often times 4Q was actually down sequentially.

Valentin Gapontsev

First of all, 4Q a year ago you remember was very weak. We had very weak order flow in September and into October that really impacted the end of last year. The bookings forecast we had for Q3 and into Q4 built on the bottom up basis, gives us some comfort that Q4 should be a reasonable quarter this year. Obviously, that tone and the bookings have to be achieved in order to get there but...

Timothy Mammen

[indiscernible] Q4 should be much, much higher than-that year with our current product sales.

Valentin Gapontsev

So, it's built upon like what we've looked on the bookings forecast from different areas around the world. The bookings forecast for this year, although Q3 is always weaker than Q2, is actually pretty strong. So, that point to Q4 in China being well-above where it was a year ago. So, those are a few of the thing you're right on the budget flush in Europe and North America. Japan, we continue to see good traction with the main cutting OEM there. So, that's the general tone around the business that we're seeing at the moment.

Timothy Mammen

The Q4 we'd expect to get these done from a new product, which we're now starting to introduce into the market. And also it only includes numerous kinds of ways I mentioned [indiscernible]. From Lumina, these projectors – then we want this Q4, we expect we'll start to get a series of sales growth, very positive growth for our System business. System business, what now [indiscernible] your qualification whichever go to customers whom would build this. Now, the testing and also be able to [indiscernible] for the qualification and so on. But they – what we expect to see this growth jump in sales of System start in quarter three, but major in quarter four in the beginning of next year.

Patrick Newton

Great. And just, I guess, on the China bookings commentary, can we get a little bit more color on where you're seeing some of that strength? And, I guess, in general, we've gotten some checks towards the end of the quarter that were showing a little bit of slowing and then still some softness in early July. So, clearly, you're seeing some better trends than what we're teasing out of the geography. I would love to know where and then what applications.

Timothy Mammen

Yeah. We've actually seen a strengthening of orders through Q2 for cutting applications. Cutting started the year very weak. You saw a strengthened order flow for welding business particularly combined the high-power in QCW Welding business, even without having the – as big a benefit as we thought we'd get from the consumer electronics last year. Continued fine-cutting applications, strong growth in that area. And then, the marking and graving businesses has held up reasonably well.

The interesting thing about China is that, and this is actually a really pleasing thing, is that it's coming from a much more diversified customer base as well. So, that's a positive. So, there's been a tremendous amount of work that's been put into growing the number of potential customers and different OEMs that we have there.

Valentin Gapontsev

Yes. We returned back OEMs which we put that into test in the use from our competition of all the practical – the most of them. Maybe with the most serious customer, they come back to IPG. It's a trend. But we did not sell – did not loss any business with current program, for present OEM customer. We deployed, for example, a customer at least, where the concerns that some of them claim they [indiscernible] fiber laser and so on. But it doesn't work at all. The increase purchase from IPG. They never stop. They did not bring in [indiscernible] to stop it. They don't have any opportunity to make this.

Despite many of them claims they have own fiber laser, invest in fiber laser. Yes, the 10, 15 years look – so, work in 15 years in laser – fiber laser. In 10 years ago, claim from the CEO that they produce [indiscernible] but what they say was neglected with also is up to now 15 years. What we can talk about small guys from China is always don't say when your [indiscernible]. They have no opportunity for new and big ones. 10 years to develop competitive fiber laser, good quality.

Patrick Newton

Thanks, Valentin. I appreciate it. I appreciate the details. Thank you for taking my questions, and good luck.

Timothy Mammen

Thank you, Patrick.

Operator

Thank you. [Operator Instruction] Our next question comes from the line of Krish Sankar with Bank of America Merrill Lynch. Please proceed with your question.

Chirag Odhav

Hi. This is Chirag Odhav on for Krish. I was hoping to just get an update on the [indiscernible] (53:06) lasers 4-A and the [indiscernible] fiber lasers? And the impact you see on sales from them?

Valentin Gapontsev

So, Han's is still claiming that they're trying to develop a fiber laser. We believe that they brought some pulsed laser offerings and then using some of that in marking and engraving applications. To our knowledge, they don't have any higher power product even at the 500-watt range. So, the sales for QCW and high-power continue. We believe we don't have a complete view on this, but continue to be sourced entirely from IPG.

Han's has had – I think the strength in their business has been on some of the micromachining applications. So, I mentioned that the cutting business in China had started slowly in Q1 and even the beginning of Q2. So, our sales to the cutting group there and other cutting sales in the first half of the year were lower than expected. But that's not because they're sourcing the lasers internally. They continue to believe they will be the primary source of all of those lasers at high-power in the QCW region. And there's no change in that view from them.

Chirag Odhav

Okay. Great.

Valentin Gapontsev

But now it started – last month, it started to grow this positive trend now cutting in China, so the quantity order is growing.

Chirag Odhav

Okay. Great. And would you be able to give a percentage of how much of your quarterly sales went to Han's?

Valentin Gapontsev

I haven't got that number at hand at the moment. It'll be in the queue.

Chirag Odhav

Okay. Perfect. Thanks.

Valentin Gapontsev

Thank you.

Operator

Thank you. Our next question comes from the line of Mark Miller with Benchmark. Please proceed with your question.

Mark Miller

You had highlighted the importance of new product sales this year. I think you had estimated $50 million to $100 million potential. And I think last quarter you broke out $30 million. I was wondering, could you breakout what the sales were for this quarter for new products and what were the primary drivers of these new product sales?

Valentin Gapontsev

So, you had – I calculated this about 20% of revenue was new products and those were the QCW, the high-power pulse, which has started to gain significant traction. So, the high-power pulse is really starting to become a much larger share of total pulse sales. The benefit of that product line is that it has really good gross margins on it. We're increasing the use in – we have mentioned that the ablative deeper engraving even marketing applications is starting to use that. The accessories were approximately $20 million of sales, so that's nicely up on a year ago. And then system sales also increased. So, I calculated all of those newer products to about 20% of revenue, so a good contribution on those.

Timothy Mammen

System sales increased by 50% only during this.

Valentin Gapontsev

First half of the year.

Timothy Mammen

Yes. First half of the year, but only beginning. The system sales were dumped very seriously next set of quarters. [indiscernible] will start to bring us what is essential [indiscernible].

Mark Miller

Okay. Thank you. And you had mentioned – you had highlighted I think at the Analyst Day another opportunity. I believe you said you were in a couple of manufacturers and looking at the low temperature polysilicon, a new opportunity, which is quite large. I'm just wondering, any progress, anything you can report how those evaluations are going?

Timothy Mammen

Polysilicon and [indiscernible].

Valentin Gapontsev

Well, assuming you can [indiscernible] such kind of technology, the way I introduce it takes many years. We don't put in our business plans [indiscernible] business. [indiscernible] process and qualification, we could not expect any contribution of this, this year or next year.

Mark Miller

Thank you.

Operator

Thank you. Our next question comes from the line of Brian Gesuale with Raymond James. Please proceed with your question.

Brian Gesuale

Hey. Good morning, guys. Just a quick question. System sales have been growing really nicely and you're fairly ambitious in your outlook. Can you maybe talk to us about how big we should think that business is this year? And then, maybe when we could see that be $100 million to $150 million unit. And maybe just an overall impact on gross margins on some of those products. Thanks.

Timothy Mammen

So, this year I think it depends really the end of the year hands out particularly with Russian orders, but you could see systems business grow more than 50% if you get the detraction on the Russian side of the business and maybe even a bit more than that. The $100 million to $150 million, it's very difficult to put a timeframe on that, Brian. Certainly, a target internally at the customer we talked about in the company of having a $200 million systems business.

You're talking a multiyear timeframe to build that business up. So, the traction we've got in Russia, there are – we're just looking at the quote list. In the U.S., there's over 100 quotes in the U.S. with different types of systems out at the moment with 26 of them that have had recent activity on them. So, it takes time to close those orders. It's a longer sales cycle, but there's a lot of development activity on both the sales side and the scientific development side on all of those different types of system.

Valentin Gapontsev

Our target [indiscernible] we have the chance to achieve this target during two years to get this to $150 million in my opinion, my target. Tim, of course, has [indiscernible] much more conservative. Careful with those [indiscernible]. Now, we're working very serious where you watch customer with new [indiscernible].

So, this is [indiscernible] each of this technology where you watch volume, but then for each of them, $50 million to $100 million minimum. But it's not one, it's now the – well, about five technologies such kind of unique technology will provide not only hardware, not only optics and the machines and mechanics, and so we provide all technologies. So, in the case, the cost [indiscernible] margin doesn't – mainly for [indiscernible] to the technology licensing and so on. It's absolutely new approach from IPG. But it works. It works very well today.

Timothy Mammen

On the gross margin side, just to address positive question. It depends upon what type of application it is. There are some lower margin applications. But there are also some very high margin applications particularly on the welding side of the business. Some of the welding systems and multi-access systems we've sold have gross margin equivalent to the corporate average. So, we don't expect a growth in that business at this point in time to take us outside of our targeted gross margin range of 50% to 55%.

Valentin Gapontsev

Our [indiscernible] technology, we now – I would've taken over with [indiscernible] with existing technology, exist in only one station, exist in technology, [indiscernible] of $40 million to $50 million. Our solution 10 times less potential with [indiscernible] mention. So – but we now provide so huge saving to people. It's not one system. It's multiple, a large quantity potential with that kind of system. So, the price in this here is not just hardware pricing. It's in margin. It was a replacement, say, enormous saving increase in [indiscernible] increased commodity of price of final product. So, quite essential increased quality.

We could not open the details here. But, it is not one application. Minimum three application with the same scale. It's not [indiscernible] it uses, reduces, introduces to developed introduce in the market.

Brian Gesuale

Great. That's terrific. Thank you.

Operator

Thank you. Our next question comes from the line of Tom Diffely with D. A. Davidson. Please proceed with your question.

Thomas Diffely

Yeah. Good morning. Tim, another question on China, about the customer. So, the questions really around the access to capital that they have, we've heard that the large guys have no problem, but the smaller players has been tough to get the access to capital. It sounds like you're seeing business as okay with the smaller players, is that correct?

Timothy Mammen

Yeah. We haven't come across anything on that side of the business. We continue to collect with the smaller players, actually cash before delivery with some of the larger players and some specific customers we use [indiscernible] in China bank notes. So, these are like internal letters of credit that certainly helps to alleviate the sort of working capital cycle that they have and we can discount those bank notes relatively inexpensive or very low interest rates at the moment.

And so, we continue to use that program. We haven't really come across credit issues in terms of access to credit in China. I would say – if anything I'd say the credit environment, they're trying to loosen it a bit. I haven't heard of any tightening recently.

Thomas Diffely

Okay. That's good to hear. And finally, when you look at the pricing, are you just responding to price in the marketplace or do you ever initiate pricing pressure just to put – take advantage of your really low cost?

Timothy Mammen

Of course, we do it sometimes to take advantage of our lower cost of maintaining gross margin to ensure that competitors have very – a lot of difficulty in getting into the market. And we also do it, as Valentin mentioned, when we're trying to develop newer applications either displacing existing laser or non-laser technology. So, it's not necessary just in response to someone going into a customer and offering them 10% less. It's in different areas we use pricing to grow the business.

Thomas Diffely

Great. Okay. Thank you.

Operator

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

Thomas Hayes

Thanks. Good morning, gentlemen. Thanks for taking my question. I guess, just real quickly, Tim, if you could just maybe talk about what you're seeing in the auto sector. If I remember correctly, the order patterns in Q1 were a bit choppy. Just wondering how Q2 was and then the outlook for the second half of the year?

Timothy Mammen

So, Q2 automotive sales increased sequentially quite nicely year-over-year. They were basically flat, so you saw some benefit on the welding side of the business there. I'd say they – well, they strengthened in China. We had a good quarter on U.S. automotive sales. Europe was pretty good. Japan on automotive was weak. One of our main customers there seems to be behind on rolling out their multiyear laser program. Purchasing from them is a bit slow. So, Japanese automotive side is probably the one I would call out as being weak. But it certainly improves sequentially year-over-year, not a huge amount.

Thomas Hayes

Great. Thank you.

Timothy Mammen

In Europe problem with it quite impact in total sales investment in Euro automotive industry. But U.S. we have a very good trend now the Detroit again start to [indiscernible] growing here the adaption of our technology in the U.S. automotive.

Operator

Thank you. Dr. Gapontsev, there are no further questions at this time. I'd like to turn the floor back to you for final remarks.

Valentin Gapontsev

Okay. Thank you for joining us this morning. Again, we look forward to speaking with you next quarter's call. Have a very good day.

Timothy Mammen

Thank you.

Valentin Gapontsev

Thank you much.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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