IPG Photonics (IPGP) Q1 2018 Results - Earnings Call Transcript

IPG Photonics Corp. (NASDAQ:IPGP) Q1 2018 Earnings Call May 1, 2018 10:00 AM ET

Executives

James F. Hillier - IPG Photonics Corp.

Valentin P. Gapontsev, Ph.D. - IPG Photonics Corp.

Timothy P. V. Mammen - IPG Photonics Corp.

Analysts

Joe H. Wittine - Longbow Research LLC

Robert Joseph Burleson - Canaccord Genuity, Inc.

Thomas Hayes - Northcoast Research Partners LLC

Thomas Robert Diffely - D.A. Davidson & Co.

Mark Miller - The Benchmark Co. LLC

James Ricchiuti - Needham & Company, LLC

Patrick J Ho - Stifel, Nicolaus & Co., Inc.

Operator

Good morning and welcome to IPG Photonics First Quarter 2018 Conference Call. Today's call is being recorded and webcast. At this time, I'd like to turn the call over to James Hillier, IPG's Vice President of Investor Relations for introduction. Please go ahead, sir.

James F. Hillier - IPG Photonics Corp.

Thank you, Melissa, and good morning, everyone. With us today is IPG Photonics' Chairman and CEO, Dr. Valentin Gapontsev; and Senior Vice President and CFO, Tim Mammen. Statements made during the course of this 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 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, 2017 and other reports on file with the Securities and Exchange Commission. Copies of these filings may be obtained by visiting the Investors section of IPG's website 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, May 1, 2018. The company assumes no obligation to publicly release any updates or revisions to any such statements. For additional details on our reported results, please refer to the earnings press release and the Excel-based financial data workbook posted to our Investor Relations website. We will post these prepared remarks on our Investor Relations website following the completion of the call.

With that, I'll now turn the call over to Valentin.

Valentin P. Gapontsev, Ph.D. - IPG Photonics Corp.

Good morning, everyone. The momentum that carried out IPG through an outstanding year 2017 continued in the first quarter of 2018. We delivered record first quarter revenue and EPS. In addition, we achieved the highest level of quarterly bookings in the company's history during the first quarter. As a result, our Q1 book-to-bill ratio was above 1, positioning us to deliver strong results in the second quarter. We continue to ramp production, meeting the demands of our customers by shipping record volumes of high power and ultra-high power fiber lasers. And it is very important that despite the tremendous increase in volume, our customers have experienced no change in product lead times. Our unique technologies and vertically-integrated business model enable us to more rapidly scale production, reduce costs, and deliver innovation faster than the competition.

As a reminder, there is no company that can deliver high power laser solutions at our scale, quality, cost and lead time.

The rapid adoption of IPG's high power products across our largest applications and geographies continues to drive outperformance.

Our high power fiber lasers enable faster processing speeds, along with superior productivity and flexibility. During the first quarter, sales of high power CW lasers increased 37% year-over-year with even higher growth in units. Sales of ultra-high power solutions at 6 kilowatts and above increased more than 60% year-over-year and are approaching 40% of total high power product sales.

Our largest OEM customers are migrating to higher power fiber laser cutting solutions at 10 kilowatts, where IPG has an unique solution in the marketplace. A handful are also testing our fiber lasers at 12 and 15 kilowatts, which continue to demonstrate faster cutting speeds and improved productivity for the end user.

At the low end of the cutting system market, we continue to see customers purchase our 1 kilowatt and 1.5 kilowatt rack-mounted fiber lasers in record number. With the recent introduction of new IPG's 2 kilowatt rack-mounted product, we expect the strong growth in this market will continue.

The market for low end cutting system in China continues to expand rapidly, driven by superior productivity and flexibility of fiber laser cutting systems over non-laser technologies, such as punch presses that use inflexible dies that takes weeks to build and wear out over time. We are benefiting from rapid growth within new product categories as well.

Pulsed laser sales increased 18%, driven by our 100 watt and above lasers, which increased more than 25% year-over-year. Market acceptance of this product is occurring across a diverse set of applications including foil cutting and terminal cleaning for batteries, solar cell scribing and drilling, and laser trimming for displays.

Sales of green lasers used as an ablation tool for improving solar cell efficiency doubled versus the year-ago period. Among our newest products, we saw our first consistent revenue from ultraviolet lasers used for marking and engraving non-metals and material ablation. And we continue to see encouraging customer interest and order activity for our new ultrafast picosecond and femtosecond laser families.

This early interest is across a variety of customers in the U.S. and Europe for many different applications within micro materials processing. Initial feedback has been very encouraging, with customers praising the consistent energy per pulse, fast cold-start time, compactness, and electrical efficiency of our products over incumbent solutions.

These new products are driving our addressable market expansion with the micro materials processing, scientific, and medical arenas. We're also expanding into new markets by selling more optical accessories and fully integrated systems to drive new application for laser technology.

Sales of beam delivery accessories, including high power welding and cutting heads, scanner, collimators, beam switches, process fibers, smart power supplies and chillers, grew at faster rate than total sales this quarter, as we continue to see strong customer interest in these products.

The acquisition of LDD and the addition of real-time welding monitoring capabilities is also helping us sell more integrated beam delivery solutions and provide a competitive advantage for our lasers within new laser based welding opportunities.

Our system businesses was also a strong contributor in the quarter, as we continue to target opportunities in the automotive, aerospace, railway, pipeline, and medical device industries.

Finally, many of you probably saw that IPG Photonics was recently added to the S&P 500 Index. It is an honor to be included in this large cap equity index along with other leading U.S. public companies. We view this as a milestone for our company, reflecting the successful execution of our strategy and our industry-leading financial performance since our initial public offering in 2006. However, we believe IPG's future is even brighter. We continue to accelerate adoption of high power fiber laser technology within our core markets, enabled by the superior productivity, reliability, and cost of ownership of our product over the competition.

In addition, we continue to expand our addressable market with the introduction of new products. These include our unique super high lumen RGB systems, super power single frequency amplifiers for lasers and high power diodes for the defense industry, and our UV ultrafast and visible lasers that enhance our presence in non-metal material processing, medical, and scientific applications.

For some of them, for example, UV lasers, we have received (10:30) multi-hundred unit OEM orders recently. With these solutions, IPG is unlocking multiple new potential growth drivers for the foreseeable future, and we execute on our mission to make our fiber laser technology the tool of choice in mass production.

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

Timothy P. V. Mammen - IPG Photonics Corp.

Thank you, Valentin, and good morning, everyone. I will review the key financial highlights of the quarter. Revenue in the first quarter grew 26% to $360 million, exceeding our guidance of $330 million to $355 million. Revenue from materials processing applications increased 28% year-over-year, driven by rapid growth in lasers sold for cutting and 3D printing applications. Revenue from other applications decreased 5% year-over-year.

By region, first quarter revenue in China increased 29% year-over-year and represented approximately 42% of total revenue. Sales of high power CW lasers for cutting applications drove the vast majority of the revenue increase in China versus the year-ago period. Welding sales in the region were up sequentially, but declined on a year-over-year basis due to the expected reduction in demand related to the smartphone investment cycle.

In addition, we saw a slight pause in activity related to electric vehicle battery welding in the region which, like our other automotive business, tends to be project-driven. However, based on current order trends, we continue to expect a strong 2018 for EV battery welding applications.

In Europe, growth accelerated to 35% year-over-year, driven by strength in high power lasers for cutting and welding applications, medium power lasers for 3D printing applications, and pulsed lasers for marking, engraving, and solar cell manufacturing.

In the U.S., first quarter revenue increased 3% year-over-year, as strength in cutting and welding applications offset lower sales in telecommunications. Sales in Japan increased 39% year-over-year, driven by a rebound in cutting, welding, and marking and engraving business after a softer 2017.

Although Japan has lagged other regions in its adoption of fiber laser technology, we continue to target compelling expansion opportunities in cutting, welding, and other application areas within the region. Recently, we hired a new president of IPG Japan, and continue to make investments in sales personnel and facilities to augment and enhance our capabilities in the region.

Turning to the performance by product, high power laser sales increased 37% year-over-year to $231 million in the first quarter and represented more than 64% of total revenue.

As Valentin noted, fiber lasers at 6 kilowatts and above grew at an even faster pace and now account for nearly 40% of all high power laser sales. Pulsed laser sales grew 18% year-over-year. We experienced rapid growth in sales of our newer green and high power pulsed lasers across a diverse set of applications, and these products represent nearly half of our pulsed laser sales. Sales of low power pulsed lasers for marking and engraving applications also grew strongly during the quarter.

Medium power laser sales increased 9%, driven by demand from 3D printing customers, which offset the decline in medium power cutting attributable to the shift by OEMs to kilowatt-scale lasers that Valentin discussed. Other product sales increased 21% year-over-year due to strong sales growth in systems and beam delivery accessories.

QCW sales of $16 million declined 24% year-over-year due to the expected reduction in demand related to the smartphone investment cycle. As a reminder, we benefit from the purchase of QCW lasers used in the production of new smartphone models, with these major smartphone redesigns occurring every other year.

Because we saw a significant QCW benefit from the smartphone industry last year, we did not expect this to occur again in 2018, and this was factored into our 2018 guidance. However, with the increasing complexity of each new smartphone model, laser technology continues to capture share from non-laser processing.

Furthermore, IPG's expanded product portfolio of high power pulsed, UV, and ultrafast products enhances our ability to capture market share in future smartphone investment cycles. First quarter gross margin of 56.5% was up 150 basis points from Q1 2017 and above our guidance range of 50% to 55%. We were able to more than offset declines in average selling prices with improved manufacturing efficiency, cost reductions, and favorable product mix.

First quarter operating income was $141 million, or 39.2% of sales, well above Q1 2017. Excluding a foreign exchange gain of $5 million, operating margin was 37.7%. Operating expense as a percentage of sales increased 80 basis points year-over-year. Relative to Q4, accruals for bonuses in Q1 were higher due to the phasing of revenue in 2017.

In addition, employer taxes and benefits accelerated into Q1 due to bonus payments and realized equity compensation. Finally, we are making necessary investments in administrative talent and IT systems to help ensure the company continue to grow at a rapid rate.

Looking ahead, we expect operating expenses to decrease as a percentage of revenue in Q2. Q1 net income was $106 million and earnings per diluted share were $1.93, above our guidance of $1.62 to $1.87. Foreign exchange gains benefited EPS by $0.07.

The effective tax rate in the quarter was 25%. Excess tax benefits on equity compensation, partially offset by increases in reserves for uncertain tax positions and other discrete items, benefited EPS by $0.06. However, this tax benefit was offset by the impact of Global Intangible Low-Taxed Income, GILTI, arising from the U.S. Tax Cuts and Jobs Act. While the Act reduced the headline Federal tax rate to 21%, included in the legislation was a special deduction for foreign-derived intangible income, FDII, and additional tax for GILTI.

For IPG, the GILTI tax exceeded the FDII deduction benefit. Even though GILTI claims to levy a special tax on low-taxed income and IPG's effective tax rate on foreign income is approximately 29%, which is above the new U.S. tax rate, the rules related to foreign tax credit limitations and allocation of domestic expenses to foreign income mean that IPG, like many other companies, has had to accrue additional taxes in the first quarter related to GILTI.

The impact of GILTI net of our FDII benefit reduced EPS by $0.06. Therefore, the net benefit to EPS from these tax items and foreign exchange was $0.07. We ended the quarter with cash, cash equivalents, and short-term investments of $1.18 billion and total debt of $48 million.

Our current level of inventory amounts to 205 days, above our target range of two turns or approximately 180 days. This inventory build is ahead of what we anticipate will be a significant increase in shipments during Q2. We have increased diode inventory as well, which has been running as low as 3 to 4 months last year, to approximately 6 months. The inventory investment during Q1 has enabled a strong start to product shipments in Q2.

Cash provided by operations during the quarter was $100 million, up 96% from Q1 2017. Capital expenditures were $39 million, up 79% year-over-year. In addition, we purchased 83,000 shares for $20 million as part of our anti-dilutive repurchase program and have now repurchased 461,000 total shares for $69 million since the program began in July 2016.

Turning to guidance for the second quarter 2018, we expect revenue of $400 million to $430 million, representing growth of 8% to 15% year-over-year. We expect our second quarter tax rate to be approximately 26%, excluding effects relating to equity grants, and anticipate delivering earnings per diluted share in the range of $2.05 to $2.35, representing growth in the range of 7% to 23% year-over-year. At this time, we're not updating our 2018 annual guidance.

As discussed in the Safe Harbor passage of today's earnings press release, actual results may differ from our guidance due to factors including, but not limited to, product demand, order cancellations and delays, competition and general economic conditions. Our guidance is based upon current market conditions and expectations, assumes exchange rates referenced in our earnings press release, and is subject to risks outlined in the company's reports with the SEC.

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. Our first question comes from the line of Joe Wittine with Longbow Research. Please proceed with your question.

Joe H. Wittine - Longbow Research LLC

Hi. Good morning and congratulations on the quarter and the guide.

Timothy P. V. Mammen - IPG Photonics Corp.

Hi.

Valentin P. Gapontsev, Ph.D. - IPG Photonics Corp.

Thank you.

Joe H. Wittine - Longbow Research LLC

Yes. Starting out here, Tim, you just said it this time, you're not updating full-year guide, so just – and that's understandable. Qualitatively speaking though, has your outlook for the year changed since the last checkpoint 90 days ago? It doesn't sound like too much is changing in the end markets.

Timothy P. V. Mammen - IPG Photonics Corp.

It hasn't changed, or we're not communicating any change given that we're not updating guidance. We only gave annual guidance about, what was it, 10 to 12 – yeah, 90 days ago. I'd say that the overall tone of order flow in Q1 was really good. Book-to-bill was above 1, so that really enables the strong guide for Q2. The order flow and tone of the business through the beginning of this quarter has remained strong. We've clearly got some really significant growth rate quarters to lap particularly Q2 and Q3. So we want to see where order flow transitions throughout this quarter and into the beginning of July because that will really drive the tone for the second half of the year.

Overall, I'd say that the business has started and retained the strength that we saw at the end of last year. Book-to-bill, as I said, was above 1 in the first quarter. I think one of the really pleasing things out of the first quarter is actually, it's not material yet. But Valentin referenced it and I did was some of the order flow from the really, really new products, the UV and the ultrafast. So we've been looking for that for a while and I think that really in the medium to longer term confirms that the diversification and potential growth of the business over the next 3 to 5 years will remain resilient.

Joe H. Wittine - Longbow Research LLC

Great.

Valentin P. Gapontsev, Ph.D. - IPG Photonics Corp.

We (24:51) for longer time because you know how unstable now the political situation, the trade war, open question and so on. So, we could not work to make forecast for the longer time that demands today.

Joe H. Wittine - Longbow Research LLC

Are you seeing any form of hesitation at all among the major OEM customers or the major integrators as it relates to the trade headlines that you mentioned, Dr. Gapontsev?

Valentin P. Gapontsev, Ph.D. - IPG Photonics Corp.

We don't see now the serious signs, but it can – situation now is changing very fast.

Joe H. Wittine - Longbow Research LLC

Okay.

Valentin P. Gapontsev, Ph.D. - IPG Photonics Corp.

Unpredictable.

Joe H. Wittine - Longbow Research LLC

Got it. Thank you. And then quickly, Dr. Gapontsev confirmed the integrators are shifting to 10 kilowatt. I wanted to ask about processing heads, some of the third-party heads available in the market are only graded up to 8 kilowatt or potentially 10 kilowatt. So I suspect you'll experience a higher attach rate of your heads as you continue to see power levels rise, and it doesn't sound like you see any slowdown in rising power levels. So is that optimism on attach rate accurate? And are you seeing any evidence that that is occurring today already?

Timothy P. V. Mammen - IPG Photonics Corp.

Yeah. I think we are. This is high powered cutting heads, with 10 kilowatt, 12 kilowatt, people are turning to IPG's cutting heads because the market is more limited, particularly at those higher power levels, and we have several OEMs that are working with us using those. So at the highest power cutting systems, we would expect a higher attachment rate as you reference it, Joe.

Valentin P. Gapontsev, Ph.D. - IPG Photonics Corp.

Now with the market available optical heads which works up to 6 kilowatt, maybe 8 kilowatt with some precaution, but for 10 and more kilowatts still not available practical. We developed such optical heads in our make and test this time of the quarter. Our customers now they are looking to start to using shortly. So, this is open door for 10 plus kilowatt mass use

Joe H. Wittine - Longbow Research LLC

Excellent. I'll step aside. Thank you.

Operator

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

Robert Joseph Burleson - Canaccord Genuity, Inc.

Hi. You guys have done a really good job calling out consumer electronics, CapEx cycles, strong year 2017, anticipated soft year 2018. Wondering though coming out of Chinese New Year, what you saw in China related to consumer electronics. If there was anything surprising strength-wise or was it kind of in line with what you were expecting?

Timothy P. V. Mammen - IPG Photonics Corp.

It was broadly in line with what we were expecting. There was no particular bid on that business. There is still talk that particularly for some of the emerging applications perhaps that there will be some strength into the second half of the year, but there's no definitive visibility. For example, people are talking about some increase, significant increase in orders for UV, but we don't have that in hand at the moment.

I'd say the tone on that business as evidenced by what a number of other companies have reported as well is exactly in line with the biannual cycle that we've talked about historically. I think the good thing, though, is that even with that, you saw China revenue up by 28% year-over-year. And in Q2, that growth rate may moderate. But we've got a very strong revenue forecast from China as well for Q2. So, we're lapping to a certain extent that weakness on the smartphone cycle, which is really great to see.

Robert Joseph Burleson - Canaccord Genuity, Inc.

Okay. Great. And then a previous questioner touched on trade war concerns, and I'm wondering, China's automotive market is opening up to wholly owned foreign players to have more direct manufacturing capacity there. And I'm wondering, how does that affect you guys potentially or your customers? Do you expect more investment in local production or if you had any conversations that indicate what that might bring?

Timothy P. V. Mammen - IPG Photonics Corp.

Nothing specific. I think tonally, one of the things that comes out of this is that, for example, if you looked at last year, where the investments for EV and the automotive, a lot of that was actually from local Chinese companies rather than JVs. I think, again, it is a reflection sometimes that the Chinese companies are early adopters and very strong adopters of leading edge technologies where some of the incumbent manufacturers can actually be a bit slower. But, I mean, that's really a tonal comment, but Bobby, I don't think there's – there's nothing specific. I actually don't think it's a negative; if there's more emerging local companies I think it may actually be a driver for us rather than a negative.

Robert Joseph Burleson - Canaccord Genuity, Inc.

Okay. Great. Thank you.

Operator

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

Thomas Hayes - Northcoast Research Partners LLC

Thank you. Good morning, gentlemen. Thanks for taking my call. I guess, Tim, you touched on China a little bit. I just wanted to maybe dig in a little bit more. Was there anything specific that drove the growth? I mean, you kind of called out the EV batteries down a little bit, consumer electronics down a little bit. Is it just the broader adoption rates are pulling results up?

Timothy P. V. Mammen - IPG Photonics Corp.

Yeah. I think, the cutting market continues to be very strong in China, particularly with the shift towards higher-power lasers. The lower-power cutting market as well with the rack-mounted is continuing to expand at a rapid rate. The other applications continue to grow well. It was – yeah, it was a broad-based sort of materials processing strength that drove that China performance. I can't call out anything specific or extraordinary to it.

Thomas Hayes - Northcoast Research Partners LLC

Great. Thank you. Maybe shifting gears a little bit to CapEx. You guys have called out, Tim, a ramp-up year for CapEx. Maybe you could just provide some thoughts on the pace of the investments and when some of the added capacity or what type of capacity is planned to come online?

Timothy P. V. Mammen - IPG Photonics Corp.

So the pace of the investment in Q1 at $39-odd million is slightly below our annual guidance for the year. We do expect that to pick up in Q2 and Q3 with projects starting in a couple of facilities that we're looking to acquire. There's constantly capacity coming on stream; as you have to imagine, we started building the year ago, some of those buildings are coming on stream. We'll start new buildings during the course of this year. They will only come on stream next year and depreciation start for them over maybe even the next 12 to 18 months.

So I think, we're continuing to manage capacity additions well relative to the revenue growth rate. And clearly, the worst position we could be in was not being able to respond to increases in demand, so our investment tends to be conservative to ensure that we have that ability. I think, even though this is a year where CapEx is expected to – will increase relative to revenue, we're still only at the top-end of historic ranges of 12% to 13%. So, it's not as though this is an excess investment cycle year either. So, yeah, I think that gives you some good color on it.

Valentin P. Gapontsev, Ph.D. - IPG Photonics Corp.

We're feeling our total capacity maybe for additional 20% increase of production, but you know that our growth is much faster, so over the last year, we will (33:07) $400 million this year we hope, it would be up to $300 million we hope. So, it's a new factory, very large factory, new factory we need to add every year practically. So, for looking for two, three years ahead, we need to build lot of additional capacities and new facility not only in U.S., but in Germany, in the other countries like in Italy and so on. So when we work in that direction, you need investment CapEx.

Thomas Hayes - Northcoast Research Partners LLC

Great. Thank you. Congratulations on the start of the year.

Timothy P. V. Mammen - IPG Photonics Corp.

Thanks, Tom.

Operator

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

Thomas Robert Diffely - D.A. Davidson & Co.

Yes. Good morning. So, I've got a question on the other side of the business, the other part that was down 5% year-over-year. Anything of note in that kind of catch-all group?

Timothy P. V. Mammen - IPG Photonics Corp.

So, to the positives out of it, actually where medical business was up and the advanced applications business. It was a weaker quarter on telecom. That's not surprising given some of the general tone again that you've seen out of different companies reporting in that industry. However, actually, we've actually got a – in Q2, the data point on telecom seems to be improving a bit. So, the company we acquired a year ago is actually forecasting now a decent ramp in revenue into Q2, and hopefully that will start to take hold and continue into the second half of the year. So, telecom, uncertain, but starting to get a bit more of a bid on it and the other businesses within that sector performed okay.

Thomas Robert Diffely - D.A. Davidson & Co.

Okay. And the relative softness in that group, is that also a beneficiary to the margins?

Timothy P. V. Mammen - IPG Photonics Corp.

Not enormously. Some of the strength on the advanced and some of the lasers that go into the medical side are very specialized. So, it's not a low-margin – particularly low-margin business, but the telecom margins are slightly lower, you're right, but the difference in revenue is so small, Tom, it doesn't have an effect, even on like a few basis points.

Thomas Robert Diffely - D.A. Davidson & Co.

Okay. And then finally, when you look at the big increase in shipments projected for 2Q, were most of those shipments revenue in the quarter or will that be a third quarter revenue event?

Timothy P. V. Mammen - IPG Photonics Corp.

I'm not quite getting the question. We're not expecting to defer a lot of revenue in Q2, I mean, particularly under the new ASC 606 guidance. So the inventory that has been built into the end of Q1 already is shipping. We had very strong revenue in the first two to three weeks in China which has built up some of that inventory. So I'm not expecting any big – I'm not sure I'm quite understanding your question, but I'm not expecting any significant deferrals in Q2.

Thomas Robert Diffely - D.A. Davidson & Co.

Right. That was it. Just that there's a lag in timing between the shipments and the revenue, and it sounds like it is not for the second quarter.

Timothy P. V. Mammen - IPG Photonics Corp.

No, we didn't have anything in Q1 either.

Thomas Robert Diffely - D.A. Davidson & Co.

Okay. Thank you.

Valentin P. Gapontsev, Ph.D. - IPG Photonics Corp.

You know that we have very short lead time, only a few weeks. It's not usually some months. So, in our case, only few weeks to have support site with very short lead time. It's our major weapon against our competition. We have to have very good stock, and the inventory for this immediate way to ship to customers.

Thomas Robert Diffely - D.A. Davidson & Co.

Okay. Great. Thank you.

Operator

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

Mark Miller - The Benchmark Co. LLC

Thank you for the question. Great report by the way. You mentioned the QCM was impacted by the smartphone slowdown. But number of firms who supply into the smartphone food chain are expecting a significant uptick in orders coming in the second half. Do you also see that?

Timothy P. V. Mammen - IPG Photonics Corp.

There is some discussion that there may be some improvements in the tone of that business, but nobody has visibility. I'd say that every company that's reported that has exposure to this market, Mark, has had a negative – at least in the near-term, their outlook is impaired. I think, there are two or three companies that we follow that also are perhaps more exposed even to that cycle than we are. So, there's some talk though there will be some improvement in that investment cycle over the second half of the year, but nobody has any real visibility into it.

Mark Miller - The Benchmark Co. LLC

Okay. You mentioned that despite – you showed very solid margins, but there were some lower ASPs. Can you give any more color on that?

Timothy P. V. Mammen - IPG Photonics Corp.

Yeah. ASPs always in Q1, you come off a period when you've been negotiating with the major OEMs for price reductions during the year. So, in fact actually, ASPs moderated this year, or went down in a more moderate fashion this year. So, I think on average, on high-power ASPs, we're at the lower end of the range of 5% to 10%. Other ASPs have also – we haven't seen any fundamental dislocation in the market like we saw mid-power down two years ago, 26% in a quarter. There's nothing like that in the market.

I think one of the most interesting things was our low-power pulse business, where everyone is worried or has been worried over the last few years about the level of competition there. We continue to believe we're selling a high quality product, which has got a warranty and very good service and support, and we're maintaining our prices even at the lowest end of the pulse, and we actually grew that business. So again, that's an attribute and a confirmation in the confidence we have in the quality of our products. So, nothing unusual on ASPs. It was pretty much in line with expectations.

Mark Miller - The Benchmark Co. LLC

Thank you.

Operator

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

James Ricchiuti - Needham & Company, LLC

Hi. Thanks. Good morning. Tim, was the book-to-bill above 1 in each of the major geographies?

Timothy P. V. Mammen - IPG Photonics Corp.

Thank you. Well, we normally don't get into that level of detail, Jim. There was nothing that was particularly weak, let me put it that way, I don't think anything was a standout in terms of weakness. I think one of the things is that the North American revenue year-over-year in Q1 only saw moderate growth. The backlog in the U.S., for example, is actually very strong starting the quarter, so we'd expect a pickup in growth rates for North America. Europe had an exceptional start to the year. We're not forecasting any impact to the business, but maybe the growth rates in Europe will be a bit more moderate in Q2. The overall book-to-bill was pretty solid. It wasn't quite as strong as the book-to-bill a year ago, which drove the very strong outperformance. It was at or just slightly above the average historically. So there's nothing – yeah, nothing in particular I could call out as being significantly weak.

James Ricchiuti - Needham & Company, LLC

Okay. And you've been – I'm hearing consistently the strength in the 3D printing business. And I guess, what, in 2017 you did about roughly $50 million of revenue. Can you give – and I know you don't want to get into this habit of giving guidance by market segment, but it sounds like you're seeing pretty good growth ahead in this market. Is that fair to say?

Timothy P. V. Mammen - IPG Photonics Corp.

Yeah. I think that business is starting to become much more meaningful on an OEM basis. We certainly got very significant orders from one of the companies out there. Their outlook is, in terms of calling off that order, has perhaps moderated a little bit. They think they may have been a bit aggressive, but it continues to be a growth opportunity. And I still look at that over the next, let's say, three- to five-year time horizon where the market may go from less than 1,000 systems sold a year. If a 20% CAGR is to be achieved, it will become a maybe 3,000 to 4,000 unit business a year. So in terms of adoption of the technology within manufacturing, it continues to ramp significantly.

James Ricchiuti - Needham & Company, LLC

Okay. And last question for me, just in general, the systems business. Looks like you're getting good traction there. Would you be willing to maybe talk a little bit about your targets for that business? And I know you've talked about it multi-year, but just as we think about it for this year.

Timothy P. V. Mammen - IPG Photonics Corp.

I think this year we're looking for above-average growth rate for the systems business. That would be one of the things that would offset some of the smartphone investment cycle. Again, we haven't given a specific guidance number for it. I think that business is continuing to perform very well. The acceptance of the different types of technologies we've got is good in the market. LDD with the weld monitoring capability adds to that.

And then there are quite a number of pretty significant orders. We got a good order for automotive. I think it's an aluminum welding application for a big system in Europe. There's a significant system in South America that we're negotiating at the moment for the oil and gas industry. And there's multiple opportunities I think on railcar in Russia and pipeline elsewhere. So, VG, do you want to add any comment to that?

Valentin P. Gapontsev, Ph.D. - IPG Photonics Corp.

We expect this growth of the system business would be (43:20) minimum its total sales growth. We expect during these three, five years, it will become very central part of our total business.

James Ricchiuti - Needham & Company, LLC

Okay. That's helpful. Congratulations on the quarter. Thank you.

Valentin P. Gapontsev, Ph.D. - IPG Photonics Corp.

Thank you.

Operator

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

Patrick J Ho - Stifel, Nicolaus & Co., Inc.

Thank you very much. Good morning and congratulations. First on the high-power laser side, you've talked about the strong growth you've seen over the last year or so, and you've mentioned some of the drivers longer term about the displacement of legacy laser solutions and other non-laser solution. You also talked a little bit about the migration from the medium-power lasers. Given the growth you've seen to date especially in Q1, is there one, I guess, area where you're seeing more of that? Is it continued displacements or was it influenced by this migration from the medium-power lasers that you talked about?

Timothy P. V. Mammen - IPG Photonics Corp.

The lower end of the market, Patrick, the growth in the sale of our rack-mounted systems that goes into low-cost cutting systems continue to perform well. That growth in the market really has to be driven by the flexibility and productivity of laser-based systems displacing traditional technologies. I don't think it's just driven by an increase in the total volume of metal that's processed. So that's certainly a continued shift away from traditional technologies towards laser technologies. And it would be the same trend relieving at the higher-power levels with the 10 kilowatt and 12 kilowatt, the cutting speeds increases. That shift as well with the higher ASPs and the unit volumes, the share of the ultra-high end of the market going from 30% to 40%, they're all really fairly significant trends within that market.

Patrick J Ho - Stifel, Nicolaus & Co., Inc.

Great. That's helpful. And maybe as my follow-up question, you've also talked about the strong traction you're seeing for a lot of your new products like the ultrafast. Is this traction happening sooner than you thought because usually with new products, it does take a little bit of time for the high-volume adoption? Are you seeing I guess faster adoption for some of these products that are contributing to your above-average performance?

Timothy P. V. Mammen - IPG Photonics Corp.

I think I have to smile at that because we've been talking about this product for two or three years. Relative to when we first set expectations, we're probably behind. Relative to how now that we've got the product introduced into the market, the reception to them has actually been very, very positive, and I'd say that the traction is meeting, maybe perhaps slightly exceeding expectations now that we've actually got product to give to customers. And certainly on the UV side if the initial orders transition into what is a significant opportunity we're chasing that would start to exceed expectations.

I'd also say that actually on the RGB, the projection system, we're starting to see an improvement in the turnaround of that business, the number of customers who are working with us. And again, relative to two years ago when we first introduced product, perhaps the initial phase of that investment was lagging a bit, but now we're starting to see real emerging interest and not massive order flow, but orders coming from customers there, so...

Valentin P. Gapontsev, Ph.D. - IPG Photonics Corp.

Now it's process qualification going in a practical all players, for example, EMT's wide projector. So like all practical, all of the major player is our – turn to our technology, despite they have own competitive technology most of them. Now they understand all this – advantage of our technology and now changed their business plan to use and must use our technology. It's only cinema for them, source for cinema projectors.

The same situation go on with ultrafast and so on with UV. With green laser, now we see fast-growing interest to our green laser in spite the end market. First, we advised five years ago, but it's very small. People did not trust, did not know. But now more and more very serious OEM players in electronic system, for them a company – the biggest American, and so they found big advantage of our technology, start to qualify even mass (48:09) order.

So really it's process implementation of new – our products is not one, two. It's many, tens product, different – is going well, and we expect during – it takes time, of course. Only qualification for these phones is the standard, to pass this, it takes one, two years typically, only qualification. Without such qualified product, we could not supply mass in the market, only for test. But after we finished qualification, now we'll open door for mass use in real production.

Patrick J Ho - Stifel, Nicolaus & Co., Inc.

Great. Thank you very much.

Operator

Thank you. Ladies and gentlemen, we have come to the end of our question-and-answer session. I'd like to turn the floor back to Dr. Gapontsev for any final comments.

Valentin P. Gapontsev, Ph.D. - IPG Photonics Corp.

Okay. Thank you again for joining us this morning. We look forward to speaking with you on next quarter's call. Have a great day.

Operator

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