IPG Photonics Corp (IPGP) 2009 Q4 法說會逐字稿

Good morning, and welcome to the IPG Photonics fourth quarter and year-end 2009 conference call. Today's conference is being recorded and webcast. At this time I'd like to turn the call over to Angelo Lopresti, IPG's Vice President, General Counsel and Secretary for introductions. Please go ahead, sir.

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

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

These risks and uncertainties include those detailed in IPG Photonics' Form 10-K for the year ended December 31, 2008 and other reports on file with the Securities and Exchange Commission. Copies of these filings may be obtained by visiting the Investors section of IPG's website at investor.ipgphotonics.com/sec.cfm or by contacting the Company directly. You may also find copies on the SEC's website at www.SEC.gov.

Any forward-looking statements made on this call are the Company's expectations or predictions only as of today, February 23, 2010. The Company assumes no obligation to publicly release any updates or revisions to any such statements. We will post these prepared remarks on our website following the completion of the call. Please go to www.ipgphotonics.com and select Investors to review these remarks. I will now turn the call over to Dr. Gapontsev.

Good morning, and thank you for joining us today. We are pleased with our revenues of $54.3m for the quarter four and our 19% sequential growth. The result substantially exceeds the $39m top end of our guidance range. We believe this reflects general improvement in the economic environment and continued market adoption of our technology.

Fourth quarter EPS of $0.07 was in line with our guidance range although lower than might be expected given revenue, primarily because we continued to reduce inventory in the fourth quarter, which resulted in lower absorption of manufacturing cost and also because expenses related to legal, selling and the research and development increased.

We were also encouraged with sequential growth across most of our market applications and products. Sequentially revenue grew from the third quarter and was down only 7% [over the] year. We saw a sequential increase in sales from our materials processing, telecommunications and medical segments. The only segment that did not grow sequentially was the advanced applications, but the sequential decline was primarily due to timing of government orders.

In addition, to sequential growth, our communication and medical markets achieved year-over-year growth in the quarter as well. Tim Mammen will go over the details, but let me point out a few recent developments.

Photonics Innovations is an Alabama-based maker of active and passive laser materials, and tunable lasers. This technology acquisition will enable us to expand our portfolio to middle-infrared spectral range.

We plan to combine our fiber laser technology with Photonics Innovations' transition metal doped crystal laser materials, to build new hybrid laser sources in the middle infrared spectrum for various applications. These applications include scientific, biomedical, material processing and eye-safe range-finding. The middle-infrared market is an exciting and emerging space and we see this as a great opportunity for IPG.

Tim will provide more details on our backlog, but the other exciting news is that order flow for the first six weeks of the year has been strong, and our backlog has continued to improve very essentially since the beginning of the year.

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

Thank you, Valentin, and good morning, everyone. As Valentin mentioned, this was a good quarter in terms of sales improvement and earnings at the high-end of our guidance range. We had a solid quarter from a balance sheet and cash flow perspective as well. We controlled capital expenditures, reduced debt by $14m, lowered inventories by $6.3m and increased our cash position by $6.6m.

Now, I'll begin by taking you through our various markets, products and applications and then review our income statement. Materials processing, which is IPG's largest market, contributed 76%, or $41.1m, of the total revenue we reported in Q4, down 10% year-over-year, but up 18% sequentially.

Our materials processing business was hardest hit by the recession, but we've seen a rebound in demand especially for welding and cutting applications. In fact, revenue for cutting applications more than doubled for the quarter compared to last year. We believe this increase is attributable to both a general recovery in demand and improved market acceptance of fiber lasers for metal cutting applications. Marking and engraving applications appear to have stabilized, and we have seen a recovery of demand from these markets, although they are still somewhat below the levels of a year ago.

The advanced applications market, which includes test and measurement, instrumentation, sensing and defense applications, as well as scientific research and development, represented 13% of total revenue or $6.8m of revenue in the fourth quarter. This was a 21% decrease year-over-year, and a 2% sequential decrease.

As Valentin mentioned, advanced applications was the only market that didn't see sequential growth, but this was primarily due to the timing of large government orders, which can be volatile from quarter to quarter. Research and development orders have been strong for the past two quarters, particularly in the US and Japan and are up year-over-year.

The communications market, which comprised 6% or $3.4m of our total revenues in the fourth quarter, turned in a good performance increasing by 9% year-over-year and 70% sequentially. The momentum in Russia that had slowed in the third quarter resumed in Q4 as we saw increased demand for telecom products for long haul, broadband access and cable TV. Telecom sales were weak again in the US.

Sales for the medical application market continue to grow. Medical sales comprised 6% of total revenue or $3m, an increase of 252% year-over-year and 60% on a sequential basis. This is the fourth consecutive quarter of sequential growth in this end market. Much of this growth is coming from the US, but we are also seeing increased demand from OEMs worldwide, especially in Korea and Germany for both cosmetic and surgical applications. We continue to focus on diversifying our customers in the medical business by prospecting for new OEMs.

Now let's look at the business in terms of product lines. High power fiber lasers were once again our best selling product line. Although high power sales were down 19% year-over-year, the $20m we reported in Q4 was up 46% sequentially and was our best quarter for this product line in 2009. The sequential strength was due to a rebound in cutting and welding applications, particularly for automotive OEMS, Tier 1 suppliers and contract manufacturers in the US, Japan and Germany.

As I mentioned earlier, sales for laser cutting applications is growing from OEMs around the world, and we believe we are gaining momentum in penetrating the segment which has been dominated traditionally by CO2 lasers.

We reported pulsed laser sales of $13.1m which represented 24% of revenue. Pulsed laser sales were down approximately 17% year-over-year and 19% sequentially. We believe sales of pulsed lasers spiked in Q3 due in part to inventory replenishment at our customers. The weakness in pulse lasers on a year-over-year basis can be attributed to the solar industry as well as lower marking and engraving sales.

Sales of medium power lasers decreased 25% from Q4 of 2008 to $4.4m (company corrected after the call). Sequentially though, medium power lasers grew 56%. We are seeing some recovery in micro-welding, cutting, sintering and printing for medium power lasers but microelectronic drilling applications remain soft.

Our low power lasers, which are primarily used for medical applications and micro-materials processing were up 62% year-over-year to $5.2m and up 31% on a sequential basis. The year-over-year and sequential growth was due to low power laser sales for medical applications primarily in the US.

From a geographic perspective, we reported 39% of total revenues from Europe, including Russia and CIS, 36% from Asia and Australia, 23% from North America, and 2% from the rest of the world.

We are pleased with our performance in the US, Germany and Japan this quarter. In the US, while delays in the recovery in the solar market continues to result in a decrease in year-over-year US sales, medical applications drove strong double-digit sequential growth.

After three quarters of sequential declines, Germany also reported double-digit sequential sales growth in the fourth quarter. This was driven primarily by automotive orders. The rest of Europe grew only slightly on a sequential basis, but reported strong year-over-year growth as a result of telecom sales in Russia.

Japan reported sequential growth for the second consecutive quarter as did the rest of Asia. The new sales strategy that we put in place in China continues to gain traction. That, coupled with an improving economy in China, and new OEM customers contributed to triple-digit year-over-year growth in Asia, excluding Japan.

Turning now to the income statement. While sales for the quarter were down 7% year-over-year to $54.3, they were up by $8.5m or 19% on a sequential basis. This was our best sales performance of 2009, and is the second consecutive quarter that we've reported double-digit increases in sequential growth. It should be noted that in part the year-on-year decrease in sales was due to a market-driven decline in average selling prices during 2009, and which we estimated reduced our sales of high power, medium power and pulsed lasers by approximately 7% during the quarter.

We estimate that if exchange rates had been approximately the same as one year ago our reported sales would have been $2.8m lower in the quarter.

Gross margins were 36.7% in the fourth quarter compared with 45.6% in Q4 2008. We estimate that approximately half of the 9 percentage point decrease was due to lower pricing. In addition, our gross profit was lower than could be expected on this level of sales, because our manufacturing cost increased by more than the increase in costs absorbed. The absorption of fixed manufacturing expenses increased by 8%, or by less than half the 19% sequential increase in sales, primarily because we sold a high percentage of products out of inventories.

Inventory at $52.9m was $6.3m lower than the third quarter, and $19.6m lower than year-end 2008. We have made progress in lowering inventory levels, but this did negatively affect gross margins and our bottom line in the quarter.

Our costs were also higher in the quarter as we eliminated short working week programs to meet growing demand, and saw reduced levels of vacation time used. If exchange rates had been approximately the same as one year ago, our gross profit of $19.9m would have been $0.4m lower.

Although our gross margin did not improve sequentially despite the increase in sales, with inventory closer to our target levels and costs in line with near term demand, we expect that we will see a return to the trend of gross margins above 40% with increased sales volumes over the longer term.

SG&A expenses were $10.2m or 18.9% of sales in Q4 compared with $8.3m or 14.2% of sales in Q4 2008. We estimate that if exchange rates had been approximately the same as one year ago our Q4 '09 SG&A expenses would have been $0.4m lower.

Salaries and benefits were higher as we ramped up sales efforts to capitalize on the market recovery. In addition, as we forecast on our Q3 call, Q4 legal expenses were significantly higher due to increased activity in the pending patent lawsuits.

As we indicated during our previous quarterly call, the IMRA litigation has recommenced. The trial has been set to begin in August 2010. As a result of this trial schedule, discovery and depositions are ongoing. We continue to expect to incur significantly higher legal expenses this year related to this case as we rigorously defend IPG against the claims in this lawsuit.

With respect to the CardioFocus litigation, not much has changed since last quarter. The Patent and Trademark office cancelled most of the claims of two of the three patents in question and a handful of claims survive. The third patent remains under re-examination. Although the litigation stay expired in October 2009, IPG asked the Court to extend the stay for year. That request remains pending.

R&D expenses were $5.1m or 9.4% of revenues in Q4 2009. This compares with $4.4m or 7.5% of revenues in the fourth quarter of 2008. If exchange rates had been approximately the same as one year ago we estimate that R&D expenses would have been $0.2m lower. R&D expenses as a percentage of sales should remain at this level or slightly lower as production picks up and consumes labor resources now being focused on R&D.

We expect quarterly operating expenses going forward to be approximately $15.5m.

In Q4 '09 exchange rate gain on transactions and the revaluation of financial assets and liabilities was $48,000 gain in Q4 '08 compared to a loss of $900,000 in Q4 '08 -- sorry Q4 '09 compared to Q4 '08.

IPG's operating income in the fourth quarter was $5.1m compared with operating income of $14.8m in Q4 of last year. We improved operating income on a sequential basis for the second consecutive quarter, growing from $3.6m in Q3 and a $1.3m operating loss in Q2.

Operating income includes stock-based compensation charges of $782,000 and $542,000 in the fourth quarters of 2009 and 2008 respectively. In the fourth quarter of 2009 $164,000, $511,000 and $107,000 of stock-based compensation charges related to cost of sales, SG&A and R&D respectively.

Our tax rate for the fourth quarter of 2009 and the full-year was 32%. The effective rate for 2008 was also 32%.

Our fourth quarter net income attributable to IPG was $3.4m or $0.07 per diluted share, compared with net income of $9.1m or $0.20 per diluted share for the fourth quarter a year ago.

Cash generated from operations in 2009 has exceeded the amount spent on investing activities by nearly $44m. Capital expenditures were $0.9m for the fourth quarter, and $10.5m for the year. As you know from past conference calls, we had been targeting CapEx of less than $15 million for the year.

In the fourth quarter, using the cash generated this year, we repaid $14m of our outstanding credit lines. Our cash and cash equivalents net of debt at the end of the fourth quarter of 2009 were $58.9m, compared with $12.2m at December 31, 2008. Cash and cash equivalents improved from year end 2008 by $31.6m to $82.9m at the end of 2009.

For the year-to-date, cash flow from operations was $54.5m. Cash used in investing activities was $10.7m, and cash used by financing activities was $12.2m.

Accounts receivable decreased to $11.4m to $30.4m at December 31, 2009 from $41.8m at December 31, 2008, in part due to lower sales and the timing of revenue recognized in the quarter, but also due to strong collections. Days sales outstanding were 50 days at the end of Q4 '09 compared to 65 days at the end of 2008.

Backlog, which we report annually, was $68m at December 31, 2009 compared with $69.3m a year ago. Our backlog includes $47.8m of orders with firm shipment dates, and $20.2m of frame agreements that we expect to ship within one year. In 2009 our backlog included $47m of orders with firm shipment dates, and $23.3m of frame agreements.

Although backlog at December 31, 2009 was basically flat as compared to 2008 it has improved since the low point at the beginning of Q2 2008 when capital equipment spending was impacted by the global economic recession. Furthermore, order flow for the first six weeks of the year has been significantly better than the comparable period in 2009 and 2008.

This leads us to our expectations going forward. We believe that our sales in the fourth quarter of 2009 were a good indication of a continuing recovery. This is the third consecutive quarter that we have had a book-to-bill greater than 1. This has resulted in two consecutive quarters of double-digit sequential increase in sales.

In Q4 some of the geographies where we had previously expressed some caution, such as the US and Europe, showed a marked improvement in sales. And we are encouraged by the developments we saw in Q2 in the materials processing market, and in the demand for high-power lasers. However, we also typically have a seasonal trend of demand reductions in the first quarter as compared to the fourth quarter due to budget and spending patterns in some of our major territories such as Russia and Asia.

So let me now provide you with our guidance. For the first quarter, IPG Photonics expects revenues in the range of $48m to $53m. The Company anticipates earnings per diluted share in the range of $0.02 to $0.07. That is based on 47.006m diluted common shares, which include 45.849m basic common shares outstanding and 1.157m potentially dilutive options.

This guidance is subject to the risks we outline in our reports with the SEC, and assumes that exchange rates remain at present levels. I want to reiterate that we do not attempt to forecast gains or losses related to exchange rates.

Before we go into Q&A, let me summarize five key points. First, our revenues of $54.3m exceeded our guidance range by more than $5m. Second, our earnings were in line with our guidance, although we expect better sales leverage going forward as inventory levels stabilize, our absorption rate improves -- catches up with our fixed costs and sales continue to grow.

Third, we saw improvements across most of our end markets applications and product lines. And again we reported a book-to-bill greater than 1.

Fourth, we continue to improve our already strong balance sheet. We maintain a focus on strong working capital management, and have demonstrated an excellent ability to generate cash.

And finally, through our focused approach to research and development, we are maintaining our leadership by developing new and innovative lasers. Despite the economic downturn in 2009 we successfully introduced several new products including green lasers, high power pulsed lasers, 100 watt packaged diodes, long pulsed Quasi-CW lasers and 10 gigabit telecom systems. Our customers continue to see the value in IPG's lasers and technologies, which can significantly lower their costs and improve the way they manufacture their products.

A recent example of this recognition is our growing market penetration in cutting applications and some significant new OEM customers in this market. Cutting is one of the largest laser materials processing applications with an estimated 4,000 flat sheet cutters sold annually.

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

(Operator Instructions). Our first question is coming from Paul [Thompson] of Bank of America Merrill Lynch. Your line is live.

Good morning. Thanks for taking my questions. If we look at the guidance for Q1 if I take the $15.5m in OpEx and the midpoint of the revenue, so does that mean there is potential for sequential growth margin decline I guess with the revenues declining in Q1? Is that the right way to think about it?

At the middle of the range I would expect if inventory remains -- the target now is to keep inventory relatively stable -- to see not a -- no, I would not expect to see a sequential decline in gross margins, I'd expect to see them relatively stable.

Okay, so maybe flat at the midpoint?

Yes.

Okay. And then could you talk a little bit about the inventory target and how that affects the goals you laid out before, the 40% gross margin and $50m in revenue?

So our basic inventory target is to ensure that we are turning inventory at least two times per year, and potentially getting up to turning it three times per year.

Historically we have been below those numbers. I believe we are now getting pretty close to achieving those targets. So the way we are forecasting inventory this year would be to see some growth in inventory as a whole, which should help our absorption levels, because we are expecting sales to grow. Whereas over the past year the substantial decrease in inventory has meant not only that absorption has been lower but gross margins have been impacted as well.

Okay, thanks. Maybe one last one, now that the year is over what's your feel for market share right now in fiber laser and then maybe the overall laser market?

It's very difficult to make a determination at the moment, Paul. I don't think the studies of where the overall market ended up last year are out yet. I can say I think we are very comfortable that we gained a lot of market share although it's off a very small base on cutting applications, and we positioned ourselves very well there.

We've continued to make progress with welding applications. The marking and engraving we already have a very significant share even though that market has increased quite substantially this year.

It will be interesting to see exactly what percentage of the market fiber now is believed to have when that data appears.

Okay. Thank you very much.

Thank you. The next question is coming from James Ricchiuti of Needham & Company. Your line is live.

Thank you. Good morning. I wonder if you could comment a little bit about the mix of revenues in Q1. That is do you see the continued strength in high-power or do you see the pulsed laser business beginning to come back in Q1?

We are actually expecting continued strength in high-power, relatively stable performance on pulse, and no decline but no big increase yet again. And the medium and low-power laser is relatively stable as well.

[Important to note] that we have now recently signed a very big contract with one of the Chinese customer, so I believe pulse laser will increase this year, the sales very essentially.

What we introduce now and started to sell (inaudible|) pulse, high-power lasers and one pulse which grew very -- have very great potential in the market both in new -- to develop new production line and to replace old [YAG] flashlamp pumped lasers. It's enormous market potential, and so we believe this during one year, two year, sales of this long-pulse laser reach levels similar to high-powered lasers.

Okay, thank you that's helpful. And, Tim, could you comment just on legal expense what you're anticipating for 2010 as a whole if you know that number now? And what -- how that compared with '09?

So the current estimate and it hasn't changed since the last investor conference we were at is about $3.6m in legal expense for the year. Last year the equivalent expenditure on patent defense was about $700,000 in total for the year.

Okay. And then last question from me. Your R&D moved up nicely in Q4 and I assume that's due to product development. How do you see the R&D expense for the year as a whole?

So providing that guidance around operating expenses at about $15.5m, I would expect the absolute level of R&D to be pretty stable during the year.

Okay, great. Thanks very much.

Thank you. Our next question is coming from Avinash Kant of D.A. Davidson & Co.

Good morning, Valentin and Tim. A quick question on the margin, I think you had two things that you talked about for the margin, one was inventory and the other one was some product mix I believe or the lower ASPs. Now, do you see these trends continue, or you've started to see some improvements in the ASPs as you go along in the March quarter?

From average selling prices I think we've seen things stabilize clearly on a year-over-year basis. We're comparing the fourth quarter of this year to a quarter before prices have started to decline. But in the second half of the year overall prices have stabilized. I'm sorry what was the other part of the question, Avinash?

So basically do you see this one staying -- the ASPs staying at these levels or you see them improving as the year goes by?

ASPs will stay at these levels, we are not intending to reduce them any further. However, I think that we have to get our margins back up. It's difficult to envisage a scenario where in the laser industry ASPs actually increase when you are trying to lead to a much wider deployment of lasers rather than having them just as a niche machine tool.

There are clearly certain very special lasers that we sell into special applications, and new products that we introduced where there is less competition, where the pricing is different from some of the more high volume products.

Right. And in view of these dynamics do you see your earlier guidance which you had talked about kind of getting to 40% gross margin at $50m in revenues and 45% at $55m? Once you were to be -- if you were to be at the stable inventory situation would you be able to still hit those targets?

I think we are probably a little bit behind on that, particularly we are waiting for some of the new products to get some real traction in the market where the pricing will offset some of the declines on the older products.

And clearly you could see in this quarter of $54m of revenue, if you take into account the absorption my opinion is that we would have been at 40% to maybe 41% in gross margin at this revenue level. And then -- so we're probably, right now, $3m to $4m -- you'd require $3m to $4m higher on those ranges, to get to those gross margins.

Last year we worked very hard to decrease cost of our products and components. And we got a very substantial -- very big improvement here this year. We expect a return from these because we'll start to get more margin from the current products and the new products we'll introduce this year.

Thanks, Valentin. And one more follow-up. It seems like you're seeing a lot of traction in your medical business, especially in the North America. Do you see that continuing throughout the year? Is there some trend that we should be watching, and this could become meaningful, going forward?

The initial indications that we have from our customers, not only in North America, but around the world, is for a positive year in medical. Clearly to grow that business by 250% year-over-year is not going to be that sustainable. And it comes off a small base. But it's not only the US on cosmetic. We've actually got a major agreement, fairly substantial, signed with a company doing surgical applications in Germany. And we're working with another company over in Italy on some surgical applications. And then the cosmetic business in China and Korea is starting to improve nicely. We also continue to work with a lot of medical -- different medical applications in Russia.

So it looks like if this traction continues, this business could become at least $10m or higher in '10. Would that be reasonable?

I would think that we would like to target that kind of revenue number for it in '10, yes.

Right. And Tim, one final question. Do you have an idea of the CapEx requirement for calendar year '10?

We have an internal budget here that also includes potentially setting aside a little bit of money for some smaller acquisitions during the year. We would target keeping CapEx at around $20m for the year. That's not all just on facilities and equipment. It also includes potentially some small acquisitions.

Okay. Thank you so much.

Thank you. Our next question is coming from Joe Maxa of Dougherty & Company.

Thank you. I just wanted to explore a little more on the Asian market. I think China was 10% of revenue last quarter. I just want to get an update on how you're doing over there.

The Asian market continues to perform extremely well. China had another good quarter. Sales in Korea were also strong. Had some good orders in Singapore. I mentioned that -- I think year-over-year, that market had grown by more than 150%. We've got more sales in Japan and a weaker marking and engraving business in Japan. So the Japanese performance year-over-year doesn't look quite so spectacular. We are targeting continued strong growth in China, Korea and Singapore this year. And in addition to that, we're also starting to see some recovery in the Indian business, too. So we're very optimistic about the Far East for 2010.

And can you talk a little bit about the auto manufacturers? It sounds like you had a good quarter in Q4. Expectations for this year?

I think, again, pretty positive. In the auto manufacturers, it was all around the world. We got orders in Germany from major manufacturers. We got orders from Tier 1 suppliers in the US. We've actually just got an order for seat welding in China as well. We want to try and work with the Korean manufacturers to get further deployed in some of the different applications there. And we're also seeing orders in Japan on the automotive side. So again, that business has continued to track nicely. And I think, particularly on the welding of different types of metals, not just steel, but aluminum where our laser has a lot of benefits, we're seeing good traction.

Can you give us a ballpark, what percent of your sales comes out of the autos?

We don't disclose that number, Joe.

Tim, in Germany, for example, we have (our inaudible) laser last year was fully qualified to use in mass production at assembly line in -- for most German manufacturers. And lots of them finished the qualifications shortly. So practically the first time, we have now our product qualified to [full] use. And we practically now -- it seems to be in competition again -- our major competition in (inaudible) in Germany.

In Japan, also the situation [going] very fast (inaudible) in automotive, not only parts, but in main assembly lines. So we expect next -- this year, next year, a marked penetration of this market.

Great, thank you.

Thank you. Our next question is coming from David Kang of B. Riley & Company.

Thank you. Good morning. Tim, can I get the stock compensation numbers once again, between COGS and operating expense?

The total is $700,000. We're going to put this script up on the -- on our website later, so you'll be able to get them off that. I can't find them in the script right now. You'll be able to get them later, within a couple of hours. The total was about $700,000 in the quarter.

Got it. And just a couple more follow-up questions. Can you talk about the new products in the pipeline? You mentioned green lasers and high-power pulse lasers. When will they make meaningful impact to your top line? Is that something that's going to happen fairly soon or is it more of a 2011?

No, we have finished practical qualification both of these -- three lines of lasers. And now we introduce in the market some small change [way] month-to-month with the new design of the packages and so on, but to come in the second quarter. All these three lines are growing much sales for the market. And we expect very big impact in our revenues. But we still did not put in our business plan these because not only (inaudible) pulse lasers installed in the field of about 50,000 units. Now it's very old and people looking for [market] replacement but new lasers and now the [long pulse] lasers (inaudible) for such application. And we expect a very fast penetration on this market.

Okay. And then can you tell us -- talk about the Chinese market, how you see the Chinese market developing this year now that the government is kind of tightening their fiscal policy?

With the Chinese market, you know our policy. Before we sold to only the Chinese market the low-power laser, mainly pulse lasers. We were careful -- we were very careful with high-powered laser, due to some export license problem and so on. Only last year, after change of management, now with improve essential new management of Chinese operation much better than what [it was] before. We opened door -- you will -- not the door, but a slit only to sell to Chinese market our high-power.

We have enormous quantity of (inaudible) orders delay in shipment only caused by very long process to get licenses. But if e get this -- we will start to get this license mainly from the German government. If we do, this process will go well. Our sale of high-power in China will increase 5 to 10 times very shortly.

Okay. And then the last question is regarding the telecom market. Sir, you are primarily in the Russian market. I was a little bit surprised to hear that -- your statement about US market being soft. Is it because of your lack of infrastructure? I think you talked about kind of increasing investment in the telecom business. Can you just talk about that, going forward, now that market is -- telecom market seems to be very robust?

I think that the US market, we spent a lot of time developing a lot of new product last year for a number of different customers. And the outlook for this year in the US is more optimistic than the performance we've had in Q4.

In Russia, there is definitely a great sense of optimism that we have there, being recognized as a local manufacturer and supplier. And we expect to see substantial growth in Russia. We've actually also started to supply, for the first time in a fairly long time, some product into European cable TV customers. So overall, I think our sense of optimism on telecom is certainly a lot better than it has been, coming into the beginning of 2009. Do you want to add some more color, Valentin?

In Telecom, before we were very strong with high-powered amplified (inaudible) modules. Now the market over such parts -- telecom parts and modules, components and modules, becoming very low profitable. So it's only one chance to remain in telecom market, to make integration. During the last five years, we spent a lot of time in the efforts to make (inaudible) phone company, telecom systems 10G. And soon, during next quarter, we'll demonstrate 40G systems. And these systems are (inaudible) territory but we introduce complete solution in Russia.

And the Russian government now qualify IPG as the only national Russian branch -- as the only national manufacturer and supplier of such system. They put us in government big program -- multi-year program with very high volume. If it happens, so then I believe we become a very serious supplier first of all in Russia, then in Asia. Some Asian countries, for them it will get very serious. So for India and some other countries, so we will go in telecom when this spiral up (inaudible) absolutely new level with much higher volumes.

Okay, thank you.

Thank you. Our next question is coming from Sven Eeenmaa of Thomas Weisel Partners.

Yes, hi. Thank you for taking my questions. I first wanted to ask about the Advanced Applications business. Could you give a little more color, in terms of the quarter in that business? And was the book-to-bill in this business about 1 for the quarter?

So first of all, compared to a year ago, revenue was down a little bit, really due to the timing of orders. The order flow -- I can't remember exactly what it was in that business. And we wouldn't necessarily disclose it by specific end-markets. But we did take a number of orders for 5 and 10 kilowatt single-mode lasers, which are the most leading-edge product. They do take us a long time to produce those. So the lead time on those lasers is longer. And we will deliver them in the first half of 2010. That was probably the main difference between order flow and revenue recognized during the quarter, Sven.

Okay, great. And the second question I had was, I think in terms of -- I think in last quarter you mentioned, in terms of the cross-margin performance, of potential for $0.75 to $0.80 contribution per incremental revenue dollar. When do you guys expect to get to that level? I understand there was like near-term inventory work-down items here.

Yes. So in that level, if you were actually absorbing close to 70% of operating capacity, the manufacturing capacity is probably still a reasonable number to get to. Maybe talking about the 80% is a bit high there. It should be tempered to about 70%. I would say that once we get close to -- closer to $60m in revenue, we'll see that kind of leverage feed through.

I would say, though, that manufacturing expenses in total in Q4 are pretty much at the level we'd expect to see them, going forward in the short term. So they've come back to a level, having been much lower in the first half of the year and in Q3, when we had our short workweek programs and limited overtime, and people on vacation, as well. So it's a good starting point in Q4 to start the improvement in absorption and then drive forward for some gross margin improvement.

The other point that Valentin made, which is important, is that some of the lower costs related to components, as we move to using PLD-30 and PLD-60s, and reducing the cost of the couplers, beam switches and optical accessories, has really not started to come through and benefit the income statements in 2009. It will really only start in 2010.

We've mentioned previously that some of the price declines in this last year got a little bit ahead of our ability to bring the cost down. But it's always been our strategy to gradually reduce prices, drive market adoption, but also bring cost down. So we're playing a little bit of catch-up as well, with that regard.

But our price again is now stabilized. Now we reached the strategic levels that in our evaluation, nobody is able to compete with us. So we've [beaten] our CO2 prices forward. But (inaudible) [disk] laser for last year, for example. Recently our major competition published they [had sold] 500 disk lasers. We've sold in the field up to now [1500.] So practically the fiber laser won now competition against the disk lasers. This is a very essential place in our development in (inaudible) rate of implementation for fiber laser will be much higher than for any other laser -- high-powered laser in the market.

Great. Thank you very much.

Just Sam, the other comment I would make on that is that clearly at these gross margin levels, one of the prime targets that the Company has this year is to see those margins improve because we know that that is the way that we'll see the earnings improve as a whole. So it is a focus of ours. And we're not sitting here particularly happy with reporting 37%, 38% gross margins.

It's only temporary.

Thank you. Our next question is coming from C.J. Muse of Barclays Capital.

Hi. This is Olga Levinzon calling for C.J. Thank you for taking my question. My first question is on the automotive side. Tim, you talked about getting several fairly -- I'm assuming fairly large orders in the fourth quarter for different automotive OEMs. Can you talk about the timing of those deliveries and how you see those revenues trending throughout the year?

We did not get particularly a single order that was particularly large. It was well spread, I think, across different automotive manufacturers, as well as different geographies. So we didn't have a particular benefit in the quarter from one single auto manufacturer, like we had in Q4 '08 when BMW -- we shipped a lot of lasers to them. And I think the overall trend is to continue to see that order improvement continue into 2010. So I'm hoping it's not going to -- if your question is driving at lumpiness on those orders, I'm hoping not to see that to the same degree that we've experienced previously when one manufacturer has qualified us.

Got it. And then for -- looking out into 2010, can you talk about your current expectations for the underlying laser market and potentially how -- I don't know -- a range around how you see fiber lasers increasing penetration or outperforming the market. Any sort of sense there?

It's very difficult to make a prognosis about the overall market. I think the feeling out there is that the laser market potentially returns to an 8% plus growth rate. And given our penetration, we clearly want to be at a premium to that level. I won't talk about it just in terms of the context for 2010. What we have publicly stated is that we are targeting, over a multi-year period, growth rates that average 20% per year. So relative to the market, you can see the adoption of fiber lasers driving our growth forward.

I think that the most recent information we have with regard to the adoption of fiber laser is just to look at, because I mentioned on the written comments, is really where we're seeing order flow in the first six weeks of this year and even in December last year, relative to comparable periods in 2009 and 2008. And we've seen a substantial improvement. And now this is probably in the best start to the year, in terms of orders that we've had, potentially. And 2008 was a pretty good year, but maybe even better than 2007, as a start to the year.

Thank you.

Thank you. The next question is coming from Jiwon Lee of Sidoti & Company.

Thank you. Three questions, please. First, I missed your order number or the book-to-bill ratio that you gave.

We just said it was above 1 for the fourth -- third consecutive quarter, Jiwon.

Okay, great. And then, care to comment or summarize your expectation for 2010, as you have with the Asian market, for North America and the European markets?

So I think, again, if I put this in the context of what we're seeing in terms of activity right now and maybe in the context of some of our internal planning, we have set targets to, not grow those two markets at quite the same rate as Asia because Asia is coming off a smaller level, but to return to meaningful growth in those areas across a number of different industries and the different product lines. So low, medium and high-power, and also seeing a recovery in pulse lasers.

In both of those geographies, we see meaningful contribution from the new products that we're introducing, which Valentin mentioned, and now are being qualified by existing customers. And we're finalizing the commercial designs of those, primarily green lasers and the QCW, the Quasi-CW laser.

In terms of the order flow we're seeing right now, we've seen a substantial improvement in European activity compared to a year ago. And we've also seen a nice improvement in US activity compared to a year ago. And the US actually had a reasonable start to 2008 and we're up on that -- 2009, I mean, had a reasonable start.

Okay. And you recently made a small acquisition. How does that fit into your [2000] revenue numbers? Are you expecting any sales out of that business?

That business generated some revenue last year. It's still relatively small and those products are at the qualification stage, I think, with a number of customers. Some of them are pretty major customers. We put that -- when we were at Photonics West, that company presented their product offerings alongside ours. And they have already had some meaningful quoting activity, following Photonics West. We expect them to generate some revenues and probably to see an improvement or an increase in those revenues in the second half of the year.

They're still relatively small. So the meaningful contribution to revenues this year is, given our size and their relative size, is probably pretty limited. But they are -- they do already have revenues and they've got product they're introducing to the market.

For second quarter this year, we will develop (inaudible) product device with this new technology. So second half of the year, we'll start to introduce in the market. I believe 2011 we'll have essential increase from this.

That's helpful, thanks. And one more question, if I may, please. On the cutting business, where is this growth coming from, in terms of the market or the region?

It's all over the world. It's Europe -- European OEMs. And they have significant presence, some of them, in the US market. In China, the single largest supplier of cutting equipment there is a customer of ours. And even in Japan, the main customer -- company in Japan who sells cutting equipment has also started to order some lasers from IPG. So it really is all around the world that growth in cutting -- lasers used in cutting applications.

Okay, great. That's all from me. Thank you.

Thank you. Our next question is coming from Joseph Garner of Emerald Advisors. Your line is live.

Thank you. Good morning. I wanted to -- wondered if you could talk a little bit about your plans on the production area. It looks like you've increased your production gradually since a trough in the first half of this year. And what your plans may be along those lines, and your flexibility and ability to do that. Are you able to kind of -- as you see demand improve, are you able to kind of quickly match that with increases in the production rate?

Yes, Joe, we definitely can. We're running at capacity levels that are, on average, probably at around 56%. In some of the processes, capacity may be as low as 30%. In some of the final assembly, it's a little bit higher. The final assembly is easy to ramp up by hiring assemblers and technicians. And given the capacity that exists in the processes, which takes a bit more time, but we've got the capacity there, we should be able to respond easily to increases in demand.

In present capacity, we can double the business without any problem.

Would there be any lag time associated with hiring people, training, etc. to get it ramped up, or how quickly can you respond?

Most of the assembly processes are very (inaudible) automated so we don't need very qualified people for this. So many process now it's like people use human robots or practically don't need to understand [process] only to install the [automatic] alignment or the product. So it's very easy to use to increase production.

I think, though, the other thing to put it into context, is if you look through the history of the Company when we were going through growth periods, we were actually -- it was -- the opposite was true. Our inventory and production levels started to get ahead, even of high-growth periods historically. So we've never really had a problem with managing a transition into a higher-growth period.

Okay. And headcount-wise, how did that change during the fourth quarter and to what degree are you hiring, currently?

So it's basically flat in the fourth quarter. It was really the fact that some of the short workweek programs were ended in both Germany and the US. And then people obviously were requesting people to use vacation time as much as they could. That obviously diminished substantially. And that really -- both of those activities resulted in the total paid salaries and benefits increasing in Q4.

During the crisis last year, practically we did not cut the people. So we saved our people. We don't plan this year to hire a serious quantity of people. So practically with present team, we target to increase very seriously our sales, 2010.

Okay, great. Thank you very much.

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

Thank you for joining us today. We plan to continue to make progress in executing on our operational and financial goals during the first quarter of 2010. We look forward to speaking with you again following the first quarter. Thank you.

Thank you, gentlemen. And thank you, ladies and gentlemen. This does conclude today's teleconference. You may disconnect your line. And thank you for joining us today.