IPG Photonics Corp (IPGP) 2011 Q2 法說會逐字稿

Good morning and welcome to IPG Photonics' second-quarter 2011 final results conference call. Today's call is being recorded and webcast. (Operator Instructions)

At this time, I would like to turn the call over to Mr. Angelo Lopresti, IPG's Vice President, General Counsel, and Secretary, for introductions. Please go ahead sir.

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, 2010, 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, August 2, 2011. 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. Valentin Gapontsev.

Good morning, everyone. IPG delivered another record quarter with all-time high revenues and net income. Revenues of $121.9 million grew by 81%, while net income came in nearly 200% higher than the same quarter in 2010.

Although the last year's sales performance was impacted by poor market conditions, we increased sales over our strong Q1 2011 by 22%. We also improved gross margin year over year to 54.7% and reported earnings of $0.63 per diluted share.

We continued to experience strong demand momentum across all regions, particularly in Europe, China, and North America. Sales grew by 92% in Europe and 60% in North America. For the second consecutive quarter, China was the standout performer from a geographic perspective, reporting an impressive 129% increase over last year.

Sales for material processing applications grew by 88% and accounted for nearly 89% of total sales for the quarter. Fiber lasers used for welding, cutting, cladding, marking, and engraving are most in demand.

IPG's high-power and pulsed laser remains our top sellers. High-power laser sales, which make up approximately 45% of our total sales, grew 134% from last year, while pulsed lasers, which account for 28% of the total, increased 52%.

The performance over the first half of 2011 has been very strong with demand growing across most geographies, end markets, and products. We are at the exciting point in time for IPG, as companies worldwide are rapidly adopting fiber lasers and migrating away from conventional lasers as they realize the impressive benefits of our products.

We mentioned it too on last quarter's call that there were numerous OEMs demonstrating cutting systems using IPG's lasers at last year's EuroBLECH show in Hanover, Germany. At that show, there were four cutting OEMs that were demonstrating systems that did not use IPG lasers. At the time of the call, three had already stated their intention to switch over to IPG. In Q2, two of those companies began placing orders for IPG lasers.

This is not a unique case. We frequently see companies evaluate competitive products and then return to IPG. In addition to our size, power, and capability advantages, IPG's abilities to mass manufacture tens of thousands of units of low power lasers and thousands of units of high-power lasers for customers at cost-effective prices are unmatched. We believe that this manufacturing capability is helping to sustain the competitive advantage created by our superior technology.

Besides our growing numbers of OEM systems customers, we are also witnessing growing interest in our ultra high-power fiber lasers for unique projects that takes advantage of the unique features of fiber laser technology. Some interesting projects we are engaged in include nuclear facility demolition, oil well fire suppression, thick pipe welding, construction works, and high speed cladding. Development of these applications takes time, but we are seeing growing interest in our ultra high-power fiber lasers that expands the total available application uses of lasers.

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

Thank you, Valentin, and good morning, everyone. I will start with a review of our end-markets, products, and geographic regions. After that, I will follow with a summary of our income statement and balance sheet, and close with our guidance.

Materials processing, which accounted for approximately 89% of total sales, increased 88% year over year to $107.9 million and increased 25% from the sequential first quarter. The most significant materials processing applications for fiber lasers are marking, cutting, welding, and cladding.

Advanced applications sales increased to $6.3 million, or by 16% year over year, but were down sequentially by 24%. Sales to this end-market can be uneven due to the timing of research and development projects and their funding.

The telecommunications market increased 175% year-over-year to $5.9 million and by 83% sequentially from Q1. Sales of fiber-optic equipment in Russia for long-haul, broadband access, and cable TV were very strong during the quarter. We are also selling telecom equipment in different geographies, such as Western Europe and South America.

Medical sales declined by 23% year over year and 10% sequentially to $1.9 million. We continue to work toward expanding our OEM customer base in this application.

Turning to our performance by product line, high-power lasers continued to drive sales as the number of OEMs adopting high-power fiber lasers has grown. High-power sales increased 134% year over year and 24% sequentially to $55.1 million.

High-power laser sales to the auto industry, particularly in the US and Germany, for welding applications were strong. We also have seen an increase in welding orders for high-power lasers to aerospace, locomotive, and ship building customers. Many welding and cutting customers are eager to implement this new technology due to its performance, reliability, and electrical efficiency.

In cutting, we dramatically increased our position, including establishing a substantial position in flat bed cutting, and our share of sales in this application is growing rapidly. Our goal is to ship more than 1,000 lasers for cutting this year.

On last quarter's call, we mentioned that our new Laser Seam Stepper system was under qualification at a major European automaker. The seam stepper is a welding system that combines our fiber laser with the welding apparatus. This results in robust welds on automobile structural parts, called body-in-white, at half the electrical cost and replaces two conventional welders.

During the second quarter, we received final qualification that allows for the orders for these products from the customer. We plan to introduce this product in other geographies and to other customers.

Pulsed laser sales increased to $34.7 million, or by 52% year over year, and by 21% on a sequential basis. Much of the increase can be attributed to growth in general manufacturing, particularly for marking and engraving applications in China.

Sales of medium power lasers increased to $8.4 million, or by 74% year over year and 13% sequentially. Medium power lasers are primarily used in microelectronics, printing, consumer, solar, and sintering applications. Sintering and printing applications showed impressive growth during the quarter.

Also, we see growing interest in the use of our lasers for battery welding for various customers in Southeast Asia, and we believe that laser sales for this application could increase substantially in the next year or so. Recently, IPG developed special air-cooled 1 and 2 kilowatt fiber lasers to meet the unique needs of battery welding applications.

Low power laser sales of $4.7 million were down 2% year over year and were flat sequentially. Low power laser sales are primarily used for medical and micro materials processing applications.

Sales of QCW lasers, which are used for consumer and micro-processing applications, were up 140% compared with last year and 91% sequentially. This new product line has had a successful launch and we expect it to become a more meaningful contributor to sales. Since its launch last year, we have attracted significant interest from a number of OEMs and end users. The QCW competes with high-power flash lamp-pumped YAG lasers.

Sales of other products, which include amplifiers, diode lasers, and certain components, increased 77% year over year to $8.5 million and by 33% sequentially. Service, parts, lease, and other revenue totaled $7.6 million.

I will now review our major geographic regions. Geographic performance was strong in all regions during the second quarter. As Valentin stated earlier, our standout regions for the quarter were North America, Europe, and China.

European sales increased to $44.2 million, or by 91.6% year over year and 12.8% on a sequential basis. Sales to major OEM customers and their suppliers for welding applications drove much of the growth in Europe. In Germany, IPG's lasers are being used by large auto manufacturers for uses such as car seats and aluminum door welding.

In addition, European sales are benefiting from strong demand for marking and engraving and printing applications. In Russia, which is included in our European sales, telecom and industrial sales were strong during Q2.

We have a new OEM integrator in Russia which supplies systems to the shipbuilding industry that is using IPG's lasers for cutting applications. Like the rest of Europe, Russia has experienced an increase in laser sales for marking and engraving as well. We are also developing a complex and ultra high-power system for in-the-field welding of pipelines in Russia.

North American sales increased to $25.3 million, or by 60% on a year over year basis, and grew by 47% from the sequential first quarter. High-power laser sales to the North American auto industry for welding and also to cutting OEMs have improved substantially, contributing to much of the second-quarter growth. The US auto industry continues to invest in new models and new production techniques, which are contributing to the US high-power laser sales.

Asian sales increased to $52.0 million, or by 86% year over year and 20% sequentially. China had a record quarter with sales growing 129% year over year and 52% sequentially. We are seeing an increasing number of sales in China for cutting, welding, and more complex marking and engraving applications, as well as opportunities for growth in consumer electronics.

Japan also continued to perform well, with sales 74% up year over year, due mostly to welding applications. One exciting development in Japan in this quarter was a demonstration by an OEM cutting customer using an IPG fiber laser with a special cutting head. The customer cut 32mm steel successfully using the IPG laser.

This is an important milestone achievement because CO2 lasers are still seen as the preferred laser for thick steel cutting. This OEM is now going to target replacing CO2 for thick steel cutting in Japan.

Also in Japan, I want to note a few significant competitive advantages that IPG's lasers provide to our customers.

First, with serious power shortages in Japan, the energy efficiency of our lasers are very important to many Japanese customers now. Secondly, IPG recently completed a vibration testing qualification for operation in earthquake-prone areas. These speak volumes about the energy efficiency and robustness of our monolithic devices in demanding environments.

We also had a major win in Japan with a major auto manufacturer who qualified our high-power lasers for body-in-white welding using a unit they had previously purchased. We expect to receive orders from them in Q3 and beyond.

Japan was down 15% sequentially as a result of the seasonality relating to the Japanese fiscal year-end and, to some extent, the disasters that occurred in Q1. However, we utilized the excess capacity in that region to ship orders to support demand in other countries.

Now turning to the income statement. Total sales for Q2 increased 81% year over year and 22% sequentially to $121.9 million, which, as Valentin mentioned, was a record high for IPG. Gross margins improved 9.4 percentage points to 54.7% from 45.3% in Q2 2010 and were up slightly from 53.7% in Q1 2011.

As our sales volumes increase, we are seeing better absorption of fixed costs. In addition, we continue to generate leverage in our business model. We have been working to further reduce the cost of our packaged diodes and other components, and to produce additional parts and components in-house which we outsource now.

SG&A expenses in Q2 were $14.2 million, or 12% of sales, compared with $12.3 million, or 18% of sales, in the second quarter of last year.

The IMRA trial is now set to begin on September 26, 2011. During Q3, we will have significantly higher legal expenses relating in part to the trial and trial preparations. The trial is expected to stretch into Q4, but most of the spend will occur in Q3. We look forward to the opportunity to present our several defenses in this lawsuit.

R&D expenses increased year over year on a real-dollar basis by 40% to $6.6 million, but were down as a percentage of sales to 5% of total revenues versus 7% for the second quarter of 2010. We focus our research and development efforts on designing and introducing new and improved standard and customized products and also on the mass production of components that go into our products. We also aim to expand our product line by developing integrated systems, increasing power levels, improving beam quality and electrical efficiency, decreasing the size of our products, and lowering the cost per watt.

Operating expenses include a $0.2 million net foreign exchange gain during the quarter compared with a gain of $2.3 million during the same period last year. Total operating expenses for the second quarter of 2011, excluding the effect of foreign exchange gains and losses, were $20.8 million compared with $17 million for the same period last year.

Second-quarter operating income was $46.1 million, or 38% of sales, compared with $15.7 million, or 23% of sales, in the second quarter of last year. Operating income includes stock-based compensation charges of $1.694 million and $793,000 in the second quarters of 2011 and 2010, respectively.

Stock-based compensation increased because of the higher fair value of options and restricted stock units issued in the second quarter of 2011. In the second quarter of 2011 $363,000, $1.074 million, and $257,000 of stock-based compensation charges related to cost of sales, SG&A, and R&D, respectively. Going forward, we expect quarterly stock-based compensation to be approximately $1.7 million per quarter for the remainder of 2011.

Our tax rate for the second quarter of 2011 was 30.5% and 30.7% for the year to date.

Net income attributable to IPG came in at a record high, increasing 198% to $30.7 million compared with $10.3 million a year ago. On a per diluted share basis, we reported $0.63 in Q2 2011 compared with $0.22 per share in the second quarter of 2010. We estimate that if exchange rates had been the same as one year ago sales in Q2 2011 would have been $7.4 million lower, gross profit would have been $3.6 million lower, and operating expenses would have been $1 million lower.

Now turning to the balance sheet, our cash and cash equivalents increased by $27.6 million sequentially to $188.2 million at the end of the second quarter of 2011. This includes $20 million of proceeds from the investment in our Russian subsidiary through the exercise of a previously issued warrant.

At June 30, inventory was $109.3 million, up 51% from year-end 2010, including the translation effect of foreign exchange. Our current level of inventory remains within our target range of less than 180 days.

Accounts receivable were $73.3 million at the end of the second quarter, or 54 days sales outstanding, compared to $55.4 million at December 31, 2010, or 49 days sales outstanding. Cash generated from operations in the first six months was $27 million. Capital expenditures for the first six months of 2011 totaled $22.8 million, which is on track for our target of $50 million for the year.

During the quarter, we purchased land in Russia, where we plan to build a new fiber facility. Later this year we expect to expand capacity in Germany, Russia, and the US, and to enhance our sales and service infrastructure with new facilities in China, India, and Japan. We also plan to add front-end diode capacity in the US by the beginning of 2012.

That leads us to our expectations going forward. The acceptance of fiber lasers is now well established, and has set the foundation for the impressive high-power and pulsed laser demand we have seen in recent quarters. As we enter the second half of the year, we expect to experience continued broad-based geographic, application, and product demand. However, we are aware of and sensitive to macro-economic factors that, to date, have not affected our outlook.

We will continue to invest in R&D and our service organization to extend our technology superiority and market leadership position. We also plan to invest in building capacity to meet future growth in demand. And finally, we will continue to leverage our infrastructure to further improve our margins and profitability.

Now let me provide you with our guidance for the upcoming quarter.

For the third quarter of 2011, IPG Photonics expects revenues in the range of $120 million to $130 million. The Company anticipates earnings per diluted share in the range of $0.56 to $0.68. That is based on 48.61 million diluted common shares, which includes 47.31 million basic common shares outstanding and 1.3 million potentially dilutive options at June 30, 2011.

Expected earnings per diluted share for the third quarter reflect higher spending in the quarter in connection with the upcoming patent litigation trial commencing in 2011, and an increase in net income attributable to the redeemable, non-controlling interest following the exercise of the warrants in the second quarter of 2011.

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

And with that, we will open the call up for your questions.

(Operator Instructions) Tom Hayes, Piper Jaffray.

Thank you. Good morning, gentlemen. I was just wondering if you could maybe give some thoughts on where we are on the penetration rates of fiber into the welding and cutting markets. It seems to be certainly a focus area; just wondering how far along we are and your general thoughts on penetrating that market.

In terms of welding, I think our view is, sorry to not give an exact number, but just about all of the lasers being sold for high-power laser -- for welding are probably fiber lasers. I think if you look in terms of more of a longer-term trend, the view is that fiber will get to probably 70%, if not more, of the welding market, but the welding market will grow substantially. I would say that in terms of penetration in welding we are well over 50% already.

In terms of cutting, I think our target in the nearest term is to get to at least 20% to 25% market share and we are well on our way to get to that. I think we stated we are going to sell more than 1,000 lasers for cutting applications. Then the market view there probably three years might be that fiber might get to 30% of the market share. Our view now is that we get to well over 50% in the next few years.

Great, thank you. I was just wondering if maybe you could provide a little bit of clarity as how much expense for the lawsuit is actually baked into the guidance.

At the operating level we have approximately an additional $2 million.

Great, thanks. Just lastly, you commented last quarter that you were seeing an increase in the OEMs as far as they are ordering greater quantities. Is that accelerating through the quarter or did it stay roughly the same?

I would say it's roughly the same. We had some new customers though, so the rate of ordering from the existing OEMs on the cutting applications is accelerating maybe a little bit. But also we are seeing increases, as we mentioned, from some of the new OEM customers starting to place orders. We do think that the, for example, progress made in Japan to cut thicker materials will start to drive some additional orders in Japan in the coming year.

I would say in China on high-power cutting we have actually seen more of a pickup in our ability to deliver lasers. The orders have been waiting for deliveries in China on high-power cutting and welding.

Great.

We brought new customers in Turkey, in Brazil, and other geographies.

Great. Congratulations on the outlook.

Paul Thomas, Bank of America Merrill Lynch.

Good morning. Thanks for taking my questions. I guess first off, congratulations on the strong results and guidance.

You mentioned the $2 million for the IMRA trial. Should we be thinking then, in terms of the 3Q guidance, that gross margins might be up a little bit from here or is it going to be flat? Or how should we look at that?

Depending on what -- at the bottom of the range we are modeling gross margins at about 53%, which would be slightly lower at the top of the range, probably at 54.5%. So I would say those are in -- approximately in line. I don't view 1% as change. Given the product mix and other factors that can affect us related to absorption, I would say we are in line.

Okay, thank you for that. Then on China, so China revenues in the quarter were about $32 million. Is that right?

They are just -- I think just under $30 million.

Just under $30 million. Then on the last call you had commented you thought that China could be up 30% in total for this year. Just wanted to get your thoughts with respect to that now. Halfway through the year do you still think it's in that range, above that range, or how do you think about that now?

Well, I think already China will be up more than 30% for the full year. I can't comment on what performance in Q4 will be, that we are seeing. We will have a good quarter in Q3 in China as well, so definitely over a year we will be up 30%.

Okay. And then lastly, a quick update on the capacity build out. So your revenue was about $122 million and you added about another $20 million in inventory. Where do you think you are or where do you think your revenue capacity is now? And do you feel like you are ahead of your plan? Are you on track with your plan to get to, I think it was $150 million in quarterly revenue capacity?

I would say we are on track with that plan. In Q2 some of the inventory build was actually purchases of long lead time components as well as additional production of both components and finished product. I think one the achievements we made in Q2 was actually to reduce lead times on high-power lasers, bringing them back more in line with our eight-week target. So that was a major accomplishment.

In terms of the capacity additions, I think our process of adding capacity is going well.

Okay, thank you very much.

Jiwon Lee, Sidoti & Co.

Just one quick clarification question on the guidance front. The non-controlling interest, how much of income is baked into the guidance?

About $0.03, so I would put about a $1.5 million in there, Jiwon.

Okay, terrific. And then another one, the big -- cutting metal on the OEM in Japan, I believe it's an older OEM in Japan; they are replacing their CO2 lasers. Could you give us a little background as to how you went ahead and won that business?

Thick metal cutting is not an automotive company it's a systems supplier of different sizes of cutting equipment, including flatbed. They have developed a special cutting head to cut thick metals using the fiber laser. It's at an early stages of -- well, they have proved in out conceptually.

We don't have a lot of other information about how quickly that business will develop. They may be supplying into the automotive industry, but thick metal cutting is not traditionally an automotive applications.

Okay, perfect. Do you have any idea about the size of at least the initial business from this opportunity?

No, we do not really.

And just kind of wanting to ask about the visibility, the order visibility. Obviously, you are guiding very strong September quarter numbers, but compared to maybe about a quarter ago, whether or not you feel that you have sort of a similar level of visibility into your business now?

I would say that -- the visibility into Q3 remains strong. In terms of the tone within the company, I would say we are not as gung ho as we were at the beginning of the year or exiting last year. I don't think anybody is given all of the macroeconomic indicators that are out there.

I think some of our competitors have found it very difficult to determine at the moment whether we are seeing some seasonal adjustments on inventory or just some caution by customers, or whether we are going to enter a period where the macro economic factors are going to impact the longer-term purchase of laser. So it's just too early to make any conclusions there.

I would say we are monitoring things very closely and we are being more cautious in the way we are planning and looking at the business.

Fair enough. Last thing from me. Anything that kind of jumps out in terms of on the pricing front, your competitive-wise especially?

We haven't seen any fundamental shifts on pricing at all. I think the thesis that we have had that we are directly competitive on an upfront basis with just about all the other laser technologies continues to hold. And we haven't seen any disruptions in product pricing in the market.

Okay. I will hop off the queue for now. Thank you.

Mark Douglass, Longbow Research.

Good morning, gentlemen. Nice quarter and congrats Tim to on the proper pronunciation of aluminum as opposed to alu-min-ium. Can you talk about the systems that you are building, looking to build? Is it more of integrated welding, cutting heads, things like that? Are you thinking of entire systems, whether it be marking systems, cutting systems, or the like?

We are making a move into far more integrated systems. Except in very specific geographies, we are unlikely to go into doing 2-D cutting systems to compete with our main OEMs. We are not going to do mass manufactured marking systems using pulsed lasers when we have 10, if not more than 100, OEMs producing those systems.

We are going to produce systems, particularly in the welding area where there aren't a lot of OEMs, maybe some specialty cutting systems for applications using our QCW. It's that kind of area. Valentine probably has some more stuff to say on that as well.

We working in duration, especially for new application. There are a lot of opportunities in, not only in welding but also in [cladding] and in many other (inaudible) for very special and for well-established market segments, like 2-D cutting. It's -- we don't (inaudible) [to compete] with our integrated.

Okay, thank you. Then, Tim, you mentioned stepped up -- is it stepped up investment in R&D relative to second quarter or are you just general comments versus 2010?

I think just general comments that R&D has increased in absolute terms by 40% and we are continuing to invest in those areas, whether it be on the component side or in terms of developing systems where we are integrating our lasers as the engine in the complete system. For example, reducing the material cost on diode packaging has been a focus this year. Redesigning some of our modulators for the pulsed lasers to make them more efficient in manufacturing.

So it's a whole host of different areas but we don't expect to see a fundamental step up. We are continuing to innovate across the components and product lines.

Okay, so a round up to kind of 5.5% range of sales?

Probably in the longer term it's a little -- as I have said, operating expenses at the moment, given the rate of growth of sales, are probably a bit below the longer-term trend level. I mean at 18% they are very low as a percentage of sales, I think, but operating expenses in the longer term will be 20% to 22%.

But in the near term it's difficult to suddenly go out there and hirer very well-qualified sales or R&D people that meet the needs of the customer -- company. You have to do that on a planned basis.

Right.

Right on that lines it's -- R&D expenses (inaudible) much within our competition help, but it does mean that we are not throwing R&D away. Just our -- the way (inaudible) much more efficient with spending, much better expenses. We are making a much more efficient, much more intensive development that many of people can observe.

Right. And then finally, any interest in accelerated share repurchases at this point or are you more interested in conserving your cash?

We are not going to enter into any share repurchases at this point in time.

Okay, thank you.

Jim Ricchiuti, Needham & Company.

Thank you. Tim, I was wondering if you might be able to put a dollar number to that goal that you talked about of having 1,000 lasers this year. I assume high-power lasers for cutting applications.

No, I think it's difficult to do that because of different power levels. I haven't extrapolated it out fully and I think it certainly gets into giving slightly longer-term guidance. Jim, I think that if you look at that in terms of market penetration though for cutting applications it's online for our target to get to more than 20% of the market.

Okay. And, Tim, how is it tracking in the first half of the year, in terms of the progress you are making?

I would say we were on target for that.

And is that up significantly from a year ago?

Yes, it is. Very significantly.

Okay. And you have talked, you and Valentin have talked, about ultra high-power fiber laser applications. Is that -- I am wondering if you can give us a sense as to how meaningful that is from a revenue standpoint now or potentially, not so much now if it's not, but looking out at 2012?

Right now, I would say the ultra high-power stuff is -- some of it's actually being integrated into complete systems. It's running anywhere from 1% to 3% of revenue and you are talking about lasers in the power level of 10 to 30 kilowatts.

Difficult to say -- in 2012 you would hope to be selling instead of maybe one unit a quarter or two, maybe looking to double that. So it depends as well how quickly the other business grows. In absolute terms, I think we would like to see that business doubled within the next year.

Okay. And last question from me, just with respect to if we see more concern on the macro level, typically do you see it more in the lower power lasers for marking? I am just trying to get a sense as to where you might see it if we see some deterioration on the macroeconomic front.

Yes, I think you start to see it on some of the lower value-add applications like marking and engraving, and also in areas where fiber is already well-penetrated and the adoption rates are a bit lower.

But based on what you see right now, including the bookings levels that you are seeing in July, I know it's the first month of the quarter, is it fair to say you are not seeing any of that yet?

I think we are cautious. I mean the rate of growth in bookings has probably slowed down, so we remain -- we are cautious, but we are also getting into this funny season of seasonality as well.

So there is a lot of -- the penetration, for example, into the auto industry in the US where we are qualified with just about every single company. They are not really buying anybody else's lasers from what we can hear. It just depends as to whether they continue on the high-power side to make those investments right now.

Pulsed laser sales in China we are wary of and we keep an eye on those. One of our major OEMs there is starting to talk about a new contract though. I would say our Chinese people are a little bit more cautious on the pulsed laser sales right now.

Okay, that is helpful.

So we don't have enough data points right now.

Okay, fair enough. Thank you.

[Olga Levinson], Barclays Capital.

Thanks for taking my question. Just a follow-up on some of the longer-term targets for the Company. You laid out a pretty good plan on the cutting side. Within welding it does -- although fiber lasers are the majority of the current laser shipped, can you talk about over the next few years how big you think the welding laser market will grow? And do you expect fiber to grow as a percentage of that or maintain the current majority share?

I think the welding market is something about $250 million at the moment. In the next five years we would like to see that grow to sort of $750 million. There is really a huge amount of investment being done into looking at replacing traditional welding techniques, because they are not as efficient and the quality of the welds is a lot worse.

For example, and we have talked about this before, in the automotive industry you get to a better structural integrity, you could reduce the weight of cars, improve the fuel efficiency. Clearly all of this talk now of going to average fuel efficiency requirements, which are going to double in the US. It is really going to help and play into the fiber laser welding ability.

The quality of the welds that we get, even compared to some of the other solid-state lasers, because of the unique characteristics of the beam, really help us as well. So we are not understating things when I think that fiber is going to be 70% of that market. The question remains is why would anybody continue using another type of solid-state laser or CO2 laser to weld.

So I really think it's more a question of how quickly that market grows rather than whether fiber's penetration is going to be less than 70%.

I think the welding market for fiber and laser welding markets now are in the -- only in the starting phase of penetration so it's during the next five, seven years it will see its share of laser welding will increase dramatically.

Got you. And then specific to the gross margin trajectory into the second half of the year, you definitely have built up some inventory over the last few quarters as part of the effort to reduce the lead times. If we assume kind of heading into the fourth quarter or beyond that actual top line remained steady and you do begin to see some inventory reduction, how do you think about gross margins there or what kind of range are you thinking about?

I think the absorption is benefiting gross margins at the moment between 2% to 3%. You can see the absorption come down and inventory consumption go up.

The other way you moderate that is by -- when you are absorbing you are absorbing your indirect labor and material costs. So you can manage the expense side as well as the production side.

Got it. Thank you.

Avinash Kant, D.A. Davidson.

Good morning, Valentin and Tim. So in the past you have talked a little bit about your bookings pattern. Would you be giving us some color on bookings? Was the book to bill above one or below one?

And also, within the bookings could you talk a little bit about the regional trends, like any particular region doing better in booking terms?

Book to bill was just slightly below one in Q2. I think that is a reflection of really very strong revenue performance. I was actually not disappointed with the bookings number relative to the revenue that we managed to ship out.

I mentioned that we have reduced some lead times so we were able to get product out in the high-power level, both in North America and China. In terms of the geographic trends, I think that the main, the strength is Europe. Both in the north in the cutting and in the south on the cutting business we have seen Q2 continued strong performance in North America.

High-power business in China for both cutting, welding, and also heavy industry applications continues to be strong. And in Japan, the order flow started to pickup in Japan towards the end of the quarter.

Through the first month of the quarter, as I mentioned, I think that if we saw the same trends that we are seeing in the beginning of the year we would be much more gung ho about the direction of the business in the second half of the year. We remain cautious in terms of the rate of growth right now, given what is happening in the US, and also some of the tightening of fiscal policy in China.

But from the comments that you are making it looks like July still is up from the June quarter levels though, but at a slower pace.

No, I said that rates of growth had slowed on the orders, but we are also into the seasonality. July and August can be always slow on orders as well.

Okay, and talking a little --

We have had some very strong weeks and then weaker weeks. For example, a lot of the auto industry in the US has been shut down for two weeks on summer holidays.

Okay. And talking a little bit about the diode prices that you have been able to bring it down to and also the capacity addition we have in early 2012, how should we think of capacity and pricing on that side?

In that we have very good -- during this quarter very good improvements in total volume of diodes we produced. We practically increased during one year to 2.5 times already.

Within the last year we produced a total optical power from diodes for all year 4.9 megawatt. This year we plan to produce more than 12 megawatts of optical power. It will be very successful first two quarters we increase of this capacity.

Next year we are going to produce more than 20 megawatts of optical power. (inaudible) impacts the decrease of price together with other (inaudible) means were used to decrease price of diodes.

So basically 5 megawatts last year, (inaudible) 12 megawatts this year, and then next year you are planning on 20 megawatts?

Right.

Okay. And one final question. Could you talk a little bit about some of the new products, like the QCM or the Laser Seam Stepper? What is the order of magnitude from these products right now?

QCW is still relatively small, but the interest in it is growing. QCW sales were, I think, about $1.5 million during the quarter, but in terms of the ramp they have gone up over the last two or three quarters have been pretty successful introductions. And that is really only the beginning.

There are numerous manufacturers around the world using different applications in micro processing and microelectronics that are really very impressed with those devices. So we are not yet into multiple unit orders with OEMs.

On the seam stepper, we are still at very early stages there in terms of total number of units supplied to different people in Europe. I think we are probably at five or six units of seam stepper supply. We hope that business runs into being more than 100 units a year. It's very difficult to say exactly when that is going to happen, but each of those seam steppers drives laser sales, high-power laser sales of 3, 4, and may be even higher power, kilowatt power.

Okay.

The advantage of fiber lasers (inaudible) so enormous and variable. But the most integrated [seal] which used such kinds of devices they produce only (inaudible) so they compare with you (inaudible) the market share. But it takes some time because they won't have the choice in the nearest future because advantage is enormous.

Thank you so much, Valentin. Tim, by the way, what is the tax rate for the rest of the year?

We are modeling at 30.7% for the full year.

Thank you so much.

Joe Maxa, Dougherty & Co.

Most of my questions have been answered, but I did want to ask or see if you could talk a little bit more about your Russian opportunity. Has the RUSNANO partnerships started to add meaningfully to your business? And then your longer-term opportunities there.

We start to use some advantage with our partnership with RUSNANO at that, but even without RUSNANO we made enormous progress during the last six months in Russia. We create now (inaudible) ready into [watch] program for the different applications and for refurbishing Russian heavy industry. And so once we do we will do it in the next two or three years.

Our sales in Russia will increase dramatically and (inaudible) only one [national] in Russian manufacturer of these technologies, laser technologies. In Russia also, we are very -- invest a lot in the (inaudible) full complete solutions integrated system and we have very good results now.

What were your sales? Can you give me an idea of what the sales were in the Russian geography in the quarter?

I can't remember them off the top of my head, Joe. I think they were around $8 million.

And how does that compare with, let's say, the last quarter or the year before?

Up over 100%.

Auto sales to a Russian company are now within the [30 million] per quarter, but the one set of these direct sales in Russia or second set it's expert outside of Russia of finished products. And one set it the export of components, some optical components to German company.

Thank you very much.

Mark Miller, Noble Financial.

You were strong in Europe and some of the other firms in your general industrial were reporting weakness, such as Philips. What do you attribute that to? Are you really gaining substantially from the conversion from traditional welding to fiber laser-based welding? Just curious about the strength in Europe.

Yes, I think there is a lot of -- not just the welding but also the cutting applications in Europe where we are very early stages in penetrating those markets. I think also some of our customers in Europe are also -- particularly in Germany. Germany is a great exporter of product so you are not necessarily reliant upon just simple demand in Europe driving our business there.

Then we have quite a lot of specialty applications. For example, we have an application called sintering which is high-speed deposition. That has performed well through the first half of the year. And actually our printing business is not a massive business; has also performed strongly.

So there is, I think, penetration and diversity of applications in Europe where the advantages of the fiber laser are particularly important. And then also our customers are, to a certain extent, export focused, so they are, in turn, not just dependent upon the strength of the European economy.

Thank you.

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

Thank you again for listening to the progress we have made in the quarter. We look forward to speaking with you again following the completion of Q3.

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