IPG Photonics Corp (IPGP) 2012 Q4 法說會逐字稿

Good morning and welcome to IPG Photonics' fourth-quarter and year-end 2012 financial results conference call. Today's call is being recorded and webcast. There will be an opportunity for questions at the end of the call. (Operator Instructions). At this time I would like to turn the call over to Mr. Angelo Lopresti, IPG's Vice President, General Counsel and Secretary, for introductions. Please go ahead, sir.

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, 2011 and other reports on file with the Securities and Exchange Commission. Copies of these filings may be obtained by visiting the Investor section of IPG's website at investor.IPGPhotonics.com/SEC.CFM, or by contacting the Company directly. You may also find 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 15, 2013. The Company assumes no obligation to publicly release any updates or revisions to any such statements. We will post these prepared remarks on our website following the completion of the call. Please go to www.IPGPhotonics.com and select Investors to review these remarks. I will now turn the call over to Dr. Gapontsev.

Good morning, everyone. IPG delivered solid financial and operational performance in 2012, even with a weak macroeconomic environment in certain geographic regions. Our revenues increased 19% for the year and we grew our bottom-line by more than 23%. Today one thing is clear -- the acceptance of fiber laser technology is growing at a steady pace.

Fiber lasers have made a major impact on the world wide materials processing market. The reliability has been proven on multiple material processing applications at all power levels in production environments. After 10 years of deployment in the field and the delivery of more than 5,500 fiber lasers with more than 500-watts power, IPG has proved beyond doubt the market acceptance of this technology in a wide range of applications.

The performance of fiber lasers substantially exceeds previous laser technologies while offering substantial cost benefit to users. We believe that fiber lasers have expanded the market for laser material processing.

As the demand for fiber laser continues to grow, we are ensuring that we have the manufacturing capacity in place to keep up with orders. We are the only fiber laser company that can deliver thousands of high power, pulsed and medium power lasers with very short lead times.

Our ability to ramp up production of existing and new products rapidly in response to customer demand has been a strong competitive factor for IPG as other laser manufacturers trying to enter the space cannot match this ability.

Our focus in 2013 will be on maintaining profitable growth by expanding our product portfolio and entering new applications and geographies. To accomplish this goal, we are introducing many new products this year that enhance our ability to serve customer needs that expand the markets we serve.

Some of these products were demonstrated at the Photonics West show earlier this month. There we launched a new generation of Kilowatt class fiber lasers designed to further enhance IPG's industry leading performance. We developed these products based upon our experience from delivering thousands of kilowatt fiber lasers to customers over the last decade.

The new generation provides better value to the customer, more reliability and performance with industry leading warranty protection to back it up. In addition, we have seeded many efforts in the last two years with the hope that they will become substantial growth opportunities for IPG.

We are seeing an increase in quote activity for our fiber laser systems business. We are demonstrating our UV fiber laser to select customers and have even run application trials with these products that have been well received. Also we are increasing the power of our green laser making it more attractive and competitive with non-fiber laser alternatives.

Further, we will be introducing new ultra short pulse lasers and megawatt scale fiber lasers. These products will be released in the coming quarters. New products to us mean new customers, new applications, new markets and new opportunities for expansion. Starting with a strong bookings month in January, this is a very exciting time for IPG. With that I will turn the call over to Tim Mammen, our Chief Financial Officer.

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 provide highlights from our income statement and balance sheet and close with our guidance.

Fourth-quarter revenue grew 17% to $145 million from $123.5 million a year ago. Fourth-quarter materials processing sales increased 14% year over year to $126.6 million accounting for 87% of total sales during the quarter. Materials processing applications continue to be the dominant use of fiber lasers, primarily in automotive, general manufacturing and heavy industry.

Other applications, which include telecom, advanced and medical accounted for the remaining 13% of sales. Revenue from these other applications increased 48% year over year to $18.4 million primarily driven by increasing demand for advanced applications.

Sales of high-power lasers, which accounted for 48% of total revenue, increased 10% year over year to $71 million. Much of the growth was driven by sales of lasers for cutting applications closely followed by welding.

We believe that the use of high-power fiber lasers for cutting is capable of growing from where it now stands at more than 20% of the total laser source market to somewhere between 50% and 75% of the market during the next three to five years. This represents a significant opportunity for IPG.

Pulsed laser sales were $30.9 million which accounted for 21% of total revenues and increased 11% compared with last year. Growth is being driven primarily by higher demand from the consumer electronics market and continued demand in general manufacturing.

Sales of medium power lasers increased to $10.3 million or by 29% year over year. Medium power fiber lasers are being used more regularly for fine processing applications such as to cut and weld thin materials. This market is another opportunity for us and has a high margin profile.

We continue to be optimistic about our QCW lasers. Sales for these lasers increased 59% during the quarter to $2.6 million compared with last year. Unit sales of these devices increased by 74%. QCW medium power lasers are used for fine welding as well as cutting and drilling of holes. High-powered QCW lasers are used for drilling Aerospace parts and other metal processing.

Sales of low-power lasers were up 17% year over year to $4.4 million due to increased sales from a large medical OEM. Sales of other products, which include amplifiers, diode lasers, green lasers, mid-IR lasers, integrated laser systems and certain components, were $10.7 million. Service parts, lease and other revenue including accessories totaled $15.1 million.

Now looking at our Q4 performance by geography, European sales increased 5% year over year to $54.2 million. The economic outlook in Europe remains uncertain, but IPG has experienced a strong start to the year in that region during January. Near-term growth for IPG in Europe will depend upon qualifications for new applications or adoptions of fiber lasers as the lead welding source by one or more major automotive manufacturers.

Sales to automotive manufacturers have been reasonably strong, particularly in North America where sales increased to $25.6 million or by 17% on a year-over-year basis. A recent trend that is driving demand in the auto space worldwide is the move towards the use of lighter, high strength steel which increases fuel efficiency in new car models. Fiber lasers are ideal for cutting and welding of high strength steel.

Asian sales, which include Western Asia and the Middle East, increased to $64.7 million or by 36% year over year. We expect that Asian market growth as a whole will be better in 2013 than in 2012. The continued penetration of major OEMs for high-power laser sales drove better than expected sales in China in the fourth quarter. We're also seeing demand improving in China for micro processing systems and for LED, although these markets can be a bit more lumpy.

We're excited by our near-term prospects in Asia after having invested significantly in our sales and management capabilities in that geography. We recently hired new general managers with significant industrial and technical expertise in China, Japan and Korea. In Korea our new GM was most recently running a much larger business for a major competitor. And we believe he has the ability to really drive growth there over the next two years.

Now working our way down the income statement, gross margins were 51.8% compared with 53.8% in Q4 2011. Gross margin in the quarter was impacted by a number of different items. As compared to Q4 2011 product mix and lower absorption of fixed manufacturing expenses reduced gross margin by 0.4% and 1% respectively.

As compared to Q3 2012 product mix reduced gross margin by about 1.5% primarily due to the fact that systems sales were a higher percentage of total sales and sales of high margin advanced application lasers were lower in Q4 2012 as compared to Q3 2012.

In addition to this, absorption of fixed manufacturing costs in Q4 2012 reduced gross margin by 1.1%. Absorption of fixed costs was lower due to the decrease in sales and manufacturing activity as compared to Q3 2012 and an increase in manufacturing expenses related to the acquisition we closed in Q3.

Finally, gross profit and margin was reduced by $0.5 million and 0.3% respectively due to the step-up to fair value of inventory acquired in the acquisition and which was sold in Q4, 2012. Gross margin includes stock-based compensation charges of $594,000 and $428,000 in the fourth quarters of 2012 and 2011 respectively.

Sales and marketing expenses were $7 million or 4.9% as a percentage of sales, up from 4.3% as a percentage of sales in the year ago quarter. The increase primarily relates to higher charges and expenses related to the amortization of demo units as well as an increase in expenses related to salaries, trade shows and travel.

General and administrative expenses increased slightly to $9.9 million but were down as a percentage of sales to 6.9% from 8% in the year ago quarter. Increased salaries and benefits and recruitment expenses were offset by lower accounting and legal expenses.

Research and development expenses increased by 24% to $9.3 million. As a percentage of sales R&D was 6.4% of total revenues which is up from 5.3% in the fourth quarter of 2011. As we mentioned earlier, we are investing significantly in the development of new innovative products to maintain our industry leadership position.

Operating expenses for the fourth quarter of 2012 include foreign exchange transaction losses of $1.6 million or $0.02 per share net of tax. Excluding the foreign exchange loss, total operating expenses increased by 21% or $4.5 million to $26.3 million as compared to Q4 2011. Operating expenses include stock-based compensation charges of $1.6 million and $1.4 million in the fourth quarters of 2012 and 2011 respectively.

Fourth-quarter operating income was $47.3 million or 32.6% of sales compared with $46.1 million or 37.3% of sales in the fourth quarter of last year. Operating margin, excluding the foreign exchange transaction loss, was 33.7% of sales. Net income attributable to IPG for the fourth quarter increased 12.3% to $34.9 million.

On a diluted per share basis we reported $0.67 for the quarter compared with $0.64 a year ago. We estimate that if exchange rates had been the same as one year ago sales in Q4 2012 would have been $1.3 million higher, gross profit would have been $0.8 million higher, and operating expenses would not have been substantially different.

Now turning to the balance sheet. We have a solid balance sheet with cash and cash equivalents, including short-term investments, increasing by $11.5 million during the quarter to $384.1 million.

At December 31, 2012 inventory was $139.6 million, an increase of 19.4% from year-end 2011 and in line with our year-over-year increase in sales. Our current level of inventory on hand amounts to 182 days compared with our target range of less than 180 days.

If foreign currency exchange rates were at the same level at the end of the fourth quarter 2012 as they were on December 31, 2011 the translated value of inventory would have been $138.5 million.

Accounts receivable were $96.6 million at the end of the fourth quarter, or 61 days sales outstanding, compared with $75.8 million at December 31, 2011 or 56 days sales outstanding.

Our cash generated from operations during the quarter was strong at approximately $59 million. Operating cash flow in the fourth quarter was expected to be reduced by approximately $30 million which related to cash payments for corporate taxes in Germany. However, the final corporation tax assessment for 2011 was only recently issued and approximately $30 million of these payments will now be made in Q1 2013.

Capital expenditures for the quarter totaled $17 million bringing us to approximately $68 million for 2012. We have made investments this year in the United States, Germany and Russia where we have significantly expanded our manufacturing facilities. For 2013 we are targeting capital expenditures in the range of between $60 million and $70 million.

Backlog, which we reported annually, was $203 million at December 31, 2012 compared with $207.3 million a year ago. Our backlog includes $102 million of orders with firm shipment dates and $101 million of frame agreements that we expect to ship within one year. In 2011 our backlog included $124.4 million of orders with firm shipment dates and $82.9 million of frame agreements.

While the book to bill for Q4 2012 was less than one, it appears that customers were holding orders until the New Year because there has been a strong stream of incoming orders in January that has so far offset the softness from Q4.

And now for our expectations for the upcoming quarter. While first-quarter revenues can be down on a sequential basis due to seasonality, given the strong start to the year in order flow we expect to report both sequential and year-over-year growth in the first quarter of 2013. We are optimistic about the future.

We continue to penetrate major OEMs and have an exciting family of new products and systems to roll out during the next few months. Even with the increase in the system sales and new product introductions we intend to target to maintain gross margin in the range of 50% to 55%.

It is our intention that any gross margin given up in the near term would be in exchange for a substantial growth in total sales that would result in an increase in gross profit while maintaining a healthy return on capital employed.

Geographically we will keep a watchful eye on Europe, but we cannot predict whether the economy will improve there or how it will impact our business. In all other major regions in which we operate we do not see signs for near-term concern.

We continue to assess targeted acquisitions that will enhance our technology and accelerate the development of our new products, as well as establish our presence in new geographies more rapidly than we could otherwise do organically.

Finally, we do not view the increased competition as a threat, but more as validation that fiber laser technology will continue to be a rapidly disruptive technology for existing and new applications. We have a 10 year head start and tremendous cost economies over the kilowatt class fiber laser competitors. IPG maintains its technological advantage and we look forward to continuing our lead in this industry.

With that IPG currently expects Q1 revenues in the range of $145 million to $155 million. The Company anticipates Q1 earnings per diluted share in the range of $0.65 to $0.75. The midpoint of this guidance represents growth in revenue of 22% year over year.

EPS guidance is based upon 52,116,000 diluted common shares which includes 51,110,000 basic common shares outstanding and 1,006,000 potentially dilutive options at December 31, 2012. The basic common shares outstanding include the 3,250,000 common shares issued as a result of the follow-on offering in Q1 2012.

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. We expect our tax rate to be in the range of 30% to 31%. And with that we will open the call for your questions.

(Operator Instructions). Zach Larkin, Stephens, Inc.

Tim, first off I wondered if you could maybe talk through the gross margin and how we should think about that going forward. Obviously no change in the range, but with the impact on the manufacturing expenses in Q4 is it reasonable to assume that we should see an improvement in gross margins Q over Q going into next quarter?

I think I went through some of the detail on what really impacted it this quarter. I think coming into the rest of the year clearly there continue to be a lot of investment being made, companies coming off two years of extremely strong growth.

When I generated my guidance, just to give a little bit more clarity on the range of gross margins I used there, it was between 52.5% and 54%. And that really does continue to factor in at the lower end of the revenue range, some lighter absorption of manufacturing costs.

At the higher end of the range we start to absorb manufacturing a lot better and as we go through the year as we hope to see revenue continue to pick up I would still expect to maintain a relatively strong gross margin profile.

I think the issues that the Company faces in the near term are if revenue happens to be down in a quarter that in the short term that does not mean we are going to hold off on investments.

Okay, thanks, that is actually very, very helpful. And then maybe moving on to the OpEx line. So the sales and marketing with the expense amortization charges in the quarter, is it reasonable to assume that those go back down to maybe something more similar with historic? But it sounds like the R&D investment; the level we saw in 4Q might be a reasonable run rate on a quarterly basis to consider going forward?

Yes, total OpEx I think in Q1 we were using about -- in total about $26.5 million. There will be a little bit of moderation on sales and marketing into Q1. On the R&D side it's absolutely the intention of the Company to continue to invest in that. I think we've got a whole host and suite of products that are going to come on stream in the near term and the first six months of this year and it is fundamentally important that we continue to maintain the advantages that we have.

I think I have always been pretty clear that the Company's just not going to continue to see operating leverage increase margins up above 39% to 40% because these investments need to happen.

On the sales and marketing side we've also articulated that some investment in sales and marketing will continue to be required through this year. Again, I think that is very important that we add headcounts on salespeople who specialize in different end markets or geographic regions.

For example, some of the new markets that we are getting into we've hired some people who are real specialists in fine processing but we'll probably need to continue to expand that. We need to look at how we are dealing with our penetration into South America.

So I think the Company has come off too very strong years of very good growth and we continue to invest in those areas. But we see this year as a year where we want to really solidify our position, ensure the distribution and penetration into end markets is very strong.

I think more moderate additions to G&A, we did expand G&A a lot last year with investments in, for example, our IT infrastructure and the required investments this year are a little bit more limited.

Patrick Newton, Stifel Nicolaus.

I guess on the gross margin side, thanks for the details around the fixed cost absorption, also around mix. Could you -- I guess a two-part question on this. One is to help us understand the mix. Could you provide us with a high brightness and advance application revenue both in 3Q and 4Q because I think that obviously had pretty significant implications?

And then you kind of touched on this but I would love to hear you comment on it head on, because the knee-jerk reaction is that this isn't just fixed cost absorption and it is not just mix, but it could be competition or it could be pricing. I think you already alluded to that not being the case, but I would love your thoughts on whether competition or pricing played any role at all in the gross margin impact on a sequential basis. And then I have a follow-up.

The first answer to the question is -- I haven't got the exact numbers here, but I think the high brightness laser sales were down from about $7 million to about $3.5 million. The other side of the equation on the product mix was that we did have some of our system sales increasing in Russia and the US a little bit. So as a percentage of total sales they're a little bit higher.

In Q1 I don't expect system sales to be as high of a percentage so their impact would be less. On the other side I think we continue to believe that we, really in terms of cost of the lasers, are way ahead of everybody else and control pricing in the market.

And if I look at our P&L, something that you don't really see here is the gross margin off individual products outside of systems and, for example, the high brightness. And on that side I don't see any fundamental shift in the gross margin off individual products even as we are still at a relatively early stage of introducing some of the new lower cost diodes.

So some of the cost benefits that we have been working on are still not fully bled in there. And I think people are clearly -- we're going to have to have a little bit of a show and tell here and demonstrate through Q1 and Q2 that we can still maintain healthy gross margins. I do draw attention to the fact that above -- anywhere above 50% is still very substantially in excess of the industry.

I can add that this year -- last year we made very big progress with [project decrease for] many parts components for our [regular] products. And so, up to 20% plus decrease of manufacturing cost. But impact of this, the real benefit of this we will have only this year; last year we started to introduce this. So it is (inaudible) we compensate any maybe impact of system with this decrease of cost and higher gross margin from our [regular] major products.

Okay, that's helpful. And I guess just moving to --.

Not only diodes, diodes, fiber modules, electronics powers (inaudible) each of these improvements will bring us a savings of $10 million.

Was that $10 million?

Yes. You want only power supply, new power supply (inaudible) high-power lasers, but we will bring us per year up to $10 million savings. Only this one, but we improve many other parts and components that start make (inaudible).

For example, even electronic PCB before we purchase our (inaudible) a lot of (inaudible) expensive, now only we install internal manufacturing PCBs it will save us this year [2015] and lots of many million dollars. It is only second but at the same fiber at the same new fiber much more powerful, reliable and more -- less expensive. So we are going in the -- working very hard for the optimization in the decreased cost of all parts.

All right, thank you for the details, Valentin. And then I guess on the R&D side, Tim, you already touched on this, but the investments that you are targeting, you talked about having a suite of products coming to market in the next -- or in the first six months of this year.

Should we interpret that to mean that the R&D is spiking in 4Q and early in 2013 and that we should kind of see it trailing off as a percentage of revenue through the duration of the year assuming a growing revenue environment?

And as we look at what you are targeting, are these R&D investments largely targeting your traditional laser source market or should we see this as your initial push into penetrating the systems market?

I think the R&D is across a wide array of areas, for example, increasing the power of green lasers, developing the UV lasers, developing ultra fast laser offerings, increasing the power of the QCW, so we have mentioned before that that now (multiple speakers)

Mid-infrared.

(multiple speakers) mid-infrared. And of course some of the systems side. In terms of R&D through this year, I think you're still going to see it average about 6% of revenue through the year.

Krish Sankar, Bank of America-Merrill Lynch.

Tim, I had a couple of them, one is if I look at your overall gross margin and I look at it by products, can you give some color on what the gross margin for the high-powered medium low power pulse lasers are compared to your corporate average?

I can give you some general trends, but I'm not going to go to specifics. So in general the high-power and pulse lasers I would have a similar gross margin, the medium power lasers have a higher gross margin and QCW is in line with high-power impulse. But we don't go into giving anything more specific than that.

And then the 50% to 55% gross margin guidance for the longer term, that includes system sales in that I'm guessing. If you just -- what is just the system sales gross margin standalone?

We have not given that number. We are targeting making sure that the system's gross margin is on average (multiple speakers).

Product for example from any new product when you introduce the market cap on lower gross (inaudible) but with volume, with optimization or supply-chain all in (inaudible) inside our production of major partner we will begin and use out sources, but then we optimize this gross margin. But now we not (inaudible) machines with gross margins lower than 45%. But with time they will -- machines will provide as our target the same gross margin we have for fiber lasers for which we produce in high volume.

Joe Maxa, Dougherty & Company.

I was just thinking about the growth where it is coming from in 2013. A lot of new applications and products. I'm wondering what the existing markets, particularly auto, which you had the strength and you see growth there, is that flattening out? Where should we see the majority of growth this year?

No, I think definitely on the existing applications there's significant growth. I think we mentioned on the call that in cutting applications fiber should get to between 50% and 75%. The 50% plus is even accepted now by other people in the industry who would not have accepted that number even a year ago.

So cutting, in terms of order flow recently, has been pretty good in Europe. The traction we are getting in Japan around cutting applications is very positive. That is something we'd highlighted previously. Some of the smaller OEMs in North America are good.

And the automotive side we think we'll get growth out of particularly the welding applications that we directly sell into in China, welding applications in North America this year. So there is a large investment by multiple companies in transmission welding, for example.

We will continue to see some good traction from the seam stepper, (inaudible) replacing resistance spot welding, that is becoming more and more compelling particularly because the seam stepper is very good for welding high-strength steel where traditional resistance spot welding is weak.

On some of the marking engraving applications, both the existing product line and the new UV, we have actually run marking applications with the new UV laser in house and the results have been extremely good. So you will continue to see some of the more traditional applications perform well as well.

Thank you, that's all I had.

We had some problem only with marking applications because we have now the (inaudible) manufacturers which are use of all the (inaudible) lower prices. But we have (inaudible) done with new budget lasers (inaudible) our position for this market (inaudible).

Jim Ricchiuti, Needham & Company.

Tim, I think you mentioned in the last call that you anticipated shipping on a large piece business to a Japanese customer. And you thought that delivery would take place in Q1 or possibly Q2. What is the status of that? Is that --?

It is more likely at the moment to be the beginning of April and it's excluded from our guidance numbers at the moment.

Okay.

Your financial year in Japan started from (inaudible).

Got it, okay. And then if we look back at 2012 and look at some of the -- perhaps the newer areas that you focused on, I mean I think you guys spoke more about the consumer electronics market of late than you have in the past. In some of these newer areas is there any way to possibly aggregate that for us for 2012? And what extent do you see some of the newer areas really contributing to incremental growth in 2013?

It's very difficult to aggregate some of these numbers out. I think the number we talked about were some of the consumer electronics over the year benefiting revenue by about $30 billion. Clearly that is a very good application when we think we can continue to build on that, particularly as we are able to introduce more diverse pulse lasers at different wavelengths.

Some of the QCW applications are starting to get some real traction. I mentioned that unit sales on QCW had increased by 74% and we are starting to see that really offset some of the price declines on QCW that happened at the beginning of 2012, so revenue was up 59%.

Some of that is also helped by the fact that the average and peak power of the QCW lasers has increased quite dramatically, so we are now seeing regular orders for 6, 9 and more power kilowatt QCW lasers. Those applications are in micro processing, for example a lot of welding and batteries as well as the Aerospace for drilling of holes. I think those are a couple of the newer areas.

Some of the work with the semiconductor companies I think will start to gain traction this year. It wasn't a big driver in 2012; we did start to get orders though with some inspection type applications with high-power lasers of 6 kilowatts. I think those are some of the more main areas.

On a more -- rather an application area I think I am very optimistic about what we are going to get out of Korea with our new general manager there. The change in order flow even through December and January points to very significant revenue growth in Korea for us this year. And the other to the Japanese and Chinese general managers as well are contributing extremely strongly.

But I think we were very significantly underperforming in Korea and we will start to get back to a more normal position there. And there is a very wide range of applications there -- welding, cutting, marking and engraving as well.

It's (Inaudible) one.

Avinash Kant, D.A. Davidson.

Two key questions actually. The first one, you had talked a little bit about in your press release that bookings in the current quarter thus far have been good now. You give us some idea of how good and what do you mean by good? Like if I look at the revenue growth last year [typically] 20%, so would it be much higher than the 20% growth that you have seen?

Yes, the order flow through the first five to six weeks of the quarter has been very good; it is significantly greater than 20%. But you have to factor into that that the guidance really reflects that strength in order flow coupled with the weaker opening backlog because of the weaker book to bill. But the overall growth in orders for the first five weeks is far in excess of 20% on a year-over-year basis.

Okay. And could you also talk a little bit about the capacity expansion plans? You have been expanding capacity in Russia, US, Germany -- have all those taken place already or that will continue to happen in 2013 also?

That continues to happen in 2013. Some of the buildings have been placed in service and some of the equipment, but the overall investment plan -- for example the new investment in the diode area and the diode buildings in the US will only come on stream during the course of this year.

There are additional buildings in Germany and manufacturing equipment that will be brought on stream during the course of these year. It is a fairly lengthy build out of capacity there and then there is a new building in Germany that will also be part of the plan this year. So it is a continued investment really across the board.

In Russia we want to (inaudible) this year about 600,000 square feet facility (inaudible) facility. And we were -- it's eight buildings and one building -- three buildings we have now occupy in the end of last year and January of this year. (Inaudible) finish up the summer of this year.

It is a new facility not just to increase capacity of current products; this is -- the (inaudible) of this new facility to prepare much production of new products which we introduce now in the market. It is (inaudible) technology in the equipment base and so on. So we prepare now much production of big line of different product (inaudible) from new kinds of laser you (inaudible) short and for long and finishing by machine systems.

Jagadish Iyer, Piper Jaffray.

Two questions, Tim and Valentin. First, if you look at how 2012 shaped up for you both in terms of your top- and bottom-line, now that you have your gross margin -- kind of your target model at 50% to 55%, how should we think about earnings growth going forward for this year and potentially for next year given the backdrop that you may not beat on the top-line growth? And then I have a follow-up?

I think there is probably, as we have articulated, limited leverage on the bottom-line during the course of this year. I think that with the investment that is going on that we can drive strong revenue growth into the end of this year and then into 2014 you might see a little bit of leverage on the operating side.

But again, I reiterate that we don't think operating margins track from -- I think they were averaging 37% this year, they are not going to track up to 39%, 40%, 41%. We continue to believe that these are much the best margins in the industry and we need to maintain our leadership by continuing to invest in R&D and sales and marketing.

So I think I would be pretty -- over the last year I get a lot of questions about how much more leverage it is. We believe that the business model is really built out at the moment. The one offset to this is if you suddenly win a huge amount of business from an end-user and you layer in a very strong amount of revenue, then you would see some leverage.

But at this point in time we have got no indication that somebody is going to place a $50 million order and call that off in a year. So, until that actually happens we remain cautious about guiding to significant leverage on the model.

But you remain upbeat on a double-digit top-line growth?

I think -- yes, I mean given the way that order flow has started we think that -- and we think that the market assessments of the growth in fiber lasers this year are very conservative and we expect the market to grow significantly more than some of the market estimates that have been put out there.

I think I have highlighted areas where we are going to get strong growth in older as well as new applications and areas where we think just -- where we are going to pick up some business. So it's (inaudible) I think 2012 overall is an extremely good year, report 19% revenue growth in a year in which the macroeconomic conditions were not exactly that strong.

I think people were laughing at me when I said a year ago that we are going to target 15% to 20%. There were a number of meetings I went into where people were very, very skeptical about our ability to do that.

Okay, that is fair enough. Then the second, it's a two part on -- how much did your automotive grow in calendar 2012 versus 2011? And how do you expect that to trend in calendar 2013?

I haven't got any specific numbers I want to disclose on that. Automotive sales we can identify are about 15% to 20% of total sales. There's a large part of automotive that we cannot identify. We expect to gain market share in China this year. So we think that we are further ahead on identifying opportunities in -- on our direct sales, this is primarily on welding, than we were at the same point last year.

In North America there is very significant ongoing investment as people transition to producing more complicated transmissions, increase penetration on seat back welding, a lot of the wedding applications on body and why we think we will start to increase as well as the tailor welded blanks.

In Germany we know that there is potential for significant contracts to be signed with some of the major automotive manufacturers there, but we don't have a lot of clarity on it yet. I think of the next three to four months we will get some more clarity on it. Some of those contracts will be over a longer term, so it will give us some good visibility over the next two to three years in potential business.

We think that some of the German automotive manufacturers are really considering a more broad replacement of some of their YAG lasers on the high-power that they use in welding. So I think Automotive is going to have a good year.

Yes, two major German manufacturers, car manufacturers now (inaudible) our new product (inaudible) before they would use only for test or evaluation (inaudible), so now they go into mass production. (Inaudible) qualified products and for a special (inaudible) seam stepper, and so with absolutely new unique product, no competition at all, a changed situation and (inaudible) where car and so on.

And the biggest customer, a German (inaudible) qualifies after it was published and after that all practical manufacturers car (inaudible) simple after such a reference (inaudible) implementation in all cars (inaudible).

Mark Douglass, Longbow Research.

Tim, can you highlight what China sales were in the fourth quarter?

China sales were $30.5 million.

Okay, thank you. And with that, did -- what have you seen out of China? We have heard a lot of people talk about they think there is going to be a recovery certainly by the second half of 2013 in China. Are you hearing similar types of things? And I assume -- talk about your orders in China in January, though I guess it was a relatively easy comparison with Chinese New Year being in January last year, right?

It was. Let me just correct myself, sorry, not $30.5 million -- about $35 million in Q4, not $30.5 million.

In terms of the order flow, Chinese New Year last year fell in the last week of January, you are right, it's in the first week of February. But overall the order flow in China has been very good even through the first week in February; there is a lot of activity around lasers for cutting applications, welding, some of the marking and engraving applications, new OEMs that have been qualified.

I think I have stated on a number of different occasions that the general tone that we have out of China for our business is better coming into this year than it was exiting 2011 into 2012. So the order flow has been very good as well.

Mark Miller, Noble Financial.

You I think last year had indicated that people were rather disbelieving about a 15% to 20% growth on the top-line. And I'm just wondering do you feel your top-line will grow that much this year?

We are certainly targeting growth in the double digits, we are not giving annual guidance on it. But I think Valentin has been pretty vociferous in stating that he believes the market will grow much more strongly than everyone else is. The start of the year in terms of order flow if this carries on would point to a very strong year. So, yes, we remain very optimistic about it.

We've got applications coming on, penetration into some different wavelengths that I think will be a nice driver. I have just articulated a lot of the investment that we expect to see in the automotive, I've talked pretty widely about the penetration into the Japanese cutting market that could drive more than 200 units of sales alone. Some of the major Japanese automotive manufacturers are continuing to deploy lasers, they are at an early stage of that.

So our view on fiber laser penetration continues to be very bullish. And while some people view it as increased competition, I think it's why every single other laser company is trying to introduce a product, albeit it said that these are significantly inferior products at a higher price than IPG's at.

And it points to the fact that everybody believes that this will be a much more fundamental processing technology in the industry. And that is a different mindset than people within the industry even had a year or two years ago. They were still trying to down play the importance of fiber as a technology.

Jiwon Lee, Sidoti.

I just wanted to talk about some of the new products. Except for the systems most of the new products are not high-power. So I wonder how do these new products -- specifically which end markets does this line-up strengthen your growth outlook, whether it is auto, heavy industry, consumer electronics, semicon -- give us a little bit of this please?

I disagree with you. You are talking high-powered, it is not high-power. So each of the product line parameters for in UV, in green and so on a different power scale to compare to infrared lasers. But we provide now the best solution, best solution for higher power, 10 times higher efficiency, much more compact footprint. This will extremely important for all such application, much higher reliability and so on.

Now the market for semicon lasers (inaudible) within UV and this ultra-short pulse, it is still not (inaudible) product now in the market. Absolutely not [prepare] and customer demands for a new line of products much better in performance and also priced extremely high today, not acceptable, practical the most integration.

We now hope and we target to change whole situation because to a market that requires absolutely new generation grade of laser and price and we are ready to meet this customer requirement. (Inaudible) nobody is able to (inaudible) current supplies provide them such quality and price and which market needs.

So the (inaudible) samples immediately, but (inaudible) much better (inaudible), but market acceptance going more because everyone with (inaudible) most integrated (inaudible) making of less (inaudible) they don't like to drop their profit. But UV ultra-short pulse its customers catch immediately because they are not happy at all with the existing situation. And we are ready now to go to this market not just but to get to the serious position of this new markets for us.

Tom Hayes, Thompson Research.

I was just wondering kind of on the R&D side as well if you could maybe give some level of magnitude as far as the number of new products you guys have in the pipeline this year versus maybe last year?

Number of new products in the pipeline.

It is hard to count this. We count by families, not by the number of product models. Because we introduced now let's say it's seven new families of lasers, each family contains from five to 10 models with different power, different performance and so on. So the total count by [quantitate] model this year will introduce double-digit new product.

Patrick Newton, Stifel Nicolaus.

Okay, guys, I just want to jump in about seasonality. I think Tim, one thing that you said that kind of struck me is on the guidance this quarter, that you are actually guiding for roughly -- I'm sorry, up at the midpoint and how that bucks normal seasonality.

But given the increased exposure to consumer electronics, could we be seeing IPG's seasonality shifting to perhaps peaking revenue in 3Q and a sequential decline at 4Q and then flat to growing revenue in the March quarter in the future? And then I have a follow-up.

Yes, I think on the last call I alluded to that as well. I mean, the information that we have at hand over the last couple of years is that revenues do seem to be driving into a peak in Q3. And then I had suggested when people were modeling to be much more moderate on 4Q.

In terms if we look at our top-line booking trends and forecasts I think that this seasonality may well be mirrored this year. And I think it is a very good thing to start factoring in. The only caveat I'd put to that is seasonality is becoming more difficult to predict because we keep layering in pockets of macroeconomic weakness and we don't know when they are going to arrive.

So that has had -- that certainly affected Q4 of 2012 with Europe being weak. Offsetting that we actually had a very nice quarter in China whereas Q4 in 2012 in China have been significantly down. So -- but in general I think this trend towards a peak of revenue in Q3 with more moderate Q4 at the moment looks like what we are -- the profile that we are experiencing.

Perfect. And I guess while we are on that seasonality trend, it seems like that seasonality has been mainly -- the shift potentially has been driven by exposure to consumer electronics, which I believe is largely through your pulse laser business which just had an incredible year in 2012.

And if we look at that business, and look at the numbers that you put up especially in the June and September quarters, how should we think about your positioning in that business to grow it on a year-over-year basis? I think there is some concern that you had relatively low penetration in certain consumer electronics customers and functions that could be difficult to replicate on a year-over-year basis. I would love any comments you have on that.

So I think the standard way that IPG grows is you qualify new applications, they layer in an extremely solid base of revenue that happens to pick up very quickly off a small base. And then you see that business grow on a more secular trend rather than quite as dynamically. I think this year that is what we would expect for that underlying consumer business.

But there are certain potential upsides to that, there are major contracts which will keep out at different wavelengths as some of the UV marking is all consumer-based. And that could actually continue to layer in a kind of new application, a different wavelength with significant benefit this year. But, yes, the underlying consumer business is certainly not going to grow at whatever it was, more than 100% than it did in 2012.

Just to come back because I think some of the benefit on Q1 is really it appears to be people having a bit more confidence around the world in some of the underlying macro numbers. So I mentioned that we thought people were maybe holding some orders from Q4, they seem to be flushing those through now. But that is continuing to hold up with the order flow and that is benefiting us.

And then some of the changes are really driven by the investment that IPG has continued to make in management and sales around the world and that investment, which I have reiterated is very important for us to make, really drives significant gains and benefits and that is what we are seeing in places like Japan and Korea and China, we saw it in Italy three years ago when we made management changes there.

We invested significantly in our Russian management; we expect to see some real growth out of that in 2013 where Russia was perhaps a little bit disappointing in 2012. So it's a whole host of different factors.

[Well, Tim went and] invested in (inaudible) management, now we knew very high professional manager will join us shortly. So we (inaudible) improve potential (inaudible). Also my opinion, my personal opinion and for quarter four weaker than we expected (inaudible) impacted by change of our manager in three major Far East companies, China, Japan and Korea (inaudible).

Over time when they changed new management it's always (inaudible) the way of some contract to shift their orders for first quarter of this year, (inaudible). But now all the new management starts to work very efficiently and we see immediately the result of this improvement.

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.

Okay. Thank you for joining us. I look forward to sitting speaking with you next quarter.

Thank you very much, everybody.

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