IPG Photonics Corp (IPGP) 2013 Q1 法說會逐字稿

Good morning, and welcome to IPG Photonics' first-quarter 2013 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, 2012, 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, May 1, 2013. The Company assumes no obligation to publicly release any updates or revisions to 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'll now turn the call over to Dr. Valentin Gapontsev.

Good morning, everyone. Today we report a new good quarter results with 15% revenue growth. Our core material growth in business grew 29% year-over-year. Now material (inaudible) represents 94% of our total business. Positive gross margin of 53.3% improved from Q4 on our level of revenue, due to product mix benefits and lower component costs and improved manufacturing efficiencies. We have seen good demand in most of our end markets and we maintain the strong technological alert our competition. Even so, the revenue was slightly lower than expected.

Booking for the quarter were (inaudible). And book to bill was substantial in excess of one. The order flow has continued to be very strong in April. Our pipeline for automotive orders is strong. In fact, we recently signed a contract with a major European auto manufacturer for 104 kilowatt units, which we estimate will be delivered over the next 12 months. This is our largest auto contract ever. We anticipate that the deployment of fiber is the growth in this market. There is potential to substantially increase the number of IPG lasers used for cutting and welding automotive applications.

Our (inaudible) had a strong quarter in material production applications. Sales of other applications which now account for 6% of our total revenue were lower year-upon-year. Other (inaudible) duplication are uneven in typical for [several million dollars] so that they can both benefit and impact the revenue depending upon the timing. As we continue to increase sales for welding, cutting and marking applications, we are capitalizing on growing opportunities for additional application in new markets.

Within the aerospace market, cladding of turbine blades and percussion of the lead-ins of components is quickly becoming a large opportunity for IPG. The speed with which our fiber laser can drill holes is much faster than what has been achieved traditional with CFO lasers for mechanical processes. Another emerging opportunity for aerospace markets is used in our fiber laser to take paint off aircraft. We delivered a batch order to further develop this application during Q1.

In the quarter, we have built and shipped to customers our first 100 kilowatt fiber laser. It is an absolute record for new power for industrial lasers. Despite weaker sales in Q1 for our applications, we believe the newest one applications including government research, quick start to drive sales more meaningful in the future.

We remain confident in our prospects for possible growth. We will maintain our solid competitive late in the fiber laser market by continuing to invest in people, processes, and technology. For example, we acquired Mobius Photonics in March to accelerate our entry into the UV market. While finishing qualification of innovative and quite effective UV in ultrafast fiber lasers to compete against existing laser technologies. In addition, we recently added significant to management bench strength to support our strategic market acquisitions and sales initiatives.

With that, I will turn the call over to Tim Mammen, our Chief Financial Officer.

Thank you, Valentin, and good morning, everyone. I'll start with a review of our end markets, products, and geographic regions. After that, I will provide highlights from our income statements and balance sheet, and close with our guidance.

First-quarter revenue grew 15% to $141.9 million from $123.2 million a year ago. It should be noted that unit volumes increased more than sales due to a decrease in average selling prices, primarily as a result of an increase in volume orders from OEMs, which attracts deeper discounts. I want to point out that this is primarily an IPG pricing strategy to drive adoption and use of lasers, rather than due to pricing pressure in the market. The greater increase in unit sales has helped to drive the manufacturing efficiencies balance in reference.

Materials Processing sales increased 29% year-over-year to $133 million, accounting for 94% of total sales during the quarter. During the quarter, we saw strength from industrial and aerospace markets for applications such as welding, cutting, marking, cladding, and percussion drilling. Other applications, which include telecom, advanced, and medical, accounted for the remaining 6% of sales. Revenue from these other applications decreased 56% year-over-year to $8.8 million.

As Valentin mentioned earlier, orders for advanced application sales can be uneven. Last year, during Q1, we shipped several large kilowatt high brightness lasers for research. Sales of high power lasers, which accounted for 53% of total revenue, increased 19% year-over-year to $75.1 million. High power fiber lasers for cutting applications continue to be more widely accepted, and are continuing to gain significant market share, and represent a large opportunity for IPG.

Pulse laser sales were $33.3 million, which accounted for 23% of total revenues, and increased 21% compared with last year. We saw strong growth within the consumer electronics market, primarily in China, and continued growth for metal marking applications. Sales of medium power lasers increased to $10.4 million, accounting for 7% of total revenues and increased 9% year-over-year. We had a record quarter for QCW laser sales, which increased by more than 100% to $3.9 million compared with last year, and accounted for 3% of sales. High-power QCW lasers are used for drilling aerospace parts and other metal processing tasks.

Sales of low power lasers were up 6% year-over-year to $4 million. Sales of other products, which include amplifiers, diode lasers, green lasers, mid-IR lasers, integrated laser systems, and certain components, were $5.8 million. Service, parts, lease, and other revenue, including accessories, totaled $9.2 million.

Now looking at our Q1 performance by geography, Asian sales, which include Western Asia and the Middle East, increased to $71 million or by 29% year-over-year, driven by strong demand for cutting, welding and marking and engraving applications. We saw good growth from China, Japan, Korea, and Turkey. European sales increased 8% year-over-year to $45.1 million, primarily driven by Materials Processing sales to cutting OEMs. We are pleased with the growth in Europe, which we achieved despite a challenging economic environment and lower sales for other advanced applications.

North American sales of $25.4 million for the quarter were essentially flat year-over-year. In North America, a decrease again in lasers sold for other advanced applications was offset by increases in both automotive and aerospace, and growth in Materials Processing.

Now, working our way down the income statement, gross margins were 53.3% compared with 55.8% in Q1 2012. This is within our target range of 50% to 55%. This year, gross margins were impacted by capacity we added, acquisitions, and volume pricing. I want to note that gross margins improved sequentially, even on lower revenues, due to improved product mix, lower component costs, and improved manufacturing efficiencies. Sales and marketing expenses were $5.9 million or 4.1% as a percentage of sales, essentially flat with 4.2% as a percentage of sales in the year-ago quarter. General and administrative expenses increased to $11.8 million and, as a percentage of sales, were 8.3% compared to 8.1% a year ago. The increase was primarily due to increased salaries, benefits, and recruitment expenses. In particular, we've invested in executive management and IT infrastructure.

Research and development expenses increased to $8.8 million. As a percentage of sales, R&D was 6.2% of total revenues, which is up from 5.8% in the first quarter of 2012. Again, this represents our increased investments in product development to capitalize on future growth opportunities. Operating expenses for the first quarter of 2013 include a foreign exchange transaction gain of approximately $0.5 million or $0.01 per share net of tax. Excluding the foreign exchange gain, total operating expenses were $26.5 million. First-quarter operating income was $49.6 million or 35% of sales compared with $45.2 million or 36.7% of sales in the first quarter of last year. Operating margin, excluding the foreign exchange transaction gain, was 34.7% of sales.

We also benefited from some discreet tax items in the quarter, including the recognition of R&D credits related to 2012, because Congress did not renew the R&D credit until January of 2013. Our tax rate in the first quarter was 29.27%, but we would expect that our rate going forward would be in the range of 30% to 30.5%. Net income attributable to IPG for the first quarter increased 17.4% to $35.1 million. On a diluted per share basis, we reported $0.67 for the quarter compared with $0.61 a year ago. We estimate that if exchange rates had been the same as one year ago, sales in Q1 2013 would have been $1.6 million higher; gross profit would have been $0.9 million higher; and operating expenses would have been $0.1 million higher.

Now, turning to the balance sheet. We have a solid balance sheet, and ended the quarter with cash and cash equivalents, including short-term investments of $355.7 million. This is down approximately 7.4% from year-end, due primarily to a $32 million payment for 2011 and 2012 corporation taxes in Germany, and capital and acquisition-related expenditures of $23.3 million, which were partially offset by other cash inflows.

At March the 31st, 2013, inventory was $142.1 million. Our current level of inventory on-hand amounts to 195 days compared to the target range of less than 180 days. If foreign exchange rates were at the same level at the end of the first quarter 2013 as they were at March the 31st, 2012, the translated value of inventory would have been $146.1 million.

Accounts Receivable were $102.7 million at the end of the first quarter, for 66 days sales outstanding, compared with $88.4 million at March the 31st, 2012, or 65 days sales outstanding. During our first quarter, we typically see an overweighting of sales in March, because January and February tend to be seasonally weak, so our days sales outstanding tend to be higher. The timing of shipments in any quarter can benefit or impact the simple days outstanding calculation.

Cash used by operations during the quarter was approximately $11.3 million, representing a decline of approximately $38.3 million compared to March the 31st, 2012, again primarily because of the timing of tax payments in Germany. Capital expenditures and acquisitions for the quarter totaled $23.3 million. During Q1, we began occupying a manufacturing facility that we constructed in Russia, continued construction of US manufacturing expansion, and began the planning stages to expand capacity in Germany. We are targeting capital expenditures in 2013 in the range of between $60 million and $70 million.

And now for our expectations for the upcoming quarter. The fundamentals that drive our business remains strong. IPG entered the second quarter with record backlog and a book to bill substantially better than one. For the first few weeks of Q2, order flow remains strong. Going forward, we expect to continue to drive profitable growth while maintaining our technological advantage, while making investments to capitalize on the enormous opportunities we see to expand IPG's business longer-term. Depending on the timing of investments relative to sales growth, these dynamics may temporarily affect operating margins from quarter-to-quarter.

Looking shorter-term, our guidance for the second quarter takes into consideration the same macro factors that have an effect on our first-quarter results. IPG Photonics currently expects Q2 revenues in the range of $155 million to $165 million. The Company anticipates Q2 earnings per diluted share in the range of $0.72 to $0.82. The midpoint of this guidance represents growth in revenue of 16% year-over-year. Given the continued strength of order flows, we expect this momentum to continue into Q3. The EPS guidance is based upon 52,350,000 diluted common shares, which includes 51,407,000 basic common shares outstanding, and 943,000 potentially dilutive options at March the 31st, 2013.

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

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

(Operator Instructions) Krish Sankar, Bank of America.

Thanks for taking my question. I have two of them. Tim, in terms of your guidance for Q2, what kind of gross margin and OpEx are you assuming?

In the range I've used on gross margin is between about 53% of the bottom of the range and closer to 55% on the top of the range as we get a bit more leverage; hence the model. And if we can get between $155 million and $165 million revenue, operating margin should track between 35% and up to 37% at the top. So I think we'll get a little bit of leverage back in, in the model sequentially.

Got it, got it. All right. And then another question is that, in terms of your Q1 -- like, you know, your numbers came in below your expected guidance, in your view, where was the miss coming from? Was it one of the product lines or was it a specific region which came in shorter?

There's a couple of specific things that affected us coming into the end of the quarter. We had a couple of large value systems that did not ship out of the US. We had another high -- very high value laser that the installation and final acceptance was deferred on in Europe. And then a little bit of timing of shipments into OEMs in Turkey, related to ensuring we had letters of credit and all prepayments in-hand. I'd say those were probably the three main items that affected the last few weeks of the quarter.

Got it, got it. Thank you very much.

Jim Ricchiuti, Needham & Company.

Tim, just regarding that last point, the last two items you cited, presumably that benefits you in the June quarter. And I wonder if you could talk a little bit about the outlook for the consumer electronics market, given the strength you had last year and Q2 and Q3? Thank you.

So overall, if we look at the business in Q2 where we stand at the moment, the amount of orders we have in-hand at the moment and already scheduled to ship is a pretty high percentage of the revenue guidance. If we're being cautious about anything, it's just around the logistics of getting product, for example, into China and then out the door to customers.

But I think we feel pretty strongly that this is going to be another good quarter overall on Materials Processing. It's not anything to do -- the range on guidance doesn't really reflect the strength of order flow. It's more of a logistics consideration, if there's any caution around the guidance range.

The consumer electronics business is actually starting to diversify and was reasonably strong in Q1. We're expecting it to remain strong in Q2. So, for example, we're getting an increasing number of orders, not just from some of the main manufacturers in Japan, but also we are seeing order pickup in Korea from some of the manufacturers there. I think the applications are starting to diversify. So, not only is it the core materials marking engraving applications, we've also got quite a lot of welding applications related to the consumer electronics. And we believe that a few of our lasers shipped to one of our main OEMs in Germany has started to be used on some of the newer glass-cutting applications, but we're not certain about that. So that business is continuing to grow and diversify.

Okay. Thanks a lot.

Patrick Newton, Stifel.

Good morning, Tim and Valentin. I guess to dovetail off the consumer and electronics, I appreciate the details about the diversifying business, and potentially having some new applications outside of just marking and welding. But if we just think about that in absolute dollar terms, I think you had a 2000 unit pulse laser win to a Taiwanese customer last year, that mainly shipped in 2Q and 3Q. And I think you'd previously discussed this being a $30 million application win. So, to boil it all down to numbers, based on the diversification you're seeing and the applications that you're seeing, do you think it's reasonable that your pulse laser business can grow year-over-year specifically in 2Q and 3Q?

I think in the second quarter, we expect we've actually had some very significant orders for pulse lasers in the second quarter. And the third quarter last year was particularly strong in consumer electronics. So the growth won't necessarily come in the third quarter just from the pulsed product line. I think it's going to come from all areas of the business, both high-power, QCW, medium power, and the pulse.

The third quarter last year was when the consumer electronics orders were particularly strong for the marking and engraving applications. It may be a little bit of a drag on pulse growth in Q3, but the overall order flow we're seeing across the product line gives us some indications that we can carry on the momentum we have. Rather like last year, Q3 will be a strong quarter.

And the pulse laser for the first quarter to compare a year ago have grown in units were 22% in revenue, and we have two reports some correction of price due to competition from new Chinese players. But last month, we collect a lot of new orders, huge quantities of new orders for pulse laser for quarter two, quarter three. So we don't see any drop in the business to just unit quantities business growing very fast.

All right, thanks for the details. And then, Tim, you did talk about high brightness, advanced application sales in the quarter being down year-over-year. I was wondering if you could talk about how they fared sequentially? And then how we should think about the growth profile of that specific product line on a go-forward basis?

Sequentially, there was no sales of high brightness lasers recognized in the first quarter. It was compensated a little bit by this huge win on the 100 kilowatt laser being delivered, which was for research and some Materials Processing. And ultimately, hopefully, going to be developed for very deep penetration welding. But there were no sales of the 10 or 5 kilowatt single mode lasers in the first quarter. We did pick up an order in the first quarter that we expect to ship in Q2. That's about $4 million. Sales into this area do continue to be very uneven. But there's obviously been also some positive news in the press recently about potential deployment of some of these systems.

Great. And then I guess one more on the automotive and with this 100 unit, 4 kilowatt fiber laser win. I'm assuming this is replacing YAG lasers. And one, is that correct? And then, two, is outside of this win, can you help us understand what material opportunities you still have in Europe in automotive in 2013? And then could you provide us on any update on share pertaining to automotive in China?

It is not -- this order is not for replacement YAG lasers order for new application for whatever this has the multi-form (inaudible). But it's not -- we also discussed now taking orders for other bigger plays in this market, will market and if so it's also large (inaudible). Now within automotive, we're going from single a few piece orders to the large quantity order. So it's full now with a practical fiber laser (inaudible) competition in the automotive industry, and we can expect in this year a very large order for mainly the most plays in this market.

I think just to follow-up on what Val was just saying, we're expecting to hear even in the next few weeks about another significant opportunity, which would be at the beginning of a retrofit of some YAG lasers (multiple speakers) in Germany.

And regarding this kilowatt lasers trend -- in spite of forecasts of analysts that forecast this year would be a blip, we have a normal growth in the orders and backlog for kilowatt lasers. And we can say for in units for quarter -- first quarter of this year to compare to first quarter last year, we have growth in power, optical power kilowatt laser 49%, in units, [36%]. It's much more than the revenue due to some correction of price. Price correction Tim mentioned before. Of course by -- we're going from single unit orders to large, long-term contracts for large quantities. So, large quantities we'll have to provide customer for quantity discounts and we provide that discount for them. So total cost per power going a little down. But the quantity of units is growing fantastical. So we expect this year in total that we'll sell [30% to] maybe 40% more units than last year.

And one last housekeeping question, Tim, on the model. G&A greater than 8% of revenue on a GAAP basis, you said hiring, you said obtaining the talent. I'm assuming there was some upfront benefits or bonuses paid with that, or signing bonuses, I guess. How should we think about that trending perhaps as a percentage of revenue or absolute basis on a go-forward?

There is no upfront bonuses or signing bonuses. The investments that happened where some of them were in the first quarter of this year that we'd invested in G&A throughout last year. So comparing it to the first quarter makes sure that in absolute dollar terms, quite a significant increase. That should moderate going forward. I think we've added a lot of executive management expertise. We've added quite a lot to IT. Clearly, as the business grows, we will continue to add but more moderately.

As I said, I think that as revenues get back up to this $160 million range, we'll start to get some decent traction off that G&A and even the R&D line, I'd like to see. And when we're looking at further investment on the selling expenses this year, hiring several new high-quality salespeople around the world, and continuing to investigate new geographic regions that we should have a presence in.

Thank you. Good luck.

Avinash Kant, D.A. Davidson.

Good morning, Valentin and Tim. A few questions. So the automotive application, the order that you received, just trying to figure out how big an opportunity could this be? First, is this the first big volume order that you have received that means, what percentage of the needs are served to that customer? That means would they come back and buy multiple of these again? Or is it kind of it satisfies their needs already?

I think this is still very early stages in the potential adoption and use of lasers in welding applications. We've talked about how really the target is to go after the resistance welding part of the market. These applications are still what I would call some of the more advanced. So, welding aluminum on the door closures, for example. So it's still more specialized applications. And if the transitions and use of lasers in the automotive industry on welding continue over the next few years in the vein that we expect, even these 100 unit orders we think represent a very small part of the total opportunity.

And could you elaborate a little bit how much time did the customer take to qualify these before they placed these orders?

This is -- this customer already has -- I think approximately 80 lasers in use. So they've been a major customer of ours since 2008. This was sort of the next big buy that they've probably been working on over the last -- discussion around this has probably been going on for several months. But it wasn't really a question of qualification or negotiation around price and supports and delivery. So, it's an ongoing customer of ours that we're cementing the relationship with. I think the view of our salespeople in Germany is this contract really -- it puts us in the prime position with them for the next several years, which is the great thing about it.

Okay. And, the next order you talked about that you were expecting, is it for the same product? I believe these are seam steppers, if I presume (multiple speakers).

It's still not seam steppers. It's useful for remote welding and similar applications. But since that part of that we still do not start Mark's implementation. The reason was because we had to make full qualification of these products. Now we finished such qualification. Before we use only practical chip only for Volkswagen, because Volkswagen was the first customer and they qualified internally. And they -- but in automotive customer waiting now for when we start to fill them. And now we should receive during a few weeks we have to receive final certificate qualification. Without this, we could not ship to customer. It was illegal.

So, but the potential for seam steppers is enormous. Typical now people use more in the field of we estimation between [50,000] to 100,000 the electric spot welders mainly, and the spot welders there. And seam steppers it weighs very successful with these spot welders. Even 10% of the spot welders would be replaced at huge margins and huge opportunities. And this our team separate our last version is now we have three generations, and last generation it's excellent at all and price acceptable competitor with the spot welder.

So Valentin, basically these are not seam steppers. These are remote welding tools that you're talking about automotive orders?

Yes, they are.

Now we deploy about more than 50 such steppers but our expectation many thousand. And it's not only for automotive in that. It's now, for example, we qualify this for use with two very much refrigerator company, and they happy to replace before they have much better quality and the price savings opportunities. So, here we will start in such application and many other applications it needs.

I had one other longer-term question actually. There's been a lot talked about the 3D printing industry. Now do you see any opportunity in the 3D printing side from the laser perspective?

The main opportunity we focus on at the moment is metal centering and deposition. We've got a major customer in OEM in Germany that's been buying our lasers for very many years around that. A lot of the plastic processing, though, Avinash, on the 3D side is using, from what I understand, some UV light sources for hardening the plastic after it's been manufactured. It's not even a UV laser. So, I think in the 3D side at the moment, the opportunities for the plastic side are pretty limited. We have not identified any very significant opportunities there at this time.

Thank you. In the interest of time and to allow as many to ask questions as possible, we ask that you limit yourself to one question and one follow-up.

Our next question is coming from the line of Mark Douglass with Longbow. Please proceed with your question.

Tim, you mentioned in the guidance you expect sales momentum going into 3Q. Are you talking about absolute dollars of sales or year-over-year growth? Or both?

Both -- relative to where we are guiding this year. So, I think 3Q a year ago was $155-odd-million.

$156 million, right. I guess from 2Q to 3Q, you said you have still momentum, so if you're guiding, call it, just 15% growth, what have you year-over-year, is that what you're talking about? Or just kind of an absolute dollar figure?

I'm just trying to give some -- a little bit of additional color around given the order flow we've seen in April, which has been another very, very strong month. If that momentum carries on through this quarter, we expect to have a good Q3. I'm not giving any other guidance around Q3. I think the overall strength of the business on order flow has been very good so far. The expectation for total bookings this quarter, based upon the pipelines that have been reviewed by the salespeople, points to a full quarter of good orders. And that should drive a strong Q3 for us. I'm not going to get into any more granularity than that around Q3.

I thought I'd try. And then, on the automotive. Can you talk about the evenness of deliveries on the automotive order? And mostly are we talking 2014 or the next 12 months or the next four quarters?

We're a little bit limited on what we can say more specifically on this order, but we've already received the first call-off that's due to be delivered this quarter. We are expecting another call-off in Q3 and then, I would think it's going to be fairly evenly spread going forward.

Okay, thank you.

Chris Godby, Stephens.

Thanks for taking my call. I guess, first of all, could you maybe touch a little bit on what happened in the other segment again? I know it sounds like it was advanced applications that drove the weakness there. But maybe what were your expectations going into the quarter and what do you expect going forward?

We didn't have any expectations for advanced -- the advanced segment has ended up exactly where we thought it would. We were not factoring in any significant single mode lasers, high brightness lasers for this application segment. So, a year ago, total sales for some of those other advanced applications was over $8.5 million. The reason for the slightly weaker revenue I articulated earlier really related to Materials Processing, deliveries.

I mentioned for Q2, the visibility that we have on some of the high brightness lasers is for an order that we already have in-hand for about $4 million. Beyond that, we don't have much visibility for future business on the advanced side. So it continues to be an uneven business. And as I mentioned, it can benefit and help drive growth in certain quarters. And in other quarters, it can drag that growth a little bit. The very nice thing about this is that it's high ASP units and fairly profitable devices. So, it's a business that I think will take another couple of years before it becomes more even.

I disagree here with Tim. We have some visibility, not for the firm but we have because of it up to 10 very serious watch customers in the US and Europe and some other countries. Discuss with our specifications for new phase 2 development. The scaffolds for the year provide when all they claim for as they apply for budget from governments and so on. So it takes only time. But it's feasible that we'll get these orders -- very serious order business into direct.

Okay. Great, thanks for the color (multiple speakers).

But the size application it's not only the advanced applications. Other applications which we're working very hard, we introduce markets very prospective line on new lasers for microelectronics, material processing for like very perfect new generation of UV lasers, ultra (inaudible) pulse lasers. And so this business where we believe we will have very serious positioning in this markets very shortly starting from this year.

Okay, thanks for the color and the clarification there. And then shifting gears a bit, can you talk about your efforts then trading the Japanese auto market? Obviously, you're in the early stages there but are you starting to see an increased traction?

Yes, we're starting to get one of the major -- the very largest manufacturers in Japan last year made an announcement about internally that they were going to start adopting fiber lasers (multiple speakers) --

They approved (inaudible) a certified fiber laser improved to use in all their production lines worldwide. For us it's extremely important, mainly it's only we work practical with development and as such automotive manufacturers. Now they qualify approve to use in all their production lines.

And we're getting orders.

And we start to get orders. And good for cuts for them for the future.

Peter Mahon, Dougherty.

I just had one question. Would you mind discussing kind of the competitive dynamics in your fiber laser business line?

I think the competition as evidenced by the growth in the Materials Processing sector over the last year is finding it very difficult to gain significant share. We've mentioned that on some of the lower power pulse lasers, there is some increased competition, and particularly in China. But in that area, we have picked up some market share there but we've not lost anything significantly in addition to that.

We're actually looking at new designs of lower-cost pulse lasers that will enable us to really compete even more strongly against them without impacting our margins. So that design is almost complete on the low-cost pulse laser.

On the high-power side, on QCW, on medium power, we've heard some of our competitors referencing, for example, weakness in China, lack of credit. That is really being driven by the fact that they're losing everything to IPG. There is no weakness in China. China is for us a very strong performer. It's been an exceptional start to the year there. So anyone who references fiber laser sales being weak due to the macro side, the underlying issue is they're not winning against IPG.

On the advanced side, the unevenness in order flow there, nobody can produce these single mode lasers. So the unevenness in order flow depends upon the timing and funding of projects. It's got nothing to do with the competitive position at all. I'd say also interestingly on the cutting side, we're seeing customers transition to higher powered lasers. That's going to make it more difficult for some of the new entrants who've got 1 and 2 kilowatt lasers, to actually gain traction against those OEMs.

And on the welding side, the primary sale of lasers is at the 4 and 6 kilowatts. So the competitive situation and thrust is, we think and we're starting to prove it, is overstated right now. One of the most interesting things I saw on some of our bills of material on the high-power lasers is that I think our cost of manufacturing these lasers now is getting to be lower than what the competition may be paying for diodes in the marketplace. The complete fully loaded cost of manufacturing. And I think that's really a testament to the continued vertical integration, the integration of power supplies in the bills, even the expansion of the PC board manufacturing, continued expansion of the metal job shops. So, some of the things I'm actually seeing on the cost side are fairly remarkable. And I think people are going to find it very difficult to get close to where we are.

Yes, we are aware of it because in many case, our price, sales price it's cheaper than manufacturing cost for our major competition. They could not able to compete at all can sell without any profits even with a loss, only whether it's not possible to make that -- they can't sell such weight -- [10] lasers, for example, they could not make clear business on this weight.

Thank you. (Operator Instructions) Shawn Lockman, Piper Jaffray.

Wondering if you could talk a little bit more about auto and give us an idea of where some of the other guys are? I know you had a good win during the quarter. You talked a little bit about an auto OEM in Japan that is looking at your laser product. But any other guys in the pipeline that are -- that could be moving toward your product? Thanks.

Everybody is moving towards the product. I mean, we just mentioned the big win in Germany. We're expecting another decision to be made over the next four weeks by one of the other German manufacturers, the continued adoption in Japan by key people there. I think a question didn't get answered earlier is what our market share in automotive and China is. It's more than 60%, we think.

In the US, just about every single manufacturer has placed orders this year. There's some real growth on transmission welding applications; the seatback welding, some of the other remote welding applications with all of the other major manufacturers in the US. So, that story is very much intact. And I think people are finding it difficult to gain some traction.

There's a little bit of just before this large order came in, in Europe, there's a little bit of weakness in Q1 on the amount of lasers that are being called off. But we are hoping that that's going to transition to a more positive trend in the second half of the year, even though there's been some negative news about the European automotive sales.

Great. That's great color. Thanks a lot. If you could talk a little bit about any kind of pricing pressure you've seen in first quarter -- anything that might be materializing in second quarter as well? How we should think about it this year either across your products or geographies? Thanks.

The only product where really there is some pricing pressure is this more commoditized end of the pulse laser business in China. Our margins still on that allegedly commoditized product line are very close to corporate average, which I think is pretty good for an allegedly commoditized line. And that's before we introduced some of this new design, lower-cost pulse lasers that are being developed and close to completion on development.

On the other side of the business, IPG's view is that we have to continue to drive pricing down of all products to really drive adoption and use. And Valentin mentioned, for example, this desire to start to see lasers displace resistance spot welding. There's probably some pricing discount that's still required to make that replacement very competitive to the end-user, when you couple it with the improvement in weld strength and the decrease in electrical consumption.

That market for this Company in a few year's time, if we can get to slightly better competitive dynamics with the legacy technology, could be enormous for the Company. So, the distinction that really has to be drawn here is what IPG's internal strategy on pricing is, which is pretty clear-cut. And don't get that confused with what people seem to be interpreting as the market driving IPG. It's really -- and by that I mean the competitive market. This is IPG's strategy and one we've pursued for the last -- almost-decade to drive fiber laser sales, and displace legacy technologies as well as existing laser technologies.

One good example of our experience, for example, with cutting applications to de-cutting applications, when fiber laser was power was higher than CFO, people said customers said, oh, fiber is good but the CO2 is cheaper. When we drop price of fiber laser now full power, fiber laser cheaper than CO2 laser, we start immediately we refer very shortly much replacement of the CO2 laser machine by fiber laser cutter. The same for any application, we analyze the market our needs and so on, and drive, we have such opportunities to build up our business in such a way to win and to beat competition, not by the quality of their laser and quality but by the better performance, even process technology process where they use lasers. But also by the economical by the price. And we are going such a way for each application especially.

Jim Ricchiuti, Needham & Company.

Tim, did you actually give out the revenue that you saw in China in the quarter? What did it represent?

We did not specifically give that out.

Can you --?

(multiple speakers) I think I have that number right here.

Okay, great. And while you (multiple speakers) --

I don't have it right here. I can give it to you later.

But the business overall in China, it sounds like it was -- you got off clearly to a good start. How would you characterize the business as you went through the quarter?

It's very strong. It was absolutely a record quarter in bookings. The April month on bookings again is very strong. It's across multiple different applications, welding, cutting, the more basic marking and engraving; some of the consumer electronics; some of the medium 500 watt-plus lasers for cutting of thinner materials, some good automotive wins. It was a very good start to the year. And I'm probably using a little bit of English understatement in that phrase, relative to China.

Okay, and Korea (multiple speakers) --?

Much better than we expect. (laughter)

Thank you. Korea, you've also been optimistic about the potential for the Korean market with the hiring, I believe, of the new General Manager. Can you give us an update on that?

Yes, I think they had a great quarter in Korea -- both a record quarter on bookings; Korean revenue was up, I think, almost -- it almost doubled compared to a year ago. In the second quarter, they're going to have another strong quarter -- they'll be sequentially a little bit lighter on revenue, but they're expecting to have a very strong quarter on bookings, so that should help them in Q3. Well, the things that we expected to happen in Korea with that transition in management have already started to take hold.

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 and look forward for speaking with you next quarter.

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