IPG Photonics Corp (IPGP) 2013 Q4 法說會逐字稿

Good morning, and welcome to the IPG Photonics' fourth-quarter and year-end 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 VP, General Counsel and Secretary. 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 Senior 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 Investor section of IPG's website or by contacting the Company directly. You may also find copies on the SEC's website.

Forward-looking statements made on this call are the Company's expectations or predictions only as of today, February 14, 2014. 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. I will now turn the call over to Dr. Valentin Gapontsev.

Good morning, everyone. As you can see in our press release, IPG performed well in 2013. We reported revenue growth in all four quarters, and grew by 15% for the full year. At 53%, our gross margins for the year were within our target range and we grew our bottom line by 7% even as we invested heavily in research and development, G&A and fixed assets.

These results demonstrate that IPG continues to extend its competitive lead while capitalizing on the growing demand for fiber laser technology. The most impressive sales growth was for our kilowatt class fiber lasers. During 2013 we increased the production volume of such lasers by 55%, up to three (inaudible) 200 units per year. It is very exciting numbers.

We are optimistic that further overall industrial output will be somewhat stronger in year 2014 than in year 2013. The optimism is based on strong order flow in 2013 and Q4 especially, and the book to bill ratio, which was much more than one. It is based also on what we hear from our key OEM customers and market analysts.

First of all, we would expect to continue to see strong growth in our traditional metal processing applications as welding, cutting and cladding. Another fast-growing IPG market is additive manufacturing of metal parts, also called 3-D printing. We believe there are meaningful opportunities for us.

IPG started to supply fiber lasers for this market many years ago, and now, when the market started booming, our sales are growing fast. Only during the last three months we received two new multimillion orders from leading players in Europe and Asia.

An exciting trend for us and metal processing and in increasing number of other applications, is that more and more manufacturers are transitioning from using lasers that have relatively low output power and a low average selling price to multiple kilowatt lasers with higher ASPs.

For example, if before 3-D printing manufacturers used hundred watt lasers, during the last quarter we already shipped many lasers with the power up to 10 kilowatts for manufacturing of large metal parts.

To open new markets we are continuously introducing products with the right features and benefits for specific applications. Just last week at Photonics West, we introduced seven new laser families, the result of our increased spending on R&D.

The product lines include new ECO family of kilowatts ytterbium lasers with unique record about 40% electrical efficiency, first kilowatt class average power nanosecond pulse lasers, first multi-hundred watt series of CW and QCW single-mode green lasers, new generation of highly efficient megawatt peak power picosecond near infrared lasers, high peak power green and UV picosecond lasers, as well as new family of visible fiber lasers and first in the market femtosecond fiber laser pumped mid-infrared lasers.

These new laser families cover more of the optical spectrum, including near and mid-infrared, visible and UV wavelengths and provide new alternatives to traditional laser users and non-laser solutions. Of course, all of these new lasers are designed with industry-leading product performance, reliability and cost of investment and ownership that IPG's fiber lasers are known for.

Interest is huge and the new product, especially the UV, green CW and pulsed and ultrafast lasers. With these new lasers we are expanding the available markets for lasers in micro-processing applications for semiconductors, LED, solar, thin-film processing, circuit boards as well as display.

Other applications that some of these new products open are stripping and cleaning of different surfaces in aerospace, shipyard, mold cleaning and repair, 3-D digital cinema projection, entertainment, biomedical and many other new fields. In addition to these products, we are expanding our offering of new state of art optical delivery accessories to include cutting, welding, cladding heads, high-power scanners and compact beam switches for materials processing.

Recently, IPG had several design wins that are worth a short mention. We won new multiple unit high-power orders from another Tier 1 European and Japanese automakers; our QCW lasers are now an accepted solution for cutting sapphire glass in smartphones; and our pulsed green laser has been designed into an ablation tool that improves solar cell efficiency sold by a major equipment manufacturer.

In year 2013 IPG has passed a critical milestone in a new field for us -- laser-based processing system development and introduction on the market. Tens of advanced products for various applications were developed, qualified and introduced on the market. The total revenue exceeded $20 million [essentially].

Some of such systems we have started to ship in volume. First of all, it is our family of unique Laser Seam Steppers. It is now gaining wider traction as a replacement for resistance spot welding. The Seam Stepper, a laser welding system with integrated clamping and safety enclosure, is already being used by several major auto manufacturers and integrators, but is also beginning to be adopted in the rail, agricultural and consumer appliance industries. More customers have Seam Steppers in demo worldwide than ever before, and we are optimistic as we focus more marketing efforts on this solution.

Other products include laser welding stations and production cells, even powder cladding machines, sheet and pipe cutters, ceramic drilling and cutting stations, and other applications. For example, we have developed and started to ship in volume powder cladding systems for turbine blade repair. The customer is one of the tier 1 industry leaders in the world.

The largest market for our systems we are developing successfully and Russia. In Q4 we have received and delivered already the first large order for our systems. The order value was about $7.8 million. We demonstrated our ability for fast development, manufacturing, shipment, installation and further production support of various perfect systems on customer specification. It caused a huge interest in Russian industry and opens IPG door for large market. As a result, now a system backlog in the most fast growing and our portfolio. We expect above 300% to 500% growth in the year.

IPG continues to grow geographically as customer demand requires. In Q4, we opened a new sales and service office in Poland, a new application center in Shanghai. In Poland, we see order activity picking up for both cutting and welding applications.

Building off a strong 2013, we are encouraged by our prospects for the new year especially given that book to bill was above one in Q4 2013. As I discussed, we have growing prospects to leverage our market-leading fiber laser technology and new products into additional markets and applications. We will continue to invest and our technology and our infrastructure to capitalize on these opportunities for the long-term.

In 2013, I was especially proud of our ability to scale production. For example, we further improved the quality of our pump diodes and have increased our production by 50% per year. The total power level of diodes produced in 2013 exceed 20 megawatts. An increasing number of OEMs are adopting fiber lasers and deploying the technology more widely into their systems, accelerating the displacement of traditional laser and non-laser technologies. As we enter 2014 we will continue to capitalize on this growing demand.

With that, I am pleased to turn the call over to Tim.

Thank you, Valentin, and good morning, everyone. Fourth-quarter revenue grew 14% to $165.9 million from $145 million a year ago.

Materials processing sales increased 22% year over year to $155.4 million, accounting for 94% 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. And as Valentin discussed, the new products we're introducing enable us to address opportunities in some of the more advanced applications such as semiconductor processing, hybrid circuit boards, nonmetal processing, sintering and cladding.

In cutting and welding, in addition to penetrating 3-D cutting of tubes and hydro form parts, we continue to sell an increasing number of lasers for traditional flat sheet metal cutting. The trends in that market are to increase speed and cutting of thicker materials which requires more powerful and expensive kilowatt scale lasers.

Our overall results were depressed by softer revenues in other applications, which include telecom, advanced and medical, accounting for the remaining 6% of sales. Revenue from these other applications decreased 42% year over year to $10.4 million.

The decline of about $8 million compared with the year-ago quarter was mostly due to lower sales for advanced applications and partially from continued weakness in telecom. Orders for advanced applications are typically large in dollar value, but are uneven from quarter to quarter. We are seeing growth in optical pumping, which is one of our largest advanced applications, led by sales to several OEMs.

High-power laser sales, which accounted for 53% of total revenue, increased 24% year over year to $87.8 million. High-power laser sales continue to grow as fiber lasers gain market share across applications and because customers are starting to use more powerful and expensive lasers in different applications.

Despite the strong growth in high-power laser sales, there continues to be a significant runway ahead for further growth in the core applications of cutting and welding, and future opportunities in deposition and ablation technologies.

Pulsed laser sales decreased 11% year over year to $27.6 million and accounted for 17% of total revenues. We continue to see competition from Chinese vendors within the marking and engraving market. However, we have launched a redesigned, simpler and less expensive pulsed laser product and we believe this product will enhance our competitive position.

Sales of medium power lasers rose 31% to $13.4 million, accounting for 8% of total revenues, which was primarily driven by increased demand for thin metal cutting and micro-welding.

QCW laser sales of $5.5 million more than doubled compared with the prior year and accounted for 3% of total revenues. We continue to see growing adoption of our QCW lasers for glass cutting, turbine blade drilling and welding applications.

Sales of low-power lasers were down 35% year over year to $2.9 million, primarily due to lower sales of medical applications.

Sales of other products, which include amplifiers, diode lasers, green lasers, mid-IR lasers, integrated laser systems and certain components, were $18.2 million, primarily driven by strong sales of systems in Russia. Service, parts, lease and other revenue, including accessories, totaled $10.5 million.

Now looking at our Q4 performance by geography. Asian sales increased to $71.8 million or by 11% year over year. Looking just at China, sales increased 12% to $40.1 million, primarily driven by our growing OEM customer base. They are using high-power lasers for cutting and welding within general manufacturing, automotive and consumer electronics.

We have also sold several Laser Seam Steppers in China to a major automotive manufacturer. In Japan we are increasingly penetrating cutting and welding applications, and we believe there is significant growth opportunity if the trend toward using fiber lasers in general in automotive manufacturing is more widely adopted by the major OEMs. In Korea, we have a strong position in battery welding. Asian sales continue to also benefit from strong demand from Turkish OEMs for cutting applications.

European sales were up 18% year over year to $64 million. This was primarily due to strong contributions from Italy and Switzerland. We also shipped several complete systems to a customer in Russia for a diverse set of applications including cutting, welding and cladding.

North American sales at $29.8 million for the quarter were up 18% year over year. High power and QCW sales, mostly to the auto and aerospace industries, drove much of the growth in North America. We also sold a 20 kilowatt laser in North America during Q4 that will be used for oil well drilling research and development.

Now working our way down the income statement. Gross margins were 49.2% compared with 51.8% in Q4 2012. Margins for the quarter were slightly below our target range of 50% to 55%, primarily due to a high inventory provision, which totaled $5.9 million, or 3.5% of revenue.

The inventory provision was primarily related to a reduction in the value of telecom components due to the slowdown in that business as well as a reduction in the value of inventory related to the acquired systems business. In addition to this, we estimate that product mix, primarily due to the increase in sales of laser systems and lower absorption of expenses related to cost of goods sold, reduced gross margins by 1.4% and 1.3% respectively.

We continue to invest in advancing our technology, infrastructure and management, which resulted in an increase in general and administrative expenses to $13 million or 7.9% of total sales compared with 6.9% of sales a year ago. Research and development expenses increased to $10.9 million from $9.3 million. As a percentage of sales, R&D was 6.6%, which is up slightly from 6.4% in the fourth quarter of 2012.

Operating expenses for the fourth quarter of 2013 of $32.7 million include a foreign exchange loss of $1.6 million, which was approximately the same as Q4 2012.

Fourth-quarter operating income was $48.9 million or 29.5% of sales compared with $47.3 million, or 32.6% of sales, in the fourth quarter of last year. Excluding foreign exchange, operating margins were 30.4% and 33.7% in 2013 and 2012 respectively.

Our tax rate in the fourth quarter was 25.3%. We continue to expect that our tax rate going forward will be approximately 30%. The lower tax rate in Q4 is primarily related to the spread of income between different tax jurisdictions as well as certain one-time benefits related to an increase in our US R&D tax credit that we had claimed following a detailed R&D study.

We estimate that the lower effective rate benefited diluted EPS by $0.03 in the quarter. In Q1 we expect the tax rate to be higher because we will not have the additional benefit related to the R&D study and the legislation related to R&D tax credits expired at the end of last year and has yet to be reenacted.

Net income attributable to IPG for the fourth quarter increased 3% to $36.6 million. On a diluted per share basis, we reported $0.70 for the fourth quarter compared with $0.67 a year ago. We estimate that the inventory provision and foreign exchange transaction losses reduced diluted earnings per share, net of tax, by $0.07 and $0.02 respectively while the lower effective tax rate during the quarter benefited earnings per share by $0.03.

Now turning to the balance sheet. We have a strong balance sheet and ended the quarter with cash and cash equivalents of $448.8 million.

At December 31, 2013, inventory was $172.7 million. Our current level of inventory on hand amounts to approximately 186 days, compared with a target range of less than 180 days. Accounts receivable were $103.8 million at the end of the fourth quarter, or 57 days sales outstanding, compared with $96.6 million at December 31, 2012, or 60 days sales outstanding.

Cash provided by operations during the quarter was strong $58.4 million.

Capital expenditures for the quarter totaled $22.6 million and were $70.9 million for 2013. Our expected CapEx for the full year 2014 will be approximately $70 million.

Backlog, which we report annually, was $265 million at December 31, 2013, compared with $203 million a year ago, and represents a 31% increase. Our backlog includes $132.6 million of orders with firm shipment dates and $132.4 million of frame agreements that we expect to ship within one year, compared to $102 million of orders with firm shipment dates and $101 million of frame agreements at December 31, 2012. The book to bill ratio for Q4 2013, as Valentin has mentioned, was greater than one.

And now for our expectations for the upcoming quarter. We anticipate reporting year-over-year growth in Q1 2014. For the first quarter and in the year ahead, we are capitalizing on the increasing demand for fiber lasers over traditional laser technologies and non-laser technologies.

Positive market trends, such as the growth in the adoption of fiber lasers for cutting and welding, 3-D printing and micro-processing, provide us with additional confidence in our growth potential. In 2014 we are focused on increasing revenues, maintaining margins within our target range by closely managing expenses and obtaining customers for our newly introduced products and the number of applications for which our fiber lasers are qualified.

Looking at Q1, we currently expect revenues in the range of $160 million to $175 million. The Company anticipates Q1 earnings per diluted share in the range of $0.69 to $0.83. The midpoint of this guidance represents quarterly revenue and EPS growth of approximately 18% and 13% respectively year over year.

The EPS guidance is based upon 52,487,000 diluted common shares, which includes 51,660,000 basic common shares outstanding and 827,000 potentially dilutive options at December 31, 2013. This guidance is subject to the risks we outlined in our reports with SEC and assumes that the exchange rates remain at present levels. I want to reiterate that we do not attempt to forecast gains or losses related to exchange rates. And with that we will open the call up for your questions.

(Operator Instructions). Patrick Newton, Stifel.

I guess just jumping right in, on the inventory reserves you have about [$]14 million cumulative over the last four quarters and they have been growing in size. I'm trying to get an understanding of are we through these reserves or can you help us understand the level of telecom industry -- I'm sorry inventory, so that we can quantify the inventory risk on a go-forward basis?

The inventory risk is substantially reduced, it's [hopefully not] eliminated; I would like to target reserves of ideally about 1% of revenue going forward.

In terms of telecom inventory, there is very little telecom inventory that is left at full value on our balance sheet. The items that are left are ones that are continuing to move; everything that has not been moving has been reduced to a zero value.

All right, that is very helpful. And then I guess if we do remove the inventory reserve in 4Q I calculate an implied gross margin of about 53.2%. And if I use of this as kind of for what business fundamentals are, and then I take the midpoint of revenue guidance and earnings guidance I would assume that you are expecting a sequential decline in your gross margin in the March quarter. So is that a fair assumption? And if you can walk us through why there would be a decline in a growing revenue environment?

So you continue to -- first of all, I think that we continue to target gross margins in the range of 50% to 55%, I think in terms of guidance the midpoint of that range is reasonable. We continue to have fixed cost additions coming on related to the investments, so not all of our infrastructure has been placed in service and additional expenditures during the year will continue to place that in service.

In order to more fully absorb that I've stated previously, Patrick, that I think we need to get revenues up to $185 million and clearly in order to achieve reasonable target growth rates we need to be somewhere above there in Q2 and Q3. So I would expect to see a bit of leverage off the gross margin in the middle and second half of the year.

In Q1 the midpoint of the range is sort of relatively flat on revenue sequentially. So you are not getting much benefit in relation to that. I think those are the main reasons and the best way to articulate thinking about the gross margin.

If you come down to the operating line, I will just address that right now. I think operating expenses in the range of $31 million to $32 million for Q1 and applying a 70% tax rate gets you approximately to the middle of the EPS range. So I think the model is pretty much in line with where I would expect it to be given the level of revenue and I think that during the year as we hopefully substantially grow revenues we can see a little bit of leverage out of that.

(Inaudible) we have to take in mind that our business model very short lead time. So only during typical two to four weeks where it is other people lead time much more -- many times more. So with really short lead time you have to (inaudible) inventory some finished works and also have to have more in house in stock these components and parts ready. So but it provide us an enormous advantage against their competition.

Krish Sankar, Bank of America-Merrill Lynch.

I had a couple of them. Number one, Tim, you guys said that last year was a big investment year for you. If I look at your OpEx for this year or at G&A, should we assume year over year it would be flat, decline or increase?

Of course operating expenses will continue to go up, the rate at which they continue to go up we are targeting this year to be about half the growth rate. So we expect to get a little bit of leverage out of that. This is a complex and growing business, you need to continue to invest in R&D and the G&A and selling side, obviously we are trying to get into markets and new applications. It is extremely important to invest in sales personnel, applications personnel.

And on G&A, as the business grows we need to add headcount around the financial function and IT as well. But the overall growth rate on operating expenses will be much more moderate this year compared to last year.

I would say if you target OpEx growing to between $35 million and $36 million by the end of the year, that is probably initially a reasonable number to aim for when you are modeling things. If we achieve very high growth rates clearly we will have to invest more.

Got it, got it, that is helpful. And then the second thing I want to find out is clearly typically you are seeing the seasonality in Q1 which you are not seeing. Is it, A, because your China sales -- you saw seasonality in China in Q4 or is there something else going on?

No, I think what we have seen is the general tone of the business through Q4 has been really pretty good. So if you go back to Q4 2012, order flow was really very weak in the comparable quarter a year ago; we ended up booking and shipping at a significant amount of revenue in Q4 2012.

What you have really seen this year is order flow all around the world in Q4 being a bit better. It started off a little bit weaker in the US in October and then picked up nicely towards the end of the quarter. Good order flow in China. And the most pleasing thing for me is I've seen European sales start to get some traction not just because we sold all these systems in Russia, but also in Germany and Switzerland and the forecast for Italy this quarter is also quite good.

So the general tone around the business I think coming into January 1 was better; we were able to build some backlog rather than consume backlog during the quarter. And the guidance reflects a continued strength on order flow during the beginning of the year. So I'm actually really quite pleased with the general tone of the business. There's also quite a lot of backlog already in hand for Q2 which is a good thing.

Joe Maxa, Dougherty & Company.

Tim, the OpEx you talked about targeting the back fourth quarter, what are we thinking on top line? I mean are we in that 15% to 20% range? Can you outgrow 2013 to --? And on that OpEx comment as far as growth when you said you target half of the growth rate -- I was uncertain. Was that half of the revenue growth rate or half of last year's growth rate?

You can take -- if you go from OpEx being $32 million to $35 million to $36 million you are getting like 10% or slightly less growth in OpEx. I can't give you a number on full-year revenue because that would be giving you full annual guidance. I think I have given enough information on ability to model the results.

Overall we continue to expect to see significant penetration of fiber into all the primary materials processing applications. We're starting to see good traction out of some of the newer materials processing applications in 3-D in some of the ablation is stripping cleaning. And then if we can get some of the newer products, we started to see some sales on the green.

And if we can get the ultrashort ultrafast lasers in customers' hands and get them qualified I think there is a little bit of upside to growth in of the second half of the year. But I can't give you -- we don't give an annual guidance. I can't give you an estimated growth rate for the year.

But I think you have to look at where the growth rates -- the market analysts are saying the growth rates for fiber will be across different applications. And they probably aren't taking into account some of the newer applications we want to get into later in the year.

So the general tone I think is that we are -- feel better about the business coming into the end of the year than we did in January last year.

Thank you.

Avinash Kant, D.A. Davidson & Company.

Two or three questions. The first one was the 3-D printing, could you give us some idea about your sales to 3-D printing in 2013 and what kind of growth should we expect in 2014?

So just about all of the major players purchased equipment from IPG; there may be one company in that UK that is currently not our customer. Sales are still relatively small, probably just about over $10 million, but grew by about 50% last year.

One of the frame agreements we have just received is equal in size to almost the entire sales last year. So that gives you a bit of a perspective and that frame agreement has been placed by one of the largest customers and suppliers of metal 3-D equipment. So that probably gives you a little bit of a frame of reference as to the opportunities and speed with which that market could grow.

I think one of the challenges around that market is whether the incumbent suppliers can even keep up with demand for major manufacturers who talked about using a significantly increasing amount of metal sintering equipment in production processes producing hundreds of thousands of parts. So people are going to have to invest and it provides an opportunity for IPG to capitalize on.

Are you competing with other players on this application or other technologies in this application?

Are we competing with --?

Yes. Like is fiber laser competing with other lasers in the metal sintering application for 3-D printing?

I believe fiber is the choice on the metal processing. On plastic it is a different question altogether.

Okay. And then changing the question a little bit here on the automotive side. So you got -- you talked about strong agreements -- or agreements at the European and Japanese automakers. Could you highlight a little bit in terms of what kind of application is that coming for?

That is welding.

Welding, okay.

Different type -- some of it is remote welding, some of it is Seam Stepper, so resistance spot welding.

Thanks.

Jim Ricchiuti, Needham & Company.

I wonder if you can comment if the book to bill was up in each of the geographic regions including China, was it up above one?

It was -- yes, I think it was in every region book to bill was above one. I'm trying to think if there was a region where it was weaker. No, it was pretty strong across the board, Jim.

Okay. And as you guys lay out all of these other opportunities, including incenting and -- these are rather large markets that you are addressing. Can you talk a little bit about where you see your total available market today versus say a year ago? And to what extent you will see some incremental revenues from these markets materializing in 2014? It sounds like you will.

The situations in this market now are very hot. So the existing suppliers with existing products could not satisfy the most application due to very bulky, very expensive, not industry practical grade products. So (inaudible) not happy with existing products. And they're waiting on a new product much more efficient, much more compact and cheaper in price.

We introduced now such type of products which really for most applications they feel (inaudible) of major customers. They're talking to us directly, they are calling us asking hurry up to provide them these new samples.

So it's a case when -- and we, during last year we developed and qualified many products for their (inaudible) which they hope and started to this year to provide them for tests for qualification and to [mass] shipment in large quality.

So we believe during the (inaudible) time we can get the central share of this market and increase this market in volume essentially, increase multiple, would be a multiple more sales of -- in units. Of course price would be cheaper in other case, but we must weigh that with (inaudible) new to grow this market.

And if I could ask one final question on the 3-D printing area, what class of laser -- power class are you -- is the sweet spot right now? And where do you see that going? Presumably you are going to be going through higher power lasers as the demands of the industry grow and those should also include higher ASPs I would assume, correct?

Correct. So historically if you look at that market it's probably been in the 200 to 400 watt range. This last year we have had and shipped orders for lasers as high as 10 kilowatts. And some of the other larger volume users are transitioning from 200 or 400 watts up to at least a kilowatt and a bit more. So yes, they want to process larger pieces and they want to improve the processing speed. It would seem that the transition there is going to be to higher power lasers, Jim.

Mark Douglass, Longbow Research.

Tim, on the currency movements that we have seen the past few quarters, I know you don't guide FX losses, but it is probably reasonable to expect you might have more in upcoming quarters.

It just depends how -- we don't use any forward contracts to hedge stuff, so it depends how effectively we are hedged internally. You get some gains related to the appreciation of the renminbi, most of the losses are generated in Germany because they have got dollar assets.

[We've actually] got those a little bit better hedged coming into the beginning of the year. January saw the euro depreciate, it has re-appreciated now. You have seen the ruble depreciate but they have got dollar assets. So as I said, Mark, it's not really -- it is not as easy just to say that they're going to be bigger losses in Q1 or smaller.

There are so many different moving parts on the exchange rate which is why we don't give guidance. But if the euro appreciated by another 10% or 15% that would be negative to us. But we are a little bit better hedged on dollar assets in Germany at the moment.

Okay, and then --.

Last year we have some (inaudible) in Japan due to them because some of our Tier 1 customers we have fixed sales in the yen. But we believe this year the yen maybe will become -- not so [strong] so it will return back.

Yes, stabilizes. With your mammoth cash balance, a couple things here, how much is outside the US? And what are your plans, I mean thinking about a dividend here, share buybacks? I mean obviously there is some M&A, but I would be surprised if you spent that kind of sum on M&A.

So first question about 40% of the cash is overseas, approximately 60% in the US. We continue to look at different acquisitions to enhance the depth of technology within the Company and new markets we can address.

Then given the rate of growth that we expect to generate, I have said before that I think we are a little bit ahead of looking more discreetly at the capital allocation (inaudible) the Company and we certainly haven't had any detailed discussions about future dividends or buybacks. It is a little bit too early to really get into that discussion right now.

Kathryn Thompson, Thompson Research.

This is Steven Ramsey filling in for Kathryn. Could you give more color on the composition of your backlogs and what is driving demand for those backlogs?

We generally don't give a lot of detail on this, it's primarily driven by the materials processing market and growth in sales across different geographies. So the commentary around European sales being stronger, would be reflective of European backlog being better than it was a year ago. The systems business growing in Russia, you have got better backlog related to that.

So it really reflects the composition of backlog, reflects the growth trends that we have discussed for applications, products and geographies. I'd say one of the good things about the composition of backlog is that there is actually a nice amount of backlog that is already available for Q2, that is the one bit of color that I did give about it.

Right, great, thank you. And my second question for the full year 2013 and for Q4, how much did unit sales grow and are you able to quantify what percentage change you saw in unit pricing?

So, Valentin mentioned on the sort of higher power lasers, kilowatt class, unit sales are up about 50%. On QCW sales unit sales were up more than 150%. On pulse lasers, even though revenue was down a bit, which implies pricing down, unit sales were up about 4%.

If you factor all of those equations in you would arrive at a calculation of high-power pricing was down about 15%, but that is not quite accurate because you have to look at the mix. In 2012 there were a lot of very high value single mode lasers that were sold. A very low volume of those high-value single mode lasers.

So the 15% is right at the top end of the range, it is a little bit lower than that. QCW pricing since the end of 2012 has been more stable, you have also seen transition to a higher power QCW lasers. And pulse laser pricing is down, I mean you have to do the math on the relative change in revenue relative to the relative change in units and you get a calculation there, I haven't done that specifically.

Jiwon Lee, Sidoti.

Tim, your growth expectation from China is a little bit different than what other laser vendors are saying. And the share gains that you are referring to, is that mainly from the industries in general manufacturing or the newer penetration into say automotive plays a bigger role this year?

It is across the board. I mean we have gone from being a Company that was primarily focused on the marking and engraving market three years ago to being one of the leading or the leading supplier of fiber laser technology for all cutting applications both at kilowatt scale and also medium power, so cutting of thinner metals.

You are seeing growth in the QCW business from micro welding and the glass cutting applications. You've seen some growth in the 3-D applications in China -- the heavy industry side is probably not a big driver at the moment, so things like ship building have not been particularly strong, some growth on the railcar business.

I think our execution in China is really a reflection of a couple of things. First of all, the desire to adopt a fiber technology has been much faster than say for example some of the other areas because they really want to promote high-quality advanced technology manufacturing.

And then our execution on the ground just in terms of the team we have built up on sales and applications, the way we work with the customers, we are carrying inventory in China, doing a lot of the export clearance there. So we put a lot of investments into really the commercial side of the business as well as the technological side of the business. And that is why people are probably struggling they don't know how to deal with those advances that we have made.

The one -- we recently received a message from one of our (inaudible) customer in China which very high (inaudible) for marking application. We sell a new product, they promise us to double sales in this year.

That's well put. And can we talk a little bit about your system side? What was the revenue level last year and what type of expectations, especially in conjunction with Russia, you are anticipating this year?

So if you include the macro micro systems and the Seam Stepper, revenue on the system side was up more than 100% for the year. Valentin has got some very aggressive target growth rates for the systems business. So the minimum we would want to grow it by more than 100% again this year and potentially more than that.

Mark Miller, Noble Financial.

I was just wondering, you noted that there was some pricing pressure in pulse and QCW was stabilizing. Were there any other notable pricing pressures in any of the other markets?

We don't see really for high-power laser don't see pricing pressure our competition still far behind us in price. And so what is our (inaudible) drop in average price for high-power laser (inaudible) because more and more OEM customer purchase in much larger volumes, so of course for larger volume they hope the better price. And we have more opportunity to meet their expectation to help them to (inaudible) to do much larger business.

And the $7.8 million Russia order, was that for telecom or what was that for in particular?

It is not telecom it is system business. System. For this customer ship 18 different business for different application. We (inaudible) including not even hardware including (inaudible) technology (inaudible) and (inaudible) very serious construction our ability to work very hard (inaudible) in three weeks only we have shipped and installed it in open new facility all this during only three weeks.

It was great (inaudible), so impressed after that. It is a lot of (inaudible) new customers going asking us all this year what they project to buy from this year it is enormous number we afraid to mention this number. It is problem not now to cover (inaudible) how to (inaudible).

Thank you.

Thank you. And it seems we have no further questions at this time. I would like to turn the floor back over for closing comments.

Thank you very much for joining us. We will look forward to speaking with you next quarter.

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