IPG Photonics Corp (IPGP) 2014 Q1 法說會逐字稿

Good morning and welcome to IPG Photonics' first-quarter 2014 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 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, 2013 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.

Any forward-looking statements made on this call are the Company's expectations or predictions only as of today, April 29, 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 our call. I will now turn the call over to Dr. Valentin Gapontsev.

Good morning, everyone. As we published today, the first-quarter results in total correspond to our guidance and even better than market expectations. IPG continued to deliver strong growth with revenue up 20% year over year. It is remarkable also that revenue in traditionally weak Q1 was up sequentially, first time for last year.

In reality, the Q1 shipment was even higher than reported revenue, however, we decided to report one realized volume shipment to famous German automaker in Q2 because of some disputes with revenue recognition according to GAAP rules. Other key parameters like gross margin, P/E and cash flow were in good shape in Q1 also. We enter Q1 with a book to bill that was greater than one for the first quarter -- greater than one for first quarter.

The detailed analysis of Q1 results will be provided by Tim Mammen. I'd like to underline some top issues and trends.

As usual, the largest contribution in Q1 revenue was it made by sales of high power Ytterbium lasers. In the quarter we installed a new record of 2.3 megawatts of combined optical power of more than 1,000 produced units. It is 44% more than a year ago and 16% higher of Q4 2013.

The growth rate is close to the five-year CAGR of 55% and confirms that IPG fiber laser penetration trend into key application and material processing including cutting, welding, cladding, cleaning, additive manufacturing and so on, are far from saturation.

We continue to work very hard to improve the performance of such lasers and decrease their cost. For example, the newest version of such laser, launched in Q1 2014, provide a wall plug efficiency above 45% whereas five years ago they provided 25% only. It is much higher then any competition can demonstrate now. Please note there are no high power direct diode systems on the market with a similar efficiency also. So the claims the direct diode systems are more efficient are not correct.

At the same time we decreased the manufacturing cost of such lasers by a factor of 2 even 2.3. It allows us to continue to control prices in the market savings at very high gross margin.

The second sales driver promote the pulsed fiber lasers. Here the situation isn't so stable. Sales decreased 13% year over year to $28.8 million due to increased competition from Chinese vendors as well as lower demand in some regions. But we are optimistic in the market segment yet.

First of all we have decreased the cost and optimized price of our traditional low-power ytterbium pulse lasers. As a result we have recently signed new very significant contracts in China. Secondly, we have developed a new low-budget version of such lasers which has passed qualification by our top customers successfully.

But most large new perspectives we connect with the launch on the market of new families of much higher grade ytterbium Paul's lasers developed during last and this year. The families include -- high peak power short nanosecond ytterbium fiber laser with a power up to 200 watts; high peak power picosecond Ytterbium fiber laser with power up to 50 watts. Femtosecond Ytterbium fiber lasers for ophthalmology and industry applications. Superhigh powered nanosecond lasers with average power up to 5 kilowatt.

We are finishing qualification installation a mass production of the families now. Some of them, like short nanosecond, and other (inaudible) walk we started to ship in serious quantity last year. The orders are growing very fast now. But the most of them should start to bring a contribution to revenue in second half of the year.

If you consider other old product, (inaudible) developed few some years ago, we see an essential growth in sales of QCW laser family. In Q1 the growth continued and exceeded 100%. However, its contribution in revenue is less than we expected before. The reason is clear, very low market prices of legacy competitor, flash lamp pumped Nd:YAG lasers.

To win the market we are working successfully to decrease the cost of these lasers. From other side, more and more OEM customers are finding an enormous performance benefit in turning to our QCW solution. We are true in fact sales growth.

The revenue contribution of other our classic lasers, as lower power Ytterbium, Erbium and Thulium laser, as well direct diode lasers, is still very low. We are looking to spend more attention to these products because they have very essential reserves for sales growth.

Further, in Q1 we have reached a very good progress in finishing of development and qualification of our new prospective product families like -- high-power green CW and short pulse fiber laser with a power up to 500 watt; UV fiber laser, both 355 nanometer and 266 nanometer spectral ranges; nanosecond and picosecond Erbium 1.5 micron and Thulium 2 micron fiber lasers; femtosecond Erbium fiber lasers of 1.5 micron (inaudible) range; first industry grade femtosecond lasers of mid infrared range of 2.5 micron (inaudible) range; high energy per pulse Holmium hybrid fiber pumped lasers of 2.1 micron (inaudible) range.

The most of the new lasers do not have analogs on the market at all. Some of them are unique (inaudible), for example, chromium doped zinc sulfide laser femtosecond laser of 2.5 micron (inaudible) range, it is open somewhat to new opportunities (inaudible) new opportunities for biotechnology, for example.

The mass production of the lasers we are targeting to start in Q3 and Q4 of the year. At last in Q1 we were very successful in further development and introduction on the market our laser-based systems. Tens different kind of machine were developed and introduced to customers. As a result our backlog for such kind of system growing dramatically into 100% increase only during Q1 of this year.

The advantages of fiber laser technology combined with the adoption of new materials and processes in many areas of manufacturing are resulting in new opportunities for IPG as fiber laser displaces more conventional methods.

An example is the use of high-strength steel in automotive manufacturing to decrease the weight of vehicles that is driving fiber laser adoption versus non-laser methods such as stamping. Other examples include growth of additive manufacturing to produce complex parts and using fiber laser to cut Sapphire Crystal and glass for use in smartphones.

In addition, the miniaturization of parts and to electronics and the resulting need to produce extremely precise tools also contributes to increased demand for fiber laser. No other Company can produce ultra-high-power laser of 20 kilowatts and -- or 100 kilowatt on a commercial basis like we can. We have numerous orders for these lasers for oil and gas extraction, heavy construction, research and special applications and so on.

We have made great progress over the last few years in overcoming customer doubts about the many benefits and reliability of fiber laser technology. There is little of such resistance on our established applications. We can see the evidence in the sales trends for sales of fiber lasers into cutting, one of the largest material processing applications.

Now practically eight from 10 top manufacturer of cutting -- to the cutting machines for example is our customers. We continue to press forward to develop new products and application to match our success in cutting.

Much of our R&D focus is on developing new applications for fiber lasers through internal research and in partnership with customers and industrial institutes. We are working to improve electrical efficiency and reduce the cost of our existing products, develop new products at new wavelengths, power levels and pulse duration as well as develop a variety of laser-based systems.

For example, last year we develop high-power pulsed UV fiber lasers for micro-machining and fine processing applications. Now we introducing pulsed fiber laser with ultrashort pulse duration with high peak power different spectral ranges including mid infrared as I mentioned before.

We are ready now to compete for (inaudible) technology for (inaudible) below cost laser femtosecond laser which now is integrated in the field (inaudible) market. As we introduce new product to our pipeline, we will be able to address opportunities in semiconductor processing and non-metal processing.

The opportunity pipeline also grows for our laser Seam Stepper as some larger auto customer have tested and using the specialized laser welder in their production lines. The stepper has wider appeal and it is being used to weld kitchen appliances, boats and trucks, aerospace to name a few. IPG is introducing a new stepper to respond to the market needs. Now we believe more than 50% major automaker now are testing qualifying the Seam Stepper for their application successfully.

To keep up with increasing demand we also are investing in expansion. Last month we purchased two buildings in Massachusetts that will be used for development and manufacturing of laser-based systems, Crystal growth and research. On a global scale we will open a new office within applications lab in Shenzhen China there our largest customer. Fiber laser technology becomes more widely adopted in both developed and emerging markets around the world.

We are increasing our international sales and service locationxs For example, we recently expanded our facility for system and component manufacturing in Russia and opened a new sales and service office in Poland and service office in Taiwan.

In summary, we continue to make investment in our product pipeline and in our worldwide infrastructure to leverage IPG's technology lead, develop new products and a growing demand for fiber laser. With that I will turn the call over to Tim.

Thank you, Valentin, and good morning, everyone. Our first quarter revenue growth of 20% was primarily attributable to high-power laser sales for materials processing applications. Mitchell's processing sales increased 22% year over year to $162.7 million, accounting for more than 95% of total sales during the quarter.

This growth continues to be driven primarily by demand for cutting applications across different industries. While welding sales were robust in Japan and Germany, welding was weaker in North America and China during the quarter. To a lesser extent growth benefited from an increase in sales for additive manufacturing, cladding and glass cutting.

Sales for other applications which account for less than 5% of IPG's total revenue, decreased by approximately 11% or by less than $1 million. Looking at our results by product line, high power sales, which account for 59% of total revenue, increased 33% year over year to $100 million. High-powered laser sales continue to grow in line with the fiber laser scanning market share and across existing and new applications.

One positive trend we are seeing is cutting OEM customers continuing to increase purchases of lasers with higher average output power. This trend may be in part to increase cutting speeds for all types of materials. but is also likely because they are replacing their CO2 lasers used for cutting thick metal with high-power fiber lasers.

In addition to the strong performance from cutting, sales for high-power welding applications were strong in Japan and Korea. We are seeing some signs of recovery in Europe, although this was offset by weaker welding sales in North America in China primarily due to the timing of projects.

One of our major auto customers has qualified IPG's fiber lasers for worldwide deployment for welding applications. Pulsed laser sales decreased 13% year over year to $28.8 million due to increased competition from Chinese vendors for marking and engraving applications as well as lower demand in South Korea where there was less investment in smartphone manufacturing applications as compared to one year ago.

These decreases were partially offset by stronger sales of pulsed lasers in Europe and North America. We have recently signed a significant new pulsed laser contract for our new generation of low-cost, low-power pulsed lasers in China. The first orders from this will be called off and ship in Q2 and should help to mitigate the competition from local Chinese suppliers.

Sales of medium power lasers rose 67% to $17.5 million or 10% of total revenues primarily driven by increased demand for thin metal cutting and micro welding in general manufacturing. QCW laser sales, which are mostly used for glass cutting, turbine blade drilling and welding applications, increased to $5.6 million or by 43% year over year accounting for the 3% of total revenues.

We are pleased to see QCW sales gain traction as a replacement for YAG lasers and also for use in new application such as Sapphire, Crystal and Glass cutting. Sales of low-power lasers were down 7% year over year to $3.8 million primarily due to lower sales of medical applications to one customer. Sales of other products, which include amplifiers, diode lasers, green lasers, mid-IR lasers, integrated laser systems and certain components were $6.8 million, up 18% year over year. Service, parts, lease and other revenue including accessories totaled $8.1 million, a decrease of 13% from last year.

Now looking at our Q1 performance by geography. Sales in Asia increased to $90.4 million or by 27% year over year. Within that region Japan had a record sales quarter thanks to our successful efforts to further penetrate cutting and welding OEMs in general manufacturing and automotive. In addition, demand for fiber lasers from Turkish OEMs for cutting systems continues to increase in drive growth.

In China, sales increased 23% to $45.9 million primarily driven by our robust OEM customer base. We continue to see strong interest in high-power lasers for cutting and welding from the automotive industry as well as increasing interest within general manufacturing, heavy industry and rail transportation.

We have been conducting demonstration with several companies within those industries for our laser Seam Stepper, which is an automated welding tool that provides customers with increased processing speeds, better and elimination of certain clamping tools and laser safety enclosures.

The Seam Stepper can be used to process several different metals including steel, aluminum, stainless steel, and the strength of the weld is about twice the strength of a traditional resistance spot weld. European sales were up 26% year over year to $56.7 million. This was primarily due to continued penetration of cutting OEMs for general manufacturing. We are also seeing growing demand in Europe for additive manufacturing applications.

European demand for cutting was particularly strong with both sales volume and an increase in the average power of lasers sold. In addition, welding sales saw a small improvement from the tepid levels of last year while pulsed laser sales were slightly up compared to a year ago reflecting the fact there is less competition in Europe for this product line.

North American sales of $22.9 million for the quarter decreased 10% year over year. The lower year-over-year comparison is primarily due to lower sales for welding and paint stripping while cutting and marking applications were stronger as compared to a year ago.

Now working our way down the income statement. Gross margins were within our target range at 52.3%. It was pleasing to see gross margins at this level even as we held inventory levels flat. Gross margin was helped by more stable pricing and solid utilization of manufacturing capacity. Utilization should improve as we grow revenue and increase sales of new products and accessories such as optical heads.

We continue to invest in advancing our technology, infrastructure and management, which resulted in an increase general administrative expenses to $12.9 million or 7.6% of sales compared with 8.3% of sales a year ago. Research and development expenses increased to $12.8 million from $8.8 million a year ago. As a percentage of sales R&D was 7.5%, which is up from 6.2% in the first quarter of 2013.

Operating expenses for the first quarter of 2014 of $31.5 million include a foreign exchange gain of $1.4 million which was up from a gain of $0.5 million in Q1 2013.

First-quarter operating income was $57.8 million or 33.9% of sales compared with $49.6 million or 35% of sales in the first quarter of last year. Excluding foreign-exchange, operating margins were 33.1% and 34.7% in 2014 and 2013 respectively.

Our tax rate in the first quarter was 30.1% which is higher than it has been recently primarily due to the mix of pretax income between jurisdictions and because the US R&D tax credit legislation has not yet been reenacted. If that is reenacted we would expect that our tax rate would be at or slightly below 30% and remain at this level going forward.

Net income attributable to IPG for the first quarter increased 15% to $40.5 million. On a diluted per-share basis, we reported $0.77 for the first quarter as compared with $0.67 a year ago.

Now looking at the balance sheet. We continue to maintain a strong balance sheet, ending the quarter with cash and cash equivalents of $480.6 million and $19.6 million of debt including lines of credit.

At March 31, 2014, inventory was $170.6 million, down from $172.7 million at year end. Our current level of inventory on hand amounts to approximately 189 days compared with our target range of less than 180 days. Accounts receivable were $107.6 million at the end of the first quarter or 57 days sales outstanding compared with $102.7 million at March 31, 2013, or 66 days sales outstanding.

Cash provided by operations during the quarter was strong at $43.4 million. Capital expenditures for the quarter totaled $11.5 million. Our expected CapEx for the full year 2014 is approximately $70 million.

And now for our expectations for the upcoming quarter. Heading into Q2 with a book to bill greater than one, we anticipate sequential and year-over-year growth for the current quarter. Continue to make strategic investments to advance our technology while focusing on generating profitable growth in maintaining margins within our target range.

Currently expect revenues for the second quarter to be in the range of $173 million to $188 million. We anticipate Q2 earnings per diluted share in the range of $0.77 to $0.92. The midpoint of this guidance represents quarterly revenue and EPS growth of 7% and 6% respectively year over year.

The EPS guidance is based upon 52,724,000 diluted common shares which includes 51,970,000 basic common shares outstanding and 754,000 potentially dilutive options at March 31, 2014. 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. With that, Valentin and I will be happy to take your questions. Thank you.

(Operator Instructions). Patrick Newton, Stifel.

-- Focus on what your revenue outlook I think the 7% year over year growth at the midpoint for 6% sequentially is definitely below expectations and it is a pretty big deceleration from growth that you usually deliver. So I am curious if there are any specific areas or products where you are seeing these growth rates decelerate, is there any macro or competitive issues that you would be willing to highlight?

Are you seeing any issues with Russia and the uncertainty there? And then, Gapontsev, I believe you made a prepared remark that said that you had an issue with the revenue recognition with a German automotive customer. I wanted to know if that is an impact or if I heard that correctly? And then I have a follow-up.

We didn't hear the beginning of that question, Patrick, but the general tone of the question is related to the midpoint of guidance, we got the rest of it. And also the revenue recognition question. Not to characterize that as a dispute, it is not really a dispute.

You may have had a dispute with me on my decision to need to defer that. It just relates to the payment terms that we have with one of the automotive manufacturers in Europe that we had to defer the revenue because the payment term is linked to the installation of the lasers within their factory.

And we cannot be deemed to have earned that until we get that installation completed, the installation was due to be completed in April/May, it was several units of lasers that were delivered. In regards to some of the other questions I think we have --.

So we have shipped the lasers, customer accepted, signed the document acceptance. But due to some note in the order that should be signed installation. So when we delay that recognition of this order. But no problem with the customer.

So is that -- you said it was supposed to be installed in the April/May timeframe. Is that embedded in your June quarter guidance or is this now shifting into September and could you help us size this revenue?

No, it is a relatively small amount of revenue, it is 10 or so lasers. It is nothing that material, Patrick. When I look at -- the stuff is all being installed, there is no issues, it is part of the larger frame agreement with that customer -- which that customer is calling off. We can't really read that much into it.

In terms of the other stuff I think we have talked about the pulsed lasers which were driving a bit in Q1 continuing to be a little bit softer in Q2. You are saying the welding business, it's starting to gain a bit of a (inaudible) started to see some recovery in Europe, certainly hoping -- started to see some better order flow in the US in the last week or so for the welding business said that is a good sign to see.

In general of course I would like to see a little bit stronger order growth at this point in time and to be perhaps guiding it a little bit more strongly, there is nothing specific on the competitive front that we have highlighted apart from pulsed lasers and they are very many opportunities that the Company is working on and we are just waiting for those to start to gain some traction.

Of course the business continues to be hurt on a growth basis with the weakness that we see in the medical and other applications. And we still don't have any clear visibility into when those are going to pick up. So I think it is a number of different factors that just as a little bit weaker quarter and then the rest of the year really will depend upon how order flow is in Q3 and through July.

The pipeline and the forecast for orders for this quarter that the sales group has put together is actually very strong, if they execute at that level I think we will be very pleased. But we need to -- we don't have a lot of visibility into shippable orders. As you know, it's a characterization of our business. So we do depend on waiting for those orders to come in.

But if the sales force performs well this year across the different geographies in Q2 into Q3 I think it bodes for a reasonably still a reasonably good year.

And know -- you didn't mention anything about uncertainty in Russia having an impact so I mentioned that was not an impact. Is that fair? And then could you help us understand what percentage of revenue you are generating from Russia currently?

In third-party revenue we have about 5% of revenue there. Russia is a little bit -- there is nothing specifically impacting, it is very difficult to forecast the timing of large systems orders. So we've been very conservative in terms of a number that we have used in guidance for Russia systems orders just because a lot of them are based upon different tenders and you don't know when those tenders are going to be concluded.

And once the tenders are generally concluded they require rapid delivery of the order. So Russia is a bit more difficult to forecast in that regard and we have definitely been conservative in that manner. As I mentioned on third-party revenue Russia is about 5% of total revenue for the group. So nothing -- the uncertainty in Russia isn't really impacting us in any way differently from last year but we have then conservative for the guidance that we are using for Russia for systems business.

Okay. And then I guess just last one, dovetailing off of that systems for Valentin or Tim is in the prepared remarks you discussed backlog for systems growing dramatically and I think you said many hundred pecent year over year. Can you help us understand the size of this backlog in absolute terms or is there a percentage of total backlog? And is there any specific geography, you just highlighted Russia where your systems business is focused?

The systems backlog in the US for example starts to grow with shipped miles per unit and in Russia I just discussed there are many, many different aspects of the pipeline and different orders that are coming in. So we expect to see that pipeline and backlog for systems continue to grow. Those are the two main countries where the systems business is really focused. So it continues to gain traction albeit off of a small base.

And we are still talking single-digit percentage revenue?

Yes. And I would be very happy if it was 10% of revenue.

(Inaudible) $60 million.

Thank you for taking my question.

Krish Sankar, Bank of America-Merrill Lynch.

Two of them, one, Tim, you kind of highlighted how the Chinese competition is like slowly kind of seems to be like impacting the pulse laser business and it seems like a year or so ago they were nowhere to be seen so I'm just kind of wondering what gives you the confidence like a year or two years down the road that the same Chinese competition won't be trying to attack your high-powered business (inaudible)?

I think on the pulse side of the Chinese competition is not a year ago, it is characterized they were nowhere to be seen as completely wrong, Krish, they have been around for at least two years on the pulsed laser side. And IPG now has got to a point where we are introducing new product with a lower cost base and cutting pricing, as we mentioned, we are starting to get some new significant orders from the OEM in China.

So it's the same with any competition. At the pulsed level it is easier for them to get in there because the diode is not a significant part of the bill of material. The relative optical power on a pulse laser they produce is lower. The complexity of the device is more simple. So that's enabled them to get some traction there. But we responded in the way that we like to respond with everything, by improving quality of the product, lowering price and becoming price competitive.

And I think we are starting to get some at least limiting their ability to compete further with us there. Who knows where they or other suppliers around the world for higher power product will be in three or five years time. But the point remains with the higher power product it is much more difficult to compete on price and the complexity of the product is much greater, the ability to scale power is much more difficult to do.

And there are companies outside of China who have been trying to scale power and reduce cost for the last decade and have not been able to keep up with us. I think that is what makes it so much more difficult for them. But we also have to continue to stay ahead of the competition, developing new products, diversifying the business, producing more systems, developing the optical delivery systems.

And that is where our continued advantage across different applications will continue to come from. If we just stood still and carried on just producing high-powered lasers that we did a year ago I am sure the Chinese would catch up, I am sure Valentin has a similar view on that.

Yes.

Got it. And a quick follow up, you guys did about like $190 million or so in China revenues last year more (inaudible) year-over-year growth. Is it fair to assume this year your China sales should be more than last year? And what kind of growth profile should you think for that?

We are targeting increasing China sales this year. In the first quarter they grew 23% and Q2 guidance they also forecasted growth but we are not giving any specific country or annual guidance. I would say that within the core applications the growth rate in China will be more in line with the secular growth rates of fiber laser rather than exceeding that. Of course as you get new applications and new product introduced those can provide a bit of a lift to revenue when they get accepted.

Core OEM customers in China for this year reported cuts much higher than was last year and also we now see other serious OEM customers also (inaudible) to IPG, so in total for us for (inaudible) very attractive today and first quarter confirm this that is for a cut it is right.

Thanks, gentlemen.

Joe Maxa, Dougherty & Company.

I wanted to ask a couple questions on the income statement. The R&D expense, obviously you are investing in your Company. Is this a baseline you should look for as I'm looking at the guidance it suggests the midpoint that R&D should come down a fair amount. So I was curious if there is any one time events in the quarter or maybe just elaborate a little bit?

My guidance I used a flat R&D number for Q2. At the midpoint we don't get a lot of leverage, Joe. But if you get to the top end of the guidance range we start to see some earnings leverage and that is demonstrated both because you will see a bit of an improvement in gross margin as well as a bit of operating leverage start to come in.

I said that it is fairly important for the Company to get to $180 million to $185 million in revenue and above that level it becomes easier to demonstrate a bit more of a robust business model.

I see. And following up on the gross margin (multiple speakers).

I've been very clear on that point for the last year I think. So there is nothing changed around that.

Correct, correct. I want to ask a little bit more on the gross margin side, staying in your typical range. There's a couple of items that perhaps are a little bit lower gross margin being the systems business and then also -- I also wanted to ask on the lower call it pulsed lasers for China. Where those gross margins shakeout compared to call it your Company average?

They are still pretty strong, the low-power pulsed laser and the introduction of the new lower pulsed device we will see an improvement in those margins. Actually you don't see a lot of this because there is a huge amount of detail and tens of thousands of transactions that go into this.

But I was actually very pleased with the gross margin of individual products now given the revenue level we had a little bit lower absorption, but I have highlighted that as revenue goes up that absorption and utilization should improve.

It wasn't too difficult to get to this gross margin level given some of the stability in pricing we're seeing on the cutting systems, Valentin had highlighted that as being a strategic initiative last year that he thought the pricing for cutting systems, or cutting lasers was more optimized.

I think we are starting to see some traction with improvement margin on the pulsed laser systems. And then the other product growing QCW costs starts to continue to come down, we had strong growth on medium power levels where the margins are pretty good. So I was actually very pleased with the gross margin by product before you get to looking at the utilization within the factory.

And then the utilization, given that inventory came down a little bit during the quarter, was pretty good. And I think that is a reflection again of more of the vertical integration starting to take hold and to leverage the investments that we have made. So if there wasn't a 54% gross margin quarter I was actually pretty pleased with it.

Great, thanks a lot. That is helpful.

Jim Ricchiuti, Needham & Company.

If I look at your guidance and think about Q2 of last year, you had a pretty strong quarter as I recall for pulse lasers and I think you also had a fairly strong quarter in North America. To what extent is that playing into the guidance -- the year-over-year guidance that you are giving, the headwinds you may have in pulse?

And if that is the case, when do the comparisons in pulse with the new product begin to get easier for you guys? Do you see a stronger second half?

I think pulse was reasonably strong in Q2 a year ago, Jim. I think there was actually another -- there was a large single mode laser that shipped in Q2 as well for defense so that is continuing to be a little bit of a drag.

North American backlog coming into the quarter was weaker than I would have liked to see and that has led to some caution around the guidance there. But I did mention in the last 10 days or so order flow has improved quite nicely in North America. And if that trend does continue it should drive us well into the end of the quarter and Q3 there is still a lot of stuff in the pipeline as well.

So North America started off weaker than we would like to see it, it started to improve a little bit now. On the pulse laser side of course as we get the normal acceptance of the lower cost device you would like to see some growth into the second quarter.

But the lower end of the pulse laser, it is starting to be come more project dependent depending upon when investment of the large manufacturing capacity additions are being made. And you kind of have to wait for those projects to come on stream again.

And, Tim, where do you see the pickup in North America coming from that you just alluded to, which applications?

The welding and cutting have had a very good week on order flow, there is some very high-power lasers we are expecting to get orders for in the next fairly shortly for some of the R&D on the oil and gas exploration.

The major automotive manufacturer that we said had qualified our product for worldwide distribution actually placed orders in North America for delivery into one of the North American factories that is the first order tchat we have received for the worldwide project. So it is across the board on the applications and product lines, Jim.

Okay. No, that is helpful. Thank you.

Avinash Kant, D.A. Davidson & Company.

A few questions. The first one you gave us some idea of, of course, the revenue growth that you have seen in China. Could you put some color around the margins that you have seen in that region, anything like gross margin or (inaudible) margin year over year growth or sequential growth, anything that you can talk about in terms of how the margin profile has taken place over the last year or so? Just some (inaudible).

Of course the volumes in China to the major OEMs are higher so they get some benefit on pricing on that, which if you looked at it on an individual product basis would point to slightly lower margins. In general the margins in China have been pretty stable. With the some of the lower costs coming through they probably improved in Q1 a little bit as compared to where they were in general if you looked at an average for last year.

On the operating side it is not really comparable. They have got sales and service and a bit of G&A in China that generates $180 million plus of revenue. So if you looked at the operating margin for the China entity it is not really comparable to anything else, it was very, very high.

But in terms of the composite or depending on the mix of the composite margins you would say have not gone down in China?

No, they have not gone down in China. I would say they've actually improved a little bit in China.

Okay. And last quarter you did make some comments about 3-D printing and applications there and you gave us some idea of the size that it was in terms of total revenues for the year. Could you give us some idea about what kind of growth should we expect and where it is at this point?

The (inaudible) manufacturing revenue grew by more than 100% compared to Q1 last year. It was just shy of about $5 million. So that implies a run rate of almost $20 million, that would be a doubling compared to 2013.

2013 was less than $10 million?

Approximately, yes.

You said $5 million in the current quarter, right?

Yes. (Multiple speakers) order flow out of that.

How are your margins in that business compared to the corporate average?

They are good, margins on those different products are very good.

Okay, perfect, thank you.

Mark Douglass, Longbow Research.

Looking at high-power and the strength there, is it accurate to characterize it as primarily Europe and Japan. And was there good growth in China?

Yes, there was good growth in China, China revenues in total were up 23% over the pulse business being a bit weaker, it intimates that the high-power business in China was very strong. High-power business in Japan was also very strong, don't forget it is the end of the financial year in Japan, it was their Q4 and now we are going into a slightly weaker Japanese quarter in Q2, because it is the beginning of the year.

But, yes, we had very strong sales across a variety of industries, across a variety of power levels in Japan. And then in Europe it is really the cutting business and some of the recovery in the welding business that has continued to drive the high-power business. Europe performed very well across -- the ticket will lead the cutting applications and started to see some improvement on welding applications.

Is it fair to characterize China as the preponderance of high-power sales?

No --.

Or at least (multiple speakers).

That show of high-power -- in fact because pulse laser sales, the proportion of sales are higher in China. If you looked at the relative regions, China high-power may be a slightly lower percent of the total as compared to Japan and Europe. In Japan actually high-power sales are 75% of sales, for example, because pulse laser sales and medium power laser sales are smaller.

Right.

And they are very high share in Europe. I mean high-power is not just driven by China, high-power is very definitely performing well outside of China in Europe and Japan. And as I mentioned, there is a lot of orders now coming through in the US for power levels -- for a lot of stuff in high-power, 4 kilowatts, 6 kilowatts. One of the orders we are waiting for is a 60 kilowatt laser in the US, so it is not just China that is driving high-power.

No, not just China but I was just wondering if there was a plurality. And then your cash, Tim, you are going to keep getting this question as it piles up. What are your plans right now? Are you expecting a share buyback authorization at some point, special dividend, I mean it seems to be more than enough for any M&A and certainly CapEx needs. What are you thinking about for cash these days?

I mean the first thing I would like to say was that I think we had a really nice quarter on operating cash flow generation and free cash flow generation. Q2 will be a little bit lower on free cash flow just because of the timing of some of the CapEx projects. There are quite a few purchases in Q2 that are scheduled to happen and CapEx should decline a little bit in Q3 and Q4.

So I was really pleased. I think we were all very pleased with the amount of operating cash flow the business generated during the quarter. With regard to the total cash on hand, there are no specific plans for buybacks pr special dividend at this point in time.

We continue to look for accretive good technology acquisitions that can drive the Company forward in terms of gaining share or into new geographies, different applications and we are focused on really looking at ways to deploy the cash in that area at this point in time.

We need to continue to try and execute on that strategy and I think that strategy is the primary focus for the time being. I can't give you a time horizon on that specifically.

Right, but it seems like you have mentioned it in the past that some of your targets aren't nearly as big as the cash balance you have. So, is that a fair characterization?

In general, you are not -- yes, there is not many companies out there that we would go and acquire for like $500 million or $600 million at this point in time. But there are several entities out there that are in the region of say $100 million to $200 million.

And if you wanted to execute on a couple of those transactions you are using up a fair amount of the cash and then we are a very vertically integrated Company, you don't want to run your cash balance down to zero and run the Company on fumes. We believe in having some reserve in our pockets as well.

Okay, thank you.

Thank you. Ladies and gentlemen, in the interest of time we ask that you limit yourself to one question at this time. Kathryn Thompson, Thompson Research Group.

My question revolves around North America. You talked about lower sales on the welding side. Was that due to weather or fundamental demand and did you see any progress through the quarter sales getting better? You have made a comment that you have had some good order flow in the last week. Thank you.

I don't think anything could be really fundamentally attributed to the weather, it may have had some small impact on it. I think it was more, Kathryn, the timing of projects. We generally see a pick up in North America into Q2 and Q3.

If anything there may be a little bit of seasonality related to the auto industry where people are requesting delivery of product and systems into the end of June and July and August when they sometimes shut down the facilities, and when they shut down we can go in or the integrators can go in and install the systems that have been ordered.

The pipeline on the welding side is certainly very strong. Maybe one of our cutting customers referenced a little bit of a slow start to the year related to the weather. But I don't think it is anything fundamental.

Jeremie Capron, CLSA.

So a good quarter, clearly sales are accelerating and now growing in excess of 20%. So I am a little bit surprised to see your guidance for Q2 single-digit growth, I mean pretty strong deceleration here. And I am trying to understand if that is more a function of the pulse business really dragging everything down or are you looking for a deceleration in the core high-power business?

I think it is the pulse business. Some of the other non-core businesses around advanced and medical and telecom still being a bit of a drag. And then some portion really around the numbers we have used on guidance for North America as well as on the Russian systems. It is very difficult to pick when those orders will actually be finalized and be requested for delivery.

I think we would like to see another $5 million plus on the guidance range, I mean that would have been a very good point to be at. It is a little bit weaker, Jeremie, than we probably like to see at this point in time.

As I mentioned though the pipeline and the forecast for orders from the sales group is very strong for this quarter. And if that is executed upon we will be in a fine position. So we just need to get a bit more visibility around that over the next three to six weeks, I would say.

Okay, that is great. And maybe quickly on Russia, obviously country risk is increasing. How should we think about your Company's risk on Russia? There were trade constraints coming up there. How would this affect IPG?

We don't think it would be (inaudible) impact in any situation. The worst-case it would be a [pro-embargo] for Russia, it could be some (inaudible) but not very much impact for IPG. Russia supplies to German American Company a lot of components, special fiber optic components. But we'll have such a similar facility (inaudible) for production this component and Germany and here.

So it is not very critical for IPG. But it is case which we don't think it will happen when full embargo with Russia from American side it is not possible at all. From a limited function which they now introduced -- Obama introduced, it is not connected at all with our business.

Thank you. We have reached the end of our Q&A session. I will now turn the conference back over to Dr. Gapontsev for any closing and additional remarks.

Thank you for joining us this morning. We look forward to speaking with you on next quarter's call.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.