IPG Photonics Corp (IPGP) 2015 Q1 法說會逐字稿

Good morning and welcome to IPG Photonics' first-quarter 2015 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.

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, 2014, 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 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 28, 2015. 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.

Thank you, Angelo. Good morning, everyone. IPG delivered another strong quarter and we are off to a terrific start of 2015. Revenues grew 17% year over year to $199 million, despite significant foreign-exchange headwinds. Underlying growth for the quarter would have been more than 25% using average exchange rates for last year. And if they use an average Q1 2014 exchange rate, the Q1 2015 revenues would be up about $220 million.

The gross margin was 54.2%, and EPS was $1.08, up 40% compared with the same quarter last year. [In that case] we had a sizable foreign-exchange transaction gain in the quarter, which improved the bottom line by $0.11 per share. IPG continues to grow the breadth and depth of our existing applications, and our products are being tested for use in new applications.

For example, during the quarter we continued to see good traction out of metal cutting. We are actively pursuing various new applications within that market. In fact, we have developed and are preparing to introduce on the market two new 2D cutting technologies. First one opens an opportunity for high-quality cuts of variety of thick metals like steel, aluminum, titanium, tungsten, and others with the thickness of 3 to 10 centimeters and includes a process technology package, high-grade cutting tables, up to 12-meters length, new generation of IPG's highly efficient 10- to 15-kilowatt fiber lasers and unique cutting heads holding up to 20 kilowatts optical power.

The second solution is a fine cutting technology of highly reflective metals like copper, gold, and others, based on IPG's new kilowatt class single-mode green fiber lasers. Additionally, in Q1 2015 IPG has installed in the customer site the first high-quality pipe cutting machine as well as a very [perspective] 5D cutting machine for large parts with complicated shape.

In Q1 we experienced an acceleration within sales of two our Japanese cutting OEMs, with cutting sales in Japan up more than 39%. We capitalized on Japanese cutting OEMs switching to fiber laser sources. Q1 2015 quarter opens for us new, exciting opportunities for fiber lasers in welding application also. We have finished qualification of new LSS-5 generation of Laser Seam Stepper technology. This system satisfies the most technical wishes for various end users and became very competitive to industrial spot welders in pricing.

Another great deal of interest was found in our new one-of-a-kind three-beam fiber laser system for brazing of zinc-coated steel packs in the automobile industries. The elegant, patent-pending IPG solution resolved various significant technical limitations of other processes. Currently, we are finishing successful production tests with one of the largest car manufacturers and expecting to start a mass deployment in the second half of the year.

The other version of the same system looks very prospective for an essential increase of aluminum welding qualities. The growing use of aluminum in autos and other industries saves the weight and increases fuel economy. So, the aluminum welding continues to be a strong opportunity for IPG.

Further, during the last months our Russian company has developed [perfected] technology for laser welding of thick steel, up to 10 centimeters; titanium, up to 5 centimeters; and other metals. On the base of their result we have started some very large scale projects with oil, large bridge sections, and other similar product manufacturers. For example, in Q1 we achieved a good progress in the development of mobile machines for oil pipe casing welding. The direct test of our equipment in the field on the well drilling stations should be started next month.

In China we see strong growth in R&D for complex welding in aerospace, specifically for the replacing rivets on airplanes. In addition, sales of our family of QCW lasers for low-power and fine welding applications continue to grow. These lasers are used for battery and electronics welding in consumer electronics. As a result, QCW laser sales performed well as a replacement for inefficient lamp pump YAG lasers. We expect this trend to continue going forward.

Another area that continue to grow for us is the use of fiber laser for additive manufacturing. Fiber laser are now widely used in this area and includes 3D printing, laser sintering, and various cladding applications. This application grew by more than 60% compared to Q1 2014. Sales to our core European customer group remains strong, while we are gaining OEMs in China, the USA, and Japan where there is increasing number of additive manufacturing customers. We combine such sales with inside development of complete solutions for some specific large scale new applications. One such project is directed to mass use in the high-speed train car manufacturing; other has a good chance to be implemented worldwide in large steel manufacturing companies. We have very serious customers in both cases.

Whereas metal processing technologies remains still for IPG has dominated application, we have reached in Q1 remarkable progress in development of new nonmetal directions. In fact, the qualification of our revolutionary new short picosecond and femtosecond laser primarily is finished. And we are starting deployment of such lasers with an average power up to 200 watts to the world's medical and industrial markets.

We have reached very good results in development of new technology for silicon polycrystal films annealing on the base of high power UV fiber lasers what we believe has a good chance to replace the present excimer laser technology in OLED display manufacturing. Further, a new state-of-the-art RGB technology platform based on new specle-free high power red, green, and blue fiber lasers has developed [by us] which would resolve the demand of high-grade 3D cinema theaters manufacturers for efficient, super high lumen projectors.

At last I should mention the high-volume market request for efficient aircraft, ships, and other machine paint removal systems. Now, the long-term project is turning from qualification to mass deployment phase, and IPG fiber lasers are playing a role of excellent engine there. Recently, we received your request from a leading customer to become a key supplier of such kind of complete systems. We are ready to reply positively for this request. Other very large-volume potential projects include fiber laser lidar sensors for driver-free vehicles and many other applications.

We believe we are operating from a strong position in our core applications. Overall, we are extending our lead over competitive lasers and non-laser methods by delivering the low-cost, highest-quality, and most reliable lasers in the market today. With increased reliability, lower maintenance, and ease-in-use, fiber laser technology is now becoming a preferred processing solution. In addition, our vertical integrated business model, manufacturing scale, extensive IP portfolio, and the drive to be the industry's greatest innovator provides high barriers to effectively compete with us.

During the quarter we acquired 76% interest in the technology company that develops key tools and controls for unique high-power 5D laser systems. The focus will be on laser processing systems for cutting, welding, cladding, and prototyping applications where lasers are not typically used. The systems will use our laser sources; these sources will be integrated with CNC and complex electrical drive systems, electrical controls, and software technology in combination with specialized optical heads. At this point the Company is serving the Russian market, starting from Russian market, where it is located.

As our Q1 results indicate, we are off to a very good start to the year. Our backlog, order flow, and book to bill remain at very strong levels in our three main geographies, and we expect that to continue in the near-term. We remain focused on gaining share in our established material processing application, developing new product applications that will expand our available market, and applying our lasers in large-scale and novel applications beyond our core application in material processing.

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

Thank you, Valentin, and good morning, everyone. First-quarter revenue grew 17% to $199 million from $170.6 million a year ago. Materials processing sales increased 18% year over year to $192 million, accounting for approximately 97% of total sales during the quarter. The continued strong performance of materials processing was driven primarily by cutting, welding, and 3D printing applications.

Sales to other markets including advanced applications, telecom, and medical applications, which accounted for approximately 3% of IPG's total revenues, decreased by approximately 11% to $7 million. The decrease was the result of lower sales in advanced applications, partially offset by sales growth in both telecom and medical. As a reminder, advanced applications sales are typically large and uneven from quarter to quarter.

High-power laser sales, which accounted for 57% of total revenue, increased 14% year over year to $114.3 million. This growth, which demonstrates our continued leadership in this area of the market, was driven primarily by strong demand in cutting and welding applications, as previously described by Valentin.

In addition, we sold several high-power 5-kilowatt single-mode lasers for a unique application related to patterning structured steel to alter its electromagnetic composition. Note that high-power laser revenues were most affected by currency headwinds.

Low-power pulsed lasers sales decreased due to lower average selling prices while unit sales increased. This demonstrated our ability to compete more effectively with this product line. At the same time, there was strong demand for our high-power pulsed lasers, primarily for marking and engraving applications and also for cleaning and ablation, which resulted in pulsed lasers sales increasing by 3% year over year to $29.9 million.

Sales of medium power lasers rose 26% to $21.9 million or 11% of total revenues. This growth continues to be driven by sales from fine processing applications, particularly cutting of thinner materials, and also from 3D printing applications.

Sales of QCW lasers, which are mostly used for fine welding, percussion drilling of holes, and some glass cutting, increased by 79% year-over-year to $10 million and accounted for 5% of total revenues. Sales were mostly driven by fine welding.

Revenue from low-power lasers decreased 8% to $3.5 million. Sales of other products, which include amplifiers, diode lasers, green lasers, mid-IR lasers, integrated laser systems and certain components increased 18% year over year to $8 million.

Service, parts, lease and other revenue including accessories totaled $11.3 million net of deferred revenue of $2.4 million, an increase of 40% from $8.1 million last year, when deferred revenue totaled $3.8 million. Included in this category are optical heads, which we note are gaining traction with customers as more high-power and other lasers are ordered with our proprietary optical processing heads.

Now looking at our performance in Q1 by geography, sales in Asia increased to $104.5 million or by 16% year over year. Within that region, China sales increased to 23% to $56.5 million. Demand was driven across all product lines, most notably high power, QCW, and medium-power lasers for cutting and welding applications. Our sales force in China continues to leverage the growth in that region, and we expect the momentum to continue.

In Japan sales decreased 15% year over year to $20.8 million. As a reminder, Japan had very strong results in year ago due to the change in consumption tax that resulted in an increase of purchasing activity in the first quarter of 2014. At the same time, the trend of Japanese cutting OEMs transitioning to fiber lasers continues to gain momentum in Q1, up 39%, as Valentin previously mentioned.

In Turkey we continued to benefit from strong demand from our cutting OEMs. In other parts of Asia growth was driven by specialty lasers for the steel industry. Notwithstanding slow growth of the economy in the Eurozone, European sales grew 15% year over year to $65.1 million, driven by even stronger growth in Germany from sales to the automobile and 3D printing industries, partially offset by weakness in Russia related to the economic environment. We expect demand for 3D printing applications to continue to grow. Also German pulsed lasers sales performed well during the quarter.

North American sales increased 25% year over year to $28.6 million, although this comparison is to a weak Q1 in 2014. The strength in the US centered on cutting applications, automotive welding, and an improvement in sources for medical devices. In addition, QCW sales for low-power welding and aerospace applications were strong.

Now working our way down the income statement, gross margins of 54.2% or at the top end of our range of 50% to 55% as a result of the strong revenue performance, benefit related to lower manufacturing costs due to the depreciation of the euro and Russian ruble exchange rates, and some benefit from product mix related to increased high-power, medium-power, and QCW sales, partially offset by increased unit sales of low-power, low-cost pulsed lasers.

Sales and marketing expenses decreased to 3.8% of sales or $7.5 million from 4.2% of sales or $7.2 million a year ago. We saw an increase in real dollars but a decline in the percentage of sales as we benefited from leverage in the model.

As a percentage of sales, R&D expenses were down slightly at 7.2% compared with 7.5% of sales in year ago. In real dollars, R&D expenses increased to $14.2 million from $12.8 million a year ago as we added to R&D headcount in the US and Russia.

General and administrative expenses decreased to 6.4% of total sales or $12.8 million from 7.6% or $12.9 million a year ago. This was primarily due to lower provisions for and an increase in recoveries for bad debt as well as a smaller loss on the disposal of fixed assets that benefited G&A by about $1.2 million in total. Excluding these amounts, G&A expenses were approximately $1.1 million or 9.4% higher than the first quarter of 2014 due to an increase in salaries and benefits, stock-based compensation, and depreciation.

In each of the aforementioned categories, operating expenses benefitted to some degree from the depreciation of the euro and other currencies.

Operating expenses for the first quarter were $25.8 million including a foreign-exchange gain of $8.8 million compared with $31.5 million a year ago, which included a foreign-exchange gain of $1.4 million. Excluding the foreign-exchange gain, operating expenses for the first quarter were $34.6 million compared with $32.9 million a year ago. The foreign-exchange gain of $8.8 million related to a position to build up dollar-based assets in Germany. The majority of that gain primarily came out of the depreciation of the euro. The FX gain had a bottom line benefit of $0.11 per share, as Valentin mentioned.

First-quarter operating income was $82 million or 41.2% of sales compared with $57.8 million or 33.9% of sales in the first quarter of last year. Excluding foreign-exchange transaction gains and losses, operating margins were 36.8% and 33.1% in 2015 and 2014, respectively.

Our tax rate in the first quarter was 30% and does not include any benefit related to potential R&D tax credits which might become available later in the year if the credit legislation in the US is reenacted.

Net income for the first quarter increased by 41.5% to $57.4 million on a diluted per-share basis. We reported $1.08 for the first quarter compared with $0.77 a year ago. Excluding the benefit related to foreign-exchange transaction gains during the quarter, EPS was $0.97. If exchange rates relative to the US dollar had been the same as one year ago, which were on average euro 0.73, Russian rubles 35, and Japanese yen 103, respectively, we would have expected revenue to be $21.6 million higher, gross profit to be $10.9 million higher, and operating expenses would have been $4.1 million higher.

Now turning to the balance sheet, continue to maintain a strong balance sheet, ending the quarter with cash and cash equivalents of $541.5 million and $32.7 million of debt including lines of credit. At March 31, 2015, inventory was $174 million (sic - see Press Release, "$174,140,000"), up 2% from $171 million at year-end 2014. Our current level of inventory on hand amounts to approximately 172 days compared with our target range of less than 180 days.

Accounts receivable were $149.8 million at the end of the first quarter or 68 days sales outstanding compared with $143 million at December 31, 2014, or 63 days sales outstanding, primarily due to the timing of shipments during the quarter and also payments received after the end of the quarter.

As Valentin discussed before, during Q1 we closed an acquisition of a systems technology company that has a unique multi-dimension high-power systems platform for large-scale cutting, welding, and cladding applications. As a result of the acquisition, intangible assets increased by approximately $6.3 million. Cash provided by operations during the quarter was strong at $52 million. Capital expenditures and amounts related to acquisitions for the quarter totaled $18.8 million including the $5 million cost of acquisition. We continue to expect the CapEx run rate for the full year 2015 to be approximately $60 million to $65 million, excluding business acquisitions.

We are off to a strong start to the year. In the first quarter, book to bill was above one, and we saw strength across the board and our largest markets. We expect that to continue as the year progresses. We continue to work with new customers and on new applications in cutting and welding in order to capitalize on the growing demand in our end markets. We are focused on establishing partnerships with new OEMs and end-users and deepening our relationships with our existing customers.

And now for our expectations -- we currently expect revenues for the second quarter to be in the range of $215 million to $225 million. We anticipate Q2 earnings per diluted share in the range of $1.05 to $1.15. The midpoint of this guidance represents quarterly revenue and EPS growth of approximately 14% to 20%, respectively, year over year. The EPS guidance is based upon 53,267,000 diluted common shares, which includes 52,486,000 basic common shares outstanding and 781,000 potentially dilutive options at March 31, 2015. This guidance is subject to the risks we outlined in our reports with the SEC and assumes exchange rates relative to the US dollar of euro 0.93, Russian rubles 52, and Japanese yen 119, respectively. I want to reiterate that we do not attempt to forecast transaction gains or losses related to changes in exchange rates.

With that, Valentin and I will be happy to take your questions.

(Operator Instructions) Mark Douglass with Longbow Research.

Tim, so you're going to keep getting this question: the cash on the balance sheet keeps piling up. Any thoughts on what's going to happen with that cash in the near-term -- dividends, anything like that, share repurchases?

At this point we have not changed the strategy at all that we articulated, albeit three or -- four or five or six weeks ago, at the end of 2014. So as we have discussed previously, if you look at the end markets that we operate in, we are still relatively early in penetrating many of the applications and potential end uses for lasers. Valentin articulated in his part of the call today numerous new applications that the Company is targeting that take us beyond the industrial area. So our view is that strategically it's extremely important to continue to maintain a healthy and strong cash position with a view to deploying that through acquisitions, as and when we find stuff that is compelling either from a technology or valuation point of view.

I think that, if we were much more mature and further developed into these end markets, we would be talking more actively about returning some of that cash to shareholders or using it in other ways. I still am very firmly of the opinion that, given where we stand, the strategy the Company is pursued by being conservative and cautious in looking at our acquisitions rather than rushing into things is very important, and I think patience is required in relation to that strategy. And that basically continues to be the point of view that we have and it hasn't changed in the last couple of months. I think the worst thing for us to do would be to go out and rush into some acquisition that wasn't particularly good.

Yes; I am not necessarily thinking of acquisitions, just that the cash flow position and the generation has been so strong, more than outpacing your CapEx needs, just returning some of that to shareholders by other means. But it doesn't sound like that is really changing.

On China, can you describe a little bit about what is happening on the ground in China? Investors continue to ask about how you can be doing so well in China, given the macro headwinds that appear to be there in the industrial and manufacturing space. But can you discuss a little bit more in detail how you are performing in China and what's going on in China for IPG?

So correct me if I'm wrong, but my recollection is that this has been a concern of investors for about four years. And we've continue to execute extremely well in that area. Fiber laser adoption and penetration has continued to grow. That has been achieved by IPG working very, very closely with OEMs and other customers on the ground there.

We started with a business that was predominantly in marketing and engraving, if you go back five or more years. We have diversified the application set so that developed into cutting applications. We are now getting into more and more welding applications. There's a significant amount of R&D that is going on in China with advanced welding applications. We mentioned some welding in the aerospace industry, where potential replacement of rivets within the joining technologies is being looked at in China. So you have a very diverse set of applications. You have an investment that IPG has made on the ground in service, sales, applications, support, and very close relationships with customers that mean that we have benefited from the overall growth in the industrial sector.

The other thing that is interesting is that, yes, the macro climate, at least to the headline, has weakened. Growth is expected to be 7%, the lowest level in almost 20 years. It's still not driving through on the more advanced side of the industrial market. And the way I would characterize that previously is that there is a very real impetus in China to transition from being a low-cost manufacturing region to being a very advanced manufacturing region, in a similar manner to what has been achieved by other countries in Asia. So that drive benefits laser sales in general and continues to offset some of the perceived weakness in the economy.

In addition to that, we sell a lot of lasers to people in the consumer electronics industry that are selling products worldwide and not just in China. And those companies continue to perform very well, so that ends up benefiting us. So there are many different aspects to our performance in China, our good performance in China.

Thank you.

Tom Hayes with Northcoast Research.

Tim, on the strength that you are seeing in the Japan cutting market, I was just wondering how would you size up the penetration rates right now of fiber lasers in that market?

Still relatively early stages, so this growth was really the first acceleration to our main OEMs that we had seen. It had been gradually building last year and really started to accelerate this year. That probably still -- they have maybe transitioned from between 5% and 10% to towards 20%. And their targets, they've told us, over the next two years is to move towards 50% to 60% utilization of fiber lasers. We think potentially that goes higher, given the general trends in the cutting industry.

Okay, great. And then Valentin mentioned in his opening remarks two of your new cutting technologies. I was just wondering if you could maybe talk about the availability of those currently in the market. And then our those sold separately or typically with systems? Or can they be bought?

So the question relates to the thick metal, ultra-thick metal cutting that you talked about.

We -- [now the whole] manufacturer of cutting systems, they turn from the 1-, 2-kilowatt laser used to the use 5 -- 4-, even 6-kilowatt laser. But a lot of new opportunities open to use the technology with many 10 kilowatts fiber laser. It is much faster and provides also a very good quality today of thick metal cutting and so on.

We tried to convince them of the [best] our customer to go farther, faster in the direction. But they are very conservative still, don't put in [any overtime] to overcome 10 kilowatts. So we have made decisions not to provide our sales such solution to market, to investigate market, and to show the cutting manufacturer [a little] that works with new opportunities here. And we will -- in the case where [one] compete with our customer, we will provide solutions which they still are not very interested. This is our policy and direction.

Within sales, it's minus [10-700] cutting machine during the year during the year only with so high power. We develop new application also to what implementation of this application. And we develop on full machine solutions, high-quality. And we deal with [light to port out of these] new application. With high-power laser it's a lot of [clad sheets], not in cutting -- welding, cladding, and other and both with new large-scale opportunities. We --

Thanks for the color.

We feel ready to apply to any other integrator our -- the breadth in lasers and optical solutions for the optical heads unique and so on. But from other side, we will open doors for everybody. But to force this application we again develop our own full complete solution including processing technology, hardware, machines, software, all what to provide to some large applications our own solution. And we are very successful in this direction now.

Thank you.

Jim Ricchiuti with Needham & Company.

You are talking a lot or at least it appears to be spending more time talking about new applications and new products. And I'm wondering if there's any way to think about this in terms of our you anticipating a bigger contribution from this area, these areas, in 2015 relative to last year? What, in particular, should we be focusing on over the balance of the year as you talk about some of these newer areas?

I think some of them, Jim -- it's a good question. We are working on different technologies and applications that point the way to growth of the Company over a two- to three-year time horizon rather than necessarily over the next three to six months. We are cognizant of the fact that as you get more and more penetrated in the industrial applications the growth of the Company in the medium to longer term is going to have to come from very innovative R&D in other areas.

In some instances we are being driven in this direction by our customers who are seeking these solutions. In other areas we are identifying areas where we think that fiber laser could have significant opportunity. So in the nearer term you are probably looking at some of the ablative and paint stripping processes, where, as Valentin said, the initial work is already really done and completed on developing complete systems that can strip aircraft. And now what they want is someone who can supply the systems and support the systems in the field on a commercial basis. So that might be one area, if you want to go really sort of nearer term, that could be a growth driver.

For example, for paint removal -- we found the total market for paint removal it's more only in the US, only in airports, more than $800 million per year. But total worldwide, more than $3.5 billion per year. Up to now [total] removal and making by chemical and other, [since it's very damaging, accounts of damages] and many other problem connected to with this. Laser technology allow to simplify it dramatically with a solution make much more perfect to such paint removal and so on.

Now the laser -- the solution for paint removal developed maybe last 10 years, we work with many institution, American and others who tried to make this. But it still was only R&D. But now with situations [ending towards a real way] growing from our developed, made, and qualified for many applications and growing [near-term] for mass production as our customer, leading customer [booked] and who will be able to produce and supply highest-quality of what volume, such equipment. We are looking for such product and working very seriously in these directions.

And just as a follow-up, just with respect to the comments you made about the bookings in the quarter, the book-to-bill, if I heard you correctly, it was above one -- can you give any color in terms of the book-to-bill in your major geographic regions?

It was basically strong across the board, apart from in Russia, where clearly the timing of orders -- and you generally see strength coming into Russia in the second half of the year and you've also got the economy being relatively weak now. However, the ruble has started to stabilize a bit, some of the budgets have been reset in Russia. So we are hoping to see some improvement there.

The rest of the world, you had book-to-bill above one just about everywhere else. So it was -- the revenue and the bookings really tracked each other during the quarter, Jim.

Okay, okay. Thank you.

First quarter mostly went better than the last quarter.

Joe Maxa with Dougherty & Company.

I wanted to follow up on the paint stripping system that you talked about. Have you had orders for that yet, or is it still too early?

You see paint-style laser already working for paint removal in, really, in the field. Everybody working. It's laser, it's our [practical, suitable laser] for example, in one application, only one sinter, 6 hours, 6-kilowatts lasers working very successful. We have [this way that they assume a] platform qualification and are now looking for max use. But we develop as much [breadth] of [power assembly] as a multi-kilowatt pulsed laser, [notched above you]. They opened now. We see a new opportunity for this. So we clearly were -- now is the time, new phase when the demand will grow very fast. Only steel -- they don't have -- customer don't have real good-quality manufacturer. We are ready to further take such position.

Okay. And you mentioned --

Whole system, not only laser, the whole system. [It's mobile system or a vertical mobile system] which includes not only on laser, not only a robot that includes also a very complicated scanning system software to make maps, for example, graphically for to where you won't have to prepare it. It's a complicated system but we are ready to take such responsibility.

I see. Okay. Also you mentioned that the seam stepper, it sounded like, was mainly gaining some traction. And that had in the past talked to be about a pretty big opportunity for the Company. Can you give us alone more color on what you are seeing there?

In separate project going well now the new -- our new LSS-5 which [peaked] generation of such system much more perfect and cheap. And they deal with meet all customer expectation, and to [your many parts]; see the steps in many application where we serve many customers. But is the market compression going not so slow. The problem is because [them also] customers, they have use of old [technology solutions] to [invest fast]. It's not for [quart] -- they already cut [nice much] better and so on but the -- not the right time to make new investment to change technology.

So it's typical with the process of integration, mass -- to install volume [sales take city] to five years, minimum. So we in this process going very successful but takes time. For hot zinc-coated metal is other situation. We started this project much later, but it's very hot today, very strong demand from major car manufacturers because current technologies with change of the process of thin coating become with this we have a problem very serious. Because they use chemical coats in the steel and it was good quality. Now the change to the hot melted zinc coating, hot coating and quality of such sheets became much less. And during the use, regular process, they have a lot of the problem with quality, a lot of defective cars, and so [the yield] decreased dramatically. We have resolved the problem, provides us an excellent, elegant pattern printing solution, in part now with the test, the old test now is going final production test. And this all immediately, many companies, car companies, start to request also for that same technology. And for this technology, [penetrated] market will be much faster and much more valuable.

Thank you.

Krish Sankar with Bank of America.

Thanks for taking my question. I have two quick ones. Tim, what kind of gross margin do you expect in the June quarter compared to the March?

Krish, we don't give any specific guidance on gross margin. Clearly, with the level of revenue we've got and the strong performance of the business, we expect to be towards the top end of the range. You will probably see a bit of a pickup in operating expenses as well as the prorating of bonus accruals, and some of the benefit on SG&A drops off. So in order to generate the guidance range that I gave on earnings, you inevitably have to be toward the top of the range on gross margin and in a similar range on operating expenses, maybe a little bit higher on operating margin for Q2.

Got it, got it. That's helpful. And then would you be interested in sharing -- I'm kind of curious on your China sales. What is the ASP range of the lasers you sell in China? Or if you don't want to disclose that, what is the ASP in China compared to, let's say, North America or Europe?

Average selling prices in China outside of the very low-cost pulsed lasers that we have are similar to elsewhere in the world relative to the volumes that the customers take. So, we have some of our largest-volume customers in China, and they clearly benefit from pricing discounts. There's no fundamental difference otherwise in the pricing strategy there. Obviously, to compete in the pulsed lasers business against some of the lower-cost manufacturers there, we've done a lot of work to reduce both the cost and the selling price of the lowest-power pulsed lasers.

Thank you very much.

Patrick Newton with Stifel.

Thank you for taking my questions. My first one is in response to prior questions you talked about increasing fiber laser penetration in China, and then Japan, cutting penetration, moving to the mid-20%s. I'm curious; if you look at the cutting market in total, where do you see overall fiber laser penetration? And could you give us some of those stats, similar to Japan, on North America, Europe, and China?

I think in Europe you are seeing people transition already to more than 50%. And the view is, again, that they will move overall up into the 80% level or more, if fiber continues to gain acceptance in the way that it has. In North America, it really is reflected because most of the manufacturers who supply North America are either European or Japanese companies. In Europe and China, definitely the penetration on cutting applications is ahead of where it was on Japan. We've articulated that on many occasions. It's good to see the changes in Japan that are starting to take place now.

Overall on the market it's a bit difficult to answer the question. You are probably trending towards about 35% to 40% penetration of the entire cutting market at kilowatt and above. So still significant opportunity for the growth there if the overall trends that are expected over the coming years continue.

And if you remove the vertically integrated players, where do you think that penetration would shift to?

Oh, yes. No; then you are up to like or than 50% if you exclude the largest vertically integrated player that we don't supply to, fiber penetration including the competition is probably about 50% of the overall market, maybe a little bit more.

Great. And then just shifting gears to your laser processing and systems controller acquisition, you talked about how this acquisition is going to enable IPG to target large-scale cutting, cladding, and welding applications. My question is, previously you talked about systems being of smaller scale, and should investors view this acquisition as a shift in your systems strategy from competing on the fringes of systems to a more direct competitive approach to traditional machine tool vendors?

I think that in terms of scale that was never really a reference to the power or the size of the equipment. It was always that we wanted to look at applications and processes that were either in early stage of development, or not well served by the market, or in geographies that are not well served by the incumbent players. And that strategy is still very much intact and has not changed, whether it be the very high-power, very thick cutting of metals that Valentin talked about or cladding applications or in paint stripping. In paint stripping the issue is that there is nobody who is actually able to supply and support to the paint stripping system that was developed in conjunction with the US defense groups. And they want somebody who is capable of supplying and supporting it to integrate the processes and the software together.

So our strategy has not really changed in that direction. As Valentin said -- he said on the earlier part of the call -- he is not trying to compete with the existing OEM base. It really is focused on these newer applications and technologies.

Scale, though -- you can sell lasers that are for fine welding applications that are in the hundreds of watts. And for some of these applications you require lasers as much as 15 kilowatts or 20 kilowatts in power, if not more.

We are not looking to [regular] sales, [mass] sales for the commonly used systems, and looking for specialty products, large-scale project, customized project, where the customer could not find good supplier and we take [over where they are weak] or going very small and so on. Much of this potential now integrator except some [very much] -- in any case, buying our laser, built everything then based on our laser. But they need two years to develop some specialty new customer project. We can make our self able now to make it much faster, much better, and cheaper, finally cheaper. And we are taking such product, more and more very serious customer going to us, asking us to develop for them very special, for very special application, concrete specialized machine, not to use -- not standard solution. And it's our business. Why you have to give it to other people?

Thanks.

Jeremie Capron with CLSA.

I wanted to follow up on this $5 million acquisition. More specifically, I wanted to confirm that this is a Russian company that you bought. And also, I'm wondering if you are seeing more actionable acquisition opportunities in the remainder of this year.

It's not a Russian company. It Belarusian company. Our Russian neighbor, but it's not a Russia, Belarusian company. It's where it is with a company which have this 25 years old where you have very good portfolio of [results] special counter, very special counter OEMs for 5D processing. That have also very skilled team of people, not large team but very skilled. For instance, they have worked many years together now and they drawing of at our division.

And then the second part of the question is: what's the perspective on opportunities for the systems?

It's [improved what essential] our ability to develop high-quality complicate [old] system. It's also open for us new opportunities. It's [exactly] our target to provide to customers a more and more integrated solution, not only optical solution. But the most customer need a full, complete solution of the laser. It's only optics; it's only part of the machine. They need complete machine. And we -- our target that we are able to provide such complete solution.

Okay. And do you see any more potential acquisitions in the rest of the year?

We are always working to investigate in parallel many opportunities but this complicate process takes a lot of time. It's a lot of the problem each time. We -- but we are working seriously in this year. But we are working for not just to make some of this additional business [ones]. We know looking for real synergy. We've got IPG's very vertical integrated company in the (inaudible) with the companies, which each practical independent and many other large consortiums. We are working full synergy. It's much more difficult than just to buy some additional businesses.

Thank you.

Mark Douglass with Longbow Research.

Tim, what kind of currency headwind on the sales line is baked into your second-quarter guidance? Not the currency, just sales.

We gave the actual exchange rates that we used to generate the guidance. So we used euros to the dollar of $1 being worth 0.93 euro. And similarly, on the ruble and the Japanese yen we use the currency exchange rates to translate the forecast we receive from our different entities into dollars. So relative to current exchange rates, the currency is fully baked in. Relative to a year ago, I would estimate that the guidance range is about $20 million lower than it would otherwise have been, if the exchange rates were the same as one year ago. So currency headwinds in Q2 would be similar to those in Q1. But we factored that into account within the guidance range and we are trying to make it very clear in the script by actually giving you the exchange rates we used.

Right. It was just on a year-over-year basis and I figured was going to be similar to 1Q. But I just wanted to confirm that. So thank you.

Thank you. That --

The most for us is what we worry about the [stability of door] because our minimum, [more serious workout the door versus foot time] of what would be on the serious change of the dollar with --

Thank you. At this time we have reached the end of our question-and-answer session. I would now like to turn the floor back over to Valentin Gapontsev for closing comments.

Thank you for joining us this morning. Again, we will continue to look forward to speaking with you on the next quarterly call. We hope it will be great report again.

Thank you, everybody.

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