IPG Photonics Corp (IPGP) 2015 Q3 法說會逐字稿

Welcome to IPG Photonics' third-quarter 2015 financial results conference call. Today's call is being recorded and webcast. (Operator Instructions)

At this time, I would like to turn the call over to Mr. Angelo Lopresti, IPGP's Senior Vice President, General Counsel, and Secretary, for introductions. Thank you. Please go ahead, sir.

Thank you, and good morning, everyone. With us today is IPGP 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 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 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, October 27, 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.

Good morning, everyone. IPG delivered yet another strong quarter, growing revenues by 22% year over year to $243.5 million in the third quarter of 2015. We translated that growth into a gross margin of 54.7%, and we reported EPS of $1.18, which includes a $0.06 per share impact of foreign exchange transaction losses.

Year over year, foreign currency losses reduced our sales by 12 percentage points. In other words, sales would have increased 34% if Q3 2015 exchange rates remained the same as a year ago. Our continued strong growth reflects the penetration of our fiber lasers into new and existing applications through our diverse and expanding product line.

IPG is executing on a variety of strategies to continue its strong growth. These include expansion in established products and markets, development of new products and applications, and geographical customer and product diversification. In current products and markets, our European OEM cutting customers have had great growth in the quarter and are moving up the power scale allowing them to improve processing speeds and cut thicker metals. In addition to benefiting from the secular shift in laser processing from legacy lasers to fiber lasers, IPG used its best-in-class products to achieve two OEM wins over another fiber laser maker.

Battery welding is an application that is growing as the demand, uses and size of batteries increase. Rechargeable batteries are everywhere -- in cell phones, electronic devices, hybrid and electrical cars, and are now moving to the power grid. Although we are limited in saying much about specific customers, we have a robust pipeline of products with several battery manufacturers that we are working on.

Our most recent product lines are gaining traction and performing quite well. For example, QCW lasers are displacing lamp-pumped YAG lasers at an increasing rate. Sales of QCW lasers grew 62% for the year to date and Q3 were the strongest quarter ever for this product line.

And now to recently introduced product that is gaining traction is our three-beam fiber laser system for brazing of zinc-coated steel for the automobile industry. We are seeing increased levels of interest in this one-of-a-kind product. In fact, we recently won a sale from the incumbent laser supplier for this application. This brazing application presents a significant opportunity for IPG in the coming years.

As we expand the range and technological capabilities of our product lines, we are also growing the breadth of the applications that these products serve. One new area is digital laser cinema projection. Our strategy is to capitalize on industry demand to improve the movie-goer's experience by replacing Xenon bulb light sources with super-high lumen laser light projectors. During the quarter, we completed a successful customer demonstration of the first prototype of our new, state-of-the-art RGB laser technology platform, based on speckle-free multi hundred watt scale red, green and blue lasers. We expect to deliver the prototype of the system in the first quarter of 2016.

We're also making significant progress on the testing and development of our UV and ultra-fast fiber lasers to address new micro processing applications. We currently have several units undergoing long-term testing and we expect to launch these products on a broader scale in the coming year.

In terms of product, customer and geographical diversity, IPG's unique super high-power lasers are gaining traction. During the third quarter, we shipped another 50-KW laser to NASA for materials testing. In addition, we will recognize revenue on a 50-KW welding system that was shipped in the second quarter and we have had another inquiry from a customer regarding a 50-KW laser for welding. In Russia, we developed and have tested a new and unique orbital pipe KW welding station that has field application in oil and gas well drilling as well as infrastructure development.

In addition, we continue to pursue projects in non-materials processing applications, such as advanced, medical and telecom, because they present significant opportunities for us as evidenced by their strong growth in Q3 when sales for non-material processing increased by 168% year over year.

In China, we are making progress to further diversify our OEM customers to reduce customer concentration. IPG is working well with several major integrators to deepen our relationships.

Geographically, we have plans to expand as our business demands. In Q4, we are planning to open our office in Wuhan, China. Wuhan is recognized as the economic, financial and transportation capital of central China, with automobile, heavy industry, electronics, photonics, pharmaceutical, chemical, food and beverage industries being well presented. Additionally, we are looking forward to establishing new operations in Brazil, Mexico and Czech Republic and expanding our application center in the Silicon Valley to develop additional micro-processing laser applications closer to key customers.

As a result of our constant focus on these strategies and the secular move to fiber lasers, we can target further 10-15% revenue growth for the full year 2016 at the minimum. The target is subject to the conditions that Tim will speak about later. We target this range in the face of the potential decelerating growth in China due to uncertain economic conditions there.

We believe that we are staying ahead of the competition, particularly with our high-power, QCW and new, more advanced products even though many companies have announced their intention to enter the fiber laser market. Our size as the world's largest maker of laser light sources, unique and integrated business model and proven history of innovation provides IPG with many advantages to reach these targets.

With that, I'll turn the call over to Tim.

Thank you, Valentin, and good morning, everyone. Let's get right into sales by application.

Materials processing sales increased 16% year over year to $223.8 million, accounting for approximately 92% of total sales during the quarter. Most of the drag on revenue due to foreign exchange that Valentin mentioned, which we discuss later, affected materials processing. Within materials processing, high-power lasers used for cutting applications was the strongest growth driver, coupled with additive manufacturing or laser sintering and more moderate growth in welding. Strong growth in these areas was offset by a decline in sales for marking and engraving applications.

Sales to other markets including advanced applications, telecom and medical applications, which accounted for approximately 8% of IPG's total revenue, increased by approximately 168% to $19.7 million. The increase was driven by strong growth in advanced applications and telecom, and to a lesser extent medical. Advanced applications growth was driven by government and aerospace related applications. Telecom strength was primarily due to demand for products for our last-mile fiber for US cable TV access. As a reminder, advanced application sales are typically large and uneven from quarter to quarter.

High-power laser sales, which accounted for 54% of total revenue, increased 24% year over year to $130.9 million. This growth was driven by continued strong sales for cutting applications, which is our largest single application, as we continue to increase our penetration of OEM cutting customers. In addition, we are continuing to see several of the OEMs increase the power levels used in their cutting systems, which further benefits sales of cutting applications.

Pulsed lasers sales decreased by 9% year over year to $35.0 million, related to the previously mentioned lower year-over-year sales for marking and engraving applications. Competition and pricing pressure for pulsed lasers has been significant and is reflected in the fact that unit sales of pulse lasers actually increased by 10%. It is interesting to note that price competition for pulsed lasers in China may actually be moderating.

Medium-power laser sales increased 31% year over year to $27.0 million, or 11% of total revenues. This growth continues to be driven by sales for fine-processing applications, particularly cutting of thinner materials as well as from additive manufacturing and laser sintering applications. Although we are seeing an increased level of competition in this market, we experienced another account win from a fiber competitor.

Sales of QCW lasers, which are mostly used for fine welding, percussion drilling of holes and some glass cutting, increased by 37% year over year to $19.8 million and accounted for 8% of total revenues. This marks our strongest quarter ever for QCW laser sales as they are continuing to displace lamp-pumped YAG lasers at an increasing rate.

Revenue from low-power lasers decreased 6% to $3.0 million.

Sales of other products, which include amplifiers, diode lasers, green lasers, mid-IR lasers, integrated laser systems and certain components, increased 101% year over year to $17.1 million, primarily as a result of higher telecom sales and sales for advanced applications.

Service, parts, lease, and other revenue, including accessories, totaled $10.7 million net of deferred revenue of $3.7 million, an increase of 22% from $8.8 million last year when deferred revenue totaled $2.7 million.

Now looking at our Q3 performance by geography.

Sales in Asia increased to $130.0 million, or by 15% year over year. Within that region, China was our best growth area. Sales there increased 29% to $93.5 million. Growth in China was primarily related to strong demand for cutting and fine processing applications, partially offset by a decline in sales for marking and engraving applications.

In Japan, sales decreased 21% year over year to $13.2 million, mainly due to the timing of orders. We booked a very large order in the quarter from one of our main cutting OEMs in Japan, reflecting the continued penetration of cutting OEMs in this area. We shipped separate multi-KW single mode lasers to a customer in Asia also for an advanced application.

Despite a tepid macro-environment in Europe, we saw solid demand throughout Europe, which drove a 27% increase in sales year over year to $76.5 million. This growth was primarily related to strong demand for cutting, laser sintering and welding applications.

North American sales grew 44% year over year to $36.3 million, driven primarily by increased sales in advanced applications and telecom, with continued materials processing strength in cutting and welding applications. During the quarter, we shipped a 50-KW fiber laser for a government application, as well as a large order of diodes to a customer in the US for an advanced application.

Now working our way down the income statement.

Gross margins of 54.7% were at the high end of our range of 50% to 55% as a result of the strong revenue performance and maintaining manufacturing efficiency as under-absorbed manufacturing costs were approximately the same as Q3 2014. While absorption of manufacturing expenses as a percentage of revenue was slightly lower compared to Q3 2014, this was offset by total direct and indirect manufacturing costs growing at a slower rate than revenue.

Sales and marketing expenses decreased to 3.2% of sales, or $7.7 million, from 3.8% of sales, or $7.5 million a year ago. We saw an increase in real dollars but decline in the percentage of sales. We benefited from leverage in the model as a result of an increase in sales to OEMs.

As a percentage of sales, R&D expenses were the same at 6.7% of sales compared with 6.7% a year ago. In real dollars, R&D expenses increased to $16.2 million from $13.4 million a year ago as we continue to focus on launching innovative new products in order to strengthen our technology lead. The increase in R&D spending related to higher personnel expenses and costs of materials used in R&D development projects.

General and administrative expenses decreased to 6.0% of total sales compared with 7.1% one year ago. General and administrative spending in total dollars increased to $14.7 million from $14.2 million a year ago.

Operating expenses for the third quarter were $43.7 million, including a foreign exchange loss of $5.1 million, compared with $31.5 million a year ago, which included a foreign exchange gain of $3.6 million. The foreign exchange loss of $5.1 million related primarily to the devaluation of the Chinese Yuan during the quarter.

Third-quarter operating income was $89.6 million, or 36.8% of sales, compared with $77.6 million, or 38.9% of sales, in the third quarter of last year. Excluding foreign exchange, operating margins were 38.9% and 37.1% in 2015 and 2014 respectively.

Our tax rate in the third quarter was 30.0% and does not include any benefit related to potential R&D tax credits that might become available later in the year if the credit legislation in the US is re-enacted.

Net income for the third quarter increased by 13.8% to $62.8 million. On a diluted per-share basis, we reported $1.18 for the third quarter compared with $1.05 a year ago. In the current quarter, the foreign exchange loss reduced EPS by $0.06 while in the same quarter last year, it benefited EPS by $0.05.

If exchange rates relative to the US dollar had been the same as one year ago, which were on average EUR0.175, RUB36, JPY104 and CNY6.16 respectively, we would've expected revenue to be $20.6 million higher, gross profit to be $9.5 million higher and operating expenses to be $4.1 million higher.

Now turning to the balance sheet.

We continue to maintain a strong balance sheet, ending the quarter with cash and cash equivalents of $651.2 million and $20.4 million of debt including lines-of-credit. At September 30, 2015, inventory was $197.6 million, up 16% from $171.0 million at year-end 2014. Our current level of inventory on hand amounts to approximately 165 days, compared with our target range of less than 180 days.

Accounts receivable were $154.8 million at the end of the third quarter, or 58 days sales outstanding, compared with $143.1 million at December 31, 2014, or 63 days sales outstanding. Accounts receivable days benefited from strong collections in China, Europe and the US. In China, we discounted bank notes accelerating collection of cash and reducing, in part, our exposure to the Chinese Yuan.

Cash provided by operations during the quarter was $93.2 million. Capital expenditures for the quarter totaled $18.2 million. We expect the CapEx run rate for the full year 2015 to be on the higher end of the $60 million to $65 million range previously provided. This range excludes amounts spent to acquire businesses during the year.

And now for our expectations. Year to date, IPG's revenues have increased by 20% despite significant foreign currency headwinds, and we have delivered operating margins of 38%. Looking ahead, we remain focused on continuing to penetrate our existing OEMs and developing new OEMs and end users, as well as developing the next generation of innovative fiber laser based products and applications to address new markets.

While the book-to-bill was slightly below one in Q3 2015, this is not unusual because we typically expect the fourth quarter to be seasonally weaker. Nonetheless, we've made significant progress on the testing and development of new product lines this year. We look forward to their launch in 2016. We continue to be confident in our longer-term growth opportunities.

We currently expect revenues for the fourth quarter to be in the range of $215 million to $230 million. We anticipate Q4 earnings per diluted share in the range of $1.00 to $1.15. The midpoint of this guidance represents quarterly revenue growth of approximately 7% and EPS remaining flat respectively year over year.

The EPS guidance is based upon 53,392,000 diluted common shares, which includes 52,675,000 basic common shares outstanding and 717,000 potentially dilutive options at September 30, 2015. This guidance is based upon current market conditions and expectations and is subject to the risks we outlined in our report with the SEC. It also assumes exchange rates relative to the US dollar of EUR0.88, RUB61, JPY120 and CNY6.35, respectively. Want to reiterate that we do not attempt to forecast transaction gains or losses related to changes in exchange rates.

The Q4 guidance represents about 7% revenue growth over the midpoint over Q4 2014. I want to point out that our guidance range includes double-digit revenue growth in Germany, Japan and China. Year over year, we expect Q4 revenue in China to grow at about 15%. While this represents a lower rate of growth as compared to the year to date, it is still pretty good. What is pulling down the overall Q4 expected growth rate is the US, which had a very strong Q4 2014 with shipments of several super-high-power lasers and a large automotive order. Revenue in the US is more evenly split between Q3 and Q4 this year rather than being weighted to Q4. In addition, we're expecting a slightly weaker quarter in Turkey and Korea, where macro-economic conditions have softened.

Valentin mentioned earlier that we are targeting 10% to 15% revenue growth at the minimum in the full year 2016. The growth will not be linear or consistent each quarter. We remind you that there can be some unevenness due to timing of shipments, for instance with advanced applications sales. We also want to mention it is based upon our current outlook, which can change based upon currency rates, the economic conditions in the countries where we sell, the overall growth of the laser market competition, pricing, and the timing and success of new product introductions, to name a few.

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

(Operator Instructions) Joe Wittine, Longbow Research.

Within the 2016 sales guidance, can you give us a sense of what is the expected contribution of the new products and new applications there? And what is the organic outlook? Thanks.

The new products are also part of the organic outlook. They are not acquired from anybody, so it's based upon our own development. We don't go -- Joe, I know you're relatively new to following the Company -- into giving specific breakdown on this. But there will be -- the background to that is, first of all, factoring in some weakness in China potentially from particularly high-powered cutting.

But we're looking at strong growth in cutting applications from Japan. We're looking at continued adoption of cutting applications in Europe. Strong growth of welding and brazing all around the world. Strong systems growth in Russia and North America. And then product introductions around the UV and pico and femtosecond lasers as well, as well as potential benefit from things like -- we're expecting some revenue from the cinema projection.

So there's a fair number of newer product lines that are starting to gain some traction. We expect other ones to also generate some benefit. And we are also being conservative with regard to expectations from a certain part of the Chinese market. There are other parts of the Chinese market that we expect to perform pretty robustly next year. So, for example, we are targeting strong growth in welding there for batteries and continued growth on QCW displacing lamp-pumped YAG lasers. So there's quite a lot of work that's gone into thinking about that and some reasonable assumptions, I think, as well that we are making about certain areas and applications.

Okay. It makes sense. Maybe just as a quick follow up, automotive wasn't mentioned there. Is that one of the pieces of China that could be easing off a little bit here? And can you remind us of your exposure to VW? I know you probably don't break out customers, but if you can give a lean to the extent that VW -- your exposure to them may differ from their global share. Thanks.

On the automotive side, I kind of lump that in with the metal welding and brazing applications. There's a lot of opportunities on welding as well as the brazing within automotive around the world, so it's within that application set.

With regard to Volkswagen, we don't give anything specific. What we have heard from Volkswagen is that none of the leading R&D type and innovative technology adoption projects are being put on hold or decelerated. The new senior management are adamant that they are going to continue at this time to pursue those, and that's about the only color we can give on that.

Helpful. Thanks, Tim.

Patrick Newton, Stifel.

I guess just further digging in on this growth target in 2016, I'm curious -- two things. One is your China growth -- what is the expectation for China growth relative to the overall 10% to 15% growth rate for the year? And then, are you forecasting stable market share from share loss or further share gains within that 10% to 15% growth?

Certainly. First of all, again, we get very specific here on asking questions about geographic regions. Relatively speaking, we have been appropriately conservative about China, and we think we're going to actually have very strong growth out of Europe. We should have good growth out of Russia and Japan and continued pretty diverse growth out of the US across a broader set of application sets. It is a moderate expectation for China we've factored in there.

In terms of market share losses, we're certainly not strategically targeting that. I know there's a lot of talk about people entering the market, but we're not seeing them gain significantly against us. We know, for example, one of our competitors' main customer in China is in serious financial difficulty. They are having difficulty collecting receivables from them. There's a rumor even that the general manager has gone AWOL of that customer.

So, you can listen to people's announcements about what they are trying to do in the market. We're certainly not anticipating any share losses on cutting and metal welding and laser sintering applications. If anything, as I said, we are targeting gains there. In China, it's more the weakness of the market at the highest power level, not a loss in market share to competition. And in all the newer applications, we are really targeting displacing existing technologies and being the leader in those areas.

With support next year, we hope to increase how the benefit from other applications out of materials processing where we've made very serious development some years and next year we expect very serious return for this new application, not connected to materials processing. Our target is to more diversify our business.

Regarding China, we are concerned about all economic situations in China, not - there are in the market speculation about losing a major customer. It's not true. This customer, we remain very strong relation and there is no damage to this relation. We do not see any opportunity during next minimum two or three years. But total situation in China, when you find it going down. And we think next year our share of China in our business would be -- maybe we will drop a little but still have to grow.

Great. And I guess just shifting the power curve, you talked about in some of your cutting OEMs moving to higher-power solutions. Could you help us understand where the average power cutting system and welding system currently stands for your portfolio? And then as we look out in the next couple of years, where do you think that average power shifts to?

Our development of new products have a very serious application, and we are working to provide to customer full complete solutions starting from new technology developed and to the hardware, the laser system and all other so full complete solutions with installation and provide service in the field. And very successful in some applications and also very serious business coming out.

I can mention the oil and gas industry to provide welding of pipe and so in the field we made field tests that were extremely successful (inaudible) innovation (inaudible) very serious (inaudible) worldwide customers is only start of the growth in construction bridge and other construction and (inaudible) building construction how we develop a framework of welding and cutting systems for pipes -- for example, for different applications and (inaudible) unique new application also with very large potential. So it's really new diversification business. We're going for higher and higher levels of integration. Not just laser or laser systems but full complete solutions.

Are there any numbers you can actually wrap around the average power? I understand the growing opportunity --

Average power increase of the (inaudible) application include power above 10 kilowatts -- 10-, 20-kilowatt power.

And within the existing customers, Patrick, you've probably seen cutting applications transitioning from a range of 1 kilowatt to 4 kilowatt into more of the range of 4 to 8 kilowatts. There are still a lot of systems sold in the 1 kilowatt and 2 kilowatt, but you are seeing more and more systems in the 4 to 8. And welding is in the range currently probably of the 4- to 10-kilowatt range with the occasional laser sold up to 50 kilowatts, and some of the newer applications Valentin is talking about are more in the range of 10 to 30 kilowatts probably.

Okay, great. I guess the crux of the question, Tim, is do you feel like as you move up this power adoption curve that you're more hitting the threshold of where the incremental power output from cutting doesn't necessarily help the customer? Or is there still significant upside?

Depends on materials. In some instances, yes. The 8-kilowatt level, it's hitting a bit of a threshold, but then there's also work that is being done to start cutting significantly thicker pieces of material and different types of material, which are acquiring power levels -- they're not very high-volume at the moment, but in the region of 15 kilowatts of power. So there's work that we're doing with customers cutting different types of metals that are very thick that require much higher power levels.

Great. Thank you for taking my questions. Good luck.

Krish Sankar, Bank of America Merrill Lynch.

Thanks for taking my question. I have two of them. Tim, kind of curious, you guys have never given a forward guidance in the past. So what gives you confidence on a 10% to 15% growth for next year?

First of all, we've done a lot of work in looking at the different regions in new applications and new product lines, new systems that are coming to the fore. And looking at the different regions which we think are going to grow strongly with those newer applications, and then factoring in the weakness. So really the purpose of that is to give people some comfort that, despite all the noise about China and even with a conservative outlook for China given the economic conditions there, that we do see significant opportunities in other areas. Historically, we haven't really felt the need to do that because we are at relatively early stages of adoption. We have seen very, very strong growth rates across the world. And we feel that people may be doubting that capability at the moment, whereas internally we feel strongly about it.

Got it. That's very helpful. And then I think in your prepared comments you said that on the pulsed laser side, the pricing pressure is actually moderating in China, but it's still very severe in other places. Kind of curious who are the real competitors there if the Chinese are actually pulling back on it?

Pricing pressure elsewhere is not that severe as it's ever been in China. It's interesting in China that the competitors are there and they've been so aggressive around pricing that they have actually undermined their own financial stability. And the rush to the bottom, if you like, in terms of pricing has meant that they are generating extremely low levels of profitability, burning cash, and to put themselves in a precarious financial position and even now understand that they cannot carry that on.

So this is -- it's not -- I don't have a specific piece of data point on it, but what we've heard is that they are looking at not continuing to drive pricing down and at least seeing it stabilize. And maybe we will see some -- maybe a little bit of an increase in pricing there. That may be a bit of a stretch, but we are certainly not seeing the same dynamics there.

And this is something we have called out before. We said that the level at which they have driven pricing to is not sustainable in terms of profitability. And now it's coming to bear on a couple of these companies whose financial situation is significantly less than what I would call stable.

Got it, got it. Thanks, Tim.

Jim Ricchiuti, Needham and Company.

I was wondering if you could maybe elaborate on your expectations for growth in Europe in 2016 and maybe talk a little bit about whether this is coming primarily from newer areas or just increased penetration of some of the core automotive markets as well as cutting and welding. I'm just curious about what your expectations -- what you're basing the optimism on for 2016 in Europe.

First of all on cutting applications, continued penetration of the existing OEM base there. We picked up one relatively small OEM this year from one of our competitors, so we expect to drive additional traction from them. But probably another 10% penetration of the total market in Europe for cutting applications, and that would be Northern Europe, Italy, some of -- Turkey ends up in Western Asia, but I would put Turkey within that. We've got a pretty optimistic outlook from the Turkish OEMs as well.

And then continued growth -- this is an existing application -- the laser sintering applications.

With cutting also you can say that now we see fast growing in the business with cutting applications in Japan. The major Japanese player in this manufacturer for cutting stay up to this year in CO2 laser. But now that must transfer to the fiber laser, so we're expecting Japan very fast growth of the penetration of fiber laser to the cutting market.

And then coming back to Europe, it would be auto, welding and brazing. We think that's going to accelerate a bit next year. And then in Russia, you have (multiple speakers) -- sorry?

No, go ahead, Tim.

So -- and those are relatively newer -- the brazing obviously is a new application for us. And in Eastern Europe, additive manufacturing, yes. So laser sinturing and additive manufacturing, continued growth.

Got it. Tim, are you on track, do you think, to do $40 million or so in additive laser sintering this year? And are the expectations for next year -- it sounds like continued robust growth there? Is that an expectation?

Expectation this year, Jim, was about $30 -- I said $32 million to $34 million. We're on track for that. So the $40 million is a bit of a high number. But, yes, the growth rate next year was probably moderated for about 50%-plus this year; it will be a little bit lower than that. But I would say targeting getting to the $40 million range to $45 million range next year in Europe would be a good starting point.

Okay. Thank you.

Joe Maxa, Dougherty and Company.

Thank you. I wanted to ask on the advanced application side -- and particularly in the military, you talked a little bit about a big order. You talked about a big order, and wondering what you are seeing there. Is there more of these orders coming? Just any color, I think, would be helpful.

There certainly seems to be more activity on this. There's indications that there's a significant additional order going to be placed by one of the subcontractors for a different type of system, but it uses sources from IPG. So there are three different types of sources that people are making in the market. Each of those relies upon different aspects of IPG technology. It appears that we are approaching -- we've said 2017 -- 2016, 2017, we would start to see a bit of an acceleration of these projects, and our sense is that that's happened. You have seen numerous announcements in the press, with winds from different subcontractors in the market and a pretty diverse set of applications out there. So there seems to be some traction in the market, Joe.

Okay, that's helpful. And then on the telecom side, I know you had success in the US. And maybe several quarters ago, you talked about opportunities in Russia; clearly, weak economy over there. But are you seeing any traction in Russia? And then again, what do you see in the US?

In the telecom and (inaudible) now telecom another quarter with very, very new contribution small. But we now looking to grow total revenue this year minimum compared to 2014. Next year we expect additional (inaudible) growth to 2.5 times. So it's the process growing with new integrated solutions we provide the market with (inaudible). So we don't expect very (inaudible) business, but all time is growing much faster than the total of our revenue.

Okay. And then in the US, are there more opportunities like you saw in Q3?

In the US, in these other countries and also in Russia, it's also -- and we are working in all directions.

Thank you.

Jagadish Iyer, Redstone Technology Research.

Two questions. First, steadily over the past three quarters, your inventories have gone up. And what kind of inventory levels do you foresee looking at how your business is shaping up for next year? And as a sequel, what does it mean for your gross margins looking at 2016? And I have a follow-up.

I think IPG has actually done a -- if you go back and look at the way inventory grew, say, three, four years ago relative to revenue growth, we invested heavily in working capital. This year, the relative change in inventory compared to revenue growth has been -- if you strip out the benefit of the foreign exchange, it's actually been about the same. So where historically you may have seen some benefit flowing through to gross margin because of a buildup of the inventory this year, it's been much more normalized.

So we've done a lot of work internally in the Company in focusing on that area of aligning production with expected demand. And we are in a rate now even if you are growing at the range of 10% to 50%, you're still going to have to invest in working capital.

So I don't see that being an impact on gross margins relative to this year. Inventory growth next year at a level equal to revenue impacts gross margin. I've certainly not put that in my planning, Jagadish, at all.

Okay, okay. Then on China, there has been a number of automotive companies that have pretty much scaled their demand expectations actually for the second half of this year. You've been seeing a strong demand from China. Is there a lag that we are likely to see looking at, say, the next couple of quarters from China? Or what is the disconnect with regard to your sales versus what the automotive companies are actually alluding to? Thank you.

I don't think that that is necessarily a disconnect. I think we said that, overall, China expectations for next year are moderate as compared to where they have been. And that takes into account automotive, some of the general manufacturing. It takes into account those strengths in other areas that are directly or indirectly related. The battery welding in part related to automotive.

And there are other projects out there, particularly on the welding side, where we continue to see projects still scheduled, if you like. They are not -- we haven't seen them pull back. So these are sort of leading-edge technology type applications that continue to drive some benefit to the Company.

Tom Hayes, Northcoast Research.

Tim, I was just wondering if maybe you can give us a quick update on where we are on the seam stepper as far as getting that further into the market?

Seam steppers are tested and now making many companies in automotive (inaudible) applications and going very successfully. But it's a process penetration. This market continues to grow (inaudible) because they can -- typically they prefer to stay with all technology only installed introduced new production line. Then seam stepper would be preferable choice to compare the current technologies. And many companies claim it will process but it's not so many new production line now of major automotive company prefer a new car current pones(inaudible). So it's long process but going very successfully, so we hope -- or take some (inaudible) from us into implementation and able to get to get serious that add to our total revenue.

Great. Thank you. And as a follow-up, I know we've discussed uses of cash previously, but was wondering with the new product set for 2016, as all -- what's the overall growth you have seen this year and expectations for next year. Where are you in regards to capacity and the outlook for additional CapEx? Thank you.

You know, with such fast growth, we're talking about growth in physical units, product quantity of laser and other products. Each year and this year alongside total growth, we have to produce in total -- we'll produce about 35%, even 40% more than the last year. In revenue, it's less because prices going down with volume as we all take exchange rate cuts prices essential in dollars.

But in the -- to produce -- to grow 35%, 40% in quantity, we wanted to have to invest in new facility, new equipment, to hire new people. We are growing so careful with support in further growth already to support total capacity, which moderate CapEx. But (inaudible) building new additional -- building capacity, we're growing -- we are able to support this growth. In our expectation in business growth.

We haven't got a final budget for next year, but I don't expect CapEx as a percentage of revenue to increase from where it is this year. We are running at -- what is it -- about 7% to 7.5% of revenue this year, so that represents a substantial amount of spending next year. So I don't expect it to increase as a percent of revenue next year, Tom.

Tom Diffely, D.A. Davidson.

Got a question. As your OEM customers move up the power curve, does that represent an upgrade or retrofit opportunity for you, or are those just going to be new system sales?

No, I don't think it does, Tom, because most of the equipment that's in the field, you rarely see on a cutting system someone go out and replace the laser or retrofit the laser in the cutting system. It makes -- it's really targeting newer systems that are being sold for cutting a variety of materials. We very rarely see any significant volume of laser sales come from retrofitting of systems and current cutting systems.

Okay, that makes sense. And then Tim, when you look at the market right now, what do you see in regards to your customers' access to capital, especially in Asian countries?

We have seen much change in there. Even in China, I think, is more demand driven. I think there's actually a push everywhere to put liquidity into the system rather than contain or curtail it. So we certainly haven't seen or heard of anything negative on the ground in relation to access to capital at this time.

Okay. And that's still the most important factor you look at for your demand?

No, it's different things -- general macro-economic trends, level of purchasing indexes. China is something on the -- the liquidity side in China is something we monitor. So it's one of the trends that you keep an eye on.

Okay. Thank you.

Jeremie Capron, CLSA.

Well done on the sales growth. It's a tough world out there, and I must say that the growth rates remain very impressive, especially given the 4X headwinds. Now, when I look at your fourth-quarter revenue guidance, obviously that's a fairly abrupt deceleration that we are looking at, down to single-digit growth. And could you go back to some of the factors that you see playing out there? I think you called out the pretty high compare in North America, yet you assume above-average growth in China. Am I missing something here? And if you could, elaborate a little bit on North America in particular. Thanks.

Yes, Jeremie. First of all, on North America last quarter, Q4 2014 was about $44 million of revenue, and the previous three quarters in 2014 were very weak. So you're not going to -- you are probably going to see something like a similar quarter to the one we have had in Q3 for the US in Q4. So that actually represents revenue being down by almost 20%. For the full year, though, you'll see the US still increase.

So it's -- last year, it was very unusual in the way the revenue came in in the US, and that's part of the impact on Q4 this year. We tried to call that out a bit on the Q3 call when someone asked that question. I don't think it was taken into account enough.

In terms of China, I mentioned that we're still looking at mid-teens growth year over year for Q4. That does, though, represent a deceleration from where China has been in Q2 and Q3. So you are seeing some moderation there -- the year-over-year difficult comparison with China. Europe will be close to mid-teens growth year over year. Japan, pretty strong in Q4. Korea, as we said, is basically flat. So that summarizes the different areas.

Europe and Japan are continuing -- this will be the final quarter where there is really -- assuming exchange rates don't change fundamentally going forward, the final quarter where there's a significant lag. So you are probably seeing revenue growth in Europe impacted by about $4 million still this quarter. $4 million to $5 million in Japan by about $2 million due to foreign currency headwinds.

Okay. And you called out increased diversification of your customer base in China, or at least progress towards there. Is there any way you could quantify that or help us understand -- historically, you've had a pretty dominant customer in China. Any visibility around that would be appreciated.

We still have, I'm pleased to say, that very significant customer that continue to buy in big volumes, as Valentin alluded to. And we don't see any change in that fundamentally in that relationship going forward.

The other work we've done, though, is to carefully build up relationships with other major suppliers. Some of those other OEMs are actually stronger than the main OEM with certain types of equipment. There's one company that is very strong on producing slightly lower-power fine-cutting machines. We have a very, very good relationship that customer and probably 10 other OEMs who are financially sound and strong entities covering a variety of different applications. So none of them are at the size of the main customer yet, but they are certainly growing. And as I mentioned, some of them are very strong in different application sets as compared to the main OEM. And we have worked very hard on those relationships as well.

It is very difficult to quantify it in absolute terms. Maybe at the end of the year, you'll see some relatively speaking, where the largest customers are and what their percentage of sales is.

We introduced new lasers now in ultra short power UV and green which had very good potential in China especially. Up until now, Chinese integrated for such applications from other suppliers like (inaudible) we now introduced new generations of such lasers which more perfect and we target to get this business from other customers -- from other suppliers. In China especially. China is a major user of such kinds of these lasers.

Bobby Burleson, Canaccord Genuity.

Just curious about additive manufacturing. Wondering where you see your market share there in 2015 and whether or not you expect to hold that share or perhaps grow it next year.

Absolutely. We expect to hold it. So just about everybody in the market continues to source their lasers from IPG bar one small supplier -- smaller supplier in the UK, whereas you are working on trying to get in to become their supplier as well.

So in terms of the incumbent suppliers of equipment, we certainly don't see an imminent threat to the strong position we have. And then on a broader sort of additive manufacturing basis, we continue to work in looking at other solutions and different ways to help the industry grow as a whole.

Okay. And then you mentioned that you expect growth to perhaps decelerate from the 50% level that you are seeing this year, in additive and next year. And I'm wondering within that, though, are you seeing any potential strong, positive inflections in demand from -- and I don't know what kind of visibility you have into the applications they are being used for. But something like aerospace programs that are supposed to kick into gear for next year using additive?

We don't see -- the number I just gave out there was really coming off like a higher base and being moderate in our expectations and what we're hearing in a moment. We don't have insight into those significant aerospace opportunities, and they would be upside to potentially the numbers that I gave you.

I think the issue the industry faces as a whole, they have still got to improve the speed with which parts can be produced without impacting the resolution of the parts. And we are starting to work with many different significant players in the industry to look at potentially different solutions that would improve the speed with which parts could be produced to developing the technologies further.

So I think the industry still has a bit of an inflection point to reach in terms of not only the cost of equipment but the speed with which parts can be produced.

Not with speed but with quality also. What they demonstrate in aerospace for parts and so they're still not practical and then not still a response to the requirement for quality and so on. So it does demonstrate opportunity. The total market for metal processing, additive manufacturing for metal, it's still extremely limited and small. And we understand this market volume because practically most of them -- vast majority of them are manufacturers of such kinds of systems buying from us. It's growing. Our orders have grown but we don't see this -- moderate growth, not very fast. And all total market we understand only some hundred million dollars for metal. For nonmetal, it's much higher but for metal, it's a very small market.

The major problem, not enough good quality, and also very low speed of -- so we are working with major potential customers like very large companies. We are working. They are all go into us and it propels us to develop new solutions. We're looking at the direction -- in the direction, it's starting to work in that direction, but it's still in the stage of development so not a real product but major potential customers, especially American major company which increased aerospace and other. We have cooperation with all of them.

Great. Thank you for that answer. If I could just sneak one more in there on China, it sounds like there is a little bit of a lag in terms of what you see versus maybe some of the areas where there's been a little deceleration. And you are factoring that into your 2016 outlook, it sounds like. And I'm wondering just the linearity of what you are expecting next year on China. Is there a period where you expect maybe some of those headwinds to abate and maybe that business to firm? Is it Q2, Q3? What is your sense for when you work through any of those headwinds?

I think like anybody who is probably selling into China, the key data points that we are waiting for is when you get through past Chinese New Year and into the second half of February and March, that's always a critical time in terms of order flow to drive the tone for Q2 and Q3. You're absolutely right there, Bobby.

In general, though, this quarter we have still got a strong bookings forecast from China. And now our head of sales has been back and forth with head of our Chinese operations a couple times in the last four weeks, and he's still of the opinion that he can meet that bookings forecast for Q4. He has not changed his outlook on that. So that's a positive.

As you saw in Q3, I don't know whether we were lagging. We were probably lagging a little bit. You saw the high-power cutting orders a bit weaker, particularly in September. The tone on those, though, has not continued to deteriorate. I actually had a conversation with the head of China there, and he's not totally negative, even on that market. He said it's sort of stabilizing a bit.

There is a key data point. As anybody will tell you, operating in China will be really what happens during February in the first couple of weeks of March. And I can't really give you anything more specific than that. We'll wait until that time.

We have found now in the last month or two a customer in China we always have meetings with and they very pessimistic from the market now with the newest quarters. Very pessimistic. We never saw -- typically, the people are very optimistic but now they are all very pessimistic for market condition and our potential for the next minimal half of the year. Hence our major -- why we can turn about, not because it's a major customer. Major customers - they will stay, we will work with them. They don't have any choice. It's not serious at all. They will make their own fiber lasers, it's more mainly what you are a much more powerful companies spend 10 years to develop this so it's now far behind. So they don't have a chance to make their own laser similar then what their using for us. But totally, when this customer business now we're going down very seriously for total, so it's now a very bad time for the Chinese market total situation.

Thank you, ladies and gentlemen. At this time, we have reached the end of the Q-and-A session. I would now like to turn the conference back over to Dr. Gapontsev for any closing or additional remarks.

Thank you. Thank you for joining us this morning. Again, we look forward for speaking with you on next quarter's call. Have a great day.

Thank you, everybody.

Thank you, ladies and gentlemen. And that does conclude our conference call for today. Thank you for joining us, and have a wonderful day.