IPG Photonics Corp (IPGP) 2015 Q4 法說會逐字稿

Good morning, and welcome to IPG Photonics' fourth-quarter and year-end 2015 financial results conference call. Today's call is being recorded and webcast. There will be an opportunity for questions at the call.

(Operator Instructions) At this time, I would like to turn the call over to Angelo Lopresti, IPG's Senior Vice President, General Counsel and Secretary, for introductions. Please go ahead sir.

Thank you and good morning everyone. With us today is IPG Photonics' Chairman and Chief Executive Officer, Dr. Valentin Gapontsev, and Senior Vice President and Chief Financial Officer, Tim Mammen.

Statements made during the course of this conference call that discuss management's or the Company's intentions, expectations or predictions of the future are forward-looking statements. These forward-looking statements are subject to known and unknown risks and uncertainties that could cause the Company's actual results to differ materially from those projected in such forward-looking statements.

These risks and uncertainties include those detailed in IPG Photonics' Form 10-K for the year ended December 31, 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, February 12, 2016. The Company assumes no obligation to publicly release any updates or revisions to any such statements. We will post these prepared remarks on our website following the completion of the call. I'll now turn the call over to Dr. Valentin Gapontsev

Thank you Angelo. Good morning everyone. 2015 was another record year for IPG as we grew our top line by 17% to $901.3 million and our earnings per diluted share by 20% to $4.53 per share. These results demonstrate our continued leadership position in the fiber laser industry and the operating leverage of our business model.

We successfully executed on our strategy to drive growth through the expansion of our established markets as well as the development of products to address new applications beyond our core applications. These initiatives provide IPG with many exciting opportunities in 2016 and beyond. I will highlight a few of these key new products and market opportunities.

Our recently introduced three-beam fiber laser system for brazing of zinc-coated steel for the automobile industry continues to gain traction. The unique capability of this system is that it delivers three beams to clean the metal surface and to join the metal in one process which is an advantage for the end user. There is a significant opportunity for IPG to grow this three beam application.

We are encouraged also by potential new volume projects for our laser seam stepper to weld auto bodies, and new opportunities that use our high-power fiber lasers to weld aluminum car parts. As we have said in the past, the trends in the auto industry to use high strength steel and aluminum alloys toward lighter weight automobiles drives increased adoption of fiber lasers.

Another new IPG product line which should accelerate penetration of different applications is a family of state of the art super high power 2D and 3D scanners that enables IPG to provide automotive customers with a complete solution for popular remote laser welding and cutting applications. Before customers had to use our lasers with bulky and less perfect scanners from other manufacturers, which made hardware and software integration more difficult, significantly increasing complete laser system cost, and making service more complex. Now IPG's solution has simplified these problems by providing customers with a full integrated solution.

Sales of our QCW lasers for fine processing and welding applications continue to grow as they displace lamp-pumped YAG lasers at an increasing rate. These lasers are used for battery and electronics welding in consumer electronics, for medical devices and other consumer products. It's good news that last year we believe we have passed a breakeven point in adoption of QCW lasers by the market.

And during previous years potentially large customers only purchased a few units, preferring to manufacture their own flash pump YAG lasers. In the second half of 2015 a couple of top customers have made a principal decision to turn to our revolutionary new solution and we have received the first multi-hundred volume orders. We believe that the majority of other customers will follow the trend and our QCW laser share in current and new applications will continue to grow to a much more substantial share of the market.

In the past we have seen similar adoption trends in the 2D cutting market. We are expecting to have a strong year for battery welding as demand continues to increase. We came with multiple project in development with several manufacturers and we believe this will be an application that will perform well in China this year.

Laser cleaning is another growth area for IPG, where high-power pulsed lasers are employed by our customers to clean parts or molds during the manufacturing process, as well as paint removal in aerospace, shipbuilding and other industries. Our unique multi kilowatt nanosecond fiber lasers are starting to change the situation in this large market segment.

IPG is also focused on driving growth outside of our core material processing applications. For example, we are pursuing a very significant market opportunity in large screen 3D cinema and light shows. During the fourth quarter, we developed and delivered the first prototype of our new unique RGB laser technology platform for cinema projection to a tier 1 customer.

In the first quarter, we plan to ship a new pre-production six wavelength for 6P unit with record lumens to that customer. Then in April, IPG will show its new digital laser luminaire at Cinema-Con 2016 in Las Vegas, a major show attended by all top cinema operators, Hollywood studios and projector manufacturers. The cinema industry needs urgently to improve the 3D movie-goer's experience by replacing Xenon bulb light sources with very high lumen laser lights. We believe that IPG's laser luminaire will deliver the brightness and dynamic range the industry is demanding for a new generation of premium large format 3D cinemas.

The same platform at a reasonable price would start to enable more rapid displacement of the bulbs currently used as the light source in the cinema industry. Additionally, we have developed and will introduce this year a new line of high brightness blue diode laser modules with an average power up to 200 watt. These unique diode modules are requested by market for use in projector systems, direct imaging systems, biotechnology instrumentations and variety of other applications.

Next, we are preparing to introduce our low-power UV and ultra-fast fiber lasers to the market in the coming months. The launch of these perfect products marks a significant milestone for IPG as they allow us to penetrate new micro-processing applications.

Another significant medium-to long-term growth opportunity is in medical applications. We recently created a separate company, IPG Medical. We have hired experienced key scientists in this field who are working with our Russian company and leading medical researchers developing new medical applications using our fiber lasers.

For example, we have been working in the urology market, where we have been testing successfully our new unique high pulse energy Thulium fiber laser which should replace traditional Holmium Yag lasers for breaking up kidney stones by enabling much faster and simpler medical procedures. We are also working successfully on other meaningful innovations in dental, aesthetic, hair removal and other medical applications.

Last year we continued with intensive development in complete laser material processing systems for a variety of applications and developed new processing technologies, sophisticated software and hardware solutions. Our focus was mainly on new applications in the fields where lasers are not used up to now. We have achieved very impressive results in some of them.

For example we have developed both processes and complete equipment and passed verification for welding of oil pipes directly at oil drilling stations in the field. Now we are working on a large project for welding large diameter gas pipelines also directly in the field.

Other successful project includes development of technology and complete laser system for welding of large structures of thick titanium or aluminum alloys. We plan to ship the first such unique system to a customer in Q1.

We are continuing investments in sales and production facilities. In Q4, we opened a new office in Wuhan, China and in the Czech Republic. Wuhan is recognized as the economic, financial and transportation capital of central China with the automobile, heavy industry, electronics, photonics, pharmaceutical, chemical, food and beverage industries being well represented. We hope that the new offices in Wuhan and the Czech Republic will help us develop new OEM customers and improve our business with existing customers.

Looking ahead, we continue to be optimistic for 2016 and are managing the company to achieve double digit-growth for the year. Our optimism is grounded in our strong core products, our backlog and many new product introductions planned during the year.

Our core fiber laser products will contribute moderately to our 2016 growth. In addition, we expect continued strong growth for some of our recently introduced products. The growth will be enhanced by our rich product pipeline.

At this time, most of our OEMS continue to expect to see growth for their applications and systems in this year and, for the most part, remain upbeat. Their feedback is not as gloomy as the emotional sentiment in the financial markets.

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

Thank you Valentin and good morning everyone. Fourth-quarter revenue grew 8% to $223.6 million from $207.4 million a year ago. Materials processing sales increased 9% year-over-year to $209.0 million, accounting for approximately 94% of total sales during the quarter.

The lower than traditional growth rate primarily reflects lower sales in Russia and Turkey and single digit growth in Europe. However, as I will discuss later, North America, China and Japan each had double-digit growth in the quarter.

Sales to other markets, including advanced applications, telecom and medical applications, which accounted for approximately 6% of IPG's total revenue, decreased by approximately 11% to $14.6 million. Strong growth in medical, and to a lesser extent telecom, was more than offset by lower sales in advanced applications, which are typically large and uneven from quarter to quarter.

Growth in the medical area was driven by increased demand from core customers in the skin rejuvenation and aesthetic markets. The increase in telecom sales was primarily due to demand for products for last-mile fiber for US cable TV access.

High-power laser sales, which accounted for 55% of total revenue, increased 6% year-over-year to $122.6 million. This growth was driven by a 10% increase in core materials processing applications including cutting and welding offset by decreases in advanced applications and micro-processing applications.

Pulsed laser sales decreased by 13% year-over-year to $27.8 million, due to lower year-over-year demand for marking and engraving applications as a result of increased competition and also pricing pressure in China. We should note that we have been seeing price competition for pulsed lasers moderating in China in recent quarters.

Medium-power laser sales increased 13% year-over-year to $24.0 million, or 11% of total revenues. This growth continues to be driven by sales for fine-processing and additive manufacturing, which includes laser sintering applications.

Sales of QCW lasers, which are mostly used for fine welding and cutting, increased by 62% year-over-year to $10.9 million and accounted for 5% of total revenues. QCW lasers are continuing to displace lamp-pumped YAG lasers at an accelerating rate as Valentin mentioned. Revenue from low-power lasers increased 13% to $3.6 million due to an increase in medical applications.

Sales of other products, which include amplifiers, diode lasers, green lasers, mid-IR lasers, integrated laser systems and certain components, increased by 64% year-over-year to $15.7 million, primarily as a result of higher telecom and laser system sales as well as sales related to the laser display project that Valentin mentioned earlier.

Service, parts, lease and other revenue, including accessories, totaled $19.0 million, an increase of 3% from $18.5 million last year. This increase includes $3.8 million of deferred revenue recognized in Q4 2015 compared with $2.9 million recognized in Q4 2014.

Now looking at our performance in Q4 by geography. Sales in Asia increased to $111.6 million, or by 14% year-over-year. Within that region, China sales increased 13% to $69.1 million. Growth in China was primarily related to strong demand for welding and brazing applications using high power and QCW lasers, and solid growth for cutting applications using high and medium power lasers.

This growth was partially offset by the decline in sales for marking and engraving applications that I mentioned earlier. In Japan, sales increased 39% year-over-year to $23.3 million reflecting the continued penetration of cutting OEMs in this geography.

European sales increased 2% year-over-year to $70.8 million. We saw good growth in Germany, particularly for welding and laser sintering applications. But that growth was partially offset by lower sales in the rest of Western Europe and Russia.

North American sales grew 2% year-over-year to $39.9 million. In North America we had double digit growth in sales in materials processing applications with particularly good growth in cutting and welding. However growth in materials processing was offset by a decline in advanced applications sales resulting in a more modest overall growth for the US despite a good performance in materials processing.

Now, working our way down the income statement. Gross margins of 54.6% were at the high end of our range of 50% to 55% as a result of the good absorption of manufacturing costs due to high levels of production. Some of this was added to inventory during the quarter, mostly in the diode area. Our inventory of diodes was operating with only a few weeks supply on hand.

As we have brought on some of the additional chip and packaging capacity we have managed to build about three months supply of diodes. In real dollars, Sales & Marketing expenses increased to $8.6 million from $7.9 million a year ago, while they were flat as a percentage of sales at 3.9%.

This is an area where we plan to invest in 2016 by expanding in new geographic locations such as the Czech Republic, Mexico and Brazil and hiring new sales specialists to cover some of our new product and application introductions.

Research & Development expenses increased to $17.8 million from $13.8 million a year ago. As a percentage of sales, R&D increased to 7.9% from 6.7% of sales in the same quarter last year. The increase in R&D spending related to higher personnel expenses and cost of materials used in R&D development projects.

R&D continues to focus on improving existing products, developing new manufacturing processes and launching innovative new products in order to strengthen our technology lead and allow us to penetrate new markets.

General and Administrative expenses decreased to 6.6% of total sales compared with 7.3% one year ago. General and Administrative spending in total dollars decreased to $14.7 million, from $15.1 million, a year ago reflecting lower consulting costs and collections of previously reserved accounts receivable.

Operating expenses for the fourth quarter were $39.0 million, including a foreign exchange gain of $2.1 million, compared with $34.3 million a year ago, which included a foreign exchange gain of $2.6 million. Fourth-quarter operating income was $83.0 million, or 37.1% of sales, compared with $79.6 million, 38.4% of sales in the fourth quarter of last year.

Excluding foreign exchange, operating margins were 36.2% and 37.2% in 2015 and 2014, respectively. Our tax rate in the fourth quarter was 26.5%. We had a benefit of $0.04 per share from the reenactment of the US R&D tax credit, which was signed permanently into law at the end of the fourth quarter as compared to a benefit of $0.02 per share in Q4 2014 when it was just reenacted for that year. The change should allow for a more consistent effective quarterly tax rate in 2016.

Net income for the fourth quarter increased by 7.6% to $60.7 million. On a diluted per share basis, we reported $1.14 for the fourth quarter compared with $1.07 a year ago. In Q4 2015 the foreign exchange gain increased EPS by $0.03 while in the same quarter last year it benefited EPS by $0.04. Excluding the benefit related to foreign exchange transaction gains and the lower effective tax rate during the quarter, EPS was $1.07 as compared to $1.01 for Q4 2014.

If exchange rates relative to the US dollar had been the same as one year ago, which were on average Euro 0.80, Russian Ruble 48, Japanese Yen 115 and Chinese Yuan 6.14, respectively, we would have expected revenue to be $15.0 million higher, gross profit to be $7.6 million higher and operating expenses would have been $2.7 million higher.

Now, turning to the balance sheet. We continue to maintain a strong balance sheet, ending the year with $582.5 million in cash and cash equivalents, $106.6 million in short-term investments, and $19.7 million of debt.

At December 31, 2015, inventory was $203.7 million, up 19.1% from $171.0 million at year end 2014. As I mentioned earlier, we had good absorption of our manufacturing costs and some of that absorption wound up in inventory. Our current level of inventory on hand amounts to approximately 184 days, compared with our target range of less than 180 days.

Accounts receivable were $150.5 million at the end of the fourth quarter, or 62 days' sales outstanding, compared with $143.1 million at December 31, 2014, or 63 days' sales outstanding.

Cash provided by operations during the quarter was $60.7 million. Capital expenditures for the quarter totaled $19.4 million and were $70.6 million for 2015 in total. This was above the $60 to $65 million range we previously provided due to the timing of payments related to a cogeneration electricity plant in Oxford, Massachusetts.

We expect CapEx for full year 2016 to be in the range of $100 million to $110 million for facilities and equipment to increase our capacity and support our future growth. We intend to seek financing for one or more of the facilities that might reduce cash expenditures to between $80 million and $90 million.

At the end of Q4, we had backlog of $442.5 million, a 38% increase from year-end 2014. This included shippable orders of $185.1 million and frame agreements of $257.4 million which increased by 6% and 76%, respectively, as compared to year end 2014.

And now for our expectations for the upcoming year. As Valentin mentioned, we continue to be optimistic for 2016 and are managing the Company to achieve double digit growth for the year. Our optimism is grounded in our strong core products, our backlog and many new product introductions planned during the year. Further backlog in China is up 27% over last year and indicates that the demand for our unique and leading products is less gloomy than the macro news everyone hears daily about China.

As Valentin discussed, our core fiber laser products will contribute moderately to our 2016 growth. In addition, we expect continued strong growth from some of our recently introduced products including the QCW lasers, high power pulsed lasers as well as the tri-focal brazing laser.

From an application perspective we expect stronger growth from high power and fine welding applications for automotive and battery welding as well as laser sintering, cleaning and ablation applications, and moderate growth from cutting applications.

The growth will be enhanced by our rich product pipeline. New product introductions for 2016 include new industrial laser systems, laser projection systems, ultra-fast pulsed lasers and UV lasers. In addition, I would like to provide some more color about opening backlog.

Japan is up by about 33% year-over-year and as already mentioned, opening backlog in China is up by approximately 27%. In other locations such as Europe and the USA it is slightly lower. Our frame order backlog has increased by 76% from $146 million to $257 million.

In Q4, we reviewed this frame agreement backlog with our customers. While we cannot assert with 100% certainty that this entire frame agreement backlog will result in shippable orders, it supports the forecasts we are receiving from our main OEMs that they still expect to see growth in 2016.

So while the midpoint of guidance calls for a slower start to the year, we are still targeting double-digit growth with increased sales in subsequent quarters based on several factors. First, a substantial proportion of Japanese backlog is scheduled by customers for Q2 and Q3 delivery. In 2015 a different dynamic was at play. In Q1 2015 Japanese revenue was strong due to the change in consumption tax rates that accelerated deliveries into Q1 2015.

While we expect Chinese revenue to continue to show growth year-over-year, in Q1 2016 revenue in Europe and US is flat compared to a year ago. It is positive that order flow in China continues to hold-up nicely while in Europe and the US order flow has started to improve during this quarter.

Obviously the macro-economic environment is more uncertain than a year ago. It could turn more negative during the year which would impact our current expectations. In addition, the growth in revenue from new product introductions is predicated on successfully introducing them to the market, gaining acceptance from end customers, displacing incumbent technologies and finding new applications. In addition our outlook can change due to changes in foreign exchange rates, competition, pricing and the timing and shipment of orders.

In short, the risks of the current environment are more difficult to predict and they have been for the last couple of years. In the meantime, we will manage for long-term growth, including investing in R&D and infrastructure, to take advantage of the historical shift in laser usage that IPG fiber lasers initiated.

We currently expect revenues for the first quarter to be in the range of $200 million to $215 million. We anticipate Q1 earnings per diluted share in the range of $0.88 to $1.03. The mid-point of this guidance represents quarterly revenue growth of approximately 4% and a relatively flat EPS, respectively, year-over-year. The EPS comparison takes into consideration, the foreign exchange gain that benefited EPS by $0.11 per share in Q1 2015.

This EPS guidance is based upon 53,434,000 diluted common shares, which includes 52,714,000 basic common shares outstanding and 720,000 potentially dilutive options at December 31, 2015. The guidance is based upon current market conditions and expectations and is subject to the risks we outline in our reports with the SEC.

It also assumes exchange rates relative to the US dollar of Euro 0.92, Russian Ruble 75, Japanese Yen 120 and Chinese Yuan 6.60, respectively. I want to reiterate that we do not attempt to forecast transaction gains or losses related to changes in exchange rates.

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

(Operator Instructions) Patrick Newton, Stifel.

Yes, thank you. Good morning Valentin and Tim. I guess, I really wanted to focus on the growth outlook. You spoke to managing the business for double-digit growth, you talked about strengthening the core portfolio in several ways that you believe that you can grow in the back half of the year. I just want to get finer point on this and help understand if the double-digit growth rate is actually kicking down or still within the target range of your prior 10% to 15% metric that you put out post 3Q earnings?

So the double-double digits is double-digit, we're not providing an update to that 10% to 15% growth range and we've chosen to frame it in this way Patrick, so there isn't an additional finer point to really be put on it. We do remain very confident for the year as a whole. As I mentioned, even the core products orders in Asia are very strong. Talked about North America and European opening backlog being a bit weaker.

I'd like to point out that we've actually had a couple of large automotive orders in the last week or so both in North America and in Germany that indicate some continuing improvements in those geographies as well. So I don't want to get drawn on any more finer points on overall, I think we set ourselves a good target for the year and it's a target that we are actively and proactively managing the Company to attain.

And then, just a clarification on your backlog. I just want to understand the difference between the firm shipment and then the frame agreement. Firm shipment are pretty straightforward, but the frame agreement; are those associated with the minimum purchase orders that you have for your larger customers or are those some other type of backlog metric?

So frame agreements are sort of -- they're not quite long-term contracts but they're the equivalents of indicated total purchases that customers will make during the year that they give us in order to obtain, for example, price breaks. If they don't achieve those anticipated volume purchases, they don't get the price breaks.

In addition to that, in certain geographies, for example in China, the frame agreements that we take are taken along with a relatively small deposit that adds some teeth to them so that they don't have a firm delivery date attached to them.

But they are tied to pricing; they're tied to, in some instances, some deposits; and then they get called off during the year and when they get called off, they get translated into shippable orders. We only report them in shippable orders when they're called off and we only report bookings as they translate out of frame agreements into the shippable orders.

One other point I'd like to make is the growth in backlog that I mentioned specifically for Japan and China relates to growth in shippable backlog. That is not just the growth in the combined shippable and frame agreement backlog.

The frame agreement, in many cases, is connected with definite time when the people will get license, export license. Sometimes they wait for some months and they try for frame agreements and they give them just immediately (inaudible).

Then if I can just make one more, and just on the adoption rate in Japan, because that seem to be a really good growth area and then also QCW, which put up impressive numbers. Can you help us understand what is the fiber penetration rate in Japan, and then, how much has QCW displaced in the YAG lasers to this point?

The penetration rates on Japan on the cutting -- on welding, Japanese penetration has always been pretty good on the high-power side, right. There has always been good adoption from the major automotive manufacturers. With our main OEM customers, on the cutting side, we're still probably in relatively early stages.

We may be tracked up from low mid-single digits to 20% penetration and that as we've articulated before, over the next 12 to 18 months is expected to get to 60% based upon the feedback we've heard from two of the three main OEMs that we deal with there. So there is still, over the next 18 months, potentially significant growth coming out of that cutting application and the cutting applications in Japan.

In terms of QCW penetration, it's a bit more difficult to understand exactly where we stand because it's really tied to what's the total volume of YAG lasers that are sold in the world each year. We think that probably more than 10,000 YAG laser is sold each year, and that would put our penetration into that market at 15% or so. If the total market for YAG laser each year is a bit higher, the QCW penetration at this point in time is potentially a little bit lower.

Joe Wittine, Longbow Research.

Hi, good morning. Appreciate the disclosure of the backlog in China. Tim, I think that was helpful relative to investor concerns for the day. So at this point, is it safe to say, you actually feel better about China into 2016 than you did 90 days ago and that your technology remains a priority investment? Or is that too aggressive of a view today as visibility in the second and third quarter orders is still murky?

I think at one of the conferences, I had mentioned, that this thing you got to kind of like bifurcate your emotional reaction or [height] to everything is going on and really look at what the facts of the situation are. So you have strong frame agreement order. You've got the strong shippable backlog order, we're receiving positive feedback from all of the main OEMs and all the core product introductions.

You've got definite projects and growth coming out of the battery welding, which will be strong in China and even in other parts of the world. And then, you've got the sort of consumer electronics cycle that's going to go through probably an investment phase this year that benefits our marking QCW lasers. One of the other companies that sells automation and sensing equipment that announced yesterday is it's also expecting to benefit from that cycle driven by the major consumer electronics manufacturer.

So we've never really and outside of your emotional reaction, even 90 days ago, we were still confident that China would have a reasonable good year in 2016 and we continue to believe that. And that's how I kind of characterize it. You got to strip away your emotional side of the equation and look at what the facts are.

Great, that's helpful. And then as my follow-up, could you give us some sense or walk us through your profitability expectations for 2016. I mean, you've been pretty clear that investors should not expect operating leverage this year. It will be somewhat of a year of investment and you walked through that. But help us modeling gross margin for the year, maybe given a combination of a little bit uncertain macro and then you also have these new products scaling which may impact [mix]?

So you've got puts and takes on this. In general, we expect to maintain margins in the upper half of the range. So broadly similar to where we've been over the last year. You'll maybe see on the take side, a bit more pricing pressure at the lower end of the market, but you'll see some puts and benefits from many of the new product introductions.

If you can grow the Company even at, what for us is a moderate rate, you'll see continued good absorption of manufacturing costs. So that gives us some comfort at that. There are also levers that we can pull. Hiring at the manufacturing level can be slowed down, is expected to be slower than it was last year. We can cut, for example, things like over time if necessary, we have some flexibility around some of the other [compensation] structures not just in manufacturing, but the rest of the P&L.

On the operating expense side, I think you probably see some leverage out of G&A, even though we'll have some investments in that. You'll see a little bit of leverage out of R&D. I think the R&D investments will be a bit more moderate and then higher investments on the selling expense side. The selling investment is absolutely required in order to expand into new geographies, support the new product line introductions.

At the bottom, that leaves you with, probably as I said, relatively flat operating margins certainly not -- we'll iterate again, this is not a business that you cannot run at 39% or 40% operating margins and we intend to maintain the business model and investors, as we need to grow the business.

Last year, we've made enormous drop to decrease [addition] of our cost of our major current projects and (inaudible) on the results of average decrease of cost up to 15% to 20% for the most product. We're working, we still have good chance probably decrease our costs. It will also support also margin.

(Operator Instructions) Krish Sankar, Bank of America.

Hi, couple of quick questions. Tim, can characterize your customer base in China. What kind of customers are there? Are they like really big guys, small guys? Do they have any access to credit issue? The second one follow-up is that, I'm kind of struggling to get to your double-digit growth guidance because it seems like your quarterly seasonality is going to be completely different from what you had experienced last four or five years, if you have to stick with your guidance. So I'm kind of curious what gives you the confidence that this year is going to be an off-seasonal year compared to the last five years? Thank you.

First of all, on the China question. There is many different customers that we deal with there on the end-user market; all the major automotive manufacturers and consumer electronics with the major manufacturer is consumer electronics and their sub-contractors who produce the equipment's and then you got all the major OEMs who produce equipment for low macro systems, microsystems, fine processing systems.

There are, of course, some smaller customers that may have less access to credit than some of those larger companies. In general though, we haven't seen a change in that environment to this point in time. If anything, I think there is an attempt by the government to make sure there is sufficient liquidity in the market rather than going through a phase of tightening.

So we haven't seen any significant changes in that and some of the OEMs by the way are pretty, pretty significant companies, they're large. The largest customer we've got out there is clearly very big, but there are three or four other significant OEMs that have revenue in the range of $200 million a year and have reasonable balance sheets.

In terms of the phasing of the year, I think Q1 and Q4 were always the weaker part of the year. This year, we start with a quarter that is down compared to Q4. That's not unusual, Krish, you can never pick where the Q1 is going to be flat, down or in line with Q4. It does depend upon the timing of orders and other dynamics at play. I'd say here, we expect to see acceleration of orders, particularly now that -- well, this is the week of Chinese New Year into next week and the rest of February and March.

I'd mention that we've got this very strong backlog in Japan that's scheduled for delivery in Q2 and Q3 and has a different dynamic at play around Q1 in Japan that benefited us last year. So we expect to still have a very strong Q2, Q3 and then, it's a bit early to talk about where Q4 stands.

You've also got the consumer electronics investment cycle this year that's expected to be stronger. That is a Q2, Q3 dynamic. So there are lots of different aspects to this that we try and think about and consider and other elements of actuality that we've also had to consider. But I don't think it's a fundamentally different dynamic. Of course you have to see as an improvement in growth rates for the rest of the year, otherwise you don't get to that double-digit growth rate that we've targeted and that we're managing to.

Joe Maxa with Dougherty & Company.

Yes, hi, thanks for the color on how you're looking at getting to double growth. I'm wondering, how much of that may come from the new products that you're introducing this year? Is it just very minimal or do you expect that you see some meaningful growth from these newer products such as the cinema and the ultra-fast lasers and the UV laser?

We expect a very serious sales with this year [static] within the UV, some UV system we introduced will have demand from the consumer, the system manufacturer, so which provide in [large quantity] they require from us. They're waiting when we really would start to provide them this UV and ultra-fast pulsed, because our solution much more practical, much high efficient and much less costly than existing [now] competitive products runs in the market today.

So we practically will change, when to change situation in this market segment. Regarding this 3D cinema, it's similar platform, it's new and very hot. The [all top] operators in their field are waiting. They don't have (inaudible)

solution but it's much still stable and also much more costly today.

So all practical operator working (inaudible) will that extremely interested. So we will start to do open door shipment for them (inaudible) customer finished qualification and that one of the tire customer and then really also support our sales to other people. We don't have any limitations here for exclusivity right for this customer. So we expect this year (inaudible) sales also luminaire products in.

So in total, we expect more than the up to $50 million to $100 million additional sales from new product this year. Also we plan this year, dramatically increase our sales of material processing system, it's expected to total 400% grow this year (inaudible) from system business.

Let me just clarify, did you say you expect $50 million to $100 million of revenue this year from the newer products. Does that include the QCW and once they've been in the market --?

QCW is not our newest product. QCW product we introduced six year ago, but only last year, you went past breakeven. Typically, beginning last year, typically new product go in very small, if situation not very hot. In QCW, situation was all people (Inaudible) YAG solid state lasers. All practical (inaudible) produce own YAG system for them to switch from own to new product also very difficult and it was (inaudible) towards the top customers reached to us to in spite they produce own YAG (inaudible) our laser QCW because much more perfect provide final integrated system much high quality.

So now, they're all love their (inaudible) same way because we don't have any competition QCW product (inaudible) in the market. We do not believe somebody will enter in the market similar product to QCW (inaudible) and this provide the upside new performance of final market appreciation system.

So with this year it should grow very fast, but it's not very old. It was introduced in the market six years old. We are talking now of new product, which only this year we'll introduce in markets. Some application are very hot and we expect very fast adoption even this year.

Just to clarify Joe, some of the newer product includes not only the QCW, the tri-focal brazing, the higher power pulsed lasers which are relatively new to the market and then you've got the systems which we've started to introduce and then you got the really new product that's coming to the market as well.

(inaudible) even as the medical devices, it's a total system, material processes system, [macro system] and some micro system. In macro system, we have big line of customer waiting when we will ship them this product, but it's here still some time need to spent for certification, documentation and so each of this product customized. But [will do] some of the product many million dollars each of them.

Tom Hayes, Northcoast Research.

Good morning gentlemen. First question Tim on the increased spending on sales and marketing, just wondering, as far as the pace of growth -- are the expenses are even added or are they kind of been, should be layered in over the year. And my follow-up was just kind of on the timing of the new Wuhan and Czech Republic facilities and when you plan on opening those?

So the sales and marketing was the investment that we wanted to make last year for various reasons didn't happen. We've just hired, for example, the new General Manager in Brazil and in Mexico. We've hired a new sales person in the Czech Republic. The Czech Republic is not a major expense. You've got a specialist sales guy who is going in there. So the sales and marketing investment is expected to happen during the course of this year because we didn't quite get to where we wanted to last year. In terms of the new offices, the Czech office is very small, it's up and running. The Wuhan office is also opened.

Year-ago we opened an office in Poland is now it going well, pretty well. So the next, we have also to split (inaudible) in East Europe also to the Czech Republic and other countries, because somebody (inaudible) sales between these countries.

Jim Ricchiuti, Needham & Company.

Thanks, good morning. You seem to be suggesting a pickup in the consumer electronics business. Are these orders you already have in backlog for Q2, Q3 delivery or are you anticipating the orders are going to come in? It sounds like you have a pretty good line of sight to this.

We'll anticipate it at this point in time. Jim we don't have the orders in hand, but we've got indications from two of the main OEMs that supply into that market that they are expecting a strong year for sales due to that investment cycle. They rarely give us order a long way ahead of time for that. They don't, in fact, get those orders from their end customer until much closer to when the investment happens.

And if you were, Tim, to look at 2015, what kind of year was it in that particular side of the business?

2015 was more moderate. I think, the last cycle that you had was some investments in 2014. 2015 wasn't bad, but it wasn't a big investment cycle. We saw some pick up more on a change in applications there that drove the QCW for the fine welding rather than it being -- a penetration of an application rather that it being driven by a significant capacity spend. I think, this year people are expecting a capacity benefit, not just application penetration benefit.

Tom Diffely, D.A. Davidson.

Yes, good morning. Tim, first on China, you said that you saw a less pricing pressure recently, could you expand a little on that?

Certainly at the lowest end of the pulsed laser product line, pricing has in the last couple of quarters stabilized a bit more than it has historically. That's driven by the fact that the local suppliers in China really cannot afford to go down any further on pricing. They have brought themselves, we believe, to the limits and that limit is actually starting to affect their financial performance. There are rumors in the market that one of them may not even be particularly financially stable at the moment. So that whole strategy has an end game to it that is not in our opinion, particularly sustainable for these smaller companies even as they try to grab share initially when they introduce product.

Where you see, the message is from when we talk to our Chinese customers that our competition in China now particularly are near the bottom. So they practically don't have any margin at all. They could not [mono] drop down even to survive long time. So they expect for this (inaudible) then we'll start, we'll give the (inaudible).

We feel in spite we compete with them with both of their operative, we feel we have very reasonable margin from our product. If people, most of these Chinese competitors cost is much higher than IPG cost purchasing our product. I would (inaudible) performance of our product much better. So we actually will stay at this market and will be much more quite situation especially next year.

Okay, and then just a quick clarification. Tim, you noted about a $100 million in short-term investments. Does this mark a different investment strategy for your cash?

On the balance sheet, yes, we're trying to get a little bit more yield out of the cash that's sitting there. It's not a huge amount. So we put some into shorter-term investments that have a weighted average maturity of less than a year. Given that interest rates were supposed to go up, we haven't put much into that side of it and the yield is still not quite, but I think it's averaging something like 60 basis points as compared to close to zero on straight less than 90-day treasuries or even negative on that. So yes there is that $100 million that's in there, Tom.

Jagadish Iyer, Redstone.

Yes, thanks for taking my question. Two questions, Tim. First on the QCW lasers, just wanted to understand the kind of growth that we should be looking at for this year and given what you had mentioned, particularly in China that you see competition on the low end, do you see a competition on the QCW and what kind of growth rate should we thinking about for the QCW for this year? And then I have follow-up.

For QCW, we don't see any competition. Nobody can produce such quality lasers now and to sell with such price. For them, cost is many times high than our cost of this laser. So even somebody will (inaudible) they're watching the time and try to reproduce, but no success. And could not therefor compete with price with us.

So as I have said today already that we don't see any completion for QCW in next minimum of two, three years. On point of growth for QCW market it's (inaudible) market more than 10,000 units. So we still can grow three to five times without any problem. We expect this year a growth more than 50% again.

Okay. Good, that's helpful, Valentin. And then as a follow-up, Tim, just as a clarification on the higher CapEx that you had set for this year, what kind of capacity that we should be looking at in terms of these incremental CapEx that you are going to be spending over the next say 12 to 18 months in terms of quarterly run rates that you can sustain with this kind of a capacity expansion that you're doing? Thank you.

So actually a lot of the CapEx is going to come though through this year. Let's talk about it at a high level. First of all, related to sort of manufacturing and facilities directly that add capacity probably 75% that we relate to that. Some of it relates to sales, service and application buildings around the world. Most of the facilities will only come on stream, towards the end of the year and some of them are only being started now. So in terms of depreciation and actually benefiting capacity, there's not going to be a huge amount of that benefit coming in early on in the year. It's more looking forward to supporting 2017 and 2018.

So while there is a bit of a negative impact on cash, there is actually not a big impact on depreciation this year and even when those buildings are bought on stream, they probably only affect depreciation by about $0.5 million a quarter.

In terms of some of the equipment, the diode area, for example, and new MBE reactors, again those are only expected to be delivered in the second half of the year and then they have to be qualified and brought up to speed. So I mentioned that we've already invested in diode capacity and we saw some of that benefit come through in Q4. The additional investment in diode capacity is, again, longer term. So I think, those are the main things.

There is a substantial amount going into also electrical co-generation capacity in Oxford, Massachusetts. We will get some rebates on that and then that will drive down one of the highest P&L cost that we have in the manufacturing side, which is actually burning in our diodes for long-term test. That co-generation capacity will help to reduce the cost of electrical burning related to diode. So there will be ultimately a cost benefit from that that comes through when we get that capacity up and running.

And you have to take in mind that, the growth 17% growth in revenue, but in physical units we've grown here practical or physical units [30] for last year. 30 more in physical units, 30% more than 2014. So some of the core product were in high power lasers, the (inaudible) laser. We increased about a year, again in an optical power we produced 40% more than 2014, a three years, second each year we increased for 40% total optical power high-power laser, because in different ways that from 1 kilowatt, 10 kilowatt, 50 kilowatt we count not in physical unit but optical power.

So optical power (inaudible) produce 40% more than 2014. So it's a such increased practical with 30% your capacity, every years you have to increase, you could not produce as the same such and provide terrific growth. So each year we invest in, further increase not only at some ways to increase productivity but also increase our capacity and the treatment facility and so on. We'll like to increase our revenue at double digit.

Jeremie Capron, CLSA.

Hi, good morning. Thanks. I was wondering that we've talked about the competitive landscape for pulsed laser in China. I wonder if you could give us an update on your core market of high-power lasers. Some competitors are coming up with higher power units and I wonder how this translates in terms of the pace of price declines for your product, especially in the context of a slower cutting market?

It's also a market trick. When people play more, we have more higher power unit, more (inaudible) In reality, you have to provide reliable way that -- as you know we [don't get] even 10 kilowatt from one channel, 10 kilowatt not the 2 kilowatt, 2.5 kilowatt some of the competitor claim today. We all time make an optimal solution, how can you provide more (inaudible) provide power, provide reliable power, provide lasers that will work many years without fail. So they need to have redundancy and we built optimal architecture scheme with the optimum quantity (inaudible) much cheaper, we have very high margin to compare other people that work in variable margin, some of them you (inaudible) no problem to make 2.55 kilowatt per one module. But for what?

It would be much less reliable, much less this practical and so on. So we don't see any sense to make this. So it's a commercial trick to claim we have higher power, we have high voltage, but it doesn't help them real competitors in the market. Customer need not volume, customer need final, reliable, high quality product, with very high efficiency and so on.

all that people claim we have now (inaudible) ask they, data will efficiency total (inaudible). We now run with 45% to 50% efficiency, nobody of them real efficiency more than 20%, 25% two times worse even three times worse. But they have to talk about this, not like power (inaudible)

In (inaudible) the situation also different, our price -- our constitution in China in (inaudible) is absolutely different, (inaudible) but performance, quality and so on, they are absolutely not comparable. The same might see this in the whole [quarterly] commodity costs. It's also different; we're talking about big range of different product.

Jeremie, on the pricing side as well there is a couple of things that I think -- maybe the medium power is a bit more competition. On high power I think [Trevor] has set himself most of the core applications to try and maintain pricing, if there are significant volume opportunities that come out of the welding market, for example, in order to crystalize and accelerate those opportunities, we're always flexible to make sure we can drive laser penetration. So it's always a question of supply and demand

With the rest of the competitive position in the market, I'd like to just mention a couple of things. One of our main competitors that has a high-power laser that sells into the cutting market in Asia actually had, I think, a down year on sales for that customer and didn't have a successful year certainly as our cutting applications grew. One of the other competitors had a reasonable year but is still only in terms of the total number of high-power lasers we sell is less than 5% of the market.

And then the other main people that talk about high power laser is we don't see them meaningfully in the market at the moment. And certainly, whether you look at the high-power pulsed applications, virtually no competition when we get into our high power pulse to QCW Valentin mentioned as well. The performance and cost of the diode is absolutely fundamental to that lasers.

So, there's a lot of talk, but the facts, when you come back to them not just the sort of scientific and technical aspects that Valentin called out, the facts if you look at the penetration, people are getting into the market is still relatively limited.

Last year, we shipped [QCW] laser sales more than 7000 pieces. 7000 in one year. The total optical power 12 megawatt of optical power, 12 megawatt. Ask other people how much power they total for fiber laser they're making per year, few hundred kilowatt only, with 12 megawatt of optical power, you need for this to make this unit for this to produce only (inaudible) high-power diode, not one chip, multi-chip diode module.

We produced last year both about million such diode module, each 50, 60 watts, with very high lifetime, 50, 60 watt million piece, ask other people what capacity do they have to develop such capacity they need five to 10 years. Nobody can even with any money that you are not able immediately to increase and produce in short-time.

It's very long process. So serious competition we could not expect because nobody have such capacity as such (inaudible) not only diode by many other the components also you have to produce, also very high volume, high quality and so on. To make few pieces, 10 pieces, 100 pieces is not too difficult; to make, 10,000 pieces high power per year, it's enormous not only investment, but many years after the development, people (inaudible) special automation is a huge work

Understood. And on the balance sheet, as baked here, you've made some good progress in terms of working capital and fixed assets turnover in the last two years. Now we have a slower year ahead of us. Do you think we should expect similar trends, similar improvements, or any change here Tim? Thanks.

We continue to be focused not on just generating great margins but also managing working capital. I'm not forecasting any fundamental shift in days sales outstanding. I think we've managed that pretty well. Inventory days, I think will fluctuate a bit during the year depending on where demand peaks and trough. So, for example, you may see inventory days exiting Q1 little bit higher, because we are expecting very strong demand in Q2 and Q3 and then inventory days lower by the end of Q3. So there will be some fluctuations around inventory, I think that we're going to have to manage. But the rest of the balance sheet, I think is, as you point out, in pretty good shape and I don't think there's going to be anything detrimental around that. We're certainly managing to ensure that we don't have anything detrimental.

Mark Miller, The Benchmark Company.

I just had a question, you said sales grew 13% year-over-year in China, but they were down significantly sequentially. I was just wondering what drove the sequential decline?

They're nearly always down sequentially in China Q3 to Q4. So the first thing that drives it is just simple seasonality and so you always have to look at China just on a quarter-over-quarter basis compared to the previous year to look at what the business trends are. There was nothing unusual that drove that sequential shift this year.

And then, I wonder if you could estimate what percent of sales recently have come by a replacement sales and how do you expect that to grow in the years ahead?

By replacement, do you mean displacing an incumbent laser technology?

I've a customer who has been using your lasers and these lasers in time needs to be replaced?

If you look at the real acceleration. If you take the high-power or the QCW, right. Most of these lasers are in terms of the volume of sales, less than five or six years old. So we think a laser and a laser, it's also important to understand that the age of the system that the later goes into.

Like a typical cutting system has a life of eight to 10 years depending upon the duty cycle it's put through and welding system because the duty cycle is a bit lower, but potentially a bit of a longer life. So you're not into like the replacement cycle yet. What you do have though is if you looked at the total number of cutting systems that's installed around the world, there are more than probably 50,000 high-power cutting systems.

By our estimation, fibers' penetration into the total installed base is -- we can (inaudible) high-power sales and total units, it's probably somewhere over 20%. There is still a huge potential opportunity as those older CO2 cutting systems reach their replacement cycle to grow into the installed base, even though we've grown substantially into the annual demand.

And that's a very important thing to note. It's not that fiber is already 80% of the installed base, it's still relatively early stages in that and similarly for QCW on displacing YAG lasers, it's relatively early stages into the installed base of many of these older laser systems.

Thank you. This concludes today's question-and-answer session. I'd like to turn the floor back to management for closing remarks.

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

Thank you everyone.

Thank you, ladies and gentlemen. This concludes today's teleconference, you may disconnect your lines at this time. And thank you for your participation.