IPG Photonics Corp (IPGP) 2016 Q1 法說會逐字稿

Greetings, and welcome to the IPG Photonics first-quarter 2016 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Angelo Lopresti, Senior Vice President, General Counsel, and Secretary for IPG. Thank you; please go ahead.

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 managements 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 actual 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, 2015, and other reports on file with the Securities and Exchange Commission. Copies of these filings may be obtained by visiting the investor section of IPG's website or by contacting the Company directly. You may also find copies on the SEC's website.

Any forward-looking statements made on this call are the Company's expectations or predictions only as of today, April 28th, 2016. 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'll now turn the call over to Dr. Valentin Gapontsev.

Thank you, Angelo. Good morning, everyone. IPG reported revenue and EPS in line with our guidance the first quarter, and we've continued to execute on our long-term growth strategy. Revenues of $207.2 million increased 4% year on year or approximately 7% on a constant-currency basis.

Furthermore, EPS was impacted by losses related to foreign exchange. First-quarter 2016 EPS of $0.92 included $0.07 per share related to foreign-exchange losses compared to its Q1 2015 EPS of $1.08, which included an $0.11 foreign-exchange gain.

First, a few remarks on application last quarter. Worldwide, cutting sales continued to grow, particularly in China, Turkey, and North America. While welding was a bit weak, this quarter overall, we continued to see expanding opportunities in brazing and for our laser seam stepper.

In addition, we developed a trifocal welding laser for tin-coated steel and aluminum. This solution resolved the problem of welding thin-coated sheets without a gap between the metal at first. Furthermore, we have been qualified by a major automotive firm for all of its transmission-welding project.

Three other firms have qualified us for powertrain-welding applications. The customers previously used CO2. As a result of these opportunities, we expect welding sales to improve this year.

Currently, our lasers have passed a qualification for manly welding applications -- new welding applications in aerospace, gas, oil, railway, and other industries, including the use in the field conditions directly at first. For example, one of Tier 1 space-rocket maker uses already our 30 kilowatt laser for welding of a rocket body, as we know such rockets have been launched to space recently. For the other one, we have shipped a unique, complete portal laser station with a highly precise 5G cutting and welding of large-scale shell parts for new international space station.

In oil industry, we have overcame a symbolic milestone by finishing with a great success at half-year test of our new orbital laser welding system for drilling rigs directly in field conditions. It is also a first in the [wanted for]. As a result, we have a good chance to start the commercial shipment of such stations in the second half of the year, in quantity.

The similar situation is going now with welding of large-diameter tubes for transcontinental gas pipelines. We have developed a unique technology for such welding effort and we have passed laboratory test in the house-developed special orbital station for 1.4-meter diameters with great success. Now we should start a few tests in May. If result would be positive, as we show, a Tier 1 customer promised to start purchase such multi-million stations shortly.

One more our great recent achievements with a big future is a new welding technology for large titanium and aluminum alloys parts in the open air, which replace very expensive and worse-quality traditional I-beam technology usually used in large vacuum chambers. We have passed all lab tests and are ready to ship our first complete portal 5D cut and weld station to the Tier 1 customer in the first half of the May. Up to 10 other customers are standing in line already.

Continue a theme we discussed previously, customers are moving up the power scale not only in cutting and welding, but also in 3D manufacturing. And with our kilowatt pulse lasers that are increasingly used in ablation and cleaning processes also.

We are pleased to see a more meaningful contribution from accessories and systems which we expect to see growth over the year. Over the last several years, we invested in various technologies that complement our core fiber laser products. This paying dividends as our cutting heads will begin to ship in China in Q2, and in quantity. And our new coming unique high-powered scanning heads will begin trials at customers, also in Q2.

As we expand the technological capabilities of our product lines, we are also growing the breadth of the applications that these products have. One new area we are pursuing is the large screen 3D cinema, and the light shows market. During the first quarter, we delivered the second prototype of our new, 300 kilo-lumen unique RGB laser technology platform for the cinema projection to a Tier 1 customer.

We attended the CinemaCON tradeshow in Las Vegas two weeks ago, demonstrated our digital laser [webinar] to the cinema industry, and saw enthusiastic interest in the new product line from major players in the industry. We believe that IPG's laser webinar will deliver a new standard of brightness and dynamic range which the industry is demanding for a new generation of premium 2D and 3D cinemas over the coming years.

The other application where we plan to build or increase our market share include medical laser devices, optical communications, or LED displays, and many others. In all cases, we are trying to develop not only new, unique laser sources and corresponding optical accessories, but also integrated solution to serve end customers directly without mediators.

As you may know, recently there have been some consolidation in the industry among our peers. We do not believe this fundamentally changes the competitive dynamics of our markets. We remain focused on improving our existing products and launching innovative new products in order to transcend our technology lead and expand into new markets.

We continue to see excellent opportunities to expand our businesses through both existing and new OEM and more and more end users as we develop innovative products to address applications beyond our core markets. We are making significant progress on the test and development of these new product lines and we'll look forward to their launch later this year.

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

Thank you, Valentin, and good morning, everyone. First-quarter revenue grew 4% to $207.2 million from $199 million a year ago.

Materials processing sales increased 3% year over year to $198.2 million, accounting for approximately 96% of total sales during the quarter. Within materials processing, sales for cutting applications continued to grow at a double-digit rate, and we started to see increasing demand for higher-power lasers for this application. Several customers have launched their new cutting systems using lasers with 8 kilowatts or more of power this year, so expect that trend to continue.

We also saw an increase in high-power lasers used for additive manufacturing, as Valentin mentioned. Overall growth was partially offset by timing of automotive and other welding orders, and lower orders for marking and engraving sales.

Sales to other markets, including advanced applications, telecom, and medical applications -- which accounted for approximately 4% of IPG's total revenue -- increased by approximately 30% to $9 million. The increase was primarily due to strong performance in advanced applications and telecom.

High-power laser sales, which accounted for 57% of total revenue, increased 3% year over year to $118.2 million. Double-digit growth in cutting applications was partially offset by a decline in welding related to the automotive industry, which we believe is primarily due to the timing of projects and orders, as we expect welding sales to improve over the remainder of the year. Affecting the comparison this year is that we benefited from several million dollars in revenue last year from a one-time order for a novel surface patterning application as well.

We believe that we are at least maintaining market share, as evidenced by the fact that total kilowatts of high-power lasers increased by approximately 17% from Q1 2015 to Q1 2016. In part, the difference between revenue growth and total kilowatts sold is due to the drag of foreign exchange on reported revenue, product mix, and also because we continue to reduce selling prices as we decrease costs and improve performance.

This is a key element of our strategy, and is done in order to maintain our competitive position. And also to drive an increase in the demand for high-power lasers in new and existing application, which we believe will drive a continued expansion of the total laser market over time.

Pulsed laser sales decreased by 4% year over year to $28.6 million due to lower year-over-year demand for marking and engraving applications as a result of increased competition as well as pricing pressure in China. At the same time, there was strong demand for our high-power pulsed lasers for marking and engraving, and our new generation of kilowatt-class nanosecond lasers, which are being used in cleaning and other ablation application.

Medium-power laser sales increased 3% year over year to $22.6 million or 11% of total revenues, primarily due to continued growth in fine-cutting application. Again, growth was achieved despite increased price pressure in China and elsewhere due to increased competition.

Sales of QCW lasers, which are mostly used for fine welding and cutting, decreased by 14% year over year to $8.6 million and accounted for 4% of total revenue. The decline is primarily related to previously mentioned timing of orders for fine-welding and hole-drilling applications. Revenue from low-power lasers decreased 14% to $3 million due to lower medical sales year over year.

Other revenue, including amplifiers, laser systems, service, parts, accessories, and change in deferred revenue, increased by 35% year over year to $26.2 million, primarily as a result of higher telecom, laser-system, and laser-accessory sales.

Now looking at our Q1 performance by geography. Sales in Asia increased to $106.6 million or by 2% year over year. Within that region, sales from China increased 9% to $61.6 million. We achieved growth in China from continued demand for welding applications and solid growth for cutting application in the face of FX headwinds and continuing competition, as noted above.

In Japan, sales decreased 5% year over year to $19.8 million, primarily due to the timing of orders and projects for automotive welding application. There are a couple of other points to note in relation to this performance.

First, that North America is benefiting from an increase in demand for cutting lasers that is being driven by Japanese OEMs placing orders for systems directly in North America rather than in Japan. Second, the macro economic situation in Japan seems to be more challenging than elsewhere. In Western Asia, we saw solid growth in Turkey, driven by higher demand from our cutting OEMs.

European sales increased 5% year over year to $68.3 million, driven by strong growth from our cutting OEMs, partially offset by weakness in Russia related to the economic environment there. Germany was relatively flat, as higher demand for laser sintering applications and high-power pulsed lasers was offset by weaker demand for automobile-welding application.

North American sales grew 11% year over year to $31.7 million, driven primarily by increased sales in cutting applications and continued strength in advanced application.

Now working our way down the income statement. Gross margins of 55.2% were slightly higher than our range of 50% to 55% as a result of the good absorption of manufacturing costs due to high levels of production. While the high level of production benefited gross margins, it also resulted in an increase in inventory.

There were also a small benefit to gross margin because in Q1 2016, we allocated some diode costs to R&D expenses because the diode group devoted resources to designing and developing a new generation of diode chip. When this chip is introduced to production, it will have better performance and lower cost.

In real dollars, sales and marketing expenses increased to $8 million from $7.5 million a year ago. While they were slightly higher as a percentage of sales, to 3.9% from 3.8%, respectively.

Research and development expenses increased to $17.5 million from $14.2 million a year ago. As a percentage of sales, R&D increased to 8.4% from 7.2% 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, including the diode R&D mentioned above. R&D continues to focus on improving existing products and components, 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 increased to 6.7% of total sales compared with 6.4% one year ago. General and administrative spending in total dollars increased to $13.9 million from $12.8 million a year ago.

Operating expenses for the first quarter were $44.4 million, including a foreign-exchange loss of $5 million, compared with $25.8 million a year ago, which included a foreign-exchange gain of $8.8 million. First-quarter operating income was $70 million or 33.8% of sales compared with $82 million or 41.2% of sales in the first quarter last year. Excluding foreign exchange, operating margins were 36.2% and 36.8% in 2016 and 2015, respectively. Our tax rate in the first quarter was 29.75%.

Net income for the first quarter decreased by 14% to $49.3 million. On a diluted per-share basis, we reported $0.92 for the first quarter compared with $1.08 a year ago. In Q1 2016, the foreign-exchange loss decreased EPS by $0.07, while in the same quarter last year, it benefited EPS by $0.11.

If exchange rates relative to the US dollar had been the same as one year ago, which were on average euro 0.89, Russian ruble 63, Japanese yen 119, and Chinese yuan 6.15, respectively, we would have expected revenue to be $5.4 million higher, gross profit to be $2.8 million higher, and operating expenses would have been $1.1 million higher.

Now turning to the balance sheet. We continue to maintain a strong balance sheet, ending the quarter with $613.7 million in cash and cash equivalents, $126.3 million in short-term investments, and $19.2 million of debt.

At March 31, 2016, inventory was $226.9 million, up 11.4% from $203.7 million at year-end 2015. Approximately $10.6 million of the increase is related to foreign-exchange translation impact. Excluding the translation effect of changes in exchange rates, inventory increased by approximately $14.1 million, as manufactured components and finished lasers were placed into inventory. This in turn benefited absorption of our manufacturing costs and gross margin.

Our current level of inventory on hand amounts to approximately 220 days -- 222 days compared with a target range of 180 days or less. On a forward-looking basis, inventory days are more reasonable.

Accounts receivable were $146.5 million at March 31, 2016, or 64 days sales outstanding, compared with $150.5 million at December 31, 2015, or 62 days sales outstanding. Total accounts receivable decreased due to the decrease in sales from Q4 2015 to Q1 2016.

Cash provided by operations during the quarter were $64 million. Capital expenditures for the quarter totaled $25 million. We continue to 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 to support future growth. We intend to seek financing for one of the facilities that will reduce cash expenditures between $80 million and $90 million.

And now for our expectations for the upcoming quarter. The positive takeaways from the first quarter were continued strength in our core cutting application worldwide and overall strong growth in China and North America. Results in China were pleasing, and revenue there grew 9% despite foreign-exchange headwinds.

Further, we saw customers increase their demand for our unique high-power products for applications such as cutting and additive manufacturing. Overall, growth was affected by foreign-exchange headwinds, timing of automotive welding orders, and lower QCW sales from lower demand for current microelectronics investments.

Also, we are not alone in referencing the quarter was impacted by the ongoing mixed and uncertain macroeconomic environments and a difficult start to the year, particularly in parts of Asia and Europe.

We currently expect revenues for the second quarter to be in the range of $235 million to $250 million. We anticipate Q2 earnings per diluted share in the range of $1.10 to $1.25. The midpoint of this guidance represents quarterly revenue and EPS growth of approximately 3% and 2%, respectively, year over year.

EPS guidance is based upon 53,621,000 diluted common shares, which includes 52,898,000 basic common shares outstanding and 723,000 potentially dilutive options at March 31, 2016. This guidance is based upon current market conditions and expectations and is subject to the risks we outlined in our reports with the SEC.

It also assumes exchange rates relative to the US dollar of euro 0.9, Russian ruble 70, Japanese yen 113, and Chinese yuan 6.51, respectively. I want to reiterate that we do not attempt to forecast transaction gains or losses related to change in exchange rates.

Taking into account our Q1 performance, our Q2 guidance, and current macroeconomic conditions, we have to recognize that our ability to achieve double-digit growth for 2016 is more uncertain than it was previously. We also have to recognize that achieving the growth target would now require growth to accelerate more than we initially estimated for the second half of this year.

As a result, we have to recalibrate our growth trajectory with current data, and we are adjusting our top-line growth targets to be within a range of 5% to 10% this year. These targets are based upon our current outlook, which can change with foreign-currency exchange rates, 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.

We continue to see excellent opportunities to expand our business through both existing and new OEMs and new end users as we develop innovative products to address applications beyond our core markets.

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

(Operator Instructions) Patrick Newton, Stifel Nicolaus.

Good morning, Valentin and Tim. I guess a clarification before I get to my questions. Tim, I think I missed your quarterly pulse-laser revenue and other revenue, if you don't mind repeating that for me.

Let me find it for you, Patrick. Pulsed revenue decreased 4% year over year to $28.6 million. Other revenue increased 35% year over year to $26.2 million.

Wonderful. Okay, thank you. And then just getting to my questions, I guess on the growth side with taking down the full-year expectations, can you help us understand what changed? It seems that China was a positive surprise in the quarter. The welding, which seems to be soft, you multiple times cited timing, so it appears somewhat temporary. So can you help us understand the delta as you sit here today relative to entering the year?

No, I think you're right. There's positives and some negatives. China's performing well; North America's performing well. Japan is probably a bit weaker than we want it to be.

I think when you start the year with a slightly weaker-than-expected quarter and you've got the drag on foreign exchange potentially affecting us a little bit more than we expected, and then Q2 guidance being a bit lighter than we want it to, the math simply -- part of it is you have to look at the numbers and go, you're going to have to see a very large increase in the second half of the year in order to achieve that top end of the range.

So we feel that it's prudent to give a wider range, given those dynamics as they exist today. So it's a bit of a mixed bag, and there are positive and some negative things out there.

The welding side, we do expect to improve. There is, for example, several significant orders for welding applications that should be delivered in Q2. And then we're expecting, as we mentioned, the qualifications from one company where we are qualified for all of their transmission welding. That should start to ramp not just this year, but hopefully over the coming longer term as well. So it's been a difficult -- when you start the year in a difficult way, it's difficult to sort of make it up dramatically.

When we're talking welding, it was weak only one quarter and it's only related to automotive application. But we [well said] that the [multi weld] is due to some problem -- troubles, which some of the core, biggest automotive companies have events happen throughout the month and so on.

But the implementation of our new brazing and the dry [poko] welding and other technology are growing very well, so we expect first jump in the welding and automotive next quarters. But we more hope to go in with new applications; I mentioned some of them. It would be very much volume application with very much higher yield in profit margin than for the [margins], and so we are very optimistic for our welding business in nearest future.

Great. And then I guess for my follow-up, I want to stick to the growth thought process. I think looking into 2Q and 3Q, investors were expecting strength from consumer electronics product refresh from a large industry player. And then also, I think there is an expectation that cutting OEMs in Japan will start to more aggressively move to fiber.

So I guess with a soft Q2 guide, are those two drivers perhaps coming in below expectations? Are they solid but offset by weakness in other areas? Or should the anticipated benefit from Japan and consumer electronics be more of a 3Q phenomena?

Well, on the consumer electronics side, you never get significant lead time on any of this. The lead times given are very short. So the visibility into that is still limited, but the expectation is still there.

On the Japanese side, one of the dynamics I mentioned was -- there are two or three things, actually. First of all, there are significant orders placed by one of the main OEMs in Japan, which is expected to be ramping in demand probably more now in Q3.

The other dynamic on Japan, though, is that some of the demand from the Japanese cutting OEMs is actually driving improved performance in North America. And there is also a significant welding order from one of the major Japanese automotive companies that has been placed in North America as well for deployment in North American factories.

That's business was developed by our Japanese group. So you have to take that into account a little bit. So that would be how I would characterize the Japanese situation a bit.

Consumer electronics, we would probably use integrative (inaudible) lasers, but now we're working directly with some of the major, these customers [in the tier] directly will open even one of them, draw in a laboratory in California, sell it for profit in development of new process for these customers, one of the biggest, largest customers in the market.

It's all going very well. So we're not -- with some other [alter] we are working with westerly peers and other peers. So here it new and a new process for the world. In the case we're working here to supply, directly, full system production (inaudible).

Great, I appreciate the details. Thank you; good luck.

Joe of Longbow Research.

In automotive, you addressed what's happening in welding. But in core cutting, activity there seems pretty good. So maybe expand a little bit more on your expectations for activity, let's say, relative to investor concerns that we are at quote-unquote peak automotive investments. Are you still confident that fiber remains a strong priority in outgoing automotive investments? Thanks.

In general, yes. I mean, there are many new applications being developed. On the cutting side, it's very difficult to get direct information on how much is going into automotive because you sell through the integrators.

In general, we reference the cutting demand by the total market. So the fact that that business continued to grow at double digits and we continue to pick up market share for cutting and we continue to see the trends towards higher-power lasers, it's a big benefit.

And then on the other side of the automotive, you've got, we mentioned -- sort of it's either joining or cutting, right? So you've got the new trifocal system for welding; you have zinc-coated steel. That complements the brazing system that's being introduced.

You've got the transmission win, so -- of course, within automotive, the move towards lasers in total continues to be relatively slow. And as Valentin mentioned, you've got some issues that some of the largest manufacturers are facing, but the trends continue. We don't think there's an underlying change to that trend.

The automotive, it's now a situation. It's -- we practical all major, the carmakers, have each of them multi-hundred laser use in major products, [body-wise] and other, these components parts manufacturing. It's not like, what, a couple years before, it was tens. But now hundreds; typical 150 to 150 lasers for one customer. It's practical all major automotive markets.

Now with our laser fully qualified by all these customers, it's major product for such -- they use any new plants and so we are sure there will use our laser definitely, for these.

But the problem in the automotive now that they don't -- few of them planning to build new factories. In current factories, they don't have problem in production lines. They prefer to use old technologies -- don't change technologies by much better. With a technology much better, it's not productive, but nobody looks in paying less than this.

But we're working now with small -- our positive [friends], we start to work with new customers, new carmakers who with electrical cars who are now building such a product to build new factories. If new factories always is the best choice, [in must] choice for productions.

Typical in markets for CO automotive, for welding, major welding, and cladding and so on. Whereas for cutting, it's still stuck in place and we believe it would be used, but not by hundreds, but by thousands lasers per one customer.

Helpful, thanks. And then as my follow-up -- on the new diode developments, can you talk through it just practically and then also financially? So first, when is the timing of when you will ship? And help us understand whether the benefit you're seeking is more cost and yields, or more performance?

And Tim, along with that on the financial side, can you address whether we should have R&D dollars? I would assume rising throughout the year here, along with sales at least.

I will introduce a new technologies, new-generation technology in the high power and other lasers. It includes new diodes, new fibers -- much more efficient -- new fiber [logs], new -- these -- all these solution. It will put it in diodes power practical per one chip, new chip, will grow 50%, even 70% per chip higher than before with higher [support chain]. The same with higher lifetime.

So as a result, we can decrease [the rope], the cost addition. Each year practically 15% to 20% we cut the cost of our major products. But there is no way we would be able to make even much better savings. And so our profit -- and so it will allow us to control prices and not allow other people to get more share in the market from outside, our margins will grow additionally.

We estimate very much savings and grow our profits during the next 1-2 years. Multi-tens millions of dollars additional profit, only due to could drop cost of our current products.

Tim, if you could address the cost side, too, then I'll bow out. Thanks.

We're not going to give anything specific on that yet, as development is just going on. The best way to reference it is with regard to the average increase in power that we are targeting, which would be 50% to 70%, as Valentin mentioned, without a significant change in the material cost of the chip. So you'd expect to see -- I haven't done the math in my head, but that drives a 30% to 40% decrease in average cost per watt.

That's helpful. I meant more on the modeling side. Should we have R&D scaling along with sales as we go out throughout the year here?

No, I think R&D at the moment is pretty much fully baked in. There was a lot of costs that went into R&D, both on materials and the diode cost allocations in Q1. So we're not expecting that to ramp dramatically at the moment, as there's a lot of activity that happened in Q1.

Tom Hayes, Northcoast Research.

Tim, I was just wondering -- you guys talked about the growth in the power level of lasers and the additive applications. I was just wondering if you could talk about the where the average kilowatts going into the applications are now, and what's your expectations for that market?

You know, with cutting, for example, I want to take for you and say what was the most people, we would use 2 or 3 kilowatts of power. Then we provide them opportunities and they are down to 4 kilowatt now. Now they have a customer start to use 6 kilowatts, OEM customers, and have them also -- dynamic of them. They've gone to 8 kilowatts power per one cutting station.

We will provide them now the also open opportunity to use 10 kilowatt to 15 kilowatt lasers. It still demonstrates a very big win with such -- cutting with so high power.

On the additive side, Tom, people are transitioning from 500- and 700-watt lasers to still relatively low power on the kilowatt scale -- 1 and 2 kilowatts. Historically, we have had some customers buy lasers as high as 10 kilowatts in power for that additive application. So that transition has only just really starting.

Okay. And market size, you think for that? I mean, you've talked about it before; has that changed at all?

Within the additive --

Yes.

Total additive market. So I don't think it fundamentally changes the additive market. At the moment, it probably reduces some of the consumption of the lower-power lasers because it makes them more efficient and effective to produce a system using the higher power.

But (inaudible) application market, it's not just 3D printer, as people understand. It's a lot of cladding and others -- the same from power [bay] and so on -- to make protection and cladding of these many parts. But it make it much more -- according to our estimation, 10 times more than -- more narrower 3D print, make a 3D print and format our applications.

But this market will grow much faster. It will use very high power lasers. And we develop, again, new technology, very high productive, efficient technology for cladding and many kinds of cladding. It's the way they buy metal production and many other application. It's [really a] very much -- a lot of applications very much market is growing.

(Operator Instructions) Jim Ricchiuti, Needham & Company.

Question is regarding bookings and backlog. Tim, you gave a little bit of color in the last call about your year-end backlog and frame agreements was. Did you revise the thinking in terms of dialing back on the full year after conversations with customers on these frame agreements? And just some color on the bookings.

No, I think one of the things that we faced was a bit of a more difficult start to the year in terms of bookings. Bookings through, if you started to look at the end of March and the first three weeks of April, have actually started to pick up fairly nicely. So the run rate on bookings in the last month is significantly higher.

The problem is when you have a bit of a slower start, then opening backlog at April was probably not as high as we wanted it, which means that Q2 is a bit more -- is impacted in terms of revenue expectations than we'd like. And then making that up in the second half of the year is more difficult.

A lot of those frame agreements are in Europe and in China, and there's been no significant change there. We're expecting a good revenue quarter on China in Q2; probably a bit lower growth in China because they had a very strong Q2 a year ago and you've got the FX headwinds there. So there's no fundamental change to that; it's more the nuances around it that affect the overall growth that you may achieve for the year.

Joe Maxa, Dougherty & Company.

I was -- get some color on the new products that you're introducing. There was some talk last quarter, you were expecting $50 million to $100 million in revenue this year? And I'm wondering if that's still on track from your initial expectations.

If you look at some of the newer products we've got out there, including the systems, the accessories, the QCW, the green, the high-power pulse lasers, revenue from all of those products combined in the first quarter was about $30 million. So yes. And it -- we are tracking to have significant revenue from product that if you go back three years or two years was not really significantly contributing to revenue.

The further growth should be on the accessories and systems side, and then the continued growth on the high-power pulse; QCW should perform better in the remainder of the year. And then you've got some revenue that also came out of the cinema-projection system in the first quarter. In the second half of the year, we expect to get something from that. And then the pico-second and UV, hopefully in the second half of the year, will begin to contribute.

So those new product are genuinely contributing to the underlying revenue of the Company at the moment and are doing so on an increasing basis. We also saw some of the telecom products start to perform a bit better in the second half of last year and even into the first quarter of this year. And much of that is based upon some newer developments as well.

Bobby Burleson, Canaccord Genuity.

Thanks for taking my question. Yes, I just wanted to revisit pricing. You've talked about competitive primate pricing dynamics in China. And I'm wondering if we're at the point where some of these price-dumping companies are at a level they can't continue lowering prices. Or if some of the government support they get will allow them to sustain further price decreases. Thanks.

The situation is not really clear. We do believe that they are limited in what they can do, continuing to put pressure on it. And people we speak to in China believe there may be a period of time that you continue to have to endure, but that in 18 months or so, the market will become a bit more rational. So their view -- so people we speak to in China locally, even some of the integrators, think that some of the support -- companies are getting, will be reduced.

There are a couple of them that are stronger, though, so that will likely survive. And then you've got some other incumbents outside of China who come into the market, who are being very aggressive around pricing. We think they probably have to become a bit more rational because they probably try to get into the market with very, very low margins on stuff. And if they want to succeed in the way that they envision they might, they probably have to be a bit more rational in time going forward.

But the picture around that is not that clear, Bobby. You never have a great intelligence around to it.

The messages from China, including our major OEMs, that now our competition for nanosecond pulsed laser for marking is they are practically working without any margin at all, or below with a negative margin. So they could not stay such way a long time, even our OEM -- Chinese OEM, large OEM.

So it can -- they throw a couple -- product [causes] through couple years, although some of the people will disappear from the market and remain only a few, the main players. So it's -- we still -- even weakened prices, we still have a very good margin either way. Of course, it impacts our revenue in total revenue, but from the point of quantity, we still are growing our quantity sales of these markets in a way that the Chinese market -- we don't like to give this land to these people.

Jagadish Iyer, Redstone Technology.

Thanks for taking my question. Before I have my questions, just a quick clarification, Tim. Did you call out the services number -- services and parts?

It's within other at the moment, still. So that was the other revenue, including systems, service, and accessories, grew by 35%.

Okay --

$26.2 million.

Oh, the services was $26.2 million?

No, it includes all other revenue, which includes -- $26.2 million includes amplifiers, laser system, service, parts, accessories, and change in deferred revenue.

Okay, got it. Okay --

It's all embedded within that.

Okay, got it. So two quick questions for you. First on given how you have reset expectations for the growth, how should we think about your product portfolio mix as we go through the year in terms of the high-power, medium-power, pulse, and QCW?

And given this kind of a growth-rate situation, why are you adding -- why are you spending additional CapEx and having inventory at this point of time, and what does it mean for gross margins? And then I have a follow-up.

I think there were two questions in there already (laughter). You've got -- no, we don't really give a lot of guidance on product mix. Clearly, if you see the welding market pick up into the second half of the year, in Q2, you'll see an improvement in growth of high-power lasers and QCW lasers. So we're expecting that to happen.

You should continue to see some improvements in total sales of pulse lasers if the consumer electronics buildout that's expected happens; that should also benefit the QCW. And then you are continuing to expect to see growth on the system side, the accessories side.

We've got a very good frame agreement order for a significant quantity of medium-power lasers. So there's no fundamental change to the mix, I don't think, going -- during the quarter or the year.

With regard to the investments in inventory, so first of all, we see -- despite a slower start to the year, you are seeing a pickup in revenue coming into Q2. So in order to achieve we've got a very strong target or significant target for China, China needs to have inventory on hand at the beginning of April in order just to meet their April revenue number. And then we will continue to ship to them during the quarter. So the inventory build is partly driven by the dynamics on the revenue increases.

In terms of the investments that we've got out there, you know, we are focused on building the Company not just for the next quarter or two fiscal quarters; we're looking at building the Company over the next two to three to five years.

And with all the new product introductions, the increased demand that we expect to see in terms of component throughput, systems development -- we certainly have not given up on the UV and the pico-second lasers that are going to be introduced fairly shortly -- there's a tremendous amount of new product that will have to be built over the coming year. So the investments are required.

And even with these investments, the capital intensity of the business remains relatively low. So we continue to have a longer-term focus on where we want to take Company over the next three to five years. We may be having a bit of a weak time at the moment, but it's certainly not something we want to continue to live by.

Also, we develop new and new technology components technology, so only this last half of year, including this quarter, we develop for them new technology, nonlinear increase. So we never before made crystal grow; crystals are made. Now we have to make it because we are going to UV business.

So on one hand, we need to use [make whole this whole]. And we develop tens other new components of all type. Each of them have to have very good, high-quality facilities. And so you have to take in mind the investments we have made, because in units -- units -- we are growing every year at a minimum is 25% to 35%.

High-power lasers, for example, last year in units, we increased manufacture our production by 75%. This year also we have to increase production in high-power laser again additional 30%. It's a very serious demand that we have to build new facility much more perfected and so on. Also, application [ways] to work directly with customers to provide them whole service.

Mark Miller, The Benchmark Company.

You had cited last quarter to $50 million to $100 million in new product sales. And it seems like the first quarter was on track for that, which from your revised guidance would indicate most of the growth we're seeing this year, year over year, is coming from these new products. Are there any areas that you expect year over year to decline?

It's difficult to put a finger on that. The other side that is improving is the cutting market; we mentioned is up 11%. Probably if you going to look at something that's going to have a difficult year, it would be the lower-power pulsed applications. That would be the one area where -- that's where the pricing pressure and competition --

A decline in the revenue, but not in quantity or units.

Tom Diffely, D. A. Davidson.

So it looks like Russia has been weak for a while now. I'm just curious -- what is the current size of the Russian exposure, and what is their risk going forward, do you think?

In total revenue, it's still very limited for third-party customers. So Russia primarily is supplying product into China to support the pulse laser market, the medium-power laser market. Direct sales in Russia are 2% of revenue at the moment.

Russian revenue in total were 25%; it contribute total business 25%. But it's the all practical export sales inside Russia is still very low due to the collapse in the currency and these sanction and so on. So practical customer, even signing contract and claim then have to revise immediately again shortly budget and so on.

So three years was very bad from this point. Now we have moved in some stabilization in second half this year, on [looks] sales. And then directly in Russia, we'll start to jump [help] very seriously.

Brian Gesuale, Raymond James.

Most of my questions have been answered. But just wondering maybe if you could expand a little bit on what you're seeing consolidation-wise, and what that's doing competitively. But also maybe dovetail any thoughts you might have of being a strategic consolidator and putting some of that balance sheet to work towards M&A. Thank you.

The question is about olefin and other companies being consolidation in the industry (multiple speakers).

[I wonder] we don't see whether it -- or how it will change the position of the market; don't seem -- it's very difficult, would be, to manage this. So watch and not so good manage (inaudible). Because I don't understand how they will make this at all what it can probably create for them with much more problems than before, if nothing else. But from point competition with fiber laser, we don't see any chance for improvement.

In terms of IPG's view on consolidation, we continue to believe that's not the best way to grow the Company. We are looking for and continue to look for more technology add-ons and acquisitions that really enhance our product portfolio, our technology leadership, or leverage us into end markets that we're not particularly strong or we want to get a stronger entree into.

We're still not in view of -- certainly what our strategy is not to be a participant in the consolidation of the laser industry, primarily because many of these technologies are not particularly complementary to each other. And we're looking for really complementary and strategic acquisitions that grow our business.

Grace Lee, CLSA.

This is grace sitting in for Jeremie Capron. We have a question about investment. Can you quantify the step up of the OpEx and CapEx intensity? And then also how it will impact the operating margin, and then what kind of duration we should expect?

I think if you look at the EBITDA in Q1 with a relatively low revenue number, the underlying operating margins at 36%, if you exclude the FX, are right in line with where I would have expected. With the guidance ranges provided for the second quarter, I expect to see that step up a little bit. I'd expect to be in the range -- like at the top of that range, I'm modeling like 38%.

In our view, those continue to be stellar operating margins. And they are generated whilst we continue to invest in the business on the sales and marketing side, the R&D side, even the G&A side to support the business as we go forward. And we believe those investments are extremely important.

So we are -- I mean, in terms of where the model stands right now, excluding the impacts of FX, I'm right where I expected to be. And an operating margin for Q2 and the rest of the year, if we can achieve the continued growth, we'll still have a very, very strong model.

In terms of CapEx, I talked about that when someone else asked the question, that our focus is broadening the Company for the next multiple number of years and executing around a plan that involves improving the product portfolio, improving total throughput of components, building new types of components. Valentin mentioned the crystal investment that we've got there. So our focus is more on the long term with that product development and those investments that are required.

There's also, as Valentin mentioned, there's continuing investment in application laboratories all around the world. We have a new apps lab in California that's going to seek to support significant opportunities with some of the consumer electronics.

There is Alabama, where there's significant automotive and aerospace industries. We've got a new apps lab in Westborough --

And Brazil.

And Brazil, we'll be investing. So it's across a different number of areas that the investment is, and it's very important for the growth of the Company. I also reiterated that I don't mean the capital intensity of the business is particularly great, given what we achieve in terms of revenue and profitability.

Thank you. At this time, I'm showing no further questions in the queue. I would like to turn the floor back over to management for any additional or closing comments.

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

Ladies and gentlemen, thank you for your participation. This concludes today's teleconference. You may disconnect your lines at this time, and have a wonderful day.