IPG Photonics Corp (IPGP) 2016 Q2 法說會逐字稿

Greetings and welcome to the IPG Photonics second-quarter 2016 earnings call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Angelo Lopresti, Senior Vice President, General Counsel and Secretary for IPG Photonics. Thank you. You may begin.

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 the management's or the Company's intentions, expectations, 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, 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 Photonics' 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, July 28, 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 will now turn the call over to Dr. Valentin Gapontsev.

Good morning, everyone. Our second-quarter results continue to demonstrate IPG's fiber laser technology leadership position. We achieved a record quarterly revenue of $252.8 million, gross margin of 54.5%, and earnings per diluted share of $1.25, a 9% improvement over the same period last year. In addition, we completed the acquisition of Menara Networks, expanding IPG's telecommunications offerings.

IPG's commanding leadership position in our core markets is the result of our advanced technology and performance advantages. Our ultra-high grade proprietary components and vertical integration provide us with the best-in-the-industry figure of merit, i.e., quality and cost. At the same time, the unmatched scale of our manufacturing capabilities enables us to meet our customers' increasing demand for different types of lasers in high volumes.

We also continuously push our technology forward as we raise the bar for fiber laser innovation. These advantages are enabling us to bolster our leadership position in our existing markets.

We believe that we are at least maintaining market share as evidenced by the fact that total kilowatts of high power and medium power lasers increased again by more than 20% from Q2 2015 to Q2 2016, while revenue for these product lines increased by approximately 6% only.

The difference between revenue growth and total kilowatts sold is due to lower selling prices related in part to competition because we want to make sure that we maintain market share. It is a significant achievement but it does mean that we have to invest again in the production capacity and operating structure in order to support the growth in volume of product and work hard to reduce cost and maintain target gross margins.

At our Investor Day in May, we outlined the breadth of IPG's growth opportunities. I would like to highlight a few of these new key products and market opportunities.

We continue to work on diversifying our business and developing new products for new applications. Year-to-date, our systems business has grown by slightly more than 50%. This growth has mostly come from the United State, while in Russia, we continue to work on numerous opportunities with our new orbital laser welding system -- unique system -- for oil well casings; systems for welding transcontinental gas pipelines, also unique; new technology for welding large titanium alloy parts and other machine systems.

Our welding systems have recently been certified according to National Standards during this quarter, and proven to have significantly faster welding speeds with record weld quality.

We are continuing to work on the Laser Luminaire system for cinema projection and currently have several prototypes in long-term internal tests, and continue to build fast-growing interest from several Tier 1 OEMs.

Our low-power UV marking system is now ready for launch and we are in discussion with several customers about evaluating that system. Some of these potential customers have many hundred production lines around the world using UV markers. Similarly, we are building the first production batch of our ultra-fast pulsed lasers in the short-picosecond range and femtosecond range with the intention of providing these to prospective customers for testing and evaluation.

While the medical business is likely to take a longer time to qualify, we are continuing to work on several interesting applications in dental, urology, ophthalmology and aesthetic areas.

During this quarter, we also closed on the acquisition of Menara Networks, an innovator of enhanced optical transmission modules and systems, allowing IPG to offer more integrated telecom solutions and expanding our current telecom product offerings. The acquisition is in line with our strategy to make bolt-on acquisitions that provide us with the talents, technology and products to enter large complementary markets.

I want to note the success we are having with the increasing adoption of our 8 to 10 kilowatt fiber lasers with Tier 1 cutting system OEMs. The power, quality and reliability of these lasers are unique, which contributed to their adoption by several OEMs in Europe and China.

Also, our high power welding heads are starting to gain traction in the locations where we introduced them. These new advanced heads are a better solution for our customers, and we

have developed a relationship with other companies to accelerate their adoption and improve their performance.

On other product development news, we are looking forward to the testing in Q3 of our new UV integrated marking system for plastics. This is a large opportunity for IPG. This product will take advantage of the same value propositions that historically allowed IPG to penetrate new and large applications, namely high quality beam, higher uptime and lower price.

As we enter the second half of 2016, we remain focused on improving our existing products, launching innovative new products and applications that broaden IPG's presence beyond our core markets, strengthening our technology lead, and positioning IPG to expand our business with existing and new OEMs.

We are making significant progress on the testing and development of these new product lines and applications, and look forward to their launch to the world market.

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

Thank you, Valentin, and good morning, everyone.

Second-quarter revenue grew 8% to a record $252.8 million from $235.1 million a year ago. Materials processing sales increased 6.5% year-over-year to $239.1 million, accounting for approximately 95% of total sales during the quarter. The increase was primarily driven by solid demand for IPG's core cutting and marking applications, as well as strength in emerging applications, including laser sintering, annealing and ablation.

Sales to other markets, including advanced applications, telecom and medical applications, which accounted for approximately 5% of IPG's total revenue, increased by approximately 28.9% to $13.7 million. The increase was primarily due to improved telecom sales, driven by IPG's recent acquisition of Menara Networks. This was partially offset by lower sales of medical applications to one customer.

High-power laser sales, which accounted for 56% of total revenue, increased 7% year-over-year to $141.4 million. This growth, which demonstrates our continued leadership in this area of the market, was driven primarily by strong sales in cutting and welding applications. As Valentin mentioned, overall growth of high-power lasers was impacted by lower selling prices as kilowatts of power sold increased by more than 20%.

Pulsed laser sales increased by 14% year-over-year to $36.6 million. We continue to see strong growth in our high-power pulsed product with strong demand for marking and engraving applications as well as for cleaning and ablation. Medium-power laser sales increased 2% year-over-year to $27.1 million, or 11% of total revenues. Higher demand for fine-processing, additive manufacturing and laser sintering applications continues to be offset by increased pricing pressure in China and elsewhere due to greater competition.

Sales of QCW lasers, which are mostly used for fine welding and cutting, increased by 3% year-over-year to $16.2 million, and accounted for 6% of total revenues. The increase is primarily related to increased sales for fine welding applications.

Revenue from low-power lasers decreased 18% to $3.1 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 13% year-over-year to $28.3 million, primarily as a result of higher telecom and laser systems sales.

Now looking at our Q2 performance by geography. Sales in Asia increased to $143.1 million, or by 4% year-over-year. Within that region, sales from China increased 4% to $96.4 million, driven by continued demand for welding and cutting applications. On a constant currency basis, China was up double-digits year-over-year. This growth was achieved despite increased pricing pressure in China and growing competition.

In Japan, sales increased 8% year-over-year to $20.3 million as we benefited a little bit from the stronger Yen. In Western Asia, we saw sales decrease to $12.7 million from $14.7 million in Q2 2015 due to lower sales of lasers for cutting applications.

European sales increased 9% year-over-year to $77 million, driven by strength in cutting and ablation applications, and record sales in laser sintering. We experienced good growth in Germany related to increased demand for marking and engraving applications. We also saw strong growth from countries where we have recently made investments or recently hired new managers and sales personnel, including Poland, India, United Kingdom, Spain and Eastern Europe.

North American sales grew 21% year-over-year to $32.3 million, driven primarily by continued strength in cutting applications and increased sales in welding applications, as we expand our presence with US automakers and their suppliers. This was partially offset by lower sales of medical and advanced applications.

Now, working our way down the income statement. Gross margins of 54.5% were strong and towards the top end of our guidance range of 50% to 55% as a result of the strong revenue performance and continued reductions in the cost of our components. These benefits were offset by an increase in unabsorbed and period manufacturing expenses and by inventory provisions, which totaled approximately 2% of revenue, or $5.8 million.

Sales & Marketing expenses increased to $9.7 million from $8 million a year ago, and were slightly higher as a percentage of sales at 3.8% from 3.4%, respectively. We continue to invest in this area by expanding our geographic locations and hiring experienced sales specialists to cover some of our product and application introductions.

Research & Development expenses increased to $18.4 million from $15.1 million a year ago. As a percentage of sales, R&D increased to 7.3% from 6.4% of sales in the same quarter last year. R&D continues to focus on improving existing products, developing new manufacturing processes, and launching innovative new products and applications in order to strengthen our technology lead and allow us to penetrate new markets.

General & Administrative spending in total dollars increased to $16.2 million from $15 million a year ago, while they were flat as a percentage of sales at 6.4%.

Operating expenses for the second quarter were $42.7 million, including a foreign exchange gain of $1.6 million, compared with $41.3 million a year ago, which included a foreign exchange loss of $3.2 million. Q2 2016 operating expenses included approximately $1.4 million of operating expenses and amortization related to the Menara acquisition.

Second-quarter operating income was $95 million, or 37.6% of sales, compared with $87.4 million, or 37.2% of sales, in the second quarter of last year. Excluding foreign exchange, operating margins were 37% and 38.5% in 2016 and 2015, respectively.

Our tax rate in the second quarter was 29.75%. Net income for the second quarter increased by 9% to $67.1 million. On a diluted per share basis, we reported $1.25 for the second quarter compared with $1.15 a year ago. In Q2 2016, the foreign exchange gain increased EPS by $0.02, while in the same quarter last year, it reduced EPS by $0.04.

If exchange rates relative to the U.S. dollar had been the same as one year ago, which were on average [Euro $0.90], Russian Ruble [$0.53], Japanese Yen [$1.21] and Chinese Yuan [$6.12], respectively, we would have expected revenue to be $3.2 million higher, gross profit to be $1.1 million higher, and operating expenses would have been $1 million higher.

Now, turning to the balance sheet. We continue to maintain a strong balance sheet, ending the quarter with $587.3 million in cash and cash equivalents, $126.8 million in short-term investments, and $42.4 million of debt. During the quarter, we used cash of $46.5 million to complete the Menara acquisition. In addition, we purchased the Marlborough manufacturing facility for approximately $23.8 million to increase capacity and support future growth. We financed that purchase with debt.

At June the 30th, 2016, inventory was $241.3 million, up 18.4% from $203.7 million at year-end 2015. Our current level of inventory on-hand amounts to approximately 191 days, compared with our target range of approximately 180 days. $7.3 million of the increase in inventory relates to the acquisition.

Accounts receivable were $151.5 million at June the 30th, 2016, or 55 days' sales outstanding, compared with $150.5 million at December the 31st, 2015, or 62 days' sales outstanding. Cash provided by operations during the quarter was $41.3 million. Capital expenditures for the quarter totaled $45.9 million.

Now, a summary of our new share repurchase program. Today, we announced that our Board of Directors authorized a share repurchase program to mitigate the dilutive impact of shares issued under our various employee and director equity compensation and employee stock purchase plans.

Under the new anti-dilutive program, aggregate share repurchases are limited to $100 million over a period ending June the 30th, 2018. Also, shares of common stock repurchased in the new program cannot exceed the number of shares issued upon exercise or release to employees and directors under various employee and director equity compensation and employee stock purchase plans, from January the 1st, 2016 through December the 31st, 2017.

Share repurchases will be made periodically in open-market transactions using the Company's working capital, and are subject to market conditions, legal requirements and other factors. In addition, management has been granted the authority to establish a trading plan under Rule 10b5-1 of the Securities Exchange Act of 1934 as part of the repurchase program.

The share repurchase program authorization does not obligate the Company to repurchase any dollar amount or number of its shares, and repurchases may be commenced or suspended from time to time without prior notice.

And now for our expectations for the upcoming quarter. We currently expect revenues for the third quarter to be in the range of $245 million to $260 million. We anticipate Q3 earnings per diluted share in the range of $1.12 to $1.27. The mid-point of this guidance represents quarterly revenue and EPS growth of approximately 4% and 1%, respectively, year-over-year.

In addition, based on near-term customer demand and macro-economic factors, we continue to expect full-year 2016 revenue growth to be in the range of 5% to 10%. This guidance is based upon current market conditions and expectations, and is subject to the risks we outlined in our reports with the SEC.

As a reminder, we do not attempt to forecast foreign exchange rate changes. The foreign exchange rates used for our guidance, as well as the shares outstanding used to calculate EPS, are disclosed in our press release.

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

(Operator Instructions) Joe Wittine, Longbow Research.

Congrats on the beat. You referenced price cuts in response to competition and I know directionally that's nothing new, that the price per kilowatt has obviously been naturally easing over time. But I don't recall you specifically calling it out in response to competition in the past.

So maybe a little bit more details, and including the power levels that we're referencing as the solely in low power, or are you seeing it in higher power levels as well? Thanks.

So we did actually put some disclosure about this earlier in the year on our releases, so it's not anything that's particularly new. Probably the most severe price decreases over the last six to nine months have come on the medium power, which is something we'd also called out as expecting to happen as newer entrants to the market are trying to gain market share.

In some instances, we'll find people really just trying to get that share by substantially lowering prices or even dumping product into the market. So that's probably the most severe extent of it. On the higher power level there's more in line with expectations, although the decreases have been relatively substantial over the last year. And probably more in the range of the 1 to 2 kilowatt power lasers.

The policy and pricing -- it's not only dependent on competition and also we are trying to include newer applications to make laser available for many new applications, whether it's very sensitive to the price. So we have such opportunities because we are working very hard to decrease a quarter of our products from component benefit from complete systems.

It's (inaudible) -- you are seeing we are growing in quantity of units (inaudible) to grow very fast, it's -- last three or four years, it's -- it was accounted for in the units was between [25%] to 40% each year (inaudible). This market is growing -- the penetration of fiber lasers is very fantastic and -- our prices we optimize with new applications, not only some with the most rich applications where people don't have up until now -- did not have other choices.

This application without the technology with currently people using this application there are other technologies to price for laser technology should provide not only better quality (inaudible) should be available and compete with price without the technology current, especially in welding -- it's that same what's happened in cutting and so on. As such you can build (inaudible) market.

So our competition -- fiber lasers markets now you see more and more traditional qualities so even Chinese manufacturers -- we don't like to provide the end market to Chinese people. We are beating them on the increase in our sales in China in spite of their drop in price.

Very helpful. Thanks. And then just on the P&L, Tim, flat revenue sequentially, but modeling it down, taking EPS to help us kind of categorize that in the P&L. Is it mix or is it continued OpEx scaling as I suspect?

So some increasing investment in OpEx but also probably more on the sales and marketing side a gradual increase there. But you've also got a full quarter of Menara expenses coming through on the P&L, including amortization of the intangibles, so that reduces the range on EPS by about $0.02.

Overall at the top end of the range, I'm using about 54% on gross margins in my modeling, so I'm being a little bit conservative on that, if you get to the top end of the range. So, yes, we're continuing to invest on the business, particularly sales and marketing, and then you've got the effect of the acquisition coming through a little bit.

Good. Thanks for in much.

Joe Maxa, Dougherty & Company.

I wanted to talk a little bit more about the newer products you've been launching or are in the process of launching and testing. If you take a look maybe a year or two from now, what would be your expectations of what all these new products can contribute to the business maybe as an aggregated look?

Good question. We, for example, with femto and short eco-picosecond this market is growing fast and so on but still having more and more problems, so enormous prices in market quality of product so far the current place in the market -- it's not good at all. It's still will more (inaudible) grades and industrial grade. And so ultimately (inaudible) in some application.

We introduced new unique from the point of (inaudible) products. Our product family of products -- not one product -- family of pica and then the second. On our estimation [double or three-point digit] time products in -- parameter of quality to total technical quality of product divided by cost.

So we provide much, much higher quality product and also much of it less costly. This open door for application and practical -- it's fully industry grade laser. We developed them three years in the introduction market before it was very hard qualification. And so now we're ready to enter it into the market main application and with we've started now -- have started mass production of this product.

We hope in two or three years we'll get (inaudible) market share of the current market and we've increased this market in an order of 10 and more in volume. So it is a real open door for many new applications but people are looking for femtosecond but still not able to use -- it's very complicated to use and cost.

The same with the UV market -- also a new approach, unique technology which will open a host of UV markets very, very practical in working market to market applications. The same with green laser is available -- green laser unique -- nobody has done similar in power in the area (inaudible). So it's a medium power laser still we try to develop markets with a real unique line products, different mix of products (inaudible).

(inaudible) for people with steel applications -- still not very familiar with the new opportunity it takes time (inaudible) market for infrared market it also would be many hundreds-million-dollars (inaudible) to be able to do it in five years. But also the problem -- because qualification process for each new product especially new has to pass very serious qualifications. OEMs are not able to introduce -- because it's a very long process for certification patent.

Before they would be able to use it in (inaudible) that production in factories so or medical applications. So typical quality certification two or three years typical process. But we are prepared all this new market from us in the future.

All right. Thank you. That's nice color.

Jim Ricchiuti, Needham & Company.

A question I had is two questions. Earlier in the year where you discussed the potential opportunity in the consumer electronics market, and I'm just wondering -- did that ever materialize? Or has that been pushed out a little bit?

Some stuff has come through but that has been weaker than we expected. It's really a result of the end-user in the consumer electronics market actually cycling, not just I think with IPG but other types of lasers, around into their new product lines. So those lasers were not enough old enough for them to replace them, and they are looking at how to use some of the stuff on the existing product line. So the expected investment for us on that has been less of a benefit this year than we would have hoped for.

Okay. And, Tim, I wonder if you can comment just in general on the tone of bookings? Particularly I'm curious if you have seen any -- as we went through the quarter -- any fallout as it relates to Brexit? And just in general the tone of bookings geographically?

So the tone on bookings was pretty reasonable. Book to bill was just about above -- it was a little bit above 1. Order flow through the first few weeks in July has held up. I think Q3 is always a bit of a challenge because you get into August, which is particularly slower in Europe.

Brexit has had no effect so far. I think it's way too early to see what the potential impact on that has been. The other thing to note is that the sales in the UK, whilst they've grown strongly with the investments we've made, they are still very small -- they're about $3 million year-to-date. So we continue to work on significant opportunities there.

The devaluation of the sterling there, we have to look at some of the pricing in the UK, given what's happened there. But it's just not a material part of the business and it's too early to call anything specific on Brexit.

The tone geographically on bookings, I think one of the weaker areas that we've seen in terms of expectations for Q3 is Turkey -- that's perhaps not surprising, given what's going on there. So that's affected a little bit the expectations for the quarter.

Turkish sales will be down about 50%, so sales into Western Asia are [about] $12.7 million -- $13 million. So that's a meaningful impact. The tone in China has been good. The bookings expectations in Q3 for China are pretty solid. We've got a good expectation for bookings in Japan and the guidance for Japan is good.

Europe is probably overall also a little bit weaker and the US is reasonable. I wouldn't characterize the US as growing massively. So I think that sort of covers all the different areas.

Okay. That's helpful. Thank you.

Bobby Burleson, Canaccord Genuity.

Congratulations on the upside in the quarter. Just curious in terms of the pricing pressure and growing competition mentioned in China. Are there -- is there anything incremental there in terms of what you were seeing a quarter ago? And do you expect maybe some stability at some point in pricing and the amount of emerging competition? Or is this something that's going to be kind of ongoing?

We believe that now our prices in China from low and mid in -- mid level in lasers now -- don't have any chance to beat them to win this. It does -- you've seen before Duncan where practical is our estimation of attaining margin but now it's now a correction price. We believe (inaudible).

Okay. And the wireline telecom investment in North America looks very strong in general. I'm wondering with your Menara acquisition what the kind of share of total revenues could be, let's say, in 2017 or maybe at some point in the future? Could communications be a 10% business? Or kind of how big do you see this becoming for IPG?

Menara needs to continue to develop their high-speed transmission capability, which would then put them firmly in the really emerging opportunities in the 25 gig to 100 gig and above range. That product is continuing to be developed by them and -- correct me if I'm wrong, Valentin -- but over the next six to nine months, we'd expect to have further progress on that and potentially something ready to release to the market.

At this point in time, Menara doubles -- more than doubles the size of our telecom business, growing it to about $40 million on an annualized basis, so it puts it at about 5% of revenue. If we can continue to execute on that -- it's difficult to put a time frame on it, but we would certainly like to grow it to be closer to 10% of the total business. But again putting time frames on this and driving the adoption into the end markets is probably the most complex thing to determine.

I have to correct -- Menara is not like a separate unit which will develop all the business. Menara would be part of our team -- we have distributed team in Italy Russia and the US and now Menara joins this team. We will also consider a couple of other groups which will shortly join us. We create new technology base jointly -- we hope with this team we would be able to during one year to year compete with 20 5G to 100 G and 200 G where we estimates current place and the market with new and more advanced innovative products.

Okay. Thank you for that. And then just curious on your legacy telecom business -- that's been strong. Wondering whether or not you are expecting continued strong growth in the organic growth for telecom for the balance of the year?

There's a couple of deployments I'm looking at around the world that are expecting the -- what was the original telecom business or the existing telecom business should have a bit of a stronger second half of this year, given those deployments they are working on.

We have (inaudible) quality of customers which have started to use our telecom product -- in the US we have serious cadence -- one of the biggest was Tier 1 series which is our components -- we have the same in Vietnam for example we have Vietnam telecom in the south of Brazil we said now we are talking to India and starting serious talks in Brazil. But a major target of ours is to get serious market share in the telecom business in Russia.

Okay. Thank you.

Jagadish Iyer, Redstone Technology Research.

Thanks for taking my question. Two questions, Tim and Valentin. First, I just wanted to understand on your magnitude you had indicated that you are seeing some price erosion. How do you see gross margins evolving in the context of how much headroom you have in terms of cost reduction as we proceed through the second half of this year and into next year? And then I have a follow-up.

So a couple of comments on that. First of all, just as you relate a little bit to the questions asked previously, the price erosion that we've seen is really relative to Q2 a year ago. Pricing has been more stable I'd say Q4, Q1 and Q2 of this year. So you haven't seen another step-down in pricing.

Relative to that, the gross margins -- if you look at the individual margin profile on the products, has continued to hold up pretty well. So then you come back to the other part of the equation, which is really how well we are absorbing, and continuing to absorb, the fixed cost in the ongoing investments.

So certainly in Q3 at the bottom end of the revenue range, you would expect to have a weaker gross margin. And then similarly in Q4, you need to see a good quarter in Q4 in order to maintain those gross margins. So it continues to come back to how well you are really absorbing the fixed cost base, because the margin profile of an individual product continues to be pretty good.

And then into the next year, it's going to be a combination of those factors. Does pricing hold up? Can we continue to bring costs down and maybe get some benefit from it? And then how well we can grow the business and absorbed the fixed cost base.

So there's less room I think for maneuvering a little bit, given the pricing pressure in the market, but we still remain in a very strong position relative to our cost and the profit margin off the product -- it's really quite amazing what we've achieved on the cost reduction side.

On cost of our products that we probably want to decrease the cost of making automation and new solution which is a cheaper and simple solution but provides higher-quality. From (inaudible) our growth margin is growing -- not going down but growing in spite of price decrease.

But we introduced new more complicated machines systems like machines and of course in the beginning these new products won't provide us or will make some impact on the gross margin but still not so much to decrease cost from our frame -- the 2% to fitted 5% 50% to 35% 55%.

We are compensated by increasing our growth margin from laser sales. From the point of price we don't see our need for the far this drop in price this year or second half this year or even next year. Maybe some -- not a serious impact to our price this time but again -- the new product wins ratio will have much higher prices but provide new opportunities to customers. So we don't see any impact of the pricing on our gross margin revenue.

That's very helpful, Valentin. And just as a big picture question, Tim, you had -- prepared remarks had said that you reiterate your 5% to 10% growth. Given all the new product rollouts and the markets and applications that you are targeting, some of them which you highlighted in your Analyst Day, can you get back to the historical growth rates of mid-to-high-teens possibly next year? Thank you.

We're not going to give -- it's way too early to call out what the growth rate is going to be next year. It's uncertain what the market is -- if the product introductions are happening, the evaluations have to go on. So there's a tremendous amount of work going on in that regard. I'm not going to get drawn into a longer-term guidance next year. And at this point in time, it's just way too early to do it, Jagadish.

Thank you, Tim. Thanks, Valentin.

Patrick Newton, Stifel.

Good morning, Valentin and Tim. Thank you for taking my questions. Diving into Menara, is it right to think that it contributed about $4 million in the June quarter and should add about $5 million to $6 million in the September quarter? And then just trying to understand the full year guidance in regard to Menara, is the 5% to 10% growth rate you are targeting an organic growth rate? Or is it also inclusive of the Menara contribution?

The Menara in the second quarter was not $4 million -- it was about $2.3 million, so less than 1% of revenue. I'm not going to break out specifically what it is in the guidance, but Q3, we just don't get into breaking these things out. So specifically it is included in the 5% to 10% annual guidance for the year.

Okay. And then I guess just looking at the annual guidance, if we take the midpoint of the revenue for the September quarter, we can back into implied guidance of about $260 million in the December quarter, just based on the midpoint of your growth rate -- or your full-year growth rate.

And just thinking through kind of an implied 10% uptick in December, can you help us understand what drives that? I think that typically China is seasonably weaker in 4Q; typically you see a downtick in the consumer electronics side of your business, which I think you said wasn't as strong as expected to date.

And then you see kind of a budget flush from more North American European types of vendors. But what is implicit in an uptick in the December quarter when, if we look back at prior years, oftentimes 4Q was actually down sequentially?

So, first of all, 4Q a year ago, you remember was very weak. We had very weak order flow in September and into October that really impacted the end of last year. The bookings forecast we have for Q3 and into Q4, built on the bottom-up basis, gives us some comfort that Q4 should be a reasonable quarter this year. Obviously that tone and the bookings have to be achieved in order to get there. But --

Q4 should be much higher than last year with our current product.

So it's built upon what we've looked at on the bookings forecast for in different areas around the world. The bookings forecast for China this year, although Q3 is always weaker than Q2, is actually pretty strong. So that points to Q4 in China being well above where it was a year ago.

So those are a few other things. You're right on the budget flush in Europe and North America. Japan, we are continuing to see good traction with the main cutting OEM there, so that's the general tone around the business that we're seeing at the moment.

And Q4 we expect to get from a new product which now we are starting to introduce in the market. And also it includes new kinds of laser management in picot and then the second than the second green and other (inaudible) projectors then in Q4 we expect will start to get serious sales growth very positive with orders of our system business with stage of qualification a lot of customers who would give us now testing and also to build this qualification, but what we expect serious growth a jump in sales of systems in quarter three but major importer for in the beginning of next year.

Great. And just I guess on the China bookings commentary, could we get a little bit more color on where you're seeing some of that strength? And I guess in general, we've gotten some checks towards the end of the quarter that were showing a little bit of slowing and then still some softness in early July. So clearly, you are seeing some better trends than what we're teasing out of the geography. But would love to know where and in what applications.

So we've actually seen a strengthening of orders through Q2 for cutting applications. Cutting started the year very weak. You saw strengthened order flow for welding business particularly combined, the high power and QCW welding business. Even without having as big of a benefit as we thought we'd get from the consumer electronics last year.

Continued fine cutting applications -- strong growth in that area. And then the marking and engraving businesses has held up reasonably well. The interesting thing about China is that -- and this is actually a really pleasing thing -- is that it's coming from a much more diversified customer base as well. So that's a positive. So there's been a tremendous amount of work that's been put into growing the number of potential customers and different OEMs that we have there.

Many of the OEMs we started to test in use from our competition all the practical most of them -- serious customer they come back to IPG. But we did not sell did not post any business with current presence OEM customers. Before it was some for the customer it lease but the concern was that some of them claimed they produce fiber lasers but it doesn't work at all.

They (inaudible) IPG they never stop year-to-year they don't have any opportunity to make it. Despite many of them claim they can work in fiber laser -- invest in fiber laser. In 10 or 15 years worked in 15 years invest in fiber laser -- 10 years ago claim the CEO that they produced kilowatt laser -- (inaudible). But we can talk about small guys are China which don't have any such reserve nor opportunity for new and big ones. 10 years to develop competitive fiber laser with quality.

I appreciate the details. Thank you for taking my questions and good luck.

Thanks, Patrick.

(Operator Instructions) Krish Sankar, Band of America Merrill Lynch.

This is [Surag Odez] on for Krish. I was hoping to just get an update on the Hans lasers foray into captive fiber lasers, and the impact you see on sales from them?

So Hans is still claiming that they are trying to develop a fiber laser. We believe that they've got some pulse laser offerings and are using some of that in their marking and engraving applications. To our knowledge, they don't have any higher power products, even at the 500 watt range. So the sales for QCW in high power continue -- we believe we don't have a complete view on this -- but continue to be sourced entirely from IPG.

Hans has had -- I think their strength in their business has been on some of their micro-machining applications, so I mentioned that the cutting business in China had started slowly in Q1, and even the beginning of Q2. So our sales to the cutting group there and other cutting sales in the first half of the year were lower than expected.

But that's not because they are sourcing lasers internally. They continue to believe that we'll be the primary source of all of those lasers at high power in the QCW region and there's no change in that view from them.

Okay. Great.

But now (inaudible) started to grow this year -- a positive trend now in cutting in China so the quantity awarded is growing.

Okay. Great. And would you be able to give a percentage of how much of your quarterly sales went to Hans?

I haven't got that number to hand in the moment. It will be in the Q.

Okay. Perfect. Thanks.

Thank you.

Mark Miller, Benchmark.

You had highlighted the importance of new product sales this year. I think you had estimated $50 million to $100 million potential. And I think last quarter you broke out $30 million. I was wondering, could you break out what the sales were for this quarter for new products? And what were the primary drivers on these new product sales?

So you had -- I calculated this about 20% of revenue was new products and those were the QCW -- the high-power pulsed, which has started to gain significant traction. So the high-power pulsed is really starting to become a much larger share of total pulsed sales.

The benefit of that product line is it has really good gross margins on it, being increasingly used. And we mentioned the ablative, deeper engraving, even marking applications are starting to use that. The accessories were approximately $20 million of sales, so that's nicely up on a year ago. And then system sales also increased. So I calculated all of those newer products to be about 20% of revenue. So a good contribution on those.

System sales increased by 50% during this --

First half of the year.

Yes -- first half of the year but only beginning. System sales will jump very seriously in the (inaudible). We believe the depth the second will start to bring (inaudible) lasers.

Okay. Thank you. And you had mentioned -- you had highlighted, and I think at the Analyst Day, another opportunity -- I believe you said you were in a couple of manufacturers looking at the low temperature polysilicon anneal opportunity, which is quite large. And I'm just wondering, any progress, anything to report on how those evaluations are going?

Polysilicon annealing, it's a long process. It's a batch kind of technology -- it takes many years. It's really we don't put in our business plan -- business plan is business. But it's going well but it's a long process and qualification we could not expect any contribution of this in this year or next year.

Thank you.

Brian Gesuale, Raymond James.

Just a quick question. System sales have been growing really nicely and you are fairly ambitious in your outlook. Could you maybe talk to us about how big we should think that business is this year? And then maybe when we can see that be a $100 million to $150 million unit? And maybe just overall impact on gross margins from some of those products? Thanks.

So this year, I think it depends really how the end of the year pans out, particularly with Russian orders, that you could see systems business grow more than 50% if you get the traction on the Russian side of the business, and maybe even a bit more than that.

The $100 million to $150 million -- it's very difficult to put a time frame on that, Brian. Certainly a target internally the customer talked about in the company of having a $200 million systems business. You're talking a multiyear time frame to build that business up.

So the traction we've got in Russia, there are -- well, just looking at the quote list in the US, there's over 100 quotes in the US for different types of systems out at the moment, with 26 of them that have had recent activity on them. So it takes time to close those orders. It's a longer sales cycle, but there's lot of development activity on both the sales side and the scientific development side on all of those different types of systems.

Our target we have which we have a chance to achieve this target is during two years to get business to $150 million -- my target. The team of course has financial people much more conservative -- careful but our target -- it's not at the end we see now we are working with very serious customer with new application in there -- it's a new technology we have developed so each of the technology very large volume for each of them $50 million to $100 million minimum but it's not one it's now a bona fide technology -- new unique technology.

We provide not only the hardware not only where is the optics and the machines and the can ask and so we provide all the technology so -- the margin doesn't mainly transferred to the technology licensing so it's a new approach from IPG but it works and works very well today.

On the gross margin side, just to address that part of the question, it depends upon what type of application it is -- there are some lower margin applications, but there are also some very high-margin applications, particularly on the welding side of the business. Some of the welding systems and multiaccess systems we've sold have gross margin equivalent to the corporate average. So we don't expect the growth in that business at this point in time to take us outside of our targeted gross margin range of 50% to 55%.

(inaudible) $40 million to $50 million -- our solution has 10 times less potential but we now provide huge savings to people with not one system -- it's multiple potential with such system. So we price and this is not just hardware pricing -- it's margin, it's replacement enormous savings increasing increased quality of final product but essentially increased quality. We could not open the details here but it's not one application. Minimum three applications with the same scale. Nobody else uses this -- we have developed -- introduced to the market.

Great. That's terrific. Thank you.

Tom Diffely, D.A. Davidson.

Tim, another question on China about the customers. So, the question is really around the access to capital that they have. We've heard that the large guys have no problem but the smaller players, it's been tough to get the access to capital. Sounds like you're seeing business that's okay with the smaller players, is that correct?

Yes, we haven't come across anything on that side of the business. We continue to collect, with the smaller players, actually cash before delivery with some of the larger players and some specific customers we use what are called in China bank notes, so these are like internal letters of credit. That certainly helps to alleviate the sort of working capital cycle that we have, and we can discount those bank notes at relatively inexpensive or very low interest rates at the moment.

So we continue to use that program. We haven't really come across credit issues in terms of access to credit in China. I would say -- if anything, I'd say the credit environments -- that they are trying to loosen it a bit. I haven't heard of any tightening recently.

Okay. That's good to hear. And then finally when you look at the pricing, are you just responding to price in the marketplace? Or do you ever initiate pricing pressure just to put -- take advantage of your really low cost?

Of course we do. Sometimes to take advantage of our lower costs whilst maintaining gross margin to ensure that competitors have very -- a lot of difficulty in getting into the market. And we also do it -- as Valentin mentioned, we are trying to develop newer applications, either displacing existing laser or non-laser technologies. So it's not necessarily just in response to someone going into a customer and offering them 10% less; it's -- in different areas, we've used pricing to grow the business.

Great. Okay. Thank you.

Tom Hayes, Northcoast Research.

Thanks for taking my question. I guess just real quickly, Tim, if you could just maybe talk about what you're seeing in the auto sector? If I remember correctly, the order patterns in Q1 were a bit choppy. Just wondering how Q2 was? And then the outlook for the second half of the year?

Q2 automotive sales increased sequentially quite nicely year-over-year. They were basically flat, so you saw some benefit on the welding side of the business there. I'd say they -- well, they strengthened in China. We had a good quarter on US automotive sales. Europe was pretty good. Japan on automotive was weak.

One of our main customers there seems to be behind on rolling out their multiyear laser program. Purchasing from then is a bit slow. So Japanese automotive side is probably the one I would call out as being weaker. But it certainly improved sequentially. Year-over-year, not a huge amount.

Great.

You know Europe the problem with it, it's all also impacted total leads -- investment in automotive industry. But the US we had very good trend now with now Detroit the adoption of our technology in US automotive.

Thank you. Dr. Gapontsev, there are no further questions at this time. I'd like to turn the floor back to you for final remarks.

Okay. Thank you for joining us this morning. Again we look forward to speaking with you next quarter's call. Have a very good day.

Thank you.

Thank you much.

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