IPG Photonics Corp (IPGP) 2017 Q2 法說會逐字稿

Good morning, and welcome to IPG Photonics' Second Quarter 2017 Conference Call. Today's call is being recorded and webcast.

At this time, I would like to turn the call over to James Hillier, IPG's Vice President of Investor Relations for introductions. Please go ahead, sir.

Thank you, Christine, and good morning, everyone. With us today is IPG Photonics' Chairman and CEO, Dr. Valentin Gapontsev; and Senior Vice President and CFO, Tim Mammen.

Statements made during the course of this conference call that discuss management's or the company's intentions, expectations or predictions of the future are forward-looking statements. These forward-looking statements are subject to known and unknown risks and uncertainties that could cause the company's actual results to differ materially from those projected in such forward-looking statements. These risks and uncertainties include those detailed in IPG Photonics' Form 10-K for the year ended December 31, 2016, and other reports on file with the Securities and Exchange Commission. Copies of these filings may be obtained by visiting the Investors section of IPG's website or by contacting the company directly. You may also find copies on the SEC's website.

Any forward-looking statements made on this call are the company's expectations or predictions only as of today, August 1, 2017. The company assumes no obligation to publicly release any updates or revisions to any such statements. We will post these prepared remarks on our website following the completion of the call.

I'll now turn the call over to Dr. Valentin Gapontsev.

Good morning, everyone. I'm pleased to report that IPG delivered another record setting quarter. Our second quarter 2017 revenue and earnings per diluted share were above high end of our guidance. Demand for our core products, particularly high-power kilowatt-scales fiber laser, has never been stronger.

Our leadership position within this fast-growing market drove record order activity in the quarter, resulting in the book to bill that was above 1. Based on this trend of our current backlog, we believe we are in excellent position to deliver another strong quarter in 3 months' time.

We continue to believe that pace at which our fiber lasers are replacing conventional lasers and non-laser-based technology is accelerating. With fiber laser cutting systems approaching 1/3 of the installed base, we believe it is becoming increasingly difficult for fabrication shops with CO2 lasers to compete with fiber lasers due to the much faster metal-cutting speed and significantly lower operating cost of fiber versus CO2 lasers. We're also seeing fiber laser systems begin to replace more non-laser-based technologies for cutting and welding applications. This includes machine presses for punching and stamping of metal, which is used in inflexible dies for cutting and drilling that wear out and break over time. Fiber laser cutting system now represent a superior return on investment for many fabrication shops due to their greater flexibility, reliability and lower operation cost.

During the second quarter, we also benefited from accelerating growth in high-power lasers and precision system for laser-based welding application. These fiber laser welding systems are increasingly replacing traditional resistance spot, arc welding, e-beam and plasma equipment in automotive, aerospace, nuclear, railway, construction, chemistry and other heavy industries.

We believe our market leadership continues to expand. There is no company that can produce high-power fiber lasers at our scale, our quality or our cost. During the second quarter, growth in sales of high-power lasers accelerated to 57% year-over-year. Our largest OEM customers are migrating to high-power fiber laser sources of 10 to 15 kilowatts and above, where IPG has unique and reliable product that help them find new applications and sell high-power system. We continue to drive adoptions through product improvement and cost reductions with a mission to make our fiber lasers a preferred tool of choice across all material processing applications. This mission was on display at the Laser World of Photonics trade show last month in Munich, where we unveiled the industry's first 120-kilowatt industrial fiber laser. I will remind you that few years ago, IPG had sold a 100 kilowatt industrial fiber laser to Japan.

In addition, we displayed new products that address areas outside core material processing application, which we believe can substantially increase our addressable markets. With so strong interest from customers and prospects in our new short picosecond, femtosecond ultra-fast laser. Our ultra-fast laser offers much higher wall-plug efficiencies, smaller footprint, more consistent energy per pulse, faster cold start time and significantly lower cost of ownership than competing products. We believe the acquisition of OptiGrate in May with its unique quality chirped volume grades in technologies enhances our key technology advantageous in ultra-fast and will help in development of new ultra-fast products.

We also shown strong interest in our unique ultra-high luminance 3P and 6P and low-speckle fiber laser sources for digital cinema and other large screen projection systems. In multi-100-watt green fiber laser for semiconductor material annealing and other applications. In our high efficient family of UV fiber lasers, in various new medical fiber lasers and in our mid-infrared chromium iron-doped, [zinc selenite] poly-crystal fiber laser pumped family of powerful source for a wide variety biophysical research and advanced applications.

During second quarter, we achieved our first commercial sales of our UV marking laser systems, ideal for use in the marking of plastics and micro-material processing application. In addition, we continue to make substantial progress within urology with the development and introduction of our new 500-watt thulium fiber laser, which has demonstrated decisive advantages in comparison with Gold Star holmium lasers, which today dominate in the urology market.

Earlier this month, we accelerated our expansion into the precision system market with the acquisition of ILT. ILT has a proven track record producing leading edge laser-based system for medical device applications, one of the fastest growing markets for fine welding and cutting application. ILT adds scale to our existing precision systems business, and we see significant opportunity to expand the addressable market for ILT's products.

While we are on track to deliver a strong year in 2017, we continue to benefit from the secular growth of fiber laser within materials processing and other applications. Our capabilities within this market are unmatched, while the competitive landscape remain very favorable to IPG. Our vertical integration, technical know-how and industry-leading manufacturing service scale provide IPG a truly unique set of capabilities within the laser industries. As a result of these crucial advantages, we are the clear fiber laser market leader. Over time, we expect these advantages to drive similar success in other markets and industries, including micro-material processing, medical cinema displays, R&D, defense and others. We continue to open doors for many new applications where laser technology wasn't used before due to the greater ease of use, the lower investment in operating cost and flexibility of our fiber lasers.

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

Thank you, Valentin, and good morning, everyone. First, let me remind you that I'll focus my comments on the key financial highlights of the second quarter. For additional details on our reported results, please refer to the excel-based financial data workbook posted to our Investor Relations website in conjunction with today's earnings press release.

Revenue in the second quarter grew 46% to a record $369 million, exceeding our guidance of $320 million to $340 million. This outperformance was primarily driven by China and to a lesser extent Europe, with robust demand across a variety of applications and industries.

Aside from the better-than-expected order flow that Valentin highlighted, we benefited from strong execution in a number of key areas, including capacity planning, production and operations management, customer credit management and global administration. Revenue from materials processing applications increased 48% year-over-year, driven by accelerating growth in cutting and welding, while marking and engraving increased by a high single-digit percentage year-over-year.

Revenue from other applications increased 19% year-over-year from strength in telecom and advanced applications. The contribution to revenue from OptiGrate, which was acquired during the quarter, was not significant.

Second quarter revenue in our largest region, China, almost doubled year-over-year and represented half of total revenue. High-power laser sales for cutting and welding applications drove the majority of the nearly $90 million revenue increase in China versus the year ago period.

We also benefited from strength in QCW laser sales, primarily related to consumer electronics applications as well as from high-power pulse and other laser products.

As Valentin noted earlier, we believe the pace at which our fiber lasers are replacing conventional lasers and non-laser-based technologies is accelerating. This trend is especially pronounced within China where the local machine tool OEMs have been faster to adopt fiber laser technology than other regions. As a result, within cutting and welding applications in China, we are benefiting from the displacement of CO2 and YAG laser systems, machine presses for punching and stamping of metal and traditional spot and arc welding equipment.

In the U.S., second quarter revenue growth accelerated to 20% year-over-year, driven by welding applications and a solid contribution from telecommunications. Although auto-related welding sales in the region were down largely due to project-related timing, we saw strong growth in welding lasers and systems sold into the medical, aerospace and general manufacturing industries.

Europe also grew 20% year-over-year with notable strength in welding applications into the automotive, heavy industry and general manufacturing industries. High-power laser sales for cutting applications also grew strongly as our largest cutting OEMs in Europe are moving, as Valentin mentioned, to high-power lasers at 10 kilowatts and above.

Sales in Japan declined 3% year-over-year. Although we remain optimistic about multiple welding-related projects and growing OEM cutting sales in the region, we have yet to see this fully materialize. It should also be noted that Japanese cutting OEMs place many orders outside of Japan. We expect a rebound in sales within Japan during the second half of the year.

Turning to performance by product. High-power laser sales increased 57% year-over-year to a record $222 million, contributing more than 2/3 of the incremental revenue we generated in Q2 '17 versus the year ago period.

We saw good revenue for fiber lasers at 6 kilowatts and above, again, this quarter as these lasers are increasing adopted for high-power cutting and welding applications.

QCW was another standout in the quarter with record sales of $29 million, growing 82% year-over-year from strength in fine welding for consumer electronics applications and percussion hole drilling for aerospace applications.

Based on historic consumer electronics build cycles, we expect QCW growth rates will begin to moderate during Q3 with the completion of key capacity additions.

Medium-power laser sales increased 11% as increased demand for fine welding, wafer inspection and 3D printing offset softness in cutting.

Within lower-end cutting applications, we continue to see many OEMs transition away from medium power, adopting high-power lasers at 1 kilowatt and above.

Pulse laser sales grew 12% year-over-year. Sales of high-power pulse lasers used in marking and engraving as well as ablative, cleaning and stripping applications increased more than 50%, being partially offset by a decline in low-power pulse laser sales.

Finally, sales of other products increased 53% year-over-year due to strong sales growth in systems and accessories.

Working our way down the income statement. Gross margin of 55.9% was up 140 basis points from Q2 2016 and above our guidance range of 50% to 55%. We were able to more than offset declines in average selling prices with improved manufacturing efficiency, cost reductions and favorable product mix.

Q2 operating income was $141 million or 38.2% of sales, up 60 basis points from Q2 2016. Excluding foreign exchange losses, operating margins increased to 40.2% from 37% in Q2 of 2016, well above our guidance range as we leveraged our costs over higher sales volume.

We were pleased to achieve leverage in sales and marketing, R&D and G&A, despite higher spending related to product development, new applications and manufacturing processes and the expansion of our sales force and global service capabilities.

Our tax rate in the second quarter was 26.5%, including a $3 million benefit from stock options exercised and RSUs released during the quarter and a $2 million benefit due to the release of reserves related to uncertain tax positions upon the conclusion in Q2 of prior period orders. These tax benefits increased EPS by $0.10.

In Q3, we expect the tax rate to be approximately 30%, excluding any effects relating to equity grants.

Net income for the second quarter was $104 million, increasing 55% from Q2 2016.

Earnings per diluted share were $1.91 for the second quarter compared with $1.25 a year ago and above our Q2 guidance range of $1.50 to $1.70.

Foreign exchange loss decreased EPS by $0.10 versus the year ago period increase of $0.02.

If exchange rates relative to the U.S. dollar had been the same as 1 year ago, we would have expected revenue to be $11 million higher, gross profit to be $8 million higher and operating expenses to be $1 million lower.

We ended Q2 with cash, cash equivalents and short-term investments of $930 million and total debt outstanding of $23 million.

Our current level of inventory on hand amounts to approximately 145 days, which is below our target range of 2 turns or approximately 180 days.

Days sales outstanding were 58 at quarter end compared with 55 a year ago.

Cash provided by operations during the quarter was $82 million.

Capital expenditures totaled $22 million for the quarter, and we continue to expect $90 million to $100 million of CapEx for the full year, including approximately $15 million to upgrade our corporate aircraft, net of proceeds from selling the existing one.

During the second quarter, we repurchased 91,000 shares for $12 million as part of our antidilutive repurchase program and have now repurchased 301,000 total shares for $33 million since the program began last July.

Turning to guidance. For the third quarter of 2017, we expect revenues to be in the range of $350 million to $375 million. We anticipate Q3 earnings per diluted share in the range of $1.70 to $1.90.

The midpoint of this guidance represents quarterly revenue and EPS growth of approximately 36% and 40%, respectively, year-over-year. Year-to-date bookings have exceeded our expectations, pointing to strong revenue growth in 2017. Based on first half outperformance and current backlog, we're now targeting approximately 32% to 34% revenue growth for the full year.

Our fourth quarter performance will be driven by order activity through the end of the third quarter and during the fourth quarter, for which our visibility is currently low.

Given the magnitude of outperformance during the first half of the year, we believe it is prudent to assume a lower growth rate in the fourth quarter due to more challenging comparisons and expected slowdown in spending relative to typical seasonality in China and the consumer electronics investment cycle.

Should this anticipated spending slowdown fail to materialize at a level consistent with historic trends, this could result in upside to our full year guidance range.

As discussed in more detail in the safe harbor passage of our news release today, actual results may differ from both our full year and quarterly guidance due to various factors, including but not limited to: product demand, order cancellations and delays, competition and general economic conditions. This guidance is based upon current market conditions and expectations and is subject to the risks outlined in the company's reports with the SEC and assumes exchange rates relative to the U.S. dollar of EUR 0.88, RUB 59, JPY 112 and CNY 6.77, respectively.

As a reminder, we do not attempt to forecast changes in foreign exchange rates.

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

(Operator Instructions) Our first question comes from the line of Joe Wittine with Longbow Research.

I was hoping you could give us some color on just how you're able to respond to this upside? So particularly with higher power sales, Dr. Gapontsev, you said up been a greater than 50% year-to-date, and obviously, within that your kilowatt shipped are up even higher, so how have you been able to scale up production in what seems like a seamless fashion? And as you look forward, are there any pain points for utilization that will need to be addressed?

So I think the first thing to really reference with that is that I always say that one of the things I think the company does very well is plan for future growth, both in terms of capacity and the investments that we make, both the longer-term investments and the working capital investments. I think the way the company has performed this year has really validated those investments, where people might have actually questioned them historically. Without those investments having been made, we would not have been able to respond to that. And I think it's actually probably one of the great strengths of what we do, even to the point of accepting the criticism that we may have been running inventory days higher than expected historically or even added investments. People always ask me, what's your level of CapEx going to be in a given year? We use a lot of our cash generated or a substantial part of it to reinvest in the business to ensure that we can respond to what we believe will be the sort of dual thesis secular growth that we have around displacing existing laser technology as well as non-laser technology. I think the other great benefit of having made these investments and our ability to respond to these increase in demand is that it has really enhanced our competitive position versus other entrants trying to get into the market with this ability to deliver in very high volumes with increasing power levels. So the increase in power levels cannot be understated as well, because that's obviously driving a substantial increase in diode demand. I think what that will result in given the rate of growth we've seen this year, is potentially slightly higher CapEx coming into next year as well in order to stay ahead of the curve on that investment side.

And also, you have to take in mind that we report now that our growth in revenue. Our real growth in physical units of our product, much higher. Because we (inaudible) the quality also to balance in the decreased price of our product. If taken into account this factor, you can add 10% to our growth as minimum in the physical units, practically all our products.

Certainly. That's helpful. I have a bunch here, but to keep it to one follow-up, maybe give us your thoughts on the automotive supply chain. Obviously, this morning, some concerning sales numbers in North America. I know, IPG is more tied to new models being introduced. But from your perspective, are some of these numbers concerning enough that you could see some impact to investments going forward?

You always like to have a bit of a tailwind behind any sector that you're dealing with. But we come back, again, to the way that we think about the basis, which is the secular shift towards using more lasers in a wider variety of applications, whether it be in automotive or other industries. We believe that that's the fundamental underlying driver of our performance. And then, we also have to deal with the cyclical shifts in demand that you inevitably see in the shorter periods or short term. So you can see ramping demand with strong PMI and increasing production volumes across different industries. And then you can see periods where the secular shift continues to happen, but a little bit of weaker demand. I think within automotive, we've always said, we're very early stages in many applications using lasers across a wide variety of different areas from transmissions to the main body. And then, you've also got some changes within the automotive sector happening as well with what's viewed as a very much a multiyear investment horizon on electric vehicle production that we think over the next 4 to 5 years will be a growth driver for us. So I think that's how we look at things. And we acknowledge that you're going to have secular shifts and some cyclical impacts from period to period.

Our next question comes from the line of Krish Sankar with Bank of America Merrill Lynch.

The first one I had was, Tim, can you just let us know how much of your sales in the quarter was from cutting and how much was from welding?

We don't specifically disclose that, because it's difficult to determine it very, very accurately. It wasn't different -- I think we've disclosed in the K historically, approximately 50% comes from cutting and then 25% plus from welding. And the numbers are following those general trends. We do not specifically disclose that, Krish, because it's a number that we don't actually even get from the customers definitively.

And growth in welding is much higher than growth rate for cutting. So it comes from our [clean deposit] this -- welding these applications in welding have very high potential. And more difficult to penetrate in this market due to it's, for practically each customer, should be customized. Not standard, but customized product. But we're working very hard. We have great success in this direction.

That is very helpful. And then just a big picture question. You guys have consistently grown double digits for the last several years. When you look forward over the next like 3 to 5 years, what do you think is the growth rate for the fiber laser industry?

The growth rate, if you look at the market analysis out there, is anywhere from low to mid-teens. I think, the issues that nobody really can forecast is how rapidly and how many different industries choose to adopt laser-based technology. So for example, this year, not only have we seen the transition to higher-power devices, because of the improvements in cutting speeds, we believe we've also seen a significant transition towards displacement of inflexible metal processing, punches and presses where you have the machines tool dies that wear out. But also punches and presses tend to damage the metal during the processes where the laser doesn't, so you've got much more flexible process now. There are hundreds and thousands of punches and presses that are deployed around the world. It's very difficult even to come up with an estimate of the total population of them. If you're starting to see a transition towards displacement on a more fundamental level of that, you've got a very significant runway for growth even in that single application. And then, if you start to see the transitions -- we've talked about the transitions in welding, but there are many applications, deposition, ablation and then you get into the newer product introductions. So we think that the overall outlook for fiber lasers over a multiyear horizon is pretty optimistic. I can't get drawn on to specific numbers that I don't think is really possible to even determine it.

Our next question comes from the line of Bobby Burleson with Canaccord Genuity.

So just quickly on consumer electronics, you guys have talked about the cadence of the investment cycle there being kind of every 2 years. And just wondering if you can think about looking at the growth this year. How much of it is attributable to consumer electronics? And kind of what kind of headwinds are we talking about next year on growths?

So again, it's a little bit difficult for us to identify definitively, because we sell a lot of stuff through the OEMs. Certainly, some of the upside on the QCW and some of the upside on the marking applications is related to the consumer electronics. I would actually characterize this year that consumer electronics, whilst it's meaningful, as being more the icing on the cake. Because so much of the growth as well has come from the high-power applications as well. And we kind of wanted to -- we tried to stress that in the script that this was not just a consumer electronics play. It is a broader-based application set. With QCW up 80% year-over-year, I would say that quite a lot of that growth -- not all of it, because some of it came out of the aerospace drilling applications, was related to the consumer electronics business. So QCW was $29 million in the quarter. You're talking $10 million to $15 million of revenue on QCW and some few million dollars on the pulse lasers as well. So it's really -- I'd characterize more as the icing on the cake. Of course, there will be bit of a headwind next year. I will say that we're already working on new applications within consumer electronics using different types of products and different types of materials that look forward to the next investment cycle. So it's interesting that we're starting to see even the interaction with some of the main customers start already for newer applications going forward. I don't think it's going to -- we haven't seen a shift yet from it being a -- to an annual investment cycle. There'll be some benefit next year, but it's still very much a biannual with the new product introductions, we think.

Okay, great. And then in high power, just curious what the footprint is for automotive there, generally. And then, it sounds like there's some cyclicality there potentially. Is that being offset by this higher rate of adoption that you're seeing in high power?

What do you mean by the footprint?

Like, just how much of that is auto related do you think?

On the high power?

Yes.

It's part of it, but there's also the other main applications on welding outside of automotive. And then, the cutting is a very significant part of the high-power growth. So it's not purely driven by automotive this year. It's across the applications, which is good to see, frankly.

High power is for heavy industry. It's still very small penetration of fiber laser and laser [at all] in heavy industry manufacturing. But now we're working very fast with the [wave] -- not just optical sources, with the wave that is new technology and very successful of such applications: very, real heavy chemistry industries, aerospace. And so it's really very huge market in future for high-power lasers. We believe automotive it's more for low power, for mid-power kilowatt. But it's some kilowatt power, automotive. But for high power, above 10-kilowatt, it's very great use there. We see a very great future. We're working very hard in this direction. The result we have now is extremely promising.

So it sounds like it's actually less in the overall corporate mix from automotive. If you look at high power, it's less auto exposure, percentage wise?

We just don't get into discussing. The whole industry side is very difficult for us to identify. We said before, even within automotive, we don't know how many OEM systems are serving the automotive market. Whether it's through -- from the fabricators to the Tier 2 because some of the systems are sold through the OEMs. So the industry side of it is just a very difficult question for us to answer. I think the answer is that the high-power growth is broad-based across multiple industries and not just automotive.

Our next question comes from the line of Joe Maxa with Dougherty.

Just wanted to dig into China a little bit given the strength you've seen. And obviously, you have a few puts and takes in consumer electronics and others. But are there any other applications that are really driving that revenue growth?

Yes, I mean, the key applications are still the main ones that we work with there. But you're starting to see some of the emerging applications even in additive, deposition and ablation outside of the 3 core applications. Within the new products, we have the ultra-fast being evaluated in China, where there's a lot of interest in that product. So we expect that in the future to grow. But yes, it's really -- I mean, it all sounds rather boring when it's the 3 main applications of cutting, welding, marking, engraving and then you get into the deposition and ablation side there, which is starting to drive some contribution.

And you believe the -- from what I understand the main driver is just the acceleration replacing other metal processing applications versus specific growth in China from, let's say, they're in -- whatever the build out, whether it's new rails or whatever the case?

I think there's some tailwind from infrastructure spending in China and strong -- a relatively strong macro situation with the PMI still being above 50%. And then you've got some of the consumer electronics, which I've characterized as the icing on the cake. So I'd say you're benefiting from a broad cross-section of different industries both on even -- so the heavy industry side, construction side, consumer electronics, automotive, electric vehicle, even some of the -- potentially, the aerospace. And then, yes, I think there's some infrastructure spending that's been relatively robust in China this year.

Our next question comes from the line of Patrick Newton with Stifel.

I wanted to focus on high power and the year-over-year 57% growth rate, incredibly impressive. If we were to take some of the key variables, whether it be ASP trends, average power trends or unit growth, can you help us understand how those impacted that 57% growth?

So I think, first of all, in terms of ASPs the declines year-over-year were on average within the ranges that we expect of 5-plus percent -- 5% to 10%. You've seen a transition for [opti] lasers with more than 6 kilowatts driving the total revenue growth. Valentin mentioned we're now selling 12 and even 15-kilowatt lasers for cutting applications. You've also seen on some of the medium and fine cutting applications, people actually transition to 1 to 1.5 kilowatts. So in each of those areas, you've seen that coupled with an increase in total unit volumes driving the high-power sector, not just in Asia but also in Europe and a little bit to a lesser extent in North America because a lot of those cutting systems, there's fewer OEMs here on that -- on the North American market. It's a bit difficult to bifurcate it more directly than that. There's clearly a lot of different things that are driving the high power. As well as we said, some of the displacements of non-laser technologies, which we've heard -- at laser Munich, this was mentioned to me at least 4 or 5 times by not only our salespeople, but some of the OEMs that I spoke to in China. So it's a little bit of hearsay, but everyone was saying that there certainly seems to be a trend on the non-laser technology side.

And I guess, just as a follow-up to that given your last comment on displacing non-laser, so digging them in China may be a 2-part question. On displacing the non-laser portion of the market, is there any way to quantify how much of that growth in China is actually coming from that? And then on the China customers, can you talk about the size of the customers that are driving this growth? Are these smaller players, mom-and-pop shops, are we talking about multinationals? And how are they funding their purchases? Is this still heavily reliant on attainable credit?

So we don't have a lot of insight into the ultimate end customers. When I spoke to some of the OEMs in China, it was a broad cross-section of different industries that I've already mentioned: some of the infrastructure side, construction, transportation outside of automotive. So for example, buses use a lot of lasers, both welding and cutting; railways where again, metal cutting and welding are applications. Behind the scenes, it's a bit difficult to again answer that question definitively. On the credit side, we always say that you have to have good access to credit in China. China always slows down if there's some tightening. And I think you've had pretty much an expansionary credit process. We continue to use our process of using banknotes to work with the working capital requirements of the larger customers. Outside of the larger customers, we were able to collect a lot of the deposits and prepayments from the smaller customers that we had. So we were being pushed for deliveries. And when we've been pushed for deliveries, clearly, the customers are placing those prepayments with us, which enables us to meet the revenue that would come from those deliveries. In terms of the end customers, again, people -- even the OEMs that I spoke to weren't able to be very definitive on -- part of it is obviously just is the fabricators there. There's very high -- there's a very large installed base of fabrication shops that serve multiple cross-section of industries as well. So some of the demand is obviously coming from them as well as some of the larger industrial complexes.

Our next question comes from the line of Jim Ricchiuti with Needham.

Just wanted to circle back to the comments you made about bookings, about bookings being above expectations. I'm just wondering if you can give us a little bit more color on where some of the upside is being driven in bookings, I mean, whether it's by geography or just any additional color. Because it does sound like bookings were even somewhat surprising to you. If that -- I don't want to put words in your mouth.

It probably wasn't surprising to Valentin. It may have been a bit surprising to me. On a geographic -- I mean, it's pretty broad-based, Jim, on a geographic basis. Clearly, Asia. I think, actually one of the countries that we haven't mentioned much, it's not huge, but where growth has been very strong and robust. And across quite a diverse set of applications has been Korea. We mentioned Japan is a little bit weaker than we would like to see it. Europe has, certainly, been very strong, again, across core applications and industries that we serve there, both in Germany and then in other areas. Italy has performed well. The sales into Switzerland and even Eastern Europe, Poland continues to hold up well. Many of the other countries where we've recently invested on the sales and service side and, for example, Czech and Slovakia has performed very well. Turkey started to come back a little bit after all, I mean, despite all the -- even the geopolitical uncertainty there. Bookings in Russia have been pretty good year-to-date. You normally expect Russia to pick up in the second half of the year. Russia has actually performed, even though it's a small number, pretty well in the first half of the year. And then North America, we mentioned was up 20%. Again, that's a pretty diverse set of applications in terms of revenue. But that's also driven by the bookings. So it's pretty broad-based, and I think that's reflective of the general strength on the macro and PMI side and some of the recovery you're seeing in Europe as well.

South America is now -- we have a very fast penetration in Mexico, Brazil and other South American countries. We made now very good new [manufacture] there. And so now we hope it would be a much faster penetration. We're still working on this (inaudible) in this area. Don't forget about other ways that we're going with, now we're going [from us] in the market. They have very great potential. For medical applications, we've now started only 1 year of the business. Medical during the year have reached fantastic results. For example, in urology, practically some clients or some of our customer have made a very top startings in business, talking about some revolution even. In this direction, we're making now with our new products and medical -- new methods how to make this operation and so on. The same way, I'm looking only medical market future (inaudible) our target to be multi-hundred million dollars of business only from medical applications. The same -- many other application we started to develop now in Syria and West Indies. So our future not only cutting and welding, our future -- a lot of other applications, which we really opened door for use a new innovative high-quality laser in. Before they were not able to use or used very old solution, 10 years old technology, which is absolutely unpractical. Now fiber laser can change situation in many of these applications.

You anticipated and answered my next question about medical. So it looks like you see this being a multi-hundred million dollar business for you. If we think about this vertical over the next couple of years, historically, small part of your business. But you see quite a bit of runway across the board, I guess, as well with ILT?

ILT it's not a big company, a small company, but very well -- they have good position, a very [successful] for medical-wise, electronic-wise, (inaudible) scientific, many others, so (inaudible) ILT will really become a qualified supplier of not just lasers, but we've become a qualified supplier of multi-axis machines for many applications. This medical device market is more than $100 billion. And of course, automation, they need in automation, so our target to become major supplier of automation system based on our fantastic business in this area of application. ILT help us with saving 2, 3 years in introduction to entry to this business.

Our next question comes from the line of Jagadish Iyer with Summit Redstone.

Two questions, Tim and Valentin. First, how much of this revenue growth that you are experiencing in 2Q and your guidance for 3Q is being driven by new products and new markets?

So the new products' introductions, which now we're not including. The QCW grew approximately at the same rate as the rest of the business. So they're starting to -- or continuing to make a contribution. But they're not the fundamental part of the driver yet. So those are really the new products on the high-power pulse systems, the accessories, the green. There's a couple of other ones. The newer products, for example, the marking systems for UV, the first sales were only received in -- the orders were only received in June. And the ultra-fast technology is now under evaluation and in the application labs with customers. So we expect to start getting orders from those devices in the next few months. Valentin can maybe give us a bit more of an update on that. But a little bit of revenue from the projection in display, obviously, from the first half of the year. So that was also pleasing to see. But it's really still, whilst the newer products are contributing, the main drivers on the newer products are still to come. And we believe that they will be an important part of the revenue stream for the company over the next couple of years.

Okay. Then if I look at, you've been selling high power for several years now. And how should we be thinking about existing customers, who initially purchased these high-power lasers and they were pretty much at the low end of this spectrum, as you look at it today? So how should we think about the replacement cycle or an upgrade option that is available? And when do you think that would really kick in? Is there any kind of time lines and any other thoughts that you might be able to help us out with?

We're still a way from a replacement cycle of the installed base of fiber, because really, the volume on fiber laser sales only started to really ramp in 2011 and '12. And then the thousands of units we've been selling has really only been in the last 3 to 4 years. So even though we've been selling high-power lasers since 2004, the total volumes in the market were very low. I think the more important thing to understand is, if you look at the cutting market and we highlighted this piece of data in the script, is that fiber now is potentially penetrated to about 30% of the installed base of cutting systems. So there's still a very significant runway for replacing existing cutting systems that use CO2. And then potentially, as you get more and more installed into that base, your annual fiber lasers will be -- the earlier fiber lasers that will be sold would be approaching a 10-year life cycle and that's typically, where you start to see some replacement of those systems. So I think you're a little bit early on a fundamental replacements of the first fiber lasers that were sold just because the volumes of them were pretty low.

Our next question comes from the line of Mark Miller with The Benchmark Company.

Systems, you mentioned they were up. Just give us a little more color, what's going on with your system sales and your strategy there?

With systems, the way now that we're working both in macro application and micro application, it's a big range of different kind of systems. And we -- so for some application, with (inaudible) new technology, for example, for micro application, welding, [cladding] and so on. Other than [that] we would develop unit technology for large diameter pipe welding and now prove the technology directly in the field at full system, not just technology, not just lasers, for these systems. A full complete solution, it's for gas pipe, for oil pipe welding and so on directly in the field. It's a long process introduction, Mark. It takes 3 to 5 years minimum. And we, in the middle of this way, we first started in development in Russia. But now we're going to Canada, U.S., to other countries, to Arab countries and so on. Syria we -- would be a very serious business for both oil and gas. We developed now the practical system for -- to weld and for assembly the railway, pull -- trucks, wagon, for passenger and also for (inaudible) wagons. It's our all-time (inaudible) tested this in the field, full complete solution. It's -- this also we have from the point for us also now the problem, sanction of the American, new sanction, can delay a little, penetration to this market. But effectively, it's multi hundred million in our practical (inaudible) in our [country]. With this political problem, maybe now we reforecast for the development for West market. For that, we created 2 [partners] inside, very serious development in Milan, Italy. Now a Milan company is second. We developed also in America this year. We developed also strong (inaudible) inside application center and the assembly center to work in American market. So it's for macro. For micro application, (inaudible) we're working for consumer electronics and not just selling lasers when our OEM customer likes the most successful [hand laser] which making only with [Apple] as it's known over this year like more than [$600 million]. And they use practically about 70%, 80% of our laser in all the systems. But now we're going -- starting to work directly with major consumer manufacturers, major manufacturers, we opened -- join (inaudible) and developed for them a new process directly to this and successful, some 10 different new technology processes, which we've developed and now application with. And next step to make the (inaudible) that supplies ourselves full automotive station, not just to provide this technology or license to this technology to our Chinese OEMs. There's also a lot of different applications. Still, from a system point, we developed project as sources for digital cinema, premium. First, it is now -- now we're working the real premium theater, large (inaudible) in London, Chicago, in Portugal, in Paris. And so we start to install our system directly in theaters. It's very successful and not [just demonstration,] practical operation for people. It's also very interesting system solutions. And we are looking for a great future of this application. So it's the same, medical device for medical application through ILT in our production factory we have also in the Marlborough, Massachusetts, plus ILT. Now it's -- we see it as branch for mid-level application in the material processing in U.S. So we thought our estimation during the next 5 years, it would be serious portion of our total business system direct from complete solution package, technology, system, hardware and service installation (inaudible). Full complete solution for customers.

Our next question comes from the line of Tom Diffely with D.A. Davidson.

Just a quick follow-up on your comment that you're starting to see fiber lasers replace the non-laser systems. Just curious, does this extend into welding at this point?

Yes, it does. It's early stages though on the welding. But given that most welding is done with non-laser technologies, growth of lasers will primarily come from that displacement. So we mentioned the different areas that we're working in, in that area, both resistance, spot welding, arc processes, plasma, e-beam and certainly some of the -- in the newer industries, they would have evaluated whether to use those and have chosen to use laser given all the efficiencies and performance advantages. And then, in some of the older industries that have clearly being using those technologies for a longer period of time, it is often a replacement to those technologies. So Valentin mentioned, the pipe welding system that's being developed. Historically, pipe welding has always used traditional technologies. Within rail car building, it's been traditional technology. So yes, we're starting on that road of replacing.

Okay. Give a sense of how much of the traditional huge welding market you could actually address with fiber lasers over time?

Well, in theory, a laser can do all the different types of welding that every single one of those applications can do. It's not a limitation of the application itself. And quite often, the quality of the weld is better, the strength of the weld, the thermal damage is less. It often comes down to more economics. So as the cost of the fiber laser comes -- becomes more competitive, you'll be able to see that displacement happen more regularly. It comes down to the acceptance actually of the end industries. Many of them have been using traditional technologies for not just tens of years, but even the last hundred years. So you've got to change the way that those industries view laser technology, and move them away from a technology that they may have been very comfortable with for a long period of time. It's not a limitation around laser capability and welding. It's about addressing the other dynamics that exist in those end markets and driving acceptance for the penetration, Tom.

Due to time constraints, our final question will come from the line of Tom Hayes with Northcoast Research.

Just real quickly, Tim, in the release, you called out one of the areas was telecom. Just wondering if you could provide some color on where the strength came from this quarter? Then your -- a little bit of sense for the size and the outlook for that business?

On telecom, we continue to execute on providing a more complete solution, coupling the technologies that we bought last year on digital signal processing with our optical capability. And that continues to perform well. We see and are looking for substantial growth in telecom actually, over the next 12 to 18 months with new product introductions that take us to a 100 gig and above. So it was basically an execution around the areas that we've been looking the growth from. Do you want to add anything to that Gapontsev about telecom?

There were new or very advanced technology to make our own module-sized transponder for new generation in the, what's called long haul transmission and for datacom servers and so on. It was up to -- during our -- during the 2, 3 years, we have the very -- for 400G, 600G, the transponders. And we developed also a new kind of DWDM, very powerful based on this -- owned technology for complete integrated solution DWDM and others. So the 3 are very serious products we created to (inaudible) it's a schedule -- very tough schedule but going very well. Our target to become serious player in the market -- telecom market with revenue multiple hundred millions minimum. 3 years -- project for 2, 3 years. We have one very serious project when we invited to become this major provider. It's all on budget the project, for 2019 to 2020. Now we prepared all the hardware and software for this project. It's very large project.

Thank you. I would now like to turn the floor back over to management for closing comments.

Okay. Thank you, again, for joining us this morning. I look forward to speaking with you on the next quarter's call. Have a great day.

Thank you, everyone.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation. And have a wonderful day.