IPG Photonics Corp (IPGP) 2017 Q3 法說會逐字稿

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

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

Thank you, Doug, 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 October 31, 2017. The company assumes no obligation to publicly release any updates or revisions to any such statements. We'll post these prepared remarks on our website following the completion of the call. I'll now turn the call over to Valentin.

Good morning, everyone. IPG Photonics delivered a record quarterly results with 48% year-over-year revenue growth and with revenue and EPS above the high end of our guidance. We have been able to meet customer requirements by increasing production faster than revenue growth and fulfilling orders with no meaningful change in lead time. This achievement is a testament to our operational excellence and strong execution in the quarter. It also highlights our philosophy to make laser technology more accessible by reducing its cost. Our vertically integrated business model enables us to more rapidly scale production, reduce costs and deliver innovation than the competition. In short, there is no company that can produce high-power fiber laser solutions at our scale, our quality, our schedule and -- or our cost.

The secular shift to high-power products across our largest application and geographies continues to drive outperformance. Our fiber lasers enable faster processing speeds and superior productivity and flexibility at a lower cost. These advantages only increase at higher-power levels. During the third quarter, sales of high-power CW lasers increased 60% year-over-year with even higher growth in units. Sales of ultra high-power solutions at 6 kilowatts and more than doubled year-over-year. Our largest OEM customers are migrating to higher-power fiber laser sources of 10 to 15 kilowatts, where IPG has unique solutions in the marketplace.

We are also seeing the customer migrate from a low- and mid-power laser solutions up to higher-power fiber technology. The market for cutting systems ranging from 700 watts to 1.5 kilowatts in China has increased dramatically this year with unit volumes more than double of last year's level. We estimate some quantity of these China-produced systems are being exported to meet demand in emerging economies in Southeast Asia, India, Eastern Europe and Latin America. These fiber-laser-based cutting systems are replacing non-laser technologies, including machine presses for punching and stamping of metal that use inflexible dies for cutting and drilling that wear out and break over time.

We are benefiting from rapid growth within our other product categories as well. Sales of QCW lasers increased more than 100% year-over-year driven by consumer electronics investments. Sales of high-power 100 watt and above nanosecond pulsed fiber lasers nearly doubled from the year-ago period. Market acceptance of these products is occurring across a diverse set of applications, including foil sheet cutting and terminal cleaning for batteries, solar cell scribing and drilling and to laser trimming for displays. Sales of green pulsed fiber lasers used as an ablation tool for improving solar cell efficiency also grew strongly, both sequentially and year-over-year. We continue to see encouraging interest from customers in evaluating our new ultrafast picosecond and femtosecond pulsed laser family. As a reminder, our ultrafast lasers offer much higher wall plug efficiency, a smaller footprint, more consistent energy per pulse, a faster cold-start time and significantly lower cost of ownership than -- as well as investment than competing products. These products meaningfully expand our addressable market opportunity within the micro materials processing, medical and scientific markets.

In addition to developing new unique laser sources, we are now producing corresponding optical accessories and fully integrated systems to drive new applications for laser technology. Sales of accessories, including welding and cutting heads, scanners, collimators, beam switches, process fibers, smart power supplies and chillers, increased 50% year-over-year. Our organic systems business, complemented by the newly acquired ILT business , was a strong contributor in the quarter. We are no longer just a supplier of lasers but also supplier, even qualified supplier for many customers complete system and application solutions into major markets such as automotive, aerospace, railway, pipeline and medical industries.

The rapid growth across our product portfolio drove a record operating cash flow of $164 million in third quarter, and our total cash balance now exceeds $1 billion. Let me take a moment to discuss our capital allocation strategy. We're committed to allocating capital in a manner that maximizes returns and increases shareholder value. There are few companies that possess the growth opportunity, balance sheet strength and free cash flow generation of IPG, providing us a unique opportunity to deploy capital to enhance and accelerate this growth opportunity.

We believe organic investment in our business will continue to deliver the greatest return to shareholders, and this remains our highest priority. We also recognize that we cannot capitalize on our tremendous growth opportunity through organic investment alone. Maintaining a strong balance sheet provides us maximum flexibility to pursue value-creating acquisitions that accelerate time to market as well as transformative deals during times of market disruption. In addition to these investment areas, we have $100 million stock repurchase authorization in effect.

We are poised to deliver our strongest annual growth in 6 years driven by accelerating adoption of our fiber laser technology within our core markets. Looking ahead, we see excellent opportunity to leverage these advantages and substantially expand our addressable market with the launch of new fiber-based laser sources and systems for the micro materials processing, medical, cinema projection, display, scientific and different industries. We continue to execute on our mission to drive adoption of our leading-edge technology through product improvement and cost reductions, making our fiber laser technology the tool of choice in mass production.

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

Thank you, Valentin, and good morning, everyone. I will review the key financial highlights of the third quarter. For additional details on our reported results, please refer to the Excel-based financial data workbook posted to our Investor Relations website.

Revenue in the third quarter grew 48% to a record $393 million, exceeding our guidance of $350 million to $375 million. This outperformance was across multiple regions, applications and products. In order to meet record demand, we demonstrated strong operational execution across our global manufacturing organization. During the quarter, currency movements benefited sequential revenue by approximately $6 million. Revenue from materials processing applications increased 52% year-over-year driven by rapid growth in lasers sold for cutting and welding applications and a record quarter for laser sales for 3D printing applications. Revenue for other -- from other applications decreased 9% year-over-year as softness in communications and government business relative to challenging comparisons a year ago offset strength in medical.

By region, third quarter revenue in China increased over 70% year-over-year and represented approximately 45% of total. Sales of high-power CW lasers for cutting and welding applications drove the vast majority of the revenue increase in China versus the year-ago period, and we also benefited from strength in QCW laser sales, primarily related to consumer electronics welding applications. Growth in Europe accelerated to 50% year-over-year driven by strength in high-power lasers for cutting and welding applications, medium-power lasers with 3D printing applications, pulsed laser sales for marking and engraving and high-power pulsed lasers for marking, engraving and solar cells manufacturing.

In the US, third quarter revenue increased 13% year-over-year as strength in systems and high-powered pulse lasers offset lower sales of high-power lasers into automotive welding applications, with the acquisition of ILT benefited systems revenue in the U.S. Project timing can lead to some variability in U.S. automotive sales.

Sales in Japan declined 10% year-over-year due to ongoing softness at our largest customer in the region. We have seen a meaningful sales increase this year among our largest Japanese OEMs within other regions, most notably China. As a result, we estimate sales to Japan-based OEMs in all regions increased by a mid-single-digit percentage year-over-year.

In other regions, sales in Turkey reached a record level this quarter on rapid growth in high-power lasers for cutting applications and accessories sales. Korea remains on track for a record year with third quarter revenue growth exceeding our corporate average on strength in automotive and battery welding, marking and engraving and applications related semiconductor, electronics and display manufacturing.

Turning to performance by product. High-power laser sales increased 60% year-over-year to a record $244 million, contributing more than 70% of the incremental revenue we generated in the third quarter 2017 versus the year-ago period. Revenue from fiber lasers at 6 kilowatts and above more than doubled from the year-ago period. QCW sales of $24 million increased more than 100% year-over-year from strength in fine welding for consumer electronics applications. Medium-power laser sales increased 22% driven by a substantial increase in demand from 3D printing customers and growth in fine welding, which was offset by the decline in medium-power cutting attributable to the shift by OEMs to 1 and 1.5-kilowatt scale lasers that Valentin discussed. Pulsed lasers sales grew 16% year-over-year. As Valentin noted, we saw strong growth in sales of our newer green and high-power pulsed lasers across a diverse set of applications. These products represent nearly half of our pulsed lasers sales. Sales of low-power pulsed lasers for marking and engraving applications were up by a low single-digit percentage. Finally, sales of other products increased 31% year-over-year due to strong sales growth in the systems and accessories.

Gross margin of 57.2% was up 280 basis points from Q3 2016 and above our guidance range of 50% to 55%. We are able to more than offset declines in average selling prices with improved manufacturing efficiency, cost reductions and favorable product mix.

Q3 operating income was $160 million or 40.8% of sales, well above Q3 2016. Excluding foreign exchange losses, operating margins increased to 41.8% from 36.5% in Q3 of 2016, above our guidance range as we leveraged our costs over higher sales volume. We were able to achieve positive leverage in sales and marketing, R&D and G&A while continuing to invest in product development and the expansion of our global sales force and administrative footprint. Our third quarter tax rate was 28%, including a $3 million benefit from stock options exercised and RSUs released during the quarter. These tax benefits increased EPS by $0.06.

Net income for the second quarter was $116 million, increasing 67% from Q3 2016. Earnings per diluted share were $2.11 for the second quarter compared with $1.29 a year ago and above our Q3 guidance range of $1.50 to $1.70. Foreign exchange transaction losses decreased EPS by $0.05 versus the year-ago period decrease of 4%.

If exchange rates relative to the U.S. dollar had been the same as 1 year ago, we would have expected revenue to be $5 million lower, gross profit to be $3 million lower and operating expenses to be $1 million lower.

We ended Q3 with cash and cash equivalents and short-term investments of $1.05 billion and total debt outstanding of $50 million. Our current level of inventory on hand amounts to approximately 155 days, which is below our target range of 2 turns or approximately 180 days. Days sales outstanding was 53 at quarter-end compared with 55 year ago.

Cash provided by operations during the quarter was $164 million. Third quarter capital expenditures were $56 million, of which $28 million reflects the gross purchase amounts of our new corporate aircraft. As a reminder, we sold our previous aircraft for $15 million during the second quarter. Through the first 9 months of the year, capital expenditures are $84 million net of proceeds from the sales of the previous aircraft. In order to help ensure sufficient future capacity, we now expect CapEx for the full year to be in the range of $100 million to $110 million or approximately 8% of revenue, up from $90 million to $100 million previously. Looking ahead to 2018, we believe CapEx is more likely to be at the higher end of our 8% to 12% target range given the accelerating growth within our business this year.

During the third quarter, we repurchased 17,000 shares for $3 million as part of our anti-dilutive repurchase program and have now repurchased 319,000 total shares for $36 million since the program began last July.

Turning to guidance. Based on our third quarter outperformance and current backlog, we are now targeting approximately 37% to 39% revenue growth for the full year, up from 32% to 34% previously. This would represent our strongest annual revenue growth in 6 years, as Valentin mentioned, and is a testament to our leadership in providing cost-effective high-power laser solutions to our customers. For the fourth quarter, we expect revenue growth in the range of 18% to 27% year-over-year or $330 million to $355 million. Our revenue outlook reflects the expected slowdown in spending related to consumer electronics investment cycle and typical seasonality in China, factors that resulted in a Q3 book-to-bill below 1.

In Q4, we expect the tax rate to be approximately 29%, excluding effects relating to equity grants, and anticipate earnings per diluted share in the range of $1.50 (sic) [$1.55] to $1.80, which reflects earnings growth in the range of 12% to 30% year-over-year.

As discussed in the safe harbor passage of today's earnings press release, actual results may differ from our guidance due to factors, including, but not limited to, product demand, order cancellations and delays, competition and general economic conditions. Our guidance is based upon current market conditions and expectations, assumes exchange rates referenced in our earnings press release and is subject to risks outlined in the company's reports with the SEC.

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 guess the question is on 2018. So obviously, the fourth quarter guidance is impressive, especially off that tough year-ago comp. But just talk us through your current thoughts on the sustainability of the market expansion beyond the fourth quarter. I don't think anyone is anticipating another 35% to 40% increase, but your CapEx forecast, you just mentioned, Tim, is a bullish indicator, so I'd just love to hear your kind of qualitative thoughts on the trajectory.

Thanks, Joe. I just want to make one correction before I go on. I think I read the EPS range as $1.50 to $1.80, that should have been $1.55 to $1.80. I just misread that, as Jim's pointed out to me. Yes. I mean, qualitatively, we can answer that question. We're certainly not in a position to give any more -- any specific guidance for next year. We're just starting our budgeting process. And I think it's better to leave that until we have certainly more definitive information from our OEMs and other customers on their likely demand. Overall, I think that the multiple drivers of our growth this year continued to remain strong. First of all, the macroeconomic environment, if anything, has strengthened a little bit. You've seen that in the last quarter with this tremendous performance with our European sales, not just on cutting, but on welding applications. You see after some of the acquisitions that have been made in the 3D printing market, we've actually seen an acceleration in that business. China continues to be driven by -- on the cutting side of it as well, actually Europe, the move to higher-power levels. But also, there's tremendous growth in lower cost cutting systems that's displacing inflexible tools. We begin -- we believe that cycle is really only at the beginning. On the welding side, you may have a little bit probably weakness on the consumer electronics cycle. But on high-power welding, which, by the way, this year is up 50%, again we think we're really only at the beginning of a cycle on welding applications, not just for automotive, but for railcars, for example, for pipeline and many other industries outside of the automotive cycle. So I think there is still a number of very significant drivers not just for 2018. They go beyond that period. And then you also have some of the newer product introductions, which we know will take time to get significant traction but should be starting to contribute in which expand the total market that we addressed very substantially and to more meaningfully be able to address microprocessing applications, medical applications and some of the projection in display areas. Do you want to add anything to it?

Yes. We expect next year, by fall, would be much higher contribution, probably grow in contribution of our new drivers. New driver sales this -- first, of course, it's our new family of lasers that are (inaudible) pulse are red, are green UV rays that -- and mid-infrared rays that now is starting many of them on mass production next year, introduce nicely with the introduction market. It's also -- we expect now or next year a much higher contribution. Our system business is growing very fast. We qualify for many Tier 1 customers and many industries and is starting now also the shipment in quantity. So our target to supply our business is -- we -- in this direction, we are going very successful. So we don't see any signs for next year there would be some -- we sure will grow a double-digit business next year without problems.

And then as my follow-up, Dr. Gapontsev, you've mentioned that IPG's lead times are unchanged, which, frankly, is pretty staggering given the growth. Can you talk through in more detail your ability? And maybe more importantly, you're in a greater stability to continue to meet demand with the market growth where it is. I don't know you provided formal backlog number next quarter, but I'm curious how much the backlog is stretched. And even looking downstream, too, are you seeing any other individual components or assembly capacity that could ultimately limit the supply chain's ability to respond to the market's growth?

Yes. We are proud that we view it. When we huge share this year basically in the units. It's revenue and it's our growth. They might think about the units quantity, practically it's 60% to 70% in average mention any company, high tech, which vertically company who are able to make so fast growth during the year in the level of $1 billion of revenue. I don't know of such company, practically. So what we demonstrate, we're able and we now have caught it (inaudible) growth need -- next growth, need additional series investment by way of investment that allow us to support that such growth driver. And taken (inaudible) regular lead time, it's only 6 weeks. If customer needs much shorter, we'll also provide without problem in 2, 3 weeks delivery even as our high-end high-power product to compare -- as we know, all our competitors have so many times more on lead time. It's only due to our fully integrated (inaudible) because some components of the (inaudible) we have in house, so we don't need to wait from outside supplier. It's a market now. Even you need the new PCB, you have to wait half of year only to deliver to get from outsider this even PCB's simplest batch in the market. We're making everything inside. It helps us to hold a leadership in the market.

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

I guess just in regard to a prior comment, you talked about the replacement of inflexible tools and that we're just at the beginning of this process. I'm curious if you can help us understand how many units this shift has represented year-to-date for IPG, perhaps comparing it to last year? And how big do you think this market is? And I ask because it's proven very challenging to size from our side of the table.

I think it is a very challenging market to size. If anything, there's no definitive data out there. So our reference to that is more subjective, I would say. Certainly, the substantial part of the growth on the lower-power, lower cost cutting systems seems to have come particularly in China from a shift towards lasers within that market. The only way we really can frame this batch is by looking at what the total data is for the machine tool market as a whole. Obviously, that covers many other applications other than just punching and pressing. But we come back to this thing where lasers are 15% to the total machine tool market that there is a tremendous amount of metal that continues to be processed using non-laser applications. Some of the data that's in market analysis out there of high level is looking for laser share of machine tools to go from that 15% to more than 20% over the next couple of years, so that represents a very significant growth driver. If we find any more data specifically on punching and pressing and other tools, believe me, we will talk to that. We just don't have it at the moment, either.

And do you have any backwards-looking data, Tim?

No. I mean, all of the data around has been difficult to find. It's really -- the data we come across is what the total size of the machine tool industry is. It's something which I'll do some work on because obviously it would beehove to have that information available. We don't -- we just don't have it at the moment, Patrick.

I can say also such example. Even our standard businesses play in the automotive industry for the welding application, (inaudible) up to now, welding penetration to automotive market is only not more than 10%, so it's enormous opportunity. Up to now, it's only point -- penetration within hot points but not a huge and full production-wide. But now the trend, we have signal from Tier 1 major customers, so very clear signal. They now will go into mass introduction or replacement of current resistance of the other technology by welding technology. It can increase only volume for automotive industry or for laser system 5 to 10x. It's still enormous opportunity for welding for thin metal. But practical market for thick metal, practical steel in starting-only phase. For example, we -- this quarter, we shipped first robotics production systems installed in one of the [Puerto Rico] who produce the panels in solar for high-speed train. This -- only this market mainly handle this system. It's first system which we'll now introduce into Europe for such application and increase practical production, speed and productivity, minimum customers to make 10x when compared to the current technology they use today and customer -- who have a line of customers who'd like to get this system.

Great. I appreciate the details, Valentin. I guess my follow-up question is on gross margin, which impressed again, thinking about short term and longer term. I think on the short-term perspective given the decelerating growth guidance sequentially, is it fair to assume gross margin looks like is implicitly down maybe 150 to 200 basis points as kind of the range you're looking at? So is that a fair assumption? And then in the intermediate term on gross margin, if we balance your long term, I think, mid-teens revenue growth guidance that you stated at your Analyst Day and your gross margin range of 50% to 55%, I'm curious how investors should think about gross margin and which factors are more permanent and which are more temporary behind the current very strong, very impressive margin results?

We clearly got a lot of momentum on the revenue side that means that we're absorbing manufacturing capacity extremely well at the moment. That is a driver. So our total manufacturing costs as a percentage of revenue this quarter are down. You've also got the shift to more than 6-kilowatt lasers that benefits the margins, so you've got a bit of a product mix benefit on that. You had some strength on medium-power sales and also QCW, which are very profitable product. I think in the -- if you go and look at this on the medium to longer term, the overall strategy as a company continues to be to ensure that we're competing and offsetting competitive dynamics in the market and limiting the ability of people to catch up with us. We try to develop newer applications and expand those applications across a pretty diverse sets of them, whether it be cutting, welding, cleaning, ablative processes, introducing new products. So you've got to factor all of those dynamics, it still is not our intention to, on the longer term, articulate a higher gross margin range than the 50% to 55%. It's still very much the intention to drive the expansion of our addressable market by looking at fiber laser technology adoption across a broad set of applications that address many different end markets. So we're benefiting certainly from tailwinds at the moment, but we're not trying to get to like a 58%, 59% gross margin model, Patrick.

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

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

I had a couple of them. Tim, I know you're not giving guidance for next year. But if I look at some of your strength this year on the QCW coming from consumer electronics and, historically, consumer electronics has had an on-year and off-year, so is it fair to assume that QCW and plus maybe the pulsed laser sales just optically should be down next year given that it's been really strong this year?

I'm not going to give specific guidance about QCW. I think externally, the consumer electronics spending cycle is a biannual one, and therefore next year, we'd expect that to be weaker. Having said that, the total contribution of that consumer electronics, I think, in total revenue growth is more than $300 million. And the consumer electronics contribution to that is about $50 million, so 4% or 5% of the total. It's certainly been, as I've characterized it, the icing on the cake, but it is by no means the sole driver of growth this year. And there are many other applications that we continue to believe will have momentum into next year. Valentin talked just now at length about other welding applications that tend to use the high power. The cutting market replacing and displacing -- continuing to displace CO2. Even though China and the China OEMs are lagging a bit, we're continuing to see some traction there overall, and that may start to accelerate. You've got the overall investments in electric vehicles and battery, which through all of the analysis that I've seen on it is it's potentially not just multiyear, but decades-long investment. That's only just at the start. You continue to see many announcements about metropolitan areas and countries around the world targeting, moving almost exclusively to EV, electric vehicle sales within a 20-year time horizon. And then you've got some of the -- the higher-power pulse is not just marking, engraving for consumer electronics. There's ablative applications there and other applications that are driving that as well. So I wouldn't get too hung up on the -- and clearly, QCW has performed brilliantly this year on the back of consumer electronics, but it is certainly by no means the only driver of growth. And it's -- again, I characterize it as the icing on the cake rather than anything more than that.

QCW and lasers, we're starting our mass penetration, we'd introduced 7 years ago. We expect it will start -- we'll win market much faster, total market, whatsoever, (inaudible) flash pump YAG laser, this market of flash pump YAG, we're talking -- our estimate were like 40,000 to 50,000 per year. But unfortunately, the market was very inertial and takes many years before to catch serious penetration. Only 2 years ago, we had sold per year more than 1,000 lasers. Last year, [interoperably too]. But this year, we expect it would be huge. It's going up like (inaudible). This year we expect it will be at 6,000 to 7,000 lasers. It's huge growth, QCW. And it's only start of the market penetration. We believe we can sell to market need to tens of thousands such lasers. It's only start of the penetration [given] time to market, QCW. We think many other lasers are going the same way.

Got it. Got it. It's very helpful. And then I had 2 other questions. Tim, is there a way you can help us slice and dice your revenues based on cutting, welding, 3D printing and exposure to autos?

I think, and we've given this data, but historically, it hasn't changed fundamentally because everything is growing at approximately the same rate. So last year, total cutting sales across all types of lasers was about 50%. Welding, in total, was about 25%. The 3D printing is still in the range of -- it's probably like 4% to 5% of total sales, and then you've got a whole host of other applications in that area. On the automotive side, we still identify about 15%, maybe slightly less, of sales going into automotive. And then you have the OEM applications that serve the automotive market that are cutting, marking, engraving, probably even some of the additive processes. So total sales into automotive, we would estimate, is still more than 20%, maybe 25% of total sales. But that's really our estimate because we don't see the end market data from a lot of those sales.

Got it. Got it. And just -- that's very helpful, Tim. And then just a final question, if I can squeeze in one. On the electric vehicle side, is it fair to assume more of the cutting applications will be for the body of the vehicle versus the welding will be more related to batteries? Is that the way to think about it? Or is it going to be across both for EVs?

It's across the board. It's more some of the fine-cutting is -- a lot of the fine-cutting volume will be driven by the batteries where you've got the foils and the thinner metals on the casing. There's also a lot of fine welding within the battery. And then on the body side, because people are trending to use lighter materials like aluminum there's welding sales being driven out of that, high-strength steels where they're trying to save weight as well, that'd be the welding and the cutting would be driving those sales on the body side. So it depends upon the type of laser it is, but it's not just the battery and it's not just the body. We think we benefit from both aspects of the production.

It's also new market there. So new market won't be -- will not use laser cutting at all, fine cutting or super high-speed cutting and so. For example, electric motor sales to market [many] hundred million motors and so on. Here, we develop new technology for super high-speed cutting of the major parts. It's huge market at all. [That's now practically] used for the stamping and so on. But now these new materials for electric motors, stamping not -- doesn't work at all. It's only super high-speed laser cutting open [episode] the new opportunity toward the -- opportunity to introduce new, much more efficient materials for electric motors, which is not possible to stamp by a regular way. And so on motor, while there's similar opportunities with very huge volume, we don't like to talk many of them because it's new, confidential. But it's really huge -- really with huge opportunity for the -- on laser technologies.

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

So first, a follow-up on the last question. When you look at the cutting and welding markets from a long term point of view, is cutting market twice as big as welding market? Or do you think the welding market is just earlier in their adoption of fiber lasers in general?

Again, as I said many times before, I believe, I want to believe that welding market would be going -- laser technology penetration is going smoothly. But in future, it will be even larger than cutting market. Welding market, but it takes much more efforts and it's more sophisticated because practical for each customer, for each product it should be customized, not standard solution. So you need much more support in other -- much more business model penetrate to build this market. It's different than cutting. Cutting there are more standard solution where people produce similar products for 2D cutting. 3D cutting, why is this much smaller? Only because it's much more complicate in technology and so on. But 2D cutting, very simple with other people using this now. Why is our own laser, fiber laser, now they dominate in this 2D cutting market? Because, of course, much -- and not only because it's much more efficient, much more faster cutting and high quality than CO2 laser, but the reason now is market penetration because now the cost of investment and maintenance for laser solution cutting machine with fiber laser, it's 2x cheaper than with CO2 laser, so CO2 laser due to -- we now remove practically in full. The thing now -- right now, new ways of penetration and replacement of non-laser solution, with punching and so on, again, because now the laser solution becoming cheaper than these solutions where people now understood this. And now we started new phase replacement, other kind of cutting, which before dominate in this market. So it's all the combination of factors: higher quality, more reliability, efficiency, so on, but also economically much better than -- and we're going this way. Why we decrease all the time cost and what support -- we're able to support much higher gross margin and so on many years because we'll open and we'll open new opportunities for laser technology penetration in new application. And when applications, when it doesn't work at all up to now, but in future, we're work and we -- this application will become very much and not only cutting reporting today.

Okay. No, very helpful. And then just maybe a quick update on the ultrafast progress?

Ultrafast product, now the market is not big enough. It's some $100 million, but it is not because of the large volume of units, it's because of high prices. So I would say now there's a lot of application, now the material process, and now when the ultrafast laser open new opportunity, much better quality of processing and so on. But people not -- they're not available for the most applications because very high price, first. Second, it's also not reliable. It's still very bulky and not practical and not industry grade, still most laboratory grade than industry grade. And people use only when they don't have any choice, but really a limited use. We develop new generation now of ultrashort pulse. Now it's not -- you will want to now to test different kind or version of model with some lasers, which we develop. Now after a long-term qualification testing and so on, now we're starting mass production, introduce to market. We -- I've said before and we hope, our target, to make full evolution on this market to provide really fully industrial, highly efficient, reliable and compact, useful devices also with much more cost, reasonable price for mass penetration used by different groups of customers for different applications. So it won't be 1,000 total lasers per year, it should be like 10,000, mainly 10,000 device per year for many, many applications. We introduced now this technology. But what exists now is the market still don't correspond to market expectation. It takes time because markets, of course, initial test and modification of final [by] integrated their system and so on. It takes time, but we now to force the -- accelerate this mass penetration, we now develop not just -- provide not just lasers and accessory for lasers, we're looking to provide -- starting to provide full complete system package technology lasers, full system installation and support our target units of -- support all cycle -- life cycle. In such way, we hope the implementation, the market development, we can short -- 2, 3x shorter than Europe. Europe, in 5 to 10 years. We hope during 2, 3 years, we will really create new market.

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

I was wondering if, Tim, you might be able to provide a little bit more color around the book-to-bill, which you said was below 1. Can you give us some sense geographically what that book-to-bill looks like, particularly in China where you've had such strong growth?

Trying not to get in -- going into all of that detail on a geographic basis, I think book-to-bill was basically and was almost exactly where we expected it to be given all the momentum that we had on the consumer electronics and other applications, and then the seasonality coming into the year. Overall, I think when you look at where guidance is, you'll get an idea of where the book-to-bill was. I think all the -- they're not a geography that are, like, underperforming expectations, if that's what you're sort of driving at, Jim. If anything, what's a little bit weak is Japan, as we mentioned, although they have a stronger revenue number coming into the end of the year as they normally do and they've also got a good bookings number, so hoping to see some recovery there. But there's nothing too unusual in what panned out for all of this during the quarter.

Okay. Well, let's maybe -- and I know as you go through the budgeting process, I would assume that the first area you're going to really drill down in just because it's shown such phenomenal growth this year is China. And I'm wondering, there's the consumer electronics piece that, yes, that's not going to be as strong, clearly, great cycle. We're in an off-year. But as you look at China over--through the first 9 months of the year, there obviously have been some really unique drivers to generate this kind of growth. Has it been new customers that have really scaled? Is it -- I mean, the EV market in China, by all accounts, seems to be growing rapidly? But I'm trying to get a sense as thinking about next year, and I know you can't give guidance, but clearly, this has been an area that's been a big driver. Are there some unusual parts that we should think about that drove your business in China this year?

I don't think there's anything unusual. Obviously, consumer electronics is a biannual investment cycle. You have had a sort of -- a bit of a multiplier effect from the EV investment cycle, which I mentioned is not just supposed to be a 1- or 2-year investment cycle. That potentially is a decade-long investment cycle. You've certainly seen an acceleration on the displacement of non-laser technologies as being a driver. Perhaps the Chinese OEMs are starting to penetrate. We mentioned some of that is export demand. They may be some better execution into some of the more peripheral markets that's driven some of that demand. I think the consumer durable goods demand in China has been good this year, so you've seen investments on that, that side. In the transportation side, you've seen continued -- not just on automotive, but on buses, for example, so public transportation...

Railway and so on.

Railcar investment. So it's been pretty -- it's a pretty diverse set of growth drivers, and I think the key for China next year will be does the underlying GDP remain at around 7%? And so long as that holds up, I think you continue to remain optimistic about it. And so long as liquidity continues to be available in the market, we remain optimistic for it. So now I don't think there's been any fundamental change in sentiments around that or, for example, the PMI in China, I think it's still above -- just above 50, right? It's still just above 50 at the moment. So that still is expansionary at this point in time. We will continue to watch all of those data points, though, Jim.

Competitive landscape, how is that as you look at...

Competitive landscape's kind of where it has been, right? There's -- it's preferable to say there's fierce competition at low-power pulse lasers. We've chosen not to go down on pricing on some of the lowest-quality product that the Chinese supply. And as we said, we saw, even in low-power pulse double -- not double, single digit growth this last quarter, which was good. There's certainly some more competition on medium power, and there's some talk about going up into the kilowatt scale, but the volumes there is still relatively small. So the competitive dynamics continue to -- they certainly haven't negated. If anything, they probably strengthened a little bit, but we continue to try and run ahead of the train, as Valentin would say.

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

You're projecting your CapEx next year to be at the high end of your range. Are you anticipating significant capacity additions? And if so, in what areas?

Yes, of course, we -- this year, we fulfilled all the success with all this market challenge. But for further growth, of course, we need additional investment in CapEx investment, much more capacity in buildings, of course, the equipment and so on. We have to grow, every year, to grow 20%. That is [to build additional] factory for $300 million, $400 million each year. It's really we need increased CapEx, but we have enough cash and we want to increase CapEx where essential next year.

Any more color on your systems business?

Systems business, we started 4 years ago, and now we're working in many different applications. So also with microprocessing and have developed, hence, new unique technology already and qualified them. We now -- we also qualifying now the system in terms of different kind of application, full complete systems, also prototype [label]. Some of them we're starting mass production. So the business -- we need to develop the business to reach multiple hundred millions. It takes some years, but we're very successful going this direction. We -- our target do not depend from integrators. Integrators now are the main obstacle for further increase of our business because they're growing very slow in many countries, not enough integrators. So customer need not just laser. Customer need full complete solution. For them -- nobody need engine to car. All need full car. The same any other -- and our target to produce complete solutions for many different application. And we think we have a good chance to become system company. I have mentioned today that we're already qualified. I don't like to make -- to name the company -- very large company, we have qualified as integrator, not just supplier of laser, as integrator. So it's opened for us opportunity directly to work without an integrator for this very large potential customer.

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

Two questions first, Valentin and Tim. So as you look at this year for the high-power sales, based on the guidance what you have provided, what percentage of your total high-power sales would be 6 kilowatts and greater and below 6 kilowatts? And where do you see that trending? Is there any reasons beyond high productivity, which is driving this strength? Then I have a follow-up.

So as we mentioned, sales of 6 kilowatts grew by -- more than doubled than a year ago and are now more than 30% of total high-power sales. The trend you'd expect to see there would be -- it's not clear on cutting as to what would represent saturation in that market because the cutting market has never gone as high power as this level and even now people having to, for example, develop cutting hedge to meet these power requirements. What the OEMs are finding though is that they are not reaching saturation of power versus speed. And therefore, this is not just cutting systems that are used for thick metal cutting. This is cutting systems that are being used across all thicknesses of materials with productivity gains and improvement. Now do I think that market is going to be -- is it going to be 80% of the market? No, because you're also seeing, for example, tremendous growth at lower power levels which are enabling the OEMs to produce low-cost cutting systems to displace at a more rapid rate inflexible tools that we've talked about. So overall, the average power of our lasers sold for cutting applications remains at about 3 kilowatts because you've seen growth at both at the high end and the low end. On welding, if you continue to see the growth on the welding that you see, welding is being more widely accepted and has always required slightly higher power levels. So you'd continue to see lasers with more than 6 kilowatt also benefit from the growth in the welding market happening over the coming years. That's kind of how we're thinking about it at the moment, Jagadish.

The typical now, we have 2 -- have in mind 2 different markets, one of them, cutting. One market, it is a market to a family market. It's huge quantity -- for now only Japan, as I know, the -- it's more than 20,000 family companies, small companies, which use kind of for a different kind of these -- make it fast products for sale with cutting systems, more than 20,000 of such. It was the one -- the CEO of 1 big Japanese company explained them. And second market to watch were perhaps production manufacturing companies, which are producing high volume. So for more family market, people don't need very high power yet. Before, they use 500 watts, 700, now they want 1.5 kilowatt because of this, but still low power. So they need budget, very low-cost cutting system. Price of such system growth now up to -- [below] $100,000 for cutting systems. So the -- but as the market is for large production, high-volume production, for big companies, they're going to 110 kilowatt plus because of much higher productivity, high quality, universal cutting system, which cover all range of the thin and thick metal, and we (inaudible) simply process in higher speed, and so higher productivity. So it's 2 different -- on low end and high end. We -- for both such application, we provide the best solution.

That's great, Valentin and Tim. Just to follow up on this one. You talked about new products at your Analyst Day. I was just wondering how much has been the contribution from these new products for this year? And where do you see that for next year? Particularly, any insight into OLEDs or on the laser projection systems, that will be great.

So overall this year with the newer products, they've actually grown at about the equivalent rate to the underlying business, maybe even a little bit quicker. At the moment, we've now taken and we exclude QCW from that newer product list because they're relatively new and we're looking at sort of the higher-power pulsed and green and shorter wavelength lasers systems and beam delivery within that category. They've basically grown at an equivalent rate to the whole business, so they performed really well. The contribution from, for example, the ultrafast is only -- is very well negligible at the moment. We just got customer evaluation going on, huge sales of UV lasers. So we hope that those are the areas we'd hope to get some traction at all coming into next year and then obviously continuing that. And so continuing to grow the systems business very dramatically, and the accessories business will continue to grow from that area. So they performed well. And one of the things we've done is take out of that new product group the QCW at the moment. So it's the remaining newer product -- really the newer products that are in there.

That is all the time we have for questions. I'd like to hand the call back over to management for closing comments.

Okay. So I have to say thank you, again, for joining us this morning, and we're sure that next quarter and end of the year, provide you new good results. And so have a great day.

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