IPG Photonics Corp (IPGP) 2018 Q3 法說會逐字稿

Good morning, and welcome to IPG Photonics' Third Quarter 2018 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, Rob, 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 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 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, 2017 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 30, 2018. The company assumes no obligation to publicly release any updates or revisions to any such statements. For additional details on our reported results, please refer to the earnings press release and the Excel-based financial data workbook posted to our Investor Relations website. We will post these prepared remarks on our Investor Relations website following the completion of the call.

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

Good morning, everyone. Q3 was a challenging quarter as macroeconomic and geopolitical factors reduced demand for our laser products. Despite these challenges, IPG made important progress driving higher power solutions into the market and generating meaningful traction selling our newest products and solutions. We believe our progress in high power and new products will help us emerge from the current downturn in a stronger competitive position with greater opportunities to address the growing market for laser solutions.

As noted in our preliminary earnings release, we believe tariffs and trade-related headwinds were the primary driver of weaker-than-expected performance for our business in China and Europe, where China is the main market for perfect European metal processing machines. Indication from our customers suggest that the purchases of laser system in these regions are being pushed out. We believe uncertainty resulting from the ongoing U.S.-China trade conflict is reducing overall demand for industrial capital equipment purchases, predominantly in China. In addition, we believe the softening microeconomic climate in China and Europe, as indicated by lower manufacturing PMI and reduced levels of infrastructure investments, is affecting near-term demand for laser system. However, we remain confident in the longer-term secular growth of fiber laser technology, our other lasers and non-laser tools.

During prior business downturns, we have seen customers begin to increase investment in transformational automation and miniaturization technologies that include our laser solutions in order to improve productivity and launch new products. We continue to expect our solutions to gain share from traditional tools and process technologies due to the superior productivity, flexibility, precision and power of fiber laser systems. We remain the clear market leader in fiber laser technology. That said, competition in continuous wave laser products at less than 4 kilowatts has increased. Some competitors have also announced a continuous wave lasers with power output of up to 10 kilowatt. China remains our largest and most competitive market. As we have previously indicated, we are seeing very aggressive pricing for select products by our competitors in China. However, we believe our advanced technology, scale and cost advantage over the competition are enabling us to win in the market, despite these pricing actions.

As our response to the new market situation, during the third quarter, we introduced new ultra-compact 1-3 kilowatt lasers and other products designed specifically for the market in China. With the benefit of additional production capacity and these new solutions, we were able to sell several hundreds more high-power lasers to OEMs in China that were either exclusively or predominantly buying lasers from our competition. We have won new business in part because some of these customers have expressed fast-growing concerns and frustration with the performance and reliability of competitor products. The revenue impacts these -- from these -- revenue impact from these gains have been limited by macroeconomic and geopolitical headwinds, but this early effort are yielding positive result. As a reminder, we believe there is no company that can deliver high-power laser solution at our quality, scale, cost and lead time. We continue to drive market acceptance of our ultra-high-power fiber laser technology at 6 kilowatts and above, which is now approaching 50% of our high-power laser sales. We continue to see our largest OEM customers migrating to higher power fiber laser cutting solutions, and Q3 was a record quarter for sales of our unique 12- and 15-kilowatt lasers. We also introduced the new perfect world's smallest 20-kilowatt cutting laser, further demonstrating IPG's industry leadership in producing the highest power solution in the marketplace. These ultra-high-power lasers are experiencing rapid adoption as they enable faster cutting speeds and improved end-user productivity.

Our new generation of super high-power fiber laser is releasing 3 new technology innovation that where will be featured at the upcoming FABTECH trade show in Atlanta. First, we're introducing new QCW mode for our YLS and YLR CW lasers that provides peak power up to 2 times average power, allowing increases in piercing speed, quality and improved piercing of thick materials -- metals. We reduced heat input in the QCW mode results in higher-quality cuts of intricate parts and cleaner, more controlled drilling of thicker materials. This unique capability is enabled by IPG's QCW diode design -- new QCW diode design that provide very high peak power for short-duty cycles. Second, we are launching adjustable beam mode capability on our flagship YLS lasers, which allows programmable adjustment of output beam mode and enables us -- our customer to process a wider range raw material thicknesses and improve piercing and cutting quality as well as optimize welding performance in certain material combinations. Third, we're introducing an integrated high-power scan head with our recently acquired weld-monitoring technology to meet the ever increasing quality monitoring requirements for industries, such as automotive, medical and other. These 3 new innovation examples of how IPG is committed to decreasing our customers' support of ownership and increasing their overall productivity. We also made a solid progress in our newest product areas, which is out of metal processing, and we believe will be in future well dependable from situation Far East, especially in China.

Sales of -- for example, sales of record high power -- super high-power green pulsed lasers used as an ablation tool for improving solar cell efficiency increased nearly 70% versus the year ago period. We achieved a record quarter for our new ultraviolet lasers solution, which are expanding our addressable market for marking and engraving for non-metal and for material ablation. Our unique new family of picosecond and femtosecond ultrafast pulsed lasers increased sales meaningfully off a small base and are seeing good customer acceptance for microprocessing application. Sales of systems and beam delivery products increased more than 20% year-over-year, evidence we are becoming a more complete solutions provider within the automotive, aerospace, railway, pipeline, entertainment and medical device industries -- and telecom industries. Collectively, sales of these new products increased approximately 10% year-over-year, and now represent more than 10% of total revenue. We expect during the next 3 years, these new applications out of metal processing will reach -- are targeted to reach 50% of our total revenue, then it would be more diversified situation, much of it's dependable for only cycle in 1 application area.

We remain optimistic about IPG's growth prospects over the medium- and longer-term given our technology and cost advantages combined with this significant market opportunity for lasers to take share from traditional processing -- metal processing technologies. We believe growth in our core industrial market is enabled by the superior performance, productivity, reliability and cost of ownership of our products over competing solutions. We expect to augment this growth with advances to -- in new product areas that meaningfully expand our addressable markets in the micro materials processing, medical, silicon, defense, scientific, projection and display industries. This includes providing more complete system and solution to end users in the aerospace, oil and gas, electrical vehicle, railway and medical device industries, and we drive penetration of advanced laser processing. Despite the challenging microeconomic and geopolitical backdrop, I believe confident -- I remain confident in IPG's multiple growth drivers for the long term, and we deliver on our mission to make our fiber laser technology the tool of choice in mass production.

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

Thank you, Valentin, and good morning, everyone. Revenue in the third quarter declined 9% to $356 million. Foreign exchange headwinds during the quarter relative to sales assumed in our Q3 guidance reduced revenue by $5 million. Without this impact, revenue would have been slightly above the low end of our guidance range. Revenue for materials processing applications decreased 11% year-over-year, and revenue from other applications increased 22%. By region, third quarter revenue in China decreased 9% year-over-year and represented approximately 45% of the total. Modest year-over-year growth in sales of high-power CW lasers for cutting applications was more than offset by declining sales of lasers into welding applications. In macro welding, we saw reduced demand from traditional automotive and electric vehicle battery welding applications on a year-over-year basis. However, during the third quarter, we received the largest order for battery processing applications in the company's history. As such, we believe this business should begin to strengthen in Q4. In micro welding, we continue to see a reduced demand related to the consumer electronics investment cycle. Past investment cycles for consumer electronics have materialized every other year, which would suggest that we should see better performance in 2019.

In Europe, revenue decreased 25% year-over-year, primarily due to softness in cutting, additive manufacturing and welding. As Valentin noted, we believe a weaker microeconomic climate in the region is the primary driver of reduced demand for lasers serving the cutting market. In addition, we faced a challenging comparison versus the year ago period when we achieved record sales within cutting applications and record shipments of ultra-high-power lasers. As we noted last quarter, we continue to expect lower sales into European additive manufacturing due to excess inventory at one of our larger customers.

In North America, revenue increased 29% year-over-year driven by strength in cutting, welding and government applications. Sales in Japan increased 4% year-over-year, with a continued rebound in cutting, offset by declines in welding and marking and engraving. Sales in Korea were consistent with the prior year. And revenue in Turkey decreased 29% year-over-year, which is not surprising given the recent economic turmoil in that country.

Turning to performance by product. High-power laser sales decreased 7% year-over-year to $227 million in the quarter, and represented more than 64% of total revenue. Reduced sales of lasers for welding, cutting and additive manufacturing were partially offset by strength in sales to government applications. Sales of fiber laser at 6 kilowatts and above increased more than 10% year-over-year, and now account for nearly 50% of all high-power laser sales driven by strong adoption in cutting applications. Sales of other high-power lasers declined year-over-year due to the weaker demand environment in China and Europe that Valentin cited. We're seeing aggressive pricing for select products by competitors in China, most notably 1- to 3-kilowatt lasers serving the cutting market. Pricing pressures in this business are being exacerbated by softening demand trends. However, with the benefit of additional production capacity and new ultra-compact high-power solutions, we are more aggressively targeting OEM accounts in China that were either exclusively or predominantly buying lasers from competition. Early progress in these efforts has helped to offset some of the pricing and demand driven pressure in our high-power cutting business and contributed more than $10 million in additional revenue during the quarter.

Pulsed laser sales decreased 11% year-over-year, with rapid growth in green, ultraviolet and ultrafast pulsed lasers, offset by reduced sales of other pulsed products. Medium-power laser sales decreased 48% on softness in additive manufacturing and cutting. QCW sales of $18 million declined 23% year-over-year due to the expected reduction in demand related to the consumer electronics investment cycle, partially offset by strong growth in higher power QCW sales into welding and aerospace drilling applications. Other product sales increased 10% year-over-year due to strong sales growth in systems and beam delivery accessories.

Gross margin of 54.8% declined 242 basis points from Q3 2017 and was at the high end of our guidance range of 50% to 55%. The decline in gross margin was largely attributable to the lower revenue in the third quarter of 2018 versus the year ago period, and as a result, less favorable absorption of manufacturing costs. However, we were able to partially offset this impact with continued cost reductions and favorable product mix.

Third quarter operating income was $124 million or 34.8% of sales, down 605 basis points from Q3 2017. Excluding a foreign exchange loss of $2 million, operating margin was 35.2%. Operating expenses as a percentage of sales increased 410 basis points year-over-year as we continue to make necessary investments in sales, engineering and administrative talent as well as in IT systems. On a sequential basis, operating expenses increased 250 basis points as a percentage of sales.

Net income was $101 million and earnings per diluted share were $1.84. Foreign exchange losses reduced EPS by $0.03. If exchange rates relative to the U.S. dollar had been the same as 1 year ago, we would have expected revenue to be $8 million higher and gross profit to be $4 million higher.

The effective tax rate in the quarter was 21%, which included certain discrete tax items that benefited EPS by approximately $0.14. Included in these items, we now expect a net benefit from Global Intangible Low-taxed Income and foreign derived net of Foreign Derived Intangible Income deductions in the U.S. Tax Act due to classification from the IRS on how these taxes should be calculated. Excluding discrete items, the effective tax rate was 27.5%.

We ended the quarter with cash, cash equivalents and short-term investments of $1.12 billion and total debt of $46 million. During the quarter, we repatriated $116 million in cash from Europe into the U.S. Having now repatriated $522 million from Europe, U.S. cash and investments now represent 78% of the total. Cash provided by operations was $72 million during the quarter and was $280 million on a year-to-date basis. Capital expenditures were $37 million during the quarter and were $133 million on a year-to-date basis, up 34% year-over-year. We continue to invest in new facilities and equipment to meet demand for our products over the next several years. In Q3, we repurchased 371,000 shares for $61 million, representing nearly half of the new $125 million repurchase authorization we announced in August.

Turning to guidance. Global macroeconomic and geopolitical headwinds have persisted into the fourth quarter affecting our business along with others in the sector. As a result, order flow has continued to soften. We are seeing aggressive pricing for select products as previously mentioned by our competitors, particularly in China, and we expect currency headwinds to be greater in the fourth quarter than in the third quarter. However, we have made strides competitively selling several hundred more high-power lasers during the third quarter to manufacturers of laser cutting systems in China that were exclusively or predominantly buying lasers from our competition. We are encouraged by this progress and the strength in new products and the performance in some other regions. Based on these factors, the fourth quarter 2008 -- for the fourth quarter 2018, we expect revenue of $300 million to $330 million. We expect our third quarter tax rate to be approximately 26% excluding effects relating to equity grants. We anticipate delivering earnings per diluted share in the range of $1.30 to $1.50. Based on this guidance, we now expect full year revenue growth for 2018 will be in the range of 1% to 4%, down from our prior outlook of 7% to 9%.

We believe there are some encouraging signs for 2019. Indications from several customers in China suggest that order flow may improve in the first quarter. We expect spending on consumer electronics, electric vehicle battery and other metal welding projects to increase in 2019 over 2018. In addition, we believe our early traction in new product areas will drive increasing contributions next year from micro materials processing applications, telecom, entertainment and display products and our systems business. However, our visibility of a trough in the current down cycle is limited by the uncertainty surrounding the global macroeconomic trade and geopolitical environments.

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, tariffs, trade policies and general economic conditions. Our guidance is based upon current market conditions and expectations, assumes exchange 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) The first question comes from the line of Joe Wittine with Longbow Research.

So we've seen a slowdown here and competition is creating a little bit more pressure than in the past, yet the gross margin is holding up, I believe, better than most would have expected. So can you discuss maybe a little bit further how you're defending the GM, including precisely where you are in realizing those cost savings from the diode efficiencies? I want to say that full benefit is beginning in the fourth quarter, but won't be fully realized until the first.

So Joe, as you allude to, we continue to focus on taking costs out of the entire bill of material. Diode is, obviously, an area we focus on. We're now producing a significant quantity in the U.S. exclusively as the new diode types and packages with the new chip design. So you are -- as you come into Q4 seeing a significant proportion of cost of sales running with those diodes, there's still some of the older packages being produced in Russia, but it's a pretty low quantity of them. The other things that we've focused on in the third quarter, which have -- has certainly helped gross margin is that total manufacturing expenses are also down substantially compared to the second quarter. Absorption unfortunately is also down and it's down significantly enough that it hasn't fully offset the unabsorbed manufacturing expenses. But I was actually very pleased to see the total reduction in manufacturing expenses and -- albeit a lower absorption rate on the lower revenue level, which will be expected. So there's both a focus on the bill of material as well as actually a focus on manufacturing expenses, for example, overtime, is being drastically reduced, headcount increases are very much limited at the moment, and then the throughput of expenses on some of the processes is also down as total throughputs on manufacturing processes, like the chip manufacturing, are also reduced. So at a high level, I think, that's a good summary of the way we're managing through this at the moment.

Okay, great. And then on China, can you discuss any further those potential green shoots that certain Chinese customers that you referenced? How much confidence do you have? Is the tone actually improving? Or are you skeptical at all that, that could merely be kind of typical out quarter or next year optimism? What -- how can we handicap the likelihood of that uptick materializing?

So the tone right now is that they're not improving, but the general feeling is that there is likely to be a pick in demand -- pickup in demand just because of the way the CapEx cycle functions. I think some of the Chinese companies are looking for greater stimulus to the private sector from the government, which will give the private sector more confidence in their ability to make CapEx decisions. From what we're hearing, a lot of the government support so far has been more to the public sector, but the private sector is optimistic that some of that support and confidence may come in the nearer term and would give them some sense that they'd see some improvements into the first half of next year. But it is -- it really is more just a reflection of the -- of that sentiment and thinking rather than anything definitive at this point in time.

That's great. Then finally from me...

Regarding automation in our Chinese competitors, they're selling now in many cases prices cheaper than material cost actively. And so who can [best] say the difference how they report some profit, we don't understand it at all, but we'll cover where the expense is.

Just a clarification point now off that beside, Dr. Gapontsev, your prepared remarks mentioned competitive commentary of up to 10-kilowatt competition. Was that referring to China-based competition? Or is that from the U.S. peer?

We don't believe the fake claim that you have this mainly and 2 years ago, it was some claim also from some Chinese, they have 10-kilowatt, but up to now, we don't believe this material product can provide any reliability and so on. Even low power lasers according our test of the lasers, they show very better reliability, and for example, our new products now, even old products, which we see 5, 10 years ago, demonstrates statistics only one set of the lasers that need service per 1 year, the full set don't need service more than 1 year. But for a new product, for the last 2, 3 years, it's -- only a few percent of laser needs, during the year, operation service, only few percent, so total reliability average lifetime without service up to 3, 5 years. So regarding these Chinese lasers, it's only a few months without service. In typical situation, we check on [same] day lasers and so on and customer also -- return customer being Chinese customers in China have many of these as such information, also very concerned about reliability when low power. What about high-power laser, it's absolutely not possible, the reliability is not achievable, functionality also is very limited. So laser with more than 5-kilowatt, but even 4-, 5-kilowatt not practical with our -- in our opinion.

You get what you pay for.

So this competition can be improved during next few years also very small to a -- they are not able to reach quality of our lasers, even -- absolutely not able during next some years.

The next question is from the line of Michael Feniger with Bank of America.

Just the first one. You mentioned, obviously, the biggest weakness, it seems like it's still tariff and trade related. You also cited consumer electronics. I'm just curious what you're seeing on the auto side. We're starting to see auto sales disappoint in North America, but in China, CapEx for auto seems to be a little bit more stickier than just sales from month-to-month. I'm just curious if you're seeing CapEx plans on the auto side for your auto customers shifting at all and get pushed out and what the dialogues there into 2019?

So Mike, we previously said that the automotive in Europe has been weaker this year than it was in 2017 and the same can be said of Japan. Both the traditional and the EV auto in China as well was weaker, but we're pleased that we got a significant order, we said that's the -- is the largest order for both welding and foil cutting applications for EV in China, so it's good to see that start to pick up. The North American automotive sales have been reasonable this year and have grown. There continue to be several projects that we're working on. So it's -- yes, the automotive cycle is not -- certainly has not got a tailwind behind it than it's had a headwind particularly from the traditional side in numerous different geographies. There are several projects that we're working on, some of them in Europe, so we'd expect to see some order flow and revenue coming out of them. But then -- fundamental game change is that they tend to represent changes in the way that the technology is being used by the automotive companies.

That's helpful. And I know we just got asked about the gross margin. I mean, this is the first quarter where you are kind of back inside that guidance range, which was expected. If we don't see that resolution on trade, and we continue to see just this type of environment, particularly on the price, is IPG -- are you guys comfortable maybe going even to that low end of the range to make sure you protect that market share and even win new customers to push back on those more aggressive peers?

So in the short term, we would be prepared to defend market share with this -- with our superior technology and reliability and higher power lasers. And if you've got a lower level of revenue, that may come with a lower gross margin. If you defend that share, and then you got into the recovery or a recovery period with increasing contribution, not just from the recovery in the metal processing market, but also from growth in the new products that we're introducing to the market, we'd expect to then see gross margin pickup from that. But yes, we are prepared to defend -- we think it's very important to defend market share in the near term and doing so may lead to some lower gross margin, particularly at the lower end of the 1- to 3-kilowatt range of lasers. It's important note though as well we continued to take cost out of those devices, so we made significant progress on that which has enabled us to continue to report what we think as stellar gross margins even as pricing has been aggressive in Q3 into Q4.

Tim mentioned that we introduced now new diodes and new fiber modules into -- or rather very more -- much more integrated electronics, a new generation high-power laser on label of one -- from 1-kilowatt up to 50 and so on. We will -- next year, we will contain these new components and cost of these components, cost per 1-kilowatt or 1-horsepower 25%, 30% within the components we use now. So we expect only due to have very serious impact improvement of faster growth of gross margin. But the production for them, the new generation, very efficient and twice practical more powerful diodes, we started only this October. So impact of this mass impact of margin, we expect next year.

The next question is from the line of Jim Ricchiuti with Needham & Company.

Tim, you alluded to a large win in EV market, and you also talked about winning some share back from competition in China. Is that all related? Or is that EV win that you discussed in addition to the share gains that you think you've managed to capture in China?

That is a completely discrete relationships and EV battery orders are separate from the wins that we've had on the cutting, they're sort of Tier 2 and Tier 3 cutting customers.

Got it. And can you talk a little bit about how you saw pushouts in both Europe and China as you progress through the quarter? Was this broadly based? Or was it concentrated among a handful of customers?

On a year-over-year basis, if you look at the performance within China, you'd actually see some OEMs growing who, for example, made significant gains. They're leaders at the high-power level who performed strongly. In other parts of the customer base, you'd see their sales down year-over-year. I'd say that coming into the end of the quarter and into the beginning of Q4, that tone has softened across-the-board for the cutting applications. Offsetting that a little bit is the win on battery welding side. In Europe, on a year-over-year basis, basically because of weakness on cutting, welding and additive for the reasons we've articulated, there's a significant decline in revenue. I'd say the European order flow is basically much more stable and our expectations for Q4 in Europe more stable than they are in China. And then we're expecting, for example, outside of those 2 areas some growth sequentially in Japan and solid performance in the U.S., which would probably show year-over-year growth, but sequentially, a stable situation. So what I'd characterize is that outside of China, we're seeing some better sense of stability, whereas China continues to be soft and has softened a bit since the end of Q3.

So your overall book-to-bill was below 1. It was weakest in China, closer to 1 in Europe and was it around 1 in the U.S.?

Jim, we don't get into giving book-to-bill by specific region. I think that my tone or comments about that by geography are the ones you should reference.

The next question is from the line of Tom Diffely with D.A. Davidson.

One more question on the Chinese market. So the slowdown there that you are seeing, is it just nervousness? Or are they actually have an issue with access to capital or can you tell?

So I think one of the issues, Tom, is that the Chinese government has been through a period of tightening during the first half of the year. That then has got compounded by the definite uncertainty related to investment decisions that has come out of the increasingly aggressive stance on the trade war. And now you're actually in a period where -- I'd say, it's more the macro than the credit access, that's the -- and the uncertainty around the macro that's impacting things. At the same time, I think you're starting to see that Chinese loosen credit policy. And let's see where they go down. I think they have to also do some stuff on the infrastructure side to give the private sector some comfort about the decision-making process on future investments. But I'd say that the tightening process got overshadowed with the very increased uncertainty around the CapEx investment cycle driven by the trade war. I don't think that's the primary driver of the weakness we're seeing at the moment.

Okay. That makes sense. And then if you look at China in general -- go ahead.

Yes. I would like to say, even without this trade war, the policy of Chinese government to help any way to the Chinese companies to win the fiber laser market, they include in their strategic -- the list of the strategic technology fiber laser 10 years ago, 10 years, Chinese customer try to make -- copy these products to install some production. And Chinese government up to now held their own manufacturing any way to win this market. If it's strategic, I would tell you, you could not stop the changing situation. Now with the step to make even dummy product, they have huge help by any means from Chinese government, state-owned companies and so on. It's -- the same happened in the electronics many years ago, then all this -- all the budget electronics they own, and now it's all moved to China, only high-end electronic still remain in Western countries, but the small-scale electronics now it's in China, they won't capitulate. The same situation our attempt to get the fiber laser technology as strategic to China to control this, it's -- we see it here with such strength they will go with our win. We still have very good position, much high quality, it's a huge different -- gap between good quality with these guys. But it's a situation -- a real situation, nobody can change this, that's more of a trade won, not trade war, but we have to offer fight for these technologies.

Yes, that makes a lot of sense. So when you look at the Chinese market, down 9% year-over-year, is there any way to quantify how much of that was -- is pricing driven versus unit driven?

No. To say this, at least, we just don't give that information, Joe (sic) [Tom]. 80% of it overall was really unit, I'm trying to come up with a reasonable number. I'd say 80% of it was driven by unit volume decreases and then the remaining 20% was being compounded by some pricing declines, particularly at the lower level. If you looked at the higher level, you'd also see some pricing declines, but that's actually on the back of very significant volume increases in some of the ultra-high-power lasers.

The next question comes from the line of Patrick Ho with Stifel.

Tim, maybe just if you could provide a little more color about the comments you made about the tone for the early parts of 2019 that appear to be obviously better relative to what you're seeing today. Is it coming from a specific market application within China? Or is it as broad-based -- where the weakness was -- appears to be much more broad-based, is the potential recovery broad based? Or is it more in 1 application?

I'd say some of the comments we've had from companies in the cutting market, conversely some of the other cutting customers are a bit more circumspect. So one of the comments we've had is that they're looking for a bit more guidance from the government for the private sector, and I think that would require some support around infrastructure spending and continue loosening on the credit cycles. The broader-based aspect of it though is reflected in the orders that we've had for the battery welding. So if those -- that investment cycle now continues, you'd expect to see that perform better in '19 than it has in '18. And for the consumer electronics cycle, we don't have visibility into anything definitive at the moment, but in general, that is a biannual investment cycle. So now that -- that's the basis upon which we're reflecting some of the comments from the customers, but also how our business cycle has also functioned historically.

Fair enough. And so for my follow-up question, just to go to the gross margin performance, which has been pretty strong, given the lower revenues and the pricing pressure you are seeing. How is the product mix shift -- as you detailed the 6 kilowatts and above are now approximately 50% of your high-power laser business, how much is that shift help in the overall gross margins while staying at relatively elevated levels despite the weaker absorption that you're seeing?

No, it's certainly a help, that's one of the benefits on product mix. So is that -- then some of the higher power QCW lasers that we sold during the quarter, I think the QCW laser has actually performed very well given that this an off-cycle from the consumer electronics investment. And most of those QCW lasers were a significant number than would have been at the higher power levels. The continued strength and performance of both higher power pulsed lasers and also the newer pulsed laser product offerings, including the green, the UV and the ultrafast, would also, if those ships, on product mix can continue, they would also help to sustain the gross margin profile. So yes, product mix is certainly helping us and has been always been part of our strategy to shift the customer base towards these higher performing -- higher performance lasers that enable improvements in productivity and drive efficiency.

(inaudible) to save gross margin and also to run (inaudible) to win control there is only one way, to generate and develop much faster and faster, new and new mode ones product for new application also to develop and implement. It's only one way. If -- our policy to run faster than any competition we are able to make this and in beginning a fast-paced this -- we have a new product when we implement provide much higher gross margin and so on. With time, with volume, or cost, margin going down is typical with business, and so nobody can change this. And our target, we introduced now for development, we have half of ready already now more than 10 new families of products, and next year will be the year when there would be a mass introduction this product. Each of this product will get 10 times more than current product, which now would bring for us revenue with much higher margin. It's -- when you first market them, you will get to know this price. If you define for other peoples, so margin, of course, would be much worse. We have opportunities we now will forecast for this new product and new application. It's -- this year, it was very critical from the point we are reaching excellent result this year. So now we see and with right in end of (inaudible) with mainly new application, very good perspective result with much higher margin than current product. In spite (inaudible) still current product due to our very hard policy to decrease cost, very efficient policy, still bring for us very good margin. But for [in turn] for up to now in spite of China, our cost of this current product topped current product for us, minimum 3 times cheaper than any competition or manufacturing. It will go and go and decrease and decrease further, but very competitive still with all product. New products are unique or most of them. Nobody produces the same today, and so we would be first in the market.

Thank you. At this time, I will turn the floor back to Mr. Dr. Gapontsev for closing remarks.

Okay. Thank you for joining us our today. When look forward, we are sure that next time we'll provide you much better results. Have a great day.

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