IPG Photonics Corp (IPGP) 2018 Q4 法說會逐字稿

Good morning, and welcome to the IPG Photonics Fourth 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, Michelle, 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, February 12, 2019. 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 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. As expected, the fourth quarter was challenging. The macroeconomic climate weakened in our largest markets, reducing demand for our laser products. Despite these challenges, we were able to deliver results in line with the outlook we provided a quarter ago. More importantly, we have made meaningful strides in key new product areas and undertaken strategic acquisitions that help us capitalize on the long-term growth opportunities for our laser solutions.

We believe our progress delivering on new growth opportunities reinforces our industry leadership in fiber laser technology, strengthens our relationships with leading-edge customers and enables the next generation of product creation.

In China, we saw further weakening in the demand environment in Q4. Higher tariffs have made minimal effect on our production costs, thanks to our diverse global manufacturing footprint and vertically integrated manufacturing. However, the U.S.-China trade war has heightened end customer fear and uncertainty.

Continued investment spending on in industrial land suggests that Chinese manufacturers likely remain committed to their long-term growth plans. In addition, the Chinese government has enacted targeted stimulus to address the macro uncertainty and trade war fears of private enterprises. These factors suggest we could see demand begin to stabilize.

Near term, we have seen signs of stabilization in our European business. Unfortunately, the drop in eurozone manufacturing PMI from more than 60 a year ago to slightly above 50 today drove a decline in our European business during the second half of 2018. The eurozone is also affected by softer China demand. There is less certainty among the -- our European customers regarding a pickup in demand, but overall trends do not appear to have worsened.

Regardless of microeconomic (sic) [macroeconomic] climate, we remain confident in the longer-term secular growth of fiber laser technology over other lasers and nonlaser tools, as well as the continued shift towards higher-powered solutions in our largest market.

We believe there is no company that can deliver high-power laser solutions at our quality, scale, cost and lead time. While competitors are announcing new products with output power of up to 10 kilowatts, we believe our advanced technology, scale and cost advantage over the competition will enable us to continue to win in this market.

We are seeing strong customer interest for our new CW lasers with QCW mode capability that provide peak power up to 2x average power, increasing piercing speed, improving cut quality and delivering cleaner, more-controlled drilling of thicker materials. This unique capability is enabled by IPG's QCW diode design that provides very-high-peak power for short-duty cycles.

The customers are also evaluating our adjustable mode beam lasers, which permit reliable adjustment of output beam mode to process a wider range of material thicknesses without the use of external optics and without stressing the optical fiber, which we believe can be an issue for competing technologies.

When combined with the ongoing improvements we make each year to the power, electrical efficiency, compactness, reliability and productivity of our fiber laser portfolio, we expect to continue to drive share gains from traditional process technologies and maintain our competitive lead in the high end of the industrial laser market.

In 2018, we made excellent progress in new growth areas helping to diversify our business. Sales of new pulsed lasers, systems, communication product and advanced applications increased 36% in 2018 to approximately 15% of total revenue and 20% of total revenue in the fourth quarter.

We demonstrated solid traction selling new pulsed laser products, which increased 30 % into 2018. These new products includes our high-power nanosecond pulsed lasers for marking, ablation and cleaning; our green pulsed lasers for solar cell ablation; our ultraviolet lasers for nonmetal marking and material ablation; and our -- finally, our picosecond and femtosecond ultrafast pulsed lasers for microprocessing applications.

In addition to sales of new lasers, we sold a record number of beam delivery accessories and complete laser systems, evidence we are becoming a more complete solution provider within the automotive, aerospace, railway, pipeline, entertainment, medical devices, communication industries and the large-screen projector systems.

In 2018, system sales of nearly $60 million increased 47% year-over-year, driven by growth in macro and micro systems and yearly revenue from our super high lumen digital cinema systems.

In December, we closed the acquisition of Genesis Systems Group, a qualified robotic systems integrator for more than 300 blue chip customers, most of which are in U.S., helping to diversify our geographic exposure.

The acquisition of Genesis is an important step for IPG's evolution to becoming a more complete provider of welding solutions and strategic partner to end customers. We plan to leverage Genesis' unique expertise in robotic systems integration to accelerate laser processing within the transportation, aerospace and industrial end markets. Genesis also provides a route to market for IPG's advanced laser welding and laser cleaning solutions.

In communications, revenue increased 7% year-over-year in 2018, driven by double-digit growth in transceiver products. Since the acquisition of Menara Networks in 2016, we have been investing to leverage their proprietary high-speed ICs, transceiver design and integration capabilities to introduce new pluggable transceiver products into this market. These products address growing bandwidth demand from data center and telecom customers and capitalize on the trends toward merchant silicon and coherent, pluggable optics.

The recently announced acquisition of Padtec's Submarine Networks Division will leverage our leading-edge optical amplifiers and DWDM systems capabilities to address the growing number of undersea cable network deployments by next-gen Internet and data center companies. Although communications is a small business for us today, we are making strategic investments that we believe will grow this business to be much more meaningful over time.

In advanced applications, we saw increasing acceptance of our single-mode fiber lasers, narrow-line amplifiers and high-power semiconductor diodes. Combining these new product opportunities with progress we are making in medical and dental lasers, instrumentation, semiconductors, electronics and scientific applications, IPG is unlocking multiple growth drivers that significantly expand our addressable market and diversify our end-market exposure.

Over the last decade, our fiber laser technology has captured a majority of the market share for laser-based metal processing. Much of the recent growth has come from China. The share gains achieved in metal processing mean we are now more susceptible to spending cycles on industrial capital equipment. However, we continue to invest in new fiber laser solutions that address the diverse end market, including electronics, medical, scientific, defense, entertainment and communications.

In 2018 alone, we spent $123 million in research and development, and $109 million on acquisitions to enhance our solutions portfolio and open up new markets. We expect to grow faster in these new product areas, diversifying our end-market exposure and enabling IPG to target a double-digit revenue growth rate.

Although we started the year with a more challenging macroeconomic backdrop, we remain optimistic about IPG's long-term growth prospects given our strategic technology platform and the vertically integrated production model.

By leveraging these advantages, we believe growth in our core industrial markets will be driven by higher-power solutions and the superior performance, productivity, reliability and cost of ownership of our product over competing solutions.

I remain confident in IPG's ability to grow over the long term and to deliver on our mission to make our fiber laser technology the tool of choice in mass production.

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

Thank you, Valentin, and good morning, everyone. Revenue in the fourth quarter declined 9% to $330 million. The acquisition of Genesis, which closed in early December, contributed $8.5 million revenue during the quarter. Foreign exchange headwinds during the quarter, relative to sales assumed in our Q4 guidance, reduced revenue by $2 million.

Revenue from materials processing applications decreased 9% year-over-year, and revenue from other applications increased 5%, driven by growth in communications, medical and government applications. For the full year, materials processing revenue increased 3%, as strength in the first half was offset by a slowdown in the second half of the year.

By region, fourth quarter revenue in China represented approximately 36% of the total and decreased by 19% year-over-year. Strong sales growth into electric vehicle battery applications was more than offset by declines in cutting and micro welding for consumer electronics. Our cutting business remains affected by the current macroeconomic climate in China.

During the first quarter, we expect to ship the remaining lasers related to the record Q3 order for battery processing applications. Beyond this order, we do not have near-term visibility into additional orders for this application but continue to expect a strong contribution from electric vehicle applications this year and over the medium to longer term.

As for micro welding and consumer electronics, recent data points from the smartphone supply chain would now suggest we're unlikely to see this business rebound in 2019.

In Europe, revenue decreased 12% year-over-year, primarily relating to softness in cutting, additive manufacturing and welding due to the weaker macroeconomic climate in the region. However, European sales increased 8% on a sequential basis, suggesting that we may have reached a bottom in the current downturn in this business. In North America, revenue increased 32% year-over-year and 14% year-over-year excluding Genesis, driven by strength in cutting, communications and government applications.

Sales in Japan increased 4% year-over-year, with a continued rebound in cutting and welding. Sales in Korea increased 9% year-over-year, and revenue in Turkey decreased approximately 40%, given the recent economic turmoil in the country. For the full year 2018, sales in China and Europe increased 1%, with growth in the first half of the year offset by declines in the second half, while sales in North America increased 22% and other regions increased 11%.

Turning to performance by product. High-power laser sales decreased 20% year-over-year to $186 million in the quarter and represented 56% of total revenue. Reduced sales of lasers for cutting and additive manufacturing were partially offset by strength in welding sales, primarily related to electric vehicle battery production. Fiber lasers at 10 kilowatts of power or more increased nearly 50% in the fourth quarter.

For the full year, high-power laser sales increased 5% year-over-year. Total optical power sold increased by more than 10% and was up more than 40% for continuous wave lasers at 6 kilowatts or greater. These ultra-high-power lasers were more than 40% of our high-power sales in 2018, driven by the productivity gains enabled by these lasers within cutting, welding, sintering and cladding applications.

Particularly encouraging was our success in driving sales of high-power CW lasers within cutting applications, where sales of 12- and 15-kilowatt lasers increased sixfold, and we introduced the world's most compact 20-kilowatt cutting laser.

In the low-cost cutting market served by lasers at 1 to 4 kilowatts of power, the competitive landscape remains intense, particularly in China. Pricing pressures in this business are being exacerbated by softening demand trends. We continue to see good success winning business from the competition with our introduction of new ultra-compact products at these power levels that possess higher reliability and greater power efficiency than the competition and which benefit from IPG's much broader support and service footprint.

The revenue impact from these gains has been limited by macroeconomic and geopolitical headwinds, but these efforts are yielding positive results. In addition, our unique QCW-CW feature is, we believe, going to be fundamentally important in the 1 to 6 kilowatt power range, where we're seeing higher levels of competition.

Pulsed laser sales increased 33% year-over-year, with rapid growth in green, high-power, ultraviolet and ultrafast pulsed lasers offset by reduced sales of lower-power pulsed products. For the full year, sales of pulsed lasers increased 9% with higher-power, shorter-wavelength and shorter-pulse-duration lasers representing nearly 50% of total pulsed laser sales. Sales of QCW lasers decreased 12% year-over-year in Q4 and 24% year-over-year for the full year due to the weaker consumer electronics investment cycle.

Medium-power laser sales decreased 29% year-over-year in Q4 and 19% year-over-year in 2018 due to the aforementioned transition to kilowatt-scale lasers in cutting and the weak additive manufacturing demand we have called out. System sales increased 42% year-over-year in Q4 and 47% year-over-year in 2018, driven by growth in macro systems for materials processing, micro systems, initial sales of our cinema projection system and the acquisition of Genesis.

I would note that in our financial data workbook, we have made several changes to the revenue breakdown by product that reflect a shift in the relative importance of certain product lines over time.

Gross margin of 50.5% declined 730 basis points from Q4 2017 and was slightly above the low end of our guidance range of 50% to 55%. The decline in gross margin was mainly attributable to the lower revenue in the fourth quarter of 2018 versus the year-ago period, resulting in less favorable absorption of manufacturing costs.

Although we did not see the same level of pricing pressure in the low-cost cutting business during Q4 as we experienced in Q3, a full quarter impact from Q3 productions, when combined with lower absorption of manufacturing costs, served to reduce our Q4 gross margin. The acquisition of Genesis reduced fourth quarter gross margin by approximately 60 basis points as well.

Fourth quarter operating income was $96 million or 29.1% of sales, down 1,200 basis points from Q4 2017. Excluding a foreign exchange gain of $5 million, operating margin was 27.7%. Operating expenses as a percentage of sales increased 570 points year-over-year due to the lower revenue level. The acquisition of Genesis increased operating expenses by approximately $2 million and reduced operating margin by 50 basis points. In addition, we made necessary investments in sales, engineering and administrative talent as well as IT systems.

Net income was $76 million and earnings per diluted share were $1.40. Foreign exchange gains increased EPS by $0.07. If exchange rates relative to the U.S. dollar had been the same as 1 year ago, we would have expected revenue to be $10 million higher and gross profit to be $6 million higher. The effective tax rate was 25%, which benefited from certain discrete items.

We ended the quarter with cash, cash equivalents and short-term investments of $1.04 billion and total debt of $45 million. U.S. cash and investments represent approximately 70% of the total. Cash provided by operations was strong at $113 million during the quarter and was $393 million for the year. Capital expenditures were $27 million during the quarter and were $160 million in 2018, up 27% year-over-year.

We continue to invest in new facilities and equipment to meet demand for our products over the next several years. We expect capital expenditures to be $145 million to $165 million in 2019.

In Q4, we repurchased 466,000 shares for $64 million, completing the $125 million repurchase authorization we announced last August. For the year, we spent $176 million repurchasing over 1 million shares, and have now offset all dilution from equity compensation and employee stock purchase plans since our repurchase program started in July 2016.

The Board of Directors has authorized a new $125 million antidilutive stock repurchase program. Under this program, IPG management is authorized to repurchase shares of common stock in an amount not to exceed the lesser of the number of shares issued to employees and directors under the company's various employee and director equity compensation and employee stock purchase plans from January 1, 2019 through December 31, 2020, and two, $125 million in total, exclusive of any fees, commissions or other expenses.

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

Our year-end backlog decreased 4% to $712 million. Orders with firm shipment dates increased 4% to $339 million. Frame agreements, which are nonbinding indications of customer pricing and volume levels, decreased 11% to $374 million. With nearly 50% of frame agreements related to customers in China, we believe the decline in frame agreements reflects the current demand weakness in the region.

Backlog, excluding the acquisition of Genesis, was $673 million, decreasing 10% year-over-year, while shippable orders, excluding Genesis, were $299 million, decreasing 8% year-over-year. Fourth quarter book-to-bill was below 1 but in line with normal seasonality.

Turning to guidance. While the global macroeconomic and geopolitical challenges affecting the sector and our business have persisted into 2019, it is important to note we have seen some encouraging signs over the last 2 months. There has been a modest pickup in order activity since late December, and we are more encouraged by the overall demand environment than we were 3 months ago.

Our conviction around improving market conditions will only be fully validated if these trends continue for the remainder of the first quarter and into the second quarter. We do expect pricing headwinds related to more aggressive competition in China to continue, exacerbating this challenging demand environment.

However, we are reinforcing our competitive lead in our core metal processing markets, retaining our established relationships with large customers and winning new business with emerging OEM customers. Moreover, we are making competitive strides in new products and applications that significantly expand our addressable market and diversify our end-market exposure.

Based on these factors, for the first quarter of 2019, we expect revenue of $290 million to $320 million. We expect our tax rate to be approximately 25%, excluding effects relating to equity grants. We anticipate delivering earnings per diluted share in the range of $1 to $1.20. We expect the acquisition of Genesis to reduce first quarter gross margin by approximately 200 basis points as the systems business generally has lower gross margins.

Although conversations with our OEM customers in China suggest cautious optimism regarding a midyear pickup in demand driven by government stimulus and continued infrastructure investment, we do not have clear visibility into full-year OEM order plans at this time. As such, we do not believe it is appropriate to provide full-year revenue guidance until this visibility improves.

In general, we would expect year-over-year declines in revenue to persist in the first and second quarter of 2019 due to more challenging comparisons, followed by improving trends in the back half of 2019, driven by a potential market recovery and strength in new products and solutions.

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 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 Jim Ricchiuti with Needham & Company.

Just with respect to some of the conversations that you've alluded to with your OEMs in China, it sounds like, on the consumer electronics side, you're not anticipating much of a pickup and perhaps seeing continued strength in the EV segment of the business. But just more broadly, which areas are you seeing some increased optimism from some of these OEMs in China?

It's clearly -- the business in China is still very much significantly focused on cutting applications, so a rebound there really requires that business to come back. And what we've seen is solid order flow through the end of December, and I'm actually really pleased with what we've seen in January from that business. On the consumer electronics side, there are some applications. There's a newer application on welding some of the frames of the metal that we expect to be a driver, but it's probably not going to offset some of the weakness, given the data points that you've seen on consumer electronics, for example, in other areas. And then on the EV, we've said that we expect the overall trends on the investment in EV to continue during the year.

We're also starting to see some increasing interest with some of the microprocessing applications from picosecond and ultrafast lasers, with many customers getting further along with their evaluation processes. But clearly, the rebound in China is -- at this point in time, is dependent on the cutting business, and that's where we're seeing some strengthening in the demand trends. Our largest OEM, we had a meeting with them this -- just these last few days, there were a couple of people in the U.S. And they're actually pleased. They're not back at quite the level they were at, but they were pleased with the overall order flow that they saw in January for cutting systems.

Okay. And just looking out at the balance of the year. It sounds like you're also seeing increased traction from some of the newer products. How important is that part of the business going to be to you showing the kind of growth in the second half of the year that maybe some of us are looking for?

It's still -- I mean, from the perspective -- if you break it down by different product lines, you'd want to see -- because there's definitive revenue we can see coming from the entertainment and projection and display, the continued growth, obviously, on the systems side of the business and that will be very important. The ultrafast is going to be important. We've got a good revenue forecast there. I'd say that it -- you have to, though, balance this, though, with the relative size of those businesses compared to the core business, so we still need to see a rebound in the core business. And if we get that, the newer product introductions with their good margin structure will add a layer of icing on that cake, I'd say. It's still, in total demand, relatively early in penetrating some of those new applications but certainly gaining some nice traction in them.

I think we've said on the call that, in Q4, the newer products are now about 20% of total revenue, which was good compared to 15% for the full year in 2018. So relatively speaking, you started to see some -- even total contribution relative to total revenue in Q4 was good for those areas. And even outside of just the new products, some of the other applications like advanced and government continued to perform well in Q4. And the telecom business was also quite strong into the end of the year.

To explain this all further, in China, in quarter 2 -- or quarter 3 and quarter 4, our major OEM customers, they have a lot of inventory they will not ship to customers. But now, since in January, especially the beginning of February, their inventory finished and we now found we're 2, 3 weeks into a very fast-growing quantity of products. In spite of the new year, Chinese New Year, it was very much a stream of new orders from major OEM [exchanges] customers. If, after this New Year is finished, this trend will [go] on, so we will, again, return to serious, again, business in China.

Our next question comes from the line of Michael Feniger with Bank of America Merrill Lynch.

Just to be clear, are you assuming gross margin in the first quarter to be down 200 basis points year-over-year? Or do you say that's the Genesis impact to gross margins in the first quarter?

So primarily, the Genesis impact to gross margins in the first quarter, at the top end of my range, I've got about 50% gross margin and at the bottom end, about 48%. Genesis would be about 160% of -- so 160 basis points in total relative to our normal guidance range.

That's helpful. And then on the pricing pressure dynamic, I think you mentioned it wasn't as bad in the fourth quarter versus the third quarter. I was hoping you could kind of elaborate on that. And is that how you're kind of assuming it should sequentially -- that pricing pressure should abate as we enter the start of the year?

Yes. So in terms of pressure on pricing in Q4, it had abated. The issue that we had was that we had to absorb the full quarter of pricing that you saw in Q3 into the business model, and that had a bigger impact in Q4 than it had in Q3. Pricing is -- remains relatively less pressurized at the moment, I'd say. And then we also have a some benefits -- there are a couple of things I'd like to call out. In Q4, even though we had a very strong success with the sale of the 12- to 15-kilowatt lasers, there were some also mix issues around gross margins.

So we actually had, relatively speaking, on the low cost-cutting side, a smaller decrease in sales of our rack-mounted lasers. And that's good to see because that's where there's the most competition. So that shows that we have good execution around that. But even though the 12 to 15 kilowatts grew very well, and even our core wireless 1 to 5 kilowatts, which are very profitable, at the higher end of the cutting market, we saw demand for those lasers more impacted. So there's some mix issues. You also saw the QCW revenue down in Q4 compared to Q3.

So there's a lot of different things on gross margin going on, not just around the pricing but also the mix. And my view on gross margin overall is that I'd like to get the core laser business back to like a $350 million run rate, and then the systems business with Genesis on top of that. And I think we'd be out of the -- at that point, we'd be out of the woods, relatively speaking, targeting being back in the upper half of our 50% to 55% range. The final thing I'd like to say on that is that we've talked about some of the lower diode costs feeding through. And there's a package diode, which is basically being used in -- across the product line. But there's actually a new package diode design that is going to be introduced as well, and that's going to -- the cost of that package actually is about 8% or 9% lower than even the existing package, and that's going to start to be used more fully during the second quarter this year. So we haven't stood still around all of -- any of these different areas, we've continued to make improvements and drive costs down.

And Tim, just...

I can explain one thing. Regarding our target for Genesis, take in mind then, last year, it's only 1 month -- they include the result only during 1 month -- or the result based on all the products which they made based their business model without IPG. This year, we've turned our target to turn the most products from Genesis. It would be new products with -- based on technology developed in IPG. And now, we have a realization in the [real] system would be made with the participation of Genesis. This product should be much more profitable than for old products which Genesis made using their own only technology.

So -- and our target on this new system product make with a margin is not a big difference for our margin of laser itself. But of course, it would be a much more marginal product, our target. Second, regarding QCW laser. We're talking -- when we're talking about QCW, this QCW laser, we developed 3, 4, or 5 years ago in Brazil's market. For now, the -- we introduced new QCW laser, much more efficient and much more competitive and profitable than old lasers which we sell before. And this new QCW laser will have to replace some lasers -- old lasers and open new opportunities. It would be much more competitive than the former lasers. So the same situation, and we have to return, increase again sales of new QCW lasers, we hope would be very [profitable] growth for sales again.

And your next question comes from the line of David Ryzhik with Susquehanna Financial Group.

Just wanted to drill down on Q1 guidance. Ex Genesis, it appears that the guide is around -- down 11% Q-over-Q overall revenue. Given that you're pleased with some of the order flows thus far this quarter, just wanted to know is there some conservatism baked into the guide. Or what else is driving that Q-over-Q decline, given that you're seeing some constructive order flow in January and early February? And I have a follow-up.

So I think 2 things on that. First of all, there's a lot of orders that are coming in for shipment in the second quarter. So the order flow improvement doesn't necessarily just flow through to the bottom line immediately. The second thing is that January is always a very weak revenue month, and it's very difficult to just make that up even if order flow strengthens and you have a great March, relatively speaking. So I'd say those are the 2 main things we've taken into consideration in determining guidance for Q1. I'd say, overall, the 11%, 10% down for the laser business is right in line with where you'd see opening shippable backlog on a year-over-year basis as well.

Great. And do you mind giving the growth rate in the 6 kilowatt and above fiber lasers? I think I may have missed it on the call.

I haven't got that at hand. We'll give that to you after as we did put it in the script somewhere.

Okay. Sure. And...

The 12 and 15 was up more than 50%, the 6 kilowatt and above -- I've got that data point somewhere, I'll give it to afterwards.

Sure. And just wanted to drill down on QCW. To what extent is this -- will this become relevant in the pricing pressure you're seeing in the 1-kilowatt to 4-kilowatt segment? Do you believe that the differentiation here will help you preserve or maybe regain some share that you've lost over the past year in that competitive environment in China?

Absolutely. I think the customer response actually -- initially, this QCW-CW feature, there's a distinction. Valentin was talking about a pure new QCW design, there's also the ability to deliver the QCW feature with the CW. It is extremely compelling from both our internal application work and some of the feedback we're getting at early stages from customers, both in terms of improving the quality of the piercing, reducing the time of the piercing and even using the QCW feature to enhance the cutting of more complex parts. So when you're cutting just in a straight line, you can deliver CW power on a constant basis. The ability to modulate the energy as you start to cut around curves and corners with more complex parts actually enhances the quality of the cutting. And if you've got a 12-kilowatt laser, you can actually modulate that laser piercing with very high energy. When -- in the 1- to 6-kilowatt range, having the QCW feature, if you've got 1-kilowatt laser to generate 2 kilowatts of power or 4 kilowatts to generate 8 kilowatts of power, gives you a significant change in the processing capabilities. So we think this is exactly a very unique capability and really does enhance the laser's capability even at those lower-power levels.

Okay, great. And then just last one from me if I can. Do you mind just sizing the telecom opportunity? You've been a little bit more vocal. You've talked about Menara. You made an undersea cable acquisition. Just would love to hear what you're -- what kind of revenue run rate are you targeting this business. And perhaps, can 5G even drive some upgrade -- some business maybe over the next few years.

Our target during a couple of years have increased our telecom revenue a million -- a couple hundred million dollars per year. And next year, we hope to reach such numbers.

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

First, a clarification on the gross margin question. So the 200 basis point impact from the recent acquisition, is that -- can we view that as kind of a permanent impact? Or is that due to onetime items in the quarter?

No. I mean, at the moment, that's where the Genesis business model stands. As Valentin has described, the overall target over time, and it will take time, is to really leverage their systems more onto the laser side and to reduce -- using our technologies and capabilities to reduce the cost of the laser relative to them. I think it's also very important to understand the value proposition that's being delivered, because when you often get into these more advanced laser processing and even whether it be welding or cladding, particularly welding of different and diverse materials, the total productivity gains and reduction in cost the laser system delivers would be captured more in the average selling price of these systems as well as reducing the cost of them. But in the near term, we can't change that business, Tom, in 2 or 3 months. It's going to take a little bit of time to do it. And I'd say, right now and for the foreseeable future, the impact overall on the business is about 150 to 200 basis points on gross margin.

And we're talking about system business. Of course, system business to improve profitability and margin in our new partners, of course, it takes time. It's not possible to make during a few months only, half year, 1 year total. We're looking for essential improvement for systems business, these -- like Genesis and so on, [IoT] next year. But take in mind, up to now, the gross margin total IPG doesn't -- a very small impact from these guys because it's still a small share of total business and so on. But major our gross margin defined our standard products, it's taken months. Last year, we decreased practically our major -- this cost power major components, like laser diodes, new generation of laser diodes for fiber modules and the many other parts, components, we decreased by -- decreased cost by 20%, even 30%. So it's very essential decrease of cost on these parts. As a result of the gross margin, total company integrated gross margin will grow. What is essential will compensate some growth if the price of low-power laser for a mid-power laser [supports for] introduction of some -- was costly up to now with the beginning systems. But in total, we have very essential benefit now in gross margin. It compensates our growth, which we have temporarily -- we hold temporarily with new products.

Okay. No, that's helpful. And then as a follow-up, when you look at the benefits from the QCW-CW combination, is that in lieu of beam shaping or in conjunction with beam shaping to increase the productivity when you have different types of cutting to do at the same time?

It can be used in conjunction with beam shaping. So for example, if you've got the inner core of the laser and you're running a certain amount of power through the inner core and not the outer ring, you could actually incorporate the QCW function within that, and that would be an intention to go forward on that direction. Actually, our competitors have looked at our beam shaping and say, "Well, only half of the energy goes through the core and half the energy goes through the ring." The reality is, if you combine that with the QCW, offsets that alleged weakness of the solution. And the other thing is the beam shaping has also had some positive application results both on improved cut quality as well as -- not just on cutting, but on welding applications. So in some of the -- there's a reduction in splatter around some of the welding applications.

The other benefit of our solution on that beam shaping side, and we believe quite strongly in this, is that we're not stressing the fiber. And we believe the competitive solutions are stressing mechanically the fiber. And interestingly, we've also heard from one of the companies that produces optical heads that there is energy leaking into the cladding of the fiber that has actually necessitated a redesign of -- a costly redesign of the optical head. So I think really people need to start parsing out these differences in technology a bit more specifically and with greater understanding of the benefits and disadvantages of different approaches.

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

Maybe as a follow-up to some of the questions already on China. Based on the order pickup activity that you've seen and the conversations with your customers, do you believe your customers have a view of an improving macro environment in the region? Or do they believe that a stimulus package is on the way, and that's giving them confidence to kind of pick up the order flow once again?

I think there's 2 or 3 things. I think Valentin said some of the slightly higher levels of inventory have been worked through. The general feedback we're getting is that the demand is there, and people would still just want some resolution of some of the uncertainty around the trade war. So you're starting to see that maybe move forward a little bit, at least in some of the discussions from the U.S. government and their desire to get that result. And the third thing, I think there is some benefit coming from the stimulus that is being put into the market, which has been both on the infrastructure. Some of it is a bit more fiscal, right, so tax rebates, which we haven't really seen before, reduction in VAT is another one. Yes, if you looked at the straight economic data, it would perhaps belie what we're seeing. But we kind of saw this downturn a bit sooner than everybody else. And hopefully, we are going to have a bit more conviction of seeing it, by the time we get to the end of this quarter, a recovery sooner than other people. So 2 or 3 things, Patrick, I think that we've heard.

Great. That's really helpful. And maybe as a follow-up question on the gross margin profile and the impact of Genesis. It sounds like, longer term, you still are committed to that the 50% to 55% range you've talked about in the past. As we look at 2019 as a whole, obviously, a pickup in revenues will help gross margins from that level. But will product mix and the mix shift, as the year progresses, to some of your new products and maybe higher-powered lasers, how big of an influence do you think that'll be to the overall gross margin profile as 2019 progresses?

I think it'll be a nice benefit. So I think I have mentioned the total pickup in revenue just on the laser business, if you can get back sort of the $340 million, $350 million, $360 million range, you start to see us leveraging the business model much more -- much better and more efficiently than we're able to at these levels. Secondly, a pickup in revenue around the core business at that level would be -- would require the higher-margin product to recover strongly as well. So that drives some of that benefit. We believe that the new features we're introducing with the QCW, CW and the beam mode will also enable a little bit of premium pricing. It's not necessarily going to be massive, but it also is competitively better. And then you've got the newer product, the ultrafast lasers have very high margins on them. Some of the projection and display product has high margin. And as you mentioned, medical, but we've got good order from some of the lithotripsy applications that's already in hand that we'll start shipping in April. So clearly, yes, some of the new laser product would help us.

And we've always said this that you're going to see competition at certain ends of the market, but we always try and run ahead of the game like taking costs down and introducing new leading-edge product. We're clearly having to deal with many different dynamics in the business at the moment. But right now, I actually think we'll get back into the upper half of that range if we can get the core laser business back to $350 million. Obviously, at that revenue level, and I think this comes back to Tom's question, the share of, for example, Genesis, even in this year, would be lower as a percentage of total revenue than it is at the core laser business being at $300 million. So the impact of Genesis would be less -- or the impact of the systems business would be less.

And also, we -- our business model for system is not in that model. We don't plan to compete with standard applications with the existing competition. For metal cutting, strip cutting, it's not our business at all. We -- the way we're powered, principal business model [we have to review], doing well with absolutely new process at all for new application when nobody still will use laser applications. We compete not -- with -- not on laser solution and sees a lot of opportunities. And for example, one of this as such, for the large pipe gas transportation or oil transportation of pipe -- pipes to weld with some laser. Up to now, nobody making these welds. We're first to develop this new technology tool. This technology replaces current technology, which other people use. It's very expensive and extremely expensive and very complicated technology.

For example, for large-gauge pipes, one only field machine system costs more than $50 million. $50 million. We developed much better, much more efficient technologies, which are higher speed, much higher quality of weld [at all] with such pipe we saw. With the weld improved in the field. And for us, this -- we can sell this technology with very high profit, even 5x cheaper than this now existing -- only system in that market. Our technology, 10x cheaper. So we can dictate anywhere with now very high profit. And we don't see in a year or 2 years somebody who can compete with this unique technology at all. To make something similar, it takes many years. That's for example.

The same, for example, with titanium welding. Now days, people now use -- to aerospace and NASA, they use this technology, e-beam welding and vacuum cameras or some such cameras for large pipes, and so it takes -- and not buy large parts. It's also many tens million dollars camera, cost for the camera. And quality of such weld, the biggest is aerospace, American and other companies use it, and they're not familiar at all with the laser. We, of course, could develop laser technology to weld directly in open air without any vacuum camera and so on. Again, it's much higher quality of final product and much faster. And of course, productivity 10x higher. And we are only starting to convince serious OEM customers, convincing them. Now they qualify in this, they go into the first production line we discussed with them to view first production line. And it will be enormous business, and it would be very highly profitable business. And from that point, Genesis products, this would be suitable because they have more experience to develop mechanical parts so on. But all others -- but major, not mechanical, major optics, major [analog] lasers, our process, unique process, to weld this.

It's for engine, for example, for turbines and so on, a very big business. The same -- some other unique technological process that we developed now and they're used in large frame for railway, for the high-speed trains, for example. The same in medical applications, for example. We're not developing standard solutions and other people use (inaudible). We developed, for example, for urology and qualify now, and now we're recognized worldwide. They recognize this technology, 5x cheaper than used now by these other people, they use holmium in lasers. It's much more efficient and so on. And so with very high margin, we can sell this into -- now we practically own a company able and now qualified and introduced -- started to sell in the market. Starting now to sell in the market.

But still, to penetrate in serious markets, it takes a couple of years as usual. [FGA] and many others, each country separate and so on. It takes time, but this technology is extremely profitable, very high [margin]. We don't use --need -- not go into standard solutions which compete with other people. We're (inaudible) margin much less. And now we developed 10 such technologies, first time, unique technology for different applications, so not for only 1 application or 2. Diversified, very serious applications starting from large pipes, so titanium alloy finishing, for example, by unique RGB system, very high screen, and also for medical and other applications. All the technology. And we sell in not just metal, not just mechanical and so on, we sell in (inaudible) of all process. Process, unique process. (inaudible) process. It's absolutely a different business model.

Our final question comes from the line of Andrew DeGasperi with Berenberg.

I guess, first, maybe can you just give us a breakdown of your end markets? Where are you seeing pockets of strength? Where are you seeing less weakness than you originally did in the last quarter? And then maybe could you discuss the auto industry generally? I know you had a little bit of exposure to that. Could you maybe just give us a little rundown as far as how's that doing in China and Europe?

So in general, I think first, starting with, relatively speaking, where the tone is a bit better compared to the beginning of Q4, we've mentioned already the order flow pickup we've seen in China and the different end markets there that are benefiting. I had mentioned that Europe was -- even during Q4 was -- seemed to be reaching at least some point of stability, and European orders in -- revenue in Q4 was actually up about 8%. So we're seeing a stabilization. And relatively, compared to what it could have been, good demand from the OEMs in Europe (inaudible) in Northern Europe and actually in Italy. North America is -- continues to be performing quite well, good growth in Q4, good reasonable order flow. Q1 is always a little bit slower in North America but reasonable good backlog. And our guidance number for Q1 is fairly good North America.

I was pleased with the overall Japanese performance, when you look so some of the Japanese machine tools. Asia and that's been very weak, but we grew Japan 4% in Q4 compared to the year ago. Korea was also reasonably good. They've also come into the year with reasonable backlog. But really, I mean, it's a smaller part of our business, but Turkey, given the geopolitical dynamics and macroeconomic impacts in Turkey, continues to be weak relative to where it was a year ago and a little bit more uncertain. But we're starting to see some order flow even from the OEMs there. It's not going to necessarily turn around dramatically, but that would be an area I'd call out for concern.

Some of the emerging markets, I think, have stabilized a bit, and that'll help the Europeans, right? So you've seen some stabilization in the economic macro environment in South America, Brazil. India, for us, is a small business at the moment, but we've got a new management team in there and they grew that business very nicely last year and have given us a strong budget for this year. So some -- the emerging markets would be an area where the dynamics, I think, have improved. We don't necessarily see that directly because the OEMs see that. Although, if the U.S. dollar continues to strengthen -- I was listening to Bloomberg Radio this morning where that was called out. The continued strength of the U.S. dollar, that can be, in the future, a headwind to emerging markets, so we're watching all of that as well.

And sorry, just a clarification on the order flow. You mentioned that mostly would show up in the 2Q quarter. Or would that potentially -- is it second half related?

No. We've got a lot of backlog for Q2 already. And generally, our terms are within a 3- to 4-month time horizon. So that's why we'd need the order flow to continue in February and March because that would drive the shipments in the end of Q2. The orders we've taken in January and February would help to start Q2 stronger than Q1.

At this time, I will turn the call back over to management for any closing remarks.

Okay. Thank you for joining us this morning. We look forward to, again, for speaking with you in next quarter's call. Have a great day. Thanks for your time.

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