IPGP - NASDAQ

Good morning, and welcome to IPG Photonics' Second Quarter 2025 Conference Call. Today's call is being recorded and webcast. At this time, I'd like to turn the call over to Eugene Fedotoff, IPG's Senior Director, Investor Relations for today's introductions. Please go ahead with your conference.

Thank you, and good morning, everyone. With me today is IPG Photonics' CEO, Dr. Mark Gitin; and Senior Vice President and CFO, Tim Mammen. On today's call, Mark will provide a summary with a quick look at our second quarter results and the overall demand environment. Then I'll walk you through the progress we are making on our long-term strategy. After that, he will turn it over to Tim to provide financial details, and then, we'll open the call for questions. Let me remind you that statements made during this call discuss our expectations or predictions of the future are forward-looking statements. These forward-looking statements are subject to risks and uncertainties and can cause the company's actual results to differ materially from those projected in such forward-looking statements. These risks and uncertainties are detailed in our Form 10-K for the period ended December 31, 2024, and our reports on file with the Securities and Exchange Commission. Any forward-looking statements made on this call are the company's expectations or predictions as of today, August 5, 2025 only and the company assumes no obligations to publicly update any or publicly provide any updates or revisions to any such statements. During this call, we will be referencing to certain non-GAAP measures. For more information on how we define these non-GAAP measures and a reconciliation of such measures to the most directly comparable GAAP measures as well as additional details on our reported results, please refer to the earnings press release, earnings call presentation and the financial data workbook posted on our Investor Relations website. We will also post these prepared remarks on our website after this call. With that, I'll now turn the call over to Mark.

Thanks, Eugene. Good morning, everyone. Second quarter revenue came in above our expectations, increasing 10% sequentially and 2% year-over-year, excluding divestitures, our first year-over-year revenue increase since 2022. Our results were driven by a combination of a modest demand improvement in multiple markets and geographies as well as our continued focus on our strategy to drive profitable growth. We're investing in key strategic initiatives targeting a $5 billion TAM that offers us hundreds of millions of dollars in revenue growth opportunities, and we are starting to see results. By quickly adjusting our operations, we were also able to ship approximately $10 million out of the $15 million in customer orders that we believe were at risk of being delayed due to tariffs and were not included in our second quarter guidance. Starting with our materials processing business. We saw a sequential demand improvement in welding, cutting and marking applications with some growth in e-mobility and general industrial markets. Our unmatched capabilities in lasers and welding process monitoring technologies, combined with deep applications expertise, continue to differentiate IPG in the marketplace. This enabled us to secure key wins in EV manufacturing despite ongoing uncertainty in the market. In China, renewed capacity investments in battery manufacturing drove growth in our welding. On the industrial side, a stabilizing demand environment supported sequential growth in welding, cutting and marking applications. Booking trends are encouraging. With demand showing signs of improvement and book-to-bill at approximately 1 on our higher second quarter revenue as we move into the second half of the year. We have also seen improvement and stabilization in the leading indicators, such as PMIs and the industrial production through June, but the demand environment remains uncertain. We also expect demand for our products will benefit from increased onshoring and local investments in automated production. We are also excited that early returns from our growth investments helped to drive revenue in the quarter. Our strategic focus on developing innovative lasers and photonic solutions to expand into medical micromachining and advanced applications is showing results. In advanced applications, we achieved another quarter of record revenue driven by higher demand across all categories, primarily in directed energy, semiconductor and scientific applications. Last quarter, I shared that strategic investments to grow our advanced applications business allowed us to achieve a key milestone 6 months ahead of schedule. I'm thrilled to announce that we've now delivered multiple units of our first laser counter UAV solution, CROSSBOW to Lockheed Martin. This disruptive turnkey directed energy system is enabled by IPG's laser systems expertise and high-performance commercial single-mode lasers and supported by our high-volume manufacturing capabilities. CROSSBOW is a scalable and cost-effective laser defense system that can neutralize unmanned aerial threats and can operate as a stand-alone system or integrate into layered defense architectures. Over the past 6 months, both IPG and Lockheed Martin have conducted extensive field testing and customer demonstration of CROSSBOW, validating the system's operational effectiveness against the increasing threat of smaller class Group 1 and Group 2 drones. We'll be showcasing CROSSBOW this September at DSEI in London, one of the industry's leading defense exhibitions, and we anticipate strong interest from both defense and commercial customers for protection of critical military and civilian assets. This is another example of how IPG leverages our core laser and photonics technologies to address critical market needs. Turning to our other growth initiatives. Micromachining delivered strong revenue compared to the prior year despite some shipment delays related to tariffs. This is a high potential market for IPG, where we see strong alignment between our technologies and the key applications of our customers. As we shared last quarter, we are also making good progress in medical with a new urology customer that is already helping to drive medical revenue growth. Looking ahead, we expect momentum to continue with additional product introductions planned for Q4 2025, 2026 and beyond as we execute on our strategic development road map. The traction we are seeing across micromachining, medical and our other focus areas reinforces that our teams are executing well and that these investments are laying the foundation for long-term growth. Finally, our capital allocation strategy is an integral part of our growth strategy. As we said before, our primary focus is on organic growth investments in strategic M&A. We expect to spend approximately $100 million on CapEx in 2025 to expand capacity and capture growth opportunities. Within M&A, we are evaluating tuck-in opportunities with a range of $50 million to $200 million in revenue. Our revenue and competitive position in cleaning applications has benefited from the cleanLASER acquisition that we made at the end of last year and we continue to target companies that offer differentiated technology or market access to accelerate strategic growth initiatives. During the quarter, we continued to opportunistically return cash to shareholders, repurchasing $30 million of IPG stock, building on the $1 billion in share repurchases over the past 3 years. Since joining IPG just over a year ago, I've been focused on setting the foundation to drive profitable growth, including strengthening the organization. We achieved a recent milestone on this objective with the appointment of 5 key leaders, including 4 recent hires to help advance our strategy and support continued global growth. These leaders have a proven track record of driving strategy and execution. They each bring distinct strengths, deep expertise and a shared commitment to collaboration and innovation. With these new appointments to our executive leadership team, we are shaping a stronger IPG, better equipped to execute with speed, serve our customers with excellence and drive our next chapter of profitable growth. I'm pleased to welcome them to the team and excited about what we will be able to accomplish. I am proud to report that we've been effectively adapting to the dynamic operating environment by leveraging the flexibility of our global manufacturing supply chain to minimize the impact of tariffs. We've demonstrated agility, shifting production across regions to better serve customers. We also continue to work on alternatives to optimize our tariff exposures. As a result, we were able to ship most of the orders that were previously anticipated to be delayed due to tariffs and longer customs processing. While new tariffs have recently been announced, our global footprint and supply chain flexibility position us well to continue meeting our customers' needs. As I mentioned earlier, our second quarter book-to-bill ratio was approximately 1 on higher revenue and we are encouraged by signs of further demand stabilization in our business. Industrial production has been improving and inventories at some of our cutting OEM customers have normalized, supporting a return to more typical purchasing behavior. We don't believe the recent increase in demand is driven by customers pulling orders forward in response to tariffs. That said, the demand environment continues to be sensitive to external factors so we are approaching the second half with cautious optimism. In closing, I'm encouraged by the progress that we're seeing, both in the stabilization of our core business and in advancing our strategy to drive laser adoption in markets with high growth potential. While tariff-related pressure and uncertainty persist, we remain focused on what we can control and confident in our ability to navigate this environment while executing for profitable growth. With that said, I will now turn the call over to Tim.

Thank you, Mark, and good morning, everyone. My comments will generally follow the earnings call presentation, which is available on our Investor Relations website. I will start with revenue trends by application on Slide 5. Revenue from materials processing decreased 6% year-over-year as a result of divestitures and lower sales in cutting, welding and additive manufacturing applications partially offset by higher revenue in micromachining and the acquisition of cleanLASER. Revenue from other applications increased 21%, driven by higher sales in medical and advanced applications. As Mark already mentioned, we saw sequential improvement in revenue in cutting, welding and marking. Welding revenue grew on customer wins and improvement in industrial demand and EV battery investments primarily in China. Cutting revenue also grew sequentially and was nearly flat compared to the prior year as the cutting OEM business showed some stabilization in Europe and an increase in demand in Asia and North America. Marking and engraving sales were also more stable. Our cleaning revenue improved sequentially and continued to benefit from cleanLASER. Mark already highlighted strong results in our medical and advanced applications in the quarter, so I won't go over them again. Our emerging growth products performed well in the quarter, increasing to 54% of sales, driven by a wide variety of laser sources, subsystems and systems. Moving to the revenue performance by region on Slide 6. Sales in North America increased 31% sequentially and were down 4% year-over-year. Sequential growth was primarily driven by higher sales in medical and advanced applications as well as improved sales to cutting OEMs. Despite more stable sequential performance, welding revenue was down compared to the prior year due to soft demand from EV manufacturing in the region. Sales in Europe were stable, with less than a 1% sequential decline and down 11% year-over-year, excluding $11 million in divestitures. Lower cutting and welding sales, as a result of soft industrial demand were partially offset by cleanLASER. Revenue in Asia increased 4% sequentially and 14% year-over-year, benefiting from higher sales in welding and cutting as well as advanced applications. We have continued to see a strong demand recovery in e-mobility, coupled with our business wins in EV welding applications. Sales to additive manufacturing were lower in the quarter due to timing of shipments, while demand remains strong. Moving to the financial performance review on Slide 7. Revenue came in above our expectations at $251 million, up 10% sequentially and down 3% on a year-over-year basis. Foreign currency increased revenue by approximately $4 million or 1% this quarter. Gross margin was 37.3%, flat year-over-year. Adjusted gross margin was 37.8% at the top of our guidance and was driven by improved manufacturing cost absorption and a decrease in inventory provisions, mostly offset by higher cost of products sold due to geographic and product mix and increased shipping costs. The impact of tariffs was 115 basis points, which was better than our expectation. Operating expenses were above last year's level, primarily due to the investments we are making in key areas that are central to our strategy as well as investments in strengthening our organization, which Mark highlighted earlier on this call. GAAP operating income was breakeven and our adjusted EBITDA was $32 million, slightly above the top end of our guidance. GAAP net income was $7 million or $0.16 per diluted share. Adjusted earnings per diluted share which includes stock-based compensation, but exclude amortization of intangibles, other acquisition-related charges, foreign exchange loss and discrete tax items was $0.30 in the second quarter, above our guidance range. Moving to a summary of our balance sheet and cash flow on Slide 8. We ended the quarter with cash, cash equivalents and short- term investments of $900 million and no debt. During the second quarter, we spent $15 million on capital expenditures and $30 million on repurchasing IPG shares, supporting our balanced capital allocation framework of investing in growth and returning cash to shareholders. We now expect CapEx of approximately $100 million in 2025 as we expand capacity, primarily in Europe. We expect operating cash flow to improve significantly in the second half substantially offsetting CapEx. Looking ahead, we expect CapEx to decrease significantly and free cash flow to improve next year. Moving to our outlook on Slide 9. For the third quarter of 2025, we expect revenue of $225 million to $255 million and adjusted gross margin between 36% and 38%, including a potential of a slightly higher impact of tariffs. With investments in the growth of our business and strengthening the organization, we expect our operating expenses to remain elevated at between $89 million and $91 million in the third quarter. We anticipate delivering adjusted earnings per diluted share in the range of $0.05 to $0.35 with approximately 42.5 million diluted common shares outstanding. Our adjusted EBITDA is expected to be between $22 million and $36 million. In closing, we are pleased to see signs of continuing revenue improvement coupled with results from our strategic initiative. And we believe we have significant operating leverage in our model. Our strong balance sheet gives us a significant advantage given the near- term uncertainty in the operating environment. With that, we'll be happy to take your questions.

[Operator Instructions] Our first question comes from Jim Ricchiuti with Needham & Company.

Congrats on the quarter. First off, on the book-to-bill, I'm wondering if you could provide any color on book-to-bill by region? Was there much variability in terms of the regional bookings?

Jim, thanks very much for the question. Good to hear from you. Actually, book-to-bill was 1 and really just about 1 across all regions. That was, of course, on -- go ahead. Sorry.

No, please, Mark.

I was just going to say that, that was also on top of the higher revenue as well. So we're quite pleased with that.

Got it. My follow-up, Mark, is on the directed energy commentary. I'm wondering how you're thinking about the opportunity for IPG over the next few years? And just relative to maybe the other emerging growth opportunities you're targeting? And can you say, for instance, how many customers you're working with in this area?

Yes, sure. So thanks, Jim. So the directed energy, again, is part of our -- part of the work that we're doing taking the key technologies within IPG. So this is the lasers as well as the broader photonics and the applications understanding to really direct it to some key areas of growth. And of course, the advanced is one with the directed energy as well as the medical and micromachining areas. But specifically, in directed energy, what I can say is that this is a very interesting market for us. In terms of market size, it's a little bit hard to estimate but it's a developing market. There's kind of billions of dollars spent each year on the order of $1 billion in the U.S. And our solution addresses a key segment of the market. And that's the key part that we believe is growing. So this is -- as I talked about on the call there, this is addressing the smaller class drones, the Group 1 and Group 2 drones, which is -- the biggest issue today or, let's say, a very significant issue today, both in warfare, we've seen that as an issue as well as in civilian infrastructures where there's incursions in -- incursions in airports, incursions at borders, incursions in stadium. It's a big issue today. So from a market standpoint, the CROSSBOW is a turnkey system that directly addresses that small drone threat. We have the partnership that we talked about with Lockheed, which is addressing one part of the market. We believe, again, the market is a broader one that has both opportunities in the defense sector, but also the civilian piece. And we'll be -- of course, I've mentioned that we've done extensive testing with Lockheed that that's going very well and that we'll be bringing the system to the DSEI show in September, where we'll have a chance to talk to a broader customer base as well. But overall, very excited with the progress the team has made. And again, this is a great application for us because it's the combination of our core technologies with the single-mode lasers as well as the photonics. And then it's key for us because, again, this is something that we can bring into our commercial manufacturing infrastructure where we're manufacturing volumes of the single-mode lasers but also systems and subsystems. So we can do this at a very disruptive price point and -- cost point. And that's why we believe that this is a unique position to be able to address the smaller drone class at a cost point that could be broadly used.

[Operator Instructions] Our next question comes from Ruben Roy with Stifel.

Mark, I wanted to start with maybe just walking through the outlook. It's great to see the progress and some signs of stabilization. But when we look at the Q3 guidance, maybe you can just walk us through the puts and takes of that guidance. So you had $10 million that you had previously anticipated out of the $15 million come through in Q2. And maybe just an update on how you're thinking about potential tariff impact as a portion of that guidance for Q3? And then you had a comment about cautious optimism for the second half. And I'm just wondering what kind of visibility you might be getting from your customers as you think about the second half, i.e., do you think that there's going to be continued stabilization and maybe improving bookings into Q4?

All right. Thanks very much. So a couple of the pieces here. Again, we're very happy to see the book-to-bill of 1. And again, that book-to-bill on top of the higher revenue. As you mentioned, we were able to ship about $10 million of the $15 million that we expected to move into Q3 because the team did a fantastic job of being able to mitigate the tariff issues because we have this flexibility, as we talked about, to be able to move the manufacturing from region to region and optimize the tariff situation. We believe we'll be able to do that also, of course, going forward. And we did see very good demand in material processing. We are seeing the industrial businesses -- the industrial markets -- there's been improvement over the last few quarters. You've seen that some of that improvement in PMI. So we're seeing that industrial pick up. And we're seeing it in material processing broadly across each of the regions and broadly across many of the applications, including the areas of welding. We talked about the EV pickup. We've seen that also in cutting. So we've seen our cutting -- the inventories of some of our OEMs have normalized. So we're seeing that area pick up. And we've seen increases -- continued demand increases in things like additive manufacturing, as well as, again, broad-based, we saw strong medical. We have -- we've picked up another customer as we talked about in medical that's attached to our road map of urology. So that's -- that's continuing to see growth. So again, we're seeing kind of broad-based improvement, I would say. And I would say cautious optimism and the reason I'm saying cautious optimism because, of course, there's still tariff uncertainties, and we're still in a macro environment that hasn't completely recovered for sure. So that's really my comments on that piece.

Got it. Yes, go ahead, Tim, sorry.

Yes. We went through it -- started the usual process on generating guidance, so there's nothing particularly unusual in there. I think the only thing I think that's good is that even at the midpoint, we're slightly above where the Street was. And I think that's the first time in quite a while that we've been able to guide at the midpoint that it is mildly positive. So I think we're more than bouncing along the bottom at the moment. We've probably got a little bit of lift off -- a little bit of lift off at the moment.

A little bit, indeed. And yes, I can't remember the last time, yes, that you guys had a guide above our numbers. So that's great. If I could follow up on Jim's question, Mark, on the defense stuff. I would love to understand how you're thinking about high energy as well? There's been some awards and actually, just yesterday, another award for 100 kilowatt system. And so is that part of your strategy longer term, perhaps? Or are you focused more on this lower cost stuff that you talked about?

Yes. So what I would say is that we've been playing in the overall market in directed energy for many years. We have very high performance, I'd say the best single-mode lasers that are applied broadly in the marketplace as well as our amplifiers. So those tend to play in many of those programs. But the high power is not what CROSSBOW is. This system is really focusing on threats from these Group 1 and Group 2 drones, the smaller drones that are more widespread and can be addressed with the relatively low power using these -- using our high brightness single-mode lasers. So that's really the area that we're talking about here. And we think that, that's, as I mentioned, is a significantly growing market because it's -- it's one of the biggest issues today. If you -- as you're reading, it's a big issue on the battlefield today. These small drones that you can buy for hundreds of dollars can inflict major damage. And then also, it's an issue in the civilian infrastructure, borders, et cetera, as well, and we're starting to see more of that, and it's only increasing. So we think that's a really good area for us to play.

Great. And if I could squeeze one more in for Tim. Tim, on the gross margin, I might have missed it, but could you give -- as part of that 36% to 38% gross margin number, it sounded like a little bit of a higher impact from tariffs. Did you give the inventory absorption number that is impacting the gross margin?

I mean relative to Q2, we are still -- we had an improvement in underabsorption that we set benefited gross margin a bit. We're still relative to peak efficiency, probably 500 basis points of getting back to that more optimal level. But we saw a meaningful improvement, a couple of hundred basis points improvement in the second quarter and expect that to flow through to Q3 as well.

Our next question comes from Scott Graham with Seaport Research Partners.

Congratulations on a nice quarter. I wanted to ask a couple of questions here, including piggybacking off of what you just said about gross margins. But first, could you kind of tell us how the order book looked as the quarter progressed? And maybe any specific end markets in particular, anything you could mention would be helpful? Yes, I don't mean in dollars. I kind of mean year-over-year because we all know that June is typically the largest month for dollar orders. I'm just hoping as on a year-over-year basis, you could talk about the progression.

Yes. I mean I think year-over-year, the total increase -- the total value of bookings increased. We haven't given that number, but it was up compared to Q2 '24. I think the overall tone during the quarter was significantly improved compared to a year ago. April was actually quite a strong bookings month, so it wasn't back loaded. Our revenue happened to be a bit more backloaded in the quarter, with June being very strong on revenue. That probably reflected the fact that the bookings in April were pretty good. May was a little bit weaker and then June picked up again. So we're actually -- we weren't scrambling to get to this number at the end of the quarter. It was easier than it has been on not just a year ago, but even the last couple of quarters where bookings have been more weighted to the end of the period.

I think he left. Our next question comes from Jim Ricchiuti with Needham & Company.

I just wanted to ask about the systems business, a smaller part of your business, obviously. But first year-on-year sequential increase that we've seen in a while, and I wanted to understand what some -- what may have drove that? I assume some of that may be the cleanLASER business. But can you elaborate on what you're seeing there?

Yes. Certainly, Jim. So a couple of things. First of all, we're very excited with cleanLASER. That's going very, very well. That acquisition that we did at the end of last year. Integration is going very well. And they've been continuing with their traction in the market. But we're also seeing -- we've also had some increases in other areas of our systems. We're making micromachining systems and systems in welding and such as well. I don't know, Tim, if you have anything you'd add?

I think you've covered. I think just on the robotics side, we had a better quarter on the large-scale gantry robotic systems as well and a pretty good quarter on LightWELD too.

Got it. And on the Medical business, it sounds like you're encouraged by the ramp you're seeing with the second customer in the urology area. I wonder if you would help us understand whether there's been any change in the overall competitive environment in this area of the business?

So let me speak to that, Jim. So let me just step back for a moment and just say that urology is one of the key areas that we're investing in. So it's the medical side, the micromachining, the advanced. And in that urology road map, we have a broad base of our capability in that area, and we're bringing out new systems. So we talked about the fact that we're bringing something out in Q4 and then a whole road map of growth. We have the strongest position on the thulium lasers in urology, and we're continuing to grow as we picked up this new customer. That's bringing our share up and continuing to drive our share in that marketplace.

Our next question is from Scott Graham with Seaport Research Partners.

Sorry about that. The gross margin, the minus 500 basis points, Tim, could you provide a little bit more color around that, if you would?

Yes, sure. I think the positive takeaways from gross margin were that we had better manufacturing efficiencies. So we had a benefit from lower underabsorbed costs. We've made statements. So that's a real focus of ours of trying to get that improved. It helped a little bit. The revenue is up a bit. The second side of it is, we've got inventory more under control over the last 12 months. The inventory provisions that we incurred were a bit lower. Offsetting those benefits, we did have really related to product mix, both on a geographic and product basis, a little bit of an impact to gross margin due to lower product gross margins. But in that regard, we've actually got cost reduction initiatives across 4 or 5 different areas that we're starting to roll through the business model. So we expect that product gross margin to improve. I mean just a couple of examples of those as, for example, the rack-integrated higher-power lasers are starting to be introduced more fully. We're looking at some of the micromachining lasers with higher power output and better specification that the bill of material won't change on. We're automating the production of some of our consumable fibers for medical. And there are other areas that we're working on to get the product cost down. So we expect that to bounce back. And then the tariffs, if you really compare Q2 to Q1, the tariff impact was 115 basis points. You add that back to both the adjusted and unadjusted gross margin, you're back close to 39% on an adjusted basis and 38.5% on a GAAP basis.

Very good. Yes. Very thorough response to my question, Tim. It would be nice also if you guys got a little bit of help from your end markets. And I think there are a couple of companies that have reported so far that have indicated that, hey, look, once this tariff uncertainty, once that cloud starts to lift a little bit, there's going to be an increase in [good] projects are going to be greenlight and things are just going to be a little bit better. I was wondering if you were kind of hearing that from your customers? A big part of your revenue basis, general industrial across the world, and it's just kind of hoping if you heard anything from that from your customers, if you could share that from your general industrial market?

Scott, this is Mark. So as I talked about, we've seen -- we've obviously seen some pickup. We see the book-to-bill strong. We've seen the PMIs improving in the various regions. But we're still in some -- we still have some uncertainty. I'd say, again, it's what I said, I think my customers are saying the same thing that they have a cautious optimism looking forward. There's still some uncertainty with the tariffs and there's some uncertainty in the market, but I'm hearing, let's say, cautious optimism.

[Operator Instructions] Our next question comes from Mark Miller with The Benchmark Company.

I'm just wondering if you can comment about welding market outside of China, in particular, United States?

So we've seen good growth in welding globally. So I can say that. The strongest growth that we saw was specifically in EV and the biggest piece of growth there was in China, but we do have -- we have had broad-based growth, and we've seen growth also quarter- on-quarter with LightWELD in welding. So we are seeing some increase.

I'm just wondering, too, if you can comment about the margin profile of your backlog? Is that similar to what you're expecting in the third quarter?

Yes. I mean the mix on that is not fundamentally different going into the quarter, Mark.

We have reached the end of the question-and-answer session. I'd now like to turn the call back over to Eugene Fedotoff for closing comments.

Thank you, everyone, for joining us this morning and your continued interest in IPG. We will be participating in several investor events this quarter and are looking forward to speaking with you again soon. Have a great day. Thank you.