Angelo Lopresti - VP, General Counsel and Secretary Valentin Gapontsev - Chairman and CEO Tim Mammen - SVP and CFO.

Patrick Newton - Stifel Nicolaus Krish Sankar - Bank of America Merrill Lynch Joe Maxa - Dougherty & Company Jim Ricchiuti - Needham & Company Avinash Kant - DA Davidson & Company Mark Douglass - Longbow Research Kathryn Thompson - Thompson Research Group Jeremie Capron - CLSA Americas.

Good morning and welcome to IPG Photonics’ First Quarter 2014 Financial Results Conference Call. Today’s call is being recorded and webcast. There will be an opportunity for questions at the end of the call. (Operator Instructions) At this time, I would like to turn the call over to Mr.

Angelo Lopresti, IPG’s Vice President, General Counsel and Secretary for introductions. Please go ahead, sir..

Thank you and good morning, everyone. With us today is IPG Photonics’ Chairman and Chief Executive Officer, Dr. Valentin Gapontsev; and Senior Vice President and Chief Financial Officer, Tim Mammen.

Statements made during the course of this conference call that discuss management’s or the Company’s intentions, expectations or predictions of the future are forward-looking statements.

These forward-looking statements are subject to known and unknown risks and uncertainties that could cause the Company’s actual results to differ materially from those projected in such forward-looking statements.

These risks and uncertainties include those detailed in IPG Photonics’ Form 10-K for the year ended December 31, 2013, 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 Web site or by contacting Company directly.

You may also find copies on the SEC’s Web site. Any forward-looking statements made on this call are the Company’s expectation or predictions only as of today, April 29, 2014. The Company assumes no obligation to publicly release any updates or revisions to any such statements.

We will post these prepared remarks on our Web site following the completion of our call. I’ll now turn the call over to Dr. Valentin Gapontsev..

Good morning everyone. As we published today, the first quarter results in total correspond to our guidance and even better than the market expectations. IPG continued to deliver strong growth, with revenue up 20% year-over-year. It is remarkable also the revenue in traditionally weak Q1, was up sequentially, first time for last years.

In reality, the Q1 shipment was even higher than reported revenue. However we decided to report one realized volume shipment to famous German automaker in Q2, because of some disputes with revenue recognition according to GAAP rules. Other key parameters like gross margin, P/E and cash flow were in good shape in Q1 also.

We enter Q2 with a book-to-bill that was greater than one for the first quarter. While the detailed analysis of Q1 results will be provided by Tim Mammen. I’d like to underline some top issues and trends. As usual, the largest contribution in Q1 revenue was made by sales of high power Ytterbium lasers.

In the quarter we installed new record of 2.3 megawatt of combined optical power for more than 1,000 produced units. It is 44% more than year ago and 16% higher of Q4 2013.

The growth rate is close to the five years CAGR of 55% and confirms that IPG fiber laser penetration trend into key application in material processing, including cutting, welding, cladding, cleaning, additive manufacturing and so on are far from saturation.

We continue to work very hard to improve the performance of such lasers and decrease their cost. For example, a newest version of such laser launched in Q1 ’14, provide the wall plug efficiency above 45% whereas five years ago we provided 25% only. It is much higher than any competition can demonstrate now.

Please note there are no high power direct diode systems on the market with a similar efficiency also. So, the claims the direct diode systems are more efficient are not correct. At the same time, we decreased manufacturing cost of such lasers by a factor of 2 even 2.3.

It allows us to continue to control prices in the market, saving a very high gross margin. The second sales driver continued to be pulsed fiber lasers. Here situation isn’t so stable. Sales decreased 13% year-over-year to 28.8 million due to increased competition from Chinese vendors, as well as lower demand in some regions.

But we are optimistic in the market segment we have. First of all, we have decreased the cost and optimized price of our traditional low power Ytterbium pulsed lasers. As a result, we have recently signed new very significant contracts in China.

Secondly, we have developed a new low budget version of such lasers which have passed qualification by our top customers successfully. But most large new perspective we connect with a launch on the market of new families of much higher grade Ytterbium pulsed lasers developed during last and this year.

The families include, high peak power short nanosecond Ytterbium, fiber lasers with a power up to 200 watt, high peak power picosecond Ytterbium fiber lasers with a power up to 50 watt, femtosecond Ytterbium fiber lasers for ophthalmology and industry applications, super high power nanosecond the lasers with average power up to 5 kilowatt.

We are finishing qualification, installation a mass production of the families now. Some of them, like short nanosecond, we started to ship in serious quantity last year. The orders are growing very fast now. But the most of them should start to bring a contribution to revenue at second half of the year.

If to consider other old products or products we introduced some years ago, we see an essential growth in sales of QCW laser family. In Q1 the growth continued and exceeded 100%. However its contribution in revenue is less than we expected before. The reason is clear, very low market prices of legacy competitor, flash lamp pumped Nd:YAG lasers.

To win the market, we are working successfully to decrease the cost of these lasers. From other side, more and more OEM customers are finding an enormous performance benefit in turning to our QCW solution. We assure a fast sales growth.

The revenue contribution of other our classic lasers, as low power Ytterbium, Erbium and Thulium lasers, as well as direct diode lasers, is still very low. We are looking to spend more attention to these products because these have very essential reserves for sales growth.

Further, in Q1 we have reached a very good progress in finishing of development and qualification of our new prospective product families like, high power green CW and short pulse fiber laser with a power up to 500 watt, UV fiber lasers, both 355 nanometers and 266 nanometers spectral ranges, nanosecond and picosecond Erbium 1.5 micron and Thulium 2 micron fiber lasers, femtosecond Erbium fiber lasers of 1.5 micrometer range, first industry grade femtosecond lasers of mid infrared range or 2.5 micrometer range, high energy per pulse Holmium hybrid fiber pumped lasers of 2.1 micrometer range.

The most of the new lasers do not have analogs on the market at all. Some of them are unique at all, for example, Chromium-doped Zinc Sulphide laser, femtosecond laser of 2.5 micrometer of range is open more to do a continuous affects a few opportunities for biotechnology for example.

The mass production of the lasers we are targeting to start in Q3 and Q4 of the year. At last in Q1 we were very successful in further development and introduction in the market our laser-based systems. Tens different kind of machines were developed and introduced to customers.

As a result our backlog for such kind of system growing dramatically into many 100 percent increase all during Q1 of this year. The advantages of fiber laser technology combined with the adoption of new materials and processes in many areas of manufacturing are resulting in new opportunities for IPG as fiber laser displays more conventional methods.

One example is the use of high-strength steel in automotive manufacturing to decrease the weight of vehicles that is driving fiber laser adoption versus non-laser methods such as stamping. Other examples include growth of additive manufacturing to produce complex parts and using fiber lasers to cut Sapphire crystals and glass for use in smartphones.

In addition, the miniaturization of parts and electronics and the resulting need for extremely precise tools also contributes to increased demand for fiber lasers. No other company can produce ultra-high power lasers of 20 kilowatts and/or 100 kilowatts on a commercial basis like we can.

We have numerous orders for these lasers for oil and gas extraction, heavy construction, research in special applications and so on. We have made great progress over the last few years in overcoming customer doubts about the many benefits and reliability of fiber laser technology. There is little of such resistance in our established applications.

We can see the evidence in the sales trends for sales of fiber lasers into cutting, one of the largest materials processing applications. Now, practically eight of from top 10 manufacturer of cutting to the cutting machine for example is our customers.

We continue to press forward to develop new products and applications to match our success in cutting. Much of our R&D focus is on developing new applications for fiber lasers through internal research and in partnership with customers and industrial institutes.

We are working to improve electrical efficiency and reduce the cost of our existing products, develop new products at new wavelengths, power levels and pulse durations as well as develop a variety of laser-based systems. For example, last year we developed high-power pulsed UV fiber lasers for micro-machining and fine processing applications.

Now we are introducing pulsed fiber lasers with ultra-short pulse durations and with high peak powers and different spectral ranges, including mid infrared laser as mentioned before.

We are ready now to complete for enough technology cuts and laser power effect of the low cost laser femtosecond laser which has now being introduced in the field ready to take the waiting in the market. As we introduce new products to our pipeline, we will be able to address opportunities in semiconductor processing and non-metal processing.

The opportunity pipeline also grows for our laser seam stepper as some larger auto customers are testing and using the specialized laser welder in their production lines. The stepper has wider appeal and it is being used to weld kitchen appliances, boats and trucks, aerospace to name a few. IPG is introducing a new stepper to respond to market needs.

Now, we believe more than 50% major automakers are test and quality this seam stepper application successfully. To keep up with increasing demand, we also are investing in expansion. Last month, we purchased two buildings in Massachusetts that will be used for development and manufacturing of laser-based systems, crystal growth, and research.

On a global scale, we will open a new office with an applications lab in Shenzhen, China near our largest customer. As fiber laser technology becomes more widely adopted in both developed and emerging markets around the world, we are increasing our international sales and service locations.

For example, we recently expanded our facilities for systems and component manufacturing in Russia and opened a new sales and service office in Poland and a service office in Taiwan.

In summary, we continue to make investments in our product pipeline and in our worldwide infrastructure to leverage IPG’s technology lead, develop new products and the growing demand for fiber lasers. With that, I will turn the call over to Tim..

Thank you Valentin and good morning everyone. Our first quarter revenue growth of 20% was primarily attributable to high-power laser sales for materials processing applications. Materials processing sales increased 22% year-over-year to 162.7 million, accounting for more than 95% of total sales during the quarter.

This growth continues to be driven primarily by demand for cutting applications across different industries. While welding sales were robust in Japan and Germany, welding was weaker in North America and China during the quarter. To a lesser extent, growth benefited from an increase in sales for additive manufacturing, cladding and glass cutting.

Sales for other applications, which account for less than 5% of IPG’s total revenue, decreased by approximately 11%, or less than $1 million. Looking at our results by product line, high-power laser sales, which accounted for 59% of total revenue, increased 33% year-over-year to $100 million.

High-power laser sales continue to grow in line with fiber lasers gaining market share across existing and new applications. One positive trend we are seeing is cutting OEM customers continuing to increase purchases of lasers with higher average output power.

This trend may be in part to increase cutting speeds for all types of materials but is also likely because they are replacing their CO2 lasers used for cutting thick metal with high-power fiber lasers. In addition to the strong performance from cutting, sales for high-power welding applications were strong in Japan and Korea.

We are seeing see some signs of recovery in Europe although this was offset by weaker welding sales in North America and China, primarily due to the timing of projects. One of our major auto customers has qualified IPG’s fiber lasers for worldwide deployment for welding applications.

Pulsed laser sales decreased 13% year-over-year to 28.8 million due to increased competition from Chinese vendors for marking and engraving applications, as well as lower demand in South Korea where there was less investment in smartphone manufacturing applications as compared to one year ago.

These decreases were partially offset by stronger sales of pulsed lasers in Europe and North America. We have recently signed a significant new pulsed laser contract for our new generation of low cost, low power pulsed laser in China.

The first orders from this will be called-off and ship in Q2 and should help to mitigate the competition from local Chinese suppliers of pulsed lasers. Sales of medium-power lasers rose 67% to 17.5 million, or 10% of total revenues, primarily driven by increased demand for thin metal cutting and micro-welding in general manufacturing.

QCW laser sales, which are mostly used for glass cutting, turbine blade drilling and welding applications, increased to $5.6 million, or 43% year-over-year, accounting for 3% of total revenues. We are pleased to see QCW sales gain traction as a replacement for YAG lasers and also for use in new applications such as Sapphire crystal and glass cutting.

Sales of low-power lasers were down 7% year-over-year to $3.8 million, primarily due to lower sales of medical applications to one customer. Sales of other products, which include amplifiers, diode lasers, green lasers, mid-IR lasers, integrated laser systems and certain components, were 6.8 million, up 18% year-over-year.

Service, parts, lease and other revenue, including accessories, totaled 8.1 million, a decrease of 13% from last year. Now looking at our Q1 performance by geography, sales in Asia increased to 90.4 million, or by 27% year-over-year.

Within that region, Japan had a record sales quarter thanks to our successful efforts to further penetrate cutting and welding OEMs, in general manufacturing and automotive. In addition, demand for fiber lasers from Turkish OEMs for cutting systems continues to increase and drive growth.

In China, sales increased 23% to 45.9 million, primarily driven by our robust OEM customer base. We continue to see strong interest in high-power lasers for cutting and welding from new automotive industry, as well as increasing interest within general manufacturing, heavy industry and rail transportation.

We have been conducting demonstrations with several companies within those industries for our laser seam stepper, which is an automated welding tool that provides customers with increased processing speeds, better quality and the elimination of certain clamping tools and laser safety enclosures.

The seam stepper can be used to process several different metals including steel, aluminum, stainless steel, and the strength of the weld is about twice the strength of a traditional resistance spot weld. European sales were up 26% year-over-year to 56.7 million.

This was primarily due to continued penetration of cutting OEMs for general manufacturing. We are also seeing growing demand in Europe for additive manufacturing applications. European demand for cutting was particularly strong with both sales volume and an increase in the average power of lasers sold.

In addition, welding sales saw a small improvement from the tepid levels of last year while pulsed laser sales were slightly up compared to a year ago reflecting the fact that there was less competition in Europe for this product line. North American sales of 22.9 million for the quarter decreased 10% year-over-year.

The lower year-over-year comparison is primarily due to lower sales for welding and paint stripping while Cutting and marking applications were stronger as compared to a year ago. Now, working our way down the income statement, gross margins were within our target range of 52.3%.

It was pleasing to see gross margins at this level even as we held inventory levels flat. Gross margin was helped by more stable pricing and solid utilization of manufacturing capacity. Utilization should improve as we grow revenue and increase sales of new products and accessories such as optical heads.

We continue to invest in advancing our technology, infrastructure and management, which resulted in an increase in General & Administrative expenses to $12.9 million or 7.6% of total sales compared with 8.3% of sales a year ago. Research & Development expenses increased to $12.8 million from $8.8 million a year ago.

As a percentage of sales, R&D was 7.5%, which is up from 6.2% in the first quarter of 2013. Operating expenses for the first quarter of 2014 of $31.5 million include a foreign exchange gain of $1.4 million, which was up from a gain of 0.5 million in Q1 2013.

First quarter operating income was 57.8 million, or 33.9% of sales, compared with 49.6 million, or 35% of sales, in the first quarter of last year. Excluding foreign exchange, operating margins were 33.1% and 34.7% in 2014 and 2013, respectively.

Our tax rate in the first quarter was 30.1% which is higher than it has been recently primarily due to the mix of pre-tax income between jurisdictions and because the U.S. R&D tax credit legislation has not yet been re-enacted.

If that it is re-enacted we would expect that our tax rate will be at or slightly below 30% and remain at this level going forward. Net income attributable to IPG for the first quarter increased 15% to 40.5 million. On a diluted per share basis, we reported $0.77 for the first quarter as compared with $0.67 a year ago.

Now, looking at the balance sheet, we continue to maintain a strong balance sheet, ending the quarter with cash and cash equivalents of $480.6 million and 19.6 million of debt including lines-of-credit. At March 31, 2014, inventory was $170.6 million, down from 172.7 million at year-end.

Our current level of inventory on-hand amounts to approximately 189 days, compared with our target range of less than 180 days. Accounts receivable were $107.6 million at the end of the first quarter, or 57 days’ sales outstanding, compared with $102.7 million at March 31, 2013, or 66 days’ sales outstanding.

Cash provided by operations during the quarter was strong at $43.4 million. Capital expenditures for the quarter totaled $11.5 million. Our expected CapEx for the full year 2014 is approximately $70 million.

And now for our expectations for the upcoming quarter, heading into Q2 with a book-to-bill greater than one, we anticipate sequential and year-over-year growth for the current quarter. Continue to make strategic investments to advance our technology while focusing on generating profitable growth and maintaining margins within our target range.

Currently expect revenues for the second quarter to be in the range of 173 million to 188 million. We anticipate Q2 earnings per diluted share in the range of $0.77 to $0.92. The mid-point of this guidance represents quarterly revenue and EPS growth of 7% and 6%, respectively, year-over-year.

The EPS guidance is based upon 52,724,000 diluted common shares, which includes 51,970,000 basic common shares outstanding and 754,000 potentially dilutive options at March 31, 2014. This guidance is subject to the risks we outlined in our reports with the SEC, and assumes that the exchange rates remain at present levels.

I want to reiterate that we do not attempt to forecast gains or losses related to exchange rates. With that, Valentin and I will be happy to take your questions. Thank you..

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Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) To allow for as many questions as possible, we ask that you limit yourself to one question and one follow-up before rejoining the queue. (Operator Instructions) Our first question comes from the line of Patrick Newton with Stifel.

Please proceed with your question..

Focus on was your revenue outlook I think the 7% year-over-year growth at the midpoint or 6% sequentially it’s definitely below expectations and it’s a pretty big deceleration from growth that you usually deliver.

So I am curious if there is any specific areas or products where you’re seeing these growth rates decelerate, is there any macro competitive issues that you’d be willing to highlight are you seeing any issues with Russia any uncertainty there? And then Gapontsev I believe you made a prepared remark that said that you had an issue with the revenue recognition with a German automotive customer.

I want to know if that’s an impact or if I heard that correct? And then I have a follow-up..

Focus on was your revenue outlook I think the 7% year-over-year growth at the midpoint or 6% sequentially it’s definitely below expectations and it’s a pretty big deceleration from growth that you usually deliver.

So I am curious if there is any specific areas or products where you’re seeing these growth rates decelerate, is there any macro competitive issues that you’d be willing to highlight are you seeing any issues with Russia any uncertainty there? And then Gapontsev I believe you made a prepared remark that said that you had an issue with the revenue recognition with a German automotive customer.

I want to know if that’s an impact or if I heard that correct? And then I have a follow-up..

We didn’t hear the beginning of that question Patrick like the general target of the question is related to the midpoint of guidance we got the rest of it.

If and then and also the revenue recognition question, not to characterize that as a dispute it’s not really a dispute, we may have had a dispute with me or my decision to need to defer that it just relates to the payment terms that we have with one of the automotive manufacturers in Europe where we had to defer the revenue because the payment term is linked to the installation of the lasers within that factory and we cannot be deemed to have earned that until we get that installation completed the installation was due to be completed in April and May it was several units of lasers that we delivered.

And we’ve got some of the other questions I think we’ve….

So we have seen delay that’s gotten the accepted sign, the document acceptance by due to some from note in the order that should be some installation so and we delayed that recognition of this order but no problem with customer..

So is that -- you say supposed to be installed in April-May timeframe, is that embedded in your June quarter guidance or is this now shifting in the September and could you help us size this revenue?.

So is that -- you say supposed to be installed in April-May timeframe, is that embedded in your June quarter guidance or is this now shifting in the September and could you help us size this revenue?.

No, it’s relatively small amount of revenue it’s 10 or so lasers its’ nothing that material Patrick and the stuffs that were installed there is no issues it’s part of a larger frame agreement with that customer which that customer is calling off. We probably read that much into it.

In terms of the other stuff I think we’re still -- we've talked about the pulse lasers which were driving a bit in Q1 continuing to be a little bit softer in Q2 you are seeing the welding business it’s starting to gain a bit of -- we saw -- we mentioned we started to see some recovery in Europe and certainly hoping and started to see some better order flow in the U.S.

in the last week or so for the welding business so that’s a good sign to see.

In general of course I’d like to see a little bit stronger order growth at this point in time and should be perhaps guiding a little bit more strongly there is nothing specific on the competitive front that we’ve highlighted apart from pulse lasers and there are very many opportunities that the Company is working on and we’re just waiting for those to start to gain some traction.

Of course the business continues to be hurt on a growth basis with the weakness that we see in the medical and other applications and we still don’t have any clear visibility into when those are going to pick up.

So I think it’s a number of different factors that just there is a little bit weaker quarter and then the rest of the year really will depend upon how order flow is in Q3 and through July the pipeline and the forecast for orders for this quarter that the sales group is put together is actually very strong if they executed at that level I think we’ll be very pleased but we need to -- we don’t have a lot of visibility into shippable orders as you know it’s a characterization of our business.

So we do depend on waiting for those orders to come in. But if the sales force performs well this year across the different geographies and in Q2 into Q3 I think it bodes for a reasonably still a reasonably good year..

And no you didn’t mention anything about uncertainty in Russia having an impact, so imagine that that was not an impact, is that fair and then could you help us understand what percentage of revenue you’re generating from Russia currently?.

And no you didn’t mention anything about uncertainty in Russia having an impact, so imagine that that was not an impact, is that fair and then could you help us understand what percentage of revenue you’re generating from Russia currently?.

The third-party revenue we have about 5% revenue there Russia is a little bit -- there is nothing specifically impacting it’s very difficult to forecast the timing of large systems orders so we’ve been very conservative in terms of a number that we’ve used in guidance for Russia systems orders just because a lot of them are based upon different tenders and you don’t know when those tenders are going to be concluded or once the tenders are generally concluded they require rapid delivery of the order.

So Russia is a bit more difficult to forecast in that regard and we’re definitely being conservative in that manner. As I mentioned on third-party revenue Russia is about 5% of total revenue for the group.

And so nothing the uncertainty in Russia isn’t really impacting us in any way differently from last year, but we’re having a conservative of the guidance that we’re using for Russia for systems business..

Okay. And then I guess just last one dovetailing off that systems for Valentin or Tim is in the prepared remarks you discussed backlog for systems growing dramatically and I think is at many 100% year-over-year.

Can you help us understand the size of this backlog in absolute terms or as a percentage of total backlog and is there any specific geography you just highlighted Russia where your systems business is focused?.

Okay. And then I guess just last one dovetailing off that systems for Valentin or Tim is in the prepared remarks you discussed backlog for systems growing dramatically and I think is at many 100% year-over-year.

Can you help us understand the size of this backlog in absolute terms or as a percentage of total backlog and is there any specific geography you just highlighted Russia where your systems business is focused?.

The systems backlog in the U.S. for example starts to grow with ship miles per units and in Russia I just discussed that there are many-many different aspects of the pipeline and different orders that are coming in so we expect to see that pipeline and backlog for systems continue to grow.

Those are the two main countries where the systems business is really focused. So it continues to gain traction albeit off a small base..

And we’re still talking a single-digit percentage of revenue?.

And we’re still talking a single-digit percentage of revenue?.

Yes. Yes I would be very happy if it was 10% of revenue..

Alright, thanks Tim..

Alright, thanks Tim..

Hopefully that’s 60 million bucks..

Thank you for taking my questions..

Thank you for taking my questions..

Thank you. Our next question comes from the line of Krish Sankar with Bank of America Merrill Lynch. Please proceed with your question..

Thanks for taking my question, I have two of them one, Tim you kind of highlighted how the Chinese competition is like slowly kind of seems to be like impacting the pulse laser business and it seems like a year or so ago there were nowhere to be seen.

So I am just kind of wondering what gives you the confidence like a year or a two years down the road that the same Chinese competition won’t to be trying to attack your high-power business as well?.

Thanks for taking my question, I have two of them one, Tim you kind of highlighted how the Chinese competition is like slowly kind of seems to be like impacting the pulse laser business and it seems like a year or so ago there were nowhere to be seen.

So I am just kind of wondering what gives you the confidence like a year or a two years down the road that the same Chinese competition won’t to be trying to attack your high-power business as well?.

I think on the pulse laser the Chinese competition is not a year ago it’s characterized that we are nowhere to be seen is completely wrong Krish they’ve been around for at least two years on the pulse laser side and IPG now has got to a point where we’re introducing new products with a lower cost base and cutting pricing.

As we mentioned, we’re starting to get some new significant orders from the OEM in China.

So it’s the same with any competition at the pulse level it’s easier for them to get there because the diode is not a significant part of the buildup material the relative optical power and the pulse laser they produce is lower the complexity of the device is more simple so that’s enabled them to gain some traction there but we’ve responded in the way that we like to respond in everything by improving quality of the product lowering price and becoming price competitive.

And I think we’re starting to get some at least limiting their ability to compete further with us there.

Who knows where they or other suppliers around the world for higher power product will be in three or five years time but the point remains that the higher power product it’s much more difficult to compete on price and the complexity of the product is much greater the ability to scale power is much more difficult to do and there are companies outside of China who’ve being trying to scale power and reduce cost for the last decade and have not been able to keep up with us.

I think that’s what makes it so much more difficult for them. But we also have to continue to stay ahead of the competition developing new products diversifying the business, producing more systems, developing the optical delivery systems. And that’s where our continued advantage across different applications will continue to come from.

If we just stood still and carried on just producing high-power lasers that we did a year ago I am sure the Chinese will catch up and I am sure Valentin has a similar view on that..

Got it, got it and then I have another quick follow-up you guys did about like 190 million or so in China revenues last year almost 40% year-over-year growth.

Is it fair to assume this year your China sales should be more than last year and what kind of growth profile should we think for that?.

Got it, got it and then I have another quick follow-up you guys did about like 190 million or so in China revenues last year almost 40% year-over-year growth.

Is it fair to assume this year your China sales should be more than last year and what kind of growth profile should we think for that?.

Yes we’re targeting increasing China sales this year in the first quarter they grew 23% and then Q2 guidance they also forecasted growth but we’re not giving any specific country or annual guidance.

I would say that within the core applications the growth rate in China will be more in line with the secular growth rates of fiber laser rather than exceeding that, and of course as you get new applications and new product introduced those can provide a bit of a lift to revenue when they get accepted..

Our core OEM customers in China for this year forecast much higher than last year and also we now see augment serious OEM customer also prestige to IPG, so in total for us forecast very attractive today and first quarter confirmed this, that this forecast is right..

Alright, thanks gentlemen. .

Alright, thanks gentlemen. .

Thank you. Our next question comes from the line of Joe Maxa with Dougherty & Company. Please proceed with your question..

Hi. Thank you. I wanted to ask couple of questions on the income statement. The R&D expense obviously you are investing in your Company, is this is a baseline you should look for as I am looking at the guidance it suggesting of a midpoint that R&D should come down a fair amount.

So I was curious if there is any one-time events in the quarter, or maybe just elaborate a little bit?.

Hi. Thank you. I wanted to ask couple of questions on the income statement. The R&D expense obviously you are investing in your Company, is this is a baseline you should look for as I am looking at the guidance it suggesting of a midpoint that R&D should come down a fair amount.

So I was curious if there is any one-time events in the quarter, or maybe just elaborate a little bit?.

My guidance is done by used flat R&D number for Q2, at the midpoint we don’t get a lot of leverage Joe but if you get to the top-end of the guidance range we start to see some earnings leverage and that’s demonstrated both because you will see that there is an improvement in gross margin as well as a bit of operating leverage start to come in.

I said that it’s fairly important that the Company gets $180 million to $185 million in revenue and above that level it becomes easier to demonstrate a bit more of a robust business model..

I see. And following up on the gross margin….

I see. And following up on the gross margin….

We’re very clear on that point for the last year I think so there is nothing changed around that..

Correct. Correct. I want to ask a little bit more on the gross margin side staying in your typical range, there is a couple of items that perhaps are a little bit lower gross margin being the systems business and then I also want to ask on these lower pulse lasers for China.

Where are those gross margin say if you will compare to your let’s call it your company average?.

Correct. Correct. I want to ask a little bit more on the gross margin side staying in your typical range, there is a couple of items that perhaps are a little bit lower gross margin being the systems business and then I also want to ask on these lower pulse lasers for China.

Where are those gross margin say if you will compare to your let’s call it your company average?.

They are still pretty strong the low power pulse laser and with the introduction of the new lower cost device we’ll see an improvement in those items. Actually you don’t see a lot of this because there is a huge amount of detail and tens of thousands of transactions they are going to.

But I’m actually very pleased with the gross margin of individual products, now given the revenue level we had a little bit low absorption but I have highlighted that as revenue goes up that absorption in neutralization should improve.

It wasn’t too difficult too difficult to get to this gross margin level given some of the stability in pricing we’re seeing on the cutting systems, Valentin has highlighted that as being a strategic initiative last year that he thought the pricing for cutting systems was -- cutting lasers was more optimized.

I think we’re starting to see some traction with improvement in margin on the pulse laser systems. And then the other product growing QCW cost us to continue to come down, we had strong growth on medium power levels where the margins are pretty good.

So I was actually very pleased with the gross margin by product before you get to looking at the utilization within the factory. And then the utilization given that inventory came down a little bit during the quarter which was pretty good.

And I think that’s a reflection again of more of the virtual integration starting to take hold and to leverage the investments that we’ve made. So like there was in the 54% gross margin quarter, I was actually pretty pleased with it..

Great, thanks a lot that’s helpful..

Great, thanks a lot that’s helpful..

Thank you. Our next question comes from the line of Jim Ricchiuti with Needham & Company. Please proceed with your question..

Hi. Thank you. If I look at your guidance and think about Q2 of last year, you had a pretty strong quarter as I recall for pulse lasers and I think you also had a fairly strong quarter in North America. To what extent is that playing into the guidance the year-over-year guidance that you are giving the headwinds you may have in pulse.

And if that’s the case when do the comparisons in pulse with the new product begin to get easier for you guys? Do you see a stronger second half?.

Hi. Thank you. If I look at your guidance and think about Q2 of last year, you had a pretty strong quarter as I recall for pulse lasers and I think you also had a fairly strong quarter in North America. To what extent is that playing into the guidance the year-over-year guidance that you are giving the headwinds you may have in pulse.

And if that’s the case when do the comparisons in pulse with the new product begin to get easier for you guys? Do you see a stronger second half?.

No I think pulse was reasonably strong in Q2 a year ago Jim, I think there was actually another there was a large single mode laser that shipped in Q2 as well for defense, so that’s continuing to be a little bit of a drag.

North American backlog coming into the quarter was weaker than I would have liked to see and that’s led to some caution around the guidance there. But I did mention in the last 10 days or so, order flow has improved quite nicely in North America.

And if that trend does continue, it should drive us well into the end of the quarter in Q3 there is still a lot of stuff in the pipeline as well. So North America started off weaker than we’d like to see it started to improve a little bit now.

On the pulse laser side of course as we get the more and more acceptance with the lower cost device you’d like to see some growth into the second quarter.

But the lower end of the pulse lasers it started to come more project dependent, depend upon when investment for large manufacturing capacity additions are being made and kind of have to wait for those projects to come on-stream again..

And Tim where do you see the pickup in North America coming from that you just alluded to which applications?.

And Tim where do you see the pickup in North America coming from that you just alluded to which applications?.

It’s the welding and cutting have had a very good week on order flow those are some very high-power lasers we’re expecting to get orders for in the next fairly shortly for some of the R&D on the oil and gas exploration.

The major automotive manufacturer that we said had qualified our product for worldwide distribution actually placed orders in North America for delivery into one of their North American factories that’s the first order we’ve received for the worldwide projects. So it’s across the board on the applications and product lines Jim..

Okay, that’s helpful. Thank you..

Okay, that’s helpful. Thank you..

Thank you. Our next question comes from the line of Avinash Kant with DA Davidson & Company. Please proceed with your question..

Good morning Valentin and Tim..

Good morning Valentin and Tim..

Good morning..

Hi Avinash..

A few questions, the first one, you gave us some idea of, of course the revenue growth that you have seen in China.

Could you put some color around the margins that you have seen in that region anything like gross margin, operating margin, year-over-year growth or sequential growth, anything that you can talk about in terms of how the margin profile has taken place over the last year or so, yes, from China?.

I think of course the volumes in China to the major OEMs are higher so they get some benefit on pricing on that which if you have looked at on individual product basis would point to slightly lower margins.

In general the margins in China have been pretty stable with some of the lower cost coming through they probably improved in Q1 a little bit as compared to where they were in general if you looked at an average for last year.

On the operating side it’s not really comparable they’ve got sales and service and a bit of G&A in China that generates 180 plus million dollars of revenue so if you looked at the operating margin for the China entity it’s not really comparable to anything else, it’s very-very high..

But in terms of the composites or depending on the mix of the composite margins you would say have run gone down in China?.

But in terms of the composites or depending on the mix of the composite margins you would say have run gone down in China?.

No, they have not gone down in China I’d say they have actually improved a little bit in China..

Okay. And last quarter you did make some comments about 3D printing and application there and suddenly gave us some idea of the size that it was in terms of the total revenues for the year.

Could you give us some idea about what kind of growth should we expect and where it is at this point?.

Okay. And last quarter you did make some comments about 3D printing and application there and suddenly gave us some idea of the size that it was in terms of the total revenues for the year.

Could you give us some idea about what kind of growth should we expect and where it is at this point?.

To the additive manufacturing revenue grew by more than 100% compared to Q1 last year, it was just shy of about $5 million. So that implies a run rate of almost $20 million that would be doubling compared to 2013..

2013 was less than 10 million?.

2013 was less than 10 million?.

Approximately, yes..

You said 5 million in the current quarter, right?.

You said 5 million in the current quarter, right?.

Yes, if you take order flow out of that..

How are your margins in that business compared to the corporate average?.

How are your margins in that business compared to the corporate average?.

They are good margins on those different products are very good..

Okay, perfect. Thank you..

Okay, perfect. Thank you..

Thank you. Our next question comes from the line of Mark Douglass with Longbow Research. Please proceed with your question..

Hi. Good morning gentlemen..

Hi. Good morning gentlemen..

Good morning Mark..

Looking at high-power and the strength there, actually to characterize it as primarily Europe and Japan and was there a good growth in China?.

Looking at high-power and the strength there, actually to characterize it as primarily Europe and Japan and was there a good growth in China?.

Yes, there was good growth in China. China revenues in total were up 23% obviously with the pulse business being a bit weaker it intonates that the high-power business in China was very strong.

High-power business in Japan was also very strong don’t forget that at the end of the financial year in Japan it was that Q4 and now we’re going into a slightly weaker Japanese quarter in Q2 because it’s the beginning of the year but yes we had very strong sales across a variety of industries, across a variety of power levels in Japan.

And then in Europe it’s really the cutting business and some of the recovery and the welding business that’s continued to drive the high-power business there. And Europe performed very well across particularly the cutting applications and started to see some improvement on welding applications..

Is it fair to characterize China as the preponderance of high-power sales or at least…?.

Is it fair to characterize China as the preponderance of high-power sales or at least…?.

No, the sales of high-power in fact because pulse laser sales the proportionate sales are higher in China if you looked at the relative regions, China high-power maybe a slightly lower percent of the total as compared to Japan and Europe.

In Japan actually high-power sales are 70% of sales for example because pulse laser sales are medium power laser sales are smaller..

Right..

Right..

And there are very high share in Europe I mean high-power is not just driven by China high-power is very definitely performing well outside of China in Europe and Japan. And as I mentioned there is a lot of orders now coming through in the U.S.

for power levels let me put on a lot of stuff in high-power 4 kilowatt, 6 kilowatt, one of the orders we are waiting for is a 60 kilowatt laser in the U.S. and so it’s not just China that’s driving high-power..

Not just China but I was just wondering if there is a plurality. And then your cash Tim you’ve been this question as it piles up.

What are your plans right now are you expecting share buyback authorization at some point, special dividends or I mean it seems to be more than enough for any M&A and certainly CapEx needs what are you thinking about your cash these days?.

Not just China but I was just wondering if there is a plurality. And then your cash Tim you’ve been this question as it piles up.

What are your plans right now are you expecting share buyback authorization at some point, special dividends or I mean it seems to be more than enough for any M&A and certainly CapEx needs what are you thinking about your cash these days?.

So, I mean the first thing I’d like to say was that I think we had a really nice quarter on operating cash flow generation and free cash flow generation.

Q2 will be a little bit lower on free cash flow just because of the timing of some of the CapEx projects there are quite a few purchases in Q2 that is scheduled to happen and then CapEx should decline a little bit in Q3 and Q4.

So I was really pleased I think we’re all very pleased with the amount of operating cash flow the business generated during the quarter. With regard to the total cash on hand there are no specific plans for buybacks or special dividends at this point in time.

We continue to look for accretive good technology acquisitions that can drive the Company forward in terms of gaining share or into new geographies different applications and we’re focused on really looking at ways to deploy the cash in that area at this point in time.

We need to continue to try and execute on that strategy and I think that strategy is the primary focus for the time to come give you a time horizon on that specifically..

Right. But it seems like you mentioned in the past that some of your targets aren’t nearly as big as the cash balance you have.

So, is that fair characterization?.

Right. But it seems like you mentioned in the past that some of your targets aren’t nearly as big as the cash balance you have.

So, is that fair characterization?.

In general, there is not many companies out there that we would going to acquire for like $500 million or $600 million at this point in time but there are several entities out there that are in the region of say 100 million to 200 million and if you wanted to execute on a couple of those transactions you’re using up of fair amount of the cash and then we are a very vertically integrated company you don’t want to run your cash balance down to zero and run the company on fumes we believe in having some reserve in our pockets as well..

Okay, thank you..

Okay, thank you..

Thank you. Ladies and gentlemen, in the interest of time, we ask that you limit yourself to one question at this time. Our next question comes from the line of Kathryn Thompson with Thompson Research Group. Please proceed with your question..

Good morning. Thanks for taking my question. My question is also around North America you talked about lower sales on the welding side. Was that due to weather or fundamental demand and did you see any progress through the quarter sales getting better you’ve made a comment that you’ve had some good order flow in the last week? Thank you..

Good morning. Thanks for taking my question. My question is also around North America you talked about lower sales on the welding side. Was that due to weather or fundamental demand and did you see any progress through the quarter sales getting better you’ve made a comment that you’ve had some good order flow in the last week? Thank you..

I don’t think anything could be really fundamentally attributed to the weather it may have had some small impact on it.

I think it’s more Kathryn about the timing of projects we generally see a pickup in North America into Q2 and Q3 if anything there maybe a little bit of seasonality related to the auto industry where people requesting delivery of product and systems into the end of June and July and August when they sometime shutdown the facilities and when they shutdown and we can go in or the integrators can go in and install the systems that are being ordered.

The pipeline on the welding side is certainly very strong and maybe one of our cutting customers referenced a little bit of a slow start to the year related to the weather but I don’t think there is anything fundamental..

Thank you. Our next question comes from the line of Jeremie Capron with CLSA. Please proceed with your question..

Hi. Good morning. So, a good quarter clearly sales are accelerating and now growing in excess of 20%.

So I am a little bit surprised to see your guidance for Q2 single-digit growth I mean pretty strong deceleration here and I am trying to understand if that’s more a function of the pulse business really dragging everything down or are you looking for deceleration in the core high power business?.

Hi. Good morning. So, a good quarter clearly sales are accelerating and now growing in excess of 20%.

So I am a little bit surprised to see your guidance for Q2 single-digit growth I mean pretty strong deceleration here and I am trying to understand if that’s more a function of the pulse business really dragging everything down or are you looking for deceleration in the core high power business?.

I think it’s the pulse business some of the other non-core businesses around advanced and medical and telecom still being a bit of a drag and then some caution really around the numbers we’ve used on guidance for North America as well as on the Russian systems and so it’s very difficult to pick when those orders will actually be finalized and be requested for delivery.

I think we would like to see another 5 plus million dollars on say on the guidance range I mean that would have been a very great good point to be it’s just a little bit weaker Jeremie than we probably like to see at this point in time.

As I mentioned the pipeline and the forecast for orders from the sales group is very strong for this quarter and if that is executed upon we will be in a fine position, so we would just need to get a bit more visibility around that over the next three to six weeks I’d say..

Okay. That’s great. And maybe quickly on Russia obviously counter risk is increasing.

How should we think about your company’s risk on Russia, there were trade constrains coming up there, how would this effect IPG?.

Okay. That’s great. And maybe quickly on Russia obviously counter risk is increasing.

How should we think about your company’s risk on Russia, there were trade constrains coming up there, how would this effect IPG?.

We don’t think it would be a serious impacted in any situation. The worse case it would be proven bad for us or could be some low cost impact in the case but not very large impact for IPG. Russian supply to German American company a lot of components especially fiber optic components.

But it will have such a similar facility for unit for production of this component in Germany and here. So it’s not very critical for IPG but its case we don’t think it will happen when full in Russia from American type, it’s not possible at all.

Some limited sanction which they now introduced Obama introduced its not connected at all with our business..

Thank you. We have reached the end of our Q&A session. I will now turn the conference back over to Dr. Gapontsev for any closing and additional remarks..

Thank you for joining us this morning. We look forward to speaking with you on next quarter’s call..

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