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

Krish Sankar - Bank of America Merrill Lynch Mark Douglas - Longbow Research Joe Maxa - Dougherty & Company Patrick Newton - Stifel Avinash Kant - D.A. Davidson & Company Jim Ricchiuti - Needham & Company Jeremie Capron - CLSA Americas Mark Miller - Noble Financial.

Good morning and welcome to IPG Photonics’ Second 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 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, July 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 website following the completion of the call. I’ll now turn the call over to Dr. Valentin Gapontsev..

First, 14% revenue growth, primarily due to a 18% growth in materials processing applications offset by declines in other applications. Second, a 70 basis point year-over-year increase in gross margins to 54.2%. Third, 16% growth on the bottom-line, demonstrating some leverage in our operating model.

Our book to bill in the quarter was also greater than one. Coming off a strong quarter, this bodes well as we enter the second half of 2014. We continue to penetrate and increase sales in metal cutting, welding, cladding, hardening and cleaning applications. We also saw growth in 3D printing, glass cutting, plastic welding and micro-processing.

These are positive trends that should translate into near and long-term growth opportunities for IPG. We were pleased to achieve these results based mostly upon our established ytterbium fiber laser product lines without a meaningful contribution from the new families of green, red, UV and mid-infrared as well as ultra-short pulsed lasers.

We expect these new families to be introduced to the market in the coming months and which should benefit growth in 2015 and 2016. Sales of high power lasers with more than 500-watts continued to perform well with unit sales of approximately 1,200 units and more than 2.4 megawatts of optical power shipped per reported quarter.

This corresponds to a three year CAGR for kilowatts of shipped power of more than 45%. Moreover, the growth opportunities in the core high power materials processing applications of cutting, welding and cladding still have a significant runway ahead.

The metal cutting market is growing at a rate of 5% to 7% annually while the market for other materials processing including welding, cladding, hardening and cleaning is growing much faster.

We believe that fiber laser technology is a major catalyst for the faster growth for these other applications and could ultimately increase the size of this market to be comparable and even higher to the cutting market.

As we mentioned in Q1 the electrical efficiency of our high power lasers now approaches 40% to 45% which is two times the efficiency of other fiber and disk lasers now available on the market. This electrical efficiency is also essentially better than the direct diode lasers currently being offered by certain competitors.

We do not believe that we are losing any share to direct diode lasers. To the contrary, given the improvement in electrical efficiency and development of automotive brazing applications we see an opportunity to potentially displace this technology. For example, roof brazing.

While the low power pulsed fiber laser market is both more mature than our high power applications it also has more competition.

Despite this, we are pleased to see that pulsed lasers sales increased sequentially due to our new low cost pulsed fiber laser and meaningful growth in sales of the new families of picosecond and super-high-power pulsed fiber lasers which we recently launched.

These pulsed lasers have peak power of up to 1 megawatt and average power up to a record 5-kilowatts, respectively. They have started to gain traction in cleaning, ablation, deep engraving and traditional marking applications.

In addition to this, sales of green lasers, while still small, also grew by more than 100% compared to a year-ago for applications in semi-conductor substrate drilling, solar cell edge deletion and entertainment applications.

We continue to make progress developing the UV technology and have both increased the reliability and peak power which has been obtained from this technology. The peak power of our UV technology is now more than 100-kilowatts and average power has reached a record level of 200-watts.

We are much closer to launching these products for mass applications. We are finishing the building of a specialized new production line for these lasers which is expected to begin production in Q4. We are investing in IPG’s worldwide infrastructure and technology to capitalize on these customer demand trends.

IPG has a number of significant advantages, including the scale that we have in our manufacturing and the depth of our technology across a wide spectrum of optical components from which the lasers are assembled.

We continue to develop products at new wavelengths, power levels and pulse durations, as well as a variety of laser-based systems that we believe will open up new markets and applications and be incremental to our overall growth.

In addition, we are working hard to further reduce the cost of our existing products which expands the benefits already enjoyed by our customers and further distances us from our competition. With that, I will turn the call over to Tim Mammen..

Thank you Valentin and good morning everyone. With Valentin having provided the business highlights, I’ll get right into the sales drivers for the quarter. Materials processing sales increased 18% year-over-year to $185.3 million, accounting for more than 96% of total sales during the quarter.

Within materials processing, cutting is our largest application and we continue to see strong growth in this application due to increased sales with our existing OEM customers and development of new OEM customers.

We also saw growth in welding applications where, for example, fiber displaced CO2 lasers in transmission welding as well as seeing growth in remote welding and to a lesser degree spot welding applications.

In addition to these applications, we are experiencing growth in some newer up and coming applications including 3D printing, ablation and cleaning of different materials as well as glass cutting, polymer welding, poly-silicon wafer annealing and other processes.

For glass cutting, we’re seeing an increasing opportunity in sapphire glass cutting applications, which is being used in a growing number of smartphones. Another fast-growing materials processing market for IPG is additive manufacturing of metal parts, or 3-D printing. Historically, much of the growth in additive manufacturing has come from plastics.

Today, industrial applications using metal are driving demand for fiber lasers to produce complex parts in volume and not just as prototypes. The increasing complexity and volume of parts that are likely to be made means that metal processing with fiber lasers could ultimately represent a large opportunity.

As complexity, size and volume of part production increases productivity gains will likely come from either using a greater number of medium power lasers in tandem or higher power fiber lasers in the kilowatt scale.

Sales for other markets including advanced applications, telecom and medical applications, which account for less than 4% of IPG’s total revenue, decreased by approximately 34%, or by $3.6 million. Looking at our results by product line, high-power laser sales, which accounted for 54% of total revenue, increased 22% year-over-year to $104.1 million.

High-power laser sales continue to grow as fiber lasers gain further market acceptance within established applications like cutting and welding and with new applications.

We have been successful thus far in penetrating these new applications, but there remains significant opportunity to gain traction with our existing OEMs and end users and with those that have yet to adopt our technologies.

As we have discussed before, we are seeing high power OEM cutting customers purchase higher power units from us as they qualify our lasers to cut faster and thicker gauge metals. Pulsed laser sales decreased 19% year-over-year to $32.4 million.

This was expected due to continued competition for low-power pulsed lasers for marking and engraving applications in China. However, we are encouraged that pulsed laser sales increased 12% from the sequential first quarter thanks in part to growing sales of our new generation of low cost, low power pulsed lasers in China.

These new lasers began shipping in Q2. We are also seeing increased sales of our high average power and high peak power pulsed lasers which are more complex and thus harder for low end manufacturers to compete with.

High power pulsed lasers are being used for higher end applications such as deep engraving of metal, cleaning of molds and tools used in manufacturing and surface ablation.

Sales of medium power lasers rose 38% to $21.6 million, or 11% of total revenues, as demand continues to steadily grow for thin metal cutting and micro-welding particularly in the consumer electronics industry.

QCW laser sales, which are mostly used for glass cutting, turbine blade drilling and welding applications, increased to $8.1 million, or 44% year-over-year, accounting for 4% of total revenues. Sales of low power lasers were down 13% year-over-year to $3.1 million, primarily due to softer sales for medical applications.

Sales of other products, which include amplifiers, diode lasers, green lasers, mid-IR lasers, integrated laser systems and certain components, were $6.7 million, up 8% year-over-year. Service, parts, lease and other revenue, including accessories, totaled $16.2 million, an increase of 39% from last year. Now looking at our Q2 performance by geography.

Sales in Asia increased to $101.7 million, or by 12% year-over-year. Within that region, China sales increased 12% to $65.6 million. The business in China is diverse across a variety of applications, including cutting, welding, marking & engraving and glass cutting, and we are making progress in growing our OEM customer base in that region.

In Korea, we are seeing increased demand for high-power and QCW lasers. And we continue to be successful in penetrating the cutting OEMs in Turkey. All of these factors helped to offset the year-over-year decline in pulsed laser sales in China. European sales were up 36% year-over-year to $64.0 million.

Growth in Europe was primarily due to continued penetration of cutting OEMs for general manufacturing, increasing demand for additive manufacturing applications and automotive sales to a major German automotive manufacturer which had shipped in Q1 but had been deferred pending installation.

In Poland, where we recently opened up a sales office, we have seen strong demand from local OEMs and orders increased by more than 300%. North American sales were $26.2 million for the quarter and decreased 14% year-over-year. Overall order flow for materials processing applications in North America is steady.

The year-over-year decline is due to the shipment of some large orders for advanced applications and marking and engraving in Q2 2013 that created a more challenging year-over-year comparison in the region. North America saw a increase in demand for welding lasers from the prior quarter. Now working our way down the income statement.

Gross margins were within our target range at 54.2% and demonstrate some leverage in our operating model as higher manufacturing activity improved absorption of manufacturing overhead. We continue to invest in advancing our technology, infrastructure and management talent.

Research & Development expenses increased to $13.4 million from $10.5 million a year ago. As a percentage of sales, R&D was 7.0%, which is up from 6.2% in the second quarter of 2013.

Our new product development strategy is focused on more broadly covering the optical spectrum, including near- and mid-infrared, and visible and ultraviolet wavelengths, as well as shorter pulse duration products. We expect these products to provide new alternatives to traditional laser and non-laser solutions.

General & Administrative expenses increased at a lower rate to $13.1 million, or 6.8% of total sales compared with $12.8 million, or 7.6% of sales a year ago. Sales & Marketing expenses increased to $8.0 million or 4.2% of sales from $6.8 million or 4.1% of sales a year ago.

Operating expenses for the second quarter of 2014 were $35.5 million, including a foreign exchange loss of $0.9 million, compared with $30.0 million a year ago, which included a foreign exchange gain of $0.1 million.

Second-quarter operating income was $68.7 million, or 35.8% of sales, compared with $59.9 million, or 35.6% of sales, in the second quarter of last year. Excluding foreign exchange, operating margins were 36.3% and 35.5% in 2014 and 2013, respectively. Our tax rate in the second quarter was 30.0%.

Net income attributable to IPG for the second quarter increased by 16% to $48.3 million. On a diluted per share basis, we reported $0.92 for the second quarter compared with $0.80 a year ago. Now turning to the balance sheet.

We continue to maintain a strong balance sheet, ending the quarter with cash and cash equivalents of $483.4 million and $14.7 million of debt including lines-of-credit. At June 30, 2014, inventory was $178.9 million, up from $172.7 million at year end.

Our current level of inventory on hand amounts to approximately 185 days, compared with our target range of less than 180 days. Accounts receivable were $124.1 million at the end of the second quarter, or 59 days’ sales outstanding, compared with $103.8 million at year end, or 57 days’ sales outstanding.

Cash provided by operations during the quarter was $33.5 million Capital expenditures for the quarter totaled $34.3 million, which included the purchase of two buildings in Massachusetts that will be used for research & development as well as manufacturing.

We estimate CapEx for 2014 of approximately $70 million, although the final amount will depend upon the timing of expenditures. Entering Q3, we remain focused on generating profitable growth, expanding our business with existing OEMs, finding new OEMs and finding new applications for our fiber laser-based products.

We will continue to make strategic investments to enhance our product pipeline and expand our worldwide infrastructure while maintaining gross margins within the target range of 50% to 55%. Order flow in Q2 was strong and, with a book-to-bill ratio of greater than one, we anticipate sequential and year-over-year revenue growth for the third quarter.

As a result, we currently expect revenues for the third quarter to be in the range of $190 million to $205 million. We anticipate Q3 earnings per diluted share in the range of $0.88 to $1.03. The mid-point of this guidance represents quarterly revenue and EPS growth of approximately 15% and 18%, respectively, year-over-year.

The EPS guidance is based upon 52,769,000 diluted common shares, which includes 52,068,000 basic common shares outstanding and 701,000 potentially dilutive options at June 30, 2014. This guidance is subject to the risks we outline 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. We will now be conducting a question-and-answer session. (Operator Instructions) Our first question is from the line of Krish Sankar of Bank of America. Please proceed with your question..

I had a couple of them. So Tim, I'm kind of surprised to see such strong growth in both China and Europe considering what's going on there.

So can you just give some color on to how you expect those two geographies to trend in the September quarter?.

Krish I don’t give guidance by quarter but I think the performance of the business to-date in Asia as a whole China and Europe has been pretty exceptional. It continues to be driven by penetrating the core applications particularly in Europe tremendous growth in cutting application where CO2 is rapidly losing ground.

In China as well cutting and welding and some of the newer applications around glass cutting the cleaning applications with the higher power pulse lasers I think these were trends that we had highlighted would be growth drivers this year and we’re pleased to see that they have materialized clearly even a bit strong than we thought they would do so.

I think it validates all the investments that the company has made and really shows that the acceptance of fiber technology is continuing to strengthen within the marketplace..

Got it. That's very helpful. And then one final question. You spoke about using fiber lasers for cutting sapphire. Can you tell like how big you expect that market to be and how you are displacing the diamond cutters? Or is there something else going on? Thank you..

So on Safire cutting you seeing for example the lenses over the cameras transitioning to Safire some of the readable on-off buttons.

I think the real opportunity on Safire is very difficult to quantify until some of the end users have smartphones determine exactly how much Safire glass they intent to use in future generations of product and that’s not particularly clear at the moment. It’s a growing opportunity.

If the transition to greater quantity of glass coverage continues I think it will be continue to be a driving opportunity for the company. But it’s not clear I don’t think anybody has any real clear idea in the market as to how large it could become..

Our next question is from the line of Mark Douglas of Longbow Research. Please proceed with your question..

Good results. Tim, did any orders pull into the quarter sooner than expected? Just a little more detail as to what was the positive surprise to you versus your expectations going into the quarter..

There is a certain amount of orders that book and bill during the quarter, nothing was pulled into the quarter everything was delivered in accordance with customer requirements.

I think what really drove the quarter coming out of April and into May and even earlier on in June was just strengthening of overall order flow in Europe and Asia you saw a strong performance out of China, Korea and Northern European countries. So there was, you said the general improvement in the tone of the business I would say.

There was nothing specific there was no big order that we pulled in till we recognize some revenue on one of the major German automotive manufacturers but that wasn’t 5% of revenue it was less than 2% of revenue..

Okay. And then on cutting sales, in our channel checks, we picked up an acceleration in the adoption of high-powered cutting.

Did you see that across the board, just an acceleration in the adoption rate? Or was that more driven by people just moving up the power levels to four and six kilowatts versus two and three maybe a year ago?.

No with the cutting with growing with higher power yet its right up to 60-80 kilowatts has also helped us to increase sales. But quantity of laser for cutting application also growing very well still you see in units growth of up to 40% it’s much higher than in revenue due to some correction with prices in the volume also discount.

But in the unit, its way we received very fast growth; it’s the same rate at what was two, three years ago up to more than 40% for year, still proper on situation..

Okay. And then just finally on the CapEx. $34 million -- I believe you did not change your CapEx expected rate for 2014. There was just a big chunk of it in the quarter. Can you discuss what your -- where you're adding capacity? And I assume some of that is from the UV laser. .

Yes, of course the timing of the CapEx was actually something we called out on the last call where we are expecting a big outflow in Q2, so you have had quite a lot of investment in facilities, the purchase of two buildings in Marlborough.

You have had the significant deposit made on a building in Moscow and then you have had continued investment for example on the UV manufacturing continued investment on diode production expansion, completion of some systems manufacturing buildings.

So, it’s across optical components, its finished product manufacturing, some R&D but the timing of those CapEx for Q2 being very strong on CapEx something that I had highlighted in the last call. So, it’s kind of right in line with expectation..

Our next question is from the line of Joe Maxa with Dougherty & Company. Please go ahead with your question..

I wanted to get an update on the seam stepper. You talked last quarter about the number of auto OEMs testing it. I just wanted to see where they're at and what your outlook is..

Everyone continues to evaluate the Seam Stepper; we continue to roll it out. We did ship a few units during the quarter, I can’t remember exactly too but not only is it automotive where continues to be a valuation by people for example in manufacturer of appliances.

I mentioned previously there was a company that makes aluminum boats that had bought Seam Stepper, had seen substantial improvement in the quality and the speed of the welding..

Train, high speed wagons and so on for many other applications, very successful test with the new technology based on Seam Stepper for example automotive, railway earlier very huge opportunity there but it takes time to introduce it to the market, the qualification and so on..

How long would you anticipate the qualifications take on a product like that?.

We accept next year very fast growth of sales..

Got it, okay. And then I wanted to ask if you're seeing any effect or impact from the ongoing events in Russia. Maybe give a little color on any impact to your business..

First of all so maybe just to address some of the more specific issues, the sanctions announced so far have not and do not have a material effect of IPG. We are clearly continuing to monitor those sanctions but from recent press report that clearly focused on financial energy and military sectors which are not a focus of our business.

The other important thing to note is that the supply of optical components both into and out of Russia is not affected by any of these sanctions that covered by use or any import or export licenses.

Clearly there are some concerns that the sanctions are creating weakening of the Russian economy in general that is I think way of monitoring and a concern of ours basically availability of liquidity.

I think the issue though is that Russian sales are still less than 5% of our total revenues, so I think what we look at it here that the growth in the systems business would clearly be potential upside to expectations but we are monitoring all of that as much as anybody else is and there continue to be some geopolitical risk around that.

The main concern from business side and going to Russian business would be a severe weakening of the Russian economy..

But take in mind that more than 75% of Russian business is export to German, American company and now fast growing export directly to Chinese customer, so share of sales directly in Russia is not watching out in any case will remain but may be some impact but various more impact because the most business of Russian company is export.

No time from Russian authority, they can make some counter attacks and which can impact our business, no signs, no intention as we know..

The next question comes from the line of Patrick Newton with Stifel. Please proceed with your question..

Congratulations on the quarter. I guess the first one is on additive manufacturing and glass sapphire cutting. You talked about this several times in your prepared remarks and thus far in the Q&A.

Although not really perhaps the size of market given a lot of the changes on sapphire, can you at least help us understand the contribution of revenue from each product line at this point?.

Yes, in general terms I’ll talk about that Patrick glass cutting grew by more than 100% it’s still less than 2% of revenue and on the additive manufacturing again that grew by more than 100% it’s probably around 2.5% of revenue or something like that. So I think we targeted last year focusing on additive manufacturing and seeing that business double.

We are on target to see that happen. And the drivers there are increased volume size and complexity in part so that drove attention to.

My view on this market is that if you get to a 1,000 systems sold for additive manufacturing the laser source could grow to $70 million or $80 million and at the moment the total number of systems sold in additive manufacturing for metals is probably somewhere if we look at the total number of laser we sell it’s probably less than 200.

And even a 1,000 systems is relatively small if additive metal manufacturing really takes hold in volume processes within industrial applications..

So both this application cutting of direct cutting and for additive manufacturing we have two kinds of business first with sale and fast growing sales of laser for other people with great integration which you know laser in both these application.

Second we develop all new technology for cutting and this additive manufacturing on technologies in which machine will support our technology and our success will be directly star to sales that much into our customer for them catching much in the open site with tested one that was a key this customer indeed and vary quality and for speed it would demonstrate much faster than existing in the market machine from other integrators.

And additive manufacturing also for this year is very interesting the result in hope to have in future to sale even system machine not only lasers..

Is there any timing on that Valentin to potentially entering that market?.

Clearly the machine for this cutting and for the [indiscernible] will then grow in some part metal parts we’re shipping now to cutting..

Okay. That's helpful. And I guess shifting gears, Tim, on the service parts lease and other. You specifically said something about add-ons, and perhaps I missed that in the past.

But I wanted to know is there reclassification of revenue in this segment, or are you just calling out add-ons because that's a big part of what allowed that segment to double sequentially?.

No, there is no reclassification that was a quoted out because the accessories were growth driver of that segment.

We will work on breaking out accessories as recess we’d include things like the optical heads that we targeted to bring to the market and had identified as being a potential source of revenue growth and that has started to happen in the second quarter..

And those are if I recall margin accretive..

They are very good margin product the optical edge..

Okay. And then I guess, given some of the new products entering the market, you have your lower-cost pulse laser that's being adopted that should help your margin mix.

Is it possible that we could see gross margin exceed the high end of your 50% to 55% range in Q3 or within the next few quarters for at least a short period of time?.

We continue to maintain the range that we’ve given. I think there are so many puts and takes around gross margin. It’s not just driven by absorption clearly as you get some of the UV product into the market you continue to grow the high power pulse product you see some transitions on cutting to higher power levels those would benefit gross margins.

We’ve also going to be cautious about continued pricing pressure within China for example in the lower end, potentially increased competition. So no I think we’d like to get to the top end of that range beyond that I don’t want to give any other indication.

We’ve identified that range as a reasonable range within which the company should grow on a medium term basis and that’ I think I’d like to leave the message..

We can demonstrate more than 60% even now but in the case we have to decrease our investment for future growth because look in strategic of what I would say what would be our position and income and then so next five years.

So now we have to invest, we’ll invest and really have to create this both the new product and the technologies and facilities and so on. And so we’ve seen 50% to 55% regional growth margin with all this our income we have to invest very aggressively for future..

Our next question is from the line of Avinash Kant of D.A. Davidson. Please proceed with your question. Please proceed with your question..

I have two quick questions, actually. The first one was on the pulse laser.

As you have been introducing your new products in the pulse lasers, on the pulse laser side, in China, do you see better margins than what you had previously on this product?.

Yes, we have seen an improvement in margins on those products, yes..

New product would be much more marginable. The product which we develop now with qualification of product would be much more profitable that low-power product for margin..

And did it take the overall margins in China better than what it was last year same quarter or?.

A lot of the pricing pressure, some of it started in Q2, it sort of accelerated Q3, Q4 and so we probably recovered a lot of what we lost in the second half of last year..

On the longer term, actually, getting back to the services revenues, clearly what kind of opportunity could you see longer-term and how many years from service? Is there a good opportunity that you think as the installed base gets a bit more mature that you could get some meaningful revenues out of services in the fiber laser side?.

So, the number we gave on servicing included accessories and we are going to try and breakout accessories coming up in the future. The main growth on that was services from the accessories on the lasers now.

The accessories we think have a significant runway of growth, if you are selling 1200 high-power lasers transitioning to 5000 high-power devices, just about every single high-power laser either needs a cutting, cladding, welding some kind of optical head to goes with it.

Those optical heads can run in place from very basic optical head might be $10,000; a very complex optical head can be tens of thousands of dollars.

So, IPG, if we can target going say over time increasing selling high-power lasers at least with optical heads you are talking about 2500 units, if you can transition that 75% to a more of a lasers sold with optical heads and ASP of $15,000 you can determine a potential revenue stream there that runs to $45 million, $50 million..

But it is not a replacement part, there is new additional optics, output optics and so on which we provide now more complete solution but output optics, very serious additional business which we are building now that will go in mass production, it is perhaps additional measure, we will have additional large revenue.

It’s not the replacement part of service..

And this will steadily grow as a installed base growth right?.

Our sales of high power fiber lasers and even QCW lasers for example grow, yes, the sales of those optical accessories will grow..

We install in Russia very large production value for such optical head, it would be for export worldwide, it’s not for us and for inside consumption..

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

Historically, Q3 has had, in some instances, a heavy component of consumer electronics related revenue to it, which has caused some seasonality in Q4.

Can you talk a little bit about how you might anticipate the mix of consumer electronics business in Q3, if it's at all meaningful?.

You compare to last year, we expect this year would be also some decrease in the orders and so on but our booking in May, June into July showed very much better bookings than it was a year ago. So, we expect the Q3 minimum and Q4 should be much better and faster grow than it was a year ago.

A year ago it was decreased but this year we expect increase of growth..

And consumer electronics there is some order flow particularly in Asia related to consumer electronics as a percentage of our revenue. If you go back to Q3, 2012 and that was the really big quarter where there was some significant build out.

It’s probably a smaller percentage of revenue nonetheless given it’s more of the general seasonality in China, Jim, that people should be cognizant of that China revenues generally in Q4 are lower than Q3 and given the relative size of China to our total revenue, I would still expect some seasonality into the fourth quarter..

Got it. And Valentin alluded to the book to bill being much greater than 1. I'm wondering if you could provide a little bit of color on the bookings, book to bill by region.

Was there much variability in the order trends by region geographically?.

No, I think the order trends generally sort of merit the results of the company, so you have very, very good order flow out of Europe and we saw the significant pick-up for example in Poland which has been relatively small. Turkey continued to hold up nicely through Q2 then you saw good order flow in China and Korea.

Japan, we would expect it to be a bit weaker, it was a bit weaker and then the U.S. the materials processing business is reasonable.

We actually got a 50 kilowatt laser order for some advanced applications and another 60 kilowatt laser order if some of the oil and gas applications, so saw so there is ultra high power orders that we saw come through in North America. The general trends the metrics sort of the results of the company in terms of revenue..

We expect also in the Q3, Q4 growth in advanced application for U.S. we hope that end the year sign and our customer growing asset initiatives improvement and from other side we expect also in Q4 would be very good and Russia of course is the system shipment, if we are correct about the orders for this -- correct in our growth (ph) orders for this. .

And if I get one final question in. I wonder if you could tell us what is the sweet spot right now in the additive metals, additive manufacturing part of the business in terms of the laser power that you're seeing..

Depends what the customer you’re talking about so you’re seeing some of the customers definitely moving towards kilowatt scale probably like a 1 kilowatt. But there are other customers who are using a slightly different solutions that are combing multiple 300 to 500 watt lasers together.

So by doing that they think they can maintain the quality of the part produced whilst improving the speed. I’d say where the quality of the part is not that rising factor and speed is more important people are transitioning towards kilowatt and then we’ve seen in some instances lasers high as 5 kilowatts used on very large parts.

We are expecting -- 10 kilowatts I think was one of those orders we had last year. Actually, we are hoping to close some additional orders for the ultra high power lasers for additive manufacturing.

But then you asked the quarter is it depends what the end customer is trying to achieve it’s a balance between quality and speed and depending on which way the electronic is sold it depends upon the solution they’re trying to use..

Also new application where they acquire much more power so it depends what’s exotic or what’s [indiscernible] the 50 kilowatt laser now which is the many customer claim for us they will now input that to put somewhere the 50 plus kilowatt power..

Thank you. The next question is from the line of Jeremie Capron, CLSA. Please proceed with your question..

Congratulations on those good results. I wanted to ask about pricing trends. And I guess my question is twofold here. On one side, on the high-power side of things, where I understand that your price point is now pretty much comparable to conventional laser technology.

And on the other side, on the pulse laser size, if you could comment also what you're seeing in the Chinese market..

First of all, price of fiber laser now for the same watt again we have much cheaper than price of conventional laser it’s not multi growth it’s much cheaper than [indiscernible] laser.

We want cutting market north of where the performance of fiber laser compared to CO2 but also because price per kilowatt is essentially cheaper than CO2 lasers when you took those the combination of these two factors on [indiscernible] the year we’re very aggressively and very [indiscernible].

So pulse lasers want much cheaper fiber pulse laser much cheaper than any kind of solid state lasers. So it depends in conduct maybe what kind of pulse laser.

So this factor is one that’s the most important in various market initiative, and we’re working very hard to decrease cost on lasers sold so we will decrease some of our pricing price saving gross margin saving as is profitable which is even for the Chinese market so that means that we stay in visible quarter when our Chinese competitor have very low margins and our margin remains the same frame as before just we much cheaper lasers and [indiscernible] but it’s laser it’s not for account toward less margin.

For account or decrease our manufacturing cost. So it impact our revenue but doesn’t impact our profitability..

Okay, understood. And then could you give us an update on your M&A pipeline? You called out some potential opportunities earlier in the year. I'm wondering if there's some progress there.

And if we could see some uses of this cash pile that's sitting on the balance sheet at this point maybe later in the year?.

No, I don’t think anyone gets very specific on what their M&A pipeline is so we continue to evaluate many different opportunities.

The key strategy is not to focus on as said earlier financially base transaction we built scale it’s very definitely to look for transactions that can leverage the technology into new end markets or accelerate the adoption of lasers into end markets either by acquiring application know-how, customer relationships.

And then on the other side of it to limited degree backfilling any gaps we think we may have on either the optical component, supply chain or the vertical integration. I think the challenges around any acquisition are you have got to find something that achieve those objectives.

We often look at companies that have good elements of those characteristics and technologies and benefits but we also find that they may have other parts of the business that are less desirable.

And so it’s a pretty fragmented industry, technologies can be very difficult or different, so we are cautious about what we are doing but there certainly is a pipeline of things we are looking at and they range in size from pretty small to larger opportunities as well..

Okay. And then the final one from me. Inventories, I think you said inventory days were running around 185. So, we've seen quite a few quarters of inventories essentially trending above your target of 180 days.

Could you explain to us what is preventing you from lowering inventory from here?.

We continue to hold, first of all the entire supply chain is internal to the company. Secondly, you are seeing I think what I would characterize as a pleasing level of revenue growth from the company.

We continue to improve the processes around inventory, so I think it’s important to note that inventories are only up 4% whilst revenue is up 14% this year. There has been significant gains made in planning and production. We continue though to hold inventory.

We believe that it’s very important competitive advantage we have and been able to respond very quickly to customer demand with short lead times. I think I am pleased to see revenue growth outpacing inventory growth. And in general total working capital growth I calculate is only about 8%, this year on 14% of revenue growth.

So, I think the balance sheet is being managed appropriately but there are different strategic considerations that come into play around all of these different masses..

What I like to underline again that one of our very powerful weapon against the competition that we have very short lead times. Typically, we now have people three to six months, we have already four to six weeks you have got them when it’s very complicated with special customized solution, if they need we can supply even during two weeks only.

For this we need to hold more inventory but have provide us big advantage to compare to competition..

The next question is from the line of Mark Miller with Noble Financial. Please proceed with your question..

Congratulations on your quarter. I was just wondering if you could give us a little more color on the UV fiber laser in terms of ramp plans, size of the market opportunity, and how you're going to compete there as an established competitor in that space. .

Main problem with the UV fiber laser not to get some technical power and so on, energy propels a major problem to provide reasonable life time because UV face degraded typical very fast but it depends requirement for life time depend from application.

Our front will run, there are some very interesting applications where people don’t need very high, of course they need but they accept with some moderate life time. We are making very intensive steps, we have very good result but still need to improve Crystal, started processing the Crystal and so on.

Other people not only we but all UV manufacturers have the same problem and we have very good result for 200 whatever is power for 355 still it’s record data, nobody reach in time as we know such numbers.

This application with such power which can offer lot of new opportunities extremely awardable and the interesting opportunities and we introduced markets. We now deal with some, our product ready for take by customer; we are starting to provide this.

So, it’s going very well, we also opened now facility and start to grow own crystals and we have improved quality of such crystal or major UV application. And so it help us to control quality and so on, so we invest in such product..

Now, by the crystals are you referring to the frequency doubler, or is this something else?.

For frequency doubling, tripling and also but different application. We have very good result with green frequency doubling, with green this already have which is very high power, so it’s now more and more very interesting application with the frequency doubling lasers, very high-quality power, direct power, and gem quality.

For UV it’s more difficult from the point right time stimulus but our test which was many [indiscernible] and are still successful and the tradition also which we once more company in California help us the lead the technology or assembly of such optical head so again we’re growing very well in these directions crystal here for conversion key components..

Thank you. The next question is from the line of Jay [indiscernible]. Please proceed with your question..

Good morning to you Valentin and Tim couple of question really just on the really the drivers you see in your growth in high power lasers.

Can you just give me some color on the market share that CO2 and how the market for high power lasers has sort of displaced investments replacement?.

So if you look at the high power lasers broadly can be broken down into three casts with the largest of which is cutting applications.

By some estimates that $1.1 billion market including the cutting head and potentially also including the chiller from the [indiscernible] present to put that analysis together so the use in ASP in that $170,000 and that was on bladed into 6,500 units, we think that’s clearly that’s growing over the last two to three years.

The estimate previously was that the annual volume of cutting systems of about 4,500 to 5,000 units. And on the basis on that fiber penetration if you include one of our competitors who is selling an another smaller competitor it’s probably 35% to 40% share. So it’s still a significant runway ahead there.

The dynamics we’ve shown in that are cost is no longer or the selling price of fiber is no longer a prohibitive factor in driving production. The increasing need to cut thick materials and fast materials is driving higher power lasers to be sold into that market.

So, we talked about when did this tipping point happen, it actually started to happen probably with some of the major European manufactures over a year ago last year Q2, Q3, some of that growth got a little bit masked given some of the weaknesses in the other business.

We’ve continued to see that traction develop over that period of time and certain this year it hasn’t slowed down much.

The one geography where I think they still lag behind on adoption which presents an opportunity over the next two to three years is Japan when they still use a lot of CO2 lasers because they can buy those CO2 lasers locally from suppliers.

We’re dealing with many of the OEMs there starting to see some increase in purchases but I’d say the cutting market in Japan has lagged a little bit behind where we’ve seen it developing in China and Europe. The other market so really the welding and cladding and cleaning markets, welding is the older product, the other high power market.

The welding side is estimated to be about $320 million, fiber is estimated to have about 50% share there. The fiber is very-very well suited to displacing all other technologies on welding.

We also think that the welding, cladding cleaning application as we mentioned on the call have an opportunity to growth at a much faster rate than cutting because it’s a less developed market in terms of penetrating and displacing other non-laser applications for example like resistant spot welding or arc based welding or even chemical processes for cleaning, explore this technologies for cladding.

So as Valentin mentioned and we’re talking about here in multiyear trends so we’re not talking about the next couple of years. But if you wanted to look for sort of 10 year trend that we might highlighted that those other high power applications we believe can become equal to and potentially larger than the cutting market.

So we mean that the growth rate there will be fairly significant. And then you seeing outside of pure CW high power the higher energy lasers that we’re increasing introducing to the market that Valentin mentioned also address for example some of the ablated processes and deeper engraving products..

Thank you. At this time we have reached the end of the Q&A session. I will now turn the conference back over to Dr. Gapontsev for any closing or additional remarks..

Thanks for your joining at this morning. We look forward to speaking with you on next quarter’s call..

Thank you very much everyone..

And that concludes our conference call. Thank you for joining us today..