Angelo P. Lopresti - IPG Photonics Corp. Valentin P. Gapontsev - IPG Photonics Corp. Timothy P. V. Mammen - IPG Photonics Corp..

Patrick Newton - Stifel, Nicolaus & Co., Inc. Joe H. Wittine - Longbow Research LLC Chirag Odhav - Merrill Lynch, Pierce, Fenner & Smith, Inc. Joe Maxa - Dougherty & Co. LLC Jim Ricchiuti - Needham & Co. LLC Thomas Hayes - Northcoast Research Partners LLC Mark Miller - The Benchmark Co. LLC Jeremie Capron - CLSA Americas LLC Brian A.

Gesuale - Raymond James & Associates, Inc. Jagadish K. Iyer - Summit Redstone Partners LLC.

Good morning. And welcome to the IPG Photonics Third Quarter 2016 Financial Results Conference Call. Today's call is being recorded and webcast. There will an opportunity for question at the end of the call. At this time, I would now like to turn the call over to Mr.

Angelo Lopresti, IPG's Senior Vice President, General Counsel and Secretary for introduction. 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, 2015 and other reports on file with the Securities and Exchange Commission. Copies of these filings may be obtained by visiting the Investors section of IPG's website or by contacting the company directly.

You may also find copies on the SEC's website. Any forward-looking statements made on this call are the company's expectations or predictions only as of today, October 27, 2016. 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..

As you have found already in our press-release, IPG achieved another record sales for the third quarter of 2016. Sales of $266 million were well above the high end of our guidance range, and we delivered third-quarter earnings per diluted share of $1.29. This includes foreign exchange losses that reduced earnings per share by $0.04.

In addition, strong order flow across nearly all geographic regions resulted in a Q3 book-to-bill ratio that was above 1, in spite of Q3 is typically a seasonally weak quarter for orders.

Our third-quarter sales performance reflects a rebound across our core materials processing applications from the weakness we experienced at the beginning of the year.

We are encouraged by the robust growth we saw in our core cutting applications, which achieved a record quarter in sales driven by increased demand in Asia and North America, in particular, as well as certain parts of Europe.

Our OEM cutting customers are tending to move up the power scale for their cutting systems, allowing them to improve processing speeds and cut thicker metals. This is a continuation of an ongoing trend that has seen cutting OEMs transition from using lasers with output power of 2 kilowatt to 4 kilowatt, 6 kilowatt and now 10 kilowatt.

In the fourth quarter we also expect demand to ramp for our 12 kilowatt fiber lasers. This trend to move up the power scale is significant for IPG because the ASPs are higher and because these higher power fiber lasers are only available today from IPG.

In a similar manner, we have seen marking and engraving OEMs buying higher power pulsed lasers which also benefits our competitive position.

Compared to the year-ago quarter, welding and cladding applications across a variety of industries including automotive, aerospace, oil well drilling, gas pipe, railway, nuclear, construction works, heavy industry, and battery welding, continue to be a bright spot for IPG.

Welding applications continue to grow as our fiber lasers are more widely accepted due to the much higher quality and speed of the welds, lower cost of equipment and better opportunities for automation and control of the processes.

The high benefit that laser welding provides is in processing of new advanced materials such as high strength steels, alumina, titanium and other alloys as well as multiple metal compositions.

As we continue to develop new applications and processes for welding and cladding and leverage the fact that our lasers can be used in the field we expect our sales to continue to grow. Our pipeline in this core application is rich. We are also encouraged by the greater acceptance we're seeing for our Laser Seam Steppers in the market.

We continue to have numerous projects evaluating their use primarily for joining of different metals in automotive. We expect this trend will continue, driving increasing sales in 2017. We are also forcing the development of new products and applications that will expand our growth opportunities in new markets.

Our UV marking system is undergoing evaluation with several customers. Other UV laser with much higher energy per pulse and average power is in final stage of qualification. In addition, we continue to ramp up our marketing efforts for our new femto and short pico second lasers as well as high power visible and unique line of mid-IR/Infrared lasers.

Our revolutionary laser luminaire systems for premium 3D cinema and other large screen applications are going very well in qualification with multiple top customers. We have demonstrated that IPG's luminaire delivers the new level of brightness and dynamic range that the industry is demanding for a new generation of projectors.

In medical, our created recently new branch, IPG Medical, has made serious progress in the development of a new generation of medical laser systems for dental, urology, ophthalmology and aesthetic applications all of them based on IPG fiber lasers.

The most impressive result we have made in urology, where our new product Urolase120 and Urolase 500 have demonstrated directly in clinics showing serious advantages to compare with the currently dominant Holmium-laser technology that some of Tier 1 players in the market segment claim it as a revolution.

Now we are making a clinical qualification of the products in different countries. We are seeing strong momentum in our business as we enter the final quarter of our fiscal year.

We have significant opportunities to expand our business through both existing and new OEMs and end-users as we develop innovative products to address applications beyond our core markets.

While the fourth quarter is seasonally historically weaker, we believe we are well positioned today for continued strong year-over-year sales and earnings growth and are confident in our short and long-term opportunities. With that, I'll turn the call over to Tim Mammen..

Thank you, Valentin and good morning, everyone. Third-quarter revenue grew 9% to a record $266 million from $243.5 million a year ago. Materials processing sales increased 10% year-over-year to $246.3 million, accounting for approximately 93% of total sales during the quarter.

This growth was primarily driven by higher demand for IPG's core cutting and welding applications. We also saw solid demand for marking and engraving, laser sintering, hole drilling and cladding applications.

Sales to other markets, including advanced applications, telecom and medical, accounted for approximately 7% of IPG's total revenue, were flat year-over-year at $19.7 million. Strong growth in telecom sales, driven by our recent acquisition of Menara Networks, was offset by lower sales of advanced applications and medical.

Menara generated $5.1 million in revenue during the quarter. Before discussing the performance of different product lines I would like to mention that ASPs for several key product categories stabilized in Q2 and Q3 this year even though they were lower when compared to Q3 2015.

High-power laser sales, which accounted for 58% of total revenue, increased 17% year-over-year to a record $153 million. This growth was driven by continued strength in cutting and welding applications, as well as increased demand for 1 kilowatt lasers for 3D printing. Pulsed laser sales decreased by 2% year-over-year to $34.4 million.

We continued to see strong growth in our high-power pulsed product driven by increased demand for marking, engraving applications, as well as cleaning and ablation. We also saw double-digit growth in sales of our green pulsed lasers, a newer product line. This growth was more than offset by weaker sales of our lower power pulsed lasers.

Medium-power laser sales decreased 7% year-over-year to $25 million, or 9% of total revenue. Higher demand for welding applications was offset by a decrease in demand for fine-processing and laser sintering applications for 3D printing.

The slightly lower medium power 3D printing sales in Q3 2016 is attributable to the timing of orders and deliveries following a strong Q2 2016 as well as the increase in 1 kilowatt high power lasers being purchased for this application.

Sales of QCW lasers, which are mostly used for fine welding and cutting, decreased by 41% year-over-year to $11.7 million and accounted for 4% of total revenues. As expected, this decrease was due to lower demand from consumer electronics applications, which resulted in substantially slower unit volumes for those applications.

Sales of QCW lasers can be lumpy due to the timing of big projects. Revenue from low-power lasers of $3 million were flat year-over-year due to lower medical OEM sales year-over-year.

Other revenue including amplifiers, laser systems, service, parts, accessories and change in deferred revenue increased by 40% year-over-year to $38.9 million, primarily as a result of higher telecom sales, an increase in parts and service revenue and lower deferred revenue. Now looking at our Q3 performance by geography.

Sales in Asia increased to $150.1 million, or by 16% year-over-year. Within that region, sales from China increased 9% to a record $102.1 million, driven by continued demand for cutting applications. On a constant currency basis, China was up double-digits year-over-year.

This growth was achieved despite the competitive dynamics there for pulsed and medium power lasers. In Japan, sales increased 77% year-over-year to $23.4 million, driven by strong demand from cutting OEMs. In Western Asia, sales decreased to $11.4 million from $13 million in Q3 2015.

Although this decrease was expected, I would like to note that the actual decrease in sales to Turkey was less than we anticipated despite the geopolitical uncertainty in that region.

European sales increased 3% year-over-year to $78.8 million, driven primarily by strength in cutting, welding and telecom, which was partially offset by lower sales of marking applications. Sales to Russia increased double digits driven by increased sales of laser systems.

North American sales grew 1% year-over-year to $36.7 million, driven primarily by increased strength in materials processing and telecom. This was offset by lower sales of medical and advanced applications. Now, working our way down the income statement. Gross margins of 54.4% were towards the top end of our guidance range of 50% to 55%.

This strong gross margin was achieved despite expenses related to the step-up to fair value of inventory acquired in the acquisition, amortization of intangibles and slightly lower absorption of manufacturing expenses, all of which was offset by continued reductions in components and other material costs.

Sales and marketing expenses increased to $10.5 million from $7.7 million a year ago as we continue to expand our geographic locations and hire experienced sales specialist. As a percentage of sales, sales and marketing expenses increased to 3.9% from 3.2% in the same quarter last year.

Research and Development expenses increased to $20.5 million from $16.2 million a year ago. As a percentage of sales, R&D increased to 7.7% from 6.7% in the same quarter last year.

R&D continues to focus on improving existing products, developing new manufacturing processes and launching innovative new products and applications in order to strengthen our technology lead and allow us to penetrate new markets.

General and administrative expenses increased to 6.3% of sales or $16.8 million from 6% of sales, or $14.7 million a year ago. The increase in G&A is primarily related to head count, stock-based compensation, accounting and legal expenses.

Operating expenses for the third quarter were $50.7 million, including a foreign exchange loss of $2.9 million compared with $43.7 million a year ago, which included a foreign exchange loss of $5.1 million. Q3 2016 operating expenses included approximately $3 million of operating expenses and amortization related to the Menara acquisition.

Third quarter operating income was $94.1 million or 35.4% of sales compared with $89.6 million or 36.8% of sales in the third quarter of last year. Excluding foreign exchange, operating margins were 36.5% and 38.9% in 2016 and 2015 respectively.

The decrease in third quarter operating margin was primarily due to the continued investment in selling and R&D, as well as increased operating expenses related to the acquisition. Our tax rate in the third quarter was 26.9%.

The tax rate benefited from the release of tax reserves following the recent conclusion of a tax audit as well as an increase in benefits related to research tax credits. In Q4, we expect the tax rate to be approximately 29%.

Net income for the third quarter increased by 10.3% to $69.2 million, on a diluted per share basis, we reported $1.29 for the third quarter compared with $1.18 a year ago. In Q3 2016, the foreign exchange loss reduced EPS by $0.04, while in the same quarter last year it reduced EPS by $0.06.

Furthermore, the acquisition was dilutive to EPS by $0.03, all of which related to acquisition accounting charges, including the impact of the step up in value of inventory, retention bonus and amortization of intangibles. If exchange rates relative to the U.S.

dollar had been the same as one year ago, which were on average €0.9, Russian RUB 63, Japanese ¥122 and Chinese CNY 6.28, respectively, we would have expected revenue to be $2 million higher, gross profits to be $1.1 million higher and operating expenses would have been $0.1 million higher. Now, turning to the balance sheet.

We continue to maintain a strong balance sheet, ending the quarter with $645.6 million in cash and cash equivalents, $127 million in short-term investments and $41.6 million of debt. At September 30, 2016, inventory was $242.4 million, up 19% from $203.7 million at year-end 2015.

Our current level of inventory on hand amounts to approximately 184 days, compared with a target range of approximately 180 days. Accounts receivable were $162.7 million at September 30, 2016 or 56 days sales outstanding compared with $150.5 million at December 31, 2015 or 62 days sales outstanding.

Cash provided by operations during the quarter was $87.7 million. Capital expenditures for the quarter totaled $30.8 million. We now expect CapEx for full-year 2016 to be in the range of $115 million to $125 million for facilities and equipment, which is slightly higher than our previous estimate.

The increase primarily relates to the timing of expenditure on facilities and our cogeneration facility in Oxford. This range excludes amount spent to acquire businesses during the year. Now, a summary of our new share repurchase program.

In July 2016, our board of directors authorized a share repurchase program to mitigate the dilutive impact of shares issued under our various employee and director equity compensation and employee stock purchase plans.

During the quarter, we spent approximately $3.5 million to repurchase 41,800 shares of stock under our authorized $100 million share repurchase program. It should be noted that we only started the program about halfway through the quarter. And now for our expectations for the upcoming quarter.

We currently expect revenues for the fourth quarter to be in the range of $255 million to $270 million. We anticipate Q4 earnings per diluted share in the range of a $1.17 to a $1.32. The midpoint of this guidance represents quarterly revenue and EPS growth of approximately 13% and 5%, respectively year-over-year.

Based on this guidance for full-year 2016, revenue growth will be within our previously stated target range of 5% to 10%.

We are encouraged by the rebound we're seeing in our core applications, and we continue to see excellent opportunities to expand our business through both existing and new OEMs and end-users as we develop innovative products to address applications beyond our core markets.

It should be noted; this guidance is based upon current market conditions and expectations and is subject to the risks we outlined in our reports with the SEC. As a reminder, we do not attempt to forecast foreign exchange rate changes.

Foreign exchange rates used for our guidance as well as the shares outstanding used to calculate EPS are disclosed in our press release. And with that, Valentin and I will be happy to take your questions..

Thank you. Thank you. Our first question comes from the line of Patrick Newton with Stifel. Please proceed with your question..

Good morning, Valentin and Tim. Great quarter, great guide. Just trying to understand EPS guidance, not being a little bit higher given the flat sequential revenue guide at the midpoints.

So, should we think about OpEx ticking up, tax rate heading higher sequentially or should we think about perhaps gross margin down ticking with – I think our math indicating roughly a 54% seems to be embedded in guidance?.

I'm modeling gross margins in the top end of the range close to where we were in Q3, so no change there. OpEx, I'm modeling about $47 million to $48 million. I do think some of the models that are out there need some adjustment relative to that number, because some of the additional OpEx related to the acquisition is not being factored in.

And then, obviously, we're not modeling any foreign exchange loss, so that would be a benefit and then the tax rates I am using for Q4 is 29%, and I think if you factor all of those in you get to the range on EPS that I gave..

Great. That's helpful.

And then I think just looking at the growth potential given the current macro landscape, the product portfolio, competitive in pricing dynamics and really the good bookings trends you've had, is it reasonable to think that IPG can return to a mid-to-high teens growth next year and that this current uptick is sustainable?.

I think it's too early to get drawn on where growth will be next year, we will give an opinion on that and decide what we give in terms of guidance in Q1 at the end of Q4, I think a year ago we were probably a bit too early trying to pitch where the market would be and where our expectations for the next year would come out.

Having said that I think we're seeing a very strong rebound in order flow in Q3 that has continued into the beginning of Q4, we have a strong bookings forecast for this quarter and are clearly targeting, trying to grow the business strongly both across the core applications, Valentin alluded to, substantial opportunities in the welding side and then would like to get some real traction out of the newer product.

But it's too early to start giving a definitive range on Q4 for next year..

Great.

And then just Valentin, with the Menara acquisition we're clearly in an explosive 110G optical cycle, you had a recent announcement that your CFP was adopted in Brazil, how should we think about the revenue potential of Menara over the next several quarters?.

Menara, and I would say, an existing product which they developed before. It's stable in growth, also new customer this year appear to build minimum (28:12) three new OEM customers, but next year we introduced market new generations of product which (28:19) what markets expect now.

So we believe the Menara portfolio and the product joint product – it's a new product that we are developing jointly with our Italian, American and Russian branches. But we believe it will give us new powerful platform, component platform than for new generation and also integrated DWDM and other system to introduce to market the most modern..

Should we think of their growth matching kind of 100G component winners which most are targeting 25% 30% growth or higher next year?.

We expect much higher growth, so now with telecom this next year..

Great. Thank you for taking the question..

You can't wait until you come to become serious player in the market today..

Great. Thank you. Good luck..

They have to develop new technology platform not just integration (29:22) now with the weld technology platforms, the most advanced technology now is here. The movement in direction, we'd like to take part of this new market which, which now created by other players like Fanuc, Furukawa, (29.44) Lumentum, and Acacia and many others..

Thank you. Our next question comes from line of Joe Wittine with Longbow Research. Please proceed with your question..

Thank you. Lo and behold, the year could grow 10% after all, just like you said 12 months ago, Tim, so congrats on the progress. On the growth initiatives, so based on the prepared remarks they all generally seem to be trending in the right direction.

So a simple question, help us rank which of these applications are poised to deliver the most substantial contribution to your reported sales over the next year? Just help us visualize I suppose..

And, again, we don't really want to get – it's a bit too early to look at where these things are going to go over the next year. We're still waiting for the market data and analysis to appear which will come January and February.

The highest level we think we've got continued penetration on cutting applications, particularly with the transition to higher power levels which will help total growth of that application first of all. Secondly, we're continuing to see the penetration in the underpenetrated area of Japan.

It's going at the pace that we would expect, and that drove, as we mentioned, some of the strength in the quarter's sales in Japan. We're expecting another strong quarter out of Japan in Q4 and then we expect next year the uptake from our main OEMs in Japan to continue to increase in 2017.

The other areas of growth were – we're very focused on growing the welding business, not just within automotive, but across the wide variety of industries that Valentin talked to you, that's both with lasers, as well as systems, so we talked about the number of different projects that are under evaluation with the seam step where we may get significantly high unit volume growth next year.

And then you've got higher powered welding systems for different heavy industries. We don't want to talk specifically about which industries we work in, because some of that's very competitively sensitive at this point in time.

The marking and engraving is probably less of a driver next year, but you continue to see growth out of our high-powered pulsed. And then you get into the shorter wavelength applications in marking, so we definitely like to see some growth out of the UV marking system which is under evaluation.

There's some edge deletion processes that are driving growth of our green laser applications, green laser product line. And then next year, you get into sort of the newer product introductions that we'd like to see continue traction out of this.

This quarter, new products probably accounted for $35 million to $38 million of total revenue, and by new products we look at product that was introduced within the last three years, is the definition that we're using there..

Excellent. And then with Asia disappointing in the second quarter, but rebounding in the third quarter, it doesn't seem like any of the, or much of the third-quarter rebound was on the consumer smartphone side.

So I guess the question is, are you viewing that as a potentially significant 2017 opportunity, since we should see a broad swath of new smartphone, et cetera, form factors that could require some new equipment, and the existing equipment will be quite aged by that point? Is 2017 a catch-up year in that market? Thanks..

We don't have any insight into that at this point in time. I think by the time we get into Q1, we will have some feedback from the OEMs, but you are absolutely right that the rebound in Asia this quarter was not driven by consumer electronics.

We had been expecting consumer electronics to be stronger at the beginning of the year, and you saw that our QCW laser sales were actually down in the quarter.

The interesting thing is that total welding sales were actually up despite that weakness on QCW, so it shows the strength of welding on the high-power side, some of the medium power laser sales as well. So that was really good to see.

We just don't have any insights at the moment into potential rebound on consumer electronics investment next year at this point in time..

In total, this quarter demonstrate the (33:50) growth in sales in units. For last three years, we demonstrate average growth in unit sales from laser like 40% to 50% per year; it's much higher than in revenue because the correction of prices saw a decrease result but revenue result but in units, we plan on very fast growth on lasers.

In this quarter, also supported say minimal 35% increase in sales compared to last year. So now this, when the average prices are now becoming more stable, now we see the stabilization of the price, so then it will effect next quarter, also higher growth in revenue because the trend to increase sales, surpass increase of unit sales of laser.

We plan on this very fast growth. We don't see any slowing demand for market for fiber laser..

Great, and then finally from me, any update on discussions for the OLED annealing offering?.

No, we continue to work on that project. As we said, that's a multiyear project. There is nothing specifically to provide an update on relation to that..

Understood. Thanks..

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

Hi. This is Chirag Odhav on for Krish. I had a couple of questions.

First, should we expect normal seasonality looking into the first quarter of next year, with Q1 being slightly lower than Q4 of this year? And second, are there any updates with Han's Laser or your relationship with them?.

So, first of all, I'm not giving guidance for Q1. This quarter, as I mentioned, the tone that we can give you in relation to that is that the order flow through Q3 was exceptional. One of the strongest Q3 quarters we've seen. The beginning of Q4 is very good as well. The total bookings forecast for Q4 is strong.

So if you get to that point, you probably still have – I mean, Q1 is always the weakest quarter of the year. So you're not going to expect a sequential increase in growth. China has got the China New Year. The first six weeks of the quarter in China are always very slow. So yes, some seasonality, but I'm not giving specific guidance around it.

In terms of Han's Laser, our relationship with Han's continues in the same way that it has for many, many years.

They're probably producing some lower power fiber laser product, in fact they are, but there's no change in our relationship with them with regard to higher powered pulsed lasers, the QCW lasers, medium power or even the high-power lasers, and we have no insight into any progress that they think they may have made in developing that product.

Certainly, the relationships have not changed. And we've got a significant benefit out of a rebound on Han's cutting business in China through the end of Q2 and into Q3 when that had been very slow.

The other thing we've done in China, which I called out previously and I'd like to call out again is, we have really diversified to a great degree the OEM base in China. We've qualified many new customers. We've picked up a customer, if not two customers, over the last year from one of our main competitors.

So even those companies that are trying to get into the market with fiber laser are not making significant headway there. So the China business is looking much more diversified both in the end applications as well as the customer base, which is great..

And we see trends, it's you and it's some of this OEM customers in China and other which stop, tried to make business, using the laser from our competitors, now return back to us, because they found during one year or couple year, use of the competitor laser, it's very big problem with the maintenance, so all the claims, they have very big – they returned back for a viable, much higher quality and even cheaper IPG where they – in spite they worry about only one supplier but they returned back to IPG.

Regarding this quarter one next year, what we can say definitely, we expect double digit growth to compare to last year, very serious. But what would be 15% or 30% will depend around the bookings flow this quarter..

Okay, great.

And just going on the China players, have you seen other players like Raycus and Maxphotonics, are they still at low power, or have you seen them move into medium and high-power lasers?.

Some of them are in the medium-power level, so you've seen the year – well compared to year ago, the decrease in medium-power selling prices. Some of them claim to be moving up to the kilowatt scale, we've not seen them in any meaningful fashion at that level..

Okay. Great. Thanks..

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

Hi. Thank you. You did mention Turkey. You've seen better-than-expected results, given the political situation.

Also, I want a little more color on what you're seeing today, and then also if you're seeing any impact to what's happening in Russia?.

In Turkey, we're expecting a reasonable quarter out of Turkey in Q4, so no degradation in the business performance there, probably I'd say sequentially, I think Turkey probably would be a bit flat, so they're not back to growing at any great rate, but the business is relatively stable.

In Russia, we continue to work on all of the different applications, so the outlook for Q4 is strong in Russia. We actually have good backlog there, and we had a good Q3 in Russia, as we mentioned, with double-digit growth year-over-year, mostly driven by high-power welding systems for one specific industry there.

So the Russian outlook looks reasonable. The exchange rate is relatively stable at the moment, because that's another thing that can be a detriment..

Okay..

In Russia, we've made a lot of development in system. We have great results there. We developed for aerospace, for railway, for the pipeline in (40:53) for oil industry, some other industry, very great new technology, full package. It's our new approach. We settled supplies before only optical solution.

We now target to supply complete solutions, starting new technology, processing technology, hardware specialized for such applications for this technology. Software and installation and engineering support during all life cycle. We are very successful in going this direction, but it's a long process.

We could not to put in the manufacturing (41:39) the field immediate with throughput qualification. But we're going very successful. We developed excellent new technology, unique practical technology, nobody is still using this (41:47).

And to recall that during the next two or three years, our business in system business will jump dramatically, many times. It's really a great achievement which we reached today, and we are sure now it would be a very serious portion of our business next year. But it all depends on political situation.

Only one there is this political now crazy situation in – so really, this can destroy on our place..

Okay.

And I wanted to ask if you could give a little more color on what you're seeing with your opportunity in the cinema market again?.

We're continuing to work with the main OEMs in that market. The system continues to be under longer-term tests. Those long-term tests are going well. We do expect, as one of those customers has got a couple of orders that they're expecting to take, I think, in the next few months.

So we'd expect to start generating some revenue out of that within the next couple of quarters, I think. So it's progressing well.

Do you want to add some color on that?.

Now practically all OEMs in this market niche now turn to us, in spite they have own competitive technology, now they recognize our technology much better that they now they will try to introduce in market. So they (43:22) to us. We negotiate which of them special specification, what each of them requirements, so we develop special version.

We also are starting now manufacturing, volume manufacturing, allow this or this laser. So it takes some time to install this. It might be three, six months when we really can start much supply to these people.

We believe it's not only cinema, it's many other application when people need vey wide screen, white brightness or how the Luminaire system provide absolutely new level of brightness and it is also quality contrast and so to compare with all others in this technology..

Thank you..

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

Thank you. I'm wondering if you are at a point where you might be willing to break out the systems revenue. I don't know if you can give a year-to-date number. It sounds like you're anticipating this business is going to start to accelerate in 2017 as well..

We are not at that point yet, Jim. It's just not material enough. It's not – it hasn't even got to 10% of sales for the quarter. So, no, we are not going to do that at this point in time.

We give so much granular information, you know, you get the point where it's sort of – you have to leverage level of materiality I think before we disclose it separately..

Okay. And I wanted to follow up on your comment about the shift in the metals 3D printing to higher power lasers 1 kilowatt. Help us understand maybe what is developing in that market, particularly we had some developments around GE buying a couple of additive manufacturing companies and one of those deals has fallen through.

But as you look at that market, I wonder if you can either give us some revenue sense as to where it was in the quarter or year-to-date and just what you see unfolding as we shift into the higher power lasers for this market?.

For year-to-date I think that application is up approximately 20%; as we've mentioned before, people need to get to higher speeds whilst maintaining the resolution of the product and one of the ways you get there is by using a high-power laser, often multiple lasers within the same system.

There's clearly continued belief that the metal additive market will grow very substantially. I looked at some of the presentations that came out after those acquisitions and there is an expected CAGR of I think 20% over a 10-year timeframe of the total number of systems for metal-based 3D applications.

So it's probably now our fourth largest – well has been our fourth largest application for a while and continues to grow well and then the move to the higher power level is a benefit, I think both competitively and then in terms of the total value that we add to the end equipment..

Now with most of the similar equipment manufacturer in this market, they use our lasers. So we understand our situation. But they're making flat-bed solution with powder flatbed solution.

They have limitation in this technology, don't think it's very high power, it's mid-power lasers that are used in large quantity but growing quantity, but it's still, for us, not a big add to our revenue. But we're working also seriously with a major player customer in this market including you mentioned already now.

We're working with many of them to develop new technology. It's not even power technology, it's about the same for many other kinds of technology. When we deal with much higher speed, security, and also in this case, the demand for much higher lasers but not only laser for complete solution.

We are working this with various potential customers in the field..

And, Tim, your bookings sound like they're very strong, continue to be strong.

Can you give some color around the bookings by geography? Was it strong across the board or any regions particularly stronger than others?.

Everywhere it's been good; Asia, both Japan, China, Europe. Italy was very strong in Q3. Germany, a little bit weaker and yet good orders out of the rest of Europe. North America coming into a bit of a difficult comp on Q4 because the phasing of revenue was so odd last year, with Q4 actually being very strong on North America.

But North America, again, year-over-year through Q3 and the beginning of this quarter has been good. I'm trying to think of where it's been weaker, and we're waiting for a big order form one of the OEMs in Japan for their cutting application. So the timing of orders in Japan is a little bit odd.

But even with the weakness in the Japanese economy, as I said, we're going to have two great quarters out of Japan in Q3 and Q4. There's no area that stands out as being weak at the moment compared to last year..

Okay. Thanks, that's helpful..

Thank you. Our next question comes from the line Tom Hayes with Northcoast Research. Please proceed with your question..

Thank you. Good morning, gentlemen, and congratulations on the quarter. Tim, I was wondering maybe if you could provide us a little bit color on some of the end markets that are working for you in Europe. It seems that that's going nicely or held steady. I just wanted to see your thoughts kind of into the end of the year..

Pretty much the same as the worldwide basis. So we had a good quarter on cutting applications I just mentioned two areas where we have main cutting OEMs. The welding business was pretty reasonable. Even though automotive in Europe is not that strong. There are lot of different projects that we've got running there.

The laser sintering application again is all European, predominantly European-based sales. The ablation and paint striping type applications that are not that meaningful, but they continue to get traction.

We saw some improvement in our European telecom business as well, so I mean that really covers the main applications that we're focused on there at the moment..

Great, thank you..

Thank you. Our next question comes from the line of Mark Miller with the Benchmark Company. Please proceed with your question..

Congratulations on your orders and your quarter.

Just a little more color maybe you mentioned in some areas, but more specifically the rebound in material processing, what is causing that to rebound in terms of more specifics?.

I think you started the year very slowly, so you had, if you take China as an example, a significant decrease in order activity and investment that started at the end of September 2015. That drove our weakness into Q4, and then the beginning of the year on that cutting application in China was very weak.

So now you've kind of coming through a bit of a cycle on that, you're seeing definite rebound on that application there. You're starting to see diversity on the welding applications, which is helping across the different geographies.

I think that the overall macro environment has remained reasonable, and you continue to see penetration of fiber across an increasing number of applications continuing to perform well. I mean another area where cutting is performed well as we've gone into the year further into the year is Japan, I mentioned Italy again.

They had an outstanding quarter in terms of bookings and revenue and have a very strong forecast in Q4 as well. The North American macro environment continues to hold up too. So it's difficult to pinpoint. I mean you get the same macro data, Mark, that I do.

And the view that you're coming through a significant down cycle on the Japanese machine tool industry that's probably 18 [months] to maybe two years into it. So people now expect the Japanese machine tool cycle to potentially improve a bit as well coming into 2017. That whole industry's been very weak for two years..

You mentioned China was at record levels. How important was Telecom to producing those records? You mentioned Telecom in several areas were strong..

No. Nothing in China on Telecom..

We're taking small – we have some small contracts, we're shipping some components to Chinese telecom companies. We are shipping, but it's not big business..

And then finally, service revenues?.

As we mentioned, there was an increase in service and parts, accessories, and the other elements to that. We don't break that out specifically. It was a good performer. It's still very small as a percentage of total sales..

We demonstrate very higher it would be which would be (53:45) laser to lifetime and so no maintenance practical fee because it's still – service for us when revenue only maybe 3% and 3.5% our business. But (53:55) the company up to 30%, 35%. So it's absolutely demonstration highest quality in the (54:03) power product..

Thank you..

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

Thank you. Good morning. I wanted to ask about your automotive customers. I think entering the year, you experienced maybe a bit of a delay in terms of orders from the auto sector. It seems to have caught up nicely in recent months. But it looks like we're starting to see slower growth in terms of automotive sales.

There's fears around maybe automotive CapEx becoming weaker going into next year. Is this something that we should be concerned about when it comes to IPG? Obviously, you've got a lot of exciting programs around welding applications and things like. But do you think that's something we should keep in the back of our mind? Thank you..

In automotive, our vision that automotive can expect next year some real increased investments because there you are now working with very hard for electrical car, but electrical car need new platform. For new platform, they have to rebuild to build new production lines. In current production lines, they don't like to change technologies.

So we supply more to automotive major players in the market. But they only point to sales when they really had some problem with quality yield and so on. But not fully change what the technology in production line.

But when this automotive would start to deal with new production line and with the forecast now to work with current new players in the market that we don't like to mention, but we're very successful. Could we build now new products, and then the laser technology would be of much use in such lines.

Other people with the way should grow this way because in today's current line not efficient for electrical car, et cetera, with new platform – new design, new platform..

Thank you. Our next question comes from line of Brian Gesuale with Raymond James. Please proceed with your question..

Hey guys. Nice job on the results here. Wondering if you could just maybe give us a little bit of color on the mile markers we should look at in the medical business.

Smaller business today, lumpy of course, but very big opportunity, how might we see that progressing over the 6- or 18-month period?.

We are looking that our – IPG medical which has become very serious player in this medical laser market. It's a market need, absolutely change of the technology because they're used to 10 to 20 years all to lasers, which we're now working with the many, the most serious way in clinics in the United States, in some other countries in the world.

So we now introduce fiber where they can make revolution in this application. It's medical application. And we now, they were such is much in very successful way. It's only short, before we just sold to some other people our laser, that's all. It was nothing.

Now we develop medical new procedures and methods and also the special laser system for such application. We believe it would be very serious margin but in three to five years, major delay not even to develop – development. Major, (58:05) qualification, FDA in some qualification process takes many years..

I mean, I just want to reiterate. I think, Brian, you may not have heard him there, but the timeframe you've got to think about the medical is three to five years rather than the 18 to 24-month time horizon..

Yes. It depends on country. In the U.S. more (58:22) but in other countries, one or two years. So we're working not only U.S., we're working both in Asia, we're working in China, especially, we're working in Russia, work in others.

We collect medical orders, use of statistic use scenario and now the system, your system making new operations in clinics for people. (58:47) but it takes time to get permission to use it widely in all these medical hospital clinics. It takes time to receive such real approval, new technology..

Thank you. Our next question comes from the line of Jagadish Iyer with Summit Redstone. Please proceed with your question..

Yes, thanks for taking my question. Just I don't know – I apologize if this has been asked. But if you look at 2017, Tim, what are two or three major things that needs to materialize for you guys to revert back to that like mid-to-high teens growth rate both in the top line and bottom-line? Thank you..

We have to maintain our competitive position, which we are very comfortable about doing. You have to make sure you don't see any substantial degradation in average selling prices, so that you can translate unit volume growth.

You want to continue to see the traction that you got on the cutting and the welding applications and then continued growth from the emerging applications that we are working on and then you clearly want some revenue out of the newer product introductions, continued growth on systems and accessories, the UV, the picosecond and potentially from the laser Luminaire to get some stuff.

I think this year is really evident. You do need a reasonable macro environment.

Everyone at the beginning of this year was thinking that our sales were more impacted by competitive dynamics and I kept telling everybody that I really felt it was the macro and the weakness on the investment cycle and I think that view of mine is really being held out through what's happened in Q3 and Q4.

When you see a strengthening on the macro, and you see order flow and the investment cycle rebound, IPG starts to benefit very strongly from that and I hope that we're putting to rest some of the fears around the competitive interpretation of what the competitive environment may potentially be.

So you clearly need to have – we are a capital equipment company, we need to have a reasonable macro environment. If you see a deterioration in that, it becomes much more difficult to grow the business significantly..

Thank you. Ladies and gentlemen, there are no further questions at this time. I would like to turn the floor back to Dr. Gapontsev for any final remarks..

Thank you. Okay. Thank you for joining us this morning. Again, we look forward to speaking with you next quarter and financial fiscal year result. And wish you a great day..

Thank you everyone..

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