Good morning, and welcome to IPG Photonics third quarter 2008 conference call. Today's call is being recorded and webcast. At this time, I'd like to turn the call over to Angelo Lopresti, IPG's 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 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, 2007 and other reports on file with the Securities and Exchange Commission. Copies of these filings may be obtained by visiting the Investor Relations section of IPG’s website at www.ipgphotonics.com or by contacting the company directly. Any forward-looking statements made on this call are the company’s expectations or predictions only as of today, November 6, 2008. 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 after the completion of the call. Please go to www.ipgphotonics.com to review these remarks. I will now turn the call over to Dr. Gapontsev.

Good morning and thank you for joining us today. IPG Photonics is very proud to report again a new very strong quarter, the eighth consecutive quarter of year-over-year growth since we’ve been public. Despite obvious recession trends in macroeconomic environment, we delivered new record growth in revenue, net income, and earnings per share, which exceeds our guidance range given. The sales for the third quarter increased by 29% to $62 million, and net income increased by 27% to $10.9 million compared to quarter three ’07. Earnings per share also increased to $0.23 from $0.19 in Q3 ’07. Our primary driver for the quarter continued to be our materials processing market, which increased sales by 47% over last year’s third quarter, combined with the fact that we saw strength across all of our geographic markets. This resulted in financial performance that exceeded the top of our guidance range. In addition, our gross margin continued to improve year-over-year. Gross margin was 37.4% and improved by approximately 2 percentage points over the quarter of last year. These results are testament to this disruptive nature of our technology, and its clear benefits to manufacturers. In the world's major markets for industrial laser systems, customers have recognized that IPG's fiber lasers can lower their costs and improve the way they manufacture their product. And in many cases, the advantages of our fiber lasers create new application where lasers have never been used before. This is the transformative power for power fiber lasers and we are determined to further grow our position in the overall laser market worldwide with this fantastic technology. Before I turn the call over to Tim Mammen, let me review some accomplishments. This quarter, we grew our top and bottom lines strongly despite challenges in a few of our end markets. Pulsed lasers continued their impressive growth in solar and marking applications. Medium-power laser sales more than doubled, thanks to continued growth in microelectronic applications. High-power fiber lasers saw continued acceptance from automakers and suppliers throughout the world and for other heavy industry applications. And sequentially we saw improved demand in the US and strong demand in Japan in quarter three. This complemented to the trends we saw in Europe and other Asian markets in the first half of the year and in the quarter. I will now turn the call over to our CFO, Tim Mammen.

Thank you, Valentin. And good morning, everyone. I will start with operational remarks and I will then review our financial highlights. Our 29% revenue growth in the third quarter over the prior year shows the traction that IPG’s fiber lasers continue to experience. Our growth was driven by a 47% increase in sales and materials processing, our largest application and one where we have the greatest diversity of uses for our products. I would like to comment on the positive developments in the market acceptance of fiber lasers for cutting, which is the largest application for high-power lasers. We have significantly increased the number of OEMs involved in cutting, as indicated by the quantity of fiber cutters displayed at the recent EuroBLECH Show in Hanover, Germany, the largest fabrication show in the world, and also at the FABTECH Show in the US. At EuroBLECH alone, five companies demonstrated 2-D fiber laser cutting systems, five more showed 3-D fiber laser cutting systems, and another five demonstrated hybrid cutting and welding fiber laser systems. We believe that this show has transformed the market’s perfection of fiber lasers for cutting applications because these companies demonstrated that the cut quality over a full range of metal thickness with fiber lasers is competitive with CO2, where previously there was some doubt about the ability of fiber to address both thin and thick metal companies. This is we believe no longer the case. Now let me provide you with some information about how we performed in the four markets that we serve. Materials processing, which is IPG’s largest market, contributed 82% or $51 million of the revenue we reported in Q3 and grew by 47% year-over-year. Sequentially, materials processing sales grew by 9%. The materials processing market encompasses several end markets, such as general manufacturing, photovoltaic,…

Thank you. (Operator instructions) We’ll go first to C.J. Muse at Barclays Capital. C.J. Muse – Barclays Capital: Yes, good morning. Thank you for taking my question. I guess first question, considering the current macro backdrop, can you track a little bit about I guess where your visibility stands at today in terms of your backlog as well as design wins that you’ve made over the last three to six months, as well as what you expect in the next three to six months and how that will support you through this crisis?

Hi, C.J. Tim. Let me just address some of the backlog and bookings order flow, and then Valentin probably can talk about some new products and design wins, which we’re expecting. Throughout Q3 of bookings, order flow remained strong. And even to date in Europe and the US we haven’t really seen a downturn. So part of the bookings actually that we took in Q3 was also related to shipments out into 2009. So, our total order backlog has increased since the beginning of the year. We do see some good visibility into the first quarter. In particular, we’ve actually seen resilience on the high power laser sale market and I think that is a clear indication that technological benefits of those products despite the high ASPs continuing to drive some growth in the business. With regard to some of the pulsed laser products, that’s really – there seemed to be some structural changes going on in China that has impacted our Q4 visibility, but we are working on a couple of major projects in China that hopefully will bear fruition in the first quarter. Perhaps in terms of design wins and new products, Valentin, you could outline some stuff there.

I could also note that regarding backlog, this year we have backlog growth and booking much higher growth than our revenue growth. So it gives us very strong position now with what I would call (inaudible). Regarding this, we’re also of course restructuring some of our business, taking in account the recession and market trends. And we worked very hard this year to develop new line of products and new applications. We are very successful we hope during this quarter four and quarter one next year. So the trend is very – some new impressive line of products, which will additionally diversify our business and will give us a wealth of new opportunities, which we believe can take some (inaudible) drop for some current sales with current products, and we hope to grow further without any serious damage from the market environment. C.J. Muse – Barclays Capital: That’s great.

Just some examples on that, C.J., is within the microelectronics we’ve seen some good growth this year. We’re expecting some new orders that will come into play in the first half of next year from that. On solar, that does seem to be a bit of a – if you fill orders for one big project and then those lines are brought up, we're expecting the solar to also continue to be strong in the beginning of next year. Some other examples of stuff, hybrid battery welding where our fiber lasers are particularly well suited. So there are some industries that appear to be relatively resilient even in the current climate where we are working very well. C.J. Muse – Barclays Capital: Great. And if I could move over to the gross margin line, if we back out that inventory write-down and reserve of $1.4 million, it looks like you would have been very close to 50% gross margin. And so I guess the question here is, should we think about ongoing write-downs on the inventory front, or are we at the revenue run rate and you’re at the efficiency side of things where you can achieve 50% gross margin from here on out?

I think we’re very close to that. I think the leverage in the model is clearly being demonstrated. I was a bit more cautious about getting there. At like $62 million of revenue, we’re saying 65 would be where more stability would occur. But I think that first of all we did a very thorough review on inventory. And just putting in a caveat there, so long as you don't see something major happen with the growth rates or actual inventory levels. I think we’ve got a good handle on excess and obsolete. We will see smaller write-downs I think over the coming quarters, just some stuff pages. But yes, I think that the model in terms of the way we’ve tried to articulate to it, has gone to that point with the leverage on gross margin at sort of $60 million of revenue. We’ve seen some balance on the inventory side. So the target generally is definitely to get to that 49%, 50% over the longer term. C.J. Muse – Barclays Capital: Great. And I guess last question here. Can you share what you wrote down on the inventory side?

Optical components, some of that we’ve looked at how many – the quantities that we had. Some of them are still being used, some of which have determined to be excess, some older fiber modules. So where we've transitioned, for example, from using high-power modules as against lower-power modules, some of the modules built using the old PLD-50 diodes. There's a selection of different items that we looked at in a lot detail. It was a detailed review done in June, but some of this stuff, as it ages, comes under our rules for writing them down. C.J. Muse – Barclays Capital: Very helpful. Thank you.

And next we’ll go to Antonio Antezano at Macquarie Capital. Antonio Antezano – Macquarie Capital: Good morning.

Good morning.

Good morning, Antonio. Antonio Antezano – Macquarie Capital: I just wanted to follow-up on the cost side, regarding SG&A and R&D, what is your flexibility to reduce the spending in the event of revenue slowdown?

In my view, the SG&A and R&D, obviously you can cut those if you go forward. And if you look at SG&A, I’ve mentioned the benefit on FX that it had brought it down this quarter. There were also some write-downs related to bad debt. I don't think those are really fundamental to our ability to conserve cash at this point in time given the revenue levels. I think the important thing to understand about our business model right now is where we stand in our CapEx investment cycle. And on the CapEx investment cycle, we are clearly at the end of some major projects. We don’t have any significant projects committed out there, and our ability to run the business on very limited CapEx in 2009 and to generate free cash flow. I think we stand extremely well positioned in that. Of course, if we see a decline in revenue or something material happen, we can always look at our SG&A expenses. And there is probably a little bit of room there, not a huge amount. And R&D, you can sort of hiring people. We could move people from doing some R&D applications to managing some of the manufacturing rather than hiring new people there. So there is some flexibility in the model. But I draw attention, I think, to the point we are in our CapEx cycle and the leverage we see on that I think positions us well for ’09. Antonio Antezano – Macquarie Capital: On CapEx, what is your CapEx forecast for next year?

We’ve talked about numbers in the range of $15 million to $20 million. We are revising and reviewing that at the moment. So I think come the beginning of the year, we’ll give a revised number on that. My view is that things are really bad next year. You can run the company on less than $10 million of CapEx. There is a little bit of investment in Russia. And this is a – it depends how our outlook looks as we do the budget process over the next coming months. Antonio Antezano – Macquarie Capital: Okay. And then just final question, on the merchant diode business, if you could share an update on that?

In terms of sales, last quarter was about $200,000. Valentin, your view on the merchant diode that is developing next year.

(inaudible) So we’ve started this diode business only recently, and we spent some time to define our policy and price policy and also the sales policy. Now we see very good acceptance with when we negotiate with some very big customers. We negotiate long-term contracts. So we’ll deliver [ph] next year. We have started talking about on many (inaudible). Antonio Antezano – Macquarie Capital: Thank you.

We’ll go next to John Harmon at Needham & Company. John Harmon – Needham & Company: Hi, good morning.

Good morning, John. John Harmon – Needham & Company: I'd just like to discuss your guidance a little bit. On the top, it was slightly down a little bit, but you said currency was going to hurt you by $3 million. But I believe you have the one-time BMW order for maybe mid-single digit millions. So if you tax all that out, maybe down a little bit – and the quarter historically has been seasonally strong. So what pieces – does that mean that the quarter is reflecting a slowdown in sort of your end markets?

Yes. And I think we articulated that. Really the thing that – you’ve got all that benefit from BMW, but even outside of that, we’re going to have a very strong quarter on high-power lasers. The real item that has taken the guidance down a little bit in terms of product performance is really the pulsed lasers. So particularly in some of the Asian markets, in China, there is also a little bit of a timing – different timing issue on orders to be shipped into the solar business where there will be a pickup in pulsed in Q1 related to solar, but we’re going to be a little bit lighter because of call downs already during the year on some products. And the real gap on this though is on pulsed, and it's primarily driven by searching aspects of the Chinese market. John Harmon – Needham & Company: So it seems like that the small amount of weakness that you are seeing is more geographical based, even though you are selling to some industries like that you mentioned automotive and aerospace that are – and of course, semiconductors that are really hurting right now.

Yes. Right now, that’s a geographic issue in Asia. And I think we’re working on resolving that. Our general manager there is actually trying to build some relationships with more of the bigger players on the laser systems marking side in China. We’ve had some orders for high power lasers even into this fourth quarter from the auto manufacturers. The exposure to semiconductors should not be restated. It’s relatively small. I mean, we sell a few units for the blowing out memory chip repairs – repairing memory chips, rather, in the manufacturing process. So we just never had a huge amount of exposure to semiconductor. John Harmon – Needham & Company: Okay, thank you. And you said you purchased an additional piece of that minority interest. I think you said before that you expected minority interest to go down by about 80%. Does it go to zero now or just something between 80% and 100%?

It won't go to zero because there continues to be a minority in certain of the other subsidiaries as well, the sales subsidiaries. But it should be – it will be basically after the end of this quarter much smaller. John Harmon – Needham & Company: Thanks. And can you provide some guidance on that next – end of next quarter?

Regarding guidance, we take into account also these very unpredictable situations in market. So we have to be much more careful today in forecasting and therefore take into account any unpredictable situation in the US market. But we still will have booking, and so don't show as a serious problem. So we're going very well, but nobody now knows what happens tomorrow. John Harmon – Needham & Company: Thank you. And then finally, are your CO2 lasers still on track for a launch early next year?

We still expect to launch CO2 and – Q1 or is it –?

With CO2 laser, we pass a good way in qualification, but still not finished with testing in quarter one with that to sale, but maximum quarter two. But we never plan to put in our forecast is the sales were – good improvement in sales due to CO2 lasers compared to fiber lasers. It will be a small – very small add in any case. John Harmon – Needham & Company: Okay. Thank you very much, and congratulations.

Thank you.

(Operator instructions) We’ll go next to John Lau with Jefferies & Company. Rahul Kanvarker – Jefferies & Company: Hello. This is Rahul Kanvarker calling in for John Lau. I was just curious to know at current capacity levels what kind of revenue run rate can you support.

We’ve reiterated – well, not reiterated. We’ve stated before that we could probably without significant capital expenditure over the next 18 to 24 months, we think we can get close to probably $90 million or $100 million. Rahul Kanvarker – Jefferies & Company: Okay.

I’m more optimistic (inaudible) with current capacity, with very small, maybe, addition, we can double the revenue without any problem. Rahul Kanvarker – Jefferies & Company: So if that is the case, then that means that currently you are earning at some 60% to 65% of capacity utilization. So – and still your gross margins are pretty impressive. So could you just explain a little bit the relationship between capacity utilization and gross margin? I mean, should we expect it to go even higher if capacity utilization goes up?

As C.J. pointed out, I think it was clear that the underlying gross margin for the product that was sold during the quarter was approaching 50%. So that's a significant improvement over the eight quarters since we've been going public. So we're seeing as revenue grow up, some of the leverage improve. We have stated that we think we can target a gross margin that continues to stay close to 50%. The issue that I think you got into is really want to expand the sale of the high power lasers and you get into volume unit orders is that you will see pricing pressure not related to the single-unit orders. But if people are going to buy 10 and 20 – to 20 units of our fiber lasers in the high power levels, pricing would have to come down. What we have stated is that the business model is very well positioned to absorb that pricing pressure without seeing any detrimental effect on gross margin. If prices stayed exactly stable as they were and revenue went to $70 million or $80 million, the company would be able to get additional leverage in the business model. Rahul Kanvarker – Jefferies & Company: Okay. So in Q3, how was the pricing environment?

It was still pretty strong, because we are still – we don't have a significant number of customers out there who are buying 20 units of our pulsed lasers. So on single units, we don’t give any additional discounts to the ones we’ve been providing before for two or three-unit sales. It’s only the expectations you get into higher volume that you will see pricing discounts related to those higher volumes.

From our side, we worked this year very hard in the last quarter also to decrease our cost of such lasers, and we were very careful during this year practically. We decreased cost of high-power laser minimum for 20%, 25%. So it will give us additionally opportunity. So I don’t see – we don't worry at all with even some able to contemplate our price, but still mention [ph] that high-power laser now growing very fast, not decrease, but growing very fast. Rahul Kanvarker – Jefferies & Company: Okay. That was very helpful. Thanks a lot.

And then also here it is very important because before we provide only laser source itself, but we have a drop of margin due to the termination like optical switches, copper-based cables (inaudible) and other, which were used from outsourcing. Now we practically develop all these items and producing (inaudible) with better quality (inaudible) available from the market, and we now – it's obvious what we provide additional share of this in total cost of high-power fiber lasers from 15% to even 30%, 40%. So now we have started to get from these parts of the sales margin, high margin which we have from laser source itself. So total margin, of course, of these high-power now is becoming much higher.

And next we’ll go to Ajit Pai of Thomas Weisel Partners. Ajit Pai – Thomas Weisel Partners: Yes, good morning.

Good morning, Ajit. Ajit Pai – Thomas Weisel Partners: A couple of quick questions. The first one is just looking at the acquisition of SPI, can you give us some commentary as to how the competitor dynamics might have changed with the acquisition?

Ajit Pai – Thomas Weisel Partners: Right. But are you seeing TRUMPF use it much more actively trying to ramp that business? Or you haven’t seen any material change as of yet?

No material change as of yet. I mean, maybe on some of the pulsed laser stuff, we've seen customers again come back to us this quarter.

Yes. I see that most of the SPI customers will – now returning to us. Ajit Pai – Thomas Weisel Partners: Right. The others, but TRUMPF had sales in their own products, are they vertically integrating very rapidly or very gradually?

We don’t have an insight into that.

They need some years only to reach the level that we have today. So they are not able to immediately make this. And we're not also sleeping. We're working very hard to improving (inaudible) product. Ajit Pai – Thomas Weisel Partners: Got it. And as some of the broader markets start slowing, the end markets, are you – what's going on with the pricing environment for your lasers right now?

They continue to remain pretty stable, Ajit. Particularly, we’re not making any concessions on single-unit sales. I think the issue that we've always talked about is as you get into these multiple-unit sales, you will see some pressure there. Pulsed lasers next year, we’d probably see a decline of – which would be in line with this last year, a few percent. Very good stability on the high – on the mid-power lasers still. So, pricing continues to be relatively stable.

Now our price is (inaudible) so low to compare to. So nobody from competition now in near future would be able to compete with this price. As you know, the SPI, they sold their laser with our recent (inaudible). They never generated any profit at the low cost. As you know, even big players, I don't like to mention their names, they sell in a competitive laser for high power without practical profit. It was not available from laser rival because they don’t have any profit today. They are trying to save their positions in market. In low and high power – pulsed lasers, also our price level not achievable to any competition today. We don't need to drop price now. But from other side, we decrease costs for during – even pulsed laser, low-power pulsed laser, during this year, we dropped price for 25%. So our margin for low-power pulsed laser now increased compared to last year is very essential. Ajit Pai – Thomas Weisel Partners: Got it. And then just looking at your telecom business, can you give us some color outside of – like in North America and in Western Europe, whether you have made any progress in trying to grow your business there recently?

Telecom in the US, there is still stuff we are working on on the US side. I think we’ve actually seen outside of some of the bigger stuff we’re working on, we have seen an improvement in sort of the order flow from existing OEMs into Q4. In Western Europe, telecom is still relatively weak.

In Western Europe, telecom very weak. In the US, we’ll see the improvement for quarter three, quarter four, beginning of quarter four. For example, we received now the big order from Harmonic again, after one year practical program orders. We – it’s now two quarters. (inaudible) to grow very fast with orders throughout. We are working with some additional big guys in this American market. And we’ve also developed very special communication project in Caribbean Island. So we hope next year we’ll double, triple telecom sales in the US. And there are regions like Asia, and Russia is also growing fast. Ajit Pai – Thomas Weisel Partners: Okay. Thank you so much.

Your next question comes from Jiwon Lee of Sidoti & Company. Jiwon Lee – Sidoti & Company: Thanks. Can we talk a little bit more about the traction that you are seeing in the cutting applications? How many OEMs are we talking here, or the dollar contribution that you are expecting this year or next?

I mean, we’re not going to provide any guidance on the dollar contributions from these cutting lasers over the next year. I think that just the – what we’ve seen at the recent shows is a clear indication that fiber lasers are now very widely accepted on cutting. I will provide – with regard to one of the longer term OEMs we’ve had, they have already placed a significant order for the next year with us for the supply of multiple units of lasers. That order came in in the third quarter of 2007. Many of the other OEMs are not necessarily giving us long-term contracts, but we’re seeing improved order flows on the cutting side from them. Valentin, what else on the cutting –?

I can say in 2007 we’ve had only two integrated very small companies that will only introduce what’s the system in the market. Only these two shows we have in October in – it was FABTECH in the US and the EuroBLECH in Hanover, Germany. (inaudible) was the hit of these important exhibitions, big shows. They have fiber laser cutter. And more than ten companies demonstrated this, and it’s not only small guys, but (inaudible) in this market segment. And the biggest players in the market like (inaudible) industry is now very worried about this situation. And also they have started to become very active in this direction. So we see – we expect next year would be booming. Fiber laser, at last, now positions sales [ph] as practical with the future of laser cutting. Jiwon Lee – Sidoti & Company: Okay. Well, that’s helpful. And what’s your current expectation from the auto industry for next year, I mean, understanding pretty dismal industry outlook?

I mean, again we’ve – we are as cognizant of what’s going on out there as anybody else is. I think that at this point, in trying to make a judgment call on the outlook, what the outcome next year is going to be is pretty difficult to do. We have actually, as I mentioned, not only seen reasonable order flow from the auto, in fact in Q3, we’ve actually seen some additional orders in Q4 for high power. There are a number of other different projects we're working on. I think undoubtedly right now there's a lot of instability in that. And you can’t really put a judgment on that business. I think hopefully as that stabilizes the value of the technology next year, we will continue to see us benefit from sales into that sector. Jiwon Lee – Sidoti & Company: Okay. And finally, roughly how many lasers would you be selling this year?

In terms of quantity of lasers this year? Jiwon Lee – Sidoti & Company: Yes, in terms of units.

What kind of lasers?

We’ll give you a number here. Through the third quarter of 2008, it’s just under 9,000 lasers. So we’re averaging 3,000 lasers a quarter at the moment, just over 3,000 lasers a quarter. Jiwon Lee – Sidoti & Company: Okay, great. Thank you.

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

Thank you, everyone, for joining us today. We continue to make progress in our operation on financial growth during 2008. The quarter's strong financial results were at the top end of our guidance, indicating that we are executing well on our growth strategy. Moreover, the strategic investments that we have made over the past year position IPG to leverage our superior technology to capitalize and opportunities across diverse markets around the world. We look forward to speaking with you again in the fourth quarter with new exciting results. Thank you much.

Thank you.

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