IPG Photonics Corporation (IPGP) Q1 2015 Earnings Report, Transcript and Summary

Good morning and welcome to IPG Photonics' First Quarter 2015 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. 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. Angelo P. Lopresti - Secretary, Senior Vice President & General Counsel: 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, 2014 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, April 28, 2015. The company assumes no obligation to publicly release any updates or revisions to 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. Valentin P. Gapontsev - Chairman & Chief Executive Officer: Thank you, Angelo. Good morning, everyone. IPG delivered another strong quarter and we are off to a terrific start in 2015. Revenues grew 17% year-over-year to $199 million, despite significant foreign exchange headwinds. Underlying growth for the quarter would have been more than 25% using average exchange rates for last year. And if we use an average Q1 2014 exchange rates, the Q1 2015 revenues would be of about $220 million. The gross margin was 54.2% and EPS was $1.08, up 40% compared with the same quarter last year. In that case, we had a sizable foreign exchange transaction gain in the quarter, which improved the bottom line by $0.11 per share. IPG continues to grow the breadth and depth of our existing applications, and our products are being tested for use in new applications. For example, during the quarter, we continued to see good traction out of metal cutting, we are actively pursuing various new applications within that market. In fact, we have developed and are preparing to introduce in the market two new 2D cutting technologies. The first one opens an opportunity for high quality cuts of a variety of thick metals like steel, aluminum, titanium, tungsten, and others with a thickness 3 centimeter to 10 centimeter, and includes a process technology package, high grade cutting tables up to 12 meters in length, new generation of IPG's highly efficient 10 kW to 15 kW fiber lasers and unique cutting heads holding up to 20 kW optical power. The second solution is a fine cutting technology for highly reflective metals like copper, gold and others, based on IPG's new kW class single mode green fiber lasers. Additionally, in Q1 2015, IPG have installed in customer sites the first high quality pipe cutting machine as well as a very perspective 5D cutting machine for large parts with complicated shapes. In Q1, we experienced an acceleration in sales to our Japanese cutting OEMs, with cutting sales in Japan up more than 39%. We capitalized on Japanese cutting OEMs switching to fiber laser sources. Q1 2015 quarter opened for us new exciting opportunities for fiber lasers in welding applications also. We have finished qualification of new LSS-5 generation of laser seam stepper technology. The system satisfies the most technical wishes of various end-users and became very competitive to industrial spot welders in pricing. Another great deal of interest we found in our new one-of-a-kind 3-beam fiber laser system for brazing of zinc coated steel parts in the automobile industry. The elegant, patent-pending IPG solution resolves very significant technical limitations of other processes. Currently, we are finishing successful production tests with one of the largest car manufacturers and expecting to start mass deployment in the second half of the year. The other version of the same system looks very prospective for an essential increase of aluminum welding quality. The growing use of aluminum in autos and other industries saves weight and increases fuel economy. So the aluminum welding continues to be a strong opportunity for IPG. Further, during the last few months, our Russian company has developed, perfected (07:20) technology for laser welding of thick steel up to 10 centimeters, titanium up to 5 centimeters, and other metals. On the basis of the result, we have started some very large scale projects with oil, large bridge sections and other similar products manufacturers. For example, in Q1, we achieved good progress in the development of mobile machine for oil pipe casing welding. The direct tests of our equipment in the field, on the well drilling stations, should be started next month. In China, we see strong growth in R&D for complex welding in aerospace, specifically for replacing rivets on airframes. In addition, sales of our family of QCW lasers for low power and fine welding applications continued to grow. These lasers are used for battery and electronics welding in consumer electronics. As a result, QCW laser sales performed well as a replacement for inefficient lamp pumped YAG lasers. We expect this trend to continue going forward. Another area that continues to grow for us is the use of fiber lasers for additive manufacturing. Fiber lasers are now widely used in this area, and includes 3D printing, laser sintering and various cladding applications. This application grew by more than 60% compared to Q1 2014. Sales to our core European customer group remains strong, while we are gaining OEMs in China, the USA. and Japan where there is an increasing number of additive manufacturing customers. We combine such sales with inside development of complete solutions for some specific, large scale new applications. One of such projects is directed to mass use in high speed train car manufacturing. Other has a good chance to be implemented worldwide in large steel manufacturing companies. We have very serious customers in both cases. Whereas various metal processing technologies remain still for IPG as dominant application, we have reached in Q1 remarkable progress in development of new, nonmetal directions further. In fact, the qualification of our revolutionary, new short picosecond and femtosecond laser family is finished, and we are starting deployment of such lasers with an average power up to 100 watts to both medical and industrial markets. We have reached very good results in development of new technology for silicon polycrystal films annealing on the basis of high-power UV fiber lasers, what we believe has a good chance to replace the present excimer laser technology in OLED display manufacturing. Further, a new, state-of-the-art RGB technology platform, based on new speckle-free high-power red, green and blue fiber lasers, has developed at first which what resolves the core demand of high grade 3D cinema theatres manufacturers for efficient, super high lumen projectors. At last, I should mention the high volume market requests for efficient aircraft, ships and other machine paint removal systems. Now, the long-term project is turning from qualification to mass deployment phase, and IPG's fiber lasers are playing a role of an excellent engine there. Recently we received a request from a leading customer to become a key supplier of such kind of complete systems. We are ready to reply positively for this request. Other very large volume potential projects include fiber laser lidar sensors for driver-free vehicles and many other applications. We believe we are operating from a strong position in our core applications. Overall, we are extending our lead over competitive lasers and non-laser methods by delivering the lowest cost, highest quality and most reliable lasers in the market today. With increased reliability, lower maintenance and ease in use, fiber laser technology is now becoming a preferred processing solution. In addition, our vertically integrated business model, manufacturing scale, extensive IP portfolio, and drive to be the industry's greatest innovator provide high barriers to effectively compete with us. During the quarter, we acquired a 76% interest in a technology company that develop key tools and controls for unique high-power 5D laser systems. The focus will be on laser processing systems for cutting, welding, cladding and prototyping applications where lasers are not typically used. The systems will use our laser sources. These sources will be integrated with CNC and complex electrical drive systems, electrical controls and software technology in combination with specialized optical heads. At this point, the company is serving the Russian market, where it is located. As our Q1 results indicate, we are off to a very good start to the year. Our backlog, order flow and book-to-bill remain at very strong levels in our three main geographies and we expect that to continue in the near term. We remain focused on gaining share in our established materials processing applications, developing new product applications that will expand our available market and applying our lasers in large scale and novel applications beyond our core applications in materials processing. With that, I will turn the call over to Tim Mammen. Timothy P. V. Mammen - Chief Financial Officer & Senior Vice President: Thank you, Valentin. And good morning, everyone. First-quarter revenue grew 17% to $199 million from $170.6 million a year ago. Materials processing sales increased 18% year-over-year to $192 million, accounting for approximately 97% of total sales during the quarter. The continued strong performance of materials processing was driven primarily by cutting, welding, and 3D printing applications. Sales to other markets, including advanced applications, telecom and medical applications, which accounted for approximately 3% of IPG's total revenue, decreased by approximately 11% to $7 million. The decrease was the result of lower sales in advanced applications, partially offset by sales growth in both telecom and medical. As a reminder, advanced applications sales are typically large and uneven from quarter-to-quarter. High-power laser sales, which accounted for 57% of total revenue, increased 14% year-over-year to $114.3 million. This growth, which demonstrates our continued leadership in this area of the market, was driven primarily by strong demand in cutting and welding applications, as previously described by Valentin. In addition, we sold several high power 5-kw single mode lasers for a unique application related to patterning structured steel to alter its electromagnetic composition. Note that high-power laser revenues were most affected by currency headwinds. Low-power pulsed laser sales decreased due to lower average selling prices while unit sales increased. This demonstrated our ability to compete more effectively with this product line. At the same time, there was strong demand for our high-power pulsed lasers, primarily for marking and engraving applications and also for cleaning and ablation, which resulted in pulsed laser sales increasing by 3% year-over-year to $29.9 million. Sales of medium-power lasers rose 26% to $21.9 million, or 11% of total revenues. This growth continues to be driven by sales for fine-processing applications, particularly cutting of thinner materials, and also from 3D printing applications. Sales of QCW lasers, which are mostly used for fine welding, percussion drilling of holes and some glass cutting, increased by 79% year-over-year to $10 million and accounted for 5% of total revenues. Sales were mostly driven by fine welding. Revenue from low-power lasers decreased 8% to $3.5 million. Sales of other products, which include amplifiers, diode lasers, green lasers, mid-IR lasers, integrated laser systems, and certain components, increased 18% year-over-year to $8 million. Service, parts, lease and other revenue, including accessories, totaled $11.3 million net of deferred revenue of $2.4 million, an increase of 40% from $8.1 million last year when deferred revenue totaled $3.8 million. Included in this category are optical heads, which we note are gaining traction with customers as more high-power and other lasers are ordered with our proprietary optical processing heads. Now looking at our performance in Q1 by geography. Sales in Asia increased to $104.5 million, or by 16% year-over-year. Within that region, China sales increased 23% to $56.5 million. Demand was driven across all product lines, most notably high-power, QCW, and medium-power lasers for cutting and welding applications. Our sales force in China continues to leverage the growth in that region and we expect the momentum to continue. In Japan, sales decreased 15% year-over-year to $20.8 million. As a reminder, Japan had very strong results a year ago due to the change in consumption tax that resulted in an increase of purchasing activity in the first quarter of 2014. At the same time, the trend of Japanese cutting OEMs transitioning to fiber lasers continues to gain momentum in Q1, up 39% as Valentin previously mentioned. In Turkey, we continued to benefit from strong demand for our cutting OEMs. In other parts of Asia, growth was driven by specialty lasers for the steel industry. Notwithstanding slow growth of the economy in the Eurozone, European sales grew 15% year-over-year to $65.1 million, driven by even stronger growth in Germany from sales to the automobile and 3-D printing industries, partially offset by weakness in Russia related to the economic environment. We expect demand for 3-D printing applications to continue to grow. Also, German pulsed laser sales performed well during the quarter. North American sales increased 25% year-over-year to $28.6 million, although this comparison is to a weak Q1 in 2014. The strength in the U.S. centered on cutting applications, automotive welding, and an improvement in sources for medical devices. In addition, QCW sales for low power welding and aerospace applications were strong. Now, working our way down the income statement. Gross margins of 54.2% were at the top end of our range of 50% to 55% as a result of the strong revenue performance, benefit related to lower manufacturing costs due to the depreciation of the euro and Russian ruble exchange rates and some benefit from product mix related to increased high-power, medium power and QCW sales, partially offset by increased unit sales of low power-low cost pulsed lasers. Sales and marketing expenses decreased to 3.8% of sales, or $7.5 million, from 4.2% of sales, or $7.2 million, a year ago. We saw an increase in real dollars, but a decline in the percentage of sales as we benefited from leverage in the model. As a percentage of sales, R&D expenses were down slightly at 7.2%, compared with 7.5% of sales, a year ago. In real dollars, R&D expenses increased to $14.2 million from $12.8 million a year ago, as we added to R&D head count in the U.S. and Russia. General and administrative expenses decreased to 6.4% of total sales, or $12.8 million, from 7.6%, or $12.9 million, a year ago. This was primarily due to lower provisions for, and an increase in recoveries for bad debt as well as a smaller loss on the disposal of fixed assets that benefited G&A by about $1.2 million in total. Excluding these amounts, G&A expenses were approximately $1.1 million or 9.4% higher than the first quarter of 2014, due to an increase in salaries and benefits, stock based compensation and depreciation. In each of the aforementioned categories, operating expenses benefited to some degree from the depreciation of the euro and other currencies. Operating expenses for the first quarter were $25.8 million, including a foreign exchange gain of $8.8 million, compared with $31.5 million a year ago, which included a foreign exchange gain of $1.4 million. Excluding the foreign exchange gain, operating expenses for the first quarter were $34.6 million, compared with $32.9 million a year ago. The foreign exchange gain of $8.8 million related to a position to build up dollar-based assets in Germany. The majority of that gain primarily came out of the depreciation of the euro. The FX gain had a bottom-line benefit of $0.11 per share as Valentin mentioned. First quarter operating income was $82 million, or 41.2% of sales, compared with $57.8 million, or 33.9% of sales, in the first quarter of last year. Excluding foreign exchange transaction gains and losses, operating margins were 36.8% and 33.1% in 2015 and 2014, respectively. Our tax rate in the first quarter was 30% and does not include any benefit related to potential R&D tax credits, which might become available later in the year if the credit legislation in the U.S. is re-enacted. Net income for the first quarter increased by 41.5% to $57.4 million. On a diluted per share basis, we reported $1.08 for the first quarter, compared with $0.77 a year ago. Excluding the benefit related to foreign exchange transaction gains during the quarter, EPS was $0.97. If exchange rates relative to the U.S. dollar had been the same as one year ago, which were on average euro 0.73, Russian RUB35 and Japanese ¥103, respectively, we would have expected revenue to be $21.6 million higher, gross profit to be $10.9 million higher and operating expenses would have been $4.1 million higher. Now, turning to the balance sheet. We continue to maintain a strong balance sheet, ending the quarter with cash and cash equivalents of $541.5 million, and $32.7 million of debt including lines-of-credit. At March 31, 2015, inventory was $174.0 million (sic) $174.1 million (27:02), up 2% from $171 million at year end 2014. Our current level of inventory on hand amounts to approximately 172 days, compared with our target range of less than 180 days. Accounts receivable were $149.8 million at the end of the first quarter, or 68 days' sales outstanding, compared with $143.1 million at December the 31, 2014, or 63 days' sales outstanding, primarily due to the timing of shipments during the quarter and also payments received after the end of the quarter. As Valentin discussed before, during Q1, we closed on acquisition of a systems technology company that has a unique multi-dimension high power systems platform for large scale cutting, welding and cladding applications. As a result of the acquisition, intangible assets increased by approximately $6.3 million. Cash provided by operations during the quarter was strong at $52 million. Capital expenditures and amounts related to acquisitions for the quarter totaled $18.8 million, including the $5 million cost of the acquisition. We continue to expect the CapEx run rate for the full year 2015 to be approximately $60 million to $65 million, excluding business acquisitions. We are off to a strong start to the year. In the first quarter, book-to-bill was above 1 and we saw strength across the board in our largest markets. We expect that to continue as the year progresses. We continue to work with new customers and on new applications in cutting and welding in order to capitalize on the growing demand in our end markets, we are focused on establishing partnerships with new OEMs and end users and deepening our relationships with our existing customers. And now for our expectations. We currently expect revenues for the second quarter to be in the range of $215 million to $225 million. We anticipate Q2 earnings per diluted share in the range of $1.05 to $1.15. The midpoint of this guidance represents quarterly revenue and EPS growth of approximately 14% and 20%, respectively year-over-year. The EPS guidance is based upon 53,267,000 diluted common shares, which includes 52,486,000 basic common shares outstanding and 781,000 potentially dilutive options at March the 31, 2015. This guidance is subject to the risks we outline in our reports with the SEC, and assumes exchange rates relative to the U.S. dollar of euro 0.93, Russian RUB52 and Japanese ¥119 respectively. I want to reiterate that we do not attempt to forecast transaction gains or losses related to changes in exchange rates. With that, Valentin and I will be happy to take your questions.

Thank you. At this time, we will be conducting a question-and-answer session. Thank you. Our first question comes from the line of Mark Douglass with Longbow Research. Please proceed with your question.

Hi. Good morning, gentlemen. Timothy P. V. Mammen - Chief Financial Officer & Senior Vice President: Good morning, Mark. Valentin P. Gapontsev - Chairman & Chief Executive Officer: Good morning.

Tim, so you're going to keep getting this question, the cash on the balance sheet keeps piling up. Any thoughts on what's going to happen with that cash in the near term, dividends or anything like that, share repurchases? Timothy P. V. Mammen - Chief Financial Officer & Senior Vice President: At this point, we've not changed the strategy at all that we articulated, albeit five weeks or six weeks ago at the end of 2014. So as we've discussed previously, if you look at the end markets that we operate in, we are still relatively early in penetrating many of the applications and potential end-users for lasers. Valentin articulated in his part of the call today numerous new applications that the company is targeting that take us beyond the industrial area. So our view is that, strategically, it's extremely important to continue to maintain a healthy and strong cash position with the view to deploying that through acquisitions as and when we find stuff that is compelling, either from a technology or valuation point view. I think that if we were much more mature and further developed into these end markets, we'd be talking more actively about returning some of that cash to shareholders or using it in other ways. I still, I'm very firmly of the opinion that, given where we stand, the strategy of the company is pursuing by being conservative and cautious and looking at acquisitions rather than rushing into things is very important, and I think patience is required in relation to that strategy. And that basically continues to be the point of view that we have and hasn't changed in the last couple of months. I think the worst thing for us to do would be to go out and rush into some acquisition that wasn't particularly good.

Yeah. I'm not necessarily thinking of acquisitions, just the cash flow position and the generation has been so strong, more than outpacing your CapEx needs, just returning some of that to shareholders by other means, but didn't sound like that that's really changing. On China, can you describe a little bit about what's happening on the ground in China? Investors continue to ask about how you can be doing so well in China, given the macro headwinds that appear to be there in the industrial manufacturing space. But can you discuss a little bit more in detail how you're performing in China and what's going on in China for IPG? Timothy P. V. Mammen - Chief Financial Officer & Senior Vice President: So, correct me if I'm wrong, but my recollection is that this has been a concern of investors for about four years, and we've continued to execute extremely well in that area. Fiber laser adoption and penetration has continued to grow. That's been achieved by IPG working very, very closely with OEMs and other customers on the ground there. We started with a business that was predominantly a market engraving if you go back five years or more years. We've diversified the application set, so that developed into cutting applications. We're now getting into more and more welding applications. There is a significant amount of R&D that's going on in China with advanced welding applications. We mentioned some welding in the aerospace industry where potential replacement of rivets within the joining technologies is being looked at in China. So you have a very diverse set of applications. You have an investment that IPG has made on the ground in service, sales, application support and very close relationships with customers that mean that we've benefited from the overall growth in the industrial sector. The other thing that is interesting is that, yes, the macro climate at least to the headline has weakened. Growth is expected to be 7%, the lowest level in almost 20 years. It's still not driving through on the more advanced side of the industrial market and the way I've characterized that previously is that there is a very real impetus in China to transition from being a low cost manufacturing region to being a very advanced manufacturing region in a similar manner to what's being achieved by other countries in Asia. So that drive benefits laser sales in general and continues to offset some of the perceived weakness in the economy. In addition to that, we sell a lot of lasers to people in the consumer electronics industry that are selling products worldwide and not just in China, and those companies continue to perform very well. So that ends up benefiting us. So there are many different aspects to our performance in China, our good performance in China.

Thank you.

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

Thank you. Thanks for taking my question. Tim, on the strength that you're seeing in the Japan cutting market, I was just wondering how would you size up the penetration rates right now of fiber lasers in that market? Timothy P. V. Mammen - Chief Financial Officer & Senior Vice President: Still relatively early stages. So, this growth was sort of really the first acceleration to our main OEMs that we had seen: it's being gradually building last year and really started to accelerate this year. That probably still – they've maybe transitioned from between 5% and 10% towards 20% and the targets they've told us over the next two years is to move towards 50% to 60% utilization of fiber lasers. We think potentially that goes high, given the general trends in the cutting industry.

Okay, great. And then Valentin mentioned in his opening remarks two of your new cutting technologies. I'm just wondering if you could maybe talk about the availability of those currently in the market? And then, are those sold separately or typically with systems or can it be both? Timothy P. V. Mammen - Chief Financial Officer & Senior Vice President: The question relates to the thick metal – ultra thick metal cutting that you talked about. Valentin P. Gapontsev - Chairman & Chief Executive Officer: Now the old manufacturing cutting system stay time to put on (38:38) the 1 kW, 2 kW laser use to the – use 5 kW, 4 kW, even 6 kW laser. But a lot of new opportunities is open to use technology with many 10 kW fiber laser. It's much faster and provide also very good quality today for thick metal cutting and so on. We try to convince the best our customer to go faster in this direction but they're very conservative still, don't put in the average time to overcome 10 kW. So we have made decision why not to provide our sales such solution to market to investigate market and to show the cutting manufacturing leaders that a lot of new opportunities here. And we indicate we won't compete with our customer. We provide solution which they're still not very interested. It's our policy and the direction.

Great, thank you. Valentin P. Gapontsev - Chairman & Chief Executive Officer: We believe, we can sell the manufacturing of 100 cutting machines during the year only with so high power. We develop new application also (40:00) implementation, this application and we develop on for machine solutions, high quality, and we really like to (40:17) this new application. Now with high power laser, it's a lot of touch it's not (40:21) in cutting, welding, cladding, and other and got new large scale opportunities.

Thanks for the color. Valentin P. Gapontsev - Chairman & Chief Executive Officer: We're ready to supply to any other integrator our – the best lasers, the optical solutions for the optical heads you need and so on. But if – from our side, we'll open door for everybody, but for this application, we again develop own full complete solution, including process and technology, hardware, machines, software, all to provide to some large applications our own solutions. And we're very successful in this direction now.

Thank you.

Our next question comes from the line of Jim Ricchiuti with Needham & Company. Please proceed with your question. Jim A. Ricchiuti - Needham & Co. LLC: Thank you. Good morning. You're talking a lot or at least it appears to be spending more time talking about new applications and new products. I'm wondering if there is any way to think about this in terms of are you anticipating a bigger contribution from these areas in 2015 relative to last year? I mean, what in particular should we be focusing on in the balance of the year as you talk about some of these newer areas? Timothy P. V. Mammen - Chief Financial Officer & Senior Vice President: I think some of them – Jim, it's a good question. We're working on different technologies and applications that point the way to the growth of the company over a two-year to three-year time horizon rather than necessarily over the next three months to six months. We're cognizant of the fact that as you get more and more penetrated in the industrial applications, the growth of the company in the medium to the longer-term is going to have to come from very innovative R&D in other areas and, in some instances, we're being driven in this direction by our customers who are seeking these solutions. In other areas, we are identifying areas where we think the fiber laser could have significant opportunities. So, in the nearer term, you're probably looking at some of the ablative and paint stripping processes where, as Valentin said, the initial work is already really done and completed on developing complete systems that can strip aircraft, and now what they want is someone who can supply the system and support the systems in the field on a commercial basis. So that might be one area, if you want to go really sort of nearer term that could be a growth driver. Valentin P. Gapontsev - Chairman & Chief Executive Officer: For example, for paint removal, we found that total market for paint removal, it's more – only in the U.S. only in Air Force more than $800 million per year, but total worldwide more than $3.5 billion per year. Up to now, this is how this removal making by chemical and other, since it's very dense (43:51) and many other problem connected with it. Laser technology allow to simplify dramatically with this solution make much more perfect, such as paint removal and so on. Now the solution for paint removal develop maybe last 10 years. We work with many institution in America and other to try to make this, but it's still what's only R&D. But now a situation than it was really going from developed, made, and qualified for many application and going native for mass production. Our customer – leading customer who can – who will be able to produce and supply highest quality of such volume, such equipment. We are looking for such product. We are working very seriously in this direction. Jim A. Ricchiuti - Needham & Co. LLC: Okay. And just as a follow-up just with respect to the comments you made about the bookings in the quarter, the book-to-bill, if I heard you correctly, was above 1. Can you give any color in terms of the book-to-bill in your major geographic regions? Timothy P. V. Mammen - Chief Financial Officer & Senior Vice President: Basically it's strong across the board apart from in Russia where clearly the timing of orders – and you generally see strength coming into Russia in the second half of the year and you've also got the economy being relatively weak there. However, the ruble has started to stabilize a bit, some of the budgets have been reset in Russia, so we're hoping to see some improvement there. The Rest of the World, you had book-to-bill above 1 just about everywhere else. So the revenue and the bookings really tracked each other during the quarter, Jim. Jim A. Ricchiuti - Needham & Co. LLC: Okay. Thank you. Valentin P. Gapontsev - Chairman & Chief Executive Officer: First quarter obviously went better than the last quarter's performance.

Our next question comes from the line of Joe Maxa with Dougherty & Company. Please go ahead with your questions. Joe Maxa - Dougherty & Co. LLC: Thank you. I wanted to follow up on the paint stripping system that you talked about. Have you had orders for that yet or is it still too early? Valentin P. Gapontsev - Chairman & Chief Executive Officer: (46:08) our laser to – already working for paint removal in the field, already working. It's a laser – it's our classical CW laser. For example, in one location, only one center, six-hour – 6 kilowatt lasers working very successfully. We have this laser, the customer possible qualification and are now looking for mass use. But we develop as much a better pulsed laser – multi-kilowatt pulsed laser, not CW, they open now still a new opportunity for this. So it's really now the time, new phase when really the demand will grow very fast. It's only still – they don't have customer, don't have real good quality manufacturer. We're ready to take such position. Joe Maxa - Dougherty & Co. LLC: Okay. And you mentioned the... Valentin P. Gapontsev - Chairman & Chief Executive Officer: Full system, not only a laser, full system, it's mobile system – a vertical mobile system, which include not only laser, not only a robot, but include also very complicated scanning system software to make maps, for example, aircraft before to – you won't have to prepare, it's a complicated system, but we are ready to take such responsibility. Joe Maxa - Dougherty & Co. LLC: I see, okay. Also you mentioned the seam stepper, it sound like was maybe gaining some traction and that had in the past talked to be about a pretty big opportunity for the company, can you give us a little more color on what you're seeing there? Valentin P. Gapontsev - Chairman & Chief Executive Officer: Seam stepper project going well. Now, our new LSS-5 system, fifth generation of such system, much more perfect and cheap, and really will meet all customer expectation. We passed serious test in many locations where we'd say many customers, but as the market penetration going not so slow. The problem is because then also customers, they have used still old technology to looking to invest, but it's not hot, they all recognize much better and so on, but not the right time to make new investment to change technology. So it's difficult with the process penetration as for what to install volume, say, it would take three year to five years minimum. So we're in this process going very successful, but takes time. For zinc coated matter, it's other situation. We started this product much later, but it's very hot today, very strong demand from major car manufacturer because current technology with change of the process of zinc coating that become in this way, a problem very serious. Before they used chemical coat in the steel, and it was good quality. Now they changed to the hot melted zinc coating, hot coating and quality of such sheets became much less. And during the regular process, they have a lot of the problem with quality and lot of defective cars and so on a yield decreased dramatically. We have resolved the problem, provided an excellent elegant patent-pending solution and passed now the test. All tests now go in final production test in this all immediately many companies, car companies start to request that same technology and because of this technology, penetration market would be much faster and much more valuable. Joe Maxa - Dougherty & Co. LLC: Thank you.

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

Yeah. Hi. Thanks for taking my question. I had two quick ones. Tim, what kind of gross margin do you expect in the June quarter compared to the March? Timothy P. V. Mammen - Chief Financial Officer & Senior Vice President: Krish, we don't give any specific guidance on gross margin. Clearly with the level of revenue we've got and the strong performance of the business, we expect to be towards the top-end of the range. You probably see a bit of a pickup in operating expenses as well as the pro rating of bonus accruals and some of the benefit on SG&A drops off. So in order to generate the guidance range that I gave on earnings, you inevitably have to be reported at the top of the range on gross margin and similar range on operating expenses, maybe a little bit higher on operating margin for Q2.

Got it. Got it. That's helpful. And then, would you be interested in sharing, I'm kind of curious on your China sales. What is the ASP range of the lasers you sell in China? Or if you don't want to disclose that, what is the ASP in China compared to, let's say North America or Europe? Timothy P. V. Mammen - Chief Financial Officer & Senior Vice President: Average selling prices in China outside of the very low-cost pulsed lasers that we have are similar to elsewhere in the world relative to the volumes that the customers take. So we have some of our largest volume customers in China and they clearly benefit from pricing discounts. There is no fundamental difference otherwise in the pricing strategy there. Obviously, to compete in the pulsed laser business, again some of the lower-cost manufacturers there, we've done a lot of work to reduce both the cost and the selling price of the lowest power pulsed lasers.

Thank you very much.

Our next question comes from the line of Patrick Newton with Stifel. Please proceed with your question. Patrick M. Newton - Stifel, Nicolaus & Co., Inc.: Yeah. Good morning, Tim and Valentin. Thank you for taking my questions. I guess my first one is, in response to prior questions you talked about increasing fiber laser penetration in China and then Japan, cutting penetration moving to the mid-20%. I'm curious if you look at the cutting market in total, where do you see overall fiber laser penetration and could you give us some of the stats similar to Japan on North America, Europe, and China? Timothy P. V. Mammen - Chief Financial Officer & Senior Vice President: I think in Europe you're seeing people transition already to more than 50% and the view is again that they'll move overall up into the sort of 80% level or more if fiber continues to gain acceptance in the way that it has. In North America, it really is reflected, because the most of the manufacturers who supply North America are either European or Japanese companies. In Europe and China, definitely, the penetration on cutting applications is ahead of where it was in Japan, we've articulated that on many occasions. It's good to see the changes in Japan that are starting to take place now. Overall, on the market, it's a bit difficult to answer the question. You're probably trending towards about 35% to 40% penetration of the entire cutting market at kilowatt and above. So still significant opportunity for growth there if the overall trends that are expected over the coming years continue. Patrick M. Newton - Stifel, Nicolaus & Co., Inc.: And if you remove the vertically integrated players, where do you think that penetration would shift to? Timothy P. V. Mammen - Chief Financial Officer & Senior Vice President: Yeah. Then you're up to like more than 50% if you exclude the sort of largest vertically integrated player that we don't supply to. Fiber penetration, including the competition is probably about 50% of the overall market, maybe a little bit more. Patrick M. Newton - Stifel, Nicolaus & Co., Inc.: Okay and great. And I guess just shifting gears to your laser processing and systems controller acquisition. You talked about how this acquisition is going to enable IPG to target large scale cutting, cladding and welding applications. I guess my question is, previously you talked about systems being a smaller scale and should investors view this acquisition as a shift in your systems strategy from competing on the fringes systems to a more direct competitive approach to traditional machine tool vendors? Timothy P. V. Mammen - Chief Financial Officer & Senior Vice President: I think that in terms of scale, it was never really a reference to the power or the size of the equipment. It was always that we wanted to look at applications and processes that were either in early stage of development or not well served by the market or in geographies that were not well served by the incumbent players and that strategy is still very much intact and has not changed, whether it be the very high power, very thick cutting of metals that Valentin talked about or cladding applications or in paint stripping. In paint stripping, the issue is that there is nobody who is actually able to supply and support the paint stripping system that was developed in conjunction with the U.S. defense groups and they want somebody who is capable of supplying and supporting it to integrate the processes and the software together. So, our strategy has not really changed in that direction. As Valentin and I said, he said on the earlier part of the call, he is not trying to compete with the existing OEM base; he really is focused on these newer applications and technologies. Scale though, you can sell lasers that are both for fine welding applications that are in the hundreds of watts and for some of these applications you require lasers as much as 15 kW or 20 kW in power if not more. Valentin P. Gapontsev - Chairman & Chief Executive Officer: We're not looking to regular sales method for the commonly used systems. I am looking for specialty product, large scale product, customized product where the customer could not find good supplier or the very weak or going very slow and so on. Most of this potential now integrated, except some very large – in many case, buying our laser, built everything and based on our laser. But they need years to develop some specialty new customer product. We can make ourselves able now to make it much faster, much better and cheaper, finally cheaper. And we take in such product more and more very serious. Customer going to asking us to develop for them very special – for very special application, concrete specialized machine not standard solution, and it's our business, why you have to give it to other people.

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

Hi. Good morning, Valentin and Tim, and thanks for squeezing me in. I wanted to follow-up on this $5 million acquisition, more specifically, I wanted to confirm that this is a Russian company that you bought, and also I'm wondering if you are seeing more actionable acquisition opportunities in the remainder of this year? Valentin P. Gapontsev - Chairman & Chief Executive Officer: It's not a Russian company, it's a Belarusian company. Our neighbor – a Russian neighbor, but it's not Russian, Belarusian company. It's very rich company which have -it's 25 years old, we have very good portfolio of the very special controller for 5D processing. They have also very skilled team of people, not a large team, but very skilled person. They worked many years together, now they join us as our division. Timothy P. V. Mammen - Chief Financial Officer & Senior Vice President: And then the second part of the question is what's the perspective on opportunities for the systems? Valentin P. Gapontsev - Chairman & Chief Executive Officer: It improve, very essential, our ability to develop high-quality complicated coat (59:12) system has also opened for us new opportunities. It's exactly our target to provide to customers a more and more integrated solution, not only optical solution, but the most customer need for full complete solution or the way that it's only optic, it's only part of the machine, they need complete machine and we – our target, but we're able to provide such complete solution.

Okay. And do you see any more potential acquisitions in the rest of the year? Valentin P. Gapontsev - Chairman & Chief Executive Officer: We're always working and investigate many opportunities, but it's a complicated process, takes a lot of time, it's a lot of problem each time. But we're working seriously in this direction. But we are looking for not just to make some of this additional business, we are looking for real synergy because IPG is a very vertical integrated company and not like this – a lot of with the companies, which each is practical independent and many other cut platform (01:00:37). We're looking for synergy. It's much more difficult than just to buy some additional businesses.

Thank you.

Our next question is a follow up from the line of Mark Douglass with Longbow Research. Please go ahead with your question.

Hello, again. Tim, what kind of currency headwind on the sales line is baked into your second quarter guidance? Not the currency, just... Timothy P. V. Mammen - Chief Financial Officer & Senior Vice President: We gave the actual exchange rates that we use to generate the guidance. So we used euros to the dollar of $1 being worth €0.93 and similarly on the ruble and the Japanese yen, we used the current exchange rates to translate the forecasts we received from our different entities into dollars. So relative to current exchange rate, the currency is fully baked in. Relative to a year ago, I would estimate that the guidance range is about $20 million lower than it would otherwise have been if exchange rates were the same as one year ago. So the currency headwinds in Q2 would be similar to those in Q1, but we factored that into account within the guidance range. We're trying to make that very clear in the script by actually giving you the exchange rates we've used.

Right, right, I just was on a year-over-year basis and I figured it was going to be similar to 1Q, but I just wanted to confirm that. So, thank you.

Thank you. Valentin P. Gapontsev - Chairman & Chief Executive Officer: The more – perhaps what we worry about stability of dollar because our many more and more serious (01:02:45) short time would be a serious change of the dollar.

Thank you. At this time, we've reached the end of our question-and-answer session and now I'd like to turn the floor back over to Valentin Gapontsev for closing comments. Valentin P. Gapontsev - Chairman & Chief Executive Officer: Thank you for joining us this morning again and we are looking forward of speaking with you on the next quarter's call. We hope it would be great to report again. Timothy P. V. Mammen - Chief Financial Officer & Senior Vice President: Thank you, everybody.