IPG Photonics Corporation (IPGP) Q3 2015 Earnings Report, Transcript and Summary

Good morning and welcome to IPG Photonics' Third 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. [Operator Instructions] At this time, I would like to turn the call over to Mr. Angelo Lopresti, IPG's Senior Vice President, General Counsel and Secretary for introductions. Thank you, 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, 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, October 27, 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.

Good morning, everyone IPG delivered it here another strong quarter growing revenue by 22% year-on-year to $143.5 million in the third quarter of 2015. We translated that growth into our growth margin of 54.7% and we reported EPS of $1.18 which includes $0.06 per share impact for foreign exchange transactional work. Year over year for foreign currency versus reduced our sales by 12% points. In other words, sales would have increased 34% if Q3 2015 exchange rates remained the same as a year ago. Our continued strong growth reflects the penetration of our fiber lasers into new and existing applications through our diverse and expanding product line. IPG is executing on a variety of strategies to continue its strong growth. These include expansion in established products and markets, development of new products and applications, and geographical, customer and product diversification. In current products and markets, our European OEM cutting customers had great growth in the quarter and are moving up the power scale allowing them to improve processing speeds and cut thicker metals. In addition to benefiting from the secular shift in laser processing from legacy lasers to fiber lasers, IPG used its best-in-class products to achieve two OEM wins over another fiber laser maker. Battery welding is an application that is growing as the demand, uses and size of batteries increase. Rechargeable batteries are everywhere in cell phones, electronic devices, hybrid and electric cars and are now moving to the power grid. Although we are limited in saying much about specific customers, we have a robust pipeline of projects with several battery manufacturers that we are working on. Our most recent product lines are gaining traction and performing quite well. For example, QCW lasers are displacing lamp-pumped YAG lasers at an increasing rate. Sales of QCW lasers grew 62% for year-to-date and Q3 was the strongest quarter ever for this product line. Another recently introduced product that is gaining traction is our three-beam fiber laser system for brazing of zinc-coated steel for the automobile industry. We’re seeing increased levels of interest in this one-of-a-kind product. In fact, we recently won a sale from the incumbent laser supplier for this application. This brazing application presents a significant opportunity for IPG in the coming years. As we expand the range and technological capabilities of our product lines, we also are growing the breadth of the applications that these products serve. One new area is digital laser cinema projection. Our strategy is to capitalize on industry demand to improve the movie-goer's experience by replacing Xenon bulb light sources with super high lumen laser light projectors. During the quarter we completed a successful customer demonstration of the first prototype of our new, state-of-the-art RGB laser technology platform, based on speckle-free multi hundred watts scalered, green and blue lasers. We expect to deliver the prototype of the system in the first quarter of 2016. We’re also making significant progress on the testing and development of our UV and ultra-fast fiber lasers to address new micro processing applications. We currently have several units undergoing long-term testing and we expect to launch these products on a broader scale in the coming year. In terms of product, customer and geographical diversity, IPG's unique super high-power lasers are gaining traction. During the third quarter, we shipped another 50-KiloWatt laser to NASA for materials testing. In addition, we will recognize revenue on a 50-KiloWatt welding system that was shipped in the second quarter and we have had another inquiry from a customer regarding a 50-KiloWatt laser for welding. In Russia, we developed and have tested a new and unique orbital welding station that has field application in oil and gas well drilling as well as infrastructure development. In addition, we continue to pursue projects in non-materials processing applications, such as advanced, medical and telecom, because they present significant opportunities for us as evidenced by their strong growth in Q3 when sales for non-materials processing increased by 168% year-over-year. In China, we are making progress to further diversify our OEM customers to reduce customer concentration. IPG is working well with several major integrators to deepen our relationships. Geographically, we have plans to expand as our business demands. In Q4, we plan to open our office in Wuhan, China. Wuhan is recognized as the economic, financial and transportation capital of central China with the automobile, heavy industry, electronics, photonics, pharmaceutical, chemical, food and beverage industries being well represented. Additionally, we are looking forward to establishing new operations in Brazil, Mexico and the Czech Republic, and expanding our applications center in Silicon Valley to develop additional micro-processing laser applications closer to key customers. As a result of our constant focus on these strategies and the secular move to fiber lasers, we can target further 10%-15% revenue growth for the full year 2016 at the minimum. The target is subject to the conditions that Tim will speak about later. We target this range in the face of the potential decelerating growth in China due to uncertain economic conditions there. We believe that we are staying ahead of the competition particularly with our high power, QCW and new, more advanced products even though many companies have announced their intention to enter the fiber laser market. Our size as the world's largest maker of laser light sources, unique and integrated business model and proven history of innovation provides IPG with many advantages to reach these targets. With that, I'll turn the call over to Tim.

Thank you, Valentin, and good morning, everyone. Let's get right into sales by application. Materials processing sales increased 16% year-over-year to $223.8 million, accounting for approximately 92% of total sales during the quarter. Most of the drag on revenue due to foreign exchange that Valentin mentioned and which we discussed later affected materials processing. Within materials processing, high-power lasers used for cutting applications was the strongest growth driver, coupled with additive manufacturing or laser sintering and more moderate growth in welding. Strong growth in these areas was offset by a decline in sales for marking and engraving applications. Sales to other markets including advanced applications, telecom and medical applications which accounted for approximately 8% of IPGs total revenue increased by approximately 168% to $19.7 million. The increase was driven by strong growth in advanced applications and telecom to a lesser extent medical. Advanced applications growth was driven by government in aerospace related applications. Telecom sales, was primarily due to demand for products for our last mile fiber for U.S. cable TV access. As a reminder, advanced application sales were typically large and uneven from quarter to quarter. High-power laser sales, which accounted for 54% to total revenue, increased 24% year-over-year to $130.9 million. This growth was driven by continued strong sales for cutting applications which is our largest single application as we continue to increased our penetration of OEM cutting customers. In addition, we are continuing to see several of the OEMs increased the power levels used in the cutting systems which further benefit sales of cutting applications. Pulsed laser sales decreased by 9% year-over-year to $35 million related to the previously mentioned lower year over year sales for marking and engraving applications. Competition in pricing pressure for Pulsed lasers has been significant these reflected in the fact that unit sales of Pulsed lasers actually increased by 10%. It is interesting to note that price competition for Pulsed lasers in China may actually be moderating. Medium-power laser sales increased 31% year over year to $27 million or 11% to total revenues this growth continuous to be driven by sales for fine processing applications particularly cutting at thinner materials as well as from additive manufacturing laser centering applications. While we’re seeing an increased level of competition in this market, we experienced another account win from a fiber competitor. Sales of QCW lasers, which are mostly used for fine welding, percussion drilling of holes and some glass cutting, increased by 37% year-over-year to $19.8 million and accounted for 8% of total revenues. This marks our strongest quarter ever for QCW laser sales as they are continuing to displace lamp-pumped YAG lasers at an increasing rate. Revenue from low-power lasers decreased 6% to $3 million. Sales of other products, which include amplifiers, diode lasers, green lasers, mid-IR lasers, integrated laser systems, and certain components, increased to 101% year-over-year to $17.1 million, primarily as a result of higher telecom sales and sales for advanced applications. Service, parts, lease and other revenue, including accessories, totaled $10.7 million, net of deferred revenue of $3.7 million, an increase of 22% from $8.8 million last year when deferred revenue totaled $2.7 million. Now looking at our Q3 performance by geography. Sales in Asia increased to $130 million, or by 15% year-over-year. Within that region, China was our best growth area. Sales there increased 29% to $93.5 million. Growth in China was primarily related to strong demand for cutting and fine processing applications partially offset by decline in sales for marking and engraving applications. In Japan, sales decreased 21% year-over-year to 13.2 million mainly due to the timing of orders. We booked a very large order in the quarter from one of our main cutting OEMs in Japan reflecting the continued penetration of cutting OEMs in this area. We shipped several multi kilowatt single mode lasers to a customer in Asia or so for an advanced application. Despite the tepid microenvironment in Europe we saw a solid demand throughout Europe which drove 27% increase in sales year-over-year to $76.5 million. This growth was primarily related to strong demand for cutting, laser sintering and welding applications. North American sales grew 44% year-over-year to $36.3 million driven primarily by increased sales and advanced application in telecom with continued material processing strength in cutting and welding applications. During the quarter we shipped a 50 kilowatt laser for government application as well as a large order of those to customer in the U.S. for an advanced application. Now working our way down the income statement, gross margins at 54.7% were the high end of our range of 50% to 55% as result of the strong revenue performance and maintaining manufacturing efficiency as under absorbed manufacturing cost were approximately the same as Q3, 2014, while absorption of manufacturing expenses as a percentage of revenue was slightly lower compared to Q3 2014. This was offset by total direct and indirect manufacturing costs growing at a slower rate than revenue. Sales and marketing expenses decreased to 3.2% of sales with $7.7 million from 3.8% of sales or $7.5 million a year ago. We saw an increase in real dollars but decline in the percentage of sales. We benefited from leverage in the model, as a result of an increase in sales to OEMs. As a percentage of sales, R&D expenses were the same at 6.7% of sales compared with 6.7% a year ago. In real dollars, R&D expenses increased to $16.2 million from $13.4 million a year ago. As we continued to focus on launching innovative new products in order to strengthen our technology lead. The increase in R&D spending related to higher personnel expenses and cost of materials used in R&D development projects. General and administrative expenses decreased to 6% of total sales compared with 7.1% one year ago. General and administrative spending in total dollars increased to $14.7 million from $14.2 million a year ago. Operating expenses for the third quarter were 43.7 million, including a foreign exchange loss of 5.1 million, compared with 31.5 million a year ago, which included a foreign exchange gain of $3.6 million. The foreign exchange loss of $5.1 million related primarily to the devaluation of the Chinese Yuan during the quarter. Third quarter operating income was $89.6 million or 36.8% to sales compared with 77.6 million or 38.9% of sales in the third quarter of last year. Excluding foreign exchange operating margins were at 38.9% and 37.1% in 2015 and 2014 respectively. Our tax rate in the third quarter was 30% and does not include any benefit related to potential R&D tax credits that might become available later in the year the credit legislation in the U.S. is reenacted. Net income for the third quarter increased by 13.8% to $62.8 million, on a diluted per share basis, we reported $1.18 for the third quarter compared with $0.05 a year ago. In the current quarter, the foreign exchange loss reduced the EPS by $0.06 while in the same quarter last year it benefited EPS by $0.05. If exchange rates relative to the U.S. dollar have been the same as one year ago which were on average € 0.75, Russian Ruble is 36, Japanese ¥104 and Chinese Yuan 6.16 respectively. We would have expected revenue to be $20.6 million higher gross profit to be $9.5 million higher and operating expenses to be 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 $651.2 million and $20.4 million of debt including lines of credit. At September 30, 2015, inventory was $197.6 million, up 16% from $171 million at year-end 2014. Our current level of inventory on hand amounts to approximately 165 days compared with our target range of less than 180 days. Accounts receivable were $154.8 million at the end of the third quarter, or 58 days sales outstanding, compared with $143.1 million at December 31, 2014, or 63 days sales outstanding. Accounts receivable days benefited from strong collections in China, Europe and the U.S. In China, we discounted back notes accelerating collection of cash and reducing in part our exposure to the Chinese Yuan. Cash provided by operations during the quarter was $93.2 million. Capital expenditures for the quarter totaled $18.2 million. We expect the CapEx run rate for the full year 2015 to be on the higher end of $60 million to $65 million range previously provided. This range excludes amounts spend to acquire businesses during the year. Now for our expectations, year-to-date IPGs revenues have increased by 20% despite significant foreign currency headwinds and we have delivered operating margins of 38%. Looking ahead, we remained focused on continuing to penetrate our existing OEMs and developing new OEMs and end users, as well as developing the next generation of innovative fiber laser based products and applications to address new markets. While book-to-bill was slightly below one in Q3 2015, this is not unusual because we typically expect the fourth quarter to be seasonally weaker. Nonetheless we have made significant progress on the testing and development of new product lines this year. We look forward to the launch in 2016. We continue to be confident in our longer term growth opportunities. Currently expect revenues for the fourth quarter to be in the range of $250 million to $230 million. We anticipate Q3 earnings per diluted share in the range of $1 to $1.15. The mid-point of this guidance represents quarterly revenue growth of approximately 7% and EPS remaining flat respectively year-over-year. The EPS guidance is based upon 53,392,000 diluted common shares which includes 52,675,000 basic common shares outstanding and 717,000 potentially diluted options at September the 30th, 2015. This guidance is based upon current market conditions and expectations and is subject to the risk we outlined in our reports with the SEC. It also assumes exchange rates relative to the U.S. dollar of €0.88, Russian Ruble 61, Japanese ¥120 and Chinese Yuan 6.35 respectively. Want to reiterate that we do not attempt to forecast transaction gains or losses related to changes in exchange rates. The guidance represents about 10% revenue growth the midpoint over Q4 2014. I want to point out that our guidance range includes double digit revenue growth in Germany, Japan, and China. Year-over-year we expect Q4 revenue in China to grow about 15%, while this represents a lower rate of growth as compared to the year-to-date it’s still pretty good. What is pulling down the overall Q4 expected growth rate is the U.S. which had a very strong Q4 2014 with shipments of several super high power lasers and the large automotive order. Revenue in the U.S. is more evenly spread between Q3 and Q4 this year or haven’t been waited to Q4. In addition we are expecting a slightly weaker quarter in Turkey and Korea where macroeconomic conditions are softened. Valentin mentioned earlier that we are targeting 10% to 15% revenue growth to minimum in this full year 2016. The growth will not be linear or consistent each quarter. Reminds you that there can be some on the even is due to timing of shipment for instance with advanced application sales. Also want to mention is based upon our current outlook which can change based upon currency rates economic conditions in the countries where we sell the overall growth of the laser market competition pricing and the timing and the success of new product introductions to name a few. With that, Valentin and I will be happy to take your questions.

Thank you, ladies and gentlemen. [Operator Instructions] Our first question comes from the line of Joe Wittine with Longbow Research. Please go ahead with your question.

Hi, good morning. Thanks for taking the question. Within the 2016 sales guidance can you give us a sense of what is the expected contribution of the new products and new applications there and what is the organic outlook? Thanks.

I mean the new products are also the part of the organic outlook. They are not a quiet from anybody. So it’s based upon our own development. We don’t go – Joe, I know you are relatively neatly following the company into giving specific breakdown on this, but there will be -- the background to that is first of all factoring in some weakness in China potentially from particularly high power cutting. We are looking at strong growth in cutting applications from Japan. We are looking continued adoption of cutting applications in Europe, strong growth of wielding and brazing all around the world, strong systems growth in Russia and North America, and then product introductions around the UV and Pico and femtosecond lasers as well, as well as potential benefit from things like and we are expecting some revenue from the cinema [ph] projection. So in terms of fair number of new product lines that are starting to gain some traction, we expect other ones to also generate some benefit and we are also being conservative with regard to expectations from a certain part of the Chinese market. There are other parts of the Chinese market that we expect to perform pretty robustly next year. So for example, we are targeting strong growth in welding there for batteries and continued growth on QCW displacing lamp-pumped YAG lasers. So it was quite a lot of work that’s gone into thinking about that and some reasonable assumptions I think as well that we’re making about certain areas and applications.

Okay and makes sense. Maybe just as a quick follow up automotive wasn’t mentioned there, is that one of the pieces of China that could be easing off a little bit here? And can you remind us of your exposure to VW? I know you probably don’t breakout customers, but if you can give a lean to the extent that VW; your exposure to them may differ from their global share? Thanks.

So on the automotive side, I kind of lump that in with metal welding and brazing applications. There is a lot of opportunities on welding as well as the brazing within automotive around the world. So that’s within that application set. With regards to Volkswagen, we don’t give anything specific. What we have heard from Volkswagen is that none of the leading R&D type and innovative technology adoption projects are being put on hold or decelerated. The new senior managements are adamant that they’re going to continue at this time to pursue those and that’s about the only color we can give on that.

Helpful. Thanks, Tim.

Thank you. Our next question comes from the line of Patrick Newton with Stifel. Please go ahead with your question.

Yes good morning Valentin and Tim. I guess just further digging in on this side growth target in 2016. I am curious, two things, one is, is your China growth – what was the expectation for China growth relative to the overall 10% to 15% growth rate for the year? And then are you forecasting stable market share, some share loss or for the share gains within that 10 to 15% growth?

Certainly, so first of all and again we get very specifically you are asking questions about geographic regions relatively speaking we’ve been appropriately conservative about China and we think we are going to actually have very strong growth out of Europe we should have good growth out of Russia and Japan and continued pretty diverse growth out of the U.S. so across board of set of application sets. It is a moderate expectation for China we put it we factored in that. In terms of market share a losses were certainly not strategically targeting that I know there is a lot of talk about people entering the market but we are not seeing and gain significantly against us we know for example one of our competitors main customers in China is in serious financial difficulties they are having difficulty collecting receivables from them there is rumor even that the General Managers gone a well of that customers. So you can listens a people announcements well what they are trying to do in the market we are certainly not anticipating any share losses on cutting and metal welding and laser sintering applications if anything as I said we are targeting gains there. And in China, it’s more of the weakness of the market at the highest power level not a loss in market share to competition and all the newer applications we are really targeting displacing existing technologies and being the leader in those areas.

We suppose next year. We will hope to increase how the benefit from other application out of material processing but we made very serious the one some year let’s say into next year we are expect very serious return for this new application not connected to this process our target is more diversify our business. Regarding China, we are concerned about all economic situation in China, not there are in the market speculation about moves into major custom it’s not through let's say the customer we remain very strong valuation let's say more damage of this [Indiscernible] we did not see any opportunity during next minimum two three years. But, total situation in China when you sign it grow in that one. And we think next year our share of China in our business would be maybe drop a little bit, but still has to grow.

Great. And I guess you are shifting the power curve you talked about is that you are cutting OEMs moving to higher power solutions. Could you help us understand where the average power cutting system and welding system stands for your portfolio and then as we look out in the next couple of years where do you think that average power shift to?

New product very serious implication and we are looking to provide the customer full complete solutions starting from new technology, the hardware laser system and all [Indiscernible] full complete solution with installation which provide service in field. And very successful some application and looked very serious business coming now. I can [Indiscernible] extremely successful we have installed valuation worldwide customers its only start to this also in construction bridge in other construction in – wage dividend construction, I would aware put a friendly version in the catching system, two fold pipe for example for different application [indiscernible] its really develop some other unique new application also with very large potential. So it's yielded new diversification business, we are going for higher and higher level of integration not just laser or laser system but full complete solution.

Is there any number you can actually wrap around average power, I understand the growth opportunities….

Every power increases in the [indiscernible] power above 10 kilowatt, 10-20 kilowatt power.

And within the existing customers Patrick, you probably seeing cutting applications transitioning from a ranges like one to four kilowatt into the more of the range of four to eight kilowatt there is still a lot of system sold in the one and two kilowatt where you are seeing more and more systems in the four to eight and welding is in the range currently probably at the four to 10 kilowatt range with the occasional laser sold up to 50 kilowatts and some of the newer applications Valentin is talking about being more in the range of 10 to 30 kilowatts probably.

Okay. Great. And I guess the crunch of the question Tim is, is do you feel like as you move up this power adoption for that you are – you are more hitting threshold of where the incremental power output from cutting doesn't necessarily help the customer or there still significant upside?

In terms materials, I mean some instances yes. Like the eight kilowatt level, its hitting a bit of a threshold, but then there is also work that is being done to start cutting significantly thicker pieces in material and different types of material which are requiring power level with not very high volume at the moment but in the region of now 15 kilowatts of power. So there is work that we are doing with customers, cutting different types of metals that are very thick that require much higher power levels.

Great. Thank you for taking my questions. Good luck.

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

Yes. Hi, thanks for taking my question. Two of them. Tim, kind of curious, you guys have never given a forward guidance in the past. So what gives you confidence on 10% to 15% growth for next year?

See, first of all, we have done a lot of work in looking at the different regions in new applications and new product lines, new systems that are coming to the fore. And, looking at the different regions which we think are going to grow strongly with those newer applications and then factoring in weakness. So really the purpose of that is to give people some comfort that despite all the noise about China and even with conservative outlook for China given the economic conditions there that we do see significant opportunities in other areas. Historically, we haven’t really felt the need to do that because we were at relatively early stages of adoption. We have seen very, very strong growth rates across the world and we feel that that, people may be doubting that capability at the moment was internally, we feel strongly about it.

Got it. That’s very helpful. And then I think in your prepared comments you said that in the plus side the pricing which is actually moderate in China but it’s still very severe in other places kind of curious who are the real competitor there if the Chinese are like actually pulling back on that?

Well, the pricing pressure elsewhere is not that severe as it’s ever been in China its interesting in China that the competitors have there may have be so aggressive around pricing that they’ve actually minded their own financial stability. And the rush to the bottom if you like in terms of pricing is meant that generates the extremely low levels of profitability burning cash and put themselves in a precarious financial position and even now understand that they cannot carry that on. So this is – it’s not – I don’t have specific piece of data point on it but what we’ve heard is that they are looking at not continuing to drive pricing down at least seeing it stabilize and maybe we will see some maybe a little bit of an increase in pricing that maybe a bit of stretch but we said we are not seeing the same dynamics there and this is something we caught out before we said the level at which they driven pricing was sustainable in terms of profitability and now it’s coming to bare on a couple of these companies who’s financial situation is significantly less than what I would call stable.

Got it. Got it. Thanks, Tim.

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

Thanks. Good morning. I was wondering if you could maybe elaborate on your expectations for growth in Europe in 2016 and maybe talk a little bit about whether this is coming primarily from newer areas or just increase penetration of some of the core automotive markets cutting as well as cutting welding. I am just curious about what are your expectations, what you are basing the optimism on for 2016 in Europe.

So first of all on cutting applications continued penetration of the existing OEM base there. We picked up one relatively small OEM this year from one of our competitors, so expect to drive additional traction from them, but probably another 10% penetration of the total market in Europe for cutting applications and that would be Northern Europe, Italy. Some of Turkey ends up in Western Asia but I would put Turkey within that. We’ve got a pretty optimistic outlook from the Turkish OEMs as well. And then continued growth, this is in existing application, the laser centering applications?

With cutting also you can say that now we see first grow in the business with cutting application in Japan. The major Japanese player in this [indiscernible] cutting stay up to this year in this year to [indiscernible]. But now that must transferred to the fiber laser and so we expect in Japan very fast growth of the -- to fiber laser to the cutting market.

And then coming back to Europe, it would be auto, wielding and brazing, we think that’s going to accelerate a bit next year.

It’s helpful.

And then Russia you have – sorry.

No, go ahead.

So, and those are relatively newer application – the brazing obviously has a newer application for us.

Additives.

And Eastern Europe additive manufacturing, yes, the laser centering and additive manufacturing continue growth.

Got it. Tim, are you on track, you think to do 40 million or so in additive laser sintering this year and are the expectations for next year? It sounds like continued robust growth there, is that an expectation?

Expectation this year Jim was about 30 – I said 32 to 34 million. We’re on track for that, so the 40 million is a bit of a high number, but yes the growth rate next year would that would probably moderate, it grew about 50 plus percent this year. It will be a little bit lower than that, but I’d say targeting – getting to the 40 to 45 million range next year in Europe would be a good starting point.

Okay. Thank you.

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

Thank you. I wanted to ask on the advance application side and particularly in the military, you talked a little bit about a big order, you talked about a big order and what are you seeing there as there are more of these orders come in, just any color rather would be helpful?

There certainly seems to be more activity on this. There’s indication that there’s a significant additional order going to be placed by one of the sub-contractors for different type of systems that have uses, sources from IPG. So there are three different types of sources that people are making in the market. Each of those relies upon different aspects of IPG technology. It appears that we’re approaching – we’ve said 2017, 2016, -- 2017 you’d start to see a bit of an acceleration of these projects and our sense is that that’s happened. You see numerous announcements in the press with wins from different sub-contractors in the market in a pretty diverse set of applications out there. So there seems to be some traction in the market Joe.

Okay. That’s helpful. And then on the telecom side, I know you had success in the U.S. and may be, I don’t know several quarters ago, you talked about opportunities in Russia, clearly, weak economy over there but are you seeing any traction in Russia and then again what do you see in the U.S.?

Telecom in Russia.

Telecom is still share now – telecom and not the total revenue contributions more but we now looking growth of revenue this year minimum if I had to compare to 2014. Next year we expect additional growth to 2.5 times. So it’s – growing with new – integrated solution we provide the market. We found our new fits. So we don’t expect very business but all time it’s growing faster than the total of our revenue.

Okay. Then in the U.S. are there more opportunities, like you saw in Q3?

In the U.S., in this Arab countries and also in Russia its – we are getting working in all direction.

Thank you.

Thank you. Our next question comes from the line of Jagadish Iyer with Redstone Technology Research. Please go ahead with your question.

Yes. Thanks for taking my question, Tim and Valentin. So two questions. First, steadily over the past three quarters your inventories have gone up and what kind of inventory levels do you foresee looking at how your business is shaping up for next year and as sequel what does it mean for your gross margins looking at 2016. And I have a follow-up.

So I think, IPG – if you go back and look at the way inventory grew, say, three, four years ago relative to revenue growth we invested heavily in working capital. This year the relative change in inventory compared to revenue growth has been if you strip out the benefit of the foreign exchange it actually been about the same. So where historically you may have seen some benefit flowing through to gross margin, because of a buildup of inventory this year has been much more normalized. So we’ve done a lot of work internally in the company and focusing on that area of aligning production with expected demand and we’re at -- right now, even if you’re growing in the range of 10% to 15% you’re still going to have to invest in working capital. So I don’t see that being an impact on gross margins relative to this year – inventory growth next year at a level equal to revenue impacts gross margin, that certainly not for that in my planning Jagadish at all.

Okay. Then on China, there has been a number of automotive companies are pretty much skilled their demand expectations actually for the second half of this year, I mean you’re going to seeing a strong demand from China, is there a lag that we are likely to see looking at say the next couple of quarters from China or where is the disconnect with regard to your sales versus what the automotive companies are actually alluding to? Thank you.

I don’t think there is necessarily a disconnect. I think, we said that overall China our expectations for the next year are moderate as compared to where they have been and that takes into account automotive, some of the general manufacturing. It takes into account those strength in other areas that are directly or indirectly related to the battery welding and part relates to automotive. And there are other projects out there particularly on the welding side where we continue to see project still scheduled if you like they are not – we haven’t seen them pull back. So these are sort of leading edge technology type application that continue to drive some benefit to the company.

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

Thank you. Good morning gentlemen. Tim, I just wanted to maybe you can give us a quick update on where we are in the Seam Steppers as far as getting that further into the market?

Seam Steppers tested and now making many companies in lot of automotive applications and going very successfully but its penetration this marketing series to growth need some years because they can typically with you, prefer to stay with all technology install – and introduce new production. Then Seam Steppers would be preferable choice to compare the current technologies and many company claim to improve this but it’s not so many new production now – major automotive company be able to – prepare to new cars also making current lines. So it’s a long process, but going very successfully. So with hope, but take some years really -- with must implementation and ready to get serious adds to our total revenue.

Great. Thank you, and just follow-up. I know you’ve discussed uses of cash as cash previously. But I was wondering with the new products set for 2016 as the obviously overall growth you’ve seen in the business this year and expectations for next year, where are you in regards to capacity and the outlook for additional CapEx? Thank you.

With such fast grow, so we’re talking about growth in the physical units product quantity of laser and other product each year and this year all such total growth we have to produce -- in total, we’ll produce about 35% even 40% more than the last year. In revenue, its where the cost price is going down with volume and it’s also the exchange rate, cut prices essential in though -- so but to produce -- to grow 35%, 40% in quantitative units we have long time in the west to build new facilities, new equipment to hire, to train new people. We have grown successful with support in further growth ready to support our capacity with moderate CapEx, but we have really enter -- now building new additional build-in capacity, we’re growing. We’re able to support this growth expectation in business growth.

So we have got a final budget for next year, but I didn’t expect CapEx as a percentage of revenue to increase from where it is this year. We’re running, what is it about, 7% to 7.5% of revenue this year. So even that represents a substantial amount of spending activity. I don’t expect to increase as a percentage of revenue in next year at all.

Thank you. Our next question comes from the line of Tom Diffely with D.A. Davidson. Please go ahead with your question.

Yes good morning. Quick question, as your OEM customers move up the power curve, does that represents an upgrade or retrofit opportunity for you or those just going to be new system sales.

No I don’t it does, Tom. I mean because most of the equipments that’s in the field, you rarely see on a cutting systems, someone go out and replace the laser or retrofit the laser and the cutting system, it makes, it’s really targeting newer systems that are being sold for cutting a variety of materials. We’ve very rarely seen any significant volume of laser sales come from retrofitting of systems in current cutting systems.

Okay. That makes sense. And then Tim when you look at the market right now, what do you see in regards to your customers access to capital especially in the Asian countries?

Seen much change in that, even in China I think it’s more demand driven. I think there is actually a push everywhere to put liquidity into the system rather than contain or curtail it. So, we certainly haven’t seen or heard of anything negative on the ground in relation to access to capital at this time.

Okay, and that’s still the most important fact that you look out for your demand?

Monitor different things general macroeconomic trends, level of purchasing indexes, China or it’s something on the liquidity side. And China is something we monitor, so it’s one of the trends that you keep an eye on.

Okay. Thank you.

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

Thanks. Good morning. Well done on the sales growth. It’s a tough world out there and I must say that the growth rates remain very impressive especially given the ForEx headwinds. Now when I look at your fourth quarter revenue guidance, obviously that's a fairly broad deceleration that we're looking at down to single-digit growth and could you go back to some of the factor that you see playing out there. I think you called out the pretty high compare in North America, yet you assume above average growth in China, am I missing something here and if you could elaborate a little bit on North American in particular? Thanks.

So yes, Jeremie, first of all on North America last quarter Q4, 2014 was about $44 million of revenue and the previous three quarters in 2014 were very weak. So you're not going -- you're probably going to see something like similar quarter to the one we had in Q3 for the U.S. in Q4. So that actually represents revenue being down by almost 20% for the full year though you will see the U.S. still increase. So it’s -- last year, was very unusual in the way the revenue came in the U.S. and that's part of the impact on Q4. If -- we try to call that out on the Q3 call when someone asked that question and don’t -- he was taken into account enough. In terms of China, I mentioned that we are still looking at mid-teens growth year-over-year for Q4. That does represent the deceleration from where China has been in Q2 and Q3. So you are seeing some moderation there, the year-over-year difficult comparison with China. Europe will be sort of close to mid-teens growth year-over-year, Japan pretty strong in Q4, Korea, as we said, is basically flat. So that sort of summarizes the different areas. Europe and Japan continue. This will be the final quarter where there is really assuming exchange rates don’t change fundamentally going forward. The final quarter, whether there is significant lag. So you are probably seeing revenue growth in Europe impacted by about $4 million still this quarter, $4 to $5 million in Japan by about $2 million, due to foreign currency headwinds.

Okay. And you called out increased diversification of your customer base in China, at least process towards there. Is there any way you could quantify that or help us understand, -- I mean historically you’ve had a pretty dominant customer in China any visibility around that would be appreciated.

So, we still have I am pleased to say that very significant customer that continue to buy in big volumes as Valentin alluded to and we don’t see any change in that -- fundamentally in that relationship going forward. The other work we’ve done though is to carefully build up relationships with other major suppliers, some of those other OEMs are actually stronger than the main OEM with certain types of equipment. There’s one company that's very strong on producing slightly lower power fine cutting machines. We have a very, very good relationship with that customer and probably 10 other OEMs who are financially sound and strong entities covering of variety of different application. So none of them were the size of the main customer yet, but they are certainly growing and as I mentioned some of them are very strong in different application sense as compared to the main OEM and we work very hard on those relationships as well. It is very difficult to quantify it in -- in absolute terms and maybe at the end of the year you will see some relatively speaking where the largest customers are and what that percentage of sales is.

We introduce new lasers now and we transferred power [indiscernible] potential in China especially we are now up to now the Chinese integrate to use such laser protype application from other suppliers like [indiscernible] we have now introduced new generation of such laser which are more perfect and we target to get this portion of serious sale of this business from other customers – from other suppliers in China, especially. So China is a major user of such kind of these lasers.

Thanks

Thank you. Our next question comes from the line of Bob Burleson with Canaccord Genuity. Please go ahead with your question.

Yes. Good morning. Thanks for taking my question. Valentin and Tim, I appreciate that. Just curious about additive manufacturing, wondering kind of where you see a market share there in 2015 and whether or not you expect to hold that share or perhaps grow it next year?

Absolutely, we expect to hold it. It’s just about everybody in the market continuous to source their lasers from IPG by one small supplier – smaller supplier in the U.K. We are actually working on trying to get in to become their supplier as well. So in terms of the incumbent suppliers of equipment we certainly don’t see an imminent threat to the strong position we have. And then on a broader sort of additive manufacturing basis we continue to work on looking at other solutions in different ways to help the industry grow as a whole.

Okay. And then you mentioned that you expect growth to perhaps decelerate from the kind of the 50% level that you are saying this year in an additive next year. And I am wondering within that are you seeing any potential strong positive inflection in demand from and I don’t know what kind of visibility you have and to the applications are being used for but something like aerospace programs that are supposed to kick into gear next year using additive?

We don’t see -- the number I just gave out there was really -- coming off like a higher base and being moderate in our expectations and what we hearing at the moment. We don’t have insights into those significant aerospace opportunities and they would be upside, potentially the numbers that I gave you.

Okay.

I think the issue the industry faces is a whole that’s still got to improve the speed with which parts can be produced without impacting the resolution of the parts and we’re starting to work with many different significant players in the industry to look at potentially different solutions, that would improve the speed with which parts could be produced and developing the technology for us. So I think the industry is still has a bit of an inflection point to reach in terms of not only the cost of equipment, but the speed with which parts can be…

No the -- but quality also. What they demonstrate in their space for parts and so, they are still not practical. They are not still respond to the requirement for quality and so on. So [indiscernible] opportunity, thought I would still market for metal process in additive manufacturing. For metal we still extremely, name it, it’s more that we understand it’s market volume because it is all practical, the most of them were – large majority of the manufactures of such [indiscernible] system buying from us and so its growing. Our order is growing, but we don’t see serious moderate growth, not very far. And [indiscernible] some $100 million for metal. For non-metal, it’s much higher, but for metal it’s what it’s more marketed, major problem not in a good quality and also very [Indiscernible] so we are working with major potential customers like very large companies. We are working, they are all going to attend [Indiscernible] has to develop a new solution. We are working in this direction, starting to work in this direction but it’s still at the stage of development, not the real product but major potential customer especially American major company which interest aerospace and other weaker operation with all of them.

Great. Thank you for that answer. If I could just sneak one more in there, on China, it sounds like there is a little bit of a lag in terms of what you see versus maybe some of the areas where there has been a little deceleration and you are factoring that into your 2016 outlook it sounds like. And I’m wondering just a linearity of what you are expecting next year on China, is there a period where you expect maybe some of those headwinds to abate and maybe that business to firm, is it Q2, Q3 what’s your sense for when you walk through any of those headwinds?

So I think like anybody who is probably selling into China the key data points that we are kind of waiting for is when you get through past Chinese New Year and into the second half of February and March, that’s always a critical time in terms of order flow to drive the tone for Q2 and Q3. You are absolutely right there Bob. In general though, this quarter we still got a strong bookings for cost in China and I know our head of sales has been back and forth with the head of our Chinese operations a couple of times in the last four weeks and he’s still of the opinion that he can meet that bookings forecast for Q4. He has not changed his outlook on that. So that’s a positive. If we saw in Q3, I don’t know whether we were lagging or probably lagging a little bit, but you saw the high power cutting orders a bit weaker particularly in September. The tone on those is there is not continue to deteriorate. I actually had a conversation with the head of China there and he is not totally negative even on that market. He said it’s sort of stabilizing a bit. But the key data point is, as anybody would tell you who operates in China would be really what happens during February and the first couple of weeks of March. And I can’t really give you anything more specific than that. We’re waiting till that time.

Now we found the last month the customer in China we always have meetings, so on the very pessimistic for market for the nearest quarters, very pessimistic. We never saw typical the people very optimistically as pessimistic, but now they are all very pessimistic for market condition, now potential for next minimal half of year. And so our major kind of why we are concerned about not because it’s a major customer. Major customer still which will stay, we work with them they don’t have any choice, it’s not serious to talk -- that we make on fiber laser, it’s more in a way [Indiscernible] powerful companies spend 10 years to develop this that is now [Indiscernible]. So they don’t have chance to make laser same what they are using for us. But total, even this customer business now going down very seriously, so total -- sorry about this, it’s now the variable signs changes market total situation.

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

Thank you. Thank you for joining us this morning. Again, we look forward with speaking with you on next quarter’s call. Have a great day.

Thank you, everybody.