Ipg Photonics Corp Q2 FY2025 Earnings Call

Good morning, and welcome to IPG Photonics' Second Quarter 2025 Conference Call. Today's call is being recorded and webcast. At this time, I'd like to turn the call over to Eugene Fedotoff, IPG's Senior Director, Investor Relations for today's introductions. Please go ahead with your conference.

Thank you, and good morning, everyone. With me today is IPG Photonics' CEO, Dr. Mark Gitin; and Senior Vice President and CFO, Tim Mammen. On today's call, Mark will provide a summary with a quick look at our second quarter results and the overall demand environment. Then I'll walk you through the progress we are making on our long-term strategy. After that, he will turn it over to Tim to provide financial details, and then, we'll open the call for questions. Let me remind you that statements made during this call discuss our expectations or predictions of the future are forward-looking statements. These forward-looking statements are subject to risks and uncertainties and can cause the company's actual results to differ materially from those projected in such forward-looking statements. These risks and uncertainties are detailed in our Form 10-K for the period ended December 31, 2024, and our reports on file with the Securities and Exchange Commission. Any forward-looking statements made on this call are the company's expectations or predictions as of today, August 5, 2025 only and the company assumes no obligations to publicly update any or publicly provide any updates or revisions to any such statements. During this call, we will be referencing to certain non-GAAP measures. For more information on how we define these non-GAAP measures and a reconciliation of such measures to the most directly comparable GAAP measures as well as additional details on our reported results, please refer to the earnings press release, earnings call presentation and the financial data workbook posted on our Investor Relations website. We will also post these prepared remarks on our website after this call. With that, I'll now turn the call over to Mark.

Thanks, Eugene. Good morning, everyone. Second quarter revenue came in above our expectations, increasing 10% sequentially and 2% year-over-year. Excluding divestitures, this was our first year-over-year revenue increase since 2022. Our results were driven by a combination of a modest demand improvement in multiple markets and geographies as well as our continued focus on our strategy to drive profitable growth. We're investing in key strategic initiatives targeting a $5 billion TAM that offers us hundreds of millions of dollars in revenue growth opportunities, and we are starting to see results. By quickly adjusting our operations, we were also able to ship approximately $10 million out of the $15 million in customer orders that we believe were at risk of being delayed due to tariffs and were not included in our second quarter guidance. Starting with our materials processing business, we saw a sequential demand improvement in welding, cutting and marking applications with some growth in e-mobility and general industrial markets. Our unmatched capabilities in lasers and welding process monitoring technologies, combined with deep applications expertise, continue to differentiate IPG in the marketplace. This enabled us to secure key wins in EV manufacturing despite ongoing uncertainty in the market. In China, renewed capacity investments in battery manufacturing drove growth in our welding. On the industrial side, a stabilizing demand environment supported sequential growth in welding, cutting and marking applications. Booking trends are encouraging, with demand showing signs of improvement and a book-to-bill at approximately 1 on our higher second quarter revenue as we move into the second half of the year. We have also seen improvement and stabilization in the leading indicators, such as PMIs and industrial production through June, but the demand environment remains uncertain. We also expect demand for our products will benefit from increased onshoring and local investments in automated production. We are also excited that early returns from our growth investments helped to drive revenue in the quarter. Our strategic focus on developing innovative lasers and photonic solutions to expand into medical micromachining and advanced applications is showing results. In advanced applications, we achieved another quarter of record revenue driven by higher demand across all categories, primarily in directed energy, semiconductor and scientific applications. Last quarter, I shared that strategic investments to grow our advanced applications business allowed us to achieve a key milestone 6 months ahead of schedule. I'm thrilled to announce that we've now delivered multiple units of our first laser counter UAV solution, CROSSBOW, to Lockheed Martin. This disruptive turnkey directed energy system is enabled by IPG's laser systems expertise and high-performance commercial single-mode lasers and supported by our high-volume manufacturing capabilities. CROSSBOW is a scalable and cost-effective laser defense system that can neutralize unmanned aerial threats and can operate as a stand-alone system or integrate into layered defense architectures. Over the past 6 months, both IPG and Lockheed Martin have conducted extensive field testing and customer demonstrations of CROSSBOW, validating the system's operational effectiveness against the increasing threat of smaller class Group 1 and Group 2 drones. We'll be showcasing CROSSBOW this September at DSEI in London, one of the industry's leading defense exhibitions, and we anticipate strong interest from both defense and commercial customers for protection of critical military and civilian assets. This is another example of how IPG leverages our core laser and photonics technologies to address critical market needs. Turning to our other growth initiatives, micromachining delivered strong revenue compared to the prior year despite some shipment delays related to tariffs. This is a high potential market for IPG, where we see strong alignment between our technologies and the key applications of our customers. As we shared last quarter, we are also making good progress in medical with a new urology customer that is already helping to drive medical revenue growth. Looking ahead, we expect momentum to continue with additional product introductions planned for Q4 2025, 2026 and beyond as we execute on our strategic development road map. The traction we are seeing across micromachining, medical and our other focus areas reinforces that our teams are executing well and that these investments are laying the foundation for long-term growth. Finally, our capital allocation strategy is an integral part of our growth strategy. As we said before, our primary focus is on organic growth investments in strategic M&A. We expect to spend approximately $100 million on CapEx in 2025 to expand capacity and capture growth opportunities. Within M&A, we are evaluating tuck-in opportunities with a range of $50 million to $200 million in revenue. Our revenue and competitive position in cleaning applications has benefited from the cleanLASER acquisition that we made at the end of last year and we continue to target companies that offer differentiated technology or market access to accelerate strategic growth initiatives. During the quarter, we continued to opportunistically return cash to shareholders, repurchasing $30 million of IPG stock, building on the $1 billion in share repurchases over the past 3 years. Since joining IPG just over a year ago, I've been focused on setting the foundation to drive profitable growth, including strengthening the organization. We achieved a recent milestone on this objective with the appointment of 5 key leaders, including 4 recent hires to help advance our strategy and support continued global growth. These leaders have a proven track record of driving strategy and execution. They each bring distinct strengths, deep expertise and a shared commitment to collaboration and innovation. With these new appointments to our executive leadership team, we are shaping a stronger IPG, better equipped to execute with speed, serve our customers with excellence and drive our next chapter of profitable growth. I'm pleased to welcome them to the team and excited about what we will be able to accomplish. I am proud to report that we've been effectively adapting to the dynamic operating environment by leveraging the flexibility of our global manufacturing supply chain to minimize the impact of tariffs. We've demonstrated agility, shifting production across regions to better serve customers. We also continue to work on alternatives to optimize our tariff exposures. As a result, we were able to ship most of the orders that were previously anticipated to be delayed due to tariffs and longer customs processing. While new tariffs have recently been announced, our global footprint and supply chain flexibility position us well to continue meeting our customers' needs. As I mentioned earlier, our second quarter book-to-bill ratio was approximately 1 on higher revenue and we are encouraged by signs of further demand stabilization in our business. Industrial production has been improving and inventories at some of our cutting OEM customers have normalized, supporting a return to more typical purchasing behavior. We don't believe the recent increase in demand is driven by customers pulling orders forward in response to tariffs. That said, the demand environment continues to be sensitive to external factors so we are approaching the second half with cautious optimism. In closing, I'm encouraged by the progress that we're seeing, both in the stabilization of our core business and in advancing our strategy to drive laser adoption in markets with high growth potential. While tariff-related pressure and uncertainty persist, we remain focused on what we can control and confident in our ability to navigate this environment while executing for profitable growth.

Thank you, Mark, and good morning, everyone. My comments will generally follow the earnings call presentation, which is available on our Investor Relations website. I will start with revenue trends by application on Slide 5. Revenue from materials processing decreased 6% year-over-year as a result of divestitures and lower sales in cutting, welding, and additive manufacturing applications, partially offset by higher revenue in micromachining and the acquisition of cleanLASER. Revenue from other applications increased 21%, driven by higher sales in medical and advanced applications. As Mark already mentioned, we saw sequential improvement in revenue in cutting, welding, and marking. Welding revenue grew on customer wins and improvement in industrial demand and EV battery investments primarily in China. Cutting revenue also grew sequentially and was nearly flat compared to the prior year as the cutting OEM business showed some stabilization in Europe and an increase in demand in Asia and North America. Marking and engraving sales were also more stable. Our cleaning revenue improved sequentially and continued to benefit from cleanLASER. Mark already highlighted strong results in our medical and advanced applications in the quarter, so I won't go over them again. Our emerging growth products performed well in the quarter, increasing to 54% of sales, driven by a wide variety of laser sources, subsystems, and systems. Moving to the revenue performance by region on Slide 6. Sales in North America increased 31% sequentially and were down 4% year-over-year. Sequential growth was primarily driven by higher sales in medical and advanced applications as well as improved sales to cutting OEMs. Despite more stable sequential performance, welding revenue was down compared to the prior year due to soft demand from EV manufacturing in the region. Sales in Europe were stable, with less than a 1% sequential decline and down 11% year-over-year, excluding $11 million in divestitures. Lower cutting and welding sales, as a result of soft industrial demand, were partially offset by cleanLASER. Revenue in Asia increased 4% sequentially and 14% year-over-year, benefiting from higher sales in welding and cutting as well as advanced applications. We have continued to see a strong demand recovery in e-mobility, coupled with our business wins in EV welding applications. Sales to additive manufacturing were lower in the quarter due to timing of shipments, while demand remains strong. Moving to the financial performance review on Slide 7. Revenue came in above our expectations at $251 million, up 10% sequentially and down 3% on a year-over-year basis. Foreign currency increased revenue by approximately $4 million or 1% this quarter. Gross margin was 37.3%, flat year-over-year. Adjusted gross margin was 37.8% at the top of our guidance and was driven by improved manufacturing cost absorption and a decrease in inventory provisions, mostly offset by higher cost of products sold due to geographic and product mix and increased shipping costs. The impact of tariffs was 115 basis points, which was better than our expectation. Operating expenses were above last year's level, primarily due to the investments we are making in key areas that are central to our strategy as well as investments in strengthening our organization, which Mark highlighted earlier on this call. GAAP operating income was breakeven and our adjusted EBITDA was $32 million, slightly above the top end of our guidance. GAAP net income was $7 million or $0.16 per diluted share. Adjusted earnings per diluted share, which includes stock-based compensation, but excludes amortization of intangibles, other acquisition-related charges, foreign exchange loss, and discrete tax items, was $0.30 in the second quarter, above our guidance range. Moving to a summary of our balance sheet and cash flow on Slide 8. We ended the quarter with cash, cash equivalents, and short-term investments of $900 million and no debt. During the second quarter, we spent $15 million on capital expenditures and $30 million on repurchasing IPG shares, supporting our balanced capital allocation framework of investing in growth and returning cash to shareholders. We now expect CapEx of approximately $100 million in 2025 as we expand capacity, primarily in Europe. We expect operating cash flow to improve significantly in the second half, substantially offsetting CapEx. Looking ahead, we expect CapEx to decrease significantly and free cash flow to improve next year. Moving to our outlook on Slide 9. For the third quarter of 2025, we expect revenue of $225 million to $255 million and adjusted gross margin between 36% and 38%, including a potential of a slightly higher impact of tariffs. With investments in the growth of our business and strengthening the organization, we expect our operating expenses to remain elevated at between $89 million and $91 million in the third quarter. We anticipate delivering adjusted earnings per diluted share in the range of $0.05 to $0.35 with approximately 42.5 million diluted common shares outstanding. Our adjusted EBITDA is expected to be between $22 million and $36 million. In closing, we are pleased to see signs of continuing revenue improvement coupled with results from our strategic initiative. And we believe we have significant operating leverage in our model. Our strong balance sheet gives us a significant advantage given the near-term uncertainty in the operating environment. With that, we'll be happy to take your questions.

Congrats on the quarter. First off, on the book-to-bill, I'm wondering if you could provide any color on book-to-bill by region? Was there much variability in terms of the regional bookings?

Jim, thanks very much for the question. Good to hear from you. Actually, book-to-bill was 1 and really just about 1 across all regions. That was, of course, on top of the higher revenue as well. So we're quite pleased with that.

Got it. My follow-up, Mark, is on the directed energy commentary. I'm wondering how you're thinking about the opportunity for IPG over the next few years? And just relative to maybe the other emerging growth opportunities you're targeting? And can you say, for instance, how many customers you're working with in this area?

Yes, sure. So thanks, Jim. So the directed energy, again, is part of our work that we're doing taking the key technologies within IPG. So this is the lasers as well as the broader photonics and the applications understanding to really direct it to some key areas of growth. And of course, the advanced is one with the directed energy, as well as the medical and micromachining areas. But specifically, in directed energy, what I can say is that this is a very interesting market for us. In terms of market size, it's a little bit hard to estimate, but it's a developing market. There's billions of dollars spent each year on the order of $1 billion in the U.S. And our solution addresses a key segment of the market. And that's the key part that we believe is growing. So this is, as I talked about on the call there, this is addressing the smaller class drones, the Group 1 and Group 2 drones, which is the biggest issue today or, let's say, a very significant issue today, both in warfare, we've seen that as an issue as well as in civilian infrastructures where there are incursions in airports, incursions at borders, incursions in stadiums. It's a big issue today. So from a market standpoint, the CROSSBOW is a turnkey system that directly addresses that small drone threat. We have the partnership that we talked about with Lockheed, which is addressing one part of the market. We believe, again, the market is a broader one that has both opportunities in the defense sector but also the civilian piece. And we'll be, of course, bringing the system to the DSEI show in September, where we'll have a chance to talk to a broader customer base as well. But overall, I'm very excited with the progress the team has made. And again, this is a great application for us because it's the combination of our core technologies with the single-mode lasers as well as the photonics. And then it's key for us because, again, this is something that we can bring into our commercial manufacturing infrastructure where we're manufacturing volumes of the single-mode lasers but also systems and subsystems. So we can do this at a very disruptive cost point and that's why we believe this is a unique position to be able to address the smaller drone class at a price point that could be broadly used.

Mark, I wanted to start with maybe just walking through the outlook. It's great to see the progress and some signs of stabilization. But when we look at the Q3 guidance, maybe you can just walk us through the puts and takes of that guidance. So you had $10 million that you had previously anticipated out of the $15 million come through in Q2. And maybe just an update on how you're thinking about potential tariff impact as a portion of that guidance for Q3? And then you had a comment about cautious optimism for the second half. And I'm just wondering what kind of visibility you might be getting from your customers as you think about the second half, i.e., do you think that there's going to be continued stabilization and maybe improving bookings into Q4?

Thank you. I want to highlight a few key points. We're pleased to see a book-to-bill ratio of 1, coupled with higher revenue. We managed to ship around $10 million of the $15 million we anticipated for Q3 due to our team's excellent handling of tariff challenges, leveraging our ability to adjust manufacturing locations to optimize tariff outcomes. We expect to maintain this flexibility moving forward. Demand in material processing has been strong, particularly with improvements in the industrial sectors over recent quarters, reflected in the PMI data. We're observing increased activity in various regions and applications, including welding. The electric vehicle sector is gaining traction, and we've noted a normalization of inventory levels among some of our OEMs, along with rising demand in additive manufacturing and robust performance in the medical field. We've also onboarded a new medical customer linked to our urology roadmap. Overall, I recognize broad-based improvements but express cautious optimism due to ongoing tariff uncertainties and an economy that hasn't fully recovered yet. Those are my thoughts on the matter.

Yes, we went through the usual process of generating guidance, so there's nothing particularly unusual there. The only positive note is that even at the midpoint, we're slightly above where analysts expected. This is the first time in quite a while that we've been able to provide a midpoint that is mildly positive. It feels like we're more than just scraping the bottom; we seem to have a little bit of upward momentum at the moment.

We have been involved in the directed energy market for many years and offer high-performance single-mode lasers and amplifiers that are widely used. However, CROSSBOW is not focused on high power. Instead, it targets threats from smaller, more prevalent Group 1 and Group 2 drones, which can be effectively addressed with low power high brightness single-mode lasers. This is a rapidly growing market, as these small drones, which can be purchased for just a few hundred dollars, pose significant risks on the battlefield and to civilian infrastructure and borders. We believe this area presents a great opportunity for us.

Yes, sure. I think the positive takeaways from gross margin were that we had better manufacturing efficiencies. So we had a benefit from lower underabsorbed costs. We've made statements. So that's a real focus of ours of trying to get that improved. It helped a little bit. The revenue is up a bit. The second side of it is, we've got inventory more under control over the last 12 months. The inventory provisions that we incurred were a bit lower. Offsetting those benefits, we did have really related to product mix, both on a geographic and product basis, a little bit of an impact to gross margin due to lower product gross margins. But in that regard, we've actually got cost reduction initiatives across 4 or 5 different areas that we're starting to roll through the business model. So we expect that product gross margin to improve.

I'm just wondering if you can comment about the margin profile of your backlog? Is that similar to what you're expecting in the third quarter?

Yes. I mean the mix on that is not fundamentally different going into the quarter.

Thank you, everyone, for joining us this morning and your continued interest in IPG. We will be participating in several investor events this quarter and are looking forward to speaking with you again soon. Have a great day. Thank you.

This concludes today's conference. You may disconnect your lines at this time. And we thank you for your participation.