Ipg Photonics Corp Q3 FY2025 Earnings Call

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 third quarter results and the overall demand environment, then 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. Let me remind you that statements made during this call that discuss our expectations or predictions of the future are forward-looking statements. These forward-looking statements are subject to 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 are detailed in our Form 10-K for the period ended December 31, 2024, and other 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, November 4, 2025, only, and the company assumes no obligations to publicly release any updates or revisions to any such statements. During this call, we will be referencing certain non-GAAP measures. For more information on how we define these non-GAAP measures and the 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. Third quarter revenue was at the top end of our expectations, flat sequentially and up 11% year-over-year, excluding divestitures. There were a number of positive factors that drove the results this quarter. Stronger demand in battery production driven by e-mobility and stationary storage supported higher sales in welding. With our adjustable mode beam laser, weld monitoring and beam delivery solutions, we continue to win orders with some of the largest battery and automotive manufacturers across multiple regions. General industrial demand was stable compared with the prior quarter, and our cutting revenue was essentially flat and consistent with the past several quarters. We began shipping the new generation of our high-power rack-integrated lasers to cutting OEM customers globally. These next-generation lasers use our new higher power diodes, have a smaller footprint and lower manufacturing costs. Demand in additive manufacturing applications was very strong, and we won new business with our single-mode lasers tailored for that application. Cleaning continued to grow, supported by the cleanLASER acquisition. Outside of industrial applications, we delivered year-over-year growth and built momentum towards longer-term value creation through new product introductions and new business wins. One exciting example of this is the growing interest in our CROSSBOW-directed energy solution, which I'll touch on shortly. I'm also pleased to share that we've received FDA clearance for the next generation of our thulium medical laser systems. This is an important step for the business, and we expect shipments to start by the end of the fourth quarter. I'll provide more detail on this milestone later in the call. Our financial results improved in the quarter as we increased gross margin, managed operating expenses, and delivered adjusted EBITDA and adjusted earnings per share at the top end of our expectations. Order activity remained healthy with a book-to-bill of approximately 1. While uncertainty in the demand environment persists, leading indicators such as PMIs continue to show improvements, and we remain cautiously optimistic going into the year-end. Now I'd like to take a step back and offer some broader perspective on the longer-term trajectory of our business and the progress we're making on our strategic initiatives. Over the last 17 months, I've been methodically working to transform the organization, creating a disciplined high-performance culture that is fully prepared to take on the opportunities that lie ahead of us. This transformation involves moving IPG from a founder-led approach to a team-led operating model that can support further growth. Last quarter, I highlighted some of the additions I have made to strengthen our executive leadership team. This top talent has brought deep expertise and fresh perspective, and they are already having a significant impact on our execution. The results we're delivering today show that the strategy we outlined earlier this year is taking hold and is beginning to drive meaningful improvement across our businesses. Our progress reflects disciplined execution, sharper focus, and a stronger alignment around our growth priorities. The steps we've taken to streamline operations, strengthen decision-making, and accelerate product development are translating into better performance and greater consistency across the business. Our focus remains on sustaining this momentum, balancing operational discipline with investment and innovation to position IPG for long-term profitable growth. The powerful combination of innovation and execution is driving progress across our key growth initiatives. Our fundamental strategy is based on converting incumbent processes and applications to our differentiated laser-based solutions. This enables us to expand existing laser use cases, create new laser applications, and extend our reach into new high-growth applications such as medical, micromachining, and directed energy. These are large opportunities with the potential to significantly expand our addressable market. We continue to strengthen our position in core industrial applications such as welding and cutting by focusing where differentiation matters most and where our technology delivers a clear performance or cost advantage. This is evidenced by our business wins and positions us to outpace the market as industrial production recovers. We're also moving up the value chain with our world-class laser applications capability that enables us to integrate our fiber lasers into differentiated systems to solve our customers' most challenging problems. This approach allows us to capture a greater share of customer spend and deepen long-term partnerships. We have already demonstrated these benefits in welding, which has become our largest application. Our unique solutions enable safer and more reliable welding processes for thin foils and alloys used in advanced batteries for EV and stationary storage applications. We are also accelerating the adoption of lasers in other large industrial applications, displacing incumbent technologies. By combining our laser technology with deep applications expertise, we are solving complex challenges for our customers where precision and efficiency matters most. Laser cleaning is a great example of this approach. Customers convert to laser cleaning from conventional abrasive or chemical methods because our laser solution offers greater speed and control, is easy to automate, and provides a safer and environmentally superior outcome. Lasers will continue to be adopted, driven by these advantages, and we are leading the change, accelerating broader implementation across the industry. Finally, we're penetrating new non-industrial applications in markets where laser-based solutions also offer clear cost benefits and superior outcomes relative to incumbent approaches. We are focused on medical, micromachining, and directed energy verticals where our innovative laser-based solutions provide strong competitive advantages. I'm pleased to report that we're making meaningful progress across each of these opportunities. In medical, we've been making strategic investments in urology applications. Our thulium lasers provide a superior solution for eliminating kidney stones and have demonstrated improved results versus legacy laser processes. On previous calls, I discussed a new customer we won earlier this year that has helped to drive strong revenue growth in the business in 2025. I'm happy to report another major milestone on today's call, FDA clearance and the upcoming launch of our next-generation urology system. This new system incorporates our proprietary StoneSense and advanced pulse modulation technologies, which deliver improved precision and control continuing to enhance results in kidney stone removal procedures. Shipments are expected to begin in the fourth quarter. This marks another important step in expanding our medical portfolio and demonstrates how our innovations continue to advance patient care and broaden our reach beyond industrial applications. We're executing against a clear roadmap that we believe will drive significant revenue growth including recurring consumables revenue over the next 2 to 3 years. Last quarter, we discussed CROSSBOW, a scalable and cost-effective laser defense system that can neutralize the threat of smaller Group 1 and Group 2 drones. CROSSBOW is a disruptive turnkey directed energy system enabled by our single-mode lasers, systems expertise, and our high-volume manufacturing capabilities. CROSSBOW can operate as a stand-alone system or can be integrated into layered defense architectures. This system was showcased during 2 recent defense shows DSEI in London and AUSA in Washington, D.C. Interest was high from both defense and commercial customers for protection of critical military and civilian assets. We are working on converting leads into orders and are having conversations with multiple potential customers. We're proud to announce the opening of our new IPG defense customer center and production facility in Huntsville, Alabama, which is dedicated to supporting the CROSSBOW product line. Over the last few months, there have been multiple examples of large international airports that were forced to shut down all flights due to the incursion of drones. We are optimistic that our solution can become a standard approach across many situations and scenarios to deal with these ever-increasing threats. We believe this growth strategy best aligns our differentiating laser technology, market leadership, and deep applications expertise to solve the most challenging problems and enables us to deliver a compelling value proposition that makes IPG a trusted partner in the industries we serve. With that, I will now turn the call over to Tim.

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 the revenue trends by application on Slide 4. Revenue from materials processing increased 6% year-over-year, drove higher sales in welding, additive manufacturing applications, cleaning and micromachining, partially offset by lower sales in marking and divestitures, while cutting revenue remained nearly flat. Revenue from applications driven by higher sales in medical and advanced. Our emerging growth products performed well in the quarter, increasing on a year-over-year basis but declining slightly sequentially and accounting for 52% of sales in the third quarter, down from our record high of 54% in the prior quarter. Moving to the revenue performance by region on Slide 5. Sales in North America decreased by 16% sequentially but were up 8% year-over-year. Sequentially, sales declined due to the timing of some large orders in welding and advanced applications, while year-over-year growth was driven by higher revenue in advanced applications and medical as well as improved cutting and cleaning sales. Sales in Europe increased 11% sequentially and 4% year-over-year, excluding $7 million in divestitures. The sequential increase was driven by higher sales in welding, cutting, additive manufacturing, while the year-over-year improvement was driven by the acquisition of cleanLASER as well as higher sales and cutting and additive manufacturing. Revenue in Asia increased 5% sequentially and 15% year-over-year, driven by higher welding sales in China, Japan, and Korea as a result of stronger demand and business wins in battery applications. Our differentiated solution, including the combination of our AMB laser, weld process monitoring, and beam delivery is improving yields and battery safety and driving adoption by major battery manufacturers in the region. Moving to the financial performance review on Slide 6. Revenue came in at the top of our expectations at $251 million, flat sequentially and up 8% on a year-over-year basis or 11% excluding divestitures. Foreign currency increased revenue by approximately $3 million or 1% this quarter. GAAP gross margin was 39.5% and adjusted gross margin was 39.8%, above our guidance and was driven by improved manufacturing cost absorption and a decrease in inventory provisions, partially offset by higher cost of products sold and increased shipping costs on a year-over-year basis. The impact of tariffs was 140 basis points in line with our expectations. We continue to work on mitigating tariffs, and the impact will likely continue in the fourth quarter. Operating expenses were flat sequentially but above last year's level, primarily due to the investments we are making to support our strategy and strengthen our organization, which Mark highlighted earlier on this call. GAAP operating income was $8 million, and our adjusted EBITDA was $37 million, slightly above the top end of our guidance. GAAP net income was $7 million or $0.18 per diluted share. Adjusted earnings per diluted share was $0.35 in the third quarter at the top end of our guidance. Moving to a summary of our balance sheet and cash flow on Slide 7. We ended the quarter with cash, cash equivalents, and short-term investments of $870 million, $30 million in long-term investments and no debt. During the quarter, we spent $21 million on capital expenditures and $16 million on repurchasing IPG shares, supporting our balanced capital allocation framework of investing in growth and returning cash to shareholders. As expected, operating cash flow started to improve significantly in the second half of the year, more than offsetting CapEx and driving positive free cash flow in the quarter. Looking ahead, we will likely come in well below $100 million in CapEx this year due to the timing of expenditures for our major investment in Germany. We still expect CapEx to decrease to about 5% of revenue and free cash flow to improve once the project is complete, but the timing of this project may keep next year's CapEx at approximately the same level as in 2025. Moving to our outlook on Slide 8. For the fourth quarter of 2025, we expect revenue of $230 million to $260 million and adjusted gross margin between 36% and 39%, including a potential impact of tariffs of about 140 basis points. With investments in the growth of our business, and strengthening the organization, including leadership, we expect our operating expenses to remain elevated between $90 million and $92 million in the fourth 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 $21 million and $38 million. In summary, we are pleased to see further signs of continuing revenue stabilization coupled with margin improvement while investing in our strategic initiatives. We continue to 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. I will now turn the call back to Mark.

Thanks, Tim. In closing, we are encouraged by the progress we've made and energized by the scale of the longer-term opportunity ahead. We believe we have strong growth opportunities driven by our differentiated solutions that have been successfully winning business even in a subdued industrial environment. As general industrial activity recovers, this positions us well to outgrow the market. Our market leadership, applications expertise, and complete solutions enables us to drive adoption of lasers replacing incumbent technologies and expanding the addressable market. We are excited that our growth initiatives in medical, micromachining, and defense are already showing meaningful progress in driving incremental revenue. While we are cautiously optimistic about the demand environment, we continue to transform the company to create value for our customers and shareholders for the longer term. With that, we will be happy to take your questions.

Our first question comes from Ruben Roy with Stifel.

Mark, I'd like to start by asking for more detail on your outlook for Q4. It's encouraging to see the progress from Q3, particularly with the book-to-bill and the new areas you're focusing on. Can you walk us through your cautiously optimistic stance as we approach year-end, considering the improvements in PMIs and current bookings? There seems to be a broad range in your guidance. What factors could drive you toward the lower or higher end of that range?

Yes, sure. Nice to talk to you, Ruben. See, first of all, we're quite happy with the performance around the world. As I mentioned, the book-to-bill continues to be about 1 globally at this elevated revenue. And it's showing continued strength in each of the regions actually in Asia, including Japan, Korea and China. Europe is stabilizing, and we've been seeing some upside in North America. And we're really encouraged with these early signs of industrial expansion, as you mentioned too, PMIs are tracking a little bit higher now. So with the U.S. about 52.5; the Eurozone, now stabilizing at about 50; China, a bit over 50 as well. So those are positive pieces. And even in what has been a muted industrial market, we're really seeing the benefits of our differentiation, right? The technology, the product quality, reliability, and the applications expertise that we've got and tie into that, the global support infrastructure that we have. Those things are starting to really give us some benefit. And we've seen that in the cutting revenue, for example, that's been essentially flat now and consistent the past several quarters. And I've talked about this before, but our OEM inventories and cutting our OEMs, their inventories really normalized. Happy that we've got our rack-integrated platform out. So this helps to contribute to how we guide. The new product is out now, and it's been qualified by most of our OEM customers. And again, that's the system that has the new diode lasers, that's higher power, smaller form factor, lower cost structure. And then as I mentioned in the prepared remarks, we're continuing to get share gains in welding and additive manufacturing, that's going well to cleaning. So I really feel good about that, that we're positioned to outgrow the market as the industrial output starts to improve. And then, of course, as I mentioned, we're also focused on the key areas that we're investing in the nonindustrial areas, right? So we've focused on the areas of medical, micromachining and the defense area, the advanced area with our CROSSBOW system, and we're seeing some pickups there in each of those areas as well, new customers that we've talked about in medical, new product coming out in Q4, where we're starting to get some shipments. So all of those are contributing as well. So overall, I'll say again, cautiously optimistic and certainly feel better about the business now than we did a year ago at this time.

Great. I just had a quick follow-up on that and a quick one for Tim. Just a follow-up. It was nice to hear the e-mobility related welding revenue strengthen a bit. Was that geo-specific? Or was that something that you saw more broad-based?

So actually, we're getting share gains globally. If you look at Asia, we've had strength in Japan and Korea and continued share gains also in China. And then we've also had uptick in Europe. And we've had some wins also in the U.S., although the U.S. is a little slower. And one thing I would point out is that it's really about battery. It's not just EV. There's quite a lot of work going on now in stationary storage as well. So in China, which has the largest growth, about 1/3 of it is due to stationary storage with 2/3 about EV. And overall, just to point out too, the EV market is continuing to grow. It's year-to-date has grown about 25% year-over-year.

I have a quick question for Tim regarding the gross margin outlook. It seems that, unless I missed something, the tariff impact is expected to remain consistent with what was observed in Q3. While the revenue at the midpoint is slightly lower, there's also a decline in the gross margin. I'm curious about how you view the margins as we approach the end of this year and what the anticipated tariff impact, if any, will be as we move into 2026.

Sure. First of all, gross margin was strong in Q3, both on a GAAP and adjusted basis, which I was very pleased with. One of the positives was that we started to see some improvement in product gross margin, which had been somewhat weaker in the second quarter. This is encouraging as it reflects the effectiveness of our cost reduction initiatives. We are also working on rolling out higher-power diodes more broadly across our platform and have introduced lower-cost lasers in other applications, which was great to see develop during the quarter. Additionally, there were other benefits to gross margin. Inventory provisions were lower, as we anticipated, given our efforts in inventory management. Another positive factor was an improvement in under-absorbed costs, resulting in good overall absorption in Q3. However, that was influenced by a slight increase in inventory, which rose by about $20 million as part of an intentional investment to reduce customer lead times and support the business at this time. We expect a more moderate impact from inventory in the fourth quarter, which is reflected in the midpoint of my gross margin guidance. This guidance does not account for any significant increase in tariffs. We are making efforts to mitigate some of the tariff effects. It's clear to me that companies are unlikely to eliminate the costs associated with tariffs due to their widespread nature, but we are exploring slight price increases and internal programs to address tariff drawbacks. These measures require time for data analysis and approvals, but we expect to see some potential improvement in tariff impacts as we move into next year.

Our next question comes from James Ricchiuti with Needham & Company.

I had a couple of questions. First on CROSSBOW. Wondering, Mark, how we might think about the opportunity looking to 2026. It sounds like you had good interest at the recent shows that you've participated in. Are you working with any other partners at the moment besides Lockheed Martin?

Jim, let me take a moment to discuss CROSSBOW. We are very enthusiastic about it. Just to clarify, this technology is targeted at the smaller class of drones, specifically Group 1 and Group 2. Our advantage lies in our ability to utilize our high-power single-mode lasers alongside the photonics we manufacture. We are capable of delivering this at scale through large volume production, which allows us to provide a unique solution. We showcased this at the two major events, DSEI in London and AUSA in Washington, D.C., just a few weeks ago. We received significant interest and leads from both military and civilian sectors. Recently, we've observed drone disruptions leading to major airport shutdowns in Europe, including Oslo, Copenhagen, and Munich, highlighting demand in the civilian market. We have numerous leads to pursue. In addition to our collaboration with Lockheed, we are also engaging with several other potential clients in both defense and civilian aerospace sectors on a global scale.

Now if we consider the opportunity looking ahead to next year, it seems like you have multiple projects underway. How should we evaluate this in terms of significant revenue?

Yes, sure. I understand, Jim. So what I would tell you is that we're qualifying leads. This does take some time to go through, so we do expect to get some revenue in 2026, but it takes some months certainly to qualify and turn leads into orders.

Got it. Regarding the new urology system, which I understand you are not addressing this quarter, I have a similar question. Looking ahead to next year, how significant are the product launches in terms of generating additional momentum in the medical market?

Thank you, Jim. I appreciate your question about the launch of our new urology product in Q4. To clarify, we have received FDA clearance and are moving forward with this launch. This new thulium-based system features two key innovations: StoneSense, which distinguishes between stones and tissue for enhanced safety, and a unique modulation of pulse output aimed at improving precision. This product marks the beginning of our product roadmap in urology, which I've previously mentioned. We are on track for the Q4 launch as planned, and this first product is expected to drive substantial revenue growth. Earlier this year, I noted that we secured a second major customer in urology, in addition to Olympus, although we cannot disclose their name yet. As we introduce new products and capture market share, we will also generate recurring revenue from the disposable fibers associated with treatments. We are set to begin shipping the new product in Q4 and are optimistic about gaining additional market share. This launch represents the first of many advancements we plan to introduce over the coming years, and we expect significant growth in the urology market, which has a total addressable market of $2 billion, making it a crucial element of our future growth strategy.

In terms of 2026, if you were to rank this on some of the other opportunities that you're focused on, where would you place this, say, among the top 3 or 4?

Yes. So Jim, it is one of the top ones for us. So when we think about the urology roadmap, we look at that as growing our urology revenue kind of 2 to 3x in the next 2 to 3 years. So I can give you some sense of how to consider that. It is one of the larger ones we're looking at. If we talk about the investments in 3 key areas based upon our differentiation. We've talked about urology, the micromachining space, and then, of course, the area of the advanced area, which includes the CROSSBOW, that together, what I've said is that, that's addressing about a $5 billion TAM and that over the next several years, we're expecting to grow hundreds of millions of dollars in those spaces.

Our next question comes from Scott Graham with Seaport Research.

Congrats on the quarter as well. Could you just remind us, when you talk about tariffs, the minus 140 basis points, that's a net number, right, versus your countermeasures?

That's the impact on the quarter compared to a normalized run rate like in Q1 or the second half of last year. It's after accounting for some countermeasures we've implemented. For example, if you're trying to adjust pricing, you need to change the pricing, update quotes, fulfill the existing backlog, and wait for customer orders. Therefore, the benefits of pricing changes take a significant amount of time to materialize. Additionally, we're exploring various strategies to reduce some duties when reexporting products or bringing products back into the U.S. that contain U.S. content. However, these strategies are complex and require considerable time to implement.

And just to remind you, Scott, too, as we've talked about for the tariffs, we have actually done quite a lot in terms of mitigation. If you recall that we have a flexible manufacturing footprint, and we actually moved product manufacturing for a number of product lines from the U.S. to Europe, for example, we also flexed our supply chain, and we adjusted where some of the supply was coming from. So we have done quite a bit to mitigate and get us to where we are as well.

Understood. Just my follow-up question is, the fourth quarter operating expenses number looks like about the same as the third quarter. And last year, I believe that number was lower, although your earnings were maybe under more pressure. Can you explain why maybe fourth quarter operating expenses aren't maybe a little bit lower than what your guidance is? I guess that one surprised me a little bit.

Absolutely, Scott. So as I've been talking about for the last few quarters, we're making some key investments, and that's what you're seeing in the OpEx. The first is really around these key programs that I've been talking about in medical, in the urology, and the micromachining, and the advanced space, the CROSSBOW is a great example. So we're investing in those key areas. That's a significant piece of it. And then also, we've made some investments really in the organization. I talked about last quarter some very top talent that we've recruited into the organization to help us lead the company into continued growth. So that's what you're seeing. And we expect that to stay at about that level going forward.

Our next question comes from Keith Housum with Northcoast Research.

Good quarter. Just remind me historically, has there been an opportunity for budget flushes in the fourth quarter and any potential benefit from the one big beautiful bill that we saw passed earlier this year?

In the fourth quarter, there can sometimes be a slight decrease compared to the third quarter, depending on geography. For example, China might show stronger revenue in the second and third quarters but could see some pull-through in other regions that may or may not make up for that loss. Overall, the seasonality isn't particularly significant and can vary from one period to another. Regarding the one big beautiful bill, it's quite complex in what it entails, and there are various strategies to consider. We are focused on maintaining some of our permanent deductions because, if we accelerate things like depreciation, we risk losing those benefits. We do not anticipate a substantial change in the effective tax rate related to the new bill going forward; there may be some cash tax benefits, but it won't significantly affect the overall effective tax rate.

Okay. I appreciate it. Helpful. And then, Mark, you briefly mentioned a new facility in Huntsville, Alabama, regarding your CROSSBOW opportunity there. Can you just expand a little bit more about what you're going to be going down there? Is it going to be manufacturing? Is it just a sales location?

Yes, definitely. Our facility in Huntsville is a small leased space located at the center of relevant technology, allowing us to be closer to essential contacts in the business. Additionally, there is cleared airspace nearby for conducting drone testing. Everything aligns, which is why we have this location. We will conduct customer tests and validations there, and some manufacturing will also take place at this facility.

Our next question comes from Mark Miller with The Benchmark Company.

I'm just wondering if you can give us some thoughts about margins for defense-related opportunities. Are they similar to corporate margins? Or would they be above or below?

Yes, thank you for the question. The CROSSBOW area is one of our highly differentiated sectors, and we are investing in medical, micromachining, and defense. This high level of differentiation leads to margins that exceed those typically seen in corporate settings.

Okay. With chip sales booming and shortages and pricing going through the roof, what's your thoughts about business from semiconductors next year?

Yes, we are excited about this area and have been focusing our efforts there. This falls under what we refer to as the advanced segment, which includes the CROSSBOW. In terms of semiconductor capital expenditures, particularly within the WFE component, we have significant differentiation. We are collaborating with key suppliers in the market, particularly in metrology, inspection, and lithography. Recently, we have achieved some important design wins in this space with our differentiated products. I am optimistic about the semiconductor sector because successful wins there translate to long-lasting revenue streams for many years. As these products begin to roll out, we have observed some positive developments, which is reflected in the slight increase in our advanced segment this quarter due to some semiconductor pull-through.

We have reached the end of the question-and-answer session. I'd now like to turn the call back to Eugene Fedotoff for closing comments.

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

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