IPG tops record sales in 3Q12, but gazes down for 4Q

Oxford, MA - IPG Photonics (NASDAQ: IPGP) posted >20% increases in sales and profits in 3Q12 citing strength in high-power lasers for automotive and general manufacturing applications. However, the firm sees a dropoff in 4Q12 thanks to some seasonality trends in specific end-markets and ongoing macroeconomic pressure across several geographies.

Specific growth drivers in the quarter, were high-power laser sales (+16% Y/Y) and pulsed laser sales (51%) driven by increased demand for consumer applications, pointed out Valentin Gapontsev, IPG's CEO. Medium-power laser sales rose 11% primarily attributed to thin metal cutting and welding in microprocessing applications.

By region, the US continues to be strong for cutting and welding applications, Gapontsev noted. Growth in Europe was strong as well but partially offset by weakness in Russia following very strong performance in that country earlier this year. In Asia, Japan and China showed moderate growth, alongside business expansion in Turkey.

Looking ahead to 4Q12 IPGP sees a bit of a slowdown, projecting $140M-$150M in sales and EPS of $0.65-$0.75. Among the challenges are the emerging influence of seasonality in China (where 4Q12 is typically a softer quarter), plus macroeconomic headwinds in both Europe and China that could spread to the US. These contributed to push IPG's book-to-bill ratio below 1.0 in 3Q12 -- this ratio of incoming orders to outgoing sales is viewed as an indicator of near-term business projections.

Revenues and income in US $M.

What the execs said

Highlights from the conference call with analysts & investors:

-- Orders slowed, but maybe a turnaround? Breaking down 3Q order activity by month, August and September were "not good months," confirmed Gapontsev. However, he said October orders are "going very well and we hope November and December also will go very well." Some specifics revealed in the conference call: One IPG customer in Japan has placed an order for a 100 kW fiber laser, for deep-penetration welding and other applications -- this would be the highest-power industrial laser ever built. Delivery is anticipated in 1Q13 or 2Q13. Another unspecified order from Japan will involve "over 50 kW of different types of lasers," added CFO Tim Mammen.

Other notable orders include "several large systems" for a Russian automotive facility, and some laser welding business from a French automaker -- characterized by Mammen as "not so big in size," but "historically a stronghold of a large competitor." (Emphasizing the caution about Europe, though, Mammen also acknowledged that the company has no 100-unit orders this year from any major EU customers, only smaller ones.) Nevertheless, "the automotive [sector] was really strong in North America," Mammen emphasized. "It was very pleasing to see that."

-- More demand for aerospace drilling. IPG is now seeing demand from the aerospace market for laser-drilling applications, Mammen noted. "We think [this] will be a growth driver next year." On a smaller scale, the company also is seeing good business from "niche" applications in cladding, annealing, and ablation. And of course the company saw "significant demand" from consumer electronics in the quarter, with reports of multiple-thousands of laser shipments -- Mammen referenced "completion of several major projects" in the quarter.

-- Continued expansion. IPG's growing business in Russia will be aided by a new machine shop and demo center, the first of several planned buildings that will increase manufacturing and R&D to ~380,000 sq. ft. of new space. The company also opened a new manufacturing facility in Germany, and in the US opened manufacturing of fiber laser systems and in-house assembly of printed circuit boards.

-- China's influence...not all good. The projected 4Q12 softness is partly due to the growing impact of China. "Historically the weaker quarters we've had are Q1, and Q4 has been stronger," noted Mammen. But as the Chinese business has grown, this seasonality has flipped to a weaker 4Q (and even into early 1Q with the Chinese New Year). "This is the second year that we’ve really seen this," he said. Nevertheless, Mammen remains bullish in IPG's business in China over the next year, particularly for automotive applications. "We won a couple of orders in Q3, and we've also identified tens of millions of dollars of potential business next year," he said.

What the analysts think

Industry watchers seem unified that IPG's 4Q12 outlook is "disappointing," if not entirely unexpected given macroeconomic and geographic market trends.

"IPGP is undoubtedly still gaining share in industrial lasers, but capital investment appears to be sliding and the consensus outlook for 2013 may be too aggressive given the macro backdrop," notes Mark Douglass with Longbow Research. Patrick Newton, Stifel Nicolaus agreed that key takeaways include "high-power deliveries pushed to 1Q13, a book-to-bill of below 1.0x, and a certain amount of conservatism."

"IPGP is not immune from macro headwinds, even as it continues to penetrate existing and new laser markets," observed Olga Levinzon with Barclays. Anticipated declines in China business "are more indicative of macro weakness/pull-backs in China infrastructure spend rather than a different seasonal pattern in China's heavy industry spending," she says, and predicts more macro pressure through the first half of 2013.