IPG Photonics Corporation (IPGP) Earnings Call Transcript

Good morning, and welcome to IPG Photonics' Second Quarter 2026 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 Senior Director and Investor Relations for the 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 of our second quarter results as well as the overview of demand environment and 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 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 charges are detailed in our Form 10-K for the period ended December 31, 2025, 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 4, 2026 only, and the company assumes no obligation 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. Second quarter revenue was above the midpoint of our guidance, increasing double digits year-over-year and growing sequentially. Both Industrial Solutions and Advanced Solutions grew quarter-over-quarter and adjusted gross margin and adjusted EPS came in above our expectations. Bookings also improved in the quarter, and book-to-bill remained above 1. Growth in both revenue and bookings points to sustained demand for our products across our end markets. Revenue growth was led by strength in Industrial Solutions primarily in welding applications as we continue to benefit from increased demand and business wins for our solutions in battery manufacturing. Cleaning and additive manufacturing also contributed to the year-over-year growth. Advanced Solutions revenue improved sequentially, driven by strong growth in semiconductor applications as we are making progress with large semiconductor equipment manufacturers. We are also seeing strong interest in our directed energy defense system, CROSSBOW. Overall, in Advanced Solutions, we continue to execute on our long-term strategic initiatives and believe that we have numerous opportunities for growth. The growth we achieved in the second quarter also demonstrates that we are making progress on our 2 clearly defined strategic growth initiatives. The first is strengthening our leadership in industrial solutions by expanding laser adoption, displacing incumbent technologies and further moving up the value chain with differentiated system and subsystem solutions. Buildings of much of the Industrial Solutions growth in the quarter. Demand in battery manufacturing remains strong across with electric vehicles and stationary storage, which supports data center energy requirements. Following our strategy to further move up the value chain, I'm excited to report that our subsystems revenue increased significantly this year. Our unique combination of adjustable mode beam lasers, advanced beam delivery and real-time process monitoring enables unmatched welding speed and quality. We are also making these subsystems easier to integrate and adding computer vision and artificial intelligence into the solutions. These advantages help drive recent wins with 2 major global automotive manufacturers. Additive manufacturing revenue remained strong in the quarter and grew significantly year-over-year. Demand is accelerating as our newest solutions enable the displacement of conventional metal machining. Winning here takes precise laser parameters, partnership with OEM customers and deep applications expertise. Our latest generation of lasers with proprietary beam shaping capabilities increases process speeds by approximately 1.5 to 2x, translating directly into higher productivity and lower total cost per part for customers. Our second strategic growth initiative is expanding our leadership in laser and photonics technologies in attractive markets and applications and advanced solutions including medical, directed energy, micromachining and semiconductor. We are leveraging core capabilities to target applications where precision, accuracy, control, efficiency and reliability matter most and are pursuing those opportunities, both organically and through acquisition. This strategic initiative is addressing over $5 billion of TAM, and we are expecting hundreds of millions of dollars in revenue over the longer term. Let me tell you about the progress we are making and the encouraging signs we are seeing towards realizing this potential. On July 16, we entered into a binding offer to acquire Lumibird Medical a global leader in diagnostic and treatment systems for ophthalmology. We believe this acquisition will allow us to achieve 4 things: First, it accelerates IPG's strategic evolution by meaningfully expanding our Advanced Solutions revenue into attractive, higher-margin medical markets with durable demand, strengthening the quality of our business mix. Second, it delivers a commitment to improve profitability through the addition of a high-margin business that we expect will be accretive to gross margin, EBITDA and adjusted EPS in the first year. Third, it creates a scaled medical laser platform by combining our leading urology business with Lumibird Medical's leading ophthalmology business increasing our addressable medical market by approximately $1 billion. And fourth, it expands our long-term value creation opportunity by combining complementary technologies, commercial capabilities and applications expertise to innovation and unlock future growth. We are very excited about this opportunity, which we expect to close in the fourth quarter of 2026. In our metal business, bookings and backlog remained strong, and we expect shipments to increase in the second half of the year. Looking forward, we remain confident in long-term demand growth for our urology systems and fibers. We are also advancing our innovation road map with new product approvals and introductions expected in 2026 and 2027. Our strongest performance within Advanced Solutions was in semiconductor applications as we continue to win new business with large semiconductor equipment manufacturers due to the differentiated value that we deliver. Our solutions for lithography, metrology and inspection are gaining traction, increasing our exposure to this high-growth market driven by an acceleration of AI-related demand for GPUs and high-bandwidth memory chips. We continue to advance our product development by working closely with customers on designing opportunities supported by the clear performance advantages our lasers and photonics solutions offer. In our Defense business, we began shipping Lockheed Martin's order for CROSSBOW this quarter. We will be shipping more units in the third quarter and continuing to engage with potential customers working to convert their interest into orders. We recently participated in a defense event at White Sands missile range demonstrating CROSSBOW capabilities to multiple agencies in demanding real-world environments. The system continues to be broadly tested in various scenarios domestically and overseas, and has proven to perform reliably in harsh conditions. We remain optimistic about the current developments in the directed energy market and believe that our systems provide effective solutions with a favorable cost to exchange ratio address the increasing threats from Group 1 and Group 2 drones. Along with making progress on our strategic growth initiatives, we are also transforming into an organization positioned to maximize the growth and profit opportunities ahead through the One IPG operating model. We are streamlining operations, strengthening decision-making and accelerating product development, translating into better performance and greater consistency across the business. In summary, the global IPG team delivered another quarter of sequential and year-over-year growth as customer demand for our unique solutions has strengthened across our markets. Orders also grew keeping our book-to-bill above 1, and we reported significant increases in adjusted gross margin and adjusted EPS. We are making meaningful progress on our strategic objectives, positioning us to continue to deliver profitable growth and create sustained shareholder value. With that, I will now turn the call over to Tim.

Thank you, Mark, and good morning, everyone. My comments will generally in follow the earnings call presentation, which is available on our Investor Relations website. I will start with revenue trends by application on Slide 5. Industrial Solutions revenue increased 16% year-over-year in the second quarter driven by growth in welding, marking, cleaning and additive manufacturing. On a sequential basis, revenue was up 4%, primarily due to strength in welding and cleaning. Advanced Solutions revenue decreased 9% compared with last year as growth in semiconductor applications was offset by lower revenue in micromachining and defense. However, Advanced Solutions revenue improved 10% quarter-over-quarter on growth in semiconductor and sequential improvement in micro sheeting applications. Sales of our emerging growth products continued to increase and accounted for 58% of our total revenue in the second quarter, up from 53% in the prior quarter. Strong growth our lasers and solutions for battery manufacturing processes drove the increase. Moving to revenue performance by region on Slide 6. North American revenue decreased 2% compared with last year due to lower revenue in cutting, defense and medical applications. Sequentially, revenue was up 1% and due to increased marketing and defense sales. European sales were up 5% year-over-year and 1% sequentially, driven by increased sales in cleaning and additive manufacturing, partially offset by a decrease in cutting. Revenue in Asia increased 19% year-over-year and 8% sequentially driven by strong growth in welding applications, which benefited from higher demand in battery manufacturing. Moving to the financial performance review on Slide 7. Total revenue was $279 million, up 11% year-over-year, marking our third consecutive quarter of double-digit year-over-year sales growth. Foreign currency benefited revenue by approximately 2% this quarter compared to the same period in the prior year. GAAP gross margin was 40.4% and adjusted gross margin was 40.7%, above the top end of our guidance range. We recorded a benefit from tariff refunds of approximately $4.7 million that had a positive impact on gross margin of approximately 170 basis points in the quarter. Lower inventory provisions and product cost continue to provide a positive benefit while manufacturing cost absorption remains below the level we are targeting in the medium term. Total adjusted operating expenses were $91 million, excluding $17.6 million in impairment of long-lived assets related to the sale of our Belarusian operations, and other onetime items. Adjusted operating expenses declined sequentially and came in slightly below our guidance range as we benefited from a German R&D tax credit of $1.8 million in the quarter. Overall, we expect operating expenses to modestly increase going forward due to our continued investments to drive growth. GAAP operating income in the quarter was $5 million, and GAAP net income was $5 million or $0.12 per diluted share. Adjusted operating income was $24 million and adjusted net income was $25 million with adjusted earnings per diluted share of $0.58. Adjusted EBITDA was $49 million. Both adjusted EPS and adjusted EBITDA came in above the top end of our guidance range. Moving to a summary of our balance sheet and cash flow on Slide 8. We ended the quarter with $871 million in cash, cash equivalents and short-term investments. We had $33 million in long-term investments and no debt. Cash flow from operations was $38 million in the quarter, improving significantly from the first quarter. During the second quarter, we spent $21 million on capital expenditures, bringing year-to-date CapEx to $37 million. Our CapEx outlook remains $90 million to $100 million for this year, including investments in our major fiber manufacturing facility in Germany. Excluding the German investment, underlying CapEx is running at about 5% of revenue, and we expect to maintain this level going forward. Moving to our outlook on Slide 9. Orders remained strong with book-to-bill staying above 1. For the third quarter of 2026, we expect revenue of $265 million to $295 million and adjusted gross margin between 37.5% and 40.5%, factoring in the ongoing impact from tariffs of about 150 basis points. We estimate adjusted operating expenses in the range of $92 million to $95 million in the third quarter, and we expect to deliver adjusted earnings per diluted share in the range of $0.30 to $0.60 with approximately 43 million diluted common shares outstanding. Our adjusted EBITDA is expected to be between $35 million and $51 million. In summary, we are pleased with our second quarter results with growth in revenue and bookings as well as improvements in gross margin and adjusted EPS. I believe that we are well positioned to continue improving our performance. We are seeing solid long-term demand trends across our markets. and are gaining traction on initiatives to expand margins even as we continue to invest in the growth opportunities ahead. I will now turn the call back over to Mark.

Thanks, Tim. We are pleased with the strong start in the first half of the year, driven by sustained industrial demand and the progress we are making with our key strategic initiatives. Our announced acquisition of Lumibird Medical accelerates our strategic evolution and significantly expands our advanced solutions portfolio into higher growth and higher-margin medical applications. We continue to execute on our growth strategy supported by operational excellence and an innovation engine that unlocks significant areas of opportunity. As we continue along this path, I am increasingly confident in our ability to achieve above-market growth, expand margins and deliver lasting value for our customers and shareholders. With that, we will be happy to take your questions.

[Operator Instructions] Our first question comes from Ruben Roy with Stifel.

I am going to start with a question on just maybe longer term, Mark, on the bookings. You've had 3 quarters in a row now where the book-to-bill is above 1. The Q3 guidance is again sort of roughly flat at the midpoint of the revenue guide. So just wondering if you could talk a little bit about building of shippable backlog against the revenue guidance and how you're thinking maybe about the next couple of quarters against, again, what seems to be a nice backdrop for bookings.

Sure. Good to hear from you, Ruben. So just to step back for a second, of course, as you mentioned, we're seeing double-digit growth year-over-year, and this is the third quarter in a row for that. Book-to-bill, again, was strong, it was above 1 for the third quarter in a row. And we're really seeing encouraging signs across the business. On the Industrial side, we've seen very positive progress with the differentiated solutions that we've we talked about in battery in additive manufacturing, cleaning, et cetera. And if you look at the PMIs globally, they've been expansive and stable, and we're seeing quite positive momentum in our advanced solutions. We've talked about the key areas of advanced solutions that are giving us confidence in the long-term opportunity for the business.

Okay. Maybe for a follow-up to drill in a little bit on the battery commentary. So you've now cited both EV and battery storage as drivers. And then also looking at the China numbers. So China back to 34% and change percent of revenue, quite a bit of growth the last several quarters, well into the double digits from China. So maybe if you could just kind of talk about 2 different things. So on one thing battery specifically, sort of how you're thinking about that in terms of sustainability or durability of that demand? And then also relative to what's going on in China? Are you gaining share in China? What's the pricing environment like for that market in China? And how do you think about China as a percentage of revenue longer term? I know a lot in there, but clearly something that seems to be going well.

Sounds good. Let me break it down and let me start with the batteries. Again, we're seeing continued wins in that area in the bad welding, but also for batteries, just to remind you that there are also some other key applications there and specialized foil cutting as well as cleaning. We're seeing strong pull in bookings in that area. And the demand here is really driven for us by the high-capacity batteries where we have strong differentiation. So in high-capacity batteries, you have higher currents mean thicker bus bars, also more critical contacts. And the drivers there are now kind of 2 key areas. Of course, there's the EV piece which I'll come back to. But the -- what's becoming a bigger piece of this now is actually stationary storage which is being driven by data centers for AI and also some grid stability for solar and other renewables. And then on the EP side, which is still continuing to grow, the high capacity is what's needed for the longer range side. So continue to believe in the long-term growth prospects there for batteries. And if we now shift to China and what's happening in China, first of all, I just want to remind that China is a significant industrial market globally. And the fact that we have differentiated solutions, you can see differentiation by the key design wins that we're getting there. And I just want to note that we're winning not only against the local Chinese players, but also against other western players because the key differentiation that we have there, and we've mentioned this before, but on the battery side, with the combination of our AMB lasers or adjustable mode beam plus the beam delivery plus the measurement capability has been really, really key. And I want to also point out that in China, we have strong capability there, and we win in additive. So that's a very important piece, which I talked about also in the in the prepared remarks where we have new lasers. We work very, very closely with that sector developed new lasers with specialized mode qualities that actually improved the throughput of those systems by, in some cases, 1.5 to 2x and really helping to drive that business of additive because the cost per part is reduced and that's allowed the additive to grow from both which started in the areas, of course, aerospace and defense, where you had very high cost, cost of part wasn't critical. It's just the importance of making those parts to now with the cost per part dropping with some of the things that we're helping to drive, you're seeing the solutions move into medical devices and even into some consumer devices. And in terms of pricing environment, the areas where we have strong differentiation in these areas. So that gives us pricing power in those markets.

That's a lot of detail, Mark. I don't want to hog this up, but maybe just one quick one for Tim. On the lower product costs that you just talked about. If you can remind us, Tim, where you are on the structural cost out and how you're thinking about utilization leverage on the gross margins from here? And that's all I have.

Sure. So yes, we've talked about this. We've got a number of different ways that we're driving improvements in gross margin. The first is that we're taking cost out of product by moving to higher power optical components, the most obvious of which is the diodes, right, the higher power, the diode. You have the fewer diodes you need, the smaller the form factor of the lasers. We're still at a relatively early stage of rolling the new generation of diodes out across the product platform. So we have further improvements gain from that. The other side of that equation actually is where we've got the differentiation is optimizing pricing, and that's another initiative that's been driven by the sales team. And then you come down as you drop through the manufacturing and operations area, we are trying to drive meaningful improvements in absorption. We're still behind where we want to be on that, but we've got several initiatives that the team is working on across different areas that would drive manufacturing efficiency and again, improve the cost of product and utilization. And with those initiatives gaining momentum over the second half of the year and into 2027 we're continuing to target improvements in gross margin and coupling that with an increasing scale of the business, which should help that.

[Operator Instructions] Our next question comes from Jim Ricchiuti with Needham & Company.

Apologies if you touched on this, I may have missed it, but I was hoping to get a little bit more color on the decline in North America. I think you alluded to a little softer medical business in the quarter. So I'm just wondering what you're seeing in North America and what your expectations are for the medical business going forward, obviously, from the acquisition.

Yes. So absolutely good to hear from you. So specifically, I think you're asking about the medical demand. We have very strong demand and backlog in medical, and we're confident that we're going to have another good year continue to -- we're continuing to advance in the innovation road map there with new product approvals and introductions that are planned in 2026 and 2027. And I talked about those, of course, Jim, we talked about the fact that we launched a key new product at the end of last year, we picked up a new key customer the fact that we have both systems as well as the disposable fibers. So those are all moving strongly and as I've talked about in the past, we expect to more than double the business over the next 2 to 3 years. So we have a lot of confidence in the medical business. And of course, we're also excited about combining that with Lumibird Medical.

So potential improvement in medical in the back half of the year, Mark, how do you think about the rest of the business in North America? What's the tone of demand that you're seeing out there?

Yes. So again, in the area of revenue that we've been overall strong even though we were slightly down there in North America, though, but our total bookings is strong book-to-bill, strong for the third quarter in a row overall. So continued strength. And I'll just point out, just to put it in context that we're seeing also continued strength as I talk about the bookings in Asia, especially Japan and China, we're seeing some improvement in Europe, and we are absolutely seeing strengthening in medical as well.

Got it. One final question, just you sound more positive on CROSSBOW and I know it's early days, but as you look at that opportunity, in 2027. Have your expectations changed at all?