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IPG Photonics Corp (IPGP) Q3 2018 Earnings Conference Call Transcript


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IPG Photonics Corp (NASDAQ: IPGP)
Q3 2018 Earnings Conference Call
Oct. 30, 2018 , 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to IPG Photonics Third Quarter 2018 conference call. Today's call is being recorded and webcast. At this time I would like to turn the call over to James Hillier, IPG's Vice President of Investor Relations for introductions. Please go ahead, sir.

James Hillier -- Vice President of Investor Relations

Thank you, Rob and good morning everyone. With us today is IPG Photonics' Chairman and CEO Dr. Valentin Gapontsev; and Senior Vice President and CFO Tim Mammen.

Statement made during the course of this 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 risk 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, 2017 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 30, 2018. The Company assumes no obligation to publicly release any updates or revisions to any such statements. For additional details on our reported results, please refer to the earnings press release and the Excel-based financial data workbook posted to our Investor Relations website. We will post these prepared remarks on our Investor Relations website following the completion of the call. With that I'll now turn the call over to Valentin.

Valentin P. Gapontsev -- Chief Executive Officer and Chairman of the Board

Good morning everyone. Q3 was a challenging quarter as macroeconomic and geopolitical factors reduced demand for our laser products. Despite these challenges, IPG made important progress driving higher power solutions into the market and generating meaningful traction selling our newest products and solutions. We believe our progress in high power and new products will help us emerge from the current downturn in a stronger competitive position with greater opportunities to address the growing market for laser solutions.

As noted in our preliminary earnings release, we believe tariffs and trade-related headwinds were the primary driver of weaker than expected performance for our business in China and Europe where China is the main market for perfect European metal processing machines. Indications from our customers suggest that purchases of laser systems in these regions are being pushed out. We believe uncertainty resulting from the ongoing US-China trade conflict is reducing overall demand for industrial capital equipment purchases, predominantly in China.

In addition, we believe the softening macroeconomic climate in China and Europe, as indicated by lower manufacturing PMI and reduced levels of infrastructure investment, is affecting near-term demand for laser systems. However, we remain confident in the longer-term secular growth of fiber laser technology over other lasers and non-laser tools. During prior business downturns, we have seen customers begin to increase investment in transformational automation and miniaturization technologies that include our laser solutions in order to improve productivity and launch new products.

We continue to expect our solutions to gain share from traditional tools and process technologies due to the superior productivity, flexibility, precision and power of fiber laser systems. We remain the clear market leader in fiber laser technology. That said, competition in continuous wave laser products at less than 4 kilowatts has increased. Some competitors have also announced continuous wave lasers with power output of up to 10 kilowatts. China remains our largest and most competitive market. As we have previously indicated, we are seeing very aggressive pricing for select products by our competitors in China. However, we believe our advanced technology, scale and cost advantage over the competition are enabling us to win in the market despite these pricing actions.

As our response to the new market situation, during the third quarter we introduced new ultra compact 1 to 3 kilowatt lasers and other products designed specifically for the market in China. With the benefit of additional production capacity and these new solutions, we were able to sell several hundred more higher power lasers to OEMs in China that were either exclusively or predominantly buying lasers from our competition. We have won new business in part because some of these customers have expressed fast-growing concern and frustration with the performance and reliability of competitor products. The revenue impact from these gains has been limited by macroeconomic and geopolitical headwinds, but these early efforts are yielding positive results. As a reminder, we believe there is no company that can deliver high power laser solutions at our quality, scale, cost and lead time.

We continue to drive market acceptance of our ultra high power fiber laser technology at 6 kilowatts and above, which is now approaching 50% of our high power laser sales. We continue to see our largest OEM customers migrating to higher power fiber laser cutting solutions, and Q3 was a record quarter for sales of our unique 12 and 15 kilowatt lasers. We also introduced the new perfect world's smallest 20 kilowatt cutting laser, further demonstrating IPG's industry leadership in producing the highest power solutions in the marketplace. These ultra high power lasers are experiencing rapid adoption as they enable faster cutting speeds and improved end user productivity.

Our new generation super high power fiber lasers is releasing three new technology innovation that will be featured at the upcoming FABTECH trade show in Atlanta. First, we are introducing a new QCW mode for our YLS and YLR CW lasers that provides peak power up to two times average power, allowing increases in piercing speed, quality and improved piercing of thick metals. The reduced heat input in the QCW mode results in higher quality cuts of intricate parts and cleaner, more controlled drilling of thicker materials. This unique capability is enabled by IPG's QCW diode designs -- new QCW diode designs that provide very high peak power for short duty cycles.

Second we are launching Adjustable Beam Mode capability on our flagship YLS lasers, which allows programmable adjustment of output beam mode and enables our customers to process a wider range of material thicknesses and improve piercing and cutting quality, as well as optimize welding performance in certain material combinations.

Third, we are introducing an integrated high power scan head with our recently acquired weld monitoring technology to meet the ever increasing quality monitoring requirements for industries such as automotive, medical and others.

These three new innovation examples of how IPG is committed to decreasing our customers' cost of ownership and increasing their overall productivity.

We also made solid progress in our newest product areas, which is out of metal processing and we believe will be in future less dependable from situation in Far East, especially in China.

Sales of -- for example, sales of record high-power, super high power green pulsed lasers used as an ablation tool for improving solar cell efficiency increased nearly 70% versus the year-ago period. We achieved a record quarter for our new ultraviolet laser solutions, which are expanding our addressable market for marking and engraving of non-metal and for material ablation. Our unique new family of picosecond and femtosecond ultrafast pulsed lasers increased sales meaningfully off a small base and are seeing good customer acceptance for micro processing applications.

Sales of systems and beam delivery products increased more than 20% year-over-year, evidence we are becoming a more complete solutions provider within the automotive, aerospace, railway, pipeline, entertainment and medical device industries -- and telecom industries. Collectively, sales of these new products increased approximately 10% year-over-year and now represent more than 10% of total revenue. We expect during next years, these new applications out of metal processing will reach our target to reach 50% of total revenue then it would be more diversified situation and much less dependable around the cycling in one application area.

We remain optimistic about IPG's growth prospects over the medium and longer-term given our technology and cost advantages combined with the significant market opportunity for lasers to take share from traditional processing -- metal processing technologies. We believe growth in our core industrial markets is enabled by the superior performance, productivity, reliability, and cost of ownership of our products over competing solutions. We expect to augment this growth with advances in new product areas that meaningfully expand our addressable market in the micro materials processing, medical, telecom, defense, scientific, projection and display industries. This includes providing more complete system and solution to end users in the aerospace, oil and gas, electric vehicle, railway and medical device industries as we drive penetration of advanced laser processing. Despite the challenging macroeconomic and geopolitical backdrop, I believe confident -- I remain confident in IPG's multiple growth drivers for the long term, as we deliver on our mission to make our fiber laser technology the tool of choice in mass production.

With that, I will turn the call to -- over to Tim.

Timothy P.V. Mammen -- Chief Financial Officer and Senior Vice President

Thank you Valentin and good morning everyone. Revenue in the third quarter declined 9% to $356 million. Foreign exchange headwinds during the quarter relative to sales assumed in our Q3 guidance reduced revenue by $5 million. Without this impact, revenue would have been slightly above the low end of our guidance range. Revenue from materials processing applications decreased 11% year-over-year and revenue from other applications increased 22%.

By region, third quarter revenue in China decreased 9% year-over-year and represented approximately 45% of the total. Modest year-over-year growth in sales of high power CW lasers for cutting applications was more than offset by declining sales of lasers into welding applications. In macro welding, saw reduced demand from traditional automotive and electric vehicle battery welding applications on a year-over-year basis. However, during the third quarter we received the largest order for battery processing applications in the Company's history. As such, we believe this business should begin to strengthen in Q4.

In micro welding we continue to see reduced demand related to the consumer electronics investment cycle. Past investment cycles for consumer electronics have materialized every other year, which would suggest that we should see better performance in 2019.

In Europe, revenue decreased 25% year-over-year primarily due to softness in cutting, additive manufacturing and welding. As Valentin noted, we believe a weaker macroeconomic climate in the region is the primary driver of reduced demand for lasers serving the cutting market. In addition, we faced a challenging comparison versus the year-ago period when we achieved record sales within cutting applications and record shipments of ultra high power lasers.

As we noted last quarter, we continue to expect lower sales into European additive manufacturing due to excess inventory at one of our larger customers. In North America, revenue increased 29% year-over-year driven by strength in cutting, welding and government applications. Sales in Japan increased 4% year-over-year with a continued rebound in cutting offset by declines in welding and marking and engraving. Sales in Korea were consistent with the prior year, and revenue in Turkey decreased 29% year-over-year, which is not surprising given the recent economic turmoil in the country.

Turning to performance by product, high power laser sales decreased 7% year-over-year to $227 million in the quarter and represented more than 64% of total revenue. Reduced sales of lasers for welding, cutting and additive manufacturing were partially offset by strength in sales to government applications. Sales of fiber lasers at 6 kilowatts and above increased more than 10% year-over-year and now account for nearly 50% of all high power laser sales, driven by strong adoption in cutting applications. Sales of other high power lasers declined year-over-year due to the weaker demand environment in China and Europe that Valentin cited.

We are seeing aggressive pricing for select products by our competitors in China, most notably 1 to 3 kilowatt lasers serving the cutting market. Pricing pressures in this business are being exacerbated by softening demand trends. However, with the benefit of additional production capacity and new ultra compact high power laser solutions, we are more aggressively targeting OEM accounts in China that were either exclusively or predominately buying lasers from competition. Early progress in these efforts has helped to offset some of the pricing and demand-driven pressure in our high power cutting business and contributed more than $10 million in additional revenue during the quarter.

Pulsed lasers sales decreased 11% year-over-year, with rapid growth in green, ultraviolet and ultrafast pulsed lasers offset by reduced sales of other pulsed products. Medium power laser sales decreased 48% on softness in additive manufacturing and cutting. QCW sales of $18 million declined 23% year-over-year due to the expected reduction in demand related to the consumer electronics investment cycle, partially offset by strong growth in higher power QCW sales into welding and aerospace drilling applications. Other product sales increased 10% year-over-year due to strong sales growth in systems and beam delivery accessories.

Gross margin of 54.8% declined 242 basis points from Q3 2017 and was at the high end of our guidance range of 50% to 55%. The decline in gross margin was largely attributable to the lower revenue in the third quarter of 2018 versus the year-ago period and less favorable absorption of manufacturing costs. However, we were able to partially offset this impact with continued cost reductions and favorable product mix.

Third quarter operating income was $124 million, or 34.8% of sales, down 605 basis points from Q3 2017. Excluding a foreign exchange loss of $2 million, operating margin was 35.2%. Operating expenses as a percentage of sales increased 410 basis points year-over-year as we continued to make necessary investments in sales, engineering and administrative talent, as well as in IT systems. On a sequential basis, operating expenses increased 250 basis points as a percentage of sales.

Net income was $101 million and earnings per diluted share were $1.84. Foreign exchange losses reduced EPS by $0.03. If exchange rates relative to the US dollar had been the same as one year ago, we would have expected revenue to be $8 million higher and gross profit to be $4 million higher. The effective tax rate in the quarter was 21%, which included certain discrete tax items that benefited EPS by approximately $0.14. Included in these items, we now expect a net benefit from the Global Intangible Low Taxed Income and Foreign Derived -- net of Foreign Derived Intangible Income deductions in the US Tax Act due to clarification from the IRS on how these taxes should be calculated. Excluding discrete items the effective tax rate was 27.5%.

We ended the quarter with cash, cash equivalents, and short-term investments of $1.12 billion and total debt of $46 million. During the quarter we repatriated $116 million in cash from Europe into the US. Having now repatriated $522 million from Europe, US cash and investments now represent 78% of the total.

Cash provided by operations was $72 million during the quarter and was $280 million a year-to-date basis. Capital expenditures were $37 million during quarter and were $133 million on a year-to-date basis, up 34% year-over-year. We continue to invest in new facilities and equipment to meet demand for our products over the next several years. In Q3 we repurchased 371,000 shares for $61 million representing nearly half of the new $125 million repurchase authorization we announced in August.

Turning to guidance, global macroeconomic and geopolitical headwinds have persisted into the fourth quarter affecting our business along with others in the sector. As a result, order flow has continued to soften. We are seeing aggressive pricing for select products as previously mentioned by our competitors, particularly in China, and we expect currency headwinds to be greater in the fourth quarter than in the third quarter. However, we have made strides competitively selling several hundred more high power lasers during the third quarter to manufacturers of laser cutting systems in China that were either exclusively or predominantly buying lasers from our competition. We are encouraged by this progress and the strength in new products and the performance in some other regions.

Based on these factors, the fourth quarter -- for the fourth quarter 2018, we expect revenue of $300 million to $330 million. We expect our third quarter tax rate to be approximately 26% excluding effects relating to equity grants. We anticipate delivering earnings per diluted share in the range of $1.30 to $1.50. Based on this guidance, we now expect full year revenue growth for 2018 will be in the range of 1% to 4%, down from our prior outlook of 7% to 9%.

We believe there are some encouraging signs for 2019. Indications from several customers in China suggest that order flow may improve in the first quarter. We expect spending on consumer electronics, electric vehicle battery and other metal welding projects to increase in 2019 over 2018.

In addition, we believe our early traction in new product areas will drive increasing contributions next year from micro materials processing applications, telecom, entertainment and display products and our systems business. However, our visibility of a trough in the current downcycle is limited by the uncertainty surrounding the global macroeconomic trade and geopolitical environments.

As discussed in the Safe Harbor passage of today's earnings press release, actual results may differ from our guidance due to factors including, but not limited to, product demand, order cancellations and delays, competition, tariffs, trade policies and general economic conditions. Our guidance is based upon current market conditions and expectations, assumes exchange rates referenced in our earnings press release, and is subject to risks outlined in the Company's reports with the SEC.

With that, Valentin and I will be happy to take your questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) The first question comes from the line of Joe Wittine with Longbow Research. Please go ahead with your questions.

Joe Wittine -- Longbow Research -- Analyst

Hi. Thank you. So we've seen a slowdown here and competition is creating a little bit more pressure than in the past. Yet the gross margin is holding up I believe better than most would have expected. So can you discuss may be a little bit further how you're defending the GM, including precisely where you are in realizing those cost savings from the diode efficiencies? I want to see that full benefit is beginning in the fourth quarter but won't be fully realized until the first. Thanks.

Timothy P.V. Mammen -- Chief Financial Officer and Senior Vice President

So Joe as you alluded to we continue to focus on taking costs out of the entire bill of material. Diode is obviously an area we focus on. We are now producing a significant quality in the U.S. exclusively as the new diode types and packages with the new chip design. So you are, as you come into Q4, seeing a significant proportion of cost of sales running with those diodes. There's still some of the older packages being produced in Russia, but it's a pretty low quality of them.

The other things that we're focused on in the third quarter which has certainly helped gross margin is that total manufacturing expenses are also down substantially compared to the second quarter. Absorption unfortunately is also down and it's down significantly enough that it hasn't fully offset the unabsorbed manufacturing expenses. But I was actually very pleased to see the total reduction in manufacturing expenses and -- albeit at lower absorption rates on the lower revenue level which will be as expected.

So both the focus on the bill of material as well as actually a focus on manufacturing expenses, for example, over time is being drastically reduced. Headcount increases are very much limited at the moment and then the throughput of expenses on some of the processes is also down as the total throughputs on manufacturing processes like the chip manufacturing also reduced. So at a high level I think that's a good summary of the way we're managing through this at the moment.

Joe Wittine -- Longbow Research -- Analyst

Okay, great. And then on China, can you discuss any further those potential green shoots that certain Chinese customers that you referenced? How much confidence do you have? Is the tone actually improving? Or are you skeptical at all that that could merely be kind of typical out quarter or next year optimism? How can we handicap the likelihood of that optic materializing? Thanks.

Timothy P.V. Mammen -- Chief Financial Officer and Senior Vice President

So the tone right now is certainly not improving but the general feeling is that there is likely to be a pick in demand -- pickup in demand just because of the way the CapEx cycle functions. I think some of the Chinese companies are looking for greater stimulus to the private sector from the government which will give the private sector more confidence in their ability to make CapEx decisions. From what we're hearing a lot of the government support so far has been more to the public sector but the private sector is optimistic that some of that support and confidence may come in the nearer term and would give them some sense that they'd see some improvements into the first half of next year. But it is -- it really is more just a reflection of their sentiment and thinking rather than anything definitive at this point in time.

Joe Wittine -- Longbow Research -- Analyst

That's great. Then finally --

Valentin P. Gapontsev -- Chief Executive Officer and Chairman of the Board

Regarding our automation in our Chinese competitors selling in many cases by pricing cheaper than material cost. So who compensates the difference, how they report on profit we don't understand at all. We'll cover the expenses.

Joe Wittine -- Longbow Research -- Analyst

Thank you. Just a clarification point now aside (ph) Dr. Gapontsev your prepared remarks mentioned competitive commentary of up to 10 kilowatt competition. Was that referring to China-based competition or was that from the U.S. peer? Thank you.

Valentin P. Gapontsev -- Chief Executive Officer and Chairman of the Board

We don't believe -- don't claim that you have this measure, two years ago it was unclear more from some Chinese they have 10-kilowatt but up to now we don't believe 10 kilowatt products can provide any material ability and so on. Even with more power lasers according to our test of them, always they fall very (inaudible) which is for example our new products now, even old products which we shipped 5, 10 years ago demonstrates statistics only one set of the lasers need service per one year, (inaudible) service more than a one year.

But for a new product for one to three years only a few percent of laser need during the year operation service, only a few percent. So (inaudible) average lifetime without service up to three, five years. So regarding this Chinese lasers it's only a few months without service. In typical situation, we check our sales in the lasers and so on and customers also return customer opinion, Chinese customers in China have many such information and also very concerned about the ability and low power. What about high-power laser, it's absolutely not possible. (inaudible) not achievable, functionality also very limited, so laser with more than 5 kilowatt, even 4, 5 kilowatt, not practical with power in my opinion.

Joe Wittine -- Longbow Research -- Analyst

You get what you pay for.

Valentin P. Gapontsev -- Chief Executive Officer and Chairman of the Board

Of course, this competition, can they improve during the next few years, also very small -- they are not able to reach quality of our lasers, absolutely not able during next some years.

Joe Wittine -- Longbow Research -- Analyst

Thank you.

Operator

The next question is from the line of Michael Feniger with Bank of America. Please proceed with your question.

Michael Feniger -- Bank of America -- Analyst

Hey, guys. Yeah, thanks for taking my questions. Just the first one. You mentioned obviously the biggest weakness it seems like it's bill tariff and trade-related. And you also cited consumer electronics. I'm just curious what you're seeing on the auto side. We are starting to see auto sales disappoint in North America but in China CapEx for auto seems to be a little bit more stickier than just sales from month-to-month. I'm just curious if you're seeing CapEx plans on the auto side for your auto customers shifting at all and getting pushed out and what are the dialogues there into 2019?

Timothy P.V. Mammen -- Chief Financial Officer and Senior Vice President

So Mike we previously said that the automotive in Europe has been weaker this year than it was in 2017 and the same can be said at Japan. Both the traditional and the EV auto in China as well was weaker but we're pleased that we got a significant auto, we said that is the largest order for both welding and foil cutting applications for EV and China. So it's good to see that start to pick up. The North American automotive sales have been reasonable this year and have grown. There continue to be several projects that we're working on. So it's -- yeah the automotive cycle is not -- certainly has not got a tailwind behind it and it had a headwind particularly from the traditional side in numerous different geographies. There are several projects that we're working on, some of them in Europe that we would expect to see some order flow and revenue coming out of them. But then the fundamental game changers they tend to represent changes in the way the technology is being used by the automotive companies.

Michael Feniger -- Bank of America -- Analyst

That's helpful. And I know we just got asked about the gross margin. I mean this is the first quarter where you're kind of back inside that guidance range which was expected. If we don't see that resolution on trade and we continue to see the type of environment particularly on the price is IPG -- are you guys comfortable maybe going even to that low end of the range to make sure you protect that market share and even win new customers to push back on those more aggressive peers? Thank you.

Timothy P.V. Mammen -- Chief Financial Officer and Senior Vice President

So in the short term we would be prepared to defend market share with this -- with our superior technology and reliability and higher-power lasers. And if you've got a lower level of revenue that may come with a lower gross margin. If you defend that share and then you got into the recovery or a recovery period with increasing contribution not just from the recovery in the metal processing market but also from growth in the new products that we're introducing into the market we'd expect to then see gross margin pickup from that. But yes we are prepared to defend -- we think it's very important to defend market share in the near term and doing so may lead to some lower gross margin, particularly at the lower end of the 1 to 3 kilowatts range of lasers. It's important note though as well we continue to take cost out of those devices, so we've made significant progress on that which has enabled us to continue to report what we think is a stellar gross margin even as pricing has been aggressive in Q3 into Q4.

Valentin P. Gapontsev -- Chief Executive Officer and Chairman of the Board

Jim mentioned that we introduced now new diodes and new fiber modules into -- all that are very, more -- much more integrated electronics, a new generation high-power laser level from 1 kilowatt up to 50 and so will -- next year will contain these new components and cost of these components, cos per 1 kilowatt or 1 watt power, 25%, 30% with the components we use now. So we expect to have very serious impact improvement of faster growth in gross margin. But the production also for them the new generation very efficient and twice practical more powerful diodes we started only this October. So impact on this -- mass impact on margin is slower, we e expect next year.

Michael Feniger -- Bank of America -- Analyst

Perfect. Thanks, guys.

Operator

The next question is from the line of Jim Ricchiuti from Needham & Company. Please proceed with your question.

James Ricchiuti -- Needham & Company -- Analyst

Hi. Good morning. Tim you alluded to a large win in the EV market. You also talked about winning some share back from competition in China. Is that all related? Or is that EV win that you discussed in addition to the share gains that you think you've managed to capture in China?

Timothy P.V. Mammen -- Chief Financial Officer and Senior Vice President

That's a completely discrete relationship and EV battery orders are separate from the wins that we've had on the cutting, the sort of tier two and tier three cutting customers.

James Ricchiuti -- Needham & Company -- Analyst

Got it. And can you talk a little bit about how you saw pushouts in both Europe and China as you progressed through the quarter? Was this broadly based or was it concentrated among a handful of customers?

Timothy P.V. Mammen -- Chief Financial Officer and Senior Vice President

On a year-over-year basis if you look at the performance within China you'd actually see some OEMs growing who for example made significant gains. They are leaders of the higher-power level who performed strongly. In other parts of the customer base you'd see their sales down year-over-year. I'd say that coming into the end of the quarter and into the beginning of Q4, that tone has softened across the board for the cutting applications. Offsetting that a little bit is the win on the battery welding side.

In Europe on a year-over-year basis basically because of the weakness on cutting, welding and additive for the reasons we've articulated there's a significant decline in revenue. I'd say the European order flow is basically much more stable and our expectations for Q4 in Europe more stable than they are in China. And then we're expecting for example outside of those two areas some growth sequentially in Japan and solid performance in the U.S which would probably show year-over-year growth but sequentially a stable situation. So what I'd characterize is outside of China we're seeing, I think, some better sense of stability whereas China continues to be soft and has softened a bit since the end of Q3.

James Ricchiuti -- Needham & Company -- Analyst

Your overall book-to-bill was below 1. It was weakest in China, closer to 1 in Europe and was it around 1 in the US?

Timothy P.V. Mammen -- Chief Financial Officer and Senior Vice President

Jim we don't get into giving book-to-bill by specific region. I think my tone or comments about that by geography are the ones you should reference.

James Ricchiuti -- Needham & Company -- Analyst

Okay. Thanks a lot.

Timothy P.V. Mammen -- Chief Financial Officer and Senior Vice President

Thank you.

Operator

The next question is from the line of Tom Diffely with D. A. Davidson.

Thomas Diffely -- D.A. Davidson & Co. -- Analyst

Yes, good morning. One more question on the Chinese market. So the slowdown there that you're seeing is it just nervousness or are they actually have an issue with access to capital or can you tell?

Timothy P.V. Mammen -- Chief Financial Officer and Senior Vice President

I think one of the issues, Tom, is that the Chinese government has been through a period of tightening during the first half of the year. That then has got compounded by the definite uncertainty related to investment decisions that has come out of the increasingly aggressive stance on the trade war. And now you're actually in a period where I'd say it's more than macro than the credit access. That's the uncertainty around the macro that's impacting things. At the same time I think you're starting to see the Chinese loosen credit policy and let's see where they go with that. I think they have to also do some stuff on infrastructure side to give the private sector some comfort about the decision-making process on future investments. But I'd say the tightening process got overshadowed with the very increased uncertainty around the CapEx investment cycle driven by the trade war. I don't think that's the primary driver of the weakness we're seeing at the moment.

Thomas Diffely -- D.A. Davidson & Co. -- Analyst

Okay. That makes sense. And then if you look at China in general -- go ahead.

Valentin P. Gapontsev -- Chief Executive Officer and Chairman of the Board

Yes. I'd like to say even without this trade war the policy of Chinese government to help any way to -- the Chinese companies to gain the fiber laser market they include in the strategic -- list of the strategic technology fiber laser 10 years ago, 10 years Chinese customers tried to make copy these products into -- to install some production. And Chinese government up to now held their own manufacturing any way to win this market. It is strategical, you could not stop the changing situation. Now they start to make even (inaudible) products. There is a huge help by any means from Chinese government state-owned companies and so on. The same happened in the electronics many years ago then all these -- all the budget electronics they won. And now they've all moved to China where it's high-end electronics still remain in Western Countries but most electronics now in China. (inaudible) The same situation now attempt to get the fiber laser technology as a strategy to China to control this -- we'd see such strength that they will grow without one. We still have very good position much high quality, it's a hugely different gap between quality with these guys. But it's a situation, the real situation nobody can change this. That's the trade war and not trade war, but we have so walk and fight for this technology.

Thomas Diffely -- D.A. Davidson & Co. -- Analyst

Yeah, that makes a lot of sense. So when you look at the Chinese market down 9% year-over-year, is there any way to quantify how much of that is pricing-driven versus unit-driven?

Timothy P.V. Mammen -- Chief Financial Officer and Senior Vice President

No, definitively we just don't give that information, Joe (ph). 80% of it overall was really unit -- trying to come up with a reasonable number, I'd say 80% of it was driven by unit volume decreases and then the remaining 20% was being compounded by some pricing declines, particularly at the lower level. If you look at the higher level you'd also see some pricing declines but that's actually on the back of very significant volume increases in some of the ultra high-power lasers.

Thomas Diffely -- D.A. Davidson & Co. -- Analyst

Okay. That's very helpful. Thanks for your time.

Operator

The next question comes from the line of Patrick Ho with Stifel.

Patrick Ho -- Stifel Nicolaus -- Analyst

Thank you very much. Tim, maybe just if you could provide a little more color about the comments you made about the tone for the early parts of 2019 that appear to be obviously better relative to what you're seeing today. Is it coming from a specific market application within China? Or is it a broad-based -- the weakness appears to be much more broad-based is the potential recovery broad-based or is it more in one application?

Timothy P.V. Mammen -- Chief Financial Officer and Senior Vice President

I'd say some of the comments we've had from companies in the cutting market conversely some of the other cutting customers are a bit more circumspect, so one of the comments we've had that they are looking for a bit more guidance from the government for the private sector and I think that would require some support around infrastructure spending and continued loosening on the credit cycles. The broader-based aspect of it though is reflected in the orders that we've had for the vast [ph) wending. So if that investment cycle now continues you'd expect to see that perform better in '19 than it has in '18. And for the consumer electronics cycle we don't have visibility into anything definitive at the moment but in general that is a biannual investment cycle. So that -- that's the basis upon which we're reflecting some of the comments from the customers but also how our business cycle has also functioned historically.

Patrick Ho -- Stifel Nicolaus -- Analyst

Sure. Fair enough. And so my follow-up question just to go to the gross margin performance which has been pretty strong given the lower revenues and the pricing pressure you're seeing. How has the product mix shift -- as you detailed the 6 kilowatts and above are now approximately 50% of your high-power laser business, how much is that shift helping the overall gross margins stay at relatively elevated levels despite the weaker absorption that you're seeing?

Timothy P.V. Mammen -- Chief Financial Officer and Senior Vice President

It's certainly a help. That's one of the benefits on product mix. So that then some of the higher power QCW lasers that we saw during the quarter I think the QCW lasers actually performed very well given that this is an off-cycle for the consumer electronics investment. And most of those QCW lasers or a significant number of them will have been at the higher power levels.

The continued strength and performance of both higher power pulsed lasers and also the newer pulsed laser product offerings including the green, the UV and the ultrafast would also -- if those shifts on product mix can continue they would also help to sustain the gross margin profile. So yes, product mix is certainly healthy and has been always been part of our strategy to shift the customer base toward these higher performing, high-performance lasers that enable improvements in productivity and drive efficiency.

Patrick Ho -- Stifel Nicolaus -- Analyst

Great. Thank you very much.

Valentin P. Gapontsev -- Chief Executive Officer and Chairman of the Board

(inaudible) gross margin in order to run or (inaudible) win control there is only one way, to generate and develop much faster and faster new and new more advanced products for new application also to develop and implement, it's only one way. Our policy is to run faster than any competition. We are able to make this in the beginning, at first place a new product when we implement market, provides much higher gross margin and so on. With time, with the volume of course margin going down, it's typical with the business, so nobody can change this. And our target we introduced now for the development we have half ready, so now more than 10 new families of products. And next year will be the year when there would be a mass introduction of this product. Each of these products will get 10 times more than current product which now brings for us revenue with much higher margin. When you first market them you get to know this -- if you define people so the margin of course would be much less. We have opportunities so we will now look out for these new products and new application.

This year was was very critical from the point of reaching excellent results this year. So now we see and with the right (inaudible) application very good prospective results with much higher margin than current products. In spite current products due to our very policy to decrease cost very efficient policies, still brings for us very good margin -- for example, up to now in spite of China our cost of these current products topped current products for us, minimum three times cheaper than any competition or manufacturing. It will grow and grow and decrease and decrease further, but we're very competitive. New products (inaudible) nobody produces the same today. So it would be a question in that market.

Patrick Ho -- Stifel Nicolaus -- Analyst

Great. Thank you very much.

Operator

Thank you. At this time I will turn the floor back to Dr. Gapontsev or closing remarks.

Valentin P. Gapontsev -- Chief Executive Officer and Chairman of the Board

Okay. Thank you for joining our today. We look forward and we are sure that next time will provide you much better results. Have a great day.

Operator

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

Duration: 55 minutes

Call participants:

James Hillier -- Vice President of Investor Relations

Valentin P. Gapontsev -- Chief Executive Officer and Chairman of the Board

Timothy P.V. Mammen -- Chief Financial Officer and Senior Vice President

Joe Wittine -- Longbow Research -- Analyst

Michael Feniger -- Bank of America -- Analyst

James Ricchiuti -- Needham & Company -- Analyst

Thomas Diffely -- D.A. Davidson & Co. -- Analyst

Patrick Ho -- Stifel Nicolaus -- Analyst

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Transcript powered by AlphaStreet

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

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This article appears in: Personal Finance , Stocks
Referenced Symbols: IPGP



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