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IPG Photonics Shines Light on Troubles Ahead


IPG Photonics (NASDAQ: IPGP) , a leading provider of fiber lasers, reported its second-quarter results on Tuesday, July 31st. Revenue jumped by 12% thanks to strength in materials processing sales. Meanwhile, stock buybacks and margin enhancements helped generate 16% growth on the bottom line.

However, management warned investors that recent macroeconomic events are causing demand to soften in Europe and China, which are two major markets for the company. In response, they dialed back their growth expectations and warned that the upcoming quarter is going to feature year-over-year declines in revenue and profits.

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IPG Photonics Q2 results: The raw numbers

Metric

Q2 2018

Q2 2017

Year-Over-Year Change

Sales

$413.6 million

$369.4 million

12%

Net income

$121.6 million

$104.1 million

17%

Earnings per Share

$2.21

$1.91

16%

Data source: IPG Photonics.

What happened with IPG Photonics this quarter?

  • Sales of $413.6 million landed within management's guidance range . Currency movements also depressed the top line by $8.4 million during the period.
  • Materials processing sales grew 11% year-over-year and accounted for 95% of total sales. Management credited the gains to strong demand in cutting and 3D printing applications.
  • Sales grew by 10% in China, 18% in Europe, and 23% in North America. Japan was a laggard and sales declined 2% on a year over year basis.
  • Gross margin expanded by 70 basis points to 56.8%. This figure is above management's target range of 50% to 55%.
  • Operating margin expanded by 110 basis points to 39.3%.
  • The company spent $31 million on buybacks during the period, which completed its initial $100 million repurchase program. IPG's Board authorized a new $125 million stock repurchase plan to take its place.

What management had to say

CEO Dr. Valentin Gapontsev was proud of his company's accomplishments during the period, stating "We delivered record quarterly revenue and net income driven by the rapid adoption of IPG's high power products." He also noted that the company's book-to-bill ratio was 1.0 for the quarter.

However, Gapontsev also remarked that business volume deteriorated toward the end of the quarter:

While orders grew slightly on a year over year basis, order flow was below our target as demand softened in Europe and China at the end of the quarter. This more modest year-over-year growth in orders has persisted through July, and we believe is primarily driven by macroeconomic and geopolitical factors rather than competitive dynamics. We are seeing strong order activity in North America and some smaller regions.

Looking forward

Dr. Gapontsev stated that he expects the macroeconomic environment and currency headwinds to persist for some time. In response to those pressures he shared downbeat guidance for the upcoming quarter:

Metric 2018 Q3 Guidance 2017 Q3 Actual Implied Change (at Midpoint for Revenue)
Revenue $360 million to $390 million $392.6 million (4.5%)
Non-GAAP EPS $1.80 to $2.05 $2.11 (8.8%)

DATA SOURCE: IPG PHOTONICS.

He also stated that full-year revenue growth for 2018 will land between 7% and 9%.

All of these guidance numbers were well short of what Wall Street was expecting . IPG's stock cratered by more than 26% in response to the news.

Dr. Gapontsev knew that this guidance wasn't going to sit well with Wall Street so he ended his prepared remarks on the conference call with investors by reaffirming his faith in the long-term potential of the business:

[W]e continue to advance in new product areas that meaningfully expand our addressable market in the micro materials processing, medical, defense, scientific, and projection and display industries. Despite some headwinds in our business over the nearterm, IPG has multiple potential 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.

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Brian Feroldi owns shares of IPG Photonics. The Motley Fool owns shares of and recommends IPG Photonics. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



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



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