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IPG Photonics Corp (IPGP) Q3 2019 Earnings Call Transcript

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IPG Photonics Corp (NASDAQ: IPGP)
Q3 2019 Earnings Call
Oct 29, 2019, 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 2019 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, Doug and good morning everyone. With us today is IPG Photonics's Chairman and CEO, Dr. Valentin Gapontsev; and Senior Vice President and CFO, Tim Mammen. Statements 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 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 include those detailed on IPG Photonics. Form 10-Q for the quarter ended June 30, 2019 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 29, 2019. And 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. Our third quarter results were in line with our expectations. Despite the challenging macroeconomic backdrop and competitive landscape in China, we demonstrated good progress selling ultra high power fiber lasers, new exciting products, accessories and complete laser systems. Intensifying competition in the China cutting market resulted in greater than average price declines that outstripped growth in units and power. However, we continue to invest in new, unique products and applications to substantially enhance our competitive position and reduce product costs.

Along these lines, we were pleased to receive our first volume order for IPG lasers with high peak power capability. HPP products are capable of delivering peak energy twice the average power of the laser. This unique capability increases piercing and cutting speed, improves cut quality, delivers cleaner, more controlled drilling of thicker materials and reduces scrap by enabling closer nesting of parts. In another example of our differentiated solutions, our adjustable mode beam lasers have now been accepted for a variety of welding applications in multiple regions. AMB permits for the broadest range of beam tunability, simplifies setup and allows for the elimination of external optics. The spatterless welding capability of our AMB laser is particularly beneficial in electric vehicle battery production. We have received encouraging feedback from customers evaluating the performance of our 20 kilowatt lasers using IPG high power cutting heads. These solutions significantly improve cutting speed for thin sheet metals over 15 kilowatt laser power while increasing the range of material thicknesses up to 6 centimeters that can be processed using laser technology.

As another example of our differentiated portfolio, IPG offers the highest brightness through 50 micron core diameter fiber, at fiber lengths of up to 20 meters. In a 6 kilowatt laser, this provides our customers with more than 70% higher productivity in cutting thin metals versus a competing laser in 100 micron fiber. Competitors in China do not offer a similar solution. At the low end of the cutting market, we will be introducing a new series of low-cost lasers that we believe significantly enhance our competitive position and margin profile for these products. Our ability to supplement leading laser solutions with high power optical heads is a key differentiator versus our laser competitors. Marrying this capability with LDD, our patented real-time weld monitoring solution, provides us with a unique offering in the welding market -- one that can enable greater use of laser-based welding in automated production environments.

Global automotive supplier Brose announced recently they are investing in our direct weld measurement technology to increase manufacturing efficiency. Beyond Brose, we recently received a significant order for battery welding that leverages this leading-edge weld sensing and monitoring solution with our lasers and scanners. We are seeing strong customer interest for other opportunities as well. Outside cutting and welding, we took orders for several products at industry-leading power levels. Chief among these was a 120-kilowatt fiber laser order from a leading European research organization. This marks the most powerful CW fiber laser IPG has ever sold. We also took an order for a 100-kilowatt CW fiber laser for another research application. These two lasers should represent approximately $6 million of revenue in the fourth quarter. In addition, we took orders for 60-kilowatt and 50-kilowatt CW lasers along with multiple 5-kilowatt and 10-kilowatt single mode lasers. Collectively, these products represent power levels and beam precision unmatched by the competition.

We continue to make progress in new product areas as well. Third quarter sales of newer laser products and systems into emerging applications grew 8% year-over-year and were 19% [Phonetic] of total revenue, up from 16% one year ago. Sales within our medical laser business nearly doubled year-over-year, driven by recent FDA approval for our thulium fiber laser solution in urology applications. Systems sales increased 14% year-over-year, excluding Genesis, driven by strong growth in IPG multi-axis and laser cube systems, ILT systems for medical device manufacturing and sales of our cinema projection systems. Sales of ultrafast pulsed lasers were growing year-over-year as we continue to pursue 50-plus projects across a wide range of micro processing applications.

We believe that our forthcoming introduction of a new 100-watt one picosecond laser and new femtosecond products will help expand our presence in this market. Despite the challenging environment, we continue to demonstrate progress in driving adoption of our laser technology in our core markets and in new product areas that expand our addressable market opportunity. Thanks to our dedicated workforce, total optical power shipped exceeded 13 megawatts in the third quarter, a testament to the acceptance of our fiber laser technology in the market. We remain confident in IPG's ability to execute during this period and emerge from the downturn in a strong competitive position, one with ample long-term opportunity to make our laser technology the tool of choice in manufacturing.

With that, I'll turn the call 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 8% year-over-year to $329 million. Revenue from materials processing applications decreased 8% year-over-year and revenue from other applications increased 5%. Revenue in China decreased 24% year-over-year and represented approximately 37% of total sales. As we had expected, performance was impacted by weaker demand due to the US-China trade conflict and greater-than-average price declines.

Overall price declines in Q3 moderated from the prior quarter. In Europe, revenue decreased 10% year-over-year primarily due to softness in cutting, additive

manufacturing and marking, partially offset by growth in welding. The demand environment in Europe remains very challenging, evidenced by weakening trends among key indicators of macroeconomic health in the region.

In North America, revenue increased 32% year-over-year, driven by the acquisition of Genesis. Excluding Genesis, sales in North America increased 2% year-over-year, with strong growth in welding, surgical and cutting applications offset by declines in our Menara communications business. Sales in Japan were flat with growth in welding and marking, offset by weaker performance in cutting. Sales in Korea decreased 8% year-over-year, but increased 10% sequentially as strength in battery welding was offset by softness in cutting and marking.

Q3 revenue in Turkey decreased 20% year-over-year, given macroeconomic pressures in the region. Sales of high power CW lasers decreased 19% year-over-year and represented approximately 56% of total revenue. Reduced revenue from high power CW lasers in cutting and, to a lesser extent, welding was partially offset by strength in other materials processing applications. Pulsed lasers sales decreased 4% year-over-year, with growth in high power pulsed lasers offset by reduced sales for marking applications.

Systems sales increased 124% year-over-year including Genesis and 14% year-over-year excluding Genesis, driven by growth in systems for welding and other materials processing applications. Medium power laser sales decreased 38% on softness in additive manufacturing and the transition to kilowatt-scale lasers in cutting, while QCW sales declined 32% year-over-year due to softness in fine welding for consumer electronics versus the year-ago period. Other product sales increased 28% year-over-year, driven by growth in beam delivery accessories and service revenue.

Gross margin of 46.4% declined 830 basis points year-over-year. Compared with the year-ago period, less favorable absorption of manufacturing expenses and foreign exchange reduced gross margin by 270 basis points. The acquisition of Genesis reduced gross margin by 170 basis points. Higher inventory reserves reduced gross margin by 150 basis points and lower product pricing and other factors reduced gross margin by approximately 240 basis points. In light of the current macroeconomic challenges, competitive landscape and our increasing systems revenue, we believe it is appropriate to moderate our target gross margin range to 45% to 50%. We are responding to the current business environment challenges with a multi-pronged strategy of product cost reduction, implementing differentiated features on our core products and leveraging the largest R&D investment in the laser industry to launch leading-edge laser products for new markets. These measures in conjunction with modest market recovery, should increase the company's industry-leading margin profile as compared with our current expectations for the fourth quarter.

Third quarter operating income was $74 million, or 22.5% of sales. Excluding a foreign exchange loss of $1 million, operating margin was 22.8%. Excluding foreign exchange, operating expenses as a percentage of sales increased 410 basis points year-over-year due to lower revenue, acquisitions and investments in engineers, salespeople and IT systems.

Net income was $57 million and earnings per diluted share were $1.07. Foreign exchange losses reduced EPS by $0.01. 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 26%, which included certain discrete tax items. We ended the quarter with cash, cash equivalents, and short-term investments of $1.08 billion and total debt of $43 million. Effective operational execution resulted in cash provided by operations of $92 million during the quarter. Capital expenditures were $21 million in the quarter and $108 million so far this year. As part of our operational review, we are reducing our annual outlook for capital expenditures to less than $150 million from prior guidance of $170 million to $180 million. We also expect the level of capital expenditures to moderate next year.

During the quarter, we repurchased 181,000 shares for $24 million. During the fourth quarter, IPG began implementing a cost reduction program in response to continued global macroeconomic, competitive and geopolitical headwinds. The company expects to reduce annualized operating expenses by approximately $30 million, with the full impact being achieved as it exits the fourth quarter of fiscal 2019. IPG is performing its annual assessment of goodwill impairment, which occurs in the fourth quarter each year. While this process is not yet complete, the company currently expects for the impairment charges will be recorded in the fourth quarter, primarily related to the communications business. The goodwill and other long-lived assets within the communications business that are subject to assessment total approximately $60 million.

Turning to guidance, as widely reported, demand for industrial automation equipment remains subdued. This market softness impacted our third quarter book-to-bill ratio, which was under 1 and below normal seasonality. Looking forward, we will rely on our core scientific strengths and strong cash flow to optimize investment in strategic initiatives critical to the long-term success of the company, including a greater mix of high power lasers, differentiated features and new solutions.

Furthermore, we intend to focus our highly trained workforce on our new leading-edge, higher margin products as they gain market acceptance, while reducing the resources deployed to manufacture lower margin products. When combined with planned cost reductions, we believe this strategy will enable us to better compete today and to capitalize on the eventual rebound in end market demand.

For the fourth quarter of 2019, we expect revenue of $270 million to $300 million. We expect our fourth quarter tax rate to be approximately 26%. We anticipate delivering earnings per diluted share in the range of $0.55 to $0.95. Our EPS guidance range includes approximately $0.02 impact from restructuring charges in the fourth quarter. This guidance excludes any EPS impact from charges that might arise from our annual assessment of goodwill impairment. 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, goodwill and other impairment charges, 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. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Joe Wittine with Edgewater Research. Please proceed with your question.

Joe Wittine -- Edgewater Research -- Analyst

Hi, good morning. First off, I was hoping if you could provide further details on the product cost reduction strategy, specifically what is different with these new initiatives compared to what I consider the company's persistent focus on bill of materials, reductions, and if you could talk to the approach on what would presumably these new lower priced products I think it would be interesting? Thanks.

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

I just didn't get the first part of the question, Joe, on products. Did you say cost production initiatives or product development?

Joe Wittine -- Edgewater Research -- Analyst

Correct, the cost --

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

Overall, the company continues to really execute and pursue its continued excellence around taking cost down out of products. Sometimes this can result in fundamental changes in product design. It also can focus on lateral thinking in terms of bill of materials, types of materials, the amount of power that we get out of individual optical components, redesigning electrical and mechanical components. So, we just haven't stopped pursuing those initiatives across a broad-based set of the products that we've introduced to the market, whether it be the lower end of the kilowatt scale lasers transitioning some of those cost benefits to the higher end of the market, and even in the introduction of some of the newer products, pursuing those initiatives in conjunction with the ultrafast technology and its robustness and compactness, looking at the ways to reduce and enhance the value of systems that are being sold. So it's also not just a cost reduction initiative, it also focuses on the different processes and technology that can be delivered in conjunction with the lasers.

In that respect draw your attention to some of the progress we've made with selling the real-time weldment monitoring capability in conjunction with the scanners and the high power lasers where there is a tremendous amount of value being delivered to the end customer and that's been reflected in the pricing that we've been able to attain. So it's no fundamental changes to continued pursuit of what we believe we're very good at doing.

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

And we introduced now the 10th new devices, which for new application each of them. All of the device don't have any [Indecipherable] in the market much higher quality in open new application absolutely. So I would tell you during one or two years, 50% of new business made with new application not that before we forecasted metal process, and only with -- it had been paid by ways in high-power, it has been. Now, according to our new business model, more than 50% of total revenue will grow from other application. This compensates our work due to price drop in Ytterbium laser and we have offered out new opportunities for further detail for further growth.

Joe Wittine -- Edgewater Research -- Analyst

Thanks for that. And then as a follow-up, I'm wondering if you could see competitively, what you're seeing in ultra high power and how you expect competition to trend going forward. There has been a story that you've been pretty insulated at certainly at 8 kilowatt and above and even in 6 kilowatt and above. So how do you expect that to change over the course of the next year? Do you think there are core technological difficulties that some of the low price competitors will continue to struggle with, or will they continue to inch up and therefore the onus is on IPG to do the same? Thank you.

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

It's still 5-kilowatt, 10-kilowatt, the competition [Indecipherable]. They don't have competitive solution for such power, 1-kilowatt, 2 kilowatt, maybe 3-kilowatt in the areas, when the very best quality lasers, they want some market share especially in China. When Chinese government making every -- all support -- make in China product practical. Without help of Chinese government, they were not able to compete even this year. 5-kilowatt or 6 kilowatt [Indecipherable] is neglected if they don't have any opportunity to compete with our lasers.

And the degradation time of our check of the lasers, new lasers, though it practically -- working only few months though it did many times reported so on quality is extremely bad. So, they are not real products, only noise in marketing [Indecipherable].

Joe Wittine -- Edgewater Research -- Analyst

Thanks, Dr. Valentin. And one quick clarification, Tim, is any of the $30 million of cost reductions included within the fourth quarter EPS guidance?

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

Some small benefit factored in on a pro rata basis through some little bit less on manufacturing, some of the operating expenses, but the full benefit really will come through at the end of the year.

Joe Wittine -- Edgewater Research -- Analyst

Great. Thank you, everyone.

Operator

Our next question comes from the line of Tom Diffely from D.A. Davidson. Please proceed with your question.

Tom Diffely -- D.A. Davidson -- Analyst

Yes, good morning. It sounds like in your earlier comments that you've seen some

relative strength in welding versus cutting. And I'm wondering, when you look at just the softness in the industrial market today, what's driving that difference?

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

So yeah, certainly, there has been some significant wins on the welding side. It often happens in this way, despite macroeconomic weakness, it can be a time when companies look at how to improve processes by driving improvements in productivity and quality. They want to enhance what they're doing. And when that demand cycles can be weaker, some of the focus on the R&D and development side is in that area. In other instances, some of this is coming from transitions in industrial manufacturing output.

So for example, battery welding, not just in China but in different countries around the world is a very significant growth driver of welding applications, and we expect it will continue to be so. And some of those investments by the way are also -- it's interesting, we have also called this out previously, even when the automotive cycle can appear to be weak on the outside, some of the investments that go into welding programs on automotive can actually pick up a bit.

Tom Diffely -- D.A. Davidson -- Analyst

Okay, that's helpful. And you also mentioned that some of the other material processing applications were fairly healthy. How big is that category? What are the biggest pieces of that category right now?

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

So, I mean the main ones would be in -- obviously the welding side. The weaker ones in the quarter were cutting and additive manufacturing, has continued good growth in some of the cleaning applications, which we've highlighted over multiple years. We expect to be a very strong growth driver of revenue, particularly with higher power pulsed lasers, which is where we have a significant advantage. I mean, you basically got either deposition, joining, separating or ablative processes. So it's the joining and ablative processes that were stronger in this quarter.

Outside of materials processing, the defense revenue is strong, the medical revenue is strong. Those were two key drivers on that side, outside of materials processing.

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

Regarding the welding application, as I said before, can repeat, it's much more complicated than cutting. Cutting, everybody what you can buy laser, to add some [Indecipherable] design and is to introduce in the market. For welding, practically for each product, each part should be developed different technology, different [Indecipherable] operation, for different methods, and always and so on. It's absolutely new business model. Before, we saw for such application only, this as a retail, lasers only, and the customer tried to develop themselves this welding processes. We thought it's not very pleasant and going very smooth. Now it changed the business model, now going signing with many very serious, very large customers, program, multi-year program of change in development, automation of the welding, all processes in their corporations, we have 10 such customers, different areas and we have developed together with them full change of technology and welding technology in their platform. It will go in the same way with many automotive companies, automotive industry, railway industry, in aerospace industry, agricultural industry. So it's much more complicated in your model. It seems much more perspective, such way we believe next two, three years welding application will grow dramatically. And nobody is able to compete and see this in the case, we have had no changes to any of it, because it is much more complicated now that benefit in our advantage, we have in-house practical optical solution, outside accessories, electronic solutions, and also we made for these companies prototype machines, more than 20 different kinds of machines, various machines we produced prototype and market supply to customers [Indecipherable] throws them huge opportunity with technology to laser welding IPG processes, only IPG-patented processes.

Tom Diffely -- D.A. Davidson -- Analyst

Okay, great. Well, appreciate all the extra color.

Operator

Our next question comes from the line of Andrew DeGasperi with Berenberg. Please proceed with your question.

Andrew DeGasperi -- Berenberg Capital Markets -- Analyst

Thanks for taking my question. Maybe first, could you provide us, if I missed it, I'm sorry, the 6-kilowatt in overmix in terms of percent of high-power revenue? And specifically, could you maybe tell us how pricing has held up in the 6-kilowatt to 10-kilowatt?

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

So 6 kilowatts, approximately 50% of total high-power sales. Pricing has been more resilient at those levels basically because of the competitive advantages. To some degree as pricing changes on a per kilowatt basis at the lower level, it does feed through, but it's generally being better at those level, certainly on a sequential basis, was pretty good at the higher power levels.

Andrew DeGasperi -- Berenberg Capital Markets -- Analyst

Got it. And just generally speaking, are you seeing a substitution effect, where maybe someone who wants to purchase an 8-kilowatt, goes with 5-kilowatt because their uptime is not as high as with customers?

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

No, we haven't really seen that change. If anything in this quarter, some of the sales of the 5-kilowatt and 4-kilowatt were a bit lower, the mix at the one, two, three was a bit higher. And then you had to strengthen more than 6 kilowatts.

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

Keep in mind, say 5 kilowatts for us, not even 6 kilowatts, 5 kilowatts for us, we control 70% to 80% marketing situation won't change. Up to now, we control 70% to 80% of this market in total. Our competition before was coherent, for example with [Indecipherable] not Chinese. But see, all these companies now practical when losing market because with new price level, twice less than one kilowatt power, they are not able [Indecipherable] to compete in this market and it wasn't practical. We remain the only supplier of such kinds of laser which will dominate the market practically, 1 kilowatt to 2 kilowatt -- our new solution will drop essentially -- cost. We have introduced in our market also 3 kilowatt to 4 kilowatt unique at the Chinese and similar competitive we see ways that deal with solution.

So practically, with the drop of pricing, you started to increase again, and we returned back lower-end market segment. [Indecipherable] business here. But with one, two, three kilowatt also will be done with our share in the market, now a dropped to 40%. Now our target to return to 60%. We have all opportunity to make this shortly.

Andrew DeGasperi -- Berenberg Capital Markets -- Analyst

Got it. And one last question for me is, I noticed in your release, you mentioned facility consolidation at some point. Maybe, can you explain that along with your gross margin trajectory? Is that going to change at this point, or should we expect it to stay in that 45 to 50 for the medium term?

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

Our target always, we promise it will support 50 plus percent gross margin and 25% to 30% net income. Our target [Indecipherable] And we have made everything to, and we believe next year we will return back to these numbers.

Andrew DeGasperi -- Berenberg Capital Markets -- Analyst

Got it. Thank you.

Operator

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

James Ricchiuti -- Needham & Company -- Analyst

Hi, thanks, good morning. I know the mix can impact gross margins as well as volume obviously, but I'm just wondering the gross margin range that you're talking about, the 45% to 50%. Is there a way to think about what level of quarterly revenues we need to be at to see those kind of margins? It's a high-end?

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

So let's step back a bit, Jim. First of all, if you look at actually this last quarter being in with 330, if you strip out the inventory provisions being a bit higher and the under-absorption, it actually should be close to 50%. So if you recover those two amounts getting back above 350, 360 probably you see toward the top end of that range. If you see mix benefits starting to flow through, for example, increased sales of higher power lasers, increased sales of newer products, the ultrafast, the UV, higher power pulsed lasers, accessories, those would be a benefit. If you saw tremendous growth obviously in systems, even though we target improving the systems gross margin, you probably see some dilution of that impact.

I think in order to get back above the 50%, you still have to see very significant growth in rebound in the total business, and the numbers we run still show that it being in the $380 million to $400 million revenue range. In the last quarter, as I mentioned on the previous question, we did see relatively speaking quite a high mix of the one-kilowatt and three-kilowatt lasers in the less than six-kilowatt range and that probably had a bit of an impact as well coming into this quarter, despite under-absorption of fixed costs, you've got these ultra-high power lasers we're shipping. So there may be some benefit related to that.

So there's some very positive stuff, if you see the product mix shift going toward where our real capability is, being able to recover some of the gross margin in conjunction with the market rebound.

James Ricchiuti -- Needham & Company -- Analyst

Got it. That's helpful. Tim, can you quantify the price pressure that you have experienced in the quarter in the sub six-kilowatt category?

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

The price pressure sequentially wasn't that much, it was pretty much the same pricing, if anything on ASPs was more of an impact related to FX sequentially, but just the mix if you looked at the less than six kilowatts, was quite heavily weighted in the quarter to the lower end of the market. In fact, if you looked at our relative change in China revenue compared to one of our biggest competitors in China, we actually think we picked up some share in the quarter relative to their performance. They talked about their China revenue being down closer to 35% in the quarter, and we were only down 26%, clearly Han's, one of our main customers, was weak, where the other customers in China are actually held up, relatively speaking, OK. So that will be another sort of positive in terms of competitive dynamics.

James Ricchiuti -- Needham & Company -- Analyst

Are you seeing any variability around bookings by region, or was it below 1 pretty much across the board?

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

It was weak across-the-board. The US was strong, backlog in the US was very strong. Europe continues to be weak. Japan is a struggle at the moment. Overall tone in Korea, given the diversity of applications, is a bit better. Then you've obviously got a lot of geopolitical stuff going on in Turkey and Western Asia, which is a bit of a challenge. So you are grappling with weak macro in a whole bunch of different locations that's -- I mean, it's similar to what everybody else on the industrial markets has alluded to, couple of companies that have reported over the last couple of days, the challenges they're facing and the tone of their commentary was right in line with what we're seeing.

James Ricchiuti -- Needham & Company -- Analyst

Understood. Thanks a lot.

Operator

Our next question comes from the line of Mark Miller with The Benchmark Company. Please proceed with your question.

Mark Miller -- The Benchmark Company -- Analyst

Thank you for the question. Any impact of tariffs? Have you seen any pull-ins or push-outs in the quarter as far as tariff concerns?

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

The trade war and tariff issues continued to make decision-making within the whole business environment very uncertain, and that's the biggest issue that people face. There's a lot of talk, Mark, about people starting to make investments in manufacturing capacity outside of China, in companies like -- countries like Vietnam, other Southeast Asia, or even India. But that's a longer-term trend, right? Building a factory and making a capital equipment investment isn't something that happens in one or two months. There's certainly talk about that being a driver in the medium to longer term as people reconfigure some of their supply chains. But we had no particular impact in the quarter of anything being pulled in and the macroeconomic uncertainty was really what drives our lack of visibility at this time, the general macroeconomic uncertainty, which is exacerbated, I think, by the China trade war and tariff situation.

Mark Miller -- The Benchmark Company -- Analyst

We heard from a couple sources that in China besides pricing mix, the Chinese manufacturers actually would prefer, they seem to prefer, I mean, more local salespeople in China rather than buying a laser that might have superior reliability, which might not have the same number of representatives in sales in China. Do you agree with that, or do you contest that?

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

With OEM customer, clearly when you have good quality lasers, we don't have any big change in China, although OEM Chinese, old and new one, use our laser. Regarding the sales to companies, which is a huge portion of the market for the moment in China, so it depends from government policy, credit policy of Chinese brands, and so all this limited to I would say forecast now a requirement to buy in-house, to buy a local manufacturing. So this government policy is not that successful, someone -- one or two steps back. It's -- without such support, all this [Indecipherable] full bankruptcy immediately, full bankruptcy immediately. This government policy should not be a long time. IPG was included in the strategic technology by the Chinese government 20 years ago, they invested huge money to the price for raises. And so only recently started from where we enter with some the real commodity not thrown in that. But as they support to buy in-house. But it's temporary. While China will talk a big market, but now forecast the market itself to grow fast. India, for example, growing now, it started to grow very fast market, before it was very small. And other Asian countries, Arab countries, is now going to South America, everywhere it's a huge market to offset. So we now really changed our policy and also changed inside. But even Chinese market I will look in to say we are in very good position in the future, because they're not able to compete with the quality. The same, I must say up to now, sales of cars in China, nobody able to compete with BMW. Low-end cars, they use of own, but high-end cars they use from check outside the markets. That's the same story here with us.

Mark Miller -- The Benchmark Company -- Analyst

Thank you.

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

And Mark, just specifically on that, we have a very broad based footprint in China of sales and service people that is unparalleled, probably within the laser industry. We have not shied away from making those investments very broadly geographically within the company.

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

Also, which we are introducing in the market now, is medical presence, [Indecipherable] the Chinese never have now any similar year, seven years and five years. So we have now signed in big West contract for medical application, Chinese customers, for example, there are many others you talk of. There really aren't in Chinese markets, we have lot of new innovative products. Nobody in the world, not only China, nobody in the world we have near the time we have something similar. So it's new market for us. We'll have to go because this low-power, low-end -- becoming commodities. It's not more high-tech. It's also, with time everybody, each product has a go-in stage to start in high-tech, with very high profit, but [Indecipherable] and going down, and because it's a lot of copies. And so we introduced new solution. It's our policy, and we were very successful in this. Now we've changed our product line with new, much more sophisticated new application and new quality and, in most cases, unique. Nobody can compete to stay nearby.

Mark Miller -- The Benchmark Company -- Analyst

Thank you.

Operator

Our next question comes from the line of Nick Todorov with Longbow Research. Please proceed with your question.

Nikolay Todorov -- Longbow Research -- Analyst

Hi, good morning guys. Tim, the spread in the EPS guidance of $0.40 is wider than typically $0.20 or $0.30 that you guys give. So can you talk about the underlying drivers of that? Is it the lack of visibility, or is it mostly tied to the goodwill impairment charges that you said were not included in line?

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

No, it's got nothing to do with the goodwill impairment charge. It is just that these revenue levels, you see a greater degree of deleveraging relative to the ability to adjust expenses, right? We have made a good start to reducing and making cost adjustments and reductions, but we're not going to dismantle the entire manufacturing capability of the company at this point in time and the investment in employees and training and all of the other advantages that have made IPG a leader within the market. At these revenue levels, you just struggle to get an accretive business model going. You need to get that recovery coming back up to 330, 340, 350. And as we've shown in the last couple of quarters, even this last quarter, you get pretty solidly above $1 in earnings, right? At the lower levels, particularly if you get to the bottom end of that range, 270, you're dealing with a different set of issues. And it's -- there's two or three companies that have announced in the last two days, where exactly the same issues faced them around their business model and the level of expenses that they carry at the moment. So that's really where it is. It's just the mechanics of the business model.

Nikolay Todorov -- Longbow Research -- Analyst

All right. Okay. And then on the buyback, can you please update us on how much you have left? And can you talk about if and why not to get more aggressive here, given where the stock price is? And given how much cash you guys have on the balance sheet, and I'm just curious to know what's kind of your plans are to do with that cash here in medium to short term?

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

So first of all, and we continue to have wide-ranging discussions around capital allocation, the focus is obviously on funding. The most important part of our investments is R&D, capital expenditures. The remaining amount on the buyback at the moment I think is about $100 million. At lower valuations, we have in the past and would going forward probably buy back ahead of dilution, but that is specifically anti-dilutive buyback that is being put in place and was approved at the April board meeting we had. So we'll continue to evaluate things on a regular basis in how to enhance and refine our capital allocation policy. We want to maintain a very strong balance sheet, but we've also come a long way from where we were two or three years ago. We think that there will be opportunities that continue to arise as we develop product for the newer markets and start to grow sales there that we want to have the firepower to pursue over the coming periods.

Nikolay Todorov -- Longbow Research -- Analyst

Okay. And last question for me. Can you just talk about relatively the profile -- or the gross margin profile of that higher power lasers, you talked about getting some tractions with orders in China. Is that relatively in that 45% to 50% range, or is the margin profile of that laser is a little bit below that?

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

The higher power stuff?

Nikolay Todorov -- Longbow Research -- Analyst

The high peak power.

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

That has very strong margin profile on that. The product -- the margin of the product is significantly above the 45% to 50%. What takes you down to those levels is the under absorption of the manufacturing expenses and other period costs. So HPP lasers, for example, as well as the 100-kilowatt, 120-kilowatt, the 50-kilowatt lasers, 60-kilowatt lasers, the single-mode lasers, high-power pulsed lasers, these all are products that have very high and

and strong margin profiles, because the competitive dynamics are very different.

Nikolay Todorov -- Longbow Research -- Analyst

Okay. Got it. Thank you.

Operator

Our next question comes from the line of Krish Sankar with Cowen & Company. Please proceed with your question.

Krish Sankar -- Cowen & Company -- Analyst

Yeah, hi, thanks for taking my question. I have two of them, Tim. First, if you look at the geographic constraint, it looks like most geographies, except the US seem to have either macro or competition issues? I'm just kind of curious, based on your visibility, do you expect this strength in US to continue, or do you think that could be the next year to drop?

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

We're still, as I said, order flow in the US has continued to be robust, strong. There's a diversity of applications here, which is only probably equaled in Korea, which is the other area where I said that you tend to see continued relatively robust side. Competitively, the issues are faced primarily in China. So it's more the macro in Europe and Japan that affect things. My visibility into an insight into what's going to happen in the US is as good as yours, Krish, I mean, I look at all the same data points and all the same discussion points, and what the Federal Reserve is expected to do. It's clearly though the strongest economy in the world at the moment, and it depends whether a soft landing or even -- not even a landing, a touchdown is achieved or not and how that proceeds into next year, where you have an election cycle going on and a whole host of other things. My crystal ball is not any better than yours around that situation.

Krish Sankar -- Cowen & Company -- Analyst

Got it. Thanks Tim. And just another quick follow-up. As we look at over the last 10-plus years, you guys had technology leadership and the lowest cost and not a whole lot of competition. So 50-plus-percent gross margin made a lot of sense. Now we have competition, systems more in the mix. Just kind of curious, is it a 45% or 50% better than most of your peers, but if I look at it long term like five years out, is 45% to 50% still the right way, do you think it should be more in the low 40s for the gross margin?

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

I think Valentin answered that question earlier. We're focusing on really leading edge technologies, processes, applications and moving -- the real strategy is to shift away from the more competitively driven areas of the market to deliver value to the end customer. And if we execute around that, we will be back in a position of significant technology leadership and targeting getting back to the 50% gross margins that we had historically. So there's a lot of execution, but there's also a significant amount of R&D that's going into that. And by the way, momentum in different product introductions in areas that we're starting to actually achieve, whether it be in the higher power levels, on the more integrated welding solutions or the ultrahigh power lasers within the medical, year-to-date, we have had very strong sales of green lasers, the ultrafast product. These are all products that are extremely sophisticated, have very significant technology advantages, but there's also amount of execution that's required to get into really growing those sales. As Valentin said, the target is to grow the company to up to 50% of revenue from non-metal applications. And if you succeed in that regard, you return to being a very dominant leader within the industry.

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

This application is in the Europe and the US, not in China. So our dependence from China situation, will decrease very much.

Krish Sankar -- Cowen & Company -- Analyst

Got it. Thanks, Tim. Thanks, Valentin.

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

Thanks Krish.

Operator

Our next question is the final question, and is a follow-up from Joe Wittine with Edgewater Research. Please proceed with your question.

Joe Wittine -- Edgewater Research -- Analyst

Yes, thanks. I just wanted to ask on kind of your mid-term outlook for two applications. One, EV battery projects going forward, are there any large projects within your forecast time line, or are we getting past larger projects and that demand is more durable? And then second, on the QCW side, I'm curious on your thoughts for 2020, the potential for significant 5G-driven retooling? The QCW run rate is down by about half from the peak from a few years back, so I'm not sure if it's too early, but I'm curious if you think you could have a nice recovery on the C cycle next year? Thanks.

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

First of all, on the battery welding, it tends still to be project-driven, Joe, but it is pretty broad based, it's not just China investment. There's European investment going on, there's some European investment that drives China, you've got significant investment on battery going on in Korea. But it's still uneven from period to period, but it's a significant driver and we continue to think that this is a decade-long investment cycle, right? If electric vehicles are really going to transition to being 40% or 50% of the total vehicle demand and output, the amount of investment that is required over the next decade continues to be very significant. The welding, cleaning processes are very sophisticated in that area. That, in conjunction with some of the capabilities around LDD, puts us probably at the forefront of that market as compared to any of the other suppliers within the market. On the consumer electronics side, it's just we don't have any significant feedback or information on where the demand cycle will be next year even with 5G potentially being a growth driver. It's a bit early on that. We'd expect to know something toward the end of the first quarter or during the first quarter.

Joe Wittine -- Edgewater Research -- Analyst

Makes sense. Thank you.

Operator

That concludes our question-and-answer session. I'd like to hand the call back to management for closing comments.

James Hillier -- Vice President of Investor Relations

Thank you for joining us this morning and for your continued interest in IPG. We look forward to speaking with you over the coming weeks and on next quarter's call. Have a great day everyone.

Operator

[Operator Closing Remarks]

Duration: 58 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 -- Edgewater Research -- Analyst

Tom Diffely -- D.A. Davidson -- Analyst

Andrew DeGasperi -- Berenberg Capital Markets -- Analyst

James Ricchiuti -- Needham & Company -- Analyst

Mark Miller -- The Benchmark Company -- Analyst

Nikolay Todorov -- Longbow Research -- Analyst

Krish Sankar -- Cowen & Company -- Analyst

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