IPG beats estimates in 2Q12, sees brightening horizons in Europe and Asia
Updated: Revenues and profits rose in 2Q12 thanks to solid business in automotive and consumer electronics, and the near-term outlook is strong despite some macroeconomic sluggishness in several key regions.
[Updated 7/31: Added comments from the conference call Q&A, and updated stock price]
Oxford, MA -- IPG Photonics (NASDAQ: IPGP) posted higher-than-anticipated revenues and profits in 2Q12, citing solid business particularly in automotive and consumer electronics, and says the near-term outlook is strong despite some macroeconomic sluggishness in several regions (e.g. Europe and China).
2Q12 revenues came in at $137.9 million (+12% Q/Q, +13% Y/Y) to, operating income rose to $56.4M (+25% Q/Q, +22% Y/Y), net income jumped to $37.7M (+26% Q/Q, +23% Y/Y), and earnings per share (EPS) rose to $0.72 (+18% Q/Q, +14%. Y/Y). Those 2Q12 results also exceed what Wall Street analysts had been projecting: $135M in revenues and EPS of $0.66, notes MarketWatch. In IPG's 1Q12 quarterly results -- which were flat with 4Q11 -- the company had predicted 2Q12 sales would be up slightly to $128-$138M, with EPS in a range of $0.60 to $0.70.
IPGP shares spiked nearly 20% in late morning trading after the better-than-expected 2Q12 results were announced; by late afternoon that had pulled back to around 10% gains.
Driving demand in 2Q12 were laser sales for materials processing applications (up 16% Y/Y), including laser cutting, laser welding, and laser marking, according to CEO Valentin Gapontsev. Sales of high-power lasers rose 13% Y/Y to exceed $62M, primarily for automotive applications and cutting OEMs; sales of medium-power lasers rose 32% Y/Y to $11.1M thanks to use in thin-sheet metal cutting and welding in consumer electronics. Pulsed laser sales were up 10% Y/Y to a record $38.2M, also thanks to demand from the consumer electronics sector. Lower-power laser sales were down 11% Y/Y to $4.2M, mainly to medical end markets.
By region, Europe actually was solid in 2Q12 despite well-known macroeconomic struggles, according to Gapontsev, with record sales in Russia primarily from telecommunications and materials processing. In Asia, China, Japan, and Turkey were strong as well, he noted. "Despite slower economic growth, China is performing well primarily due to market share gains in cutting applications, strength in micro-electronics and growth in welding applications," added CFO Tim Mammen.
During the quarter IPG purchased the remaining 22.5% minority interest in its Russian subsidiary NTO IRE-Polus from RUSNANO. Even with that $55M transaction, though, the company generated a record $52M in cash from operations, noted Gapontsev.
"This was an excellent quarter and guide as the adoption of fiber lasers over incumbent technologies remains healthy," says Mark Douglass from Longbow Research in a research note. Another positive indicator: inventories declined almost $2M in 2Q12 even as sales grew by 12%, reversing a trend of rising inventories the past few quarters, he points out. "IPGP continues to dominate the space and the near term looks better than anticipated."
For 3Q12, IPG continues to see a strong near-term outlook, projecting revenues rising to a range of $145M-$155M, and EPS increasing to a range of $0.74 to $0.84. (Wall Street watchers were anticipating 3Q12 revenues of $144M and EPS of $0.72, MarketWatch notes.) As more competitors add fiber laser offerings, that actually helps drive acceptance of fiber lasers and expands the market for everyone, pointed out Mammen. Several factors are counteracting macroeconomic softness in various geographic markets, Gapontsev explained, "including the adoption of fiber lasers over other laser technologies, the use of lasers in an increasing number of applications, and strong demand trends in key industries, including automotive and consumer electronics." Douglass cautioned, though, that any outlooks extending into 2013 might be a bit aggressive given the macroeconomic environment.
Growth by region
IPG's growth in Europe has been heavily weighted toward Russia, which continues to make a big push to reinvest in manufacturing capabilities, spanning major industries from auto to shipbuilding to aerospace to trains. Russia is also IPG's biggest end-market for telecommunications. IPG believes strongly in Russia as a key growth market; Mammen said 3Q12 sales to Russia should be good, and 4Q will be traditionally strong in Russia." Mammen reiterated IPG's macro outlook on Russia as a secular growth story as it modernizes its industry, and subsequently its embrace of industrial laser technology in manufacturing, particularly fiber laser devices and systems. "Our targets we have for Russia over the next couple of years are very high," Mammen said.
Excluding Russia, the European region has seen a "substantial increase" in customer demand: German sales were up 4%-5% in 2Q12, and European sales overall minus Russia were up by about 5%, noted Mammen. An example is laser cutting applications, and from customers that had been previously more focused on CO2 lasers.
In the US, Mammen expects to see "a nice pickup" going into 3Q12, with a fairly nice pickup in Japan. China also will perform relatively well, he said -- not the same surge as seen earlier this year, "but still a strong quarter," he said. In Europe IPG currently sees good order flow, notably in microelectronics and auto, including some advanced application orders for high-power lasers (10 kW and 3 kW single-mode), he pointed out.
Sales in China soared to nearly $38M in 2Q12, which Mammen attributed to investments in strengthening IPG's local management and distribution efforts. Demand for laser cutting 2D has grown significantly over the past year, he noted. Specific high-interest applications include high-quality laser marking for microelectronics and medium-power laser welding. By year's end, look for fiber lasers to have made "significant market share gains in China," Mammen predicted.
Auto adoption: Thousands of units at stake
Addressing specific trends in the auto sector for the next six months, Mammen pointed to the ongoing transition to lasers for both cutting and welding high-strength steel, a trend he characterized as at "a relatively early stage" in North America and "a very early stage" in China.
This is a critically important growth area for industrial lasers. Mammen revealed that one OEM in North America alone expects to deploy several thousand laser cutting systems worldwide "in the medium term" for cutting high-strength steel.
Mammen also pointed to a "relatively new development in North America," following German counterparts, in increasing the use of aluminum in vehicles. Fiber lasers in particular, he said, are very well suited for auto applications in welding aluminum, and the company has recently qualified a couple of end-users.
In Asia, China shows good progress in adopting new technologies in auto manufacturing -- not so much companies realizing they want to use industrial lasers, but more shifting to new manufacturing techniques that they want to adopt, Mammen explained. Japan as well is seeing some industrial laser purchasing from larger manufacturers, Mammen said, a trend that started in 2Q12 and is expected to continue in 3Q.
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