IPG Photonics - Earnings Call - Q1 2020
May 5, 2020
Transcript
Speaker 0
Good morning, and welcome to IPG Photonics First Quarter twenty twenty Conference Call. Today's call is being recorded and webcast. At this time, I'd like to turn the call over to James Hillier, IPG's Vice President of Investor Relations for introductions. Please go ahead, sir.
Speaker 1
Thank you, Doug, and good morning, everyone. With us today is IPG Photonics' Chairman and CEO, Doctor. Valentin Kaponsis Chief Operating Officer, Doctor. Eugene Sherbakoff 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 the impact of the COVID-nineteen pandemic on our business and those detailed in IPG Photonics' Form 10 ks for the period ended December 3139, 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, 05/05/2020.
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.
Speaker 2
Good morning, everyone. Before I discuss our results and strategic initiatives, I want to address how IPG is navigating the effect of the novel coronavirus outbreak. The well-being of our people, our customers, and our partners is our highest priority. IPG employees who can work from home and are doing so. In all regions, we continue to manufacture and service our solutions.
Although there are some restrictions to US production, the impact to date has not been material given our products are used across a wide variety of critical infrastructure sector. In Germany, we didn't stop work practically at all. In Russia, it was only one week vacation during these two months. In order to safeguard our people, we have employed additional distancing and cleaning measures in our facilities, sourced 100,000 masks for use in our production, have introduced very effective UV means for total disinfection of air in our old production on office rooms, and temporary increase wages for our hourly employees who continue to work on-site. As a result, up to date, we are proud to report that IPG did not have any COVID nineteen infected cases on all our world locations in spite of more than eighty percent of our staff from going to work on-site practically all these two months.
IPG was trying to help also to locate to local communities communities elsewhere, everywhere. In China, we have donated approximately 1,000,000 RMB to help the drought affected by this worldwide epidemic. And in The US, we have donated many tens of thousand masks to local hospitals in need. In Russia, we donated a modern CT imaging system to local hospital as well as mask and other means. Eugene will discuss the impact on COVID nineteen in our operation in greater details.
I want to assure you that at IPG, we are doing all we can to help safeguard our people and communities. During this time of uncertainty, which is unlikely that we have faced before, it is unclear what will happen to global demand over the coming weeks and months. This uncertainty makes forecasting our business very challenging in the near to medium term. Nonetheless, our strong balance sheet, ample cash reserves, and minimal debt provide us flexibility in responding to coronavirus related disruptions and to emerge from the crisis with the ability to to size with the many opportunities we expect to see. We plan to continue investment in strategic research and capital project that will drive the next leg of market share capture for our fiber laser technology.
Because our fiber lasers are a key enabler enabler of automated precision manufacturing, we expect to disproportionately benefit from an eventual recovery in the industrial cycle. Timing to results, we delivered first quarter revenue at the high end of our guidance range on better than expected performance in China and strength in new products. Despite the weaker demand environment, we have seen strong customer interest in a number of our leading edge laser solutions. In cutting and welding applications, our ultra high power lasers at twelve, fifteen, or 20 kilowatts have demonstrated superior attributes to competing products, including faster cutting and welding speeds, better beam parameters, higher work efficiency, and see significantly better reliability. IPG lasers continue to deliver peace of mind and to lower lifetime cost by enhancing end user productivity.
We received received our first volume order for our adjustable mode beam lasers in for electric vehicle battery welding. As a reminder, our AMB lasers permit the broadest range of beam tunability enabling spotless welding. In addition, we more than doubled sales of high power nanosecond pulse lasers at three hundred and five hundred watts used for foil cutting in electric vehicle battery process and applications. IPG remains the only reliable laser source supplier of these products, and we continue to expect strong growth in this application during the year. Product innovation remained core to IPG's success.
During the first quarter, emerging product and application sales were 23% of total revenue, increasing more than 20% year over year despite the softer demand environment for IPG laser systems during to COVID nineteen. Sales of green pulsed laser used to improve solar cell efficiency increased by more than 50% year over year. Sales of ultrafast pulsed lasers increased modestly as customer acceptance and traction, was curtailed by the uncertain demand environment. However, we continue to target more than 50 new projects for these lasers across a wide range of applications processing glass, ceramic, set, circuit boards, OLED, films, batteries, and solar cells. Sales of medical lasers were a record $10,000,000 in Q1, increasing more than 500% year over year.
We continue to ramp sales of our thulium laser solution for urology and other soft tissue applications from the partnerships we seeded several years ago and an FDA approval late last year. Our medical laser business includes sales of consumable fibers, recurring revenue stream that will grow as the number of installed system increases. Advanced application revenue more than doubled year over year with strong growth in government, semiconductor and scientific applications. We will continue to invest in transformative new products, including new medical treatments, mid infrared lasers for spectroscopy inspection and sensing application, ultra high power single mode laser for aerospace and defense. These new solutions will enhance our growth and margin profile and provide greater geographic and end market diversification.
Finally, I want to express my gratitude to the IPG team for their outstanding performance during this most challenging time. I believe their execution combined with our laser technology leadership and robust balance sheet will enable IPG to capitalize on the long term secular growth in laser technology and to deliver on our mission to make our fiber laser technologies the tool of choice in mass production. With that, I will turn the call over to Eugene.
Speaker 3
Thank you, Valentin, and good morning, everyone. I will begin my discussion of the effects of COVID nineteen Currently, all three of our major production facility in Germany, The US, and Russia remain open. However, we have scaled back production in Massachusetts to thus product required to support essential businesses. This include lasers and laser system used in the transportation, medical, agriculture, communications, and defense end markets among them.
Our German operation operating on more normalized basis, albeit with social distancing measures in place. In Russia, our employees are working on rotating basis to limit contact. Our highest priority remains the safety of our employers, their families, our business partners, and community. And as Valentin noted, we have put in place additional health, safety, and workplace measures to safeguard the health and well-being of our valued employers and colleagues. Our vertical integration production model continues to provide us with critical advantages in this time of supply chain disruption.
Also, we source certain raw materials from third party. We internally produce the more complex components and models used in our technology. Our leading edge components and models are the critical technical performance and cost differentiator between IPG and our competition. We continue to leverage this advantage developed for more than twenty years of investment in technology, people, and processes. Many of our third party suppliers remain open, provided us companies we need.
However, the supply chain constraint we face are primarily related to logistic, including available air cargo space and higher freight rates. Available cargo space on flights between The US and Europe, and Europe and Asia is more limited, so shipments are taking longer. In addition, shipments with Europe are limited with countries worse affected by COVID nineteen and experiences some delays in other places due to check at border crossing. Recognizing that this solution situation is fluid and subject to change, we believe we have the ability to meet near term demand for our products. In total, manufacturing and operating expenses were approximately 20,000,000 lower in Q1 compared to the peak level in Q2 twenty nineteen.
Also, of this reduction is due to the lower level of activity. It is primarily attributed to the cost reduction actions we undertook in the second half of twenty nineteen. We remain committed to managing our cost structure and working capital to the business environment. Examining our performance by region, revenue in China decreased 40% year over year and represented approximately 28% of total sales. As we had expected, performance was impacted by weaker demand due to the normal coronavirus outbreak.
So we did see a strong recovery in orders during the later half of March and April. We continue to face aggressive price competition in region. However, pricing was more stable in the sequential basis. In Europe, where industrial demand environment remains very challenging, revenue decreased 15% year over year. Revenue in North America increased 4% year over year with strong growth in medical lasers and advanced applications.
Our growth in North America illustrates the benefits of our diversified portfolio strategy, where increasing the adoption of emerging laser solution and application of set softness with industrial markets. Sales in Japan decreased 12% year over year, given ongoing micro macroeconomic weakness in the region. Sales in Korea decreased 26% year over year, due to the effect of COVID nineteen with the with the region. And sales in Target decreased 36% year over year due to the virus and other macroeconomic challenges affected cutting business in the region. With that, I will turn the call over to Tim to discuss financial highlights in the quarter.
Speaker 4
Thank you, Eugene, and good morning, everyone. Revenue in the first quarter declined 21% year over year to $249,000,000 Revenue from materials processing applications decreased 28% year over year and revenue from other applications increased 123%. Sales of high power CW lasers decreased 33% year over year and represented approximately 48% of total revenue. Sales of ultra high power lasers at six kilowatts or greater represented nearly 50% of total high power CW laser sales. Pulse laser sales increased 1% year over year with growth in green and high power pulse lasers partially offset by lower sales of lower power pulse lasers for marking applications.
Systems sales decreased 43% year over year as growth in systems for medical device manufacturing was offset by lower sales of other IPG laser systems and Genesis non laser systems. Medium power laser sales decreased 28% on continued softness in additive manufacturing and the transition to kilowatt scale lasers in cutting, while QCW laser sales decreased 30% year over year. Other product sales increased 38% year over year, driven by growth in medical laser sales and total service revenue. Q1 GAAP gross margin was 41%, which declined 600 basis points year over year. Compared with the year ago period, the year over year decline in gross margin was driven by the following factors: 200 basis points from less favorable absorption of manufacturing expenses 190 basis points from higher inventory reserves, 90 basis points from an increase in shipping costs, 20 basis points from foreign exchange and 100 basis points from other factors, including lower product pricing.
First quarter GAAP operating income was $45,000,000 and operating margin was 18%. During the quarter, we recognized a foreign exchange gain of $20,000,000 primarily related to revaluation of U. S. Dollar cash and other assets in Russia given the depreciation of the ruble versus the U. S.
Dollar. Excluding this foreign exchange gain, operating margin was 10%. Q1 net income was $36,000,000 or $0.68 per diluted share. The previously referenced foreign exchange gains increased EPS by $0.28 The effective tax rate in the quarter was 23%. If exchange rates relative to the U.
S. Dollar had been the same as one year ago, we would have expected revenue to be $5,000,000 higher and gross profit to be $3,000,000 higher. We ended the quarter with cash, cash equivalents and short term investments of $1,200,000,000 and total debt of $41,000,000 As Valentin noted earlier, our strong balance sheet provides us with ample flexibility in responding to coronavirus related disruptions, particularly around investing for future growth opportunities. Effective operational execution resulted in cash provided by operations of $57,000,000 during the quarter. Capital expenditures were $18,000,000 in the quarter and are trending below our targets of $115,000,000 to $125,000,000 for 2020.
During the quarter, we repurchased 109,000 shares for $13,000,000 Today, IPG also announced that its Board of Directors has authorized the purchase of up to $200,000,000 of IPG common stock in open market transactions or otherwise, subject to market conditions and other relevant factors. This new authorization is in addition to the company's existing 125,000,000 stock repurchase program authorized in February 2019, of which approximately $60,000,000 remains available under that prior program. In March and April, we extended our credit lines with Bank of America and Deutsche Bank for five and three additional years respectively. Bank of America also increased the total unsecured availability to $75,000,000 from $50,000,000 First quarter book to bill was meaningfully greater than one and above normal seasonality, reflecting solid bookings growth and the weaker revenue quarter in China. Normally, this would have translated into stronger guidance for the second quarter, but the global demand environment remains very uncertain given the effects of COVID-nineteen on manufacturing facilities and customer confidence around the world.
While we have seen a rebound in China based order volumes in the March and April, this has coincided with declining bookings in other regions, including Western Europe, North America and other countries in Asia. As such, visibility into a recovery in global demand remains uncertain at this time. Despite the uncertain near term demand environment, we continue to target significant longer term growth opportunities in laser welding, electric vehicle battery processing and our portfolio of new products. Our strong balance sheet will help us through the crisis and emerge with the ability to capitalize on the many opportunities we have ahead. For the second quarter of twenty twenty, IPG expects revenue of $260,000,000 to $290,000,000 Company expects the second quarter tax rate to be approximately 26%.
IPG anticipates delivering earnings per diluted share in the range of $0.40 to $0.70 with 53,100,000.0 basic common shares outstanding and 53,700,000.0 diluted common shares outstanding. Financial guidance provided this quarter is subject to greater risk and uncertainty given the COVID-nineteen pandemic and its associated impact to the global business environment and government policies. 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 cancellation and delays, competition, tariffs, trade policies, health epidemics and general economic conditions. Our guidance is based upon current market conditions and expectations, assumes exchange rates are referenced in our earnings press release and is subject to risks outlined in the company's reports with the SEC. With that, Valentin and Eugene and I will be happy to take your questions.
Speaker 0
Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer session. Our first question comes from the line of John Marchetti with Stifel. Please proceed with your question.
Speaker 5
Thanks very much. I was just wondering, Valentin, if you could comment a little bit or add some color to your pricing commentary about the China market. It sounded like pricing there at least was a little bit more stable on a quarter over quarter basis. I'm curious if you think that is something that's somewhat more sustainable or if it has to do more with the restrictions that we saw in place in during the March.
Speaker 2
Okay. Chinese market now demonstrate more stability than it was two years in 'eighteen. In 'nineteen, the price is now much less than it before, but the price is becoming more stable. And the situation, of course, very uncertain and so on. But in total trend for us now, it looks very much more better than we expected.
So during the for example, last two months, we received water for me mispower lasers much, much more than before at the time. It's only during two months, we received water of about the last year. It was half of last year. So it is, if it's paramount, the same trend, so we can expect to double the business in the mid power lasers this year to compare to 19. Of course, situation, certain nobody can predict what happened next month is but even very pessimistic case looks very promising.
You guys didn't know. But it's still we introduce especially, we call traditional opinion in the to compare to our Chinese competition. In second half this year, when we introduce new generation mid power lasers much more perfect and much more higher functionality and the whole other to compare with the family, which we developed in '18. And now we sell in the market. So situation for high power laser in China also growing fast.
They purchase more and more high power laser with more than 10 kilowatt power. Especially with frame orders, it's huge. It's all going now. So let's say we still as a result, our now production facility in Russia, especially in Germany and Russia, which fails Chinese market. Now over, busy.
So we now working 80% of people in the working, on-site and with, on over time over time, not enough peep people to fulfill in current order. For new product, we we introduced mainly the way we put in The US now. We introduced now that we have to deal with new production line. Product market accept very well, but now we still have problem to produce in volume. We are working everywhere to increase create new production line, especially
China very
Speaker 5
And then, Tim, maybe just a quick one for you. Last quarter, you talked about an expected impact of around 45,000,000 I'm curious how that actually played out in the quarter if you were above, below that or in line there. And maybe with the guidance that you're giving, if you can maybe quantify a little bit what you actually think the revenue impact and maybe the EPS impact of the ongoing virus situation is? Thank you.
Speaker 4
So given that we came in at the top end of the guidance range we gave for Q1, the actual impact in the first quarter was slightly below the $45,000,000 that we had framed Q1 guidance around. That really was based upon a strong rebound in demand in China in March having really lost February as a month. That was a characterized it as a lost month. And overall demand actually in Europe was was reasonably strong in Q1 with total order flow. And as you saw, given North America actually grew a little bit year over year, particularly with the strength on the new medical applications, that demand environment held up reasonably well.
Within our Q2 guidance number, we're not going to give a specific estimates of how much it's impacted. It's more difficult to do because whilst you're seeing strength and significant strength that Vansen has just talked about in Europe, the demand environment at least at the moment sorry, significant strength in China, the demand environment in Europe and order flow there as we mentioned has weakened. It's also weaker in North America and there's a bit more uncertainty as well for China Japan relative to the original forecast that we had there. So the overall impact though on Q2 is more than the 45,000,000 that guided to for Q1, but we're not going to go and give a specific number around it. The drop through to EPS is probably a bit more difficult to quantify, given that we're not giving a specific revenue number, but it will result in gross margins being lower than they would otherwise have been and certainly earnings per share being reduced below the level that we were expecting in the second quarter.
Speaker 5
Thanks very much.
Speaker 0
Our next question comes from the line of Jim Ricchiuti with Needham and Company. Please proceed with your question.
Speaker 6
Regarding the pickup that you saw in demand in China in March and April, is that, do you think, to support the current demand for these manufacturers as they've emerged from lockdown? Or does this appear to be them adding additional manufacturing capacity for business there perhaps assuming is coming in in q two, q three?
Speaker 4
Jim, I mean, some of it is a rebound from very little demand happening for a a six week period. But I think it's in part it's not necessarily new capacity coming on board. It's it's that of probably all of the economies that have gone through the coronavirus and COVID nineteen, China went into it earlier. China is certainly exhibiting at this point in time more of perhaps a v shaped recovery in terms of the letters that everyone is talking about. It's probably as Val had said total demand for some of the the lower power kilowatt scale lasers has repadded very strongly.
We've seen also good demand from higher power pulse lasers for EV, higher power lasers for welding. We'll reference the AMB. I think like everybody, it's not entirely certain how sustainable this can be. Valentin's comment was that if it is sustained, it does point to a nice recovery in our business over a reasonable recovery in Q2 and potentially that picking up in Q3. I think there's just so much uncertainty out there at the moment about whether a a v shaped recovery in China will be sustained or what kind of recovery we'll see in Europe, North America, and other Asian countries as we get out of this.
But certainly, we've been surprised by the strength of the demand, and it's been a positive thing coming into this quarter from China.
Speaker 6
Got it. With respect to the systems business down pretty significantly in q one, I guess, is it fair to say this is mainly more a US business to a lesser extent European? Is this was the decline more concentrated in in medical device manufacturing? And you've got some tougher comps as you look out of the back half. Is this an area of the business that perhaps has more uncertainty to it?
Or do you see some recovery off these low levels?
Speaker 4
No. So in fact, the demand for the medical device systems used to manufacture medical devices draw distinction between that and the medical lasers we solve for medical procedures, There's the ILT acquisition, which services medical device manufacturing. Demand within that application has actually held up reasonably well. Demand for our more specialized multi axis systems that are used in fine processing has also held up well. The weakness has really been on the system side for the smaller form compact cutting system where that has certainly been impacted by people pushing out investment decisions.
So that would be used more on the job shop and less more less advanced applications. And with with Genesys welding systems, particularly on the non laser side where, again, it's sometimes a significant investment decision. Certainly, that business has shown a slowdown. So I'd characterize it as some of the nonlaser welding applications for Genesis and the more basic systems, small form compact cutting systems?
Speaker 2
No way. Is this a system business we're changing with IoT. And with Genesys, we are changing the time a new product line, which include the laser of the sources or to and it's all on increased share of total system system with laser. IoT, for example, the way of using our new ultra fast lasers, new generation of machine for stent stent making. And this before, there was a very small cell with former
Now with laser, new with laser, this qualification going very well. Right now, we see demand for start to grow very fast for this machine. Second, also, for IoT, for example, before they offer sales within US. And now we extend the IoT marketing IoT system in the Europe also, East Europe in going even to the East because new generation such machine very competitive becoming very competitive in quality and also in cost to compare to this local manufacturer.
Speaker 6
So it sounds like you're suggesting this business may be bottoming here and should improve with the new products in the back half?
Speaker 4
I think what we're saying is we're seeing strength from some of the more advanced and newer products that we're introducing. And as we introduce more of those newer products, that's really been the target of the business strategically is to drive that growth from those areas. So it is to introduce more laser based welding systems with Genesis and to grow the medical device manufacturing capability that we've that we acquired as well. So that's a slight nuance to what you're saying, Jim, but pretty similar.
Speaker 6
Okay. Thank you.
Speaker 2
We see changes. It's more longer to make this new version machine in the mobile, it process going very well, so we expect it. And so this year, next year, we'll be in real market new way efficient, very effective in highest performance machine with based on laser processing.
Speaker 0
Our next question comes from the line of Tom Diffely with D. A. Davidson. Just
Speaker 7
wondering, based on the cost cutting that Eugene referenced earlier, I was wondering, Tim, is there a change to the long term target model from a margin point of view? Are you still in that 45 to 50 range, do you think?
Speaker 4
At the moment, we're not taking the changing the long term target model. We're clearly operating at revenue levels below even medium and longer term targets, and that's really why the current performance is below that range. At this point in time, we're still trying to manage the business and definitely targeting trying to get back to the 45% to 50% range.
Speaker 7
Okay. And then just another question on the COVID impact on capacity. It sounds like it's not really impacting you right now as much as maybe it would be if you're at full production. Curious,
Speaker 8
is there some
Speaker 7
way to quantify the impact to your capacity, either through having to do social spacing or supplier constraints?
Speaker 4
Eugene, do you wanna address that question from an operations perspective?
Speaker 7
Yes.
Speaker 3
In principle, I already mentioned that we didn't get any big any big problem in Germany because our capacity was where we used approximately 90% of our capacity, without without some strong limitations. In other countries, also, I mentioned that in Massachusetts, we only produce products which required support essential businesses. In Russia, of course, it's other situation, but our main production now in Germany. And I think we have a lot of today orders, and we definitely will ship these orders in time. It's not not no risk.
And from the future, we'll see if it will be necessary. We can introduce some additional measures like second shifts, some additional people, and so on. Again, for production point of view, I don't see any big risk. Only one risk, it's exist. We maybe in future, we will not have enough orders.
But if orders will come, we'll definitely will proceed all these orders.
Speaker 2
No disagree do I agree in full? For current product, we have enough capacity for current product. It's laser set for. For new product, we introduced now the same, but visible green laser, UV laser, ultrashort lasers, and so on. We still don't have enough capacity.
We have to deal to looking for people and creating new production line. We still in the first phase, it's still this year, next year, we have a slow real mass production. Then a real today, we would be a realize all potential. Now current capacity not able to support this demand.
Speaker 7
Okay. Thank you.
Speaker 2
We can try what you what do you need? We don't need equipment. We don't need the facility. We have this. We need people.
Need to well trained people in electronics and the optic engineers, technician, high quality. In The US, in Germany, it's very difficult available with their people. So we transfer more and more this production have to East Europe to Russia, and we build new, very large mass production capacity in Belarusia in Minsk.
Speaker 0
Our next question comes from the line of Michael Feniger of Bank of America.
Speaker 9
This question was already answered and addressed. The gross margin actually picked up in Q1 versus the fourth quarter even with the sequential drop in revenue. If I go back a few years, your Q1 margin sequentially actually goes down. So I was hoping you could kind of address some of the measures you were able to put in place to actually show that improvement. And with the revenue recovering Q2 and hopefully in Q3, I'm just wondering if on that target gross margin, has the revenue that you need to get to, has that changed in terms of hitting $300,000,000 or $350,000,000 or that $400,000,000 mark, has that changed the paradigm in terms of what gross margin ranges could be?
Speaker 4
Michael, the first part of the question there about Q1 gross margin, I think we were pleased given the revenue level with the gross margin that we achieved, particularly given that we also had some higher inventory provisions. So the performance even relative to our guidance was better. I've not really tracked it as to comparably what gross margin does Q1 to Q4. I don't tend to focus on that so much. What I will say is in Q1, we've referenced that we've had these cost reduction initiatives that were started really in Q3 twenty nineteen they accelerated in Q4.
So one of the benefits we had in the first quarter was that those cost reduction initiatives flowed more completely and fully through the business model. As Eugene mentioned, the total amount of expenses that we incurred in the first quarter were both manufacturing and operating, we haven't split it out between the two, was $20,000,000 lower. A significant part of that compared, for example, to the middle of last year was on the manufacturing side. So partly due to lower activity, but lower headcount because some of the restructuring, fewer contractors used in certain locations. So it's really around the way that we try to manage the cost base of the business.
And some of that wasn't even really clearly because we started this last year. It wasn't related to the pandemic taking hold. These were operational initiatives that we had started to execute upon over the last six and nine months. With regard to the future, I think the thing that's most pertinent to that, so we're not fundamentally changing the range of revenue that needs to be achieved for the business model to show decent leverage in it. I think as we get back above $300,000,000 transition to $330,000,000 $350,000,000 we get into a much more comfortable position.
And if we can grow revenue to $370,000,000 or 400,000,000 we think that we will be again getting back towards close to 50 percent margin, in particular, if some of that growth comes from our leading edge products that we're introducing to the market, whether it's not just the higher power lasers for cutting, but some of the AMB lasers for welding, the new product in ultrafast, the green lasers, the more advanced systems, the medical devices, the devices for medical procedures. So all of those are as those have started to show strength in them, some of the defense applications, we shipped another 100 kilowatt laser this quarter. These are all things that over time should benefit the business model. So there's no fundamental change in seeing some accretion and leverage out of gross margin that we expect to happen as revenue starts to recover. Even in old product old product, current product, like
Speaker 2
the mid power lasers, high power lasers, one micron range as is. This year, we introduced new generation laser with the cost of them. Manufacturing cost would be 26% less than current product. Performance would be better, but the cost would be 20%, 30% less. So we expect so that with this product, we will increase gross margin essentially from this mass product.
Speaker 9
That's that's helpful. And longer term, I'd love to get a sense of how you think COVID impacts, you know, your customer base with manufacturing facilities, but also just the supply chain. With with social distancing, do do new facilities need more automation and and and laser technology for safety concerns? Do you see with what we've seen play out in other markets with supply chains, do we have to see them get reoriented and maybe some manufacturing facilities have to move out of China or be rebuilt locally in other regions? Just curious if you've seen any of that.
Speaker 4
I mean, I think from a productivity perspective within our own systems, the safety and cleaning and even some of Valentin referenced this sort of UV light cleansing that we're using, we're not seeing a fundamental change in the ability to use our space or the productivity from it. Some of the things that you reference are actions and initiatives that we've already taken and been investing in for several years. So increased use of automation in diode manufacturing and packaging are all part of our strategies. It's one of the reasons that we have a supply chain that is really focused in either North America, Germany or Russian, where we don't use lower cost labor in other areas around the world. So certainly, automation is an area where we think that potentially IPG will use more of it over time and some of our customers will use more over time.
That continued transition towards automation will help laser based sales, particularly as they're integrated within robotic and other systems. Some of the other questions, think, are broader based you know, economic and supply chain strategic and logistics decisions that companies may make. One of the outcomes of this is given the disruption of being able to get components from different places around the world is that you may see a reversion from just simply concentrating manufacturing in low cost countries like China and other areas in Asia because the actual cost of doing so is higher than having your supply chain more distributed. So you may well see some investments around component manufacturing in North America and Europe, and and that again may be over the wrong extent of benefit to IPG.
Speaker 2
And our strategic strategic target, our that mass production, we are making more and more, you know, our target to make in full East Europe. East Europe mean the Russian, Belarusia, new very large production facility. It's for China, for the for low cost product and so on. For but America, U US, and the Germany would be major for the development of new product, Introduction, if the market is product qualification and so on, is there this with Europe and American market only, but not production. Oh, we move for more cost.
And cost of production, for example, now would cheaper than in China. It's much more protected, much more higher quality and people and very well organized with the way with this facility. We have built already 330,000 square feet we have built with that production. But next year, it will start to work in full, so that will help us to deal with mass production, to making with very low cost, very high quality, and so on, well protected against any political and other problem. Thank you.
Speaker 0
Our next question comes from the line of Jed Dorsheimer with Canaccord Genuity. Please proceed with your question.
Speaker 10
Hi, thanks. And it's nice to see a positive outlook here. I guess, question regarding the uptick with respect to what I presume is pent up demand from things being shut down over in China. I'm curious if we look at China's GDP being largely export and we look at the rest of the world largely seeing a decline in GDP from a consumption perspective, I'm just curious how you reconcile the pickup in manufacturing capacity. Is it a function of utilization or is it upgrades in existing facilities that is attributing to the demand?
Thanks.
Speaker 4
First of all, I think that there continues to be uncertainty as to how global GDP and China GDP, North America, European GDP will recover over the next six to nine months, I think. That remains the uncertain question and some of the outlook there. With regard to the China rebound in demand specifically, yes, some of the China investments relate to exports, but don't forget that the Chinese government has been pursuing a strategy of trying to drive local consumption and demand. So that may be driving part of this recovery. Many of the industries we also serve are not so much export orientated, whether it be electric vehicle manufacturing to supply local demand, the housing sector, consumer durable goods.
Of course, some of the consumer electronics stuff is is exported, but there's also strong local demand there as well. So I think perhaps some of the the supply chains that we serve are not just solely export focused. They are also driven by internal China demand. I think over the medium term, clearly, the data points that we're gonna be looking at are how, you know, regional and global PMIs trend, what export data looks like for robotic orders coming out of out of other Asian countries and, you know, machine tool data export. So whilst we're pleased with the overall performance in Q1 with revenue coming at the top end of the range and pleased to be able to guide at least sequentially higher, it's not as though we or the global economy is out of the woods yet.
I think there remains some uncertainty on that, Jed.
Speaker 10
That's helpful. Thank you. Just as a follow-up, and you may have missed this, I jumped on a little bit late on the call, but the with the price stabilization, particularly in the low to mid power range where we've seen intense price pressure over the past year or so. Is that do you attribute the stabilization to less competitors? Are we seeing attrition that's finally playing out?
Or are you seeing we've just hit a bottom in terms of that pricing? Or maybe just a little bit more color on the pricing dynamic in what was a more competitive segment of the market.
Speaker 2
Well, first of all, we dropped price essentially. China stimulated drop of prices to win this market with the market worldwide the market. When we have this challenge, and we also drop the price despite our product much higher quality, much more reliable, and so on. But our prices come close to Chinese prices, especially for that, we drop very essential cost of this upgrade the design. Now and now our price is very low price.
Very company Chinese could not drop more because in other case, they near bunker many of them with our government support near bankruptcy now. Very low gross margin and artificial even because real gross margin much less than report even at the most of them because government support from this competition. But we without any competition, providing similar, we have not big difference in price. No. By the way, from the point any European, any American competitor competitor now away, they are not able to compete it over this, not only with our quality, but also prices for practical.
China remain only competitor for IPG in this area. And the way they could not drop prices more essentially because it would be absolutely for them, and why it is so they generate only almost The rate was only artificial. We support it some go to the, like, thirty forty 35% gross mark, but it's artificial, not the real market gross margin. So no more way to go down.
Speaker 10
Got it. Thank you. That's really helpful color.
Speaker 2
Next question comes from the line of We still are still at one. Even with these prices, we now with new our design, we our gross margin, we increased again. It would drop, like, 50%. Now we increase again up to 60%, even 70%. So real gross margin and so on.
So we're competitive now even with such price and profitable.
Speaker 0
Our next question comes from the line of Mark Miller with The Benchmark Company. Please proceed with your question.
Speaker 8
Thank you for taking my question. I just was wondering about the supply chain again. Are you seeing any impact? You mentioned air shipments in terms of component supply. Or are you being impacted by some of your customers, their problems related to the virus?
Speaker 4
Eugene, do you want to take that question on supply chain and components?
Speaker 3
Yeah. From the point of our current component supply, we didn't get any problems because we made some measure before. It means we have enough components to our continuous operation of our stock, main components. And for, of course, this COVID nineteen's influence for our customers sometimes, and this is why, some of them, they delay these orders and also to, ask us to delay shipment for some existing orders. These are main problems.
But in principle
Speaker 7
All cannot be completed at scale.
Speaker 3
But in principle, we don't see any big problems today connected to COVID nineteen with her supply chain.
Speaker 8
Just wonder if you could estimate
Speaker 2
Due to to our policy because first of all, we shipping outside much less components than any our competition. Most components, especially expensive with so on, critical, we produce it in house. Now produce account and not only optical, electrical, metal capacity. Any things get sold. As soon as maybe 80%, 90%, possibly buying making inside.
Only 15% outside. It's number one. Second, we hold our typical policy to hold three months storage for for all series product. They also help for the one month shortage, two month shortage. We have enough, most case, a part in house in storage.
So it's only very few problem we have really now with components, which still waiting from us, especially for new product, but not for mass product.
Speaker 8
You mentioned ultrafast You mentioned ultrafast lasers were strong. I just wonder if you could estimate what percent of recently introduced products were what percent did they represent of total sales? Is it around 20%?
Speaker 4
Yeah. The ultrafast product as a percentage of total sales is still relatively relatively small, Mark. I think what Valentin was referencing was that there's good progress being made on numerous different projects. He mentioned one specifically that IPG subsidiary, ILT, has developed a new system for stent cutting using our own ultrafast lasers. So the numerous projects we have there are are moving well.
Ultrafast was was reasonably performed reasonably in the quarter, but it's certainly nowhere near the level we wanted to get to.
Speaker 2
With ultrafast product, major product we they will introduce market on the end of last year beginning this year. It's all testing customer. We're going very well. Customer, very like most customer we provide for test. They really like their product.
They promise very serious order. But our problem now to install mass production. Now we produce not enough even for current demand. During this year, we have installed production up to the couple thousand per year, then it would be real we become serious business. But it's still it's a complicated assembly need to, where is it, train these people, and so on for this.
This is major problem in the people now, not the but and I install mass production.
Speaker 8
No. I was actually referring to all new product sales, not just ultrafast lasers, recently introduced.
Speaker 4
Oh, those were 23% of total revenue, Mark. Thank you.
Speaker 2
A year ago, it was less than 10%.
Speaker 4
I can't remember exactly, but it's a share it's growing from a year ago.
Speaker 0
Our next question comes from the line of Krish Sankar with Cowen and Company. Please proceed with your question.
Speaker 11
Hi. Thanks for taking my question. I have two of them. Tim, I just wanted to get your thoughts on the Commerce Department ruling from last week, expanding the scope of the export rules, given the fact that you guys have quite a bit of exposure to China. How do you think about it to the extent that you understand and interpret those rules?
And then I had a follow-up.
Speaker 4
Chris, I can't answer that question at this point in time. I haven't done enough work on it to be able to to look at it and see how it might affect us. So I I don't have an answer to that question right now.
Speaker 0
Got it. No worries. And then
Speaker 11
a second question, I just wanted to find out on the June sequential uptake, can you just tell us which product lines are going to grow more than others? And are you seeing your typical seasonal uptick you see in pulse lasers because of the consumer electronics end market?
Speaker 4
I mean, we don't normally get that granular on it. We expect obviously to see high power pickup because of the demand from China. QCW will see some increase, but it's not a fundamental investment cycle that we normally see from consumer electronics, but that would expect to see some pickup. And, pulse, maybe some additional marking, but, again, it's you're not you haven't got a a major consumer electronics investment cycle that is driving our sequential improvement in q two. And as I said, even though it's great to see a bit of a sequential improvement compared to what guidance may have been without COVID and the demands that we were seeing, it's still a relatively weak performance.
Speaker 2
Got it. Thanks, Tim.
Speaker 0
That is all the time we have for questions. I'd like to turn the call back to management for closing remarks.
Speaker 1
Great. 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. We'll be participating in a number of virtual investor conferences this quarter. Have a great day, and stay safe, everyone.
Ladies
Speaker 0
and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.