IPG Photonics - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 revenue of $250.7M and adjusted EPS of $0.30 exceeded internal guidance and Street consensus, supported by demand recovery in general industrial and e‑mobility, medical and advanced applications; GAAP EPS was $0.16 and gross margin was 37.3%.
• Materials Processing remained 85% of revenue (down 6% y/y), while Other Applications grew 21% y/y; Emerging Growth Products expanded to 54% of sales, and book-to-bill was approximately one on higher revenue.
• Q3 2025 guidance: revenue $225–$255M, adjusted gross margin 36–38%, OpEx $89–$91M, adjusted EPS $0.05–$0.35; management flagged tariff uncertainty but highlighted supply chain flexibility and manufacturing agility as offsets.
• CFO noted Q3 guidance midpoint is slightly above Street, a first in “quite a while,” signaling narrative stabilization and emerging operating leverage; strengthened leadership appointments reinforce execution capacity.
• Catalysts: commercialization of Crossbow directed energy system (deliveries to Lockheed Martin), continued medical/urology wins, Asia recovery, and tariff mitigation progress—key drivers that can influence investor sentiment near term.

What Went Well and What Went Wrong

What Went Well

• Revenue came in above expectations; adjusted EPS ($0.30) and adjusted EBITDA ($31.5M) were at/above guidance ranges, aided by improved manufacturing absorption and lower inventory provisions.
• Strategic initiatives delivered tangible results: medical and advanced applications drove growth; “we’ve now delivered multiple units of our first laser counter‑UAV solution, Crossbow, to Lockheed Martin” with extensive field testing and customer demos validating effectiveness.
• Book-to-bill of ~1 on higher revenue, signs of stabilization in welding, cutting, marking, and EV battery manufacturing demand, plus micromachining strength; Asia +14% y/y.

What Went Wrong

• GAAP operating income near breakeven ($0.1M) and operating margin “—%,” reflecting elevated OpEx to support strategy and leadership build-out; y/y revenue down 3% due to divestitures.
• Tariffs still a headwind (impact ~115 bps to gross margin), with continued uncertainty; product/geographic mix pressures limited margin expansion despite absorption improvements.
• Europe down 24% y/y on soft industrial demand; North America down 4% y/y, with welding weaker vs prior year due to soft EV manufacturing demand in the region.

Transcript

Speaker 5

Good morning and welcome to IPG Photonics second quarter 2025 conference call. Today's call is being recorded and webcast. At this time, I'd like to turn the call over to Eugene Fedotoff, IPG Senior Director, Investor Relations, for today's introductions. Please go ahead with your conference.

Speaker 3

Thank you and good morning, everyone. With me today is IPG Photonics CEO, Dr. Mark Gitin, and Senior Vice President and CFO, Tim Mammen. On today's call, Mark will provide a summary with a quick look at our second quarter results and the overall demand environment. I'll walk you through the progress we are making on our long-term strategy. After that, he will turn it over to Tim to provide financial details, and then we'll open the call for questions. Let me remind you that statements made during this call that discuss our expectations or predictions of the future are forward-looking statements. These forward-looking statements are subject to risks and uncertainties and can cause the company's actual results to differ materially from those projected in such forward-looking statements.

These risks and uncertainties are detailed in our Form 10-K for the period ending December 31, 2024, and our reports on file with the Securities and Exchange Commission. Any forward-looking statements made on this call are the company's expectations or predictions as of today, August 5, 2025, only, and the company assumes no obligations to publicly provide any updates or revisions to any such statements. During this call, we will be referencing to certain non-GAAP measures. For more information on how we define these non-GAAP measures and the reconciliation of such measures to the most directly comparable GAAP measures, as well as additional details on our reported results, please refer to the earnings press release, earnings call presentation, and the financial data workbook posted on our Investor Relations website. We will also post these prepared remarks on our website after this call.

With that, I'll now turn the call over to Mark.

Speaker 1

Thanks, Eugene. Good morning, everyone. Second quarter revenue came in above our expectations, increasing 10% sequentially and 2% year-over-year, excluding divestitures. Our first year-over-year revenue increase since 2022. Our results were driven by a combination of a modest demand improvement in multiple markets and geographies, as well as our continued focus on our strategy to drive profitable growth. We're investing in key strategic initiatives targeting a $5 billion TAM that offers us hundreds of millions of dollars in revenue growth opportunities, and we are starting to see results. By quickly adjusting our operations, we were also able to ship approximately $10 million out of the $15 million in customer orders that we believe were at risk of being delayed due to tariffs, and were not included in our second quarter guidance.

Starting with our materials processing business, we saw a sequential demand improvement in welding, cutting, and marking applications, with some growth in e-mobility and general industrial markets. Our unmatched capabilities in lasers and welding process monitoring technologies, combined with deep applications expertise, continue to differentiate IPG Photonics in the marketplace. This enabled us to secure key wins in EV manufacturing despite ongoing uncertainty in the market. In China, renewed capacity investments in battery manufacturing drove growth in our welding. On the industrial side, a stabilizing demand environment supported sequential growth in welding, cutting, and marking applications. Booking trends are encouraging, with demand showing signs of improvement and book-to-bill at approximately one on our higher second quarter revenue as we move into the second half of the year.

We have also seen improvement and stabilization in the leading indicators, such as PMIs and the industrial production through June, but the demand environment remains uncertain. We also expect demand for our products will benefit from increased onshoring and local investments in automated production. We're also excited that early returns from our growth investments help to drive revenue in the quarter. Our strategic focus on developing innovative lasers and photonic solutions to expand into medical, micro machining, and advanced applications is showing results. In advanced applications, we achieved another quarter of record revenue, driven by higher demand across all categories, primarily in directed energy, semiconductor, and scientific applications. Last quarter, I shared that strategic investments to grow our advanced applications business allowed us to achieve a key milestone six months ahead of schedule.

I'm thrilled to announce that we've now delivered multiple units of our first laser counter UAV solution, Crossbow, to Lockheed Martin. This disruptive turnkey directed energy system is enabled by IPG Photonics' laser systems expertise and high-performance commercial single-mode lasers, and supported by our high-volume manufacturing capabilities. Crossbow is a scalable and cost-effective laser defense system that can neutralize unmanned aerial threats and can operate as a standalone system or integrate into layered defense architectures. Over the past six months, both IPG Photonics and Lockheed Martin have conducted extensive field testing and customer demonstration of Crossbow, validating the system's operational effectiveness against the increasing threat of smaller class Group 1 and Group 2 drones. We'll be showcasing Crossbow this September at DSCI in London, one of the industry's leading defense exhibitions, and we anticipate strong interest from both defense and commercial customers for protection of critical military and civilian assets.

This is another example of how IPG Photonics leverages our core laser and photonics technologies to address critical market needs. Turning to our other growth initiatives, micro machining delivered strong revenue compared to the prior year, despite some shipment delays related to tariffs. This is a high-potential market for IPG Photonics, where we see strong alignment between our technologies and the key applications of our customers. As we shared last quarter, we are also making good progress in medical, with a new urology customer that is already helping to drive medical revenue growth. Looking ahead, we expect momentum to continue with additional product introductions planned for Q4 2025, 2026, and beyond as we execute on our strategic development roadmap.

The traction we are seeing across micro machining, medical, and our other focus areas reinforces that our teams are executing well and that these investments are laying the foundation for long-term growth. Finally, our capital allocation strategy is an integral part of our growth strategy. As we've said before, our primary focus is on organic growth investments and strategic M&A. We expect to spend approximately $100 million on CapEx in 2025 to expand capacity and capture growth opportunities. Within M&A, we are evaluating tuck-in opportunities with a range of $50 million to $200 million in revenue. Our revenue and competitive position in cleaning applications has benefited from the cleanLASER acquisition that we made at the end of last year, and we continue to target companies that offer differentiated technology or market access to accelerate strategic growth initiatives.

During the quarter, we continued to opportunistically return cash to shareholders, repurchasing $30 million of IPG stock, building on the $1 billion in share repurchases over the past three years. Since joining IPG just over a year ago, I have been focused on setting the foundation to drive profitable growth, including strengthening the organization. We achieved a recent milestone on this objective with the appointment of five key leaders, including four recent hires, to help advance our strategy and support continued global growth. These leaders have a proven track record of driving strategy and execution. They each bring distinct strengths, deep expertise, and a shared commitment to collaboration and innovation. With these new appointments to our executive leadership team, we are shaping a stronger IPG, better equipped to execute with speed, serve our customers with excellence, and drive our next chapter of profitable growth.

I am pleased to welcome them to the team and excited about what we will be able to accomplish. I am proud to report that we've been effectively adapting to the dynamic operating environment by leveraging the flexibility of our global manufacturing supply chain to minimize the impact of tariffs. We've demonstrated agility, shifting production across regions to better serve customers. We also continue to work on alternatives to optimize our tariff exposures. As a result, we were able to ship most of the orders that were previously anticipated to be delayed due to tariffs and longer customs processing. While new tariffs have recently been announced, our global footprint and supply chain flexibility position us well to continue meeting our customers' needs. As I mentioned earlier, our second quarter book-to-bill ratio was approximately one on higher revenue, and we are encouraged by signs of further demand stabilization in our business.

Industrial production has been improving, and inventories at some of our cutting OEM customers have normalized, supporting a return to more typical purchasing behavior. We don't believe the recent increase in demand is driven by customers pulling orders forward in response to tariffs. That said, the demand environment continues to be sensitive to external factors, so we are approaching the second half with cautious optimism. In closing, I am encouraged by the progress that we're seeing, both in the stabilization of our core business and in advancing our strategy to drive laser adoption in markets with high growth potential. While tariff-related pressure and uncertainty persist, we remain focused on what we can control and confident in our ability to navigate this environment while executing for profitable growth. With that said, I will now turn the call over to Tim.

Speaker 0

Thank you, Mark, and good morning, everyone. My comments will generally follow the earnings call presentation, which is available on our Investor Relations website. I will start with revenue trends by application on slide five. Revenue from materials processing decreased 6% year-over-year as a result of divestitures and lower sales in cutting, welding, and additive manufacturing applications, partially offset by higher revenue in micro machining and the acquisition of cleanLASER. Revenue from other applications increased 21%, driven by higher sales in medical and advanced applications. As Mark already mentioned, we saw sequential improvement in revenue in cutting, welding, and marking. Welding revenue grew on customer wins and improvement in industrial demand and EV battery investments, primarily in China.

Cutting revenue also grew sequentially and was nearly flat compared to the prior year as the cutting OEM business showed some stabilization in Europe and an increase in demand in Asia and North America. Marking and engraving sales were also more stable. Our cleaning revenue improved sequentially and continued to benefit from cleanLASER. Mark already highlighted strong results in our medical and advanced applications in the quarter, so I won't go over them again. Our emerging growth products performed well in the quarter, increasing to 54% of sales, driven by a wide variety of laser sources, subsystems, and systems. Moving to the revenue performance by region on slide six, sales in North America increased 31% sequentially and were down 4% year-over-year. Sequential growth was primarily driven by higher sales in medical and advanced applications, as well as improved sales to cutting OEMs.

Despite more stable sequential performance, welding revenue was down compared to the prior year due to soft demand from EV manufacturing in the region. Sales in Europe were stable, with less than a 1% sequential decline and down 11% year-over-year, excluding $11 million in divestitures. Lower cutting and welding sales are results of soft industrial demand and were partially offset by cleanLASER. Revenue in Asia increased 4% sequentially and 14% year-over-year, benefiting from higher sales in welding and cutting, as well as advanced applications. We have continued to see a strong demand recovery in e-mobility, coupled with our business wins in EV welding applications. Sales to additive manufacturing were lower in the quarter due to timing of shipments, while demand remained strong. Moving to the financial performance review on slide seven, revenue came in above our expectations at $251 million, up 10% sequentially, and down 3% on a year-over-year basis.

Foreign currency increased revenue by approximately $4 million, or 1% this quarter. Gross margin was 37.3%, flat year-over-year. Adjusted gross margin was 37.8% at the top of our guidance and was driven by improved manufacturing cost absorption and a decrease in inventory provisions, mostly offset by higher cost of products sold due to geographic and product mix and increased shipping costs. The impact of tariffs was 115 basis points, which was better than our expectations. Operating expenses were above last year's level, primarily due to the investments we are making in key areas that are central to our strategy, as well as investments in strengthening our organization, which Mark highlighted earlier on this call. GAAP operating income was breakeven, and our adjusted EBITDA was $32 million, slightly above the top end of our guidance. GAAP net income was $7 million, or $0.16 per diluted share.

Adjusted earnings per diluted share, which include stock-based compensation but exclude amortization of intangibles, other acquisition-related charges, foreign exchange loss, and discrete tax items, was $0.30 in the second quarter, above our guidance range. Moving to a summary of our balance sheet and cash flow on slide eight, we ended the quarter with cash, cash equivalents, and short-term investments of $900 million and no debt. During the second quarter, we spent $15 million on capital expenditures and $30 million on repurchasing IPG shares, supporting our balanced capital allocation framework of investing in growth and returning cash to shareholders. We now expect CapEx of approximately $100 million in 2025 as we expand capacity primarily in Europe. We expect operating cash flow to improve significantly in the second half, substantially offsetting CapEx. Looking ahead, we expect CapEx to decrease significantly and free cash flow to improve next year.

Moving to our outlook on slide nine, for the third quarter of 2025, we expect revenue of $225 million to $255 million and adjusted gross margin between 36% and 38%, including a potential of a slightly higher impact of tariffs. With investments in the growth of our business and strengthening the organization, we expect our operating expenses to remain elevated at between $89 million and $91 million in the third quarter. We anticipate delivering adjusted earnings per diluted share in the range of $0.05 to $0.35, with approximately 42.5 million diluted common shares outstanding. Our adjusted EBITDA is expected to be between $22 million and $36 million. In closing, we are pleased to see signs of continuing revenue improvement coupled with results from our strategic initiative, and we believe we have significant operating leverage in our model.

Our strong balance sheet gives us a significant advantage given the near-term uncertainty in the operating environment. With that, we'll be happy to take your questions.

Speaker 5

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from Jim Ricchiuti with Needham & Company. Please proceed with your question.

Hi, thanks. Good morning. Congrats on the quarter. First off, on the book-to-bill, I'm wondering if you could provide any color on book-to-bill by region. Was there much variability in terms of the regional bookings?

Speaker 1

Hey, Jim. Thanks very much for the question. Good to hear from you. Actually, book-to-bill was one and really just about one across all regions.

Good.

That was, of course, on. Go ahead. Sorry.

No, please, Mark.

I was just going to say that was also on top of the higher revenue as well, so we're quite pleased with that.

Got it. My follow-up, Mark, is from the directed energy commentary. I'm wondering how you're thinking about the opportunity for IPG over the next few years, just relative to maybe the other emerging growth opportunities you're targeting. Can you say, for instance, how many customers you're working with in this area? Thank you.

Yeah, sure. Thanks, Jim. The directed energy, again, is part of the work that we're doing, taking the key technologies within IPG Photonics. This is the lasers as well as the broader photonics and the applications understanding to really direct it to some key areas of growth. The advanced is one with the directed energy, as well as the medical and micro machining areas. Specifically in directed energy, what I can say is that this is a very interesting market for us. In terms of market size, it's a little bit hard to estimate, but it's a developing market. There are kind of billions of dollars spent each year, on the order of $1 billion in the U.S. Our solution addresses a key segment of the market, and that's the key part that we believe is growing.

This is, as I talked about on the call, addressing the smaller class drones, the Group 1 and Group 2 drones, which is the biggest issue today, or let's say a very significant issue today, both in warfare. We've seen that as an issue, as well as in civilian infrastructures where there's incursions in airports, incursions at borders, incursions in stadiums. It's a big issue today. From a market standpoint, the Crossbow laser counter-UAV system is a turnkey system that directly addresses the small drone threat. We have the partnership that we talked about with Lockheed Martin, which is addressing one part of the market. We believe the market is a broader one that has both opportunities in the defense sector, but also the civilian piece.

I've mentioned that we've done extensive testing with Lockheed Martin, that that's going very well, and that we'll be bringing the system to the DSCI show in September, where we'll have a chance to talk to a broader customer base as well. Overall, very excited with the progress the team has made. This is a great application for us because it's the combination of our core technologies with the single-mode lasers, as well as the photonics. It's key for us because this is something that we can bring into our commercial manufacturing infrastructure, where we're manufacturing volumes of these single-mode lasers, but also systems and subsystems. We could do this at a very disruptive price point and cost point. That's why we believe that this is a unique position to be able to address this smaller drone class at a cost point that could be broadly used.

Thanks, Mark. Appreciate the additional color on that. I'll jump back in the queue.

Speaker 5

As a reminder, if you'd like to ask a question, please press star one on your telephone keypad. One moment, please, while we poll for questions. Our next question comes from Ruben Roy with Stifel. Please proceed with your question.

Thank you. Hi, Mark, and hi, Tim. Mark, I wanted to start with maybe just walking through the outlook. It's great to see the progress and some signs of stabilization. When we look at the Q3 guidance, maybe you can just walk us through the puts and takes of that guidance. You had $10 million that you had previously anticipated out of the $15 million come through in Q2. Maybe just an update on how you're thinking about potential tariff impact as a portion of that guidance for Q3. You had a comment about cautious optimism for the second half. I'm just wondering, you know, what kind of visibility you might be getting from your customers as you think about the second half. I.e., do you think that there's going to be continued stabilization and maybe improving bookings into Q4? Thank you.

Speaker 1

All right. Thanks very much. A couple of the pieces here. Again, we're very happy to see the book-to-bill of one. That book-to-bill on top of the higher revenue. As you mentioned, we were able to ship about $10 million of the $15 million that we expected to move into Q3 because the team did a fantastic job of being able to mitigate the tariff issues because we have this flexibility, as we've talked about, to be able to move the manufacturing from region to region and optimize the tariff situation. We believe we'll be able to do that also, of course, going forward. We did see very good demand in material processing. We're seeing the industrial businesses, the industrial markets. There's been improvement over the last few quarters. You've seen that, some of that improvement in PMI. We're seeing that industrial pickup.

We're seeing it in material processing broadly across each of the regions and broadly across many of the applications, including the areas of welding. We talked about the EV pickup. We've seen that also in cutting. We've seen our cutting inventories. Some of our OEMs have normalized. We're seeing that area pick up. We've seen increases, continued demand increases in things like additive manufacturing, as well as, again, broad-based. We saw a strong medical. We picked up another customer, as we've talked about, in medical that's attached to our roadmap of urology. That's continuing to see growth. Again, we're seeing kind of broad-based improvement, I would say. I would say cautious optimism. The reason I'm saying cautious optimism is because, of course, there's still tariff uncertainties, and we're still in a macro environment that hasn't completely recovered for sure. That's really my comments on that piece.

Got it. Thank you for that, Deepin. Yeah, go ahead, Tim.

Speaker 0

We went through a standard usual process on generating guidance. There's nothing particularly unusual in there. I think the only thing that's good is that even at the midpoint, we're slightly above where the street was. I think that's the first time in quite a while that we've been able to guide at a midpoint that is mildly positive. I think we're more than bouncing along the bottom at the moment. We've probably got a little bit of lift-off, a little bit of lift-off at the moment.

A little bit, indeed. Yes, I can't remember the last time that you guys had a guide above our numbers. That's great. If I could follow up on Jim's question, Mark, on the defense stuff, would love to understand how you're thinking about high energy as well. There have been some awards, and actually, just yesterday, another award for a 100 kilowatt system. Is that part of your strategy longer term, perhaps, or are you focused more on this lower cost stuff that you talked about? Thank you.

Speaker 1

Yeah. What I would say is that we've been playing in the overall market in directed energy for many years. We have very high performance, I'd say the best single-mode lasers that are applied broadly in the marketplace, as well as our amplifiers. Those tend to play in many of those programs. The high power is not what the Crossbow laser counter-UAV system is. This system is really focusing on threats from these Group 1 and Group 2 drones, the smaller drones that are more widespread and can be addressed with the relatively low power using our high brightness single-mode lasers. That's really the area that we're talking about here. We think that that's a, as I mentioned, a significantly growing market because it's one of the biggest issues today. As you're reading, it's a big issue on the battlefield today.

These small drones that you can buy for hundreds of dollars can inflict major damage. It's also an issue in the civilian infrastructure, borders, et cetera, as well. We're starting to see more of that, and it's only increasing. We think that's a really good area for us to play.

Great. If I could squeeze one more in for Tim. Tim, on the gross margin, I might have missed it, but did you give, as part of that 36% to 38% gross margin number, it sounded like a little bit of a higher impact from tariffs. Did you give the inventory absorption number that is impacting the gross margin?

Speaker 0

I mean, relative to Q2, we had an improvement in underabsorption that we said benefited gross margin a bit. We're still, relative to peak efficiency, probably 500 basis points off getting back to that more optimal level. We saw a meaningful improvement, a couple of hundred basis points improvement in the second quarter. I expect that to flow through to Q3 as well.

Okay. Thank you. That's all I had. Thank you.

Speaker 5

Our next question comes from Scott Graham with Seaport Research Partners. Please proceed with your question.

Hi, good morning, and congratulations on a nice quarter. I wanted to ask a couple of questions here, including piggybacking off of what you just said about gross margin, Tim. First, could you kind of tell us how the order book looked as the quarter progressed? Maybe any specific end markets in particular, anything you could mention would be helpful. I don't mean in dollars. I kind of mean year over year because we all know that June is typically the largest month for dollar orders. I'm just hoping, as on a year-over-year basis, you could talk about the progression.

Speaker 0

Yeah, I mean, I think year over year, the total increase, the total value of bookings increased. We haven't given that number, but it was up compared to Q2 2024. I think the overall tone during the quarter was significantly improved compared to a year ago. April was actually quite a strong bookings month, so it wasn't backloaded. Our revenue happened to be a bit more backloaded in the quarter, with June being very strong on revenue. That probably reflected the fact that the bookings in April were pretty good. May was a little bit weaker, and then June picked up again. We weren't scrambling to get to this number at the end of the quarter. It was easier than it has been on not just a year ago, but even the last couple of quarters where bookings have been more weighted to the end of the period.

Oh, I think he left.

Speaker 5

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

I just wanted to ask about the systems business, a smaller part of your business, obviously, but the first year-on-year and sequential increase that we've seen in a while. I wanted to understand what may have drove that. I assume some of that may be the cleanLASER business, but can you elaborate on what you're seeing there?

Speaker 1

Yeah, certainly, Jim. A couple of things. First of all, we're very excited with cleanLASER. That's going very, very well, that acquisition that we did at the end of last year. Integration is going very well, and they've been continuing with their traction in the market. We're also seeing, you know, we've also had some increases in other areas of our systems, you know, making micro machining systems and systems in welding and such as well. I don't know, Tim, if you have anything you'd add.

Speaker 0

I think you covered it. I think just on the robotics side, we had about a quarter on the large-scale gantry robotic systems as well, and a pretty good quarter on LightWELD too.

Got it. On the medical business, it sounds like you're encouraged by the ramp you're seeing with the second customer in the urology area. I wonder if you would help us understand whether there's been any change in the overall competitive environment in this area of the business.

Speaker 1

Let me speak to that, Jim. Let me just step back for a moment and just say that, you know, urology is one of the key areas that we're investing in. It's the medical side, the micro machining, the advanced. In that urology roadmap, we have a broad base of capability in that area, and we're bringing out new systems. We talked about the fact that we're bringing something out in Q4 and then a whole roadmap of growth. We have the strongest position on the thulium lasers in urology, and we're continuing to grow as we picked up this new customer that's bringing our share up and continuing to drive our share in that marketplace.

Thank you.

Speaker 5

Our next question is from Scott Graham with Seaport Research Partners. Please proceed with your question.

Hi again. Sorry about that. The gross margin, the minus 500 basis points, Tim, could you provide a little bit more color around that, if you would?

Speaker 0

Yeah, sure. I think the positive takeaways from gross margin were that we had better manufacturing efficiency. We had a benefit from lower underabsorbed costs. We've made statements that that's a real focus of ours of trying to get that improved. It helped a little bit. The revenue is up a bit. The second side of it is that we've got inventory more under control over the last 12 months. The inventory provisions that we incurred were a bit lower, offsetting those benefits. We did have, really related to product mix, both on a geographic and product basis, a little bit of an impact to gross margin due to lower product gross margins. In that regard, we've actually got cost reduction initiatives across four or five different areas that we're starting to roll through the business model. We expect that product gross margin to improve.

I mean, just a couple of examples of those, as for example, the rack-integrated higher-power lasers are starting to be introduced more fully. We're looking at some of the micro machining lasers with higher power output and better specification that the bill of material won't change on. We're automating the production of some of our consumable fibers for medical. There are other areas that we're working on to get the product cost down. Expect that to bounce back. The tariffs, if you really compare Q2 to Q1, the tariff impact was 115 basis points. You add that back to both the adjusted and unadjusted gross margin, you're back close to 39% on an adjusted basis and 38.5% on a GAAP basis.

Very good. Yeah, very thorough response to my question, Tim. Thank you really a lot for that. It would be nice also if you guys got a little bit of help from your end markets. I think there are a couple of companies that have reported so far that have indicated that, hey, look, once this tariff uncertainty, once that cloud starts to lift a little bit, you know, there's going to be an increase in green projects are going to be greenlighted and things are just going to be a little bit better. I was wondering if you were kind of hearing that from your customers, a big part of your revenue base is general industrial across the world. I was just kind of hoping if you heard anything from that from your customers, if you could share that from your general industrial market.

Speaker 1

Hey, Scott. This is Mark. As I talked about, we've seen, we've obviously seen some pickup. We've seen the book-to-bill strong. We've seen the PMIs improving in the various regions. We're still in some, we still have some uncertainty. I'd say, again, it's what I said. I think my customers are saying the same thing, that they have a cautious optimism looking forward. There's still some uncertainty with the tariffs, and there's some uncertainty in the market. I'm hearing, let's say, cautious optimism.

Very good. Thank you.

Speaker 5

As a reminder, if you'd like to ask a question, please press star one on your telephone keypad. One moment, please, while we poll for questions. Our next question comes from Mark Miller with The Benchmark Company. Please proceed with your question.

I'm just wondering if you can comment about welding market outside of China, in particular, the United States.

Speaker 1

Yes. Hi there, Mark. We've seen good growth in welding globally. I can say that the strongest growth that we saw was specifically in EV. The biggest piece of growth there was in China, but we have had broad-based growth, and we've seen growth also quarter on quarter with LightWELD in welding. We are seeing some increase.

I'm just wondering, too, if you can comment about the margin profile of your backlog. Is that similar to what you're expecting in the third quarter?

Speaker 0

Yeah, I mean, the mix on that's not fundamentally different going into the quarter, Mark.

Thank you.

Speaker 5

We have reached the end of the question and answer session. I'd now like to turn the call back over to Eugene Fedotoff for closing comments.

Speaker 3

Thank you, everyone, for joining us this morning in your continued interest in IPG Photonics. We will be participating in several investor events this quarter and are looking forward to speaking with you again soon. Have a great day. Thank you.

Speaker 5

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your time.