IPG Photonics Corporation (IPGP) Earnings Call Transcript & Summary

[Audio Gap] Gesuale, senior analyst at Raymond James, covering the industrial tech space. I'm delighted to have IPG Photonics here to take us through the story. It's been a fantastic run for the company year-to-date, up over 70%, really encouraging earnings as well. We have the company's CEO, Mark Gitin, here to take us through the story as well as Tim Mammen. We're going to do a fireside chat format. And if there's any questions from the audience, please let me know. Let a couple of you filter in here.

Mark, let's start by level setting people to the IPG Photonics story. Take us through your core competency, applications for fiber lasers, regional exposure of the business and topics to ground the audience in your overall business.

Yes. Sure, Brian. So IPG is a global leader in fiber lasers and incredibly innovative company. I've known the company actually since 1995, when I met the founder of Valentin Gapontsev. He invited me to the site then in Germany in 1996, and there were 14 employees, incredible innovative capabilities. And I tracked the company over the years. I spent all of these years in the lasers and optics industry, kept in touch with him, kept in touch with the company. And actually in the mid-teens, when I was at Coherent, I had the opportunity to compete with IPG in metal cutting. We had a group that -- and we built high-power fiber lasers and tried to compete with IPG, not very successfully, I can tell you. And then as I came to consider taking the IPG role as CEO, I certainly spent a lot of time and did my due diligence and looked at all of the technologies and capabilities that I could see from the outside, and I saw that there was a really good opportunity to grow. But it was really when I got inside the company and was able to look under the covers that I really understood the depth and breadth of the capability of the company, both in the fiber lasers capability, but also broadly in photonics and optics and scanners and measurement capability and an incredibly deep capability in laser applications. Really understanding the interaction between laser materials and really having the capability to provide solutions. So that was very key. And the areas that IPG drives is really on the industrial side, it's kind of 2 areas. Industrial, it's about metal cutting, welding, additive manufacturing is a key application there, cleaning. And then we've been expanding the business into nonindustrial markets in medical, micromachining and the defense areas. And I would just say, as I mentioned, incredibly innovative company and really with the opportunity to provide solutions. And that's very key as you look to grow the business, and we look to grow into new areas of TAM, total available market that we can access because we can provide solutions going all the way from the laser to the broad components and ultimately to subsystems and systems are key areas that we can provide. You asked about the -- from the standpoint of the global aspects, we've become in the last couple of years, much more balanced across all of the global regions.

Great. You've been CEO for a little under 2 years. It seems longer because you've gotten so much accomplished. What are maybe the top 2 or 3 changes you've put in place? And what would those things be that be most visible for investors to measure externally as we look into the business?

Yes, absolutely. So for one thing, I've really worked on strengthening the organization and making some shift in the organization. This was really a founder-led organization when I came in. Valentin really led from the top and everything went through he and Eugene Scherbakov that followed in his footsteps for a couple of years. Everything was running through the CEO. So when I came to join the company, I had 19 direct reports and everything was coming through to me. And as I looked at how to scale the company, really looked at how do we have this in an operating form that can actually scale the company. So built out the leadership team, first of all, with some key people internally, Tim being one of them. And so there were several key individuals internally that I've moved to form a leadership team as I ran both businesses at Coherent and MKS that way, brought this team then to help me hire the rest of the leadership team. And we were able to hire a fantastic group of people, and we're operating very well together as a leadership team now to grow the company. At the same time, we worked on a strategy to grow the company. And that's something, as I first looked under the covers, and I mentioned the broad capability of the company, not only in the core industrial areas. So that was one piece is really to understand the differentiation that we could provide and grow into the core industrial areas, again, and those are areas in cutting, in welding, including batteries, micromachining -- sorry, cutting and welding and then growing the business into new areas, including medical, micromachining and also the defense area. So these were areas that we could see that could take that core capability inside the company, these core technologies and be able to grow them into new areas of TAM. And so that allows us to expand to a TAM of an additional about $4 billion to $5 billion of TAM and really address those with these key areas, again, in this medical area, the micromachining and and the defense area. So those are a couple of areas to really expand the company and also put some key processes in place as -- again, it was -- in some ways, when I started, it was really operating as a $1 billion start-up. And so there were some key processes that we were able to put in place that also optimize the decision-making processes, but also very structured processes like product development and NPI processes that we put in, key quality processes. We optimize the go-to-market as well. And all of those are helping us, and we're seeing the benefits of that both in the core markets as well as these new areas that we're starting to grow the business.

I want to talk about some of the new markets you've gone into. But first, I want to talk about the strength of the business. I thought this most recent print was the most optimistic you sounded about the demand environment for quite some time. Can you maybe rank the regional markets that you serve from strongest to weakest and let us -- you often have a really good kind of visible insight into the global macro demand environment.

Yes. Thanks. I mean, overall, 2025 was a good year for us. This was our first year of growth since 2021. And it's something that we saw happening through the year. And we saw the growth in both the core industrial markets, but also in some of the key areas that I talked about, the areas that we're expanding in. So from the industrial side, we started to see midyear, we started to see the PMIs pick up in -- actually in each of the regions in the U.S., in China, Japan and started to see some recovery in Europe. We saw -- as we came through the year, our Q4 was very strong. And as we -- so that was very strong. And then going into 2026, coming with a strong book-to-bill, so strong revenue in Q4 and then a book-to-bill that was firmly above 1, leading us into 2026. And again, seeing the PMIs are a nice indicator for the industrial markets. We've seen those pointing up in the U.S. kind of in the 52 range and in China, seeing that area also mildly expansive above 50. Japan in the 52 kind of range and now starting to see some improvement also in Europe with the Eurozone and Germany now crossing 50. So those are positive signs. And what I should say is I talked about the strength and innovation, and that really points to the differentiation that we have in the marketplace. First, I can mention that in the core markets, even areas like cutting, which are a less differentiated piece of the business, we have some key differentiation there. We -- in 2025, we launched a new platform of lasers that we Rack integrated platform that has higher power. It's in a smaller form factor at a lower cost based upon new high-performing diodes. We also recognized in cutting that we have differentiation with our key OEMs because of the service infrastructure that we provide and the quality and the reliability of the products. So that's -- in cutting, we saw cutting stabilize and even point up in the -- towards the end of the year. And then the areas of welding, including battery where we've seen good growth. Again, key differentiation with laser technology, but also the scanning and beam delivery and sensing that we bring to that market, differentiation in additive manufacturing, where we have unique lasers that allow that -- those systems to operate and provide much faster throughput. So being highly differentiated as we see the markets improving in industrial, we expect to be able to outgrow the markets. And then at the same time, I talked about these -- the broader technologies that we have, being able to apply those to the medical, to the micromachining and to the defense markets and having a continued trajectory of growth in those areas. So as we enter 2026, as I said, I feel very cautiously optimistic about those -- the industrial areas and in each of the regions, as I mentioned, and then feel good about the areas that we're investing in for continued growth.

That's great. I want to actually push for a definition of cautiously optimistic. So if we think about demand, both its strength and its durability and we rated each of them from 1 to 10, what number will we get from your cautiously optimistic?

Yes. So I'm not going to try to numerically categorize that, but good try. But I would just say, again, the PMIs are a good indicator as we look forward. And again, there've been uptick even a bit more in February than January. So those are things that give me that cautious optimism along with, again, the differentiation that we have. And we see that as we're winning business in a number of areas in both the industrial as well as the nonindustrial areas.

That's a great segue to some of your new product innovation. You've entered the counter drone space. It's an area that the markets are very excited about, and we're expecting to see a lot of growth there. Can you talk maybe about how you size that market over time from an addressable market standpoint, whether that's dollars or units, what your road map might look like and how you're going to participate? And what is happening kind of with distribution and how you go to market with that product set?

Yes, sure. Maybe I'll just step back for a moment. The area of directed energy is something that IPG has played in for many years with our single-mode lasers and our amplifiers. They've gone into many programs around the world. What I recognized and we recognized when I first came in was into the company was that there was a discontinuity. And that discontinuity was the smaller class drones were becoming a bigger and bigger issue, both in -- we saw it in warfare in the Ukraine war, but also the smaller class drones being an issue at borders as well as in stadiums, airports, other types of civilian infrastructure. It's a big problem. These are the started kind of drones that you can buy for a couple -- a few hundred dollars to a couple of thousand dollars at Best Buy. And unfortunately, they can be weaponized. So we recognize that. And we also recognize that we were in a pretty unique situation because IPG has large scale in making single-mode lasers, which is the critical piece for these counter drone type systems or directed energy systems. And we make these in high volume for welding applications. We also make the surrounding components, the optics, the scanners, the beam delivery pieces, and we make systems in high volume and that gave us the opportunity to do something unique, and that was to build what we call a commercial system. So this is a system, a complete system that can track and target and take down drones and able to do that at commercial quality, commercial volume and really differentiated cost position. And so we saw that as a unique spot and the technology was all within the company. So hired some very capable people in the counter drone area, brought them into the company when I first came. And IPG, again, incredibly innovative, fast moving. In a year, we were able to develop a system that can do exactly that, can take down drones. And we launched that in -- in the fall of 2025, just a few months ago. We launched it at a couple of major shows in Europe and one in Asia, and we've gotten very good response from that, both from the defense and military, but also from that civilian infrastructure side like protecting oilfields or airports or borders. And early on, we had a very good response. actually, Lockheed Martin, we announced that a few months ago, was an early customer for the product and bought a number of units and did extensive testing. And then in fact, we announced last week that they had a significant follow-on order just last week as well. So that is going -- that's moving along quite well for us. And it's really -- we're at that stage now of turning the strong interest into orders in an area that will continue to drive. Hopefully, I answered your question.

Yes, you did. Very well. Another market that you've really made some progress in is the medical market, both product cycle vectors as well as distribution expansion. Can you maybe explain the addressable market there, your products, how you go to market there with some of your distribution and how that affects the business going forward?

Yes, absolutely. So again, medical, another one of the trajectories that we're investing in for growth inside with that -- with the large new TAM that we're investing in. And specifically in medical, the area is in urology around the major area is lithotripsy, which is kidney stones. So we build actually based upon some core technology, again, thulium lasers, we build a complete surgical system and the delivery fibers, which are disposable and it's recurring revenue they're used with each procedure. We announced early on that our first major customer there was Olympus, one of the leaders in urology. And again, we make the entire system and they bring that to market. We do the system as well as the fibers. And then we announced earlier in 2025 that we got another major customer that is helping to grow that business. And this is one of the road maps that we're investing R&D and because we see it as a great opportunity for for growth. So we brought out -- we developed a new road map, and we brought out the first product of that just at the end of 2025 with something that we call StoneSense, which can sense the difference between kidney stone and soft tissue. And then we have a road map of growth with new products coming out over '26 and '27, continuing to grow that trajectory in urology, which is about a $2 billion TAM and both in the system side as well as additional areas of recurring revenue. So it's an exciting area that we see good opportunity in because of the innovations that we brought.

Let's move on to the cleaning market where you use some organic capabilities, made an acquisition, put it together, expanded your footprint. Maybe tell us about the opportunities you're seeing in that market.

Yes. So maybe just to step back and say industrial cleaning is a very large market. It's a many billion-dollar market. In fact, just metal cleaning itself is about an $18 billion market, dominated by caustic chemicals and abrasives is the large pieces that are used in the conventional processes. And cleaning is one of these areas where it's a large TAM, and it's about creating solutions to turn that TAM into SAM. So just to give an example of what I mean when we talk about laser cleaning, when you go to weld 2 parts together, 2 metal parts, if they have oil and grease, then that will inhibit the performance of the weld. And so you -- a standard process would be to use caustic chemicals to clean that off and then weld the parts together. We're able to, with laser cleaning, simply vaporize all of that off the surface before bonding them together, before welding them together, for example. So that's a significant market. And we had a foothold there, but a company called cleanLASER, smaller company with really the world renowned for laser cleaning, the capability, the process and the ability to turn that into systems. So we acquired them at the end of 2024, just about a year ago. It was a great opportunity. It's a very good fit for us for our -- for our lasers, for the process, and they fit in well. It was also a very good opportunity to start up an M&A process with the team. M&A is something that I've been quite experienced with in my time at Coherent and at MKS. And so really use that as an opportunity to teach the team, structured M&A from the standpoint of due diligence. And then we did a very structured integration process with cleanLASER with all of the key attributes we were trying to drive for the deal upfront, having leaders for each of the key functions reporting into the executive team every couple of weeks and then really driving the road map matching between the lasers and optics and such and the cleanLASER systems. And we've had a great result over the first year. The performance has been better than we had anticipated. And we're seeing some of these benefits of the synergy, for example, in the road maps where the cleanLASER systems that are on road map to come out shortly are much smaller in size and lower in cost and higher performance based upon lasers that we've made and optimized for the system and the joining of the 2 together are really showing some fantastic synergy from the product side. And then we're also seeing a synergy on the go-to-market side. We've recently been able to get some major orders from larger companies that would not have purchased directly from cleanLASER because of the size and scale of the company. But now as part of IPG, it was a different story, and we were able to execute those. And so we're really moving in the right direction there, and it sets us up well for cleaning. It also sets us up well for next stages of M&A for the company.

I wanted to focus these next couple of questions on the model. I get a lot of questions from investors looking at your business today, it's about $1 billion in sales. Past PMI cycles, we've seen the business peak at about $1.4 billion, $1.5 billion. The most recent cycles had big China and big EV as part of those. If we're in an expansionary cycle and it's durable, where does that next $400 million or $500 million of revenue come for IPG Photonics.

It really comes from both of the areas that we've talked about. So if you think about it as I do in terms of the industrial markets and then the broad category of non-industrial. In industrial, I talked about the key differentiation that we have. And as the business -- as the PMI shift and if the industrial markets continue to grow, we expect to outgrow the markets in those industrial areas. And then in the areas that we're targeting in medical, micromachining and defense, I've talked about that as several billion dollars of new TAM. And I've said before that we expect to grow in those areas by several hundred million dollars or over time.

Is there a balance between new versus existing market -- expansion of existing markets with a macro recovery and strength versus these new markets as you think about the TAM and their adoption cycles?

Yes. I'd say it's -- they're happening together. So again, we're well differentiated in the areas of the industrial. And you see areas that we're leaning into where we're providing solutions and able to provide systems and solutions and grow in welding, in additive manufacturing, in cleaning, for example. And then, again, these -- the areas that I've talked about in medical, micromachining and defense. We're starting to see those things happen. We're seeing the uptick in medical. We've grown the medical year-over-year, grew just over 20%. So we're starting to see the uptick from the investments we're making and the new customer coming on. We've seen upticks in areas of micromachining through the year that I talked about. And then you're starting to see some things happening in the directed energy space and talked about the new order that we got last month. So again, in that area, we expect to grow hundreds of millions of dollars. So both of those areas are going to be important as we move forward.

Let's flip and look at the other side of the ledger on earnings power. That's another one that I get a lot of. If we look at some of those past revenue peaks in the 2017 time frame, gross margins were in the upper 50s in the 2020s peak, high 40s. What's the structural leverage of the business on gross margins? And is there any way when we think about volume to stair step at these volumes, this is the gross margin, but ultimately, where is the structural endpoint on gross margins?

I'm going to let Tim take that.

Yes. So I think let me talk about some of the levers that we can -- that we're working on, first of all, with the cost structure and gross margin, segue that into what our sort of target is on gross margin and drop-through. So we're working actively on reducing the cost of products at the moment. We've got new generations of high-power diodes that are being increasingly incorporated across the product platform. We've got new products coming out. All of the new product areas have gross margins that are at corporate average or better than. The cost reduction initiatives like the higher power diode translates into being able to actually produce a smaller form factor laser, right, the number of optical splices that you have, connecting the glass together is reduced and there's a lot of laser content on that. So as you go up the power spectrum on the power capability on optical components, you can actually reduce the build cost on -- build and material cost on the end product. So that's something we've talked about, we're working on and we're increasingly rolling that out throughout the portfolio. We're looking at where we've got differentiation and pricing capability, right, optimizing pricing in part to offset some of the tariff impact that we're subject to. And then compared to the last 24 months or so our overall level of inventory is in a better place, right? So we've had provisions that were running at 500, 600 basis points a quarter. We're close to getting that down to like 200 basis points a quarter. I'd like to see it at 150. And then the final part of the jigsaw is really how you manage your fixed cost base and your utilization and absorption of that fixed cost base at different revenue levels. And clearly, as you build scale into the business, right, you start to absorb that fixed cost base better. Second half of last year, we had a little bit of volatility, where we had some pretty good margins in Q3, but we built inventory and we actually decided to take inventory down a bit in Q4. So even on higher revenue levels, we had a little bit more under absorption than you'd expect. We said that was 150 to 200 basis points. So we would have been close to 40% gross margin. But the objective overall is to drive gross margins up above 40% again and hopefully get close to that mid-40s level. The other thing we've been focused on a lot internally is that there's clearly a lot of investment going on in the business at the moment, right, on the OpEx side, not just the organization, but R&D, distribution, even on some of like the finance areas. And OpEx is running at quite an elevated level relative to the revenue. We're very cognizant of what we want to start driving is that OpEx share as a percentage of revenue down and then increasing the drop-through on each incremental dollar of revenue we're getting. We're initially going to target around 30% drop-through, but we want to increase that over the next, say, 18 months or so to about 40% drop-through of each incremental dollar. We really acknowledge that the investments we're making. We want a return on them, we'll get a return on them. And then they're not going to keep ticking up constantly, and we want to drive OpEx down as a percentage of sales.

Fantastic. We're just about out of time, Mark. I'll give you kind of the last word here. No follow-up, drop the mic and we'll take it to the breakout room.

Okay. Great. I would just say, IPG is a fantastic company. We've made some significant changes over the last couple of years. Again, based upon the core technology that's here, we've got a great strategy now to grow the business in both the core markets and the industrial market, but also being able to grow into the nonindustrial markets. We are opening up new TAM. We've made some changes in the organization. We're a stronger company that's executing very well. We have a very strong balance sheet with $900 million of cash and no debt. we're in a very good position to grow the business, both organically and inorganically.

Great. Tim, Mark, thank you so much for joining us, and thank you, everybody.