IPG Photonics Corporation

Good morning and welcome to IPG Photonics second quarter 2026 conference call. Today's call is being recorded in webcast. At this time, I'd like to turn the call over to Eugene Fedotoff, IPG Senior Director and Investor Relations for the introductions. Please go ahead with your conference.

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 of our second quarter results as well as the overview of demand environment and then 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. 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 that could 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 ended December 31, 2025. 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 4, 2026 only, and the company assumes no obligation to publicly release any updates or revisions to any such statements. During this call, we will be referencing 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 gap 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.

Thanks, Eugene. Good morning, everyone. Second quarter revenue was above the midpoint of our guidance, increasing double digits year over year and growing sequentially. Both industrial solutions and advanced solutions grew quarter over quarter, and adjusted gross margin and adjusted EPS came in above our expectations. Bookings also improved in the quarter, and book-to-bill remained above one. Growth in both revenue and bookings points to sustained demand for our products across our end markets. Revenue growth was led by strength in industrial solutions, primarily in welding applications, as we continued to benefit from increased demand and business wins for our solutions in battery manufacturing. Cleaning and additive manufacturing also contributed to the year-over-year growth. Advanced solutions revenue improved sequentially, driven by strong growth in semiconductor applications, as we were making progress with large semiconductor equipment manufacturers. We are also seeing strong interest in our directed energy defense system, Crossbow. Overall, in advanced solutions, we continue to execute on our long-term strategic initiatives and believe that we have numerous opportunities for growth. The growth we achieved in the second quarter also demonstrates that we are making progress on our two clearly defined strategic growth initiatives. The first is strengthening our leadership in industrial solutions by expanding laser adoption, displacing incumbent technologies, and further moving up the value chain with differentiated system and subsystem solutions. Welding drove much of the industrial solutions growth in the quarter. Demand in battery manufacturing remained strong across both electric vehicles and stationary storage, which supports data center energy requirements. Following our strategy to further move up the value chain, I'm excited to report that our subsystems revenue Our unique combination of adjustable mode beam lasers, advanced beam delivery, and real time process monitoring enables unmatched welding speed and quality. We are also making these subsystems easier to integrate and adding computer vision and artificial intelligence into the solutions. These advantages help drive recent wins with two major global automotive manufacturers. Additive manufacturing revenue remained strong in the quarter and grew significantly year over year. Demand is accelerating as our newest solutions enable the displacement of conventional metal machining. Winning here takes precise laser parameters, partnership with OEM customers, and deep applications expertise. Our latest generation of lasers with proprietary beam shaping capabilities increases process speeds by approximately 1.5 to 2 times Translating directly into higher productivity and lower total cost per part for customers. Our second strategic growth initiative is expanding our leadership in laser and photonics technologies in attractive markets and applications in advanced solutions, including medical, directed energy, micromachining, and semiconductors. We are leveraging core capabilities to target applications where precision, accuracy, control, efficiency, and reliability matter most, and are pursuing those opportunities both organically and through acquisition. This strategic initiative is addressing over $5 billion of TAM, and we are expecting hundreds of millions of dollars in revenue over the longer term. Let me tell you about the progress we are making and the encouraging signs we are seeing towards realizing this On July 16th, we entered into a binding offer to acquire LumiBird Medical, a global leader in diagnostic and treatment systems for ophthalmology. We believe this acquisition will allow us to achieve four things. First, it accelerates IPG's strategic evolution by meaningfully expanding our advanced solutions revenue into attractive, higher margin medical markets with durable demand, strengthening the quality of our business mix. Second, It delivers on our commitment to improve profitability through the addition of a high margin business that we expect will be accretive to gross margin EBITDA and adjusted EPS in the first year. Third, it creates a scaled medical laser platform by combining our leading urology business with LumiBird Medical's leading ophthalmology business, increasing our addressable medical market by approximately $1 billion. And fourth, It expands our long-term value creation opportunity by combining complementary technologies, commercial capabilities, and applications expertise to drive innovation and unlock future growth. We are very excited about this opportunity, which we expect to close in the fourth quarter of 2026. In our medical business, bookings and backlog remain strong and we expect shipments to increase in the second half of the year. Looking forward, We are also advancing our innovation roadmap with new product approvals and introductions expected in 2026 and 2027. Our strongest performance within advanced solutions was in semiconductor applications as we continue to win new business with large semiconductor equipment manufacturers due to the differentiated value that we deliver. Our solutions for lithography, metrology, and inspection are gaining traction, increasing our exposure to this high-growth market driven by an acceleration of AI-related demand for GPUs and high-bandwidth memory chips. We continue to advance our product development by working closely with customers on design and opportunities supported by the clear performance advantages our lasers and photonics solutions offer. In our defense business, We began shipping Lockheed Martin's order for crossbow this quarter. We will be shipping more units in the third quarter and continuing to engage with potential customers working to convert their interest into orders. We recently participated in a defense event at White Sands Missile Range, demonstrating crossbow capabilities to multiple agencies in demanding real world environments. The system continues to be broadly tested in various scenarios domestically and overseas, and has proven to perform reliably in harsh conditions. We remain optimistic about the current developments in the directed energy market and believe that our systems provide effective solutions with a favorable cost exchange ratio to address the increasing threats from Group 1 and Group 2 drones. Along with making progress on our strategic growth initiatives, We are also transforming into an organization positioned to maximize the growth and profit opportunities ahead through the one IPG operating model. We are streamlining operations, strengthening decision making, and accelerating product development, translating into better performance and greater consistency across the business. In summary, the global IPG team delivered another quarter of sequential and year-over-year growth as customer demand for our unique solutions has strengthened across our markets. Orders also grew, keeping our book to bill above one, and we reported significant increases in adjusted gross margin and adjusted EPS. We are making meaningful progress on our strategic objectives, positioning us to continue to deliver profitable growth and create sustained shareholder value. With that, I will now turn the call over to Tim.

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. Industrial solutions revenue increased 16% year over year in the second quarter, driven by growth in welding, marking, cleaning, and additive manufacturing. On a sequential basis, revenue is up 4%. primarily due to strength in welding and cleaning. Advanced solutions revenue decreased 9% compared with last year as growth in semiconductor applications was offset by lower revenue in micromachining and defense. However, advanced solutions revenue improved 10% quarter over quarter on growth in semiconductor and sequential improvement in micromachining applications. Sales of our emerging growth products continued to increase and accounted for 58% of our total revenue in the second quarter, up from 53% in the prior quarter. Strong growth in our lasers and solutions for battery manufacturing processes drove the increase. Moving to revenue performance by region on slide six, North American revenue decreased 2% compared with last year due to lower revenue in cutting, defense, and medical applications. Sequentially, revenue was up 1% due to increased marking and defense sales. European sales were up 5% year over year and 1% sequentially driven by increased sales in cleaning and additive manufacturing, partially offset by a decrease in cutting. Revenue in Asia increased 19% year-over-year and 8% sequentially, driven by strong growth in welding applications, which benefited from higher demand in battery manufacturing. Moving to the financial performance review on slide seven. Total revenue was $279 million, up 11% year-over-year, marking our third consecutive quarter have double-digit year-over-year sales growth. Foreign currency benefited revenue by approximately 2% in this quarter compared to the same period in the prior year. Gap gross margin was 40.4%, and adjusted gross margin was 40.7%, above the top end of our guidance range. We recorded a benefit from tariff refunds of approximately $4.7 million that had a positive impact on gross margin of approximately 170 basis points in the quarter. Lower inventory provisions and product cost continue to provide a positive benefit while manufacturing cost absorption remains below the level we are targeting in the medium term. Total adjusted operating expenses were $91 million, excluding $17.6 million in impairment of long-lived assets related to the sale of our Belarusian operations and other one-time items. Adjusted operating expenses declined sequentially and came in slightly below our guidance range as we benefited from a German R&D tax credit of $1.8 million in the quarter. Overall, we expect operating expenses to modestly increase going forward due to our continued investments to drive growth. Gap operating income in the quarter was $5 million and gap net income was $5 million or 12 cents per diluted share. Adjusted operating income was $24 million. and adjusted net income was $25 million with adjusted earnings per diluted share of 58 cents. Adjusted EBITDA was $49 million. Both adjusted EPS and adjusted EBITDA came in above the top end of our guidance range. Moving to a summary of our balance sheet and cash flow on slide eight. We ended the quarter with $871 million in cash, cash equivalents, and short-term investments. We had $33 million in long-term investments and no debt. Cash flow from operations was $38 million in the quarter, improving significantly from the first quarter. In the second quarter, we spent $21 million on capital expenditures, bringing year-to-date CapEx to $37 million. Our CapEx outlook remains $90 million to $100 million for this year, including investments in our major fiber manufacturing facility in Germany. Excluding the German investment, underlying CapEx is running at about 5% of revenue, and we expect to maintain this level going forward. Moving to our outlook on slide nine, orders remain strong with book-to-bills staying above one. For the third quarter of 2026, we expect revenue of $265 million to $295 million and adjusted gross margin between 37.5% and 40.5%, factoring in the ongoing impact from tariffs of about 150 basis points. We estimate adjusted operating expenses in the range of $92 million to $95 million in the third quarter, and we expect to deliver adjusted earnings per diluted share in the range of 30 cents to 60 cents with approximately 43 million diluted common shares outstanding. Our adjusted EBITDA is expected to be between $35 million and $51 million. In summary, we are pleased with our second quarter results, with growth in revenue and bookings, as well as improvements in gross margin and adjusted EPS. We believe that we are well positioned to continue improving our performance. We are seeing solid long-term demand trends, Thank you, Tim. We are pleased with the strong start in the first half of the year, driven by sustained industrial demand and the progress we are making with our key strategic initiatives.

Our announced acquisition of LumiBird Medical accelerates our strategic evolution and significantly expands our advanced solutions portfolio into higher growth and higher margin medical applications. We continue to execute on our growth strategy supported by operational excellence and an innovation engine that unlocks significant areas of opportunity. As we continue along this path, I am increasingly confident in our ability to achieve above-market growth, expand margins, and deliver lasting value for our customers and shareholders. With that, we will be happy to take your questions.

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 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. One moment while we poll for questions. Our first question comes from Ruben Roy with Stiefel. Your line is now live.

Thank you. Good morning. Hi, Mark. Hi, Tim. I wanted to start with a question on just maybe longer term, Mark, on the bookings. You've had three quarters in a row now where the book to bill is above one. The Q3 guidance is, again, sort of roughly flat at the midpoint of the revenue guide. So just wondering if you could talk a little bit about building of shippable backlog against the revenue guidance and how you're thinking maybe about the next couple of quarters against, again, what seems to be a nice backdrop for bookings. Thank you.

Sure. Hey, good to hear from you, Ruben. So, you know, just to step back for a second, of course, as you mentioned, we're seeing double digit growth year over year. And this is the third quarter in a row for that. Book to bill, again, was strong, was above one for the third quarter in a row. And we're really seeing encouraging signs across the business. You know, on the industrial side, you know, we've seen, you know, very positive progress with the differentiated solutions that we've developed. We've talked about in battery and additive manufacturing, cleaning, et cetera. And if you look at the PMIs globally, they've been expansive and stable. And we're seeing quite positive momentum in our advanced solutions. We've talked about the key areas of advanced solutions. They are giving us confidence in the long-term opportunity for the business.

Mm-hmm.

Okay, thanks, Mark. Maybe for a follow-up to drill in a little bit on the battery commentary. So you've now cited both EV and battery storage as drivers, and I'm also looking at the China numbers. So China back to 34 and change percent of revenue, quite a bit of growth the last several quarters, well into the double digits from China. So maybe if you could just kind of talk about two different things. So on... Well, sounds good. Let me break it down and let me start with the batteries.

Again, we're seeing continued wins in that area in the battery welding, but also for batteries, just to remind you that there are also some other key applications there, and specialized foil cutting as well as cleaning. We're seeing strong pull and bookings in that area. And the demand here is really driven for us by the high-capacity batteries, where we have strong differentiation. So in high-capacity batteries, you have higher currents, Higher currents mean thicker bus bars, also more critical contacts. And the drivers there are now kind of two key areas. Of course, there's the EV piece, which I'll come back to. But what's becoming a bigger piece of this now is actually a stationary storage, which is being driven by data centers for AI and also some grid stability for solar and other renewables. And then on the EFE side, which is still continuing to grow, the high capacity is what's needed for the longer range side. So continue to believe in the long-term growth prospects there for batteries. And if we now shift to China and what's happening in China, first of all, just want to remind that China is a significant industrial market globally. And the fact... Thank you for joining us. And I want to also point out that in China, we have strong capability there and we win in additives. So that's a very important piece which I talked about also in the in the prepared remarks where we have new lasers. We work very, very closely with that sector. We've developed new lasers with specialized mode qualities that actually improve the throughput of those systems by, in some cases, one and a half to two X and really helping to drive that business of additive because the cost per parts reduced and that's allowed the additive to grow from both You know, which started in the areas, of course, aerospace and defense, where you had, you know, very high cost, you know, cost of part wasn't critical, it's just the importance of making those parts to now with the cost per part dropping with some of the things that we're helping to drive, you're seeing this, the solutions move into, you know, medical devices and even into some consumer devices. And in terms of pricing environment, the areas where we have strong differentiation in these areas, so that gives us pricing power in those markets.

That's a lot of detail, Mark. I don't want to hog this up, but maybe just one quick one for Tim on the lower product cost that you just talked about. If you can remind us, Tim, where you are on the structural cost out and how you're thinking about utilization leverage and the gross margins from here. That's all I have. Thank you.

Sure, so yeah, we've talked about this. We've got a number of different ways that we're driving improvements in gross margin. The first is that we're taking cost out of product by moving to higher power optical components, the most obvious of which is the diodes, right? The higher power of the diode. You have the fewer diodes you need, the smaller the form factor of the lasers. We're still at a relatively early stage of rolling the new generation of diodes out across the product platform, so We have further improvements to gain from that. The other side of that equation actually is where we've got the differentiation is optimizing pricing. And that's another initiative that's been driven by the sales team. And then you come down as you drop through the manufacturing and operations area. We are trying to drive meaningful improvements in absorption. We're still behind where we want to be on that. But we've got several initiatives that the team is working on Thank you, Jens. Thanks, Ruben.

As a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad. One moment while we poll for questions. Our next question comes from Jim Rusciutti with Needham & Company. Your line is now live.

Thank you. Good morning. Apologies if you touched on this. I may have missed it, but I was hoping to get a little bit more color on the The decline in North America, I think you alluded to a little softer medical business in the quarter. So I'm just wondering what you're seeing in North America and what your expectations are for the medical business going forward, apart obviously from the acquisition.

Yes. So absolutely. Good to hear from you. So, you know, specifically, I think you're asking about the medical demand. We have very strong demand and backlog in medical, and we're confident that we're going to have another good year. We're continuing to advance in the innovation roadmap there with new product approvals and introductions that are planned in 2026 and 2027. And I talked about those. Of course, Jim, we talked about the fact that we launched a key new product at the end of last year. We picked up a new key customer. The fact that we have both systems as well as the disposable fibers. So those are all moving strongly. And as I've talked about in the past, we expect to more than double the business over the next two to three years. So we have a lot of confidence in the medical business. And of course, we're also excited about combining that with LumiBird Medical.

So, potential improvement in medical in the back half of the year. Mark, how do you think about the rest of the business in North America? What's the tone of demand that you're seeing out there?

Yeah, so, you know, again, in the area of revenue, we've been overall strong revenue Even though we were slightly down there in North America, though, but our total bookings is strong, book-to-bill strong for the third quarter in a row overall. So, you know, continued strength, and I'll just point out, just to put it in context, that we're seeing also continued strength as I talk about bookings in Asia, especially Japan and China. We're seeing some improvement in Europe, and we are, you know, absolutely seeing strengthening in medical as well.

One final question. You sounded more positive on PROSPO, and I know it's early days, but as you look at that opportunity in 2027, have your expectations changed at all?

You know, what I'd say, Jim, is we're very excited about that program. and, you know, for context, again, we're still seeing, you know, daily headlines for drone threats. You know, we think this is a really big opportunity. Of course, it's still emerging, but we're excited about it both for military and civilian, as we've talked about before. And, you know, we have a really unique position because in order for this area to be, you know, strong, we need to be able to support address the threats in a sustainably affordable approach. And that's why Crossbow is so strong, because we have this very compelling cost exchange ratio. We're leveraging the IPG, our commercial scale, the vertical integration, the quality, cost, and volume we've talked about. And we're seeing quite positive momentum. Obviously, we've started shipping You know, as we said, the production were from Lockheed. So, you know, that's great. And we're also seeing the systems now being operated in very harsh conditions in the U.S. and multiple countries overseas. And I mentioned also in the prepared remarks that we've had successful tests at the White Sands Missile Range recently with multiple agencies. That's quite exciting, and there were a number of tests done. Just to give you a little bit more color there, there were multiple cross-post systems under test at the same time, really showcasing some cooperative engagement tactics with the units. They were validated over really extreme environmental conditions for really a multi-week deployment that had Monsoonal rain, extreme heat, sandstorm testing, really validating CROSPO's environmental ratings, and even some testing of interoperability on government systems. So again, a lot of good things happening there. We're really excited about the future of CROSPO, both in the defense and military area, but also we have this view of the strength for civilian infrastructure, which is also a significant problem. You know, all of this addressing the drone problem.

Good color. And one final question maybe for Tim. Tim, were the bookings, was that book fit bill fairly consistent across your major regions? Any real variability in that?

No, not a lot. I think it generally reflects on the industrial side, the strengthening PMI. Data, which has been, you know, continues to be expansionary and pretty good. So now we had good bookings in Asia, Japan and China in particular. We had good bookings in North America. And Europe was also pretty good, although I'd say Europe is probably the area where we continue to see some impact from the higher oil prices and the geopolitical environment, probably a bit more than elsewhere. But yeah, generally, we're pretty good. Mark mentioned the medical bookings were strong. continue to make progress in some of the other advanced applications such as semiconductor and micromachining. They're still a small part of the business, but we're certainly getting a good beachhead across those areas too.

Thank you.

Our next question comes from Scott Graham with Seaport Research. Your line is now live.

Good morning. Thanks for taking the question. With the additive manufacturing being up significantly, I think, Mark, you cited beam control and one and a half to two times efficiency. I know you're trying to do this across your businesses, and yet I thought maybe you only cited it for additive. Could you kind of talk about what you're doing in your other businesses and your other markets to get customers to upgrade their lasers and maybe change out their machinery?

Sure. Thanks very much for the question, Scott. Maybe the way to talk about this is just like in additive, what's really unique about IPG is not only the strength in the lasers and photonics, but the really deep understanding of the applications. So as I pointed out in additive, partnering with the OEM customers, really understanding the needs there, allowed us to develop these specialized mode structures that plugged into their systems, made their systems have throughputs that were significantly higher. I mentioned when I talked earlier, that's allowed the cost per part to drop and actually allowed the expansion of those systems into broader markets. So if I take that in areas like semiconductor that I've talked about, again we have this deep technology in you know broadly in lasers and photonics and the applications understanding in semiconductor you know it's a great example the the semiconductor capex areas where they're really pushing the limits in lithography metrology inspect and inspection we have core technologies that help them on the cutting edge and so by working with them on their road maps and developing Specialized Solutions for our lasers, then we're able to become part of those roadmaps, get designed in, and that's why we're starting to see the benefits there. And we do that in a variety of markets. And in fact, just to give you a little bit more color because I talked about the subsystems piece, again, that takes that deep applications understanding to be able to design not only the lasers for the specific application, but also the surrounding beam delivery, scanning capabilities, and the actual application piece so that we can provide a full solution where it's needed. So we can provide the lasers where it's needed. We can provide a combination with specific other photonic components and even provide a full solution as a subsystem or a system. And we're able to do that in multiple markets.

That's helpful. More clear. Thank you. The pricing, I know you implemented some price increases this year. Just kind of wanted to know how they're sticking. Are they intended to cover inflation in full or just partially or maybe mostly offset it?

Yeah, so let me just speak generally about pricing. That's an area, again, the strong differentiation that we have can provide much higher value for customer where we can therefore take that in price. Of course, it depends on the particular area. We're able to do that again where we add the most value, where we have the most differentiation, and we're doing that to obviously be able to offset in some of those areas, but also to command the value that we deserve in the marketplace.

Is the goal there to Thank you very much.

It's part of the strategy to offset that, but as with anything that we've done historically, taking cost out of product is the other arrow in the quiver, if you like, and then driving the improvements in manufacturing efficiency to see an overall improvement in gross margin and drop through to profitability.

Very good. Thank you both.

As a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad. One moment, please, while we poll for questions. Our next question comes from Keith Howsam with North Coast Research. Your line is live.

Great, thanks. Good morning, gentlemen. Mark, just trying to understand a little bit more of the adjustable beam part of the business. I understand that's a driver of some of the growth here, especially over in China and the walling area. How big is the adjustable beam business for you guys, and is that growing faster than the overall business for you?

Yeah, so Again, to talk about that area of adjustable mode beam, that's important for a number of welding applications. One of those is certainly the battery. So as we talk about the battery demand and the continued winds and strong pull and bookings that we're seeing there, the adjustable mode beam lasers are a key piece of that. And remember that that has High differentiation, and I'm just going to remind you why, that in those applications, it's critical to have that adjustable mode beam, and especially the fact that we've developed very high power single mode in that beam, and that's what's helping to drive that area of battery, but also broader welding. It gives you some significant advantages in that area. One of the key drivers is absolutely the batteries. As I mentioned before, the batteries are being driven by stationary storage as well as Thank you for joining us. You know, that you can see in the emerging growth products as you saw the growth in that area and that we're at a maximal point in that at 58% of revenue. That's one of the key areas that's driving that.

Okay, appreciate that. And in terms of medical, your hope to double or triple that or double that business in two to three years, remind me how big medical is for you guys. Is that in the 7% to 8% range right now for you?

Yes, that's correct.

Okay, great. Thanks, guys. Appreciate it.

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.

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

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