IPG Photonics (IPGP) Q4 2018 Earnings Conference Call Transcript

IPG Photonics (IPGP -0.38%)
Q4 2018 Earnings Conference Call
Feb. 12, 2019 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants
  
  See all our earnings call transcripts.

Prepared Remarks:

Operator

Good morning and welcome to IPG Photonics fourth-quarter 2018 conference call. Today's call is being recorded and webcast. At this time, I would like to turn the call over to James Hillier, IPG's vice president of investor relations, for introductions. Please go ahead, sir.

James Hillier -- Vice President of Investor Relations

Thank you, Michelle, and good morning, everyone. With us today is IPG Photonics' Chairman and CEO Dr. Valentin Gapontsev and Senior Vice President and CFO Tim Mammen. Statements made during the course of this call that discuss management or the company's intentions, expectations or predictions of the future are forward-looking statements.

These forward-looking statements are subject to risks and uncertainties that could cause the company's actual results to differ materially from those projected in such forward-looking statements. These risks and uncertainties include those detailed in IPG Photonics' Form 10-K for the year ended December 31, 2017 and other reports on file with the Securities and Exchange Commission. Copies of these filings may be obtained by visiting the Investors' section of IPG's website or by contacting the company directly. You may also find copies on the SEC's website.

Any forward-looking statements made on this call are the company's expectations or predictions only as of today, February 12, 2018. The company assumes no obligation to publicly release any updates or revisions to any such statements. For additional details on our reported results, please refer to the earnings press release and Excel-based financial data workbook posted to our Investor Relations website. We will post these prepared remarks on our Investor Relations website following the completion of the call.

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

Valentin Gapontsev -- Chairman and Chief Executive Officer

Good morning, everyone. As expected, the fourth quarter was challenged. The macro economic climate weakened in our largest markets, reducing demand for our laser products. Despite these challenges, we were able to deliver results in line with the outlook we provided a quarter ago.

More importantly, we have made meaningful strides in key new product areas and undertaking strategic acquisitions that help us capitalize on the long-term growth opportunity for our laser solution. We believe our progress in delivering on new growth opportunities reinforce our industry leadership in fiber laser technology, strengthen our relationships with leading-edge customers, and enables the next generation of product creation. In China, we saw further weakening in demand environment in Q4. Higher tariffs made minimal effect on our production cost.

Thanks to our diverse global manufacturing footprint and vertically integrated manufacturing. However, the U.S.-China trade war heightening and the customary fear and uncertainty. Continued investment spending on industrial and suggests that Chinese manufacturers likely remain committed to the long-term growth plans. In addition, the Chinese government has enacted targeted [Inaudible] to address the market uncertainty and trade war [Inaudible] private enterprises.

This [Inaudible] we could see demand begin [Inaudible]. Near term, we have seen signs of stabilization in our European business. Unfortunately, the drop in the EU eurozone manufacturing PMI from more than 60 a year ago to slightly above 50 today drove a decline in our European business during the second half of 2018. The eurozone is also affected by softer China demand.

There is great uncertainty among the -- our European customers regarding a pickup in demand but overall, trends do not appear to have worsened. With regard with micro economic climate, we remain confident in the [Inaudible] growth of fiber laser technology. Our [Inaudible] and laser tools as well as the continued shift toward high-powered solution in our largest market. We believe there is no company that can deliver high-power laser solution at our quality, scale, cost, and lead time.

While competitors are announcing new products with output power of up to 10 kilowatts. We believe our -- the [Inaudible] technology scale and cost [Inaudible] will enable us to continue to win in this market. Well, it seen strong customer interest for our new CW laser use QCW mode capability that provides good power up to two times average power increase in piercing speed, improving cut quality, and delivering cleaner more controlled drilling of [Inaudible] materials. This unique capability is enabled by IPG's QCV diode [Inaudible] that provides very high peak power for short duty cycle.

The customer are also evaluating our adjustable [Inaudible] lasers, which permit reliable attachment of our beam mode to process a wider range of material [Inaudible] without the use of external optics and without stressing the optical fiber, which we believe can be an issue with competing technologies. When combined with the ongoing improvements, we make each year to the power of electrical efficiency compactness reliability and productivity of our fiber laser portfolio. We expect to continue to derive share gains from traditional process technologies and maintain our competitive lead in the high end of the industrial media market. In 2018, we made excellent progress in new growth areas, helping diversify our business.

Sales of new power, laser systems, communication products and advanced applications increased 36% in 2018 to approximately 15% of total revenue and 20% of total revenue in the fourth quarter. [Inaudible] new laser products, which increased 50% into 2018. These new products include our high-power nanosecond [Inaudible] laser for marking ablation and cleaning, our green power laser for solar cell ablation, ultraviolet lasers for nonmetal marking material ablation, and our family of pico [Inaudible] ultrafast lasers for micro processing application. In addition to sales of new lasers, we sold we sold a record number of beam delivery accessories and complete laser systems, evidence we are becoming a more complete solutions provider within the automotive, aerospace, railway, pipeline, entertainment, medical device, communications industries, and the large screen [Inaudible] systems.

In 2018, systems sales of nearly $60 million increased 47% year over year, driven by growth in macro and micro systems and yearly revenue from our super high lumen digital cinema systems. In December, we closed the acquisition of Genesis Systems Group, a qualified robotic system integrator for more than 300 blue-chip customers, most of which are in U.S., helping to diversify our geographic exposure. The acquisition of Genesis is an important step for IPG's evolution to become a more complete provider of [Inaudible] welding solutions and strategic partner to end customers. We plan to leverage Genesis unique expertise in robotic systems integration to accelerate laser processing within the transportation, aerospace and industrial end market.

Genesis also provides a route to market for IPG's advanced laser welding and laser cleaning solutions. In communications, revenue increased 7% year over year in 2018, driven by double-digit growth in transceiver products. Since the acquisition of Menara Networks in 2016, we have been investing to leverage the proprietary high-speed [Inaudible] transceiver designs and integration capabilities to introduce new pluggable transceiver products into this market. These products address growing bandwidth's demand from data center and telecom customers, and capitalize on the trends toward merchant silicon and coherent, pluggable optics.

The recently announced acquisition of [Inaudible] submarine division will leverage our leading-edge optical amplifiers in GWGM systems capability to address the growing number of undersea cable network deployments by next-gen Internet and data center companies. Also the communications is a small business for us today. We are making a strategic investment that we believe will grow this business to be much more meaningful over time. In advanced applications, we saw increasing acceptance of our single-mode fiber lasers, narrowline amplifiers and high power semiconductor diodes.

Combining these new product opportunities with the progress we are making in medical and dental lasers, instrumentation, semiconductors, electronics, and scientific applications, IPG is unlocking multiple growth drivers that significantly expand our addressable market and diversify our end market exposure. [Inaudible] last decade, our fiber laser technology has captured the majority of the market share for laser-based metal processing. Much of the recent growth has come from China. The share gains achieved in metal processing mean we are now more susceptible to spending cycles on industrial capital equipment.

However, we continue to invest in new fiber laser solutions that address the diverse end markets, including electronics, medical, scientific, defense, entertainment, and communications. In 2018 alone, we spent $123 million in research and development, and $109 million on acquisitions to enhance our solutions portfolio and open up new markets. We expect to grow faster in these new product areas, diversifying our end market exposure and enabling IPG to target a double-digit revenue growth rate. Also, we start the year with a more challenging macroeconomic backdrop.

We remain optimistic about IPG's long-term growth prospects, given our superior technology platform and vertically integrated production model. By leveraging these advantages, we believe growth in our core industrial markets will be driven by higher power solutions and strategic performance, productivity, reliability, and cost of ownership of our products. Our competing solutions -- I remain confident in IPG's ability to grow over the long term and to deliver on our mission to make our fiber laser technology the tool of choice in mass production. With that, I will turn the call over to Tim.

Tim Mammen -- Senior Vice President and Chief Financial Officer

Thank you, Valentin, and good morning, everyone. Revenue in the fourth quarter declined 9% to $330 million. The acquisition of Genesis, which closed in early December, contributed $8.5 million revenue during the quarter. Foreign exchange headwinds during the quarter, relative to sales assumed in our Q4 guidance, reduced revenue by $2 million.

Revenue from materials processing applications decreased 9% year over year and revenue from other applications increased 5%, driven by growth in communications, medical, and government applications. For the full year, materials processing revenue increased 3% as strength in the first half was offset by a slowdown in the second half of the year. By region, fourth-quarter revenue in China represented approximately 36% of the total and decreased by 19% year over year. Strong sales growth into electric vehicle battery applications was more than offset by declines in cutting and micro welding for consumer electronics.

Our cutting business remained affected by the current macroeconomic climate in China. During the first quarter, we expect to ship the remaining lasers related to the record Q3 order for battery processing applications. Beyond this order, we do not have near-term visibility into additional orders for this application, but continue to expect a strong contribution from electric vehicle applications this year and over the medium to longer-term. As for microwelding in consumer electronics' recent data points from the smartphone supply chain would now suggest we're unlikely to see this business rebound in 2019.

In Europe, revenue decreased 12% year over year, primarily relating to softness in cutting, additive manufacturing, and welding due to the weaker macroeconomic climate in the region. However, European sales increased 8% on a sequential basis, suggesting that we may have reached a bottom in the current downturn in this business. In North America, revenue increased 32% year over year and 14% year over year, excluding Genesis, driven by strength in cutting, communications and government applications. Sales in Japan increased 4% year over year with a continued rebound in cutting and welding.

Sales in Korea increased 9% year over year and revenue in Turkey decreased approximately 40%, given the recent economic turmoil in the country. For the full-year 2018, sales in China and Europe increased 1% with growth in the first half of the year offset by declines in the second half while sales in North America increased 22% and other regions increased 11%. Turning to performance by product, high-power laser sales decreased 20% year over year to $186 million in the quarter and represented 56% of total revenue. Reduced sales of lasers for cutting and additive manufacturing were partially offset by strength in welding sales, primarily related to electric vehicle battery production.

Fiber lasers at 10 kilowatts of power or more increased nearly 50% in the fourth quarter. For the full year, high-power laser sales increased 5% year over year. Total optical power sold increased by more than 10% and was up more than 40% for continuous wave lasers at 6 kilowatts or greater. These ultra-high power lasers were more than 40% of our high-power sales in 2018, driven by the productivity gains enabled by these lasers within cutting, welding, centering, and cladding applications.

Particularly encouraging was our success in driving sales of high-power CW lasers within cutting applications, where sales of 12 and 15 kilowatt lasers increased sixfold and we introduced the world's most compact 20 kilowatt cutting laser. In the low-cost cutting market, served by lasers at 1 to 4 kilowatts of power, the competitive landscape remains intense, particularly in China. Pricing pressures in this business are being exacerbated by softening demand trends. We continue to see good success winning business from the competition with our introduction of new ultra-compact products at these power levels that possess higher reliability and greater power efficiency than the competition, and which benefit from IPG's much broader support and service footprint.

The revenue impact from these gains has been limited by macroeconomic and geopolitical headwinds, but these efforts are yielding positive results. In addition, our unique QCW/CW feature is, we believe, going to be fundamentally important in the 1 to 6 kilowatt power range., where we're seeing higher levels of competition. [Inaudible] lasers sales increased 33% year over year, with rapid growth in green, high power, ultraviolet, and ultrafast pulsed lasers, offset by reduced sales of lower-power pulsed products. For the full year, sales of pulsed lasers increased 9% with higher power, shorter wavelength, and shorter pulse duration lasers representing nearly 50% of total pulsed lasers sales.

Sales of QCW lasers decreased 12% year over year in Q4 and 24% year over year for the full year due to the weaker consumer electronics investment cycle. Medium-power laser sales decreased 29% year overyear in Q4 and 19% year over year in 2018 due to the aforementioned transition to kilowatt scale lasers in cutting and the weak additive manufacturing demand we have called out. Systems sales increased 42% year over year in Q4 and 47% year over year in 2018, driven by growth in macro systems -- for materials processing -- micro systems, initial sales of our cinema projection system, and the acquisition of Genesis. I would note that in our financial data workbook, we have made several changes to the revenue breakdown by product that reflect a shift in the relative importance of certain product lines over time.

Gross margin of 50.5% declined 730 basis points from Q4 2017 and was slightly above the low end of our guidance range of 50% to 55%. The decline in gross margin was mainly attributable to the lower revenue in the fourth quarter of 2018 versus the year-ago period, resulting in less favorable absorption of manufacturing costs. Although, we did not see the same level of pricing pressure in the low-cost cutting business during Q4, as we experienced in Q3, a full-quarter impact from Q3 price productions, when combined with lower absorption of manufacturing costs, served to reduce our Q4 gross margin. The acquisition of Genesis reduced fourth quarter gross margin by approximately 60 basis points as well.

Fourth-quarter operating income was $96 million, or 29.1% of sales, down 1,200 basis points from Q4 2017. Excluding a foreign exchange gain of $5 million, operating margin was 27.7%. Operating expenses as a percentage of sales increased 570 basis points year over year due to the lower revenue level. The acquisition of Genesis increased operating expenses by approximately $2 million and reduced operating margin by 50 basis points.

In addition, we made necessary investments in sales, engineering, and administrative talent as well as IT systems. Net income was $76 million and earnings per diluted share were $1.40. Foreign exchange gains increased EPS by $0.07. If exchange rates, relative to the U.S.

dollar had been the same as one year ago, we would have expected revenue to be $10 million higher and gross profits to be $6 million higher. The effective tax rate in the quarter was 25%, which benefited from certain discrete items. We ended the quarter with cash, cash equivalents, and short-term investments of $1.04 billion and total debt of $45 million. U.S.

cash and investments represent approximately 70% of -- total. Cash provided by operations was strong at $113 million during the quarter and was $393 million for the year. Capital expenditures were $27 million during quarter and were $160 million in 2018, up 27% year over year. We continue to invest in new facilities and equipment to meet demand for our products over the next several years.

We expect capital expenditures to be $145 million to $165 million in 2019. In Q4, we repurchased 466,000 shares for $64 million, completing the $125 million repurchase authorization we announced last August. For the year, we spent $176 million, repurchasing over 1 million shares and have now offset all dilution from equity compensation and employee stock purchases plans since our repurchase program started in July 2016. The board of directors has authorized a new $125 million anti-dilutive stock repurchase program.

Under this program, IPG management is authorized to repurchase shares of common stock in an amount not to exceed the lesser of the number of shares issued to employees and directors under the company's various employee and director equity compensation, and employee stock purchase plans from January 1, 2019 through December 31, 2020; and two, $125 million in total, exclusive of any fees, commissions or other expenses. As a reminder, the share repurchase program authorization does not obligate the company to repurchase any dollar amount or number of its shares and repurchases may be commenced or suspended from time to time without prior notice. Our year-end backlog decreased 4% to $712 million. Orders with firm shipment dates increased 4% to $339 million.

Frame agreements, which are non-binding indications of customer pricing and volume levels, decreased 11% to $374 million. With nearly 50% of frame agreements related to customers in China, we believe the decline in frame agreements reflects the current demand weakness in the region. Backlog excluding the acquisition of Genesis was $673 million, decreasing 10% year over year while shippable orders, excluding Genesis, were $299 million, decreasing 8% year over year. Fourth-quarter book-to-bill was below 1, but in line with normal seasonality.

Turning to guidance, while the global macroeconomic and geopolitical challenges affecting the sector and our business have persisted into 2019, it is important to note, we have seen some encouraging signs over the last two months. There has been a modest pickup in order activity since late December and we are more encouraged by the overall demand environment than we were three months ago. Our conviction around improving market conditions will only be fully validated if these trends continue for the remainder of the first quarter and into the second quarter. We do expect pricing headwinds related to more aggressive competition in China to continue, exacerbating this challenging demand environment.

However, we are reinforcing our competitive lead in our core metal processing markets, retaining our established relationships with large customers, and winning new business with emerging OEM customers. Moreover, we are making competitive strides to new products and applications that significantly expand our addressable market and diversify our end market exposure. Based on these factors, for the first quarter of 2019, we expect revenue of $290 million to $320 million. We expect our tax rate to be approximately 25%, excluding effects relating to equity grants.

Anticipate delivering earnings per diluted share in the range of $1 to $1.20. We expect the acquisition of Genesis to reduce first-quarter gross margin by approximately 200 basis points as the systems business generally has lower gross margins. Although conversations with our OEM customers in China suggest cautious optimism regarding a mid-year pickup in demand driven by government stimulus and continued infrastructure investment, we do not have clear visibility into full-year OEM order plans at this time. As such, we do not believe it is appropriate to provide full-year revenue guidance until this visibility improves.

In general, we would expect year-over-year declines in revenue to persist in the first and second quarter of 2019 due to more challenging comparisons, followed by improving trends in the back half of 2019, driven by potential market recovery and strength in new products and solutions. As discussed in the safe harbor passage of today's earnings press release, actual results may differ from our guidance due to factors including, but not limited to, product demand, order cancellations and delays, competition, tariffs, trade policies, and general economic conditions. Our guidance is based upon current market conditions and expectations, assumes exchange rates referenced in our earnings press release, and is subject to risks outlined in the company's reports with the SEC. With that, Valentin and I will be happy to take your questions. 

Questions and Answers:

Operator

Thank you. [Operator instructions] Our first question comes from the line of Jim Ricchiuti with Needham & Company. Please proceed with your question.

Jim Ricchiuti -- Needham & Company -- Analyst

Hi. Thank you. Good morning. Just with respect to some of the conversations that you've alluded to with your OEMs in China, it sounds like on the consumer electronics side, you're not anticipating much of a pickup and perhaps seeing continued strength in the EV segment of the business.

But just more broadly which areas are you seeing some increased optimism from some of these OEMs in China?

Tim Mammen -- Senior Vice President and Chief Financial Officer

Hi, Jim. It's clearly -- the business in China is still very much significantly focused on cutting applications, so a rebound that really requires that business to come back. And what we've seen is solid order flow through the end of December and I've actually been really pleased with what we've seen in January from that business. On the consumer electronics side, there are some applications -- there's a new application on welding some of the frames of the metal that we expect to be a driver but is probably not going to offset some of the weakness, given the data points that you've seen on consumer electronics, for example, in other areas.

And then on the EV we've said that we expect the overall trends on the investment in EV to continue during the year. We're also starting to see some increasing interest for some of the micro processing applications from pico second and ultrafast lasers with many customers getting further along with their evaluation processes. But clearly, the rebound in China is, at this point in time, is dependent on the cutting business and that's where we've seen some strengthening in the demand trends. Our largest OEM, we had a meeting with them this just this last few days.

There were a couple of people in the U.S., and they're actually pleased. They're not back at quite the level they were at, but they were pleased with the overall order flow they saw in January for cutting systems.

Jim Ricchiuti -- Needham & Company -- Analyst

OK. And, Tim, just looking out at the balance of the year, it sounds like you're also seeing increased traction from some of the newer products. How important is that part of the business going to be to you showing the kind of growth in the second half of the year that maybe some of us are looking for?

Tim Mammen -- Senior Vice President and Chief Financial Officer

It's still -- I mean, from the perspective you break it down by different product lines, you want to see -- the definitive revenue, we can see coming from the entertainment and projection and display; the continued growth, obviously, on the systems side of the business and -- that will be very important. The ultrafast is going to be important. We've got a good revenue forecast there. I'd say that you have to do balances toward the relative size of those businesses compared to the core business.

So, we still need to see a rebound in the core business. And if we get that, the newer product introductions with that good margin structure will add a layer of icing on that cake, I'd say. It's still in total demand relatively early in penetrating some of those new applications but certainly gaining some nice traction in them. I think we said on the call that in Q4 the newer products are now about 20% of total revenue, which was good compared to 15% for the full year in 2018.

So relatively speaking, you started to see some -- even total contribution relative to total revenue in Q4 was good from those areas. And even outside of just the new products, some of the other applications like advanced and government continue to perform well. In Q4, in the telecom business, was also quite strong into the end of the year.

Jim Ricchiuti -- Needham & Company -- Analyst

Thanks very much.

Valentin Gapontsev -- Chairman and Chief Executive Officer

[Inaudible] China -- in China, in quarter two or quarter three, and quarter four, our major OEM customers, they helped [Inaudible] inventory [Inaudible] to customers. But now it seems in January, especially beginning of February, the inventory finished and we've now found one, two or three weeks into a very positive growth in [Inaudible] new year. Chinese New Year, it was very to watch stream of new orders from [Inaudible] OEM Chinese customer. [Inaudible] New Year, finish this trend, we will [Inaudible], so we will again return to serious, again, business in China.

Jim Ricchiuti -- Needham & Company -- Analyst

OK. Thank you, Valentine. That's helpful.

Operator

Thank you. Our next question comes from the line of Michael Feniger with Bank of America Merrill Lynch. Please proceed with your question.

Michael Feniger -- Bank of America Merrill Lynch -- Analyst

Hi, guys. Thanks for taking my question. I just -- just to be clear, are you assuming gross margin in the first quarter to be down 200 basis points year over year or do you say that's the Genesis impact to gross margins in the first quarter?

Tim Mammen -- Senior Vice President and Chief Financial Officer

Primarily the Genesis impact to gross margins in the first quarter, at the top end of my range, I've got about 50% gross margin; and at the bottom end, about 48%. Genesis would be about 160% of -- so, 160 basis points in total relative to our normal guidance range.

Michael Feniger -- Bank of America Merrill Lynch -- Analyst

That's helpful. And then on the pricing pressure dynamic, I think you mentioned it wasn't as bad in the fourth quarter versus the third quarter. So, can you kind of elaborate on that? And is that how you're kind of assuming it should sequentially -- that pricing pressure should abate as we enter the start of the year?

Tim Mammen -- Senior Vice President and Chief Financial Officer

Yes, so in terms of pressure on pricing in Q4, it had abated. The issue that we had was that we had to absorb the full quarter of pricing that you saw in Q3 into the business model, and that had a bigger impact in Q4 than it had in in Q3. Pricing is remains relatively less pressurized at the moment, I'd say. And then we also have some benefit -- a couple of other things I'd like to call out.

In Q4, even though we had very strong success with the sale of the 12 to 15 kilowatt lasers, there were some also mix issues around gross margin so we actually had, relatively speaking, on the low cost cutting side a smaller decrease in sales of our rock-mounted lasers. And that's good to see because that's where there's the most competition. So that shows that we had good execution around that. But even though the 12 to 15 kilowatts grew very well and even our core YLS 1 to 5 kilowatts, which are very profitable, at the higher end of the cutting market, we saw demand for those lasers more impacted.

So there's a mix issue -- you also saw the QCW revenue down in Q4 compared to Q3, so there's a lot of different things on gross margin going on not just around the pricing but also the mix. And my view on gross margin overall is that like to get the core laser business back to like a $350 million run rate and then the systems business with Genesis on top of that and I think we'll be out of the -- at that point, we'd be out of the woods, relatively speaking, and targeting being back in the upper half about 50% to 55% range. The final thing I'd like to say on this is that we've talked about some of the lower diode cost feeding through and there's a package diode, which is basically being used in -- across the product line, but there's actually a new package diode design that is going to be introduced as well. And that's kind going -- the cost of that package actually is about 8% or 9% lower than even the existing package, and that's going to start to be used more fully during the second quarter this year.

So we haven't stood still around all of -- any of these different areas. We continue to make improvements and drive cost down.

Michael Feniger -- Bank of America Merrill Lynch -- Analyst

And, Tim, just --

Valentin Gapontsev -- Chairman and Chief Executive Officer

Can you explain also regarding our target form [Inaudible] taking [Inaudible]. Last year, it was only one month [Inaudible] included [Inaudible] one month. [Inaudible] or the result based on all the products, which they made no base to business model without IPG. This year, we've done -- our target to 10 to move product from Chinese city toward new product with -- based on technology developed in IPG.

And now, we've [Inaudible] in the new system that would be made with participation of Genesis. This product should be a much more profitable than products, which Genesis made with -- using their own only technology. So, [Inaudible] new existing product mix with a margin not a big margin of [Inaudible] itself that. That's [Inaudible] it would be much more margin of products, our target.

To continue, regarding QCW [Inaudible] when we're talking about QCW [Inaudible] four or five years to introduce market. For nowadays, we introduce new QCW much more efficient and much more competitive and profitable than [Inaudible], which we sell before is this new [Inaudible] have to replace some [Inaudible] open new opportunity would be much more competitive than former ways. So, the same situation and we have to return increased again sales to [Inaudible] new [Inaudible] growth of sales again.

Michael Feniger -- Bank of America Merrill Lynch -- Analyst

Thank you.

Operator

Thank you. Our next question comes from the line of David Ryzhik with Susquehanna Financial Group. Please proceed with your question.

David Ryzhik -- Susquehanna Financial Group -- Analyst

Hi. Thanks so much for taking the question. Just wanted to drill down on Q1 guidance. Ex Genesis, it appears that the guide is around -- down to 11% Q over Q overall revenue.

Given that you're pleased with some of the order flows, thus far, this quarter, just wanted to know is there some conservatism baked into the guide? Or what else is driving that Q-over-Q decline, given that you're seeing some constructive order flow in January and early February? And have a follow-up.

Tim Mammen -- Senior Vice President and Chief Financial Officer

So, I think two things on that. First of all, there's a lot of orders that are coming in for shipment in the second quarter. So, the order flow improvement doesn't necessarily just flow through to the bottom line immediately. The second thing is that January is always a very weak revenue month and it's very difficult to just make that up even if order flow strengthens and you have a great march, relatively speaking, so I'd say those are the two main things we've taken into consideration in determining guidance for Q1.

I'd say, overall, the 11%, 10% down for the laser business is right in line with where you'd see opening shippable backlog on an -- on a year-over-year basis as well.

David Ryzhik -- Susquehanna Financial Group -- Analyst

Great. Thanks. And do you mind giving the the growth rate in the 6 kilowatt and above fiber lasers? I think I may have missed it on the call.

Valentin Gapontsev -- Chairman and Chief Executive Officer

In the data.

Tim Mammen -- Senior Vice President and Chief Financial Officer

I've got on hand. We'll give that to afterwards. We did put it in the script somewhere.

David Ryzhik -- Susquehanna Financial Group -- Analyst

OK, sure.

Tim Mammen -- Senior Vice President and Chief Financial Officer

The 12 and 15 was up more than 50%. The 6 kilowatt and above -- I've got that data point somewhere. I'll give it to you afterwards.

David Ryzhik -- Susquehanna Financial Group -- Analyst

Sure. And I just wanted to drill down on QCW. To what extent is this -- will this become relevant in the pricing pressure you're seeing in the 1 kilowatt to 4 kilowatt segment? Do you believe that the differentiation here will help you preserve or maybe regain some share that you've lost over the past year in that competitive environment in China?

Tim Mammen -- Senior Vice President and Chief Financial Officer

Absolutely. I think the customer response actually initially this QCW/CW feature, there's a distinction valve is talking about a pure new QCW design. There's also the ability to deliver the QCW feature with the CW. It is extremely compelling from both our internal application work and some of the feedback we're getting at early stages from customers, both in terms of improving the quality of the piercing, reducing the time of the piercing, and even using the QCW feature to enhance the cutting of more complex parts.

So, when you're cut in just in a straight line, you can deliver CW power on a constant basis. The ability to modulate the energy as you start to cut around curves and corners with more complex parts actually enhances the quality of the cutting. And if you've got a 12 kilowatt laser, you can actually modulate that laser for piercing with very high energy. In the 1 to 6 kilowatt range, having the QCW feature, if you've got a 1 kilowatt laser to generate 2 kilowatts of power or 4 kilowatts to generate 8 kilowatts of power gives you a significant change in the processing capabilities.

So we think this is actually a very unique capability and really does enhance the laser's capability even at those lower power levels.

David Ryzhik -- Susquehanna Financial Group -- Analyst

OK. Great. And just last one for me, if I can. Do you mind just sizing the telecom opportunity? You've been a little bit more vocal.

You've talked about Menara, you made an undersea cable acquisition, just we'd love to hear what your -- what kind of revenue run rate are you targeting in this business? And perhaps can 5G even drive some some upgrades -- some business maybe over the next few years? Thanks so much.

Valentin Gapontsev -- Chairman and Chief Executive Officer

Our target during a couple years is increase our telecom revenue. I mean, a couple hundred million dollars per year. And next year, we'll hope to reach such numbers.

David Ryzhik -- Susquehanna Financial Group -- Analyst

OK.

Operator

Our next question comes from the line of Tom Diffely with D.A. Davidson. Please proceed with your question.

Tom Diffely -- D.A. Davidson -- Analyst

Yes, good morning. First, a clarification on the gross margin question. So the 200-basis-point impact from the recent acquisition, is that a -- can we view that as a kind of a permanent impact or is that due to onetime items in the quarter?

Tim Mammen -- Senior Vice President and Chief Financial Officer

No -- I mean, at the moment that's where the Genesis business model stands. As Valentine has described, the overall target over time, and it will take time, is to really leverage their systems more onto the laser side and to reduce using our technologies and capabilities to reduce the cost of the laser relative to the -- I think it's also very important to understand the value proposition that's being delivered because when you often get into these more advanced laser processing and even whether it be welding or cladding, particularly welding of different and diverse materials, the total productivity gains and reduction in cost the laser system delivers would be captured more in the average selling price of these systems as well as reducing the cost of them. But in the near-term, we can't change that business, Tom, in two or three months. It's going to take a little bit of time to do it and I'd say, right now and for the foreseeable future, the impact overall on the business is about 150 to 200 basis points on gross margin.

Valentin Gapontsev -- Chairman and Chief Executive Officer

We're talking about system being the total cost. System business to improve profitability in margin [Inaudible] of course, it takes time. It's not possible to make during a few months only. Half year, one a year or so, it will be looking for essential improvement for system business [Inaudible] Genesis [Inaudible] next year.

But take in mind up to now, the gross margin total, IPG doesn't -- very small impact from these guys because it feels small share of total business and so on. But major our gross margin define our standard product. You take in mind, last year we decreased practically our major cost power major component. So they put it in the laser diode, new generation of laser diodes [Inaudible] parts components, we decrease by -- decrease cost to buy 20%, even 50%.

So, it's very essential decrease, of course, of this part is the result also gross margin total company integrated margin will grow [Inaudible] essential. We will compensate some loss into price or [Inaudible] power [Inaudible] introduction of some with quality up to now two big union systems. But in total, we have very essential benefit now in gross margin. It compensates all [Inaudible], which we have temporary [Inaudible] new products.

Tom Diffely -- D.A. Davidson -- Analyst

OK. That's helpful. Thank you. And then as a follow-up, when you look at the benefits from the QCW/CW combination, is that in lieu of beam shaping or in conjunction with beam shaping to increase the productivity when you have different types of cutting to do at the same time?

Tim Mammen -- Senior Vice President and Chief Financial Officer

Can be used in conjunction with beam shaping. So for example, if you've got the inner core of the laser and you're running a certain amount of power through the inner core, not the outer ring, you could actually incorporate the QCW function within that, and that would be an intention to go forward on that direction. And actually, our competitors have looked at our beam shaping and say, "Well, only half the energy goes through the core and half the energy goes through the ring. The reality is if you combine that with the QCW, offset that alleged weakness of the solution.

And the other thing is the beam shaping has also had some positive application results, both on improved cut quality as well as not just on cutting but on welding applications. So, on some of the -- there's a reductions in splatter around some of the welding applications. The other benefit of our solution on that beam shaping side, and we believe quite strongly in this, is that we're not stressing the fiber, and we believe that competitor solutions are stressing mechanically the fiber. And interesting, we've also heard from one of the companies that produces optical hedge that there is energy leaking into the cladding of the fiber that is actually necessitated a redesign of -- a costly redesign of the optical head.

So, I think really people need to start passing out these differences in technology a bit more specifically and with greater understanding of the benefits and disadvantages of different approaches.

Tom Diffely -- D.A. Davidson -- Analyst

OK. That's helpful. Appreciate it. Thank you.

Operator

Thank you. Our next question comes from the line of Patrick Ho with Stifel. Please proceed with your question.

Patrick Ho -- Stifel Financial Corp -- Analyst

Thank you very much. Maybe as a follow-up to some of the questions are already on China, based on the order pickup activity that you've seen and the conversations with your customers, do you believe your customers have a view of an improving macro environment in the region or do they believe that a stimulus package is on the way and that's giving them confidence to kind of pickup the order flow once again?

Tim Mammen -- Senior Vice President and Chief Financial Officer

I think it's two or three things. I think Valentin said some of the slightly higher levels of inventory have been worked through. The general feedback we're getting is that the demand is there and people still just want some resolution of some of the uncertainty around the trade war. So, you're starting to see that maybe move forward a little bit, at least in some of the discussions from the U.S.

government and their desire to get that resolved. And the third thing, I think there is some benefit coming from the stimulus that is being put into the market, which has been both on the infrastructure -- some of it is a bit more fiscal rights, so tax rebates, which we haven't really seen before, reduction in VAT is another one. Yes, if you look at the straight economic data, it would perhaps belie what we're seeing but we kind of saw this downturn a bit sooner than everybody else and hopefully we are going to have a bit more conviction of seeing it by the time we get to the end of this quarter, a recovery sooner than other people. So, two or three things, Patrick, I think that we've we've heard.

Patrick Ho -- Stifel Financial Corp -- Analyst

Great. That's really helpful. And maybe as a follow-up question on the gross margin profile and the impact of Genesis, it sounds like longer term you still are committed to that 50% to 55% range you've talked about in the past. As we look at 2019 as a whole, obviously, a pickup in revenues will help gross margins from that level but will product mix and the mix shift as the year progresses to some of your new products and maybe higher powered lasers, how big of an influence do you think that'll be to the overall gross margin profile as 2019 progresses?

Tim Mammen -- Senior Vice President and Chief Financial Officer

It'll be a nice part of it. So, I think I mentioned, the total pickup in revenue just on the laser business, if you can get back to a sort of 343, 53, 60 range, you start to see us leveraging the business model much more -- much better and more efficiently than we're able to at these levels. Secondly, a pickup in revenue around the core business at that level would be -- would require the higher margin product to recover strongly as well so that drives some of that benefit. Now, we believe that the new features we're introducing with the QCW/CW in the B mode will also enable a little bit of premium pricing.

It's not necessarily going to be a massive but it also is competitively a benefit. And then you've got the new opponent. The ultrafast lasers have very high margins on them. Some of the projection and display product has high margin.

And as you mentioned, medical, we've got a good order for some of the lift trips the applications that's already in hand that will start shipping in April. So clearly, some of the new laser product would help us. And we've always said this that we're going to see competition of certain ends of the market but we always try and run ahead of the game by taking cost down and introducing new leading-edge products. We're clearly having to deal with many different dynamics in the business at the moment.

But right now, I actually think we'll get back into the upper half of that range if we can get the core laser business back to $350 million. Obviously, at that revenue level, I think this comes back to Tom's question, the share of, for example, Genesis even in this year, would be would be lower as a percentage of total revenue than it is at the core laser business being at $300 million. So the impact of Genesis would be less or the impact on the systems business would be --

Valentin Gapontsev -- Chairman and Chief Executive Officer

[Inaudible] also we -- our business model for system is not [Inaudible] model. We don't plan it to compete with tendered application when existing is completed and put it in metal cutting, ship cutting. It's not our business at all. We do develop our [Inaudible] business model [Inaudible] develop absolutely new processes, a new application when nobody [Inaudible] application.

We compete not -- with not [Inaudible] solution and [Inaudible] opportunities. And for example, [Inaudible] large pipe [Inaudible] partition or [Inaudible] partition pipe -- pipes [Inaudible] . Up to now, nobody make in this world. We were first to develop this new technology [Inaudible].

This technology replace current techno, which other people use. It's very expensive and extremely expensive and very complicated technology. For example, for a large [Inaudible] pipes, one only [Inaudible] machine system costs more than $50 million, $50 million. We developed much better, much more efficient technologies, which is higher speed -- much higher quality [Inaudible] with such pipe.

Also, we developed proof in the field and for us, we can sell this technology with very high profit, even five times cheaper than this now existing only system the market. Our technology is 10 times cheaper, so we can dictate any [Inaudible] with now very high profit. We don't see a year or two years somebody who can compete with this [Inaudible] this unique at all. It make [Inaudible] takes many years, for example.

The same, for example, if -- so with titanium, [Inaudible] people for aerospace and now they use this technology [Inaudible] with such camera for large pipes. And so, [Inaudible] not by large part and it's also many $10 million camera, [Inaudible] camera and quality of such wealth [Inaudible] aerospace American and other companies. They are not familiar at all with the way that we develop [Inaudible] laser technology to [Inaudible] in open air without any [Inaudible] camera and so on. Again, it's much higher quality, our final product, much faster in the course of productivity, 10 times higher, and we are only starting to convince the serious OEM customers, convince them in how they qualify in this first production line we discussed with them to be a production line.

And it would be enormous believe it would be a very highly profitable business. And from the point of the Genesis product, this would be suitable because they have more experience to develop mechanical parts and so on. But all others, but major not mechanical, major optics, major [Inaudible] process, unique process to develop this. Its engine, for example, for turbines and so on, for example, have very big business.

The same -- some margin unique technology [Inaudible] for a railway, for the high speed trains. For example, the same in medical application, for example, [Inaudible] that solution other people [Inaudible]. We will develop, for example, [Inaudible] and qualify now. [Inaudible] recognize, worldwide to recognize.

This technology five times cheaper than use now by these other people that use [Inaudible] and much more efficient and so on. And so, it's very high margin. We can sell this [Inaudible] no practical the only company able and now qualifying introduce [Inaudible] in the market, starting now to sell in the market. But to penetrate in serious market, it takes a couple years as the usual.

FDA [Inaudible] each country separate its own it takes time but. This technology is extremely profitable, very [Inaudible] not go into a standard solution, which compete with other people [Inaudible] margin much less.

Patrick Ho -- Stifel Financial Corp -- Analyst

Great. Thank you very much.

Valentin Gapontsev -- Chairman and Chief Executive Officer

Now, we developed 10 such technology, first time, unique technology for different application not for only one application at all, justify where this year's application, starting from large pipes or the titanium or [Inaudible] for example, by unique [Inaudible] system, where [Inaudible] screen and also for medical and other application, all the technology. And we say [Inaudible] profits, profits, unique profits, patented profits.

Patrick Ho -- Stifel Financial Corp -- Analyst

Thank you.

Valentin Gapontsev -- Chairman and Chief Executive Officer

It's absolute [Inaudible] business model.

Operator

Thank you. Our final question comes from the line of Andrew DeGasperi with Berenberg. Please proceed with your question.

Andrew DeGasperi -- Berenberg Capital Markets -- Analyst

Yes. Thanks for taking my question. I guess, first, maybe can you just give us a breakdown of the markets, where you're seeing pockets of strength, where you're seeing less weakness than you originally did in the last quarter? And then maybe could you discuss the auto industry generally? I know you have a little bit of exposure to that. Could you maybe just give us a little rundown as far as how is that doing in China and Europe?

Tim Mammen -- Senior Vice President and Chief Financial Officer

So, in general, I think first starting with relatively speaking where the tone is a bit better compared to the beginning of Q4, we've mentioned already the order flow pickup we've seen in China and the different end markets there that are benefiting. I had mentioned that Europe was, even during Q4 was -- seem to be reaching at least some point of stability in European orders in -- or revenue in Q4 was actually up about 8%, so we're seeing a stabilization and relatively compared to where it could have been good demand from the OEMs in Europe as opposed to northern Europe and actually in Italy. And North America is -- continues to be performing quite well. Good growth in Q4, good reasonable order flow.

Q1 is always a little bit slower in North America but reasonably good backlog in our guidance number for Q1 is fairly good for North America. I was pleased with the overall Japanese performance. I mean, look at some of the Japanese machine tool. Data and that's been very weak, but we we grew Japan 4% in Q4 compared to the year ago.

Korea was also reasonably good. They also come into the year with reasonable backlog. Really, I mean, it's a smaller part of our business but Turkey, given the geopolitical dynamics and macroeconomic impacts in Turkey continues to be weak relative to where it was a year ago and a little bit more uncertain. But we're starting to see some order flow even from the OEMs there.

It's not going to necessarily turn around dramatically but that would be an area I'd call out for concern. Some of the emerging markets, I think, have stabilized a bit and that'll help the Europeans, right. So you're seeing some stabilization in the economics and macro environments in South America, Brazil. India, for us, is a small business at the moment but we've got a new management team in there and they grew that business very nicely last year and have given us a strong budget for this year.

So some -- the emerging markets would be an area where the dynamics, I think, have improved. We don't necessarily see that directly because the OEMs see that. Although if the U.S. dollar continues to strengthen -- I was listening to Bloomberg Radio this morning, where that was called out.

The continued strength of the U.S. dollar, that's a -- can be, in the future, a headwind to emerging markets, so we're watching all of that as well.

Andrew DeGasperi -- Berenberg Capital Markets -- Analyst

And sorry, just a clarification on the back -- on the order flow, I think you mentioned that mostly would show up in the 2Q quarter, or would that potentially -- is it second half related?

Tim Mammen -- Senior Vice President and Chief Financial Officer

No, we've got a lot of backlog for Q2 already. And generally, our terms are within a three to four month time horizon. So that's why we'd need the order flow to continue in February and March because that would drive the shipments in the end of Q2. The orders we've taken in January and February would help to start Q2 stronger than Q1.

Andrew DeGasperi -- Berenberg Capital Markets -- Analyst

Got it. Thank you.

Operator

Thank you. At this time, I'll turn the call back over to management for any closing remarks.

Valentin Gapontsev -- Chairman and Chief Executive Officer

OK. Thank you for joining us this morning. We look forward, again, to speaking with you next quarter's call. Have a great day.

Thanks for your time.

Duration: 70 minutes

Call Participants:

James Hillier -- Vice President of Investor Relations

Valentin Gapontsev -- Chairman and Chief Executive Officer

Tim Mammen -- Senior Vice President and Chief Financial Officer

Jim Ricchiuti -- Needham & Company -- Analyst

Michael Feniger -- Bank of America Merrill Lynch -- Analyst

David Ryzhik -- Susquehanna Financial Group -- Analyst

Tom Diffely -- D.A. Davidson -- Analyst

Patrick Ho -- Stifel Financial Corp -- Analyst

Andrew DeGasperi -- Berenberg Capital Markets -- Analyst

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