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IPG Photonics Corp  (NASDAQ:IPGP)
Q1 2019 Earnings Call
April 30, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to IPG Photonics' First Quarter 2019 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, Doug, 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's or the company's intentions, expectations or predictions of the future are forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause the company's actual results to differ materially from those projected in such forward-looking statements. These risks and uncertainties include those detailed in IPG Photonics' Form 10-K for the year ended December 31, 2018 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, April 30, 2019. The company assumes no obligation to publicly release any updates or revisions to any such statements. For additional details on our reported results, please refer to the earnings press release and the Excel-based financial data workbook posted to our Investor Relations website. We will post these prepared remarks on our Investor Relations website following the completion of the call. With that, I'll now turn the call over to Valentin.

Valentin P. Gapontsev -- Chief Executive Officer and Chairman of the Board

Good morning everyone. We were pleased to deliver first quarter results in line with our guidance given the challenging macroeconomic, geopolitical and competitive backdrop. During the quarter, business trends improved in China, driving sequential growth in orders. More importantly, we have met competitive challenges head on, substantially reducing component and manufacturing costs.

We have also introduced unmatched product features that improve processing speed, flexibility and quality for our customers. IPG always seeks to gain advantage during times of market stress. If properly executed, these challenging times can be a catalyst for R&D investment that results in a stronger competitive position on which excess returns can be earned.

We remain the clear market leader in fiber lasers with hundreds of megawatts of installed capacity. In the first quarter, we shipped more than 11 megawatts of total optical power, up

nearly 10% year over year. High power megawatts increased even more nearly 15% year over year. Although we have seen aggressive pricing among China-based competition for 1 kilowatt to 4 kilowatts lasers serving the low-cost cutting market, we increased sales of our rack-mounted lasers sequentially, with even stronger unit growth. The pricing environment has affected the dollar value of units serving this market. However, our ability to rapidly reduce costs has limited the gross margin impact to just 200 basis points year over year. Last year, we reduced the cost of diodes essentially and some other components by more than 15% and have started the mass production of new diodes in Q1. This year, we have visibility into further cost reductions and product enhancements that we believe extend our competitive lead.

In the last few quarters, we have developed and couple of weeks ago have started to sell to customers new, unique 2 kilowatts to 4 kilowatts QCW lasers with double peak power additional capability. This innovation essentially enhances our competitive position in the cutting market. The lasers increase piercing speed, improved cut quality, delivering cleaner, more controlled drilling of thicker materials while reducing scrap. It is an enormous advantage to compare to competitive lasers of other Chinese guys and will give us a very big improvement in sales this year. At ultra high power sector, our multiple IPG customers will shortly be launching their first 20-kilowatt laser cutting systems, raising the bar for speed and flexibility in processing thicker metals versus non-laser technologies.

In addition, we see compelling customer interest in our new generation of high-power lasers with adjustable mode beam capability that permits reliable adjustment of the output beam to process a wider range of material thicknesses for cutting applications, while reducing spatter and improving quality in welding applications.

We also made solid progress in our newest product areas outside metal processing. Sales of green pulsed lasers, for example, used to improve solar cell efficiency more than doubled year over year. We also made a fast growth in the sale of our red, blue and other new products. We increased sales of our ultrafast pulsed lasers nearly three times compared with the prior year and are actively working on more than 50 new projects for these lasers across a wide range of applications. Systems sales increased more than 200%, and the acquisition of Genesis allows IPG to accelerate laser processing within the transportation, agriculture, aerospace and industrial end markets. Sales of beam delivery accessories increased more than 70% year over year. We increased sales of our laser-based cinema projection system more than 150% year over year as our solution is being adopted at three of the leading providers of cinema projection technology. We also have visibility into strong growth in medical laser solutions this year. Collectively, sales of newer laser products and systems into emerging applications grew at double digit rate in the first quarter and were 15% of total revenue.

We continue to demonstrate meaningful traction in ultra high power fiber lasers while investing in new products and applications. We believe this progress substantially expands our addressable market and opens up opportunities that will drive the company's growth for many years. Our mission is to make IPG's fiber laser technology the tool of choice in mass production for many years ahead. I am confident in our ability to execute on this mission and deliver superior returns.

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

Timothy P. V. Mammen -- Chief Financial Officer and Senior Vice President

Thank you Valentin and good morning everyone. Revenue in the first quarter declined 12% year over year to $315 million. Revenue from materials processing applications decreased 11% year over year and revenue from other applications decreased 32% due to the timing of orders in our advanced applications and communications businesses.

By region, first quarter revenue in China decreased 24% year over year and represented approximately 36% of the total. Macro-driven softness in cutting and marking applications was partially offset by growth in macro welding. Within China, sales of ultra high power CW lasers grew by a double digit percentage, but were more than offset by declining sales of lasers for lower power applications. In Europe, revenue decreased 24% year over year primarily due to softness in cutting and additive manufacturing, partially offset by growth in welding.

In Europe, total sales of $88 million were consistent with the Q3 2018 level, which supports our previous assertion that revenue in the region appears to have stabilized. However, continued macroeconomic softness in the region, as evidenced by the decline in Eurozone manufacturing PMI, makes predicting an eventual rebound in Europe more challenging.

In North America, revenue increased 65% year over year, driven by the acquisition of Genesis. Excluding Genesis, sales in North America increased 1% year over year with slight declines in cutting, welding, and marking, offset by strength in other products and applications. Sales in Japan decreased 20% year over year on softness in marking, welding and cutting. However, strong bookings in the region suggest improved performance in Japan during the second quarter. Sales in Korea increased 4%, and revenue in Turkey decreased 36% year over year, but improved sequentially.

Turning to performance by product. High power CW laser sales decreased 22% year over year and represented approximately 57% of total revenue. Reduced sales of high power CW lasers for cutting and additive manufacturing were partially offset by strength in welding applications. Sales of ultra high power fiber lasers at 6 kilowatts or greater accounted for nearly 50% of all high power laser sales, driven by rapid adoption in cutting applications. Sales of lasers at 10 kilowatts or greater increased more than 40% year over year, while sales of other high power lasers declined year over year due to the weaker demand environment in China and Europe and more aggressive price reductions on select products.

Pulsed lasers sales decreased 18% year over year, with rapid growth in green and ultrafast pulsed lasers offset by reduced sales of other pulsed products. Medium and low power laser sales decreased 39% on softness in additive manufacturing and the transition to kilowatt-scale lasers in cutting. QCW sales declined 13% year over year but increased 17% on a sequential basis, as lower sales into consumer electronics applications was partially offset by increased sales of higher power QCW lasers into other applications. Systems sales increased 245% year over year due to the acquisition of Genesis. Excluding Genesis, systems sales increased nearly 20% year over year, driven by growth in macrosystems for welding, drilling, and ablation applications, along with the initial acceptance of our laser-based cinema projection system at leading providers of cinema projection technology. Other product sales increased 6% year over year, driven by growth in beam delivery accessories and service revenue.

Gross margin of 47.3% declined 920 basis points from the first quarter of 2018. Compared with the year-ago period, less favorable absorption of manufacturing expenses reduced gross margin by nearly 500 basis points. Lower-than-expected absorption of manufacturing expenses and a higher inventory provision resulted in gross margin coming in slightly below the low end of our expected Q1 range. In addition, acquisitions reduced gross margin by more than 200 basis points, and lower product pricing and foreign exchange headwinds reduced gross margin by a further 200 basis points approximately. Holding other factors constant, we believe that recovery in our business to approximately $380 million in quarterly sales would enable us to get close to the mid-point of our long-term gross margin guidance of 50% to 55%.

First quarter operating income was $68 million, or 21.7% of sales, down 1,750 basis points from the first quarter of 2018. Excluding a foreign exchange loss of $2 million, operating margin was 22.2%. Excluding foreign exchange, operating expenses as a percentage of sales increased 630 basis points year over year due to lower revenue, investments in engineers, salespeople and IT systems, higher R&D material costs, and higher-than-normal legal expenses.

Net income was $55 million and earnings per diluted share were $1.02. Slightly lower than expected absorption of fixed manufacturing costs and a higher inventory provision reduced EPS by $0.04 relative to guidance. In addition, higher R&D material expenses, legal costs and foreign exchange losses reduced EPS by $0.04. If exchange rates relative to the US dollar had been the same as one year ago, we would have expected revenue to be $15 million higher and gross profit to be $8 million higher. The effective tax rate in the quarter was 24%, which included certain discrete tax items.

We ended the quarter with cash, cash equivalents, and short-term investments of $1.03 billion and total debt of $44 million. Cash provided by operations was $46 million during the quarter. Operating cash flow was reduced by cash tax payments that totaled more than $50 million relative to a Q1 tax provision of $17 million. These payments were primarily related to the timing of cash taxes paid in Germany with the filing of our 2017 tax return in Q4 2018.

Capital expenditures were $33 million, which included approximately $21 million for the purchase of a new facility in Massachusetts, as we continue to invest in new plants and equipment to meet demand for our products over the next several years.

Turning to guidance, we have seen further signs of improving business conditions in China, our largest region, with sequential growth in orders and good momentum through the first three weeks of the second quarter. Our first quarter book-to-bill ratio was above one, in line with normal seasonality, albeit off a lower base given the weaker macroeconomic environment. If this momentum in China is maintained, it should continue to drive better performance. Performance in Europe is generally stable, but down from peak levels, reflecting reported economic trends in the region. We expect pricing headwinds relative to competition in China to continue. We believe our innovative new products, accessories and complete solutions would provide customers with a superior value proposition, both cement and enhance our market leadership position.

Based on these factors, for the second quarter of 2019, we expect revenue of $340 million to $370 million. We expect our second quarter tax rate to be approximately 25%, and we anticipate delivering earnings per diluted share in the range of $1.25 to $1.55.

Commentary from our largest machine tool OEM customers continues to improve, but we do not yet have clear visibility into their full-year order plans. As such, we do not believe it is appropriate to provide full-year revenue guidance at this time. As a reminder, we would expect year-over-year trends to improve in the back half of 2019 driven by 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.

And with that, Valentin and I will be happy to take your questions.

Questions and Answers:

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Our first question comes from the line of Jim Ricchiuti from Needham & Company. Please proceed with your question.

James Ricchiuti -- Needham & Company -- Analyst

Hi, thank you. Tim, when you talked about the 200 basis points impact on gross margins from acquisitions, was that all Genesis related?

Timothy P. V. Mammen -- Chief Financial Officer and Senior Vice President

Yes.

James Ricchiuti -- Needham & Company -- Analyst

Okay. So, Genesis was about $21 million of revenues in the quarter?

Timothy P. V. Mammen -- Chief Financial Officer and Senior Vice President

We said $24 million in the press release.

James Ricchiuti -- Needham & Company -- Analyst

Oh I'm sorry. Okay.

Timothy P. V. Mammen -- Chief Financial Officer and Senior Vice President

In line with that.

James Ricchiuti -- Needham & Company -- Analyst

Okay, just as it relates to what you're seeing in the market in China, are you hearing anything from your customers that give you any view of a pickup or on the other hand weakness in consumer electronics related revenues?

Timothy P. V. Mammen -- Chief Financial Officer and Senior Vice President

We're not hearing anything that's going to drive a very significant pickup, but there is some demand for consumer electronics applications. We're seeing some order flow for some of the micro welding applications with our QCW lasers. We've been asked to deliver some product with very short lead times for that. Continuing to work on some of the higher power applications for welding the frame around different phones. But yes, this year I don't think is going to be a significant consumer electronics revenue driver as some of the biannual cycles are and I think there's another company that reported last night that reflected that as well. So there's some order flow, but it's certainly not a bullish tone around consumer electronics in general.

James Ricchiuti -- Needham & Company -- Analyst

Understood. And then just a clarification and I'll jump back in the queue. The book to bill of 1.0, were you referencing China or were you talking about book to bill across the various regions?

Timothy P. V. Mammen -- Chief Financial Officer and Senior Vice President

In total, China was also up above 1 there as well.

James Ricchiuti -- Needham & Company -- Analyst

Okay. Thanks very much.

Operator

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

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

Yes, good morning. I was curious you talked about how you've been able to offset some of the pricing with some of the new features. I'm curious what type of features is the most successful? Is it speed, reliability, or specific tech specs? What do you find the most successful in fighting off some of the pricing pressure?

Timothy P. V. Mammen -- Chief Financial Officer and Senior Vice President

So Tom, first of all, I think really what has offset some of the pricing pressure has been this very significant reduction in component and sub assembly cost with the new generation of diodes. And relative to the pricing pressure we've seen, only seeing 200 basis points in margin degradation related specifically to pricing I think is really quite extraordinary. In terms of some of the product features we've introduced in -- for the cutting applications, I think the QCW feature with the 2 times peak power because of the improvement in piercing speed, quality of piercing, the fact that the cutting can then start closer to the edge of the metal and reduce scrap is going to be a very fundamentally important feature to have with the lasers.

And on the adjustable mode beam, I think there's good work being done with customers. I say there's a lot more excitement around the QCW feature, which is actually good for us because that's very unique to IPG. Several other customers offer the variable beam capability, but QCW is really unique to IPG.

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

And then maybe getting back to the cost reduction side, I mean you guys have been very good over the last decade of reducing the cost. Is this a continuous opportunity for you or at some point do you run out of ways to reduce the cost?

Timothy P. V. Mammen -- Chief Financial Officer and Senior Vice President

I mean Valentin keeps driving everybody every year to get to cost reductions. And if you just looked at say the cost of an individual component, you might be reaching greater limits on being able to reduce that. But if you can then take that and get more power out of individual components, that as much as anything else can bring your cost per watt down. As you get more power out of the components, it can also simplify the product architecture, reduce the number of splices for example that are required in the manufacturing process, reduces the form factor of the lasers. That in itself takes cost out. So, every year we take cost out and think it's going to become more difficult and then we succeed yet again to take a significant amount of cost out.

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

Great. And then finally, when you talked about the pricing...

Timothy P. V. Mammen -- Chief Financial Officer and Senior Vice President

Valentin will add a comment around that just before you go in.

Valentin P. Gapontsev -- Chief Executive Officer and Chairman of the Board

I would say with diode for example for last six years, we decreased cost of 1 watt of diode -- decreased more than 10 times during six years, 10 times decreased cost of diode. Now nobody can compete with that (inaudible). It's a fantastic result, which 10 years ago the biggest scientists that they dream only about that possibly in future someone will have reached such numbers. And we have produced now about more than 70 megawatts of optical power, 70 megawatts. Ask all together who produce diode, maybe only few megawatts only. We produced 70 megawatts. Who are able to compete in quantity, how many years they need to invest to reach such number. But without this diode, nobody can practically win with us to replace us in the market. Nobody able even to cross us in the market such number. Only diode, but all other components fall for the quantity of different kinds of lasers only poses now competition changes and so on.

It's only for a couple of lasers, 1 micron of lasers only will go power up to 2 kilowatts to 3 kilowatts. But equality, no question (inaudible), but even quality, they'll never able even to reach our number. This price correction was a very tough decision, of course it's damaged the market very essential price. But when you talk about quantity for them, laser -- high power laser, 1 kilowatt price we increase, each year we increased up to 20% up to now. Every year we increased 22 units. Price, the decrease of price, you take one time aggressive one year, two years, then finished. They could not grow price up to new. And now they are making (inaudible) with this without moving margin practical, but they have to stop. But quantity every year, we increase quantity 15%, 20% up to now. We did not lose market share, whole time we increased market share.

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

Great. Thanks for the extra color. Finally, Tim, when you look at the pricing pressure that you've seen, is that you responding to market pricing or is it you getting aggressive on pricing to regain or retain share?

Timothy P. V. Mammen -- Chief Financial Officer and Senior Vice President

Market pricing has been very aggressive as Valentin's referenced. We think that -- we can see that it started to stabilize a bit. To a degree, we have to respond to it, but we're still pricing at a premium to the market given our improved quality and performance of the lasers, for example, with electrical efficiency, the size, general reliability of the product. And now with the new feature sets, we believe some of these features will enable us to add value around the product and enhance that pricing a little bit relative to where the competition is.

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

Great. Thank you for your time.

Operator

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

Patrick Ho -- Stifel Nicolaus -- Analyst

Thank you very much. Tim, maybe first off, just following up on the strong performance you had in the ultra high powered segment on a year-to-year basis. I guess from a big picture basis, where do you believe we're in in the industry transition to these higher powered lasers, particularly for the cutting market? Are we still at the very early stage of say like first or second inning or are we kind of halfway through, I guess this industry shift?

Timothy P. V. Mammen -- Chief Financial Officer and Senior Vice President

It's still a relatively early stage. I think it depends what power level you're talking about. In the 6 kilowatts to 10 kilowatt range, the first use of those lasers started a couple of years ago. In 10 kilowatts to 15 kilowatts, it's only really that transition happened -- started to happen over the last year. And at 20 kilowatts, as we referenced, people are only just starting to introduce cutting systems at that kind of power level. So it's the higher power you get, the more recent the transitions are to utilizing higher power scale devices.

Patrick Ho -- Stifel Nicolaus -- Analyst

Great. And as my follow-up question, in terms of the improved outlook that you're starting to see in China, is part of that related to a better inventory situation therein where they worked off maybe some of the excess laser inventory they have or is it being driven by, I guess, a turn in demand?

Timothy P. V. Mammen -- Chief Financial Officer and Senior Vice President

So, we don't think that there's at any time a huge amount of inventory that sits with the OEMs in part that's because of the way we manage the business, right. We have very short lead times. We don't force product on people when they see fluctuations in demand. So what we're seeing here, there may be a little bit of an inventory adjustment, but it's not -- I do not believe it's the primary driver. The primary driver has been a shift in the demand cycle coming back and we referenced that even in Q1. So, we started to make a bit of a call on our first quarter earnings announcement. Now the bookings forecast for China in Q2 would -- doesn't just reflect an inventory adjustment. That reflects a very definitive pickup in demand and that reflects I think the effective -- some of the stimulus and other actions that have been taken locally to get to I think a softer landing than might otherwise have happened.

Patrick Ho -- Stifel Nicolaus -- Analyst

Great. Thank you very much.

Operator

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

David Ryzhik -- Susquehanna International Group -- Analyst

Hi. Thanks so much for taking the question. So regarding the 6 kilowatt or above high power lasers in your prepared remarks, I guess, the numbers would shake out to around flat year-over-year growth in Q1 and China grew double digits in this segment. So, that would suggest the rest of the world declined year-over-year. I just wanted to get your sense on what are the demand trends for 6 kilowatt and above ex-China and what you saw there in Q1? And then I have a follow-up. Thanks.

Timothy P. V. Mammen -- Chief Financial Officer and Senior Vice President

Yes, absolutely, I mean, it's clear that relative peak revenue in Europe was actually in Q1 a year ago and a lot of that was coming off the initial transition toward more than 6 kilowatt power lasers. So Europe as we said compared to that peak continues to be weak, but it has stabilized at least, right? Revenue is tracking along over the last three quarters at relatively the same level, but it's still significantly off the peak demand that we saw at the beginning of the year. That would be the main driver. In Q1 Japan was also a little bit weak, but order flow from some of the main OEMs started to pick up at the end of the quarter and we're going to see an improvement in high power laser demand in Japan in Q2 and their bookings forecast is also good. So, that trend should happen into Q3. Korea was OK with high power lasers. The cutting applications not brilliant, but they've got a good forecast as well for the second quarter. So yes, ex-China particularly the largest market where we serve is Europe, that certainly is off from -- continues to be off from peak demand a year ago.

David Ryzhik -- Susquehanna International Group -- Analyst

Okay, thanks. And just regarding ultrafast, you talked about sales up 3x. You're working on more than 15 new products. Would love to -- perhaps you can expand upon your strategy there, how you view the market opportunity, perhaps what kind of revenue run rate you think you can get to over the next few years? Would really appreciate that. Thank you.

Timothy P. V. Mammen -- Chief Financial Officer and Senior Vice President

So, it's actually we're working on about 50 projects with different customers and we believe we've got a very -- an excellent device that is compact, it has a very fast start-up time from a cold, it has very good electrical efficiency. We're working on continuing to improve the amount of energy and the average power that we can get out of the device so that we can address more and more applications at a very high level. I think that's the main strategy and then really pushing the product out to customers for evaluation in processing of many different types of materials. It's certainly a product that has got a lot of very positive feedback from customers. We're not getting back into specific run rate around ultrafast lasers. If we look at the micro processing and look at ultrafast and UV and some of the visible product offerings, the total revenue around that is actually starting to approach a -- just below a $10 million quarterly run rate so getting up toward a $40 million annual run rate. And that's really starting to get, to be more meaningful therefore. So 2% or 3% of revenue we said get to 5% and 10% of revenue first and then gain another 500 basis points a share, you can quickly see yourselves heading toward $100 million to $150 million of total revenue quite quickly.

Valentin P. Gapontsev -- Chief Executive Officer and Chairman of the Board

And I can tell you with ultrafast lasers, we will introduce multi-laser with all fiber with a reasonable power source, first laser. All other customers have provided very bulky, expensive and not flexible solid-state solution. It is not fiber solution. We provide now a 50-watt home fiber placed in the market. With the two years, we're qualifying and the customer also testing and so on. So (inaudible) request for OEM customers, we've started to only one month ago, one month ago. Therefore, it's particular process qualification testing and so on. But returns from the market is therefore so excellent, own people sell their wire much, much better when they use now from other sources and so it's -- but only start to save. So the REO overall, the REO, it would be we expect next year. REO (Multiple Speakers)

David Ryzhik -- Susquehanna International Group -- Analyst

Thank you so much for the color Valentin and Tim, quick follow-up. Do you feel like you need to invest in SG&A and R&D? Should we expect some pickup in investments related to this opportunity?

Timothy P. V. Mammen -- Chief Financial Officer and Senior Vice President

On the R&D side, I think we're continuing to invest in R&D and devoting the resources that we need to get the product to market. We haven't seen any decreases in R&D through the downturn. On SG&A, we've added headcount around that area that's starting to execute. We, of course, look for people who are more specialized in this area as we build the business. But we tend not to go and chase like 100 people to build that market. We look for the best people who are technically competent and have a deep knowledge based around the different users in the market and leverage them to get a return quickly on the sales cycle for that. So we're not looking to add 100 salespeople to get into the ultrafast market.

David Ryzhik -- Susquehanna International Group -- Analyst

Thank you very much. Appreciate that.

Operator

Our next question comes from the line of Andrew DeGasperi from Berenberg. Please proceed with your question.

Andrew DeGasperi -- Berenberg Capital Markets -- Analyst

Thanks for taking my questions. First on the welding side, I know that China's cut their subsidies in April for EV. I'm just wondering if there's any impact that you see yet on sales from that end?

Timothy P. V. Mammen -- Chief Financial Officer and Senior Vice President

We haven't seen anything specific related to change in EV demand. We continue to work on different projects. Some of them are not even just related to China demand. They're related to some of the international automotive companies, installing battery capacity in China. So I think it's too soon to make a call on whether there's removal of the subsidies or cutting of them in April, what the impact of them will be. It's certainly not -- we would have liked to see the subsidies stay because it's going to be a bit of a negative.

Andrew DeGasperi -- Berenberg Capital Markets -- Analyst

Got it. And then secondly, just on the pricing side as a follow-up, is, are you seeing anything in terms of competition moving in the mid-power range? I mean, we've been hearing that your Chinese competitors are trying to improve the reliability of their lasers in the 5 to 6 kilowatt. Just wondering if you're seeing anything on that side.

Timothy P. V. Mammen -- Chief Financial Officer and Senior Vice President

Nothing material. I think, of course, they're all trying to get there, but --

Valentin P. Gapontsev -- Chief Executive Officer and Chairman of the Board

They don't have a good chance for this to improve. There you have to understand, with increase of power, it'd be you watch your problem growing very fast, but even all our tests could make personal test newest version of this competition, also for example, so, the earlier what (inaudible) minimum two three times batteries per year. We need for three years minimum, making one-third, there you will have two or three, even on lower power, 1 kilowatt, 2 kilowatt, five, six and so (inaudible), they are magical with there. So how would they improve nearest time, nearest year, we don't see any opportunity.

Andrew DeGasperi -- Berenberg Capital Markets -- Analyst

Great thank you.

Valentin P. Gapontsev -- Chief Executive Officer and Chairman of the Board

So you know what, we have for a diode 10 times value of them -- all represent, given their breadth over there (inaudible) it was, sort of perhaps the inventor, perhaps creator of high-powered diodes. Now we (inaudible) going out of this business because it's not competitive. I would say, not Chinese. Not Chinese.

Operator

Our next question comes from the line of Joe Wittine from Edgewater Research. Please proceed with your question.

Joe Wittine -- Edgewater Research -- Analyst

Hi thanks. With respect to the full year, we have started to hear some global integrators willing to quantify a 2019 outlook, certainly more than we saw 90 days ago. You obviously aren't hearing enough to publicly quantify a range, which I get, but maybe talk us through any notable forecast you have heard or any regional details you may be hearing. And for those that are tight-lipped, maybe what are they telling you that they're waiting on before giving a more definitive look into the full year, is it specific down market verticals, is it geopolitical, et cetera? Thanks.

Timothy P. V. Mammen -- Chief Financial Officer and Senior Vice President

So I think, yes, Joe a couple of the OEMs have come up and given some generic information about what they expect for the year. And then, one example of those that customers, a large, but not even our largest customer, and although very important, the business is much more one-dimensional than ours. So focused on 2D cutting, whereas we've got a much more diversified set of applications and end markets. I think we look at this and our annual guidance even a less volatile environment is tricky. What we have been saying and are continuing to see is a nice recovery and even strength in overall bookings. With a strong bookings forecast for Q2, particularly in China as I referenced, and that's being provided by the sales group, we expect that to continue.

Assessing that, I don't want to -- it gets a bit difficult to give anything specific. But if you look at Q3, for example, consensus, I think, looks pretty reasonable. I think RSUs, we just don't have visibility into Q4 yet. We're struggling a little bit. Look at how changeable the macro environment is. One month ago, Europe looked like a basket case and yet only today, the data in Europe looks a lot stronger. So we're certainly seeing some very positive trends on the business. It's just a bit early to get out there and give an annual guidance on it. And we hope to see this momentum continue. If they achieve the bookings forecast they got for Q2, we're going to see a really nice recovery in the business. So we're waiting on seeing that happening.

Joe Wittine -- Edgewater Research -- Analyst

Okay. Makes sense. And then just as a follow-up on China, you kind of presented it as a tale of two worlds, ultra high-power, CW is up but then low-power applications are facing some headwinds. On the ultra high-power CW, can you confirm whether that's six and up or 10 and up? And then on the low-power weakness, is that competition-related or is that more demand-related, the declines that you're seeing? Thanks.

Timothy P. V. Mammen -- Chief Financial Officer and Senior Vice President

On the ultra high-power, we certainly are seeing a lot of strength in 10 and up, a little bit less than six. The low end of the market has, in total units, has continued to perform OK, but it's really sort of more of a pricing impact at the lower end of the market that's affecting things. So that market hasn't gone -- it's not 20% down. It's more on a pricing issue there. The competition is also a lot stronger at that level. So we think, together with some of these new features, particularly the QCW feature on the lasers, will be a substantial enhancement, the smaller form factors of these lasers also will be of a benefit to the end market, relative to the Chinese competition.

Valentin P. Gapontsev -- Chief Executive Officer and Chairman of the Board

Not only it's smaller, but also it is much more functionality for that, much more and much more efficient, but much more additional functionality property and so on, which you know this, people only claim that they have the five or 10 kilowatt laser our competitor. But if compare the lasers, we don't see in the exhibition, we don't see it on own laser, it has done it. So on and so on. Where is this laser? We have to (inaudible) hear from customers who use these lasers. It's only a, why, more than marketing tricks. It's not seriously one to talk about. We have produced 10 kilowatt of laser now of about 1,000, 1,000 lasers. Today, how many they produce? Maybe less than 10. It's only for a while, it's not still laser, not marketing tool, it's only a marketing trick more clearly. When we were in (inaudible) we tried to achieve (inaudible), laser machine sold, what they sold is not 10 kilowatts at all. Absolutely. We're not -- because this is not 10. We've got -- we've got even heating. They need water, five times more water only to heat -- to cool them. But they don't have any claim, even pipes at all for this, so it's (inaudible) five pipes, maybe again, cool only two, three kilowatts, but not 10, never 10.

Joe Wittine -- Edgewater Research -- Analyst

Thanks, everyone.

Operator

Our next question comes from the line of Mark Miller with The Benchmark Company. Please proceed with your question.

Mark Miller -- The Benchmark Company. -- Analyst

Don't want to overdo this, but in terms of the ultra high power, some people have announced products recently, and are you seeing any increased competition or is that still your own playing field?

Timothy P. V. Mammen -- Chief Financial Officer and Senior Vice President

Mark, I don't have a very definitive answer on his view of what their capabilities in that area just now. So there is nothing else to add on it, we just don't believe that they are anywhere close to us. But yes, they announced that, but they just don't have competing product that is getting any meaningful traction in the market.

Mark Miller -- The Benchmark Company. -- Analyst

And you mentioned ultra-fast and green lasers did well last quarter. Can you estimate what percent of sales are coming from new products last quarter?

Timothy P. V. Mammen -- Chief Financial Officer and Senior Vice President

Yes, in total, new products are driving about 15% of sales and grew at a double-digit rate and there's a whole variety of new products in there including the ultra fast, green, the visible, some of our higher power pulsed systems, accessories, which includes the beam delivery stuff, so about 15% to total revenue.

Mark Miller -- The Benchmark Company. -- Analyst

Thank you.

Valentin P. Gapontsev -- Chief Executive Officer and Chairman of the Board

Keep in mind, only green lasers. We have now more than 15 different kinds of types lasers with different functionality. Most of them unique, nobody able to reproduce and to provide the same quality, the same performance at all. It's unique version of lasers. And more and more people started to take this, and they found it fantastic laser. Now several folks have started to make green lasers because they thought big opportunities claim about. We don't see any competition only some application around.

Mark Miller -- The Benchmark Company. -- Analyst

Thank you.

Operator

Our next question comes from the line of Alex Chang with Citigroup. Please proceed with your question.

Alex Chang -- Citigroup -- Analyst

Thanks for taking my questions. I have one question regarding to China's sales. Actually we have seen the major customer in China, deliver around 26% YoY sales in the first quarter. Also your major competitors in China also deliver about 20% you know, revenue growth, but your revenue from China was 20% decline. How can we understand this, I mean how much is from the changing impact. How much is from ASP or unit sales?

Timothy P. V. Mammen -- Chief Financial Officer and Senior Vice President

So, Alex, this is a relatively easy question to answer, we've done a research into it. We actually had a very strong quarter in Q1 2018 in China with our main OEMs. And if you looked at the main OEM revenue, most of them went from Q1 to Q2 with a doubling of revenue, so their sales from IPG were in the prior quarter ahead of that growth that we had a really exceptional quarter. So relative to that, our Q1 this year, looks weaker, but we're starting to see improving demand trends.

I mean the main OEM out there that is our largest customer, they reported revenue doubled from Q1 to Q2 and that was their peak. They don't -- they're buying lasers ahead of that for us. So, of course, there is some impact on it on pricing that we've referenced that the total unit sales across the board performing quite nicely. We're starting to get real traction at 10 killowatts and more. But it's really a, it's a timing difference that appears to create normally between the way they're performing and not. So, they had a relatively weak Q1 a year ago, and those shows some more solid performance relative to that. But we've got a very different timing difference to deal with.

Alex Chang -- Citigroup -- Analyst

Understood. My follow-up question is about, your new product with QCW feature. As you mentioned, the QCW is meaningful for the consumer electronics applications. So, how much contribution from this new product do you expect for this year? And apart from the consumer electronics, what other applications would these new products that are in for?

Timothy P. V. Mammen -- Chief Financial Officer and Senior Vice President

Just want to be clear, the older QCW generation of lasers was an exclusively QCW feature that was targeting the micro-cutting and welding applications in consumer electronics. The new QCW feature, where we get two times the energy out of a CW laser incorporates and combines that feature with a normal continuous wave laser, the additional peak power is what really helps within the cutting applications for reducing testing time, improving the quality of the testing, as well as enabling the OEM to start cutting nearer to the edge of the metal reducing scrap. So, it's an entirely different feature that's enabled by IPG's new generation of diodes which can run both in CW and QCW feature or mode, rather. We can explain that to you a little more detail afterwards if you aren't clear on it.

Valentin P. Gapontsev -- Chief Executive Officer and Chairman of the Board

Yes. In terms so with the new QCW laser, it's not the same we had before. It's much more powerful and area we'll provide ways to good improvement and catching it all. If you (inaudible) Chinese not able to make something similar at all. And not only now, but year-over-year, one reason we used our diodes, they work with five times more peak power, then able to work diode from any other source, not only from Chinese-made, but made by any other customer manufacturing worldwide. Our diodes provides so many properties, only with such diodes can make a efficient such kind of fiber laser.

Alex Chang -- Citigroup -- Analyst

Thank you.

Operator

Our next question comes from the line of Tom Hayes with Northcoast Research. Please proceed with your question.

Tom Hayes -- Northcoast Research -- Analyst

Thank you. Good morning, gentlemen. Thanks for taking my question. Maybe just wanted to follow-up, you had mentioned several times in your prepared remarks on the weakness in the additive manufacturing space. Just wanted to get some thoughts on kind of that market and the outlook for the year.

Timothy P. V. Mammen -- Chief Financial Officer and Senior Vice President

It started to improve a little bit, but it hasn't got the same traction it had in the end of 2017 and into the first two or even the first quarter of 2018. So, the order flow is trying to pick up, it's certainly not at the level it was a year ago, yet.

Tom Hayes -- Northcoast Research -- Analyst

Okay. And then just maybe on North America, I think you said when you factored Genesis out the North American revenue was up about 1%. Anything strikingly as far as that outlook?

Timothy P. V. Mammen -- Chief Financial Officer and Senior Vice President

So some of the other business in North America, the advanced applications and the telecommunications, are just primarily here. It was probably the weakest part of that. The interesting thing there is on advanced applications. We had very strong orders in Q1 for a couple of the applications there. So that revenue will start to pick up. The communications outlook has a bit more of an improvement coming into Q2. But I'd say, we were actually really pleased with the advanced application order flow in Q1. So it's really more of a timing issue there.

And it's once application of after many 10th year of development of laser devices for the practical use, now they have started to ask, so they will now invest some practical applications. So volume and set of few units start to grow by 10, by 100 in revenue. It would be a bigger loss. And we, many years, started them for this development. Now so in a way I expect both the year -- both are for real practical or field use.

Operator

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

Yeah, thanks. Thanks guys for taking my question. Tim, just a point clarity, the $380 million of quarterly sales to get to the midpoint of gross margin, does that include Genesis or exclude Genesis?

Timothy P. V. Mammen -- Chief Financial Officer and Senior Vice President

No, including. So you're kind of getting backup of 350 with the laser business.

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

Perfect, thanks. And can you help frame the puts and takes for us in terms of this gross margin trajectory. So, I believe in the second half of last year, you had some significant headwinds, there was currency, the price reset, utilization rates were moving lower. How should we think about moving into the second half? Where are utilization rates kind of trending now? Can we see diode savings flow through the P&L more so in the second half and maybe talk currency?

Timothy P. V. Mammen -- Chief Financial Officer and Senior Vice President

So even with the first generation of the new type of diode, you saw some benefit in that last year. As I referenced, I think it's actually -- it's amazing that when you look at the model, only 200 basis points of the margin degradation really specifically relates to pricing. The cost of the bill of material has come down already very significantly. Balance in reference, there is the next generation of this higher-power diode coming onstream that started to be used in the first quarter. We started to use it, not exclusively, so that will continue to benefit the cost of product through the year. So that's still got to fully flow through. So that should help a little bit with gross margin.

The key thing outside of that is really to get back to an absorption -- a better absorption rates on fixed cost because that, as I mentioned, is 500 basis points of the difference relative to our year-ago gross margins. So recovering that puts you closer to the midpoint of the 50% to 55% range. It would actually put the laser revenue if you exclude the acquisition in the upper half of that range because the acquisition is a bit of a dilutive impact to that. So that would be very good.

Right now, exchange rates are still a bit of a headwind. We referenced that they took $15 million out of revenue for the first quarter. The Chinese yuan is still at a lower level than it was in Q1 and Q2 when it kind of peaked at CNY6.3 and it's CNY6.5 (ph) the last couple of days, but it's CNY6.7. The euro is weaker than it was a year ago. It was at $1.12 this morning. So it's up from $1.17 to $1.20 that it was in the first half of last year. So FX is still a bit of a headwind we're dealing with.

Mark Miller -- The Benchmark Company. -- Analyst

Fair enough. And this is -- this question is not necessarily on Q2, but if credit improves, the trade tensions ease and the macro just stabilizes, do you see some signs of a replacement cycle for laser systems in the second half or 2020 that can kind of provide us support of revenue? I know growth has been weak the last three quarters, but if we take a step back, you've grown revenue at a 25% CAGR over the last decade. Is there signs that the installed base is aging and we could see some replacement?

Timothy P. V. Mammen -- Chief Financial Officer and Senior Vice President

I don't have an update specifically to give you a definitive answer on that. Certainly some of the -- some of the higher power devices are more than a decade old, so we're probably seeing some replacement cycle. The real increase in high-power volume though started five years ago. So we're still a couple of -- we've always said, a couple of years off from a real ramp potentially in a replacement cycle for that. I mean, 2014, '15 was when we started to see very significant growth in the high-power lasers. So those lasers are not yet at the end of their life cycle.

Certainly some of the stuff in 2010 or '11, I mean, our electrical efficiency back then was significantly below where it is now, our form factor was a lot bigger, the quality of the device, even though it was very good, doesn't match what we have today. So there is some replacement probably going on. It's not a huge amount. We'd be looking for continued displacement of non-laser applications as the investment cycle picked up, right? As people look to invest in new equipment, they would consider a laser-based system now where historically they may have been looking at a non-laser-based application.

Valentin P. Gapontsev -- Chief Executive Officer and Chairman of the Board

Yes. Before the people (inaudible), for example, for very thick metal (inaudible) for example, the plasma cutting and the laser cutting, where the cutting was better but still not for thick metal. Now we provide them very thick metal cutting opportunity and cost per meter is now with laser much cheaper than plasma. So they start to request plasma also water cutting and many others. They replace now only -- also only start to request e-beam (inaudible) for example, now we -- the way we process for laser cutting version of this many metals, thick metals and also on titanium and so on (inaudible) excellent fantastic new opportunities (inaudible) instead of e-beam, but people are going where it's a low but it's real, where do you watch the market would be near is 3, 5 years. Where do you watch market. If only IPG developed now a new generation this year, we introduced a new generation, 1- to 20-kilowatt laser, 2 times cheaper than before and much more compact, easy-to-use, very simple (inaudible) operator.

Now never before it was given, one year ago, we had much more bulky and much more expensive lasers. Now we produce very nice quality, very compact, efficient, easy-to-use, very light lasers immediate where many people from plasma and other stuff from laser. But nobody able to provide the same at all and nobody would be able, not even Chinese, no (inaudible) nobody could try to make fiber laser and high-power. Nobody have been able to make the same.

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

Thanks.

Timothy P. V. Mammen -- Chief Financial Officer and Senior Vice President

And Michael, the other point to take on that is that there is still tens of thousands of CO2 lasers that require replacing in the market. Installed base of CO2 laser is still 60,000 or 70,000 lasers despite the penetration of fiber into the market. And as you see the global economy, if it does stabilize or even improve and credit cycles improve, that may be a source of demand that would be the benefit over the next 12 months to 18 months.

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

Yeah. That makes sense. And just lastly, I mean, you mentioned like when someone asked before about consumer electronics, it's -- you mentioned it's usually a biannual cycle. So 2018, last year, was a very difficult year and you even hinted this year and some of -- some peers this year is going to be challenged as well. So that's kind of two years of a down cycle there. So how far is your consumer electronics business kind of down from that 2017 level? And then if you think of 2020, with some introductions of models, a potential recovery in smartphones, I'm just trying to gauge, do you think laser processing in that application could increase kind of cycle-over-cycle? Do you see room for that to kind of improve if we do see 2020, that type of recovery that some people expect in that market? Thanks.

Timothy P. V. Mammen -- Chief Financial Officer and Senior Vice President

Yeah. I mean, consumer electronics, you'd expect this year because of the biannual product cycle to be stronger, w just not -- we don't still have any visibility into that demand. Yes. In each iteration of different smartphones, there is more and more laser processing done, whether it be some of the welding applications around the frame or different materials being used, increasing use of ultrafast pulsed lasers, not just sort of focused on the metal processing side of things.

Valentin P. Gapontsev -- Chief Executive Officer and Chairman of the Board

UV and so on.

Timothy P. V. Mammen -- Chief Financial Officer and Senior Vice President

Yes, the UV. So yes, the applications have broadened and that market does see a bit of a rebound with new product introductions. We would certainly hope to be at the vanguard of benefiting from that. We just don't have any visibility into it, meaningful at the moment. And so I mentioned the stuff we've seen as orders coming through.

Valentin P. Gapontsev -- Chief Executive Officer and Chairman of the Board

Even imaging lasers now more practical than it was in some application and was recognized worldwide to -- recognized, for example, for urology, for stone removal and so on. It's now practical all the best professors and doctors in the world, in America, Europe, and now in China, will open also now to say we're seeing qualification for -- qualification in some countries and after one, two years, it would be practically with you practically with -- already in place now both -- in many others who before dominated the market now all replaced with our thulium lasers. It's a new revolution.

Now our sales grew already by hundred, but in future, will be by many thousands, And this laser is much more costly than material processing lasers, one thulium is like 10 Chinese lasers cost. So it's really a very big business. We expect and we now introduced many other applications, also medical lasers, new generation fiber, first time a fiber instead of this very old laser they used up to now, and not useful, not practical at all. And those are now practical found what is fiber laser, a real new innovation and with the medical application, where it brings the most big companies right now making hundreds of millions of dollars in this market.

Operator

That is all the time we have for questions. I'd like to hand the call back to management for closing comments.

James Hillier -- Vice President of Investor Relations

Well, thank you for joining us this morning for your continued interest in IPG. We look forward to speaking with you over the coming weeks and our next quarter's call. Have a great day, everyone.

Operator

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.

Duration: 67 minutes

Call participants:

James Hillier -- Vice President of Investor Relations

Valentin P. Gapontsev -- Chief Executive Officer and Chairman of the Board

Timothy P. V. Mammen -- Chief Financial Officer and Senior Vice President

James Ricchiuti -- Needham & Company -- Analyst

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

Patrick Ho -- Stifel Nicolaus -- Analyst

David Ryzhik -- Susquehanna International Group -- Analyst

Andrew DeGasperi -- Berenberg Capital Markets -- Analyst

Joe Wittine -- Edgewater Research -- Analyst

Mark Miller -- The Benchmark Company. -- Analyst

Alex Chang -- Citigroup -- Analyst

Tom Hayes -- Northcoast Research -- Analyst

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

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