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IPG Photonics Corp (NASDAQ:IPGP)
Q2 2020 Earnings Call
Aug 4, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to IPG Photonics' Second Quarter 2020 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, Stacey, and good morning, everyone. With us today is IPG Photonics' Chairman and CEO, Dr. Valentin Gapontsev; Chief Operating Officer, Dr. Eugene Scherbakov; 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 the impact of the COVID-19 pandemic on our business, and those detailed in IPG Photonics' Form 10-K for the period ended December 31, 2019, 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, August 4, 2020. 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 P. Gapontsev -- Chief Executive Officer and Chairman of the Board

Good morning, everyone. Despite the continued challenges to our business from the COVID-19 pandemic, we delivered second quarter results above our guidance range. Our strong performance was driven by better-than-expected performance in China and strength in new products. Before discussing the latest trends in our business, I want to provide you with an update on our ongoing efforts to deal with COVID-19 pandemic. The wellbeing of our people, our customers and our partners remains our highest priority. We are continuing to manufacture and service our solutions in all regions, having employed additional distancing, cleaning and air purification and disinfection procedures, while providing all employees with masks to wear in our offices. With the state of Massachusetts, now in Phase three of its reopening, it has allowed us to bring additional employees back into our headquarters, so that staffing levels in the U.S. will be more commensurate with our facilities in Germany and Russia. Our commitment and support of workforce health and safety extends to COVID-19 response efforts in local communities worldwide. In addition to the nation in China, Russia and Europe, we have donated essential parties of face mask to MGH Boston and one of the local country hospital. Also, we have recently made a sizable financial contribution to the Worcester Education Development fund to purchase Chromebooks for online education programs this fall.

IPG is committed to supporting economic empowerment and diversity efforts in our local communities. While we believe that cultivating of diverse and inclusive work environment, once that fosters a culture of mutual respect, help ensure our growth and success in the marketplace. 30 years ago, when I founded IPG, our vision was to create a company that would redefine our industry and whose day-to-day operation were committed to improving our communities and our society as a whole. Since that time, we have demonstrated a commitment to fostering, cultivating and preserving a cultural merit, where our greatest ideas and innovations have come from the diverse collaboration of experiences and backgrounds of our people. Turning to our results. We continue to benefit from signs of industrial demand recovery in select regions, most notably China. In particular, demand for high-power CW and pulsed lasers for cutting and battery processing application remains robust. However, global demand trends remain very uncertain at this time, and we have seen a continued pushout and delays in select welding and system projects in Western Europe, North America and other parts of Asia. This uncertainty continues to make forecasting of our business very challenging in the near to medium term. We continue to believe that our large, diverse, advanced materials and components technology platform, very efficient R&D model and well as well as strong balance sheet and free cash flow provide us ample flexibility to respond to business disruptions and emerge from the pandemic in a stronger competitive position. Although the demand environment remains mixed, we are demonstrating good progress in our core market, thanks to our technology differentiation and low-cost production capabilities.

In the cutting market, we delivered strong sequential growth in both our rack mounted 1- to 4-kilowatt lasers for the high volume market, and our ultra-high power lasers for leading-edge cutting systems. With the launch of our new ultra-compact YLR-U series of lasers, IPG is once again raising the bar for leading-edge performance in the high-volume cutting sector. The YLR-U has essentially extended optical performance, the small size and the lowest weight in the industry, at first time for the for the range of devices is full protected against of humidity penetration, delivering unmatched performance in a ultra-compact form factor with a record power to volume ratio. At the high end of the market, we expect to benefit from the substantial increase in order volumes for our 30-kilowatt lasers and ultra-high power optical heads. These lasers not only enable 50% to 100% faster cutting speeds than 15-kilowatt devices, but are capable of processing material with 20 to 50 millimeters of thickness or even greater. This improvement in both productivity and flexibility is driving the replacement at first time of plasma cutting machines and the lower power laser solutions, particularly in the machine shop and construction industries. Moreover, these bases provide the superior beam parameters, record wall plug efficiency and unique high reliability that are the hallmarks of our solutions, which drives superior return on investment to our customers. Our Adjustable Mode Beam laser continue to gain traction in the welding industry, most notably in electrical vehicle battery welding. Our AMB products produce superior speed and weld quality over competing solution, thanks to broadest range of beam tunability, which enables spotless welding. During the quarter, we again note that double sales of high-power nanosecond pulsed lasers used for foil cutting and other electrical vehicle battery processing application, and we do expect strong growth in this application to continue during the second half of the year.

Product innovation remains core to IPG's success. During second quarter, emerging product and application sales were 1/4 of total revenue, increasing nearly 20% sequentially, despite softer demand trends in several new product categories due to the COVID-19 pandemic. Sales of medical laser increased more than 150% year-over-year, as we continue to sell our gold now or already gold standard thulium laser solution, and consumable fibers to urology and other soft tissue applications. Advanced application revenue increased more than 40% year-over-year in Q2, driven by strength in government, semiconductor and the resumption of cinema projection system shipment. Unfortunately, the COVID-19 pandemic limited our ability to make further progress selling our green, ultraviolet and ultra-fast pulsed lasers into emerging microprocessing application, given the restricted travel and shut down of customer sites and application webs during the quarter. However, we continue to target more than 50 new projects for these lasers across a wide range of application, processing glass, ceramic, composite materials, numerous crystals, circuit boards, OLED films, batteries and solar cells. We're continuing investment in a number of next-generation solutions that we plan to launch over the next six to 12 months, with significant disruptive potential. This includes our newest outstanding handheld laser welding, underlining handheld, at first time. It's our newest product at very serious market terms. Multichannel QCW lasers for spot welding application and kilowatt-scale pulsed lasers for ablation and cleaning applications, as well as first time, multi-kilowatt thulium and green fiber lasers. Beyond materials processing, we continue to develop new soft tissue medical treatments, mid-infrared lasers for molecular beam resolution molecular level resolution online spectroscopy, inspection, sensing and biomedical research application, new high-speed transceiver for the telecom and datacom market as well as new high ultra-high power single-mode lasers and amplifiers for defense application. I want to conclude my remarks here by thanking our people for their strong execution over one of the most challenging period year in our company's history. I remain confident that our technology and manufacturing leadership will enable us to accelerate growth out of this pandemic and deliver on our mission to make our fiber laser technology the tool of choice in mass production. With that, I will turn the call to our COO, Eugene Scherbakov.

Eugene Scherbakov -- Chief Operating Officer, Managing Director, Senior Vice President, Europe and Director

I will begin my remarks by discussing the effect of COVID-19 on our production. All three of our major production facility in Germany, the United States and Russia remain open. We have increased production at our facility in Massachusetts, as the state continued to progress on its reopening. Our facility in Germany and Russia are operating on largely normalized basis, albeit with the social distancing and enhanced cleaning and filtration measures in place. I want to reiterate that safety of our employees, their families, our business partners and community remain our highest priority. We continue to benefit from our vertical integrated product model, which enables a key technological and cost advantages over the competition, while minimizing supply chain disruptions. The current constraint on our business primarily relate restrictions on travel that affect of our sales and application development efforts as well as our shipments of products around the world. Shipping costs were again elevated this quarter, while we see we saw delay and pushout in project-based work due to COVID-19 pandemic. However, we continue to believe we have ability to meet the near-term demand for our products. We continue to benefit from cost reduction actions we undertook in the second half of 2019. As the total manufacturer, operating expenses increased approximately $2 million sequentially, while revenue increased $47 million quarter-over-quarter. Examining our performance by region.

Revenue in China decreased 11% year-over-year, but more than double sequentially, represented approximately 49% of our total sales. We benefited from strong sequential improvement in sales into cutting, welding and battery processing, driven by a pickup in order activity in March and April, that continues through the latter half of Q2, albeit at a more moderate pace. We continue to face aggressive competition in the region, but we continue to maintain share at key accounts, while anticipating a strong mix of lasers at 10-kilowatts or greater in the second half of 2020. In Europe, revenue decreased 24% year-over-year due to the effect of COVID-19 on many countries in the region. Similarly, revenue in North America decreased 16% year-over-year, with strong growth in medical lasers and advanced applications more than offset by declines in laser and system sales for material processing. Sales in Japan decreased 16% year-over-year. While COVID-19 infection in the region are below other countries, the continuous stopping and restarting of economic activity has delayed many significant projects with our welding and cutting businesses in the region. Sales in Korea decreased 33% year-over-year, as economic activity in the region remains subdued, and sales in Turkey decreased more than 70% year-over-year as the COVID-19 pandemic severely effected cutting sales in the region. With that, I will turn the call over to Tim to discuss financial highlights in the quarter.

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

Thank you, Eugene, and good morning, everyone. Revenue in the second quarter was $296 million, which declined 19% year-over-year, but increased 19% quarter-over-quarter. Revenue from materials processing applications decreased 21% year-over-year, and revenue from other applications increased 36%. Sales of high-power CW lasers decreased 26% year-over-year and represented approximately 53% of total revenue. Sales of ultra-high power lasers at six kilowatts or greater, represented more than 50% of total high-power CW laser sales. Pulse laser sales increased 4% year-over-year, with growth in high-power pulse lasers partially offset by lower sales of lower power pulse lasers for marking applications. Systems sales decreased 37% year-over-year, as growth in systems for medical device manufacturing was offset by lower sales of other IPG laser systems and Genesis nonlaser systems. Medium-power laser sales decreased 31% and continued softness in additive manufacturing and the transition to kilowatt scale lasers in cutting, while QCW laser sales decreased 14% year-over-year but increased 39% quarter-over-quarter from sequential improvement in consumer electronics applications. Other product sales increased 21% year-over-year driven by growth in medical laser sales.

Q2 gross margin was 46%, which declined 350 basis points year-over-year. Compared with the year-ago period, the decline in gross margin was driven primarily by less favorable absorption of fixed manufacturing expenses. In addition, increased shipping costs were partially offset by lower inventory provisions compared with the year-ago period. Second quarter GAAP operating income was $47 million, and operating margin was 16%. During the quarter, we recognized a foreign exchange loss of $13 million primarily related to revaluation of U.S. dollar cash and other assets in Russia, given the appreciation of the ruble versus the U.S. dollar. In addition, we incurred a charge of $1 million, which includes the noncash write-off of machinery as well as other charges for severance and lease termination relating to our strategic decision to exit the submarine networking business. Foreign exchange loss and other charges reduced Q2 operating margin by approximately 470 basis points. Q2 net income was $38 million or $0.71 per diluted share. The previously referenced foreign exchange loss and charges for restructuring and asset impairment reduced EPS by $0.20. The effective tax rate in the quarter was 23%. If exchange rates relative to the U.S. dollar had been the same as one year ago, we would have expected revenue to be $8 million higher and gross profit to be $4 million higher.

We ended the quarter with cash, cash equivalents and short-term investments of $1.2 billion and total debt of $40 million. Strong operational execution resulted in cash provided by operations of $73 million during the quarter. Capital expenditures were $20 million in the quarter. For the full year 2020, we now expect capital expenditures of approximately $100 million, below our prior target of $115 million to $125 million. During the quarter, we repurchased 131,000 shares for $16 million. Second quarter book-to-bill was greater than 1, with strong bookings growth in China offset by weaker order trends in other regions. As expected, the pose the pace of order growth in China moderated in the second quarter as the quarter progressed, while we have seen modest improvement in order trends in other regions. However, visibility into a recovery in global demand remains uncertain at this time. We continue to benefit from near-term growth opportunities in ultra-high power cutting, electric vehicle battery processing and systems and devices for the medical industry. We believe that the strides we are making in higher power products within our core materials processing business and new solutions will enable us to emerge from the pandemic in a stronger competitive position.

For the third quarter of 2020, IPG expects revenue of $280 million to $310 million. Company expects the third quarter tax rate to be approximately 26%. IPG anticipates delivering earnings per diluted share in the range of $0.70 to $1, with 53 million basic common shares outstanding and 53.5 million diluted common shares outstanding. Financial guidance provided this quarter is subject to greater risk and uncertainty given the COVID-19 pandemic and its associated impacts to the global business environment and government policies. 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, goodwill and other impairment charges, product demand, order cancellations and delays, competition, tariffs, trade policies, health epidemics 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, Eugene and I will be happy to take your questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Jim Ricchiuti with Needham & Company. Please go ahead.

James Andrew Ricchiuti -- Needham & Company -- Analyst

Hi, good morning. A couple of questions. Just on the other applications area, you referenced that 36% growth, which is, and certainly, a strong growth rate. But sequentially, it was down. And I just want to maybe square some of that with the commentary you made about the momentum from new products. Was there some COVID-related impact that sequentially affected that? Was it just more macro related?

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

No. It wasn't really either of those things, Jim. First of all, the medical product for the lithotripsy application was launched in Q2, and we had very strong initial sales as the customer in that area built the inventory to launch the product. And I had stated on the Q1 call that revenue from that application would still continue to be strong on a year-over-year basis, but the total demand would moderate a bit compared to that initial product launch. Interestingly, that customer, the launch has gone very well, and we actually received an increase in the total orders that we've got on hand during the quarter, additional four million. So that's more just timing of product launch rather than anything COVID or macro-related in particular. The second thing is the defense and other advanced applications, including instrumentation and others, had a very strong first quarter. We shipped 100-kilowatt laser in the U.S. So again, it's more timing of orders for those some of those other advanced applications, which performed, again, well in the second quarter, but just relative to Q1, some of the unevenness around revenue was exhibited. Interestingly, we're working on several more orders for high-power single-mode lasers in the U.S. We have an order to be delivered to Asia in the second half of the year. There's a little bit of uncertainty around the timing of that delivery. So the backlog around some of the advanced applications continues to be big. The telecom business in Q2 was a bit weaker, and that was COVID-related demand there. I think that clarifies the...

James Andrew Ricchiuti -- Needham & Company -- Analyst

It does.

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

Just a few comment from medical. Medical, the penetration of medical market revenue growth so depends strongly from FDA approval. First, number one, is we're very successful in urology now, it becomes gold standard, now recognized gold standard in new in this urology application. But only at first very we received a because remember, we received FDA, for example, here and also some in China, in Russia, we received one a few months ago, and we only started to stable because before it was only for test and so on. So sales in this urology application is only starting. Secondly, we developed new products, not only for urology, but for work up to 10 other application medical application. But some of the devices finished so on and also in methodic, they were developed well. But we're still in stage of certification to get FDA in other countries' similar approval. We could not sell these in the market. But we expect next year, two years, we'll receive a note of approval, we then will open and ready to go the market attack the market from many positions for many applications. So medical business, we expect will grow very fast the next three 2, three years.

James Andrew Ricchiuti -- Needham & Company -- Analyst

Got it. And then just a follow-up on the guidance. I'm wondering if you're seeing any stronger demand in the consumer electronics market? There are some companies that have shown some or demonstrated some pickup in demand in this area. And I'm wondering, is that at all factored into your guidance?

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

Yes. I mean, yes, we saw some demand even in Q2, Jim, with the QCW improvement. But for us, the total demand environment for consumer electronics is certainly much more moderate than it's been historically. There's a bit of a benefit there for sales into consumer electronics in primarily in Asia. But it certainly hasn't got the momentum behind it that we've historically seen on the materials processing-type applications.

James Andrew Ricchiuti -- Needham & Company -- Analyst

Thank you, and I'll jump back in the queue.

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

Thank you.

Operator

Our next question comes from Tom Diffely with D.A. Davidson. Please go ahead.

Thomas Robert Diffely -- D.A. Davidson & Co -- Analyst

Yeah, good morning. First, wondering what the relative strength in the pulsed business is coming from?

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

So that was really on the high-power pulsed, it's electric vehicle battery applications, including foil cutting, cleaning applications as well. So the ultra and the higher power pulsed lasers that we have, have a significant competitive advantage in the market for those types of applications. There may even be some limited amount of welding being done with those higher power pulsed lasers alongside the QCW as well.

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

Also, cleaning, for example, very important. Cleaning started to grow very fast. For this, we need the 100 many hundred watt and kilowatt pulsed kilowatt power pulsed laser, we have all these set of lasers. It's not available from practically any other sources today. So it's but [Indecipherable] like 20- to 50-watt for marking application is always practical, our sales in China stopped because they saw crazy prices like for old marking system, like a couple thousand dollars, not serious [Indecipherable]. We will withdraw from this market in China. In other countries, we're still selling these marking lasers, but in China, not possible at all. They killed this market.

Thomas Robert Diffely -- D.A. Davidson & Co -- Analyst

Yes. Okay. That makes sense. And then I'm curious, how important is the auto industry the global auto industry for you for recovery? And what is your view of the auto recovery over the next several quarters to a year?

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

The automotive industry continues to be an important part of IPG and laser usage. Many European auto manufacturers are almost exclusively using IPG products. So some recovery in main body applications and closures would help, both on the welding and even the cutting market. But one of the primary growth areas we see on automotive outside traditional will be continued investment in electric vehicle manufacturing all around the world, and that continues to have some particular strength behind it. Overall, some of the welding applications for automotive, even on the traditional side, were reasonable in Q2. For example, one of the main Japanese manufacturers is continuing to roll out some of their specialty welding applications using IPG lasers.

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

[Indecipherable] practical way, the mold even all the Tier 1, these automotive customers, they use IPG lasers. The question not we penetrate, we have improved the usage in auto in Germany, also in Japan, for example, in the U.S. and so on. But total demand now, very low due to many problems in the data module market also due to COVID, many other reasons, but total demand for laser very low. But when they're looking for a laser solution, they're buying from IPG. But electrical car, Misubishi, also Tesla, for example, our customers forgot thank you..

Operator

Our next question comes from Joe Wittine with Edgewater Research. Please go ahead.

James Andrew Ricchiuti -- Needham & Company -- Analyst

Hey, thanks. First off, I wanted to try to bridge to the third quarter sales guide, which is flattish sequentially at the midpoint. You have a benefit of a full quarter of activity in the West versus the second with April essentially being a loss month. So is there anything that's an offset there that's worth noting that's more of a headwind sequentially?

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

I think we're seeing some moderate improvement in order trends outside of China, in particular. So moderate improvements in North America, in Europe and are not quite the same. China has still got some strong demand to it, but it hasn't got quite the same momentum in China that you had coming out of the crisis at the beginning of last quarter. So we said that total order flow in China had moderated a little bit. We've got a lot of backlog in China, and some of that is actually also scheduled to ship in Q4 rather than Q3. I can't know anything in particular. I think you're dealing with an environment that's not exactly strong and have a lot of momentum behind it anywhere, right? You're in a situation of recovery and reasonable demand trends where we've guided to, not particularly strong demand trends.

Joseph Helmut Wittine -- Edgewater -- Analyst

Okay. Makes sense. And then, Tim, the gross margin was impressive. The only favorable comment I caught in your prepared remarks was a smaller inventory reserve. Is there anything else worth noting in that uplift, which was almost 500 basis points? And any context with that on how you're looking at gross margin in the second half?

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

I think the most pleasing thing about gross margin is that despite prices coming down, the gross margin that we're achieving off a product bill of material has actually stabilized and even gone up a bit. So that's been the main benefit. And that's even before we launch the smaller the YLR-U, dash U, rack-mounted lasers, so there'll be some additional cost benefit coming in from those as well. So I think the most pleasing thing is that despite continued pricing pressure in the market, IPG continues to execute very well around reducing cost of product and has further cost reductions coming through in the second half of the year. In the second quarter, our guidance range for gross margin ranges from about 43%, 44% up to 47%. So a reasonable level.

Joseph Helmut Wittine -- Edgewater -- Analyst

Okay. And maybe I'll squeeze in one more just on that topic, on the new rack mounts, the YLR-U. Any comments on how you're envisioning the curve of adoption going forward? How quickly how much you think that could be an above trend benefit from a competitive perspective in the 1- to 3-kilowatt China market? And if you're able to quantify any kind of corresponding impact to gross margin or how you're thinking about that from a building materials perspective, that could be interesting as well.

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

Did you want to take the new YLR-U product adoption and customers?

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

We only introduce if the market started fill in volume manufacturing volume this quarter, but it's a great ways, much more than much greater than current rate that we sold before and not comparable at all in quality with Chinese product. It's a very important cost of manufacturers with the wholesale central to U.S. so we hope that will go now we define the policy price policy for these lasers in the market. It takes some time estimation also. But we hope this product will replace many Chinese at all because they could not move, absolutely. Not comparable. And a very reasonable would be we hope the price also, compete in price for this product. Now our market share this year in numbers. In numbers, we're again growing in sales. First quarter, we grow in sales more than 20% compared to last year so in numbers. But due to price drop, we see some drop in revenue. But we hope now that our the numbers have increase more in the second half of this year. And so we are very [Indecipherable] our revenue also share in the market with this low-power,1- to 4-kilowatt four kilowatts from not available at all from Chinese, but up to now, any 4-kilowatt in direct mount, with a 3-kilowatt maximum. But we increased our DSP also this second half of the year, we increased our direct mount into series up to 8-kilowatts, it's fantastic, unique lasers. So it's we call this, we return our position series in this low power market order high-power, not absolutely no chance to other people to compete with us.

Joseph Helmut Wittine -- Edgewater -- Analyst

That's helpful, thanks a lot

Operator

Our next question comes from Michael Feniger with Bank of America. Please go ahead.

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

Hey guys, thanks for taking my questions. Tim, just to flesh out a previous question about in the midpoint of your guide, was flat sequentially, I'm just trying to get a sense if there's been a breakdown when we think of the PMIs and general manufacturing activity in your business. I think in July, we saw the PMIs recover actually go above 50, indicating some expansion. Usually, in that environment, you guys kind of see sequential growth. So I'm just curious how much of it is conservatism because we don't know obviously what will happen in August and September. Did you guys see at least that improvement that matches PMIs? Just any help more that you kind of flesh out around that.

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

I think we're just in a phase of recovery from very slow economic activity in the second quarter. I agree that PMIs have improved a bit. We've also seen some improvement in order flow outside of China, as we said, in other countries in Asia, in Europe and the U.S., it's just not that it's rebounded in quite the same way that it did in China initially. I don't think there's necessarily a big disconnect from this. I think we actually performed very well in Q2 in fact. So perhaps the expectation of going to a stronger sequential growth is a bit more muted because of that underlying strong performance in Q2 relative to Q3. I'm not really seeing any fundamental dislocation between where the economic data is and where our revenue numbers are. I think there's a little bit more optimism out there but I can't claim that it's tremendously strong at this point in time. And the other thing you got to factor in a little bit that, even though things are being shutdown, like Q3 in August is always very slow in Europe for example, just with the summer vacations and Valentin's view is maybe people work harder this year because they haven't been in the office, I said, I think they're going to still want to get on go on holiday. So I don't see a big dislocation.

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

That's good to hear. And the gross margin, this is the second quarter surprising to the upside. I think you might have mentioned before, pricing kind of stable. It looks like your inventories are back under control, you have cost savings coming through. I guess, Tim, if we get back, and this is a big if, but if we get back at $350 million revenue run rate, is there any change you see in your gross margin range?

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

First, for price, it's not stable. It's not true. Yes. Now as we show, we have all messages, information we're getting with China, for example, again, [Indecipherable] drop additional price for mid-power laser, 1, 2-kilowatt. The additional like 15%, 20% they dropped price, promised to drop price against first quarter of this year. It's crazy too, but it's the situation. I don't think it's their own view, they're pushed by Chinese government, again, this market. It's the deal with policy country policy, it's not just company's but a commercial policy. But it's the situation. Now what how we can compete with this, it's very serious, it's revenue drop and just through the market segment also. Regarding the sales in the U.S., for example, nowadays, it's American officials help us to the way market again. So we are now all in now, compared to August in this new [Indecipherable] was introduced, new roles, again, the commercial both. Now we could not go especially with new products, we can go they require more and more meetings to help installation, training the customers and so on. But recon, not able to go inside of America. All were blocked. Now, again, stopped, we have to wait. We could not work with customers. Our service also, and so on. It's a serious again, very serious damage again. It's on account of what we don't know. We couldn't receive even now, many cases, what we purchased. We could not because garage which driver or truck said it used to go to Massachusetts from other state, so yes, they refuse it all. They don't understand the situation. They refuse to deliver what we purchased. We're waiting for parts, components and so on. Materials, we could not get these materials. New yield now [Indecipherable].

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

Yes. And just to sneak a question in on reshoring. I'm just curious if you guys are hearing anything of customers signaling this in North America or other regions. Is this if this is an opportunity, is it more on the welding side? Because the argument against reshoring has always been it's cost prohibitive, which is why automation would have to play a part. So I'm curious if you guys have any thoughts on that or see any early signs of that type of theme.

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

Mike, just going back to your other question. I think at the moment, we're happy with the range of 45% to 50% on gross margin. To get back to $350 million of revenue, we'd be hoping to be much more closely toward the top of our range. We're not going to be changing that range at this point in time. We'll see how things pan out. On onshoring, I think it's a longer term trend. And if and as it happens, it's going to have to be driven by improvements in productivity and ensuring the cost is of manufacturing product onshore is low, and that plays into utilizing more lasers and automation. So I don't know if there's been any huge announcements by companies onshoring. Maybe one semiconductor company is starting to do more onshore in the U.S., but I think the geopolitical situation continues in the way it will. It's probably likely to become a longer term trend.

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

Thank you.

Operator

Our next question comes from Nik Todorov with Longbow Research. Please go ahead.

Nikolay Todorov -- Longbow -- Analyst

Hey guys, thanks. Good morning. I just want to ask, first, you mentioned seeing some signs of lasers displacing plasma cutting machines. I think you were specifically talking about the 50-kilowatt lasers that you're selling, but I wonder if you can provide a little bit more color on that dynamic, that also and that super high-power lasers region, but also if you're seeing any of that happening in the more traditional 10- to 15-kilowatt laser space. Yes. That will be my first question.

Eugene Scherbakov -- Chief Operating Officer, Managing Director, Senior Vice President, Europe and Director

Okay. But 15-kilowatt is not a limit. We will already get some order from our two or three OEM customers for 20-kilowatt lasers for China, Japan and other countries. And recently, we received order the first order for 30-kilowatt lasers, also for cutting applications. And from this, point of view, we see the good potential for our high-power lasers, definitely, because no competition. And performance of our lasers in any cases, superior. And this is a trend. It's not only to substitute plasma-cutting machine. It's one only one of the goals. Because based on these 20- and 30-kilowatt lasers, our customer can provide absolutely new approach to cutting applications with much more higher speed, much more reliable cutting machine and also much more productive machine. And finally, with much more lower price for cutting applications. This is much more important.

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

And let me remind you, only a few years ago, a lot of the young companies who produced CO2 lasers cutting at the same analysis so [Indecipherable] so fiber ways was only four cut, very seemed better, like 2, 3, five millimeters only. Now we develop technology to cut 50 millimeters. They said never more than 10 millimeters, would be impossible to cut with fiber laser. Now we resolved this question. We developed this technology. It's not only machine, secular auto laser, optical heads, but also technology, how to cut very thick metal sheets. They practically cover all needs to cut metal [Indecipherable]. We drill now in one meter metal sheets, one meter metal sheets with success with good speed. We're drilling holes that can have even one meter. We demonstrated it in our messages. Nobody believed this was possible at all. We showed this to [Indecipherable] cutting. But next step, with cutting, not only metal cutting, with metal sheets cutting, and so on. Next step is cutting all other materials like [Indecipherable] ceramic, [Indecipherable] we evolve this technology for cutting all these, very serious new markets when [Indecipherable] steel and cutting like used only for very [Indecipherable] like 1, two millimeters, for example, supplier of what, for iPhone, so on. With the way of technology, [Indecipherable] ceramic or this graphite, so on, which cut up too many tenth millimeter sheet. If nobody used up to now this technology or don't have this we have this technology, we have patents in developing interest and use in market, new family of machines to cut off such materials, including construction [Indecipherable] and so on. It's a huge market. All this cutting, 3D cutting still not very well distributed to a little place in market, practically strong and premium industry and so on. But now, a new opportunity 3D cutting is also [Indecipherable] duration would be used much larger scale and larger applications range.

Nikolay Todorov -- Longbow -- Analyst

That's helpful. Just have a follow-up. You mentioned that, I guess, guidance implies that China revenue is going to be more flat to down sequentially. You mentioned you're not seeing any disconnect economically. But I guess, can you comment on the competitive environment a little bit? You mentioned that you're seeing still like seeing aggressive price action. But we also heard that there some of the competitors there have some higher pulse for share gains, particularly in the 6-kilowatt and above plate. I guess, do you see that as feasible? Or how do you plan on combating that?

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

The competition hasn't really changed fundamentally. It's still the same players there. Of course, at the lower end, there's been fierce competition. I think we're responding to that with the new product, which Valentin articulated, was way ahead of where they are in terms of efficiencies, form factor electrical efficiency, sorry, reliability. Yes. Of course, at higher power levels, the competition is trying to get share there but we've referenced before that they see a lot of power degradation in their lasers even at lower power levels. So those power that power degradation becomes more of an issue as you go up to lasers with 6, eight and 10 kilowatts so...

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

More power,more high degradation, much more danger and so on, if they still could not resolve for 1-, 2-kilowatt degradation. Degradation, Chinese lasers, 10 times higher than in our lasers, 10 times higher. So you see enormous difference and so on. And higher power degradation is much more danger than lower power. It's number one. Number two, when we introduced now this year, into March to last year, end of last year, this year, both a new version of not only YLR-U, but also YLS-U. So YLS-U is a laser from 4-, 5-kilowatt up to 15-, 20-kilowatt. Absolutely new ultra solution, much more again, more perfect and more compact and cheaper in cost, much cheaper in cost. So for these reasons, we don't have any problem gross margin and so on. It's still now where we're so competitive in both, in not only quality, but in cost and the pricing. So it's good. And they don't have any chance, in our opinion, to compete, penetrate in serious in these market changes today.

Nikolay Todorov -- Longbow -- Analyst

Got it, thanks. Good luck.

Operator

Our next question comes from Mark Miller with The Benchmark Company. Please go ahead.

Mark S. Miller -- The Benchmark Company -- Analyst

You mentioned strength in emerging products, up 20%, sequentially. I think you said cinema, I'm not sure if you include that in emerging products, but if you could bring out some of these emerging products that are showing healthy demand?

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

Mark, we don't go into that granular level on those. They include things like the higher power pulsed for the cleaning applications and EV battery processing, which had strong sales, includes screen lasers for solar cell and nonmetal processing; edge deletion; ablative processes; ultrafast; UV has got many different types of projects we're working on there with higher power; the systems beam delivery; and some of the defense and single-mode applications are included in there. But we just don't get down into giving a granular breakdown between each of those individually.

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

On this year, second half this year and first half next year, we introduced on the market some 10 new products, the most of them don't have any analogs. Only these next 12 months, we introduce in the market, so many new products. Now with delays due to COVID, because any new product, you have to work very tightly with customers. You have to meet with them, help train them, have install, have so on. But now, on the Board, at most, were very limited in the way penetration introduction in the market. But it will go and so on. It's this situation will resolve. The product [Indecipherable] already and our qualification process are rigid, so on with so much production, it's a lot of new innovative products. Some 10, not 1, 2, 3, 5, some 10 products with different application, we introduce all these now in the market.

Mark S. Miller -- The Benchmark Company -- Analyst

And any further penetration in terms of lasers in the automotive industry replacing spot welders? That was kind of a cost issue before.

Eugene Scherbakov -- Chief Operating Officer, Managing Director, Senior Vice President, Europe and Director

Yes, recently, we installed in our for our German customer, 16 [Indecipherable] system for production automotive production. And from this point of view, we see the good potential for our systems, not only for one application but different kind of applications. It's also for EV, electrical vehicle, but we also see some opportunity for other. But also, I would like to mention that such kind of system now, we use it not only for automotive. Agriculture, for example, one of the bigger customers in the United States, also in Europe. They have to use our system for production of their machine. And it's the first time they start to use the laser systems, and the first result is very good. And this is very important that we are not shipping only the small system, but we are shipping the complete production line for such kind of applications.

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

And also we for this now we introduce next this year, it will be press released this month, we introduce now very interesting new product, which automotive will use in many we have not many, 10,000, but even 100,000 units, they're using the assembly facility. We introduced a new solution, extremely interesting, much more higher quality welds and so on solution we introduced in this market. It will we believe it would be accepted very fast by the most cutting automotive companies, but also from point in transportation. For them, we're working very closely to develop technology of cutting and welding technology for many car manufacturers. It's and we ship them out [Indecipherable] system, were working in the persistence prototype and they very happy customers. So we hope to distribute this experience. It would be also a serious additional business and custom and welding application.

Operator

We've run out of time. I would like to turn the floor over to James Hillier for closing comments.

James Hillier -- Vice President of Investor Relations

Thank you for joining us this morning and for your continued interest in IPG. We look forward to speaking with you over the coming weeks, and we'll be participating in a number of virtual investor conferences this quarter. So thank you. Stay safe, and have a great day, everyone.

Operator

[Operator Closing Remarks]

Duration: 60 minutes

Call participants:

James Hillier -- Vice President of Investor Relations

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

Eugene Scherbakov -- Chief Operating Officer, Managing Director, Senior Vice President, Europe and Director

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

James Andrew Ricchiuti -- Needham & Company -- Analyst

Thomas Robert Diffely -- D.A. Davidson & Co -- Analyst

Joseph Helmut Wittine -- Edgewater -- Analyst

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

Nikolay Todorov -- Longbow -- Analyst

Mark S. Miller -- The Benchmark Company -- Analyst

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