IPG Photonics' Record Results Just Don't Cut It

Investors were expecting big things from IPG Photonics (IPGP 3.14%) going into its second-quarter financial report. The company had handily beat analysts' consensus estimates and topped the high end of its own guidance last quarter, and investors were looking for more of the same -- especially since the stock doubled over the course of 2017.

Those expectations were too frothy, it turns out. The company reported record results, but misses on both the top and bottom line failed to meet investors' high expectations, and the stock plummeted -- down about 27% as of this writing.

For the just completed second quarter, IPG reported revenue of nearly $414 million, up 12% year over year. But it missed analysts' consensus estimate of $418.61, and came in below the company's forecast of $415 million at the midpoint of guidance. Diluted earnings per share of $2.21 increased 16% compared to the prior-year quarter, and fell with the company's guidance, but fell short of analysts' expectations for $2.25.

IPG Photonics second-quarter results: The raw numbers

Data source: IPG Photonics' second-quarter 2018 financial report.

Total operating expenses of $72.6 million grew 11% year over year, and slightly improved margins allowed more to drop to the bottom line.

The majority of the company's growth came from materials processing, which increased 11% year over year and accounted for nearly 95% of IPG's total revenue. The company saw strength in the cutting and 3D-printing applications. High-power CW (continuous-wave) lasers were still a hot item, up 20% year over year, accounting for 64% of sales; the company saw even stronger demand for ultrahigh-power CW lasers.

The company experienced unusually strong growth in North America, which increased 23% year over year. International sales were a drag on the results, however, as growth in China slowed to 10% compared to the prior-year quarter, while revenue in Europe increased 18%. Sales in Japan declined 2% year over year.

IPG pointed to escalating trade tensions as a contributing factor to its less-than-laser-sharp results. In its press release, the company said (emphasis mine): "While orders grew slightly on a year over year basis, order flow was below our target as demand softened in Europe and China at the end of the quarter. This more modest year over year growth in orders has persisted through July, and we believe is primarily driven by macroeconomic and geopolitical factors rather than competitive dynamics."

Image source: Getty Images.

Looking ahead

In terms of guidance, IPG is forecasting third-quarter revenue in a range of $360 million to $390 million, which would represent a decline of between 1% and 8% year over year. The company expects diluted earnings per share of between $1.80 and $2.05, a decline of between 3% and 15% compared to the prior-year quarter. The company is now guiding for full-year revenue growth in a range of 7% to 9%.

As of this writing, analysts' consensus estimate for the third quarter is calling for revenue of $424.91 million, and diluted earnings per share of $2.27, but I expect that to be revised downward as the market digests IPG's latest results.

It's too early to tell if this is merely a blip on the radar brought on by trade tensions, or a more prolonged slump. With the surprisingly weak results compared to the company's usual habit of "beat and raise," and tepid guidance for the remainder of the year, it's no surprise that IPG's investors went running for the hills.