Until last quarter, IPG Photonics (NASDAQ:IPGP) was on fire, gaining 50% over the prior 12 months and topping off a decade that saw its stock price grow by more than 1,200%. But as the old saying goes, "What goes up, must come down." For the second quarter, the company's results came in below analysts' consensus estimates, as well as its own forecast, causing the stock to lose more than a quarter of its value. What caused the rare miss? Increasing trade tensions between the U.S. and some of the company's biggest markets.
IPG is scheduled to report the financial results of its 2018 third quarter before the market open on Tuesday, October 30. Let's take a look at what happened last quarter and see what to expect when the company reports earnings.
Look out below
For the second quarter, IPG reported revenue of $414 million, up 12% year over year, but far below analysts' consensus estimates of $418.61 million -- and even missing the company's own forecast for $415 million at the midpoint of its guidance. Diluted earnings per share of $2.21 were within the company's forecast, but also fell short of expectations for $2.25.
Growth in North America was stronger than expected, up 23% year over year, but unfortunately, it wasn't enough to counter softer sales in both Europe and China, which increased 18% and 10%, respectively, compared to the prior-year quarter. To put that into perspective, those regions both generated 29% year-over-year growth in the company's record first quarter.
The company addressed the shortfall in its press release, writing (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.
What the quarter may hold
In light of the global trade atmosphere, IPG provided a muted forecast for the third quarter, expecting revenue in a range of $360 million to $390 million, a decline of between 1% and 8% compared to the prior-year quarter. The company's profit expectations were similarly soft, with diluted earnings per share expected between $1.80 and $2.05, a decline of between 3% and 15% year over year. IPG also lowered its full-year revenue forecast to 8% at the midpoint of its guidance.
Even the lowered expectations weren't low enough, as the laser maker reported preliminary results earlier this month. IPG now says it expects revenue for the quarter in a range of $355 million and $356 million -- missing the low end of the company's reduced guidance. Foreign currency headwinds didn't help, knocking an additional $5 million more off the top than anticipated. The company now expects earnings per diluted share of between $1.83 and $1.87 -- even after a tax benefit of $0.15 is factored in.
The saber-rattling between Washington and Beijing isn't expected to let up any time soon. This doesn't bode well for a company that does about half of its business with China, particularly since it was one of the geographic regions IPG called out as experiencing softening demand and "a more modest outlook."