The laser industry has done extremely well over the past several years, but recently, things have taken a turn for the worse. Companies like IPG Photonics (NASDAQ:IPGP) that specialize in lasers have run into headwinds from a variety of factors, including the threat of tariffs on key U.S. trading partners like China and the European Union. Fears have sent share prices plunging, wiping out a year's worth of gains and calling into question the resiliency of laser manufacturing more broadly.
Coming into Tuesday's third-quarter financial report, IPG Photonics investors were prepared for declines in revenue and earnings, having received a warning from the company earlier in the month. The company wasn't able to avoid those declines, but it still managed to excite shareholders about a potential recovery in the works, and that was enough to take what could have been a lackluster report and turn it into good news in many people's eyes.
How IPG fared
IPG Photonics' third-quarter results weren't all that pretty. Revenue dropped 9% to $356.3 million, which was only slightly better than the 9.5% decline that most of those following the stock were expecting to see. Net income fell at an even sharper 13% pace, and the resulting earnings of $1.84 per share missed the consensus forecast among investors by $0.01.
From a product standpoint, IPG Photonics saw mixed performance. Its high-power continuous-wave laser unit, which brings in well over half its overall revenue, saw sales decline 7% compared to the year-earlier quarter. However, within that segment, sales of fiber lasers were higher by 10%, accounting for more than half of all sales thanks to their use in cutting operations. However, mid-power CW lasers saw sales cut nearly in half, and weakness in pulsed and quasi-continuous wave laser sales more than offset modest gains in IPG's catch-all Other category.
IPG also saw dramatic differences in performance geographically. The laser maker was highly successful in the North American market, seeing sales gains nearly eclipse the 30% mark. Yet declines of around 9% in sales in China and an even bigger percentage drop in Germany and other parts of Europe hurt overall top-line numbers. Japanese sales were modestly higher, but that was one of the only bright spots outside of IPG's home market.
Cost containment wasn't as effect as it needed to be for IPG. Sales and marketing costs were up less than 1% year over year, but even that was problematic given the overall top-line decline. Moreover, research and development expenses as well as overhead costs rose by double-digit percentages, and that put a lot of pressure on IPG.
What's ahead for IPG Photonics?
CEO Dr. Valentin Gapontsev explained the challenges that the company suffered. "Our third quarter results were affected by macroeconomic headwinds and geopolitical factors," Gapontsev said, "that reduced demand in China and Europe. Nevertheless, IPG made significant strides driving higher power solutions into the market and generating meaningful traction selling our newest products." The CEO also pointed to record sales of ultra-high power lasers as indicative of future opportunities for the company.
IPG is also optimistic about the future. For the fourth quarter, the company gave guidance for $300 million to $330 million in sales, with earnings of $1.30 to $1.50 per share. Both of those numbers were weaker than most investors were expecting, but IPG also said that it sees order flow beginning to improve as early as the first quarter of 2019. If Chinese customers start spending more on consumer electronics, electric vehicle battery projects, and other metal welding needs, then IPG hopes to emerge from the current downward cycle largely intact.
IPG Photonics shareholders agreed with that optimistic assessment, and the stock climbed more than 10% on Tuesday following the announcement. It's far from a sure thing, but right now, IPG has investors excited about the chances the laser maker has to get its revenue and earnings moving back in the right direction.