There was a lot of uncertainty going into IPG Photonics' (IPGP 0.26%) third-quarter earnings report. After notching all-time highs early last year, the company has been hit hard by economic weakness and the ongoing trade war with China. The difficult environment and continuing uncertainty have pummeled IPG, which has lost half its value, driving it into value stock territory.
The hard times continued for IPG Photonics into the third quarter, for even as hopes for an end to the trade war grow, macroeconomic conditions continued to exact a toll, and the stock fell 13% on Tuesday in the wake of the company's earnings release.
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A tough quarter by any measure
IPG Photonics delivered revenue of $329.1 million, down 8% year over year and near the low end of management's guidance of between $325 million and $355 million. Analysts' consensus estimates had been calling for revenue of $337.5 million. Foreign currency exchange rate headwinds dinged the results by $5 million.
Operating expenses were higher, increasing to $78.7 million, up 10% year over year. This was led by sales and marketing that soared 40% compared to the prior-year quarter as the company fought to stabilize its falling revenue. Research and development (R&D) and general and administrative (G&A) expenses increased by 4% and 6%, respectively.
This resulted in net income of $57.13 million, producing earnings per share (EPS) of $1.07, a drop of 42% compared to the prior-year quarter and missing expectations of $1.17.
Across-the-board weakness
Materials processing, which constitutes the bulk of IPG's business -- producing 93% of sales -- fell 8% year over year because the company sold fewer cutting and 3D printing applications. The sales of other applications increased 5% compared to the prior-year quarter. High-power CW (continuous-wave) lasers fell 19% year over year, accounting for 56% of total revenue.
Sales were hit the hardest in China, declining 24% year over year, the result of the economic weakness and the ongoing trade war. Sales also fell 10% in Europe and were flat in Japan. The news wasn't all bad, as sales increased 32% in North America, though it wasn't enough to offset declines in other markets.
IPG Photonics' CEO, Dr. Valentin Gapontsev, said of the quarter, "We are responding with a multi-pronged strategy of product cost reduction, implementing differentiated features on our core products and leveraging the largest R&D investment in the laser industry to launch leading edge laser products for new markets."
A path forward
IPG isn't sitting idly by, waiting for the current macroeconomic and geopolitical headwinds to improve. On the conference call, the company laid out plans for the restructuring and cost-reduction program, which management believes will reduce operating expenses by about $30 million per year. As part of this initiative, IPG will reduce its global headcount by 300 positions, and the company will also consolidate a small number of its facilities.
The laser maker will focus on sales of its leading-edge, higher-margin products while simultaneously reducing resources dedicated to its lower-margin merchandise. IPG is also reviewing its manufacturing and material costs in an effort to decrease its overall cost of goods, which would help firm up its bottom line.
For the upcoming fourth quarter, IPG is forecasting revenue in a range of $270 million to $300 million, which would represent a decline of between 10% and 28% year over year. This would result in EPS in a range of $0.55 and $0.95, a slump of between 32% and 61% compared to the prior-year quarter. Both numbers were lower than investors were hoping for; analysts' consensus estimates were calling for revenue of $312.17 million and earnings per share of $1.01.
While the future continues to look bleak for the technology company, IPG Photonics is positioning itself for a rebound when the macro conditions improve.
