There was a lot of uncertainty going into IPG Photonics' (NASDAQ:IPGP) fourth-quarter earnings report.
Over the past several quarters, the company has been hit hard by a one-two punch economic weakness and the recently ended trade war with China. Now, the outbreak of coronavirus is once again disrupting its business in China.
The ongoing uncertainty has punished IPG, which has lost nearly half its value since early 2018. Investors had hoped for some relief when IPG reported earnings, but those hopes quickly faded, driving the stock back down in the process.
Adding insult to injury
IPG Photonics delivered revenue of $306.6 million, down 7% year over year, but surpassing the high end of management's guidance of between $270 million and $300 million. Analysts' consensus estimates had been calling for revenue of $287 million.
Operating expenses soared to $124 million, up 75% year over year. Sales and marketing costs climbed 16% compared to the prior-year quarter, while research and development (R&D) and general and administrative (G&A) expenses declined by 3% and 9%, respectively. The biggest hit came from goodwill and asset impairment charges, which clocked in at $37 million and $7 million, respectively. Foreign currency exchange rate headwinds took a toll to the tune of $5.3 million.
The various charges reduced earnings per diluted share by $0.99, leaving operating income near break-even, and taking IPG from a profit to a net loss of $4.3 million, resulting in a loss per share of $0.08, and missing expectations for earnings per share of $0.78. It's worth noting the results would have exceeded expectations if not for the one-time charges.
Out of the frying pan, into the fire
Materials processing, which accounts for the vast majority of IPG's business -- accounting for 90% of sales -- tumbled 11% year over year. Sales of other applications fell even harder, down 42% compared to the prior-year quarter. High-power CW (continuous-wave) lasers fell 15% year over year, and now represent 51% of total revenue.
Sales suffered the most in China, declining 21% year over year, the result of economic weakness and the outbreak of novel coronavirus. Sales also fell 17% in Europe and 37% in Japan. On the bright side, sales increased 30% in North America, but the damage was already done.
IPG Photonics' CEO, Dr. Valentin Gapontsev, seemed laser-focused on the solution rather than the problem:
We are responding with product cost reductions and differentiated new features and accessories for our core products. Furthermore, we are leveraging one of the largest R&D investments in the laser industry to launch leading-edge laser products and systems for new markets.
An uncertain future
In the face of an economic weakness and novel coronavirus, IPG continues to work to make itself a leaner, stronger company. It followed through on plans for a restructuring and cost reduction program, which management calculates will reduce operating expenses by about $30 million in the coming year.
Just prior to the outbreak of coronavirus, IPG said there were "signs that business in China was firming, with order flow having picked up in December and January. However, ongoing business disruption related to the novel coronavirus outbreak makes forecasting our business in China and the impact on global demand very challenging at this point."
As a result of the uncertainty, IPG is estimating a hit to revenue of $45 million, and is lowering EPS by $0.45. For the first quarter, management is forecasting revenue in a range of $220 million to $250 million, which would represent a year-over-year decline of between 20% and 30%. If things go as planned, the company is forecasting a return to profitability, with EPS in a range of flat to $0.30. If the situation in China worsens, however, all bets are off.
Investors with a sufficiently long time horizon will simply put this technology stock away and wait out the macro conditions. The outbreak will eventually subside, and when it does, IPG will be ready to rebound.