Lasers are a critical component not only in manufacturing but in a wide range of other industries, and IPG Photonics (NASDAQ:IPGP) has enjoyed great success in delivering lasers that can meet the needs of customers for many different uses. Throughout the second half of the year, though, investors have been somewhat nervous about the macroeconomic conditions that the laser industry faces, sending shares of IPG Photonics and laser-making peer Coherent (NASDAQ:COHR) downward.
Coming into Tuesday morning's third-quarter financial report, IPG Photonics shareholders wanted to see solid signs that the business hadn't deteriorated from its impressive past growth rate. IPG Photonics wasn't able to hit the target on that front, as net income growth slowed to enough of an extent to spook investors even further. Let's look more closely at IPG Photonics and whether the quarter's shortfall is a one-time event or something investors should worry about for the long haul.
IPG Photonics fizzles out
The third-quarter results that IPG Photonics posted weren't terrible on their face. Revenue growth of 22% to $243.5 million was actually slightly above what most investors were expecting to see, topping calls for sales gains of about 21%. Yet on the bottom line, net income rose just 14% to $62.8 million, and that worked out to earnings of $1.18 per share, up 12% from the year-earlier period but falling $0.03 per share short of the consensus forecast among investors.
Looking more closely at IPG Photonics' results, foreign currency impacts continue to hold back the laser maker. The company said that foreign-exchange losses reduced earnings by $0.06 per share and cost it about 12 percentage points of revenue growth.
Overall, materials processing sales rose 16%, with the company reporting solid demand for cutting, additive manufacturing, ablation, and welding applications. Strong telecom and advanced-applications sales led to other-market revenue nearly tripling. Interestingly, though, IPG Photonics didn't provide nearly as much detail about the results in each of its product classes as it has in past releases. The company contented itself to say that sales of high-power, medium-power, and quasi-continuous wave lasers "all performed well" but that decreases in sales of pulsed and lower-power lasers offset some of their counterparts' gains. On a geographical basis, IPG Photonics reported strong growth in China, Europe, and North America, but it saw sales sag in Korea and Japan.
CEO Dr. Valentin Gapontsev recognized the impact that foreign currency headwinds had on results but still had a positive view of how IPG Photonics is performing in general. "These results reflect the continued penetration of our fiber lasers into new and existing applications throughout diverse and expanding product line," Gapontsev said. Record sales show the strength of the company in the CEO's eyes.
Will IPG Photonics hit the mark?
Gapontsev also remains optimistic about IPG Photonics' future. "We remain focused on developing new and innovative products to address applications beyond our core markets," he said, and "we have made significant progress on the testing and development of these new product lines this year and look forward to their launch in 2016."
Unfortunately, the guidance that IPG Photonics gave for what it called a historically "seasonally weaker" fourth quarter fell short of what investors had hoped to see. Revenue of $215 million to $230 million would be as much as 8% lower than the consensus forecast, and earnings of $1 to $1.15 per share would fall at or below the current expectations among shareholders. For perspective, it's interesting to note that Coherent expects far slower sales growth for the foreseeable future than IPG Photonics does, although Coherent is working to get more of its revenue down to the bottom line in the form of earnings over the next year.
IPG Photonics investors didn't respond favorably to the news, sending the stock down 6% within the first 45 minutes of pre-market trading following the announcement. With so much at stake in 2016, IPG Photonics will need to perform strongly to finish the year if it wants to reassure nervous shareholders that it still has good potential for future growth.