"If wishes were fishes, we'd all cast nets in the sea," goes the old saying. So I'm hoping you all stayed on shore when IPG Photonics (NASDAQ:IPGP) reported its fourth-quarter 2007 results last week.
Newsflash: Wishes ain't fishes
Three months ago, I wrapped up a description of the superb Q3 profits this Motley Fool Rule Breakers recommendation earned with a Foolish wish. I hoped that in Q4, IPG would show us declining accounts receivable and fewer inventories on its balance sheet -- and perhaps even a bit of free cash flow for its trouble. Well, that would be strikes one, two, and three: Sales growth of 31% in Q4 was once again pleasingly fast, but not quite as fast as A/R growth of 51%, or inventory growth of 43%.
As for cash flow, management didn't bother to provide a cash flow statement in its release, so we won't know that number until the 10-K filing comes out. My guess, though, is that free cash flow was pretty dismal. With so much cash tied up in uncollected bills and yet-to-be-sold inventory, it could hardly be otherwise. Additionally, management did reveal that it spent $34.3 million on capex over the course of the year.
Speaking of capex
In addition to reducing its chances of generating positive free cash flow, the continued investments in infrastructure hurt IPG's margins last quarter, and probably explain why the firm "missed" analyst estimates for net earnings. Operating margins shed 290 basis points in Q4, dropping to 22.5%. (However, for the year, the firm's 24.5% operating margin remained comfortably ahead of rivals Coherent (NASDAQ:COHR), Rofin-Sinar (NASDAQ:RSTI), JDS Uniphase (NASDAQ:JDSU), and Nortel (NYSE:NT).)
Explaining the margins drop, CEO Dr. Valentin Gapontsev argued that the firm's investments in infrastructure will "broaden our geographic reach, increase our capacity and strengthen our position as the only fully integrated manufacturer of fiber lasers" (emphasis added).
Judging from management's guidance of $50 million to $54 million in Q1 sales, though, capacity problems may not pose a problem for IPG much longer. At the top of that range, we're looking at 29% year-over-year growth in Q1 -- faster growth than any of the rivals named above, not to mention competitors Cisco (NASDAQ:CSCO) or Corning (NYSE:GLW). But check out the trend: At 37% sales growth in Q2 2007, then 32% in Q3, 31% in Q4, and now 29% (or less) in Q1 2008, this fish keeps swimming slower and slower.
