IPG Photonics Corp (NASDAQ: IPGP) Q1 2020 Earnings Call Transcript

IPG Photonics Corp (IPGP) Q1 2020 earnings call dated May 05, 2020

Corporate Participants:

James Hillier — Vice President of Investor Relations

Valentin P. Gapontsev Ph.D. — Chief Executive Officer and Chairman of the Board

Eugene Scherbakov Ph.D. — Chief Operating Officer, Managing Director of IPG Laser GmbH, Senior Vice President, Europe and Dire

Timothy P.V. Mammen — Chief Financial Officer and Senior Vice President

Analysts:

John Marchetti — Stifel — Analyst

Jim Ricchiuti — Needham and Company — Analyst

Tom Diffely — D.A. Davidson — Analyst

Michael Feniger — Bank of America — Analyst

Jed Dorsheimer — Canaccord Genuity — Analyst

Mark Miller — The Benchmark Company — Analyst

Krish Sankar — Cowen and Company — Analyst

Presentation:

Operator

Good morning, and welcome to IPG Photonics’ First Quarter 2020 Conference Call. [Operator Instructions].

At this time, I’d like to turn the call over to James Hillier, IPG’s Vice President of Investor Relations, for introductions. Please go ahead, sir.

James Hillier — Vice President of Investor Relations

Thank you, Doug, and good morning, everyone. With us today is IPG Photonics’s Chairman and CEO, Dr. Valentin Gapontsev; Chief Operating Officer, Dr. Eugene Scherbakov; and Senior Vice President and CFO, Tim Mammen. Statements made during the course of this call that discuss management’s or the company’s intentions, expectations or predictions of the future are forward-looking statements.

These forward-looking statements are subject to risks and uncertainties that could cause the company’s actual results to differ materially from those projected in such forward-looking statements. These risks and uncertainties include the impact of the COVID-19 pandemic on our business and those detailed in IPG Photonics’ Form 10-K for the period ended December 31, 2019, and other reports on file with the Securities and Exchange Commission. Copies of these filings may be obtained by visiting the Investors section of IPG’s website, or by contacting the company directly. You may also find copies on the SEC’s website.

Any forward-looking statements made on this call are the company’s expectations or predictions only as of today, May 5, 2020. The company assumes no obligation to publicly release any updates or revisions to any such statements. For additional details on our reported results, please refer to the earnings press release and the Excel-based financial data workbook posted to our Investor Relations website. We’ll post these prepared remarks on our Investor Relations website following the completion of the call.

With that, I’ll now turn the call over to Valentin.

Valentin P. Gapontsev Ph.D. — Chief Executive Officer and Chairman of the Board

Good morning, everyone. Before I discuss our results and strategic initiatives, I want to address how IPG is navigating the effects of the novel coronavirus outbreak. The well-being of our people, our customers and our partners is our highest priority. IPG employees who can work from home and are doing so. In all regions, we continue to manufacture and service our solutions. Although there are some restrictions to the U.S. production, the impact to date has not been material given our products are used across a wide variety of critical infrastructure sectors. In Germany we didn’t stop work practically at all. In Russia, it was only one week vacation during these two months. In order to safeguard our people, we have employed additional distancing and cleaning measures in our facilities, sourced 100,000 masks for use in our production.

We introduced very effective UV means for total disinfection of air in all production and office rooms, and temporarily increased wages for our hourly employees who continue to work on site. As a result, up to date, we are proud to report that IPG did not have any COVID-19 infected cases on all our world locations, in spite of more than 80% of our staff were working on-site practically all these two months. IPG was trying to help local communities, community elsewhere everywhere. In China, we have donated approximately RMB one million to help the those affected by this worldwide epidemic.

And in the U.S., we have donated many tens of thousands of masks to local hospitals in need. In Russia, we donated a modern CT imaging system to local hospital as well as mask and other needs. Eugene will discuss the impact on COVID-19 in our operation in great detail. I want to assure you that at IPG, we are doing all we can to help safeguard our people and communities. During this time of uncertainty, which is unlike any that we have faced before, it is unclear what will happen to global demand over the coming weeks and months. This uncertainty makes forecasting our business very challenging in the near- to medium-term. Nonetheless, our strong balance sheet, ample cash reserves and minimal debt provides us flexibility in responding to coronavirus-related disruptions, and to emerge from the crisis with the ability to seize the many opportunities we expect to see.

We plan to continue investment in strategic research and capital project that will drive the next leg of market share capture for our fiber laser technology. Because our fiber lasers are a key enabler of automated precision manufacturing, we expect to disproportionately benefit from an eventual recovery in the industrial cycle. Turning to results, we delivered first quarter revenue at the high-end of our guidance range on better-than-expected performance in China and strength in new products. Despite the weaker demand environment, we have seen strong customer interest in a number of our leading-edge laser solutions.

In cutting and welding applications, our ultra high-power lasers at 12, 15 or 20 kilowatts have demonstrated superior attributes to competing products, including faster cutting and welding speeds, better beam parameters, higher wall plug efficiency and significantly better reliability. IPG lasers continue to deliver peace of mind and lower lifetime costs by enhancing end-user productivity. We received our first volume order for our Adjustable Mode Beam lasers for electric vehicle battery welding. As a reminder, our AMB lasers permit the broadest range of beam tunability, enabling spatterless welding. In addition, we more than doubled sales of high-power nanosecond pulsed lasers at 300 and 500 watts used for foil cutting in electric vehicle battery processing applications. IPG remains the only reliable laser source supplier of these products, and we continue to expect strong growth for in this application during the year.

Product innovation remains core IPG for to IPG’s success. During the first quarter emerging product and application sales were 23% of total revenue, increasing more than 20% year-over-year despite a softer demand environment for IPG laser systems due to COVID-19. Sales of the green pulsed lasers used to improve solar cell efficiency, increased by more than 50% year-over-year. Sales of ultrafast pulsed lasers increased modestly, as customer acceptance and traction was curtailed by the uncertain demand environment. However, we continue to target more than 50 new projects for these lasers across a wide range of applications processing glass, ceramic, circuit boards, OLED films, batteries and solar cells. Sales of medical lasers were a record $10 million in Q1, increasing more than 500% year-over-year. We continue to ramp sales of our thulium laser solution for urology and other soft tissue applications from the partnerships we seeded several years ago, and an FDA approval late last year.

Our medical laser business includes sales of consumable fibers, a recurring revenue stream that will grow as the number of installed system increases. Advanced application revenue more than doubled year-over-year, with strong growth in government, semiconductor and scientific applications. We will continue to invest in transformative new products, including new medical treatments, mid-infrared lasers for spectroscopy, inspection and sensing applications, ultra high-power single mode laser for aerospace and defense. These new solutions will enhance our growth and margin profile, and provide greater geographic and end market diversification.

Finally, I want to express my gratitude to the IPG team for their outstanding performance during this most challenging time. I believe the execution, combined with our laser technology leadership and robust balance sheet will enable IPG to capitalize on the long-term secular growth in laser technology, and to deliver on our mission to make our fiber laser technology the tool of choice in mass production.

With that, I will turn the call over to Eugene.

Eugene Scherbakov Ph.D. — Chief Operating Officer, Managing Director of IPG Laser GmbH, Senior Vice President, Europe and Dire

Thank you, Valentin, and good morning, everyone. I will begin by discussing the effects of COVID-19 on our production. Currently, all three of our major production facilities in Germany, the U.S. and Russia remain open. However, we have scaled back production in Massachusetts to those product required to support essential businesses. These includes lasers and laser systems used in the transportation, medical, agriculture, communications and defense end markets among them. Our German operations are operating on a more normalized basis, albeit with social distancing measures in place. In Russia, our employees are working on a rotating basis to limit contact. Our highest priority remains the safety of our employees, their families, our business partners and community.

And as Valentin noted, we have put in place additional health safety and workplace measures to safeguard the health and well-being of our valued employees and colleagues. Our vertical integration production model continues to provide us with critical advantages in this time of supply chain disruption. Also, we saw certain raw materials from third party. We internally produce more complex components and modules used in our technology. Our leading-edge components and modules are the critical technical, performance and cost differentiator between IPG and our competition. We continue to leverage this advantage demand from more than 20 years of investment in technology, people and processes. Many of our third-party suppliers remain open providing us components we need.

However, the supply chain constraint we face are primarily related to logistics, including available air cargo space and higher freight rates. Available cargo space on flights between the U.S. and Europe, and Europe and Asia is more limited, so shipments are taking longer. In addition, shipments within Europe are limited within countries worse affected by COVID-19, and experiencing some delays in other places due to checks at border crossing. Recognizing that this situation is fluid and subject to change, we believe we have the ability to meet near-term demand for our products. In total, manufacturing and operating expenses were approximately $20 million lower in Q1 compared to the peak level in Q2 2019. Although some of this reduction is due to the lower level of activity, it is primarily attributed to the cost reduction actions we undertook in the second half of 2019.

We remain committed to managing our cost structure and working capital to the business environment. Examining our performance by region. Revenue in China decreased 40% year-over-year and represented approximately 28% of total sales. As we had expected, performance was impacted by weaker demand due to the novel coronavirus outbreak, though we did see a strong recovery in orders during the later half of March and April. We continue to face aggressive price competition in the region; however, pricing was more stable in the sequential basis.

In Europe, where industrial demand environment remains very challenging, revenue decreased 15% year-over-year. Revenue in North America increased 4% year-on-year with strong growth in medical lasers and advanced applications. Our growth in North America illustrates the benefits of our diversified portfolio strategy, where increasing the adoption of emerging laser solution and applications offset softness within industrial markets. Sales in Japan decreased 12% year-over-year, given ongoing macroeconomic weakness in the region. Sales in Korea decreased 26% year-over-year due to the effect of COVID-19 within the region. And sales in Turkey decreased 36% year-over-year due to the virus and other macroeconomic challenges affecting cutting business in the region.

With that, I will turn the call over to Tim to discuss financial highlights in the quarter.

Timothy P.V. Mammen — Chief Financial Officer and Senior Vice President

Thank you, Eugene, and good morning, everyone. Revenue in the first quarter declined 21% year-over-year to $249 million. Revenue from materials processing applications decreased 28% year-over-year, and revenue from other applications increased 123%. Sales of high-power CW lasers decreased 33% year-over-year, and represented approximately 48% of total revenue. Sales of ultra high power lasers at six kilowatts or greater represented nearly 50% of total high-power CW laser sales. Pulsed laser sales increased 1% year-over-year, with growth in green and high power pulsed lasers partially offset by lower sales of lower power pulsed lasers for marking applications. Systems sales decreased 43% year-over-year, as growth in systems for medical device manufacturing was offset by lower sales of other IPG laser systems and Genesis nonlaser systems.

Medium power laser sales decreased 28% on continued softness in additive manufacturing, and the transition to kilowatt-scale lasers in cutting, while QCW laser sales decreased 30% year-over-year. Other product sales increased 38% year-over-year, driven by growth in medical laser sales and total service revenue. Q1 GAAP gross margin was 41%, which declined 600 basis points year-over-year. Compared with the year-ago period, the year-over-year decline in gross margin was driven by the following factors: 200 basis points from less favorable absorption of manufacturing expenses; 190 basis points from higher inventory reserves; 90 basis points from an increase in shipping costs; 20 basis points from foreign exchange; and 100 basis points from other factors including lower product pricing.

First quarter GAAP operating income was $45 million, and operating margin was 18%. During the quarter, we recognized a foreign exchange gain of $20 million primarily related to the revaluation of U.S. dollar cash and other assets in Russia, given the depreciation of the Ruble versus the U.S. dollar. Excluding this foreign exchange gain, operating margin was 10%. Q1 net income was $36 million or $0.68 per diluted share. The previously referenced foreign exchange gains increased EPS by $0.28. The effective tax rate in the quarter was 23%. If exchange rates relative to the U.S. dollar had been the same as one year ago, we would have expected revenue to be $5 million higher and gross profit to be $3 million higher.

We ended the quarter with cash, cash equivalents and short-term investments of $1.2 billion, and total debt of $41 million. As Valentin noted earlier, our strong balance sheet provides us with ample flexibility in responding to coronavirus-related disruptions, particularly around investing for future growth opportunities. Effective operational execution resulted in cash provided by operations of $57 million during the quarter. Capital expenditures were $18 million in the quarter, and are trending below our target of $115 million to $125 million for 2020. During the quarter, we repurchased 109,000 shares for $13 million.

Today, IPG also announced that its Board of Directors has authorized the purchase of up to $200 million of IPG common stock in open market transactions or otherwise, subject to market conditions and other relevant factors. This new authorization is in addition to the company’s existing $125 million stock repurchase program authorized in February 2019, of which approximately $60 million remains available under that prior program. In March and April, we extended our credit lines with Bank of America and Deutsche Bank for five and three additional years, respectively. Bank of America also increased the total unsecured availability to $75 million from $50 million.

First quarter book-to-bill was meaningfully greater than one, and above normal seasonality, reflecting solid bookings growth and the weaker revenue quarter in China. Normally, this would have translated into stronger guidance for the second quarter, but the global demand environment remains very uncertain given the effects of COVID-19 on manufacturing facilities and customer confidence around the world. While we have seen a rebound in China-based order volumes in the latter half of March and April, this has coincided with declining bookings in other regions, including Western Europe, North America and other countries in Asia. As such, visibility into a recovery in global demand remains uncertain at this time. Despite the uncertain near-term demand environment, we continue to target significant longer-term growth opportunities in laser welding, electric vehicle battery processing and our portfolio of new products.

Our strong balance sheet will help us through the crisis, and emerge with the ability to capitalize on the many opportunities we have ahead. For the second quarter of 2020, IPG expects revenue of $260 million to $290 million. The company expects the second quarter tax rate to be approximately 26%. IPG anticipates delivering earnings per diluted share in the range of $0.40 to $0.70, with 53.1 million basic common shares outstanding and 53.7 million diluted common shares outstanding. Financial guidance provided this quarter is subject to greater risk and uncertainty given the COVID-19 pandemic and its associated impact to the global business environment and government policies.

As discussed in the safe harbor passage of today’s earnings press release, actual results may differ from our guidance due to factors, including, but not limited to, goodwill and other impairment charges, product demand, order cancellation and delays, competition, tariffs, trade policies, health epidemics and general economic conditions. Our guidance is based upon current market conditions and expectations, assumes exchange rates referenced in our earnings press release and is subject to risks outlined in the company’s reports with the SEC.

With that, Valentin and Eugene and I will be happy to take your questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of John Marchetti with Stifel. Please proceed with your question.

John Marchetti — Stifel — Analyst

Thanks very much. I was just wondering, Valentin, if you could comment a little bit or add some color to your pricing commentary about the China market? It sounded like pricing there at least was a little bit more stable on a quarter-over-quarter basis. I’m curious if you think that is something that’s somewhat more sustainable? Or if it has to do more with the restrictions that we saw in place in during the March quarter?

Valentin P. Gapontsev Ph.D. — Chief Executive Officer and Chairman of the Board

Okay. Chinese markets now demonstrate more stability than it was two years, say, in 2018. In 2019, the price is now much less than before battery prices becoming more stable. And the situation, of course, very uncertain and so on. But in total trend for us now, it looks very much more better than we expected. So during the for example, last two months, we received order for mid power lasers much, much more than before the time. It’s only during two months we received order of about last year. It was half of last year. So it is if it’s put the same trend, so we can expect to double the business in the mid power lasers this year to compare to 2019.

Of course, situation, certainly, nobody can predict what happens next month, but even very pessimistic case looks very promising. But still we introduced, especially recall traditional of opinion in the year to compare to our Chinese competition in second half this year. When we introduced new generation mid-power lasers much more perfect and much more higher functionality and whole others to compare with the family, which we developed in 2018, and now we sell in the market.

So situation for high power in China also growing fast. They purchase more and more high-power laser, more than 10-kilowatt power, special frame orders is huge. It’s all growing now. So let’s say we still as a result, our now production facility, especially in Germany and Russia, which serves Chinese market, now over busy. So we’re now watching 80% of people in the working on-site, and we see overtime, not enough people to procure in current order. For new product, we introduced mainly developed in the U.S., introduced now that we have to deal with new production line. Product market accepts very well, but now we still have problem to produce in volume. We’re looking everywhere to increase create new production line. Especially in China, they work very well.

John Marchetti — Stifel — Analyst

Great. And then, Tim, maybe just a quick one for you. Last quarter, you talked about an expected impact of around $45 million. I’m curious how that actually played out in the quarter? If you were above, below that or in line there? And maybe, with the guidance that you’re giving, if you can maybe quantify a little bit what you actually think the revenue impact and maybe the EPS impact of the ongoing virus situation is?

Timothy P.V. Mammen — Chief Financial Officer and Senior Vice President

So given that we came in at the top end of the guidance range we gave for Q1, the actual impact in the first quarter was slightly below the $45 million that we had framed Q1 guidance around. That really was based upon a strong rebound in demand in China in March, having really lost February as a month. That was a I characterized it as a lost month. And overall demand actually in Europe was reasonably strong in Q1 with total order flow. And as you saw, given North America actually grew a little bit year-over-year, particularly with the strength of the new medical applications. That demand environment held up reasonably well. Within our Q2 guidance number, we’re not going to give a specific estimates of how much it’s impacted.

It’s more difficult to do because, whilst you’re seeing strength and significant strength that Valentin just talked about in Europe, the demand environment, at least at the moment sorry, significant strength in China, the demand environment in Europe and order flow there, as we mentioned, has weakened. It’s also weaker in North America, and there’s a bit more uncertainty as well for Japan relative to the original forecast that we had there. So the overall impact, though, on Q2 is more than the $45 million that we guided to for Q1, but we’re not going to go and give a specific number around it. The drop-through to EPS is probably a bit more difficult to quantify, given that we’re not giving a specific revenue number, but it will result in gross margins being lower than they would otherwise have been. And certainly, earnings per share being reduced below the level that we were expecting in the second quarter.

John Marchetti — Stifel — Analyst

Thanks very much.

Operator

Our next question comes from the line of Jim Ricchiuti with Needham & Company. Please proceed with your question.

Jim Ricchiuti — Needham and Company — Analyst

Regarding the pickup that you saw in demand in China in March and April, is that, do you think, to support the current demand for these manufacturers as they’ve emerged from lockdown? Or does this appear to be them adding additional manufacturing capacity for business there perhaps assuming it’s coming in, in Q2, Q3?

Timothy P.V. Mammen — Chief Financial Officer and Senior Vice President

Jim, I mean, some of it is a rebound from very little demand happening for a six week period. But I think it’s, in part it’s not necessarily new capacity coming on board. It’s that of probably all of the economies that have gone through the coronavirus and COVID-19, China went into it earlier. China is certainly exhibiting at this point in time more of perhaps a V-shaped recovery in terms of the letters that everyone is talking about. It’s probably, as Valentin said, total demand for some of the lower power kilowatt scale lasers has rebounded very strongly. We’ve seen also good demand from higher power pulsed lasers for EV, higher power lasers for welding, we referenced the AMB.

I think like everybody, it’s not entirely certain how sustainable this can be. Valentin’s comment was, that if it is sustained, it does point to a nice recovery in our business over a reasonable recovery in Q2, and potentially that picking up in Q3. I think there’s just so much uncertainty out there at the moment about whether a V-shaped recovery in China will be sustained or what kind of recovery we’ll see in Europe, North America and other Asian countries as we get out of this. But certainly, we’ve been surprised by the strength of the demand, and it’s been a positive thing coming into this quarter from China.

Jim Ricchiuti — Needham and Company — Analyst

Got it. With respect to the systems business, down pretty significantly in Q1. I guess, is it fair to say this is mainly more a U.S. business, to a lesser extent, European? Is this was the decline more concentrated in medical device manufacturing? And you’ve got some tougher comps as you look out at the back half. Is this an area of the business that perhaps has more uncertainty to it? Or do you see some recovery off these low levels?

Timothy P.V. Mammen — Chief Financial Officer and Senior Vice President

No. So in fact, the demand for the medical device systems used to manufacture medical devices draw a distinction between that and the medical lasers we sell for medical procedures, right? There’s the ILT acquisition, which services medical device manufacturing. Demand within that applications actually held up reasonably well. Demand for our more specialized multiaccess systems that are used in fine processing has also held up well. The weakness has really been on the system side for the smaller form compact cutting system, where that has certainly been impacted by people pushing out investment decisions. So that would be used more on the job shop and less advanced applications.

And with Genesis welding systems, particularly on the non-laser side, where again, it’s sometimes a significant investment decision. Certainly, that business has shown a slowdown. So I’d characterize some of the non-laser welding applications for Genesis, and the more basic cutting systems, small-form compact cutting systems.

Valentin P. Gapontsev Ph.D. — Chief Executive Officer and Chairman of the Board

And now we in this system business, we are changing with ILT, and with Genesis, we’re changing the time, a new product line, which includes laser also sourced and so on increased share in total system with laser. ILT, for example, they developed using our new ultra custom lasers, new generation of machine with stent making. And before, there was a very small cell with former product without laser. Now with laser, new with some laser. Now this qualification going very well. Right now, we see demand start to grow very fast for this machine. Second also, for ILT, for example, for the all the sales was within U.S.

And now we extend the ILT marketing, ILT system in Europe, also, Eastern Europe and going even to the East, because new generation such machines, very competitive. Becoming very competitive in quality and also in cost to compare to this local manufacturer.

Jim Ricchiuti — Needham and Company — Analyst

So it sounds like you’re suggesting this business may be bottoming here and should improve with the new products in the back half?

Timothy P.V. Mammen — Chief Financial Officer and Senior Vice President

I think what we’re saying is we’re seeing strength from some of the more advanced and newer products that we’re introducing. And as we introduce more of those newer products, that’s really been the target of the business strategically, is to drive that growth from those areas. So it is to introduce more laser-based welding systems with Genesis, and to grow the medical device manufacturing capability that we acquired as well. So perhaps a slight nuance to what you’re saying, Jim, but pretty similar.

Eugene Scherbakov Ph.D. — Chief Operating Officer, Managing Director of IPG Laser GmbH, Senior Vice President, Europe and Dire

With changes, it’s more longer to make this new version machine in mobile, but the process is going very well. So we expect end of this year, next year, will be we’ll enter the market in new way, efficient, very effective and high performance machine with with from the process.

Operator

Our next question comes from the line of Tom Diffely with D.A. Davidson. Please proceed with your question.

Tom Diffely — D.A. Davidson — Analyst

Yes, good morning. Thanks for taking the call. Just wondering, based on the cost-cutting that Eugene referenced earlier, I was wondering, Tim, is there a change to the long-term target model from a margin point of view? Are you still in that 45% to 50% range, do you think?

Timothy P.V. Mammen — Chief Financial Officer and Senior Vice President

At the moment, we’re not taking a lot changing the long-term target model. We’re clearly operating at revenue levels below our even medium- and longer-term targets, and that’s really why the current performance is below that range. At this point in time, we are still trying to manage the business and definitely targeting trying to get back to the 45% to 50% range.

Tom Diffely — D.A. Davidson — Analyst

Okay. And then, just got another question on the COVID impact on capacity. It sounds like it’s not really impacting you right now as much as maybe it would be if you’re at full production. Curious, is there someone to quantify the impact to your capacity either through having to do social spacing or supplier constraints?

Timothy P.V. Mammen — Chief Financial Officer and Senior Vice President

Eugene, do you want to address that question from an operations perspective?

Eugene Scherbakov Ph.D. — Chief Operating Officer, Managing Director of IPG Laser GmbH, Senior Vice President, Europe and Dire

Yes. In principle, I already mentioned that we didn’t get any big problem in Germany because our capacity was we used approximately 90% of our capacity without strong limitations. In other countries, also, I mentioned that in Massachusetts, we only produced products, which are required to support essential businesses. In Russia, of course, it’s out other situation, but our main production now in Germany. I think we have a lot of, today, orders. And we definitely will ship these orders in time. It’s no risk. And from the future, we’ll see if it will be necessary, we can introduce some additional measures, like second shifts, some additional people and so on. Again, from a production point of view, I don’t see any big risk. Only one risk that exist, maybe in the future, we will not have enough orders. But if orders will come, we will definitely proceed with all these orders.

Valentin P. Gapontsev Ph.D. — Chief Executive Officer and Chairman of the Board

For current product, we have enough capacity for current product. For new products, we introduced now the same, but visible green laser, UV laser, ultra short lasers and so on. We still don’t have enough capacity, have to build looking for people and creating new production line. We’re still in the first phase this year and next year, we have got with solid year on production. Then today, we would be realizing whole potential. Now current capacity not able to support this demand. What do you need? We don’t need equipment. We don’t need the facility. We have this. We need people. We need to train people in electronics energy, optic engineers, technician, high-quality. In the U.S. and in Germany, it’s very difficult to available those people, so we transfer more and more of this production to Eastern Europe to Russia, and we built new very large mass production capacity in Belarussia.

Operator

Our next question comes from the line of Michael Feniger of Bank of America.Please proceed with your question.

Michael Feniger — Bank of America — Analyst

Hey guys, thanks for taking my question and apologies if this question was already answered then addressed. The gross margin actually picked up in Q1 first, the fourth quarter, even with the sequential drop in revenue. If I go back a few years, your Q1 margin sequentially actually goes down. So I was hoping you could kind of address some of the measures you were able to put in place to actually show that improvement? And with the revenue recovering in Q2 and hopefully in Q3, I’m just wondering if, on that target gross margin, has the revenue that you need to get to, has that changed in terms of hitting $300 million or $350 million or $400 million mark? Has that changed the paradigm in terms of what gross margin ranges could be?

Timothy P.V. Mammen — Chief Financial Officer and Senior Vice President

Michael, the first part of the question there about Q1 gross margin, I think we were pleased, given the revenue level, with the gross margin that we achieved, particularly given that we also had some higher inventory provisions. So the performance, even relative to our guidance, was better. I’ve not really tracked it as to comparably what gross margin does Q1 to Q4. I don’t tend to focus on that so much. What I will say is in Q1, we’ve referenced that we’ve had these cost reduction initiatives that were started really in Q3 2019. It accelerated in Q4, so one of the benefits we had in the first quarter with those cost reduction initiatives flowed more completely and fully through the business model.

As Eugene mentioned, the total amount of expenses that we incurred in the first quarter were both manufacturing and operating, we haven’t split it out between the two, was $20 million lower. A significant part of that compared, for example, to the middle of last year, was on the manufacturing side. So partly due to lower activity, but lower headcount because some of the restructuring, fewer contractors used in certain locations. So it’s really around the way that we try to manage the cost base of the business, and some of that wasn’t even really clearly because we started this last year. It wasn’t related to the pandemic taking hold. These were operational initiatives that we had started to execute upon over the last six and nine months.

With regard to the future thing, the thing that’s most pertinent to that so we’re not fundamentally changing the range of revenue that needs to be achieved for the business model to show decent leverage in it. I think as we get back above $300 million, transition to $330 million, $350 million, we get into a much more comfortable position. And if we can grow revenue to $370 million or $400 million, we think that we will be again getting back towards close to 50% margin, in particular, if some of that growth comes from our leading-edge products that were introducing to the market.

Whether it’s not just the higher power lasers for cutting, but some of the AMB lasers for welding, the new product in ultrafast, the green lasers, the more advanced systems, the medical devices, the devices for medical procedures. So all of those are as those have started to show strength in the some of the defense applications, we shipped another 100-kilowatt laser this quarter. These are all things that over time should benefit the business model. So there’s no fundamental change in seeing some accretion and leverage out of gross margin that we expect to happen as revenues starts to recover.

Valentin P. Gapontsev Ph.D. — Chief Executive Officer and Chairman of the Board

In old product, current product like mid-power lasers, high-power lasers, one-micron range. This year, we introduced new generation laser with 1/4 of them manufactured and costs would be 20%, 30% less than current product. Performance would be better, but the cost would be 20%, 30% less, so we expect so with this product, we will increase gross margin essential from this mass product.

Michael Feniger — Bank of America — Analyst

That’s helpful. Longer term, I’d love to get a sense of how you think COVID impacts your customer base with manufacturing facilities? But also just the supply chain? With social distancing, do new facilities need more automation and laser technology for safety concerns? Do you see with what we’ve seen play out in other markets with supply chains? Do they go do we have to see them get reoriented? And maybe some manufacturing facilities have to move out of China or be rebuilt locally in other regions. Just curious if you’ve seen any of that.

Timothy P.V. Mammen — Chief Financial Officer and Senior Vice President

I mean, I think, from a productivity perspective within our own systems, the safety and cleaning and even some of Valentin’s references sort of UV light cleansing that we’re using. We’re not seeing a fundamental change in the ability to use our space or the productivity from it. Some of the things that you referenced are actions and initiatives that we’ve already taken and been investing in for several years. So increased use of automation in diode manufacturing and packaging are all part of our strategies. It’s one of the reasons that we have a supply chain that is really focused in either North America, Germany or Russia, where we don’t use lower cost labor in other areas around the world. So certainly, automation is an area where we think that potentially IPG will use more of it over time, and some of our customers will use more of it over time.

That continued transition towards automation will help laser-based sales, particularly as they’re integrated within robotic and other systems. Some of your other questions, I think, have broader-based economic and supply chain strategic and logistics decisions that companies may make. One of the outcomes of this is, given the disruption of being able to get components from different places around the world is that you may see a reversion from just simply concentrating manufacturing in low-cost countries like China and other areas in Asia because the actual cost of doing so is higher than having your supply chain more distributed. So you may well see some investments around component manufacturing in North America and Europe. And that, again, maybe over the longer term, a benefit to IPG.

Valentin P. Gapontsev Ph.D. — Chief Executive Officer and Chairman of the Board

And our strategic target, our the mass production, we start making more and more our target to make in for East Europe. East Europe means Russia and Belarussia. New very large production facility. It’s for China for the East, for low cost product and so on. For but America, U.S., and the Germany would be measured for the development of new product, introduction in the market this product qualification and so on, to serve this East West Europe and American market only. But mass production, we move for more cost. And cost of production, for example, now Belarussia would be cheaper than in China.

It’s much more protected, much more higher quality and people are very well organized with this facility. We have built already 30,000 300,000 square feet. We have built that production. But next year, it will start to work in full, so that will help us to review mass production, to make in with a very low cost, very high quality and so on, well protected against any political and other problems.

Michael Feniger — Bank of America — Analyst

Thank you.

Operator

Our next question comes from the line of Jed Dorsheimer with Canaccord Genuity. Please proceed with your question.

Jed Dorsheimer — Canaccord Genuity — Analyst

Hi, thanks. And it’s nice to to see a positive outlook here.. I guess a question regarding the uptick with respect to what I presume is pent-up demand from things being shut down over in China. I’m curious, if we look at China’s GDP being largely export, and we look at the rest of the world largely seeing a decline in GDP from a consumption perspective. I’m just curious, how you reconcile the pickup in manufacturing capacity? Is it a function of utilization? Or you see or is it upgrades in existing facilities that is attributing to the demand?

Timothy P.V. Mammen — Chief Financial Officer and Senior Vice President

So first of all, I think that there continues to be uncertainty as to how global GDP and China GDP, North America, European GDP will recover over the next six to nine months. I think that remains the uncertain question in some of the outlook there. With regard to the China rebound in demand, specifically, yes, some of the China investments relate to exports, but don’t forget that the Chinese government has been pursuing a strategy of trying to drive local consumption and demand. So that may be driving part of this recovery. Many of the industries we also serve are not so much export-orientated, whether it be electric vehicle manufacturing to supply local demand, the housing sector consumer durable goods.

Of course, some of the consumer electronics stuff is exported, but there’s also strong local demand there as well. So I think perhaps some of the supply chains that we serve are not just solely export-focused. They are also driven by internal China demand. I think over the medium term, clearly, the data points that we’re going to be looking at are how regional and global PMIs trend? What export data looks like for robotic orders coming out of other Asian countries and machine tool data exports? So whilst we’re pleased with the overall performance in Q1 with revenue coming at the top end of the range, I’m pleased to be able to guide at least sequentially higher. It’s not as though we or the global economy is out of the woods yet. I think there remains some uncertainty on that, Jed.

Jed Dorsheimer — Canaccord Genuity — Analyst

That’s helpful. Just as a follow-up, and I may have missed this, I jumped on a little bit late on the call. But the with the price stabilization, particularly in the low- to mid-power range, where we’ve seen intense price pressure over the past year or so, is that do you attribute the stabilization to less competitors? Are we seeing attrition that’s finally playing out? Or are you seeing we’ve just hit a bottom in terms of that pricing? Or maybe just a little bit more color on the pricing dynamic in what was a more competitive segment of the market?

Valentin P. Gapontsev Ph.D. — Chief Executive Officer and Chairman of the Board

Well, first of all, we do not price essentially. China stimulates this drop of prices over to win this market, win the market worldwide. When we had this challenge and we also dropped prices despite our product, much higher quality, much more reliable than so and so on. But our prices [Indecipherable] for that we dropped very essential cost of this upgrade to design. And now our price is very low price, very competitive. Chinese could not drop more because, in other case, they’re near bankrupt many of them with our government support are near bankruptcy now, very low gross margin and artificial, even.

They continue with gross margin much less than reported even most of them, because government supports on this compensation. But we, without any compensation are providing similar with no big difference in price. By the way, from the point any European, any American can be competitors now. They are not able to compete it already, not only with our quality, but also prices for practical. China remained only competitor for IPG in this area. And they could not drop prices more essentially, because it would be hard for them and why is it so? They generate only more [Indecipherable] 35% gross margin, but it’s artificial, not real margin, gross margin. So no more way to go down.

But we still [Indecipherable]. Even with these prices, we now renew our design, we our gross margin will increase again. It dropped like 40%, 50%. Now we increase again up to 60% and even 70%. So a real gross margin, so on. So we’re very competitive now, even with such price and profitable.

Operator

Our next question comes from the line of Mark Miller with The Benchmark Company. Please proceed with your question.

Mark Miller — The Benchmark Company — Analyst

Thank you for taking my question. I just was wondering about the supply chain again. Are you seeing any impact? You mentioned air shipments in terms of component supply? Or are you being impacted by some of your customers, their problems related to the virus?

Timothy P.V. Mammen — Chief Financial Officer and Senior Vice President

Eugene, do you want to take that question on supply chain and components?

Eugene Scherbakov Ph.D. — Chief Operating Officer, Managing Director of IPG Laser GmbH, Senior Vice President, Europe and Dire

Yes. From the point of component supply, we didn’t get any problems because we made some measures before. It means we have enough components to our continuous operation of our stock, main components. And for of course, COVID-19 influence for our customers sometimes. And this is why some of them, the delay with orders, and also to ask us to delay shipment for some existing orders. These are our main problems. But in principle, we don’t see any big problems today connected to COVID-19 in the supply chain.

Valentin P. Gapontsev Ph.D. — Chief Executive Officer and Chairman of the Board

Due to our policy because we have some fall, we’re shipping our size much less components than any our competitors. Most components, especially expensive with so on, critical we produce in-house. Now produce account and not only optical, electrical, metal capacity, anything can soon maybe 80%, 90% plus, we will buy will be making inside, only 10%, 15% outside, number one. Second, we hold our typical policy to hold three-month storage, so for serious product. The outside help for the one-month shortage, two-month shortage, we have now most cases, but in-house in storage. So it’s very few problems we have really now are with components, which still waiting from compact, especially for new product, but not for mass product.

Mark Miller — The Benchmark Company — Analyst

You mentioned ultrafast lasers were strong. I was wondering if you could estimate what percent of recently introduced products were what percent did they represent of total sales? Is it around 20%?

Timothy P.V. Mammen — Chief Financial Officer and Senior Vice President

Yes. The ultrafast product as a percentage of total sales are still relatively small, Mark. I think what Valentin was referencing was that there’s good progress being made on numerous different projects. You mentioned one specifically that IPG subsidiary, ILT, has developed a new system for stent cutting using our own ultrafast lasers. So the numerous projects we have there are moving well. Ultrafast was reasonably a performed reasonably in the quarter, but it’s certainly nowhere near the level we wanted to get to.

Valentin P. Gapontsev Ph.D. — Chief Executive Officer and Chairman of the Board

Our first product major product we introduced to market on the end of last year, beginning this year. It’s all testing customer. We won very well customer, very wide, and more customers we provide for sale. They very liked the product. They promise very serious orders. But our problem now to install mass production. Now we produce not enough even for current demand. During this year, we have installed production up to the couple thousand per year, then it would be real. It will become serious business. But it’s still it’s a complicated. Assembly need very trained people and so on for this. This major problem are people now, not and there’s so much production.

Mark Miller — The Benchmark Company — Analyst

No, I was actually referring to all new product sales, not just ultrafast lasers recently introduced.

Timothy P.V. Mammen — Chief Financial Officer and Senior Vice President

Those were 23% of total revenue, Mark.

Mark Miller — The Benchmark Company — Analyst

Okay, thank you.

Valentin P. Gapontsev Ph.D. — Chief Executive Officer and Chairman of the Board

A year ago, it was within 10.

Timothy P.V. Mammen — Chief Financial Officer and Senior Vice President

Can’t remember exactly, but it’s a share, it’s growing from a year ago.

Operator

Our next question comes from the line of Krish Sankar with Cowen & Company. Please proceed with your question.

Krish Sankar — Cowen and Company — Analyst

Yeah, hi, thanks for taking my question. I have two of them. Tim, I just wanted to get your thoughts on the commerce department rolling from last week, expanding the scope of the export rules, given the fact that you guys have quite a bit of exposure to China. How do you think about it to the extent that you understand and interpret those rules? And then I have a follow-up.

Timothy P.V. Mammen — Chief Financial Officer and Senior Vice President

Krish, I can’t answer that question at this point in time. I haven’t done enough work on it to be able to look at it and see how it might affect us. So I don’t have an answer to that question right now.

Krish Sankar — Cowen and Company — Analyst

Got it. No worries. And then a second question, I just wanted to find out on the June quarter sequential uptake, can you just tell us which product lines are going to grow more than others? And are you seeing your typical seasonal uptick you see in pulsed lasers because of the consumer electronics end market?

Timothy P.V. Mammen — Chief Financial Officer and Senior Vice President

I mean we don’t normally get that granular on it. We’re expected obviously to see high-power pick up because of the demand from China. QCW will see some increase, but it’s not a fundamental investment cycle that we normally see from consumer electronics. But that would expect to see some pickup. And pulsed, maybe some additional marking, but again, it’s you’re not you haven’t got a major consumer electronics investment cycle that is driving how is sequential improvement in Q2. And as I said, even though it’s great to see a bit of a sequential improvement compared to what guidance may have been without COVID and the demands that we were seeing, it’s still a relatively weak performance.

Krish Sankar — Cowen and Company — Analyst

Got it. Thanks, Tim.

Operator

That is all the time we have for questions. I’d like to turn the call back to management for closing remarks.

James Hillier — Vice President of Investor Relations

Great. Thank you for joining us this morning and for your continued interest in IPG. We look forward to speaking with you over the coming weeks. And we’ll be participating in a number of virtual investor conferences this quarter. Have a great day, and stay safe, everyone.

Operator

[Operator Closing Remarks]