IPG Photonics Corporation 2026 Q2 Earnings Call

Thank you, and good morning, everyone. With me today is IPG Photonics CEO, Dr. Mark Gitin, and Senior Vice President and CFO, Tim Mammen. On today's call, Mark will provide a summary of our second quarter results, as well as the overview of demand environment, and then walk you through the progress we are making on our long-term strategy. After that, he will turn it over to Tim to provide financial details. Let me remind you that statements made during this call that discuss our 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 are detailed in our Form 10-K for the period ended December 31st, 2025, and our reports on file with the Securities and Exchange Commission.

Any forward-looking statements made on this call are the company's expectations or predictions as of today, August four, 2026 only, and the company assumes no obligation to publicly release any updates or revisions to any such statements. During this call, we will be referencing certain non-GAAP measures. For more information on how we define these non-GAAP measures and a reconciliation of such measures to the most directly comparable GAAP measures, as well as additional details on our reported results, please refer to the earnings press release, earnings call presentation, and the financial data workbook posted on our Investor Relations website. We will also post these prepared remarks on our website after this call. With that, I'll now turn the call over to Mark.

Thanks, Eugene. Good morning, everyone. Second quarter revenue was above the midpoint of our guidance, increasing double digits year-over-year and growing sequentially. Both industrial solutions and advanced solutions grew quarter-over-quarter and adjusted gross margin and adjusted EPS came in above our expectations. Bookings also improved in the quarter, and book-to-bill remained above one. Growth in both revenue and bookings points to sustained demand for our products across our end markets. Revenue growth was led by strength in industrial solutions, primarily in welding applications, as we continued to benefit from increased demand and business wins for our solutions in battery manufacturing. Cleaning and additive manufacturing also contributed to the year-over-year growth. Advanced solutions revenue improved sequentially, driven by strong growth in semiconductor applications as we are making progress with large semiconductor equipment manufacturers. We are also seeing strong interest in our directed energy defense system, CROSSBOW.

Overall, in advanced solutions, we continue to execute on our long-term strategic initiatives and believe that we have numerous opportunities for growth. The growth we achieved in the second quarter also demonstrates that we are making progress on our two clearly defined strategic growth initiatives. The first is strengthening our leadership in industrial solutions by expanding laser adoption, displacing incumbent technologies, and further moving up the value chain with differentiated system and subsystem solutions. Welding drove much of the industrial solutions growth in the quarter. Demand in battery manufacturing remains strong across both electric vehicles and stationary storage, which supports data center energy requirements. Following our strategy to further move up the value chain, I'm excited to report that our subsystems revenue increased significantly this year. Our unique combination of Adjustable Mode Beam lasers, advanced beam delivery, and real-time process monitoring enables unmatched welding speed and quality.

We are also making these subsystems easier to integrate and adding computer vision and artificial intelligence into the solutions. These advantages help drive recent wins with two major global automotive manufacturers. Additive manufacturing revenue remained strong in the quarter and grew significantly year-over-year. Demand is accelerating as our newest solutions enable the displacement of conventional metal machining. Winning here takes precise laser parameters, partnership with OEM customers, and deep applications expertise. Our latest generation of lasers with proprietary beam shaping capabilities increases process speeds by approximately 1.5 to two times, translating directly into higher productivity and lower total cost per part for customers. Our second strategic growth initiative is expanding our leadership in laser and photonics technologies in attractive markets and applications in advanced solutions, including medical, directed energy, micromachining, and semiconductor.

We are leveraging core capabilities to target applications where precision, accuracy, control, efficiency, and reliability matter most and are pursuing those opportunities both organically and through acquisition. This strategic initiative is addressing over $5 billion of TAM. We are expecting hundreds of millions of dollars in revenue over the longer term. Let me tell you about the progress we are making and the encouraging signs we are seeing towards realizing this potential. On July 16th, we entered into a binding offer to acquire Lumibird Medical, a global leader in diagnostic and treatment systems for ophthalmology. We believe this acquisition will allow us to achieve four things. First, it accelerates IPG's strategic evolution by meaningfully expanding our advanced solutions revenue into attractive higher-margin medical markets with durable demand, strengthening the quality of our business mix.

Second, it delivers on our commitment to improve profitability through the addition of a high-margin business that we expect will be accretive to gross margin, EBITDA, and adjusted EPS in the first year. Third, it creates a scaled medical laser platform by combining our leading urology business with Lumibird Medical's leading ophthalmology business, increasing our addressable medical market by approximately $1 billion. Fourth, it expands our long-term value creation opportunity by combining complementary technologies, commercial capabilities, and applications expertise to drive innovation and unlock future growth. We are very excited about this opportunity, which we expect to close in the fourth quarter of 2026. In our medical business, bookings and backlog remain strong, and we expect shipments to increase in the second half of the year. Looking forward, we remain confident in long-term demand growth for our urology systems and fibers.

We are also advancing our innovation roadmap with new product approvals and introductions expected in 2026 and 2027. Our strongest performance within Advanced Solutions was in semiconductor applications, as we continued to win new business with large semiconductor equipment manufacturers due to the differentiated value that we deliver. Our solutions for lithography, metrology, and inspection are gaining traction, increasing our exposure to this high-growth market, driven by an acceleration of AI-related demand for GPUs and high-bandwidth memory chips. We continue to advance our product development by working closely with customers on design and opportunities, supported by the clear performance advantages our lasers and photonic solutions offer. In our defense business, we began shipping Lockheed Martin's order for CROSSBOW this quarter. We will be shipping more units in the third quarter and continuing to engage with potential customers working to convert their interest into orders.

We recently participated in a defense event at White Sands Missile Range, demonstrating CROSSBOW capabilities to multiple agencies in demanding real-world environments. The system continues to be broadly tested in various scenarios domestically and overseas and has proven to perform reliably in harsh conditions. We remain optimistic about the current developments in the directed energy market and believe that our systems provide effective solutions with a favorable cost exchange ratio to address the increasing threats from Group 1 and Group 2 drones. We are also transforming into an organization positioned to maximize the growth and profit opportunities ahead through the One-IPG operating model. We are streamlining operations, strengthening decision-making, and accelerating product development, translating into better performance and greater consistency across the business.

In summary, the global IPG team delivered another quarter of sequential and year-over-year growth as customer demand for our unique solutions has strengthened across our markets. Orders also grew, keeping our book-to-bill above one, and we reported significant increases in adjusted gross margin and adjusted EPS. We are making meaningful progress on our strategic objectives, positioning us to continue to deliver profitable growth and create sustained shareholder value. With that, I will now turn the call over to Tim.

Thank you, Mark, and good morning, everyone. My comments will generally follow the earnings call presentation, which is available on our investor relations website. I will start with revenue trends by application on slide five. Industrial solutions revenue increased 16% year-over-year in the second quarter, driven by growth in welding, marking, cleaning, and additive manufacturing. On a sequential basis, revenue is up 4%, primarily due to strength in welding and cleaning. Advanced solutions revenue decreased 9% compared with last year, as growth in semiconductor applications was offset by lower revenue in micromachining and defense. Advanced solutions revenue improved 10% quarter-over-quarter on growth in semiconductor and sequential improvement in micromachining applications. Sales of our emerging growth products continued to increase and accounted for 58% of our total revenue in the second quarter, up from 53% in the prior quarter.

Strong growth in our lasers and solutions for battery manufacturing processes drove the increase. Moving to revenue performance by region on slide six. North American revenue decreased 2% compared with last year due to lower revenue in cutting, defense, and medical applications. Sequentially, revenue was up 1% due to increased marking and defense sales. European sales were up 5% year-over-year and 1% sequentially, driven by increased sales in cleaning and additive manufacturing, partially offset by a decrease in cutting. Revenue in Asia increased 19% year-over-year and 8% sequentially, driven by strong growth in welding applications, which benefited from higher demand in battery manufacturing. Moving to the financial performance review on slide seven. Total revenue was $279 million, up 11% year-over-year, marking our third consecutive quarter of double-digit year-over-year sales growth.

Foreign currency benefited revenue by approximately 2% this quarter compared to the same period in the prior year. GAAP gross margin was 40.4%, and adjusted gross margin was 40.7%, above the top end of our guidance range. We recorded a benefit from tariff refunds of approximately $4.7 million that had a positive impact on gross margin of approximately 170 basis points in the quarter. Lower inventory provisions and product cost continued to provide a positive benefit, while manufacturing cost absorption remains below the level we are targeting in the medium term. Total adjusted operating expenses were $91 million, excluding $17.6 million in impairment of long-lived assets related to the sale of our Belarusian operations and other one-time items. Adjusted operating expenses declined sequentially and came in slightly below our guidance range as we benefited from a German R&D tax credit of $1.8 million in the quarter.