Good morning, and welcome to IPG Photonics Third Quarter 2025 Conference Call. Today's call is being recorded and webcast. At this time, I'd like to turn the call over to your host, Eugene Fedotoff, IPG's Senior Director, Investor Relations, for introductions. Please go ahead with your conference.

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 with a quick look at our third quarter results and the overall demand environment, 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 31, 2024, and other 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, November 4, 2025, only, and the company assumes no obligations 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 the 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. Third quarter revenue was at the top end of our expectations, flat sequentially and up 11% year-over-year, excluding divestitures. There were a number of positive factors that drove the results this quarter. Stronger demand in battery production driven by e-mobility and stationary storage supported higher sales in welding. With our adjustable mode beam laser, weld monitoring and beam delivery solutions, we continue to win orders with some of the largest battery and automotive manufacturers across multiple regions. General industrial demand was stable compared with the prior quarter, and our cutting revenue was essentially flat and consistent with the past several quarters. We began shipping the new generation of our high-power rack-integrated lasers to cutting OEM customers globally. These next-generation lasers use our new higher power diodes, have a smaller footprint and lower manufacturing costs. Demand in additive manufacturing applications was very strong, and we won new business with our single-mode lasers tailored for that application. Cleaning continued to grow, supported by the cleanLASER acquisition. Outside of industrial applications, we delivered year-over-year growth and built momentum towards longer-term value creation through new product introductions and new business wins. One exciting example of this is the growing interest in our CROSSBOW-directed energy solution, which I'll touch on shortly. I'm also pleased to share that we've received FDA clearance for the next generation of our thulium medical laser systems. This is an important step for the business, and we expect shipments to start by the end of the fourth quarter. I'll provide more detail on this milestone later in the call. Our financial results improved in the quarter as we increased gross margin, managed operating expenses and delivered adjusted EBITDA and adjusted earnings per share at the top end of our expectations. Order activity remained healthy with book-to-bill…

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 the revenue trends by application on Slide 4. Revenue from materials processing increased 6% year-over-year, drove higher sales in welding, additive manufacturing applications, cleaning and micromachining, partially offset by lower sales in marking and divestitures, while cutting revenue remained nearly flat. Revenue from applications driven by higher sales in medical and advanced. Our emerging growth products performed well in the quarter, increasing on a year-over-year basis but declining slightly sequentially and accounting for 52% of sales in the third quarter, down from our record high of 54% in the prior quarter. Moving to the revenue performance by region on Slide 5. Sales in North America decreased by 16% sequentially but were up 8% year-over-year. Sequentially, sales declined due to the timing of some large orders in welding and advanced applications, while year-over-year growth was driven by higher revenue in advanced applications and medical as well as improved cutting and cleaning sales. Sales in Europe increased 11% sequentially and 4% year-over-year, excluding $7 million in divestitures. The sequential increase was driven by higher sales in welding, cutting, additive manufacturing, while the year-over-year improvement was driven by the acquisition of cleanLASER as well as higher sales and cutting and additive manufacturing. Revenue in Asia increased 5% sequentially and 15% year-over-year, driven by higher welding sales in China, Japan and Korea as a result of stronger demand and business wins in battery applications. Our differentiated solution, including the combination of our AMB laser, weld process monitoring, and beam delivery is improving yields and battery safety and driving adoption by major battery manufacturers in the region. Moving to the financial performance review on Slide 6. Revenue…

Thanks, Tim. In closing, we are encouraged by the progress we've made and energized by the scale of the longer-term opportunity ahead. We believe we have strong growth opportunities driven by our differentiated solutions that have been successfully winning business even in a subdued industrial environment. As general industrial activity recovers, this positions us well to outgrow the market. Our market leadership, applications expertise and complete solutions enables us to drive adoption of lasers replacing incumbent technologies and expanding the addressable market. We are excited that our growth initiatives in medical, micromachining and defense are already showing meaningful progress in driving incremental revenue. While we are cautiously optimistic about the demand environment, we continue to transform the company to create value for our customers and shareholders for the longer term. With that, we will be happy to take your questions.

[Operator Instructions] Our first question comes from Ruben Roy with Stifel.

Mark, I'd like to start with maybe just a little more detail on how you're thinking about the outlook for Q4. It's nice to see the progress coming out of Q3 and the book-to-bill and some of the sort of new areas that you're focused on continuing to contribute. So maybe you can walk us through -- I know you've used the term cautiously optimistic going into year-end here. But with PMIs improving, et cetera, and where the bookings are, it's a wide range of guidance again. What are some of the puts and takes to get to the lower end of that guided range or the higher end?

Yes, sure. Nice to talk to you, Ruben. See, first of all, we're quite happy with the performance around the world. As I mentioned, the book-to-bill continues to be about 1 globally at this elevated revenue. And it's showing continued strength in each of the regions actually in Asia, including Japan, Korea and China. Europe is stabilizing, and we've been seeing some upside in North America. And we're really encouraged with these early signs of industrial expansion, as you mentioned too, PMIs are tracking a little bit higher now. So with the U.S. about [ 52.5 ]; the Eurozone, now stabilizing at about [ 50 ]; China, a bit over [ 50 ] as well. So those are positive pieces. And even in what has been muted industrial market, we're really seeing the benefits of our differentiation, right? The technology, the product quality, reliability and the applications expertise that we've got and tie into that, the global support infrastructure that we have. Those things are starting to really give us some benefit. And we've seen that in the cutting revenue, for example, that's been essentially flat now and consistent the past several quarters. And I've talked about this before, but our OEM inventories and cutting our OEMs, their inventories really normalized. Happy that we've got our rack-integrated platform out. So this helps to contribute to how we guide. The new product is out now, and it's been qualified by most of our OEM customers. And again, that's the system that has the new diode lasers, that's higher power, smaller form factor, lower cost structure. And then as I mentioned in the prepared remarks, we're continuing to get share gains in welding and additive manufacturing, that's going well to cleaning. So I really feel good about that, that we're positioned to outgrow the market as the industrial output starts to improve. And then, of course, as I mentioned, we're also focused on the key areas that we're investing in the nonindustrial areas, right? So we've focused on the areas of medical, micromachining and the defense area, the advanced area with our CROSSBOW system, and we're seeing some pickups there in each of those areas as well, new customer that we've talked about in medical, new product coming out in Q4, where we're starting to get some shipments. So all of those are contributing as well. So overall, I'll say again, cautiously optimistic and certainly feel better about the business now than we did a year ago at this time.

Great. I just had a quick follow-up on that and a quick one for Tim. Just a follow-up. It was nice to hear the e-mobility related welding revenue strengthen a bit. Was that geo specific? Or was that something that you saw more broad-based? .

So actually, we're getting share gains globally. The -- if you look at Asia, we've had strength in Japan and Korea and continued share gains also in China. And then we've also had uptick in Europe. And we've had some wins also in the U.S., although the U.S. is a little slower. And one thing I would point out is that it's really about battery. It's not just EV. There's quite a lot of work going on now in stationary storage as well. So in China, which has the largest growth in has -- about 1/3 of it is due to stationary storage with 2/3 about EV. And overall, just to point out too, the EV market is continuing to grow. It's year-to-date has grown about 25% year-over-year.

Yes. Got it. Okay. A quick one for Tim. On the gross margin, Tim, just thinking about the outlook. It sounds like the -- unless I missed this, the tariff impact is about the same as you saw in Q3. Revenue at the midpoint is a little bit lower, but you've got a downtick in the gross margin. So maybe some moving parts there and how you're thinking about the margins as you get out of this year? And what's the expectation for tariff impact, if any, as you get into '26?

Sure. I think, first of all, gross margin, both actually on a GAAP and adjusted basis was strong in Q3. I was actually very pleased with it. Some of the positives on that were that we started to see some improvement in product gross margin, which we've mentioned have been a bit weaker in the second quarter. So that's really good because that shows that some of the cost reduction initiatives that we've got. Mark mentioned that around the RI laser. We're also trying to roll out the higher-power diodes across the platform more broadly, for example. There are other applications where we've introduced lower-cost lasers. So that was really pleasing to see that develop during the quarter for me. The other benefit on gross margin, a couple of other ones. Inventory provisions were lower, so I'd said that we expected to see those come down in the second half of this year given the work we've done around managing inventory. And then the final benefit was really an improvement in under-absorbed costs. So the overall absorption was pretty good in Q3. That, though, did result from growing inventory a bit. If you look at the balance sheet, inventory is up about $20 million. That was an intentional investment in inventory really to reduce lead times to customers and support the business at this point in time. We're not expecting -- expecting a much more moderate impact from inventory in the fourth quarter. So kind of the midpoint of my gross margin guide factors that in. It's not factoring in any other significant increase in tariffs. We're trying to mitigate some of the effect of tariffs. I said fairly clearly. I don't think companies are going to get rid of the cost of tariffs given how pervasive they are, but we're looking at where we can increase pricing a little bit. We're looking at other programs internally in terms of manufacturing drawbacks of tariffs and things like that. They do take time to put in place. There's a huge amount of data, analytics and approvals that you need to go through to get those in place, but they should start to see some of that tariff impact potentially ameliorate a bit going into next year.

Our next question comes from James Ricchiuti with Needham & Company.

I had a couple of questions. First on CROSSBOW. Wondering, Mark, how we might think about the opportunity looking to 2026. It sounds like you had good interest at the recent shows that you've participated in. Are you working with any other partners at the moment besides Lockheed Martin?

Jim, let me just step back for a minute. So yes, we're quite excited with CROSSBOW. And just to remind everybody, that's directed at the smaller class of drones, the Group 1 and Group 2. And we have really a unique position because it uses our high-power single-mode lasers plus the surrounding photonics that we make. And systems. And we do this at scale at large volume manufacturing. So we're able to deliver that and provide kind of a unique solution. And we demonstrated that or showed that at the 2 big shows the DSEI, which is in London and also at the AUSA just a couple of weeks ago in Washington, D.C. And Jim, what I would say is that we had quite a lot of interest, quite a lot of leads for that and that was both in the military space, but also in the civilian airspace, that's been a recent -- just in the last 6 weeks or so, we saw drone incursions shutdown major airports in Europe. Oslo, Copenhagen, Munich, all had long shutdowns. So there's interest also in that civilian space. So quite a lot of leads that we're working through. We have, obviously, the link with Lockheed, but that's not -- it's not only Lockheed, we have conversations going on with quite a few other potential customers in both the defense and civilian aerospace areas and globally.

Now if we think about the opportunity, looking out to next year, it sounds like you've got a few -- more than a few irons in the fire in that -- I guess how do we think about it in terms of material revenue where I'm going with this?

Yes, sure. I understand, Jim. So what I would tell you is that we're qualifying leads. This does take some time to go through, so we do expect to get some revenue in 2026, but it takes some months certainly to qualify and turn leads into orders.

Got it. Just with respect to the new urology system, which I guess you're skipping this quarter, again, similar question, looking out to next year, is this -- how significant product launches this review in terms of, I think, additional momentum in the medical market here?

Yes. Thanks, Jim. I'll tell you, you're a little bit garbled in your voice, but I think I understood the question, and that was around the launch of our new urology product here in Q4. So just to reiterate for a moment, we have received FDA clearance, and we are launching this. This is a new product in urology. It's a thulium-based system. Next generation that has a couple of really key features. One is called StoneSense and the other is really a unique way that we're able to modulate the pulse output and both of those are for basically precision and safety. The StoneSense actually can tell the difference between hitting a stone and tissue and therefore, have additional safety in the process. So we're launching that product. That's the first of a road map of new products in urology, and I've been talking about this for several quarters now. And just to point out, I had said several quarters ago that we were targeting a Q4 launch. So that's on track. And the entire road map with this being the first product is -- will give us substantial revenue growth. And I also want to point out too that earlier in the year, I had announced that we had a second major customer that's a leader also in the urology space. Remember, we've talked about Olympus before as one. We can't name the other, but it's another large player in the marketplace. And just to remind you also that as we bring out new product in the system side and gain share, that also brings with it recurring revenue because we also make the disposable fibers that go with each of the treatments. So what I'd say is we're starting to ship the new product in Q4. We're excited about the product. We think it will gain us more share in that market. But I also want to say that it's the first of a number of new advancements that we'll be bringing out over the next couple of years. And we're expecting in urology, which is a $2 billion TAM, we're expecting to significantly grow that and it's -- so it will be a key part of our growth going forward.

In terms of 2026, if you were to rank this on some of the other opportunities that you're focused on, where would you place this, say, among the top 3 or 4?

Yes. So Jim, it is one of the top ones for us. So when we think about the urology road map, we look at that as growing our urology revenue kind of 2 to 3x in the next 2 to 3 years. So I can give you some sense of how to consider that. It is one of the larger ones we're looking at. If we talk about the investments in 3 key areas based upon our differentiation. We've talked about the urology, the micromachining space and then, of course, the area of the advanced area, which includes the CROSSBOW, that together, what I've said is that, that's addressing about a $5 billion TAM and that over the next several years, we're expecting to grow hundreds of millions of dollars in those spaces.

Our next question is from Scott Graham with Seaport Research.

Congrats on the quarter as well. Could you just remind us, when you talk about tariffs, the minus 140 basis points, that's a net number, right, versus your countermeasures?

That's the -- yes, that's the impact on the quarter relative to a normalized run rate say in Q1 or second half of last year. So it's net of some countermeasures at the moment that we've implemented. But for example, if you're trying to change pricing, Scott, you got to go through adjusting pricing, you got to adjust quotes, you've got to ship the existing backlog, you got to wait for orders from customers. So you don't see the benefit from something like change in pricing for quite a significant period of time. And then I mentioned that we're looking at different types of strategies to draw back some duties when you're reexporting product or bringing product back into the U.S. that has U.S. content. But again, those take a lot of time to put in place because they're quite complex to do.

And just to remind you, Scott, too, as we've talked about for the tariffs, we have actually done quite a lot in terms of mitigation. If you recall that we have a flexible manufacturing footprint, and we actually moved product manufacturing for a number of product lines from the U.S. to Europe, for example, we also flexed our supply chain, and we adjusted where some of the supply was coming from. So we have done quite a bit to mitigate and get us to where we are as well.

Understood. Just my follow-up question is, the fourth quarter operating expenses number looks like about the same as the third quarter. And last year, I believe that number was lower, although your earnings were maybe under more pressure. Can you explain why maybe fourth quarter operating expenses aren't maybe a little bit lower than what your guidance is? I guess that one surprised me a little bit.

Absolutely, Scott. So as I've been talking about for the last few quarters, we're making some key investments and that's what you're seeing in the OpEx. The first is really around these key programs that I've been talking about in medical, in the urology and the micromachining, in the advanced space, the CROSSBOW is a great example. So we're investing in those key areas. That's a significant piece of it. And then also, we've made some investments really in the organization. I talked about last quarter some very top talent that we've recruited into the organization to help us lead the company into continued growth. So that's what you're seeing. And we expect that to stay at about that level going forward.

Our next question comes from Keith Housum with Northcoast Research.

Good quarter. Just remind me historically, has there been an opportunity for budget flushes in the fourth quarter and any potential benefit from the one big beautiful bill that we saw passed earlier this year?

In seasonality in the fourth quarter, sometimes Q4 can be a bit weaker than the third quarter. It depends upon the geographies is the issues, Keith. I mean you can have slightly lower revenue, for example, in China, where China can be stronger in Q2, Q3, but then you can get some pull-through in other geographies that may or may not offset that. So it's not a particularly meaningful seasonality, I'd say, and it can be a little bit variable from period to period. And then the one big beautiful bill, no, I mean, the way -- one big beautiful bill is very complicated in what it does? There are different ways you have to strategize about that. The way that we've looked at it in terms of preserving some of our permanent deductions that if you accelerate, for example, depreciation, you lose those. We don't see a meaningful change in the effective tax rate going forward related to OB3, you can see some benefit on cash taxes but not really to the effective tax rate overall.

Okay. I appreciate it. Helpful. And then, Mark, you briefly mentioned a new facility in Huntsville, Alabama, regarding your CROSSBOW opportunity there. Can you just expand a little bit more about what you're going to be going down there? Is it going to be manufacturing? Is it just a sales location?

Yes, absolutely. So yes, so our Huntsville location, so it's a small lease facility, and it's really in the heart of, let's say, of that type of technology, and it brings us closer to some key people that we need in that business. But it's also -- it also has near it cleared airspace for doing a drone type testing. So it all pulls together, and that's why we have that. And we're able to do a customer test there, validation there, and we'll do our -- some of the manufacturing there as well.

[Operator Instructions] Our next question comes from Mark Miller with The Benchmark Company.

I'm just wondering if you can give us some thoughts about margins for defense-related opportunities. Are they similar to corporate margins? Or would they be above or below?

Yes. Thanks very much for the question. So this is -- the area, for example, CROSSBOW is, again, in one of the highly differentiated areas. So that's where we're investing in these areas in medical, micromachining and this CROSSBOW area, this defense area. So very high differentiation and therefore, margins above what you would see in corporate.

Okay. With chip sales booming and shortages and pricing going through the roof, what's your thoughts about business from semiconductors next year?

Yes. So I can tell you, we're actually excited about that area. That's an area that we've been concentrating in. So that also falls within that what we call the advanced segment, which has the CROSSBOW in it as well. So the area of semiconductor CapEx, this WFE piece, again, it's where we have significant differentiation. We're working with key suppliers that are in that market, largely in the metrology, inspection and lithography space. And we've gotten some very -- some design wins in that area recently from that work with very differentiated products. So I really like those, that semiconductor area because when you win there, it's really an annuity that lasts for many years. And so as those start to roll out, we've seen some of that happening, that's why you saw our advanced up a bit this quarter was because of some of the semiconductor pull-through.

We have reached the end of the question-and-answer session. I'd now like to turn the call back over to Eugene Fedotoff for closing comments.

Thank you for joining us this morning and your continued interest in IPG. We will be participating in several investor events this quarter, and I'm looking forward to speaking with you again soon. Have a great day, everyone.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.