IPG Photonics Aktie

Good morning, and welcome to IPG Photonics' First Quarter 2026 Conference Call. Today's call is being recorded and webcast. At this time, I'd like to turn the call over to 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 of our first quarter results as well as the overall 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 period ended December 31, 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, May 5, 2026 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 is the most directly comparable GAAP measures as well as additional details on reported results, please refer to the earnings press release, earnings call presentation and the financial data were 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. First quarter revenue exceeded our expectations, increasing 17% year-over-year. We continue to see improved demand for our laser solutions, particularly in battery manufacturing and medical applications, which drove our strong performance in the quarter. We maintained a disciplined focus on our growth initiatives across all of our markets, delivering solid first quarter results and building momentum for future growth.

Before looking more closely at our first quarter sales performance, I would like to highlight our updated revenue reporting framework, which better aligns with our strategic growth initiatives, making it easier to understand and track our progress. It also provides a clear separation between our industrial and nonindustrial revenue streams, giving better visibility into our focus areas and splitting the business into 2 distinct buckets, with unique performance and growth profiles.

This reporting combines applications into 2 categories: Industrial Solutions and Advanced Solutions. Today, most of our business is in industrial solutions where we are building on our strong foundation, expanding our addressable market by displacing incumbent technologies and enhancing our value proposition by offering differentiated system and subsystem solutions. This includes applications such as cutting, welding, cleaning and additive manufacturing and other industrial offerings.

In the first quarter, Industrial Solutions revenue accounted for 86% of total sales increasing 21% year-over-year as our design wins took hold and general industrial demand improved, welding, cutting, marking and cleaning applications drove higher revenue.

Welding and cutting, our 2 largest applications posted double-digit growth benefiting from solid demand and new orders from battery manufacturing. Sequentially, Industrial Solutions revenue was relatively flat and outperform typical seasonality driven by business wins in cutting and additive manufacturing.

In Advanced Solutions, which is another important driver of our future growth. We are applying our laser technologies and applications expertise, solving challenging problems for customers. Advanced Solutions serves markets such as medical, defense, micromachining, semiconductor manufacturing and others that present strong growth opportunities and collectively represent a $5 billion TAM. We've already established a solid presence in these markets and are excited about the opportunities that lie ahead.

Advanced Solutions represented 14% of our revenue in the first quarter and declined modestly year-over-year. Revenue growth in medical and semiconductor applications was offset by lower micromachining sales due to cyclical demand in solar cell manufacturing. Sequentially, revenue declined due to lower medical sales following an exceptionally strong fourth quarter of 2025.

We were particularly encouraged by increased sales in semiconductor applications as we gain traction with large equipment manufacturers.

Total bookings were strong in the quarter with book-to-bill firmly above 1 for the second consecutive quarter. This gives us confidence in our outlook it points to robust demand for our solutions despite elevated levels of macroeconomic uncertainty.

We see the strong demand to remain focused on executing our key growth initiatives across Industrial Solutions and advanced solutions, building upon our strong foundation and industrial innovation, expanding our leadership in laser technology into new high-growth applications such as medical, micromachining and defense.

While our initiatives target a wide range of opportunities, our path to success is consistent, leveraging differentiated laser technology and deep applications expertise to deliver clear performance advantages that incumbent approaches cannot match. Together, these initiatives represent compelling opportunities to meaningfully expand our addressable market and support sustained long-term growth.

In Industrial Solutions, welding revenue is growing, driven by our advanced capabilities for battery manufacturing across both electric vehicles and stationary storage applications. Global stationary storage deployment is growing rapidly to support data center energy requirements and is gaining increasing share of battery manufacturing.

These batteries use larger cells with thicker bus bars, requiring higher power lasers, process monitoring. This aligns directly with our strengths. Our unique combination of adjustable mode beam lasers, advanced beam delivery and real-time process monitoring ensures well quality and sets us apart from the competition.

Beyond lasers and subsystems, we continue to make meaningful progress in our systems business, which posted another strong quarter. We're moving up the value chain by integrating our fiber lasers into differentiated complete systems which, together with our applications expertise enables us to tackle complex problems that incumbent technologies cannot address. This approach allows us to deepen our partnerships with customers across a wide range of markets from welding to cleaning.

Turning to Advanced Solutions. We continue to make progress with our growth strategy by targeting opportunities across defense, medical and micromachining applications. In February, we announced that Lockheed Martin placed a $10 million follow-on order for Crossbow our scalable, cost-effective, high-energy laser defense system for countering Group 1 and Group 2 drone threats.

Shipments for that order are expected to begin in the second quarter. We also showcased Crossbow at the 2026 AUSA Global Force Symposium in Huntsville, Alabama, where we engage with defense industry leaders on how our solutions can address escalating drone threats at a significantly improved cost exchange ratio. Crossbow continues to generate interest from potential customers we're gaining traction on converting that interest into orders.

In Medical, revenue grew significantly year-over-year driven by sales to a new customer as our solutions continue to deliver clinically meaningful outcomes. We are advancing our innovation road map and expect several new product approvals and introductions in 2026 and in 2027. We have a very strong backlog for 2026, giving us excellent visibility into full year revenue that points to another good year in medical.

In semiconductor, revenue grew this quarter as we ramped up new lithography, metrology and inspection business with large semiconductor equipment manufacturers. This market is being driven by the accelerating adoption of AI, which is fueling demand for GPUs and high-bandwidth memory chips. We continue to advance our product development and are working closely with customers on design and opportunities, supported by the clear performance advantages of our solutions.

Our strategic progress is enabled by the organizational changes and investments we have made. We have streamlined operations, strengthened decision-making and accelerated product development, translating into better performance and greater consistency across the business. While our entrepreneurial and innovative spirit remains at the heart of IPG, we are building the operating discipline required to scale these capabilities effectively.

In summary, our team delivered another over-year growth. Customer demand for our differentiated laser solutions continue to strengthen across our markets. We are making meaningful progress on our strategic objectives, outperforming the market and creating lasting value for our customers and our shareholders.

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 5. Industrial Solutions revenue increased 21% year-over-year in Q1 and driven by growth in welding, cutting, cleaning and marking. This was partially offset by lower revenue in additive manufacturing.

On a sequential basis, revenue was basically flat, down 1% and as lower revenue in welding and additive manufacturing was largely offset by growth in cutting and marking. Cleaning revenue is flat. Advanced Solutions revenue decreased 5% compared with last year as growth in medical and semiconductor was offset by lower revenue in defense and micromachining.

Revenue is down 13% quarter-over-quarter on lower medical sales from a very strong fourth quarter. Micromachining, semiconductor and scientific revenue all improved sequentially. Sales of our emerging growth products continued to increase and accounted for 53% of total revenue in the first quarter, consistent with the prior quarter. Following our annual review, we made a slight adjustment to the product list. Many of these products are benefiting from growth in battery manufacturing and the medical market.

Moving to revenue performance by region on Slide 6. North American revenue increased 27% compared with last year, driven by growth in welding, cutting, additive manufacturing and medical applications. Sequentially, revenue was down 4% due to declines in Cleaning and Medical, partially offset by strength in welding, cutting, additive manufacturing and micro machining.

European sales were up 4% year-over-year, driven by cutting and down 13% sequentially versus a strong fourth quarter due to lower sales in welding, cleaning and additive manufacturing. Revenue in Asia improved 14% year-over-year driven by strong demand in welding, cutting, marking and cleaning applications, which primarily benefited from capacity additions for battery manufacturing. Revenue is flat quarter-over-quarter.

Moving to the financial performance review on Slide 7. Total revenue was $265 million, up 17% year-over-year, marking our second consecutive quarter of double-digit sales growth. Foreign currency benefited revenue by approximately 4% this quarter compared to the same period in the prior year.

GAAP gross margin was 37.5%, and adjusted gross margin was 37.8%. Adjusted gross margin came in close to the midpoint of our guidance range and improved sequentially. Gross margins benefited year-over-year from lower inventory provisions due to improved inventory management. While product margins have been stable over the last few quarters, we did experience headwinds from tariffs compared to the first quarter of 2025.

We continue to target improvement in product margins based on pricing and cost reduction initiatives that are starting to take hold. Underabsorbed expenses continue to run at a higher level than we are targeting in the medium term. And we have specific initiatives underway to improve our operational efficiency. We expect the impact from tariffs to persist in 2026 and continue to work on ways to offset their impact, including cost reduction and pricing initiatives.

Total GAAP operating expenses were $107 million. This includes a $13.5 million payment and license related to an agreement with TRUMPF Laser System technique, settling all parts of litigation between us worldwide. The license will have an immaterial impact on our future results.

Excluding the settlement payment, litigation expenses, amortization of intangibles and other acquisition-related expenses, adjusted operating expenses were approximately $91 million, as we continue to invest in our strategic initiatives to drive future growth. GAAP operating loss in the quarter was $8 million, and GAAP net income was $2 million or $0.04 per diluted share.

Excluding onetime items, FX and amortization, adjusted operating income was $9 million, and adjusted net income was $13 million, with adjusted earnings per diluted share of $0.29. Adjusted EBITDA was $35 million. Both adjusted EPS and adjusted EBITDA came in above the midpoints of our guidance ranges.

Moving to a summary of our balance sheet and cash flow on Slide 8. We ended the quarter with $813 million in cash, cash equivalents and short-term investments. We had $71 million in long-term investments and no debt. Cash used in operations was $5 million. The first quarter is typically weaker for cash generation, as it is impacted by annual bonus payments.

During the first quarter, we spent $16 million on capital expenditures, below the expected run rate given our CapEx budget of $90 million to $100 million this year due to the timing of investments in our major fiber manufacturing facility in Germany. Excluding the German investment, underlying CapEx is running at about 5% of revenue and we expect to maintain this level going forward.

Moving to our outlook on Slide 9. Orders remained strong with book-to-bill staying firmly about. For the second quarter of 2026, we expect revenue of $260 million to $290 million, and we expect adjusted gross margin between 37% and and 40%, including an ongoing impact from tariffs of about 150 basis points.

We estimate adjusted operating expenses in the range of $92 million to $95 million in the second quarter and anticipate that these expenses will increase moderately during the year to support opportunities to further accelerate our key growth initiatives.

For the second quarter, we expect to deliver adjusted earnings per diluted share in the range of $0.25 to $0.55 and with approximately 43 million diluted common shares outstanding. Our adjusted EBITDA is expected to be between $32 million and $48 million. In summary, we are pleased with our first quarter results with both bookings and revenue moving in the right direction.

The underlying strength of the business is good to see, but we'd like to remind you that we do face tougher comparisons in the second half of 2026 relative to a strong second half in 2025. Although first quarter gross margin was a little light given the level of revenue, we continue to strive for margin increases through cost reductions, pricing initiatives and reducing underabsorbed costs.

While we are monitoring freight costs that may be influenced by geopolitical developments in the Middle East, our direct exposure to petrochemicals and energy markets is limited and our vertical integration provides resilience against potential adverse impacts arising from conflicts in the region.

I will now turn the call back over to Mark.

Thanks, Jim. As Tim said, we are pleased with the strong start to the year, reflecting robust demand for our solutions despite elevated macroeconomic uncertainty. While we are closely monitoring current geopolitical events and have yet to see an impact on demand for our solutions, we remain cautiously optimistic in our outlook.

We focus on what we can control executing on our growth strategy, supported by operational excellence and an innovation engine that continues to unlock significant areas of incremental opportunity. This foundation gives us confidence in our ability to achieve above market growth and deliver lasting value for our customers and shareholders.

With that, we will be happy to take your questions.

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

Tim, I guess I'll start with one of your last comments on the margin structure. And maybe if we just think about sort of medium to longer term, you've sort of talked about mid-40s as a structural area that the business can run from a longer-term perspective. And if you think about the tariff regime, higher input costs, sort of the puts and takes on product improvements, et cetera.

I'm just wondering if you still think that mid-40s target is valid on a multiyear basis? Or has the structural feeling moved around at all based on what you're seeing at this point?

In general, that's a target we're still striving to get to. We are starting to see some of the cost reduction initiatives and some of the pricing that we talked about last year paid through.

The other critical aspect of that, Ruben, is really balancing the fixed cost manufacturing structure with the total level of capitalized absorbed costs so that we can get absorption down as a percentage of sales, and we've certainly got room to drive overall gross margins up.

I think relative to the mid-40s when we gave that guidance, the only real headwind at the moment is the tariffs impacting that by 150 basis points or so. But that tariff regime is obviously pretty fluid right now. And I think, overall, for Q2, the guidance at the top end of the range reflect some of that momentum on gross margin that we want to continue to drive forward with.

Right. Okay. That's helpful. And then I guess a higher-level question for Mark. I get the new framework here with Industrial Solutions and Advanced Solutions, I think that makes strategic sense the way you've been sort of managing the business and looking at the business. So glad to see that. Maybe, Mark, if you could maybe talk through in a little more detail some of the drivers across some of the businesses that you discussed in your prepared remarks.

As you think about Q2 and maybe the rest of the year, that would be helpful, given that you're bringing this out differently. So I mean, -- if we think about some of the moving parts in medical, for instance, which you've been pretty excited about, it sounds like there is a little bit of a sequential decline with unevenness and customer ordering. Is that a scheduling dynamic? Is that related to product timing? And maybe if you could talk about some of the other bigger parts of the business, cutting and welding and how you're seeing sort of backlog against those big pieces of the business playing out now? And sort of do you have any extended visibility, that would be helpful for us.

Yes, absolutely. Good to talk to you, Ruben. So first of all, we continue and we expect to see continued growth in both of the areas, both Industrial Solutions and Advanced Solutions. And of course, we saw overall the business strongly quarter -- year-over-year, we saw a 17% growth.

We saw that across a wide range of areas in both the -- in both the industrial as well as the advanced. If we look at the particular areas in industrial, we saw growth and continue to see growth in in Welding, specifically in the battery area. We've seen good growth actually in cutting as we also start to start to impact some of the plasma cutting area with our new RAC integrated lasers at very high powers, with new cutting heads.

We're also making good progress in additive manufacturing and cleaning all of that Industrial Solutions area. And then as we look at the areas of advanced -- we've seen year-over-year strong medical. We've also seen growth in semiconductor, an area that we're starting to make impact on, as I mentioned in the call, in some of the areas of inspection, metrology, lithography areas.

And then you specifically asked about the quarter-on-quarter about on medical. We just had a very strong quarter in medical -- we have a strong backlog in Medical in the year 2026. So we continue to expect to see growth in that specific area as well.

Got it. Mark, if I could just sneak in one follow-up question. Congrats on the Lockheed Martin follow-up order. Can you just help me think about the revenue recognition profile on that cross program? Is this sort of spread over multiple quarters, I would assume it would be. And it sounds like you're going to be shipping for revenue in Q2. So is that starting this quarter for sort of the initial orders that you had -- or does that just reference the follow-on order and you've been shipping for revenue. Maybe you could just help us frame the scale production ramp for that program that I all had.

Yes, sure. Sure. No, we're making great progress in Crossbow -- as we've talked about, obviously, we launched that at the end of last year. We brought that to a number of key shows -- we have a very strong pipeline. Lockheed was a first mover in that area. And yes, we did ship initial systems to them. So they have done a considerable amount of work with that.

And then we got the $10 million follow-on order. And yes, we are beginning to ship that here in Q2, and that will be delivered over multiple quarters. And I can tell you that we have great interest from a number of key customers that we're working through the funnel, very excited about it. The they're really understanding the benefit of the IPG system. The Crossbows, as we mentioned in the past, this is based upon our high-power single-mode lasers, which IPG is the strongest at.

We've demonstrated and shown lasers up to 8 kilowatts single mode, which is tremendous, and we have we're making very, very good progress with customers as we launch this forward.

[Operator Instructions]. Our next question comes from James Ricchiuti with Needham & Company.

Something to get maybe some additional color on the booking strength that you saw, whether there's much variability by geography perhaps in the 2 business categories that you're now presenting to us.

Yes. Jim, I'm happy to talk about it. I can talk about it for you regionally. We're not breaking it out by the 2 areas for bookings. But in the regional standpoint, we were very strong in North America and Asia, especially in China and Japan. Europe was a bit more stable.

Okay. And Mark, just on the strength in China. I wanted to -- it looks like you had a pretty good quarter in China, yet there seems to be a couple of moving pieces in China. I think Tim alluded to Ablative being a little weaker, but is the strength that you saw year-over-year or you're seeing in China, is that coming from the battery side of the business?

So Jim, we're actually seeing strength across the board. Sometimes there's a little bit of movement quarter-to-quarter, but we've been quite strong in welding, especially in the battery area because we have very strong differentiation there, as you know, with our adjustable beam lasers, combined with the combined with the scanning and beam delivery as well as the process monitoring that we have. And that's very critical in that battery area, we're seeing significant growth and that's not just EV, but actually the bigger grower right now or a similar grower is actually the stationary storage for for the data center work.

And those take the thicker bus bars because they are higher capacity batteries and that really zeros in on our solution. So that area of battery plus the additive and there are some areas of micromachining also where we're strongly differentiated in China, and we've seen some of that growth.

And actually, when I talk about the battery, I can tell you also that, that's happening, we're seeing some of that globally. In fact, in the U.S., we're actually seeing some of the battery factories convert from EV to stationary storage, which is good for us as well.

Got it. And maybe a related strong growth in systems the last couple of quarters. And I know there are a couple of moving pieces in that as well. Anything in particular stand out?

We've had some -- yes, thanks for the question. We've seen strong growth in cleaning is one of the key areas, the whole area of systems is a strength for us now because, again, it combines the laser capability plus the applications capability that we have and the ability to deliver that in subsystems and systems and really deliver a solution and cleaning is 1 of those key areas, and we're bringing out some new products in that area as well. So excited about the growth in systems.

Got it. And just one final quick one for Tim. Tim, any way to think about OpEx as we look out to the back half of the year? Any major changes that we would assume.

Yes. We sort of got maybe a moderate pickup in OpEx in the second half of the year with continued investments in the organizations and really driving these growth initiatives forward. But pretty moderate from where we are today. We know we need to we know cognizance of having invested significantly in OpEx to get the company turned around and we need to manage that cost base as we go forward and ensure getting the growth coupled with those investments.

[Operator Instructions]. There are no further questions at this time. I'd like to turn the call back over to Eugene Fedotoff for closing comments.

Okay. Thank you for joining us this morning and for 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.

[Audio Gap] Gesuale, senior analyst at Raymond James, covering the industrial tech space. I'm delighted to have IPG Photonics here to take us through the story. It's been a fantastic run for the company year-to-date, up over 70%, really encouraging earnings as well. We have the company's CEO, Mark Gitin, here to take us through the story as well as Tim Mammen. We're going to do a fireside chat format. And if there's any questions from the audience, please let me know.

Let a couple of you filter in here.

Mark, let's start by level setting people to the IPG Photonics story. Take us through your core competency, applications for fiber lasers, regional exposure of the business and topics to ground the audience in your overall business.

Yes. Sure, Brian. So IPG is a global leader in fiber lasers and incredibly innovative company. I've known the company actually since 1995, when I met the founder of Valentin Gapontsev. He invited me to the site then in Germany in 1996, and there were 14 employees, incredible innovative capabilities. And I tracked the company over the years. I spent all of these years in the lasers and optics industry, kept in touch with him, kept in touch with the company.

And actually in the mid-teens, when I was at Coherent, I had the opportunity to compete with IPG in metal cutting. We had a group that -- and we built high-power fiber lasers and tried to compete with IPG, not very successfully, I can tell you. And then as I came to consider taking the IPG role as CEO, I certainly spent a lot of time and did my due diligence and looked at all of the technologies and capabilities that I could see from the outside, and I saw that there was a really good opportunity to grow. But it was really when I got inside the company and was able to look under the covers that I really understood the depth and breadth of the capability of the company, both in the fiber lasers capability, but also broadly in photonics and optics and scanners and measurement capability and an incredibly deep capability in laser applications.

Really understanding the interaction between laser materials and really having the capability to provide solutions. So that was very key. And the areas that IPG drives is really on the industrial side, it's kind of 2 areas. Industrial, it's about metal cutting, welding, additive manufacturing is a key application there, cleaning. And then we've been expanding the business into nonindustrial markets in medical, micromachining and the defense areas. And I would just say, as I mentioned, incredibly innovative company and really with the opportunity to provide solutions. And that's very key as you look to grow the business, and we look to grow into new areas of TAM, total available market that we can access because we can provide solutions going all the way from the laser to the broad components and ultimately to subsystems and systems are key areas that we can provide.

You asked about the -- from the standpoint of the global aspects, we've become in the last couple of years, much more balanced across all of the global regions.

Great. You've been CEO for a little under 2 years. It seems longer because you've gotten so much accomplished. What are maybe the top 2 or 3 changes you've put in place? And what would those things be that be most visible for investors to measure externally as we look into the business?

Yes, absolutely. So for one thing, I've really worked on strengthening the organization and making some shift in the organization. This was really a founder-led organization when I came in. Valentin really led from the top and everything went through he and Eugene Scherbakov that followed in his footsteps for a couple of years. Everything was running through the CEO.

So when I came to join the company, I had 19 direct reports and everything was coming through to me. And as I looked at how to scale the company, really looked at how do we have this in an operating form that can actually scale the company. So built out the leadership team, first of all, with some key people internally, Tim being one of them. And so there were several key individuals internally that I've moved to form a leadership team as I ran both businesses at Coherent and MKS that way, brought this team then to help me hire the rest of the leadership team. And we were able to hire a fantastic group of people, and we're operating very well together as a leadership team now to grow the company.

At the same time, we worked on a strategy to grow the company. And that's something, as I first looked under the covers, and I mentioned the broad capability of the company, not only in the core industrial areas. So that was one piece is really to understand the differentiation that we could provide and grow into the core industrial areas, again, and those are areas in cutting, in welding, including batteries, micromachining -- sorry, cutting and welding and then growing the business into new areas, including medical, micromachining and also the defense area. So these were areas that we could see that could take that core capability inside the company, these core technologies and be able to grow them into new areas of TAM. And so that allows us to expand to a TAM of an additional about $4 billion to $5 billion of TAM and really address those with these key areas, again, in this medical area, the micromachining and and the defense area.

So those are a couple of areas to really expand the company and also put some key processes in place as -- again, it was -- in some ways, when I started, it was really operating as a $1 billion start-up. And so there were some key processes that we were able to put in place that also optimize the decision-making processes, but also very structured processes like product development and NPI processes that we put in, key quality processes. We optimize the go-to-market as well. And all of those are helping us, and we're seeing the benefits of that both in the core markets as well as these new areas that we're starting to grow the business.

I want to talk about some of the new markets you've gone into. But first, I want to talk about the strength of the business. I thought this most recent print was the most optimistic you sounded about the demand environment for quite some time. Can you maybe rank the regional markets that you serve from strongest to weakest and let us -- you often have a really good kind of visible insight into the global macro demand environment.

Yes. Thanks. I mean, overall, 2025 was a good year for us. This was our first year of growth since 2021. And it's something that we saw happening through the year. And we saw the growth in both the core industrial markets, but also in some of the key areas that I talked about, the areas that we're expanding in. So from the industrial side, we started to see midyear, we started to see the PMIs pick up in -- actually in each of the regions in the U.S., in China, Japan and started to see some recovery in Europe.

We saw -- as we came through the year, our Q4 was very strong. And as we -- so that was very strong. And then going into 2026, coming with a strong book-to-bill, so strong revenue in Q4 and then a book-to-bill that was firmly above 1, leading us into 2026. And again, seeing the PMIs are a nice indicator for the industrial markets. We've seen those pointing up in the U.S. kind of in the 52 range and in China, seeing that area also mildly expansive above 50. Japan in the 52 kind of range and now starting to see some improvement also in Europe with the Eurozone and Germany now crossing 50. So those are positive signs.

And what I should say is I talked about the strength and innovation, and that really points to the differentiation that we have in the marketplace. First, I can mention that in the core markets, even areas like cutting, which are a less differentiated piece of the business, we have some key differentiation there. We -- in 2025, we launched a new platform of lasers that we Rack integrated platform that has higher power. It's in a smaller form factor at a lower cost based upon new high-performing diodes.

We also recognized in cutting that we have differentiation with our key OEMs because of the service infrastructure that we provide and the quality and the reliability of the products. So that's -- in cutting, we saw cutting stabilize and even point up in the -- towards the end of the year. And then the areas of welding, including battery where we've seen good growth. Again, key differentiation with laser technology, but also the scanning and beam delivery and sensing that we bring to that market, differentiation in additive manufacturing, where we have unique lasers that allow that -- those systems to operate and provide much faster throughput.

So being highly differentiated as we see the markets improving in industrial, we expect to be able to outgrow the markets. And then at the same time, I talked about these -- the broader technologies that we have, being able to apply those to the medical, to the micromachining and to the defense markets and having a continued trajectory of growth in those areas. So as we enter 2026, as I said, I feel very cautiously optimistic about those -- the industrial areas and in each of the regions, as I mentioned, and then feel good about the areas that we're investing in for continued growth.

That's great. I want to actually push for a definition of cautiously optimistic. So if we think about demand, both its strength and its durability and we rated each of them from 1 to 10, what number will we get from your cautiously optimistic?

Yes. So I'm not going to try to numerically categorize that, but good try. But I would just say, again, the PMIs are a good indicator as we look forward. And again, there've been uptick even a bit more in February than January. So those are things that give me that cautious optimism along with, again, the differentiation that we have. And we see that as we're winning business in a number of areas in both the industrial as well as the nonindustrial areas.

That's a great segue to some of your new product innovation. You've entered the counter drone space. It's an area that the markets are very excited about, and we're expecting to see a lot of growth there. Can you talk maybe about how you size that market over time from an addressable market standpoint, whether that's dollars or units, what your road map might look like and how you're going to participate? And what is happening kind of with distribution and how you go to market with that product set?

Yes, sure. Maybe I'll just step back for a moment. The area of directed energy is something that IPG has played in for many years with our single-mode lasers and our amplifiers. They've gone into many programs around the world. What I recognized and we recognized when I first came in was into the company was that there was a discontinuity. And that discontinuity was the smaller class drones were becoming a bigger and bigger issue, both in -- we saw it in warfare in the Ukraine war, but also the smaller class drones being an issue at borders as well as in stadiums, airports, other types of civilian infrastructure. It's a big problem.

These are the started kind of drones that you can buy for a couple -- a few hundred dollars to a couple of thousand dollars at Best Buy. And unfortunately, they can be weaponized. So we recognize that. And we also recognize that we were in a pretty unique situation because IPG has large scale in making single-mode lasers, which is the critical piece for these counter drone type systems or directed energy systems. And we make these in high volume for welding applications. We also make the surrounding components, the optics, the scanners, the beam delivery pieces, and we make systems in high volume and that gave us the opportunity to do something unique, and that was to build what we call a commercial system.

So this is a system, a complete system that can track and target and take down drones and able to do that at commercial quality, commercial volume and really differentiated cost position. And so we saw that as a unique spot and the technology was all within the company. So hired some very capable people in the counter drone area, brought them into the company when I first came. And IPG, again, incredibly innovative, fast moving. In a year, we were able to develop a system that can do exactly that, can take down drones. And we launched that in -- in the fall of 2025, just a few months ago. We launched it at a couple of major shows in Europe and one in Asia, and we've gotten very good response from that, both from the defense and military, but also from that civilian infrastructure side like protecting oilfields or airports or borders.

And early on, we had a very good response. actually, Lockheed Martin, we announced that a few months ago, was an early customer for the product and bought a number of units and did extensive testing. And then in fact, we announced last week that they had a significant follow-on order just last week as well. So that is going -- that's moving along quite well for us. And it's really -- we're at that stage now of turning the strong interest into orders in an area that will continue to drive. Hopefully, I answered your question.

Yes, you did. Very well. Another market that you've really made some progress in is the medical market, both product cycle vectors as well as distribution expansion. Can you maybe explain the addressable market there, your products, how you go to market there with some of your distribution and how that affects the business going forward?

Yes, absolutely. So again, medical, another one of the trajectories that we're investing in for growth inside with that -- with the large new TAM that we're investing in. And specifically in medical, the area is in urology around the major area is lithotripsy, which is kidney stones. So we build actually based upon some core technology, again, thulium lasers, we build a complete surgical system and the delivery fibers, which are disposable and it's recurring revenue they're used with each procedure.

We announced early on that our first major customer there was Olympus, one of the leaders in urology. And again, we make the entire system and they bring that to market. We do the system as well as the fibers. And then we announced earlier in 2025 that we got another major customer that is helping to grow that business. And this is one of the road maps that we're investing R&D and because we see it as a great opportunity for for growth. So we brought out -- we developed a new road map, and we brought out the first product of that just at the end of 2025 with something that we call StoneSense, which can sense the difference between kidney stone and soft tissue.

And then we have a road map of growth with new products coming out over '26 and '27, continuing to grow that trajectory in urology, which is about a $2 billion TAM and both in the system side as well as additional areas of recurring revenue. So it's an exciting area that we see good opportunity in because of the innovations that we brought.

Let's move on to the cleaning market where you use some organic capabilities, made an acquisition, put it together, expanded your footprint. Maybe tell us about the opportunities you're seeing in that market.

Yes. So maybe just to step back and say industrial cleaning is a very large market. It's a many billion-dollar market. In fact, just metal cleaning itself is about an $18 billion market, dominated by caustic chemicals and abrasives is the large pieces that are used in the conventional processes. And cleaning is one of these areas where it's a large TAM, and it's about creating solutions to turn that TAM into SAM. So just to give an example of what I mean when we talk about laser cleaning, when you go to weld 2 parts together, 2 metal parts, if they have oil and grease, then that will inhibit the performance of the weld. And so you -- a standard process would be to use caustic chemicals to clean that off and then weld the parts together.

We're able to, with laser cleaning, simply vaporize all of that off the surface before bonding them together, before welding them together, for example. So that's a significant market. And we had a foothold there, but a company called cleanLASER, smaller company with really the world renowned for laser cleaning, the capability, the process and the ability to turn that into systems. So we acquired them at the end of 2024, just about a year ago. It was a great opportunity. It's a very good fit for us for our -- for our lasers, for the process, and they fit in well.

It was also a very good opportunity to start up an M&A process with the team. M&A is something that I've been quite experienced with in my time at Coherent and at MKS. And so really use that as an opportunity to teach the team, structured M&A from the standpoint of due diligence. And then we did a very structured integration process with cleanLASER with all of the key attributes we were trying to drive for the deal upfront, having leaders for each of the key functions reporting into the executive team every couple of weeks and then really driving the road map matching between the lasers and optics and such and the cleanLASER systems.

And we've had a great result over the first year. The performance has been better than we had anticipated. And we're seeing some of these benefits of the synergy, for example, in the road maps where the cleanLASER systems that are on road map to come out shortly are much smaller in size and lower in cost and higher performance based upon lasers that we've made and optimized for the system and the joining of the 2 together are really showing some fantastic synergy from the product side.

And then we're also seeing a synergy on the go-to-market side. We've recently been able to get some major orders from larger companies that would not have purchased directly from cleanLASER because of the size and scale of the company. But now as part of IPG, it was a different story, and we were able to execute those. And so we're really moving in the right direction there, and it sets us up well for cleaning. It also sets us up well for next stages of M&A for the company.

I wanted to focus these next couple of questions on the model. I get a lot of questions from investors looking at your business today, it's about $1 billion in sales. Past PMI cycles, we've seen the business peak at about $1.4 billion, $1.5 billion. The most recent cycles had big China and big EV as part of those. If we're in an expansionary cycle and it's durable, where does that next $400 million or $500 million of revenue come for IPG Photonics.

It really comes from both of the areas that we've talked about. So if you think about it as I do in terms of the industrial markets and then the broad category of non-industrial. In industrial, I talked about the key differentiation that we have. And as the business -- as the PMI shift and if the industrial markets continue to grow, we expect to outgrow the markets in those industrial areas.

And then in the areas that we're targeting in medical, micromachining and defense, I've talked about that as several billion dollars of new TAM. And I've said before that we expect to grow in those areas by several hundred million dollars or over time.

Is there a balance between new versus existing market -- expansion of existing markets with a macro recovery and strength versus these new markets as you think about the TAM and their adoption cycles?

Yes. I'd say it's -- they're happening together. So again, we're well differentiated in the areas of the industrial. And you see areas that we're leaning into where we're providing solutions and able to provide systems and solutions and grow in welding, in additive manufacturing, in cleaning, for example. And then, again, these -- the areas that I've talked about in medical, micromachining and defense. We're starting to see those things happen. We're seeing the uptick in medical. We've grown the medical year-over-year, grew just over 20%. So we're starting to see the uptick from the investments we're making and the new customer coming on.

We've seen upticks in areas of micromachining through the year that I talked about. And then you're starting to see some things happening in the directed energy space and talked about the new order that we got last month. So again, in that area, we expect to grow hundreds of millions of dollars. So both of those areas are going to be important as we move forward.

Let's flip and look at the other side of the ledger on earnings power. That's another one that I get a lot of. If we look at some of those past revenue peaks in the 2017 time frame, gross margins were in the upper 50s in the 2020s peak, high 40s. What's the structural leverage of the business on gross margins? And is there any way when we think about volume to stair step at these volumes, this is the gross margin, but ultimately, where is the structural endpoint on gross margins?

I'm going to let Tim take that.

Yes. So I think let me talk about some of the levers that we can -- that we're working on, first of all, with the cost structure and gross margin, segue that into what our sort of target is on gross margin and drop-through. So we're working actively on reducing the cost of products at the moment. We've got new generations of high-power diodes that are being increasingly incorporated across the product platform. We've got new products coming out. All of the new product areas have gross margins that are at corporate average or better than.

The cost reduction initiatives like the higher power diode translates into being able to actually produce a smaller form factor laser, right, the number of optical splices that you have, connecting the glass together is reduced and there's a lot of laser content on that. So as you go up the power spectrum on the power capability on optical components, you can actually reduce the build cost on -- build and material cost on the end product. So that's something we've talked about, we're working on and we're increasingly rolling that out throughout the portfolio.

We're looking at where we've got differentiation and pricing capability, right, optimizing pricing in part to offset some of the tariff impact that we're subject to. And then compared to the last 24 months or so our overall level of inventory is in a better place, right? So we've had provisions that were running at 500, 600 basis points a quarter. We're close to getting that down to like 200 basis points a quarter. I'd like to see it at 150.

And then the final part of the jigsaw is really how you manage your fixed cost base and your utilization and absorption of that fixed cost base at different revenue levels. And clearly, as you build scale into the business, right, you start to absorb that fixed cost base better.

Second half of last year, we had a little bit of volatility, where we had some pretty good margins in Q3, but we built inventory and we actually decided to take inventory down a bit in Q4. So even on higher revenue levels, we had a little bit more under absorption than you'd expect. We said that was 150 to 200 basis points. So we would have been close to 40% gross margin. But the objective overall is to drive gross margins up above 40% again and hopefully get close to that mid-40s level.

The other thing we've been focused on a lot internally is that there's clearly a lot of investment going on in the business at the moment, right, on the OpEx side, not just the organization, but R&D, distribution, even on some of like the finance areas. And OpEx is running at quite an elevated level relative to the revenue. We're very cognizant of what we want to start driving is that OpEx share as a percentage of revenue down and then increasing the drop-through on each incremental dollar of revenue we're getting. We're initially going to target around 30% drop-through, but we want to increase that over the next, say, 18 months or so to about 40% drop-through of each incremental dollar.

We really acknowledge that the investments we're making. We want a return on them, we'll get a return on them. And then they're not going to keep ticking up constantly, and we want to drive OpEx down as a percentage of sales.

Fantastic. We're just about out of time, Mark. I'll give you kind of the last word here. No follow-up, drop the mic and we'll take it to the breakout room.

Okay. Great. I would just say, IPG is a fantastic company. We've made some significant changes over the last couple of years. Again, based upon the core technology that's here, we've got a great strategy now to grow the business in both the core markets and the industrial market, but also being able to grow into the nonindustrial markets. We are opening up new TAM. We've made some changes in the organization. We're a stronger company that's executing very well. We have a very strong balance sheet with $900 million of cash and no debt. we're in a very good position to grow the business, both organically and inorganically.

Great. Tim, Mark, thank you so much for joining us, and thank you, everybody.

Good morning, and welcome to IPG Photonics Fourth 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 of our fourth quarter and full year results as well as the overall 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 on 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 with the period ended December 31, 2024 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, February 12, 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 the reconciliation 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, and good morning, everybody. Fourth quarter revenue came in above our expectations, increasing 17% year-over-year and 9% sequentially. Revenue growth was driven by further stabilization in industrial demand, new opportunities and a disciplined focus on our growth initiatives. This focus led to strong results in medical and advanced applications this quarter.

Materials processing revenue was up 6% sequentially and 17% year-over-year, driven by stable general industrial demand and increased demand in battery and additive manufacturing applications. Sequentially, welding revenue was stable while demand for cutting applications increased. Cleaning was another strong performer, and we're starting to see increased revenue synergies with the cleanLASER acquisition.

Medical sales had a solid finish to 2025, increasing sequentially and year-over-year as new products gain traction, and we also saw strong sequential and year-over-year growth in semiconductor applications, which drove high revenue in advanced applications.

Turning to full year results. Revenue grew 3%, our first full year revenue growth since 2021. Materials processing sales were flat with lower cutting sales being fully offset by growth in other materials processing applications, including cleaning and additive manufacturer. Our welding revenue was flat as lower demand in the general industrial and traditional automotive markets was offset by higher demand in battery manufacturing.

In particular, we saw a strong increase in sales of our welding products in Asia as battery investments rebounded in China. Demand is shifting from electric vehicles to stationary storage, which is a positive shift for IPG as stationary storage batteries often require more sophisticated welding processes. In addition, we're beginning to see increased demand for our solutions and process expertise in battery manufacturing for consumer and medical devices.

In 2025, we made meaningful progress expanding our business beyond materials processing applications. The portion of our business outside of materials processing accounted for approximately 14% of our total revenue and contributed strongly to our growth this year with micromachining, medical and advanced applications all increasing by double digits.

Turning to medical. Sales grew by 21% to a new record level in 2025 as we benefited from a new customer win that became a major contributor to our revenue growth. In the past year, we also received FDA clearance for our next-generation urology system with our proprietary StoneSense and advanced modulation technologies. These solutions enable the surgeon to differentiate between kidney stones and soft tissue, improving precision and control during procedures. We started shipping this product in the fourth quarter.

Our solutions are delivering clinically meaningful outcomes and we continue to make advances with our innovation road map with additional new product introductions planned in 2026. We also see the opportunity to continue growing medical sales through share gain and new product innovation, coupled with an ability to increase recurring revenue through the sales of consumable delivery fibers.

In 2025, we took an important step forward in directed energy by rolling out our first complete stand-alone system for defense applications. We developed, tested and introduced CROSSBOW, a scalable and cost-effective laser defense system that can neutralize the threat of smaller group 1 and group 2 drones. In support of this initiative, we have established IPG Defense to drive product development and customer engagement, and we have recently opened a new office and manufacturing facility in Huntsville, Alabama. .

Overall, 2025 was a positive year for IPG, affirming that our strategic approach is working. We are seeing sales growth increasingly driven by high-value applications where differentiation and technical capability are critical to addressing complex customer challenges.

Looking ahead to 2026, strong bookings in Q4 resulted to book-to-bill firmly above 1 on strong revenue, signaling improving market conditions and strengthening customer demand. While we are encouraged by these trends, we remain cautiously optimistic as we recognize that macroeconomic uncertainty persists. We continue to make progress with our growth strategy with notable improvements across medical, micromachining and advanced applications, which have been key investment priorities for the company.

We expect this momentum to continue into 2026. The progress that we are reporting today reflects disciplined execution, a sharper focus and a stronger alignment with our growth priorities. Over the past 2 years, we have strategically positioned the company to capitalize on the growth opportunities we see before us. The organization is evolving towards a team-led operating model that aims to preserve our entrepreneurial spirit while instilling the discipline and operating rigor required to scale effectively.

We've made tremendous progress streamlining operations, strengthening decision-making and accelerating product development, and these efforts have translated into better performance and a greater consistency across the business. While there's still more work to be done, I'm encouraged by our progress and confident in our ability to make further advances in pursuit of our growth objectives.

We view our growth opportunities across two primary categories. First, we are strengthening our position in core industrial applications. Second, we are penetrating new nonindustrial applications and markets where laser-based solutions offer clear cost benefits and superior outcomes relative to incumbent approaches.

Together, these areas allow us to expand existing laser use cases, create new laser applications and extend our reach into new high-growth applications such as medical, micromachining and directed energy. These are exciting opportunities with great potential to significantly expand our addressable market and support long-term growth.

Within industrial applications, we are growing through new business and accelerating the adoption of lasers in large markets, displacing incumbent technology. By combining our laser technology with deep applications expertise, we are helping customers address complex challenges where precision and efficiency matter most. This requires the innovation to offer superior and differentiated products as well as the commercial acumen to provide outstanding customer service.

We are also moving up the value chain by integrating our fiber lasers into differentiated systems and subsystems. This world-class laser applications capability enables us to address our customers' most challenging problems and deepen our long-term partnerships by expanding the value we deliver beyond the laser itself.

A good example of this approach is cleaning, where we have successfully converted applications from chemicals and abrasives to laser-based solutions. The cleanLASER acquisition, which completed its full year with us in 2025, has helped our growth in this area by providing safe, effective and environmentally friendly solutions that are truly differentiated from incumbent technologies. Our integration of cleanLASER went very well with actual performance exceeding our expectations. We've also generated revenue synergies by leveraging our scale to reach large customers, and we continue to identify new opportunities for our comprehensive laser cleaning solutions.

Beyond industrial solutions, we are building on the success we achieved in 2025 discussed earlier in the call. Growth in these areas requires differentiated capabilities and applications expertise to address customer challenges, leveraging our laser technology and deep [ materials ] knowledge to create solutions that deliver results with precision and accuracy.

Innovation remains a core focus for IPG with continued emphasis on product performance, lowering cost of ownership and delivering service and application support that customers value. This strength is gaining increased recognition from both our customers and the broader photonics community. In that context,

I'm pleased to share that IPG received a prestigious Prism Award in the lasers category for our new 8-kilowatt single-mode laser at the award ceremony held last month during the 2026 SPIE Photonics West Exhibition in San Francisco. Often referred to as the authors of photonics, the SPIE Prism Awards recognize innovative optics and photonics products that bring transformative technologies to market, with the winners selected by an international panel of academic, government and industry experts.

This honor further reinforces IPG's position as a global leader in fiber laser innovation and single-mode technology. Throughout the exhibition, thought leaders from IPG presented on multiple laser technologies in industry topics. One such presentation highlighted a major technological milestone in ultraviolet spectrum with a successful demonstration of a compact 148-nanometer vacuum ultraviolet BUV laser source based on our proprietary crystal materials technology. This breakthrough has the potential to enable new opportunities in nuclear clocks, quantum computing, metrology and other advanced applications.

In summary, the team delivered solid performance in 2025, driving growth while meeting the needs of our customers. We made significant progress on our strategic objectives and enter 2026 focused on continued growth through innovation and disciplined execution.

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'll start with revenue trends by application on Slide 4. Revenue from materials processing increased 17% year-over-year in the quarter driven by higher sales in welding, marking, cleaning and additive manufacturing applications, partially offset by lower sales in micromachining, which is impacted by the timing of customer orders.

Cutting revenue was slightly lower year-over-year but improved sequentially and was generally in line with the stable revenue we've seen over the last 4 quarters. Revenue from applications other than materials processing increased by 15%, driven by higher sales in medical and advanced applications.

Sales of our emerging growth products increased sequentially and year-over-year and accounted for 54% of total sales on higher revenue in the quarter, up from 52% in the prior quarter and matching our record high achieved in the second quarter.

Moving to the revenue performance by region on Slide 5. Sales in North America increased by 21% sequentially and 23% year-over-year driven by higher revenue in cutting, cleaning, medical and advanced applications. Sales in

Europe increased 8% sequentially and 7% year-over-year driven by higher revenue in additive manufacturing as well as cleaning, which saw strong growth resulting from the acquisition of cleanLASER. This growth was partially offset by decreased sales in cutting and welding applications.

Revenue in Asia continued to improve and increased 5% sequentially and 19% year-over-year driven by higher welding sales in China due to strong demand and new business in battery applications. Revenue in Japan was relatively stable year-over-year but improved sequentially.

Moving to the financial performance review on Slide 6. Revenue was above our expectations of $274 million, up 9% sequentially and 17% on a year-over-year basis. Foreign currency increased revenue by approximately $6 million or 2% this quarter compared to the same period in the prior year. We saw very strong customer order activity at the end of the year and were able to respond quickly and ship in the quarter to satisfy this increased demand.

GAAP gross margin was 36.1% and adjusted gross margin was 37.6% excluding accelerated depreciation on a long-lived asset and amortization expense. Adjusted gross margin came in at the midpoint of our guidance range but below what we would normally expect at this level of revenue, primarily due to planned inventory management that drove lower absorption of fixed costs. You may recall that third quarter gross margin benefited from higher fixed cost absorption as we increased inventory.

The impact of tariffs remained a headwind, reducing gross margin by 200 basis points year-over-year, which was 50 basis points higher than our expectations due to the timing of recognizing tariff expenses. We continue to work on ways to offset their impact, including cost reductions and pricing initiatives, but tariff impact will likely persist in 2026 albeit at a slightly moderated level. Year-over-year, the decrease in gross margin was driven by higher product costs and tariffs, partially offset by lower inventory provisions.

Excluding approximately $4 million in onetime costs, operating expenses remained stable on a sequential basis but increased on a year-over-year basis due to investments we are making to support our strategy and strengthen our organization. GAAP operating income was $3 million and our adjusted EBITDA was $41 million for the fourth quarter, above the top end of our guidance. GAAP net income was $13 million or $0.31 per diluted share. Adjusted net income was $20 million with earnings per diluted share of $0.46.

Moving to a summary of our balance sheet and cash flow on Slide 7. We ended the quarter with $839 million in cash, cash equivalents and short-term investments, $77 million in long-term investments and no debt. During the fourth quarter, we spent $18 million on capital expenditures and $4 million on repurchasing IPG shares, supporting our balanced capital allocation framework of investing in growth and returning cash to shareholders.

As expected, our cash flow from operations improved significantly in the second half of the year, driving positive free cash flow in the fourth quarter. Our 2025 capital expenditures came in well below our initial expectations due to the timing of expenditures for our major fiber manufacturing facility investment in Germany, which moved approximately $50 million into 2026. As a result, we now expect CapEx to be $90 million to $100 million this year. Excluding the amount delayed into underlying CapEx is about 5% of revenue, and we expect to maintain this level going forward.

While maintaining a strong balance sheet, we have continued returning capital to shareholders with our ongoing stock repurchases. We repurchased shares for a total of over $4 million in the fourth quarter and $53 million in 2025. We have returned over $1 billion to shareholders via share repurchases in the last 4 years. To enable us to continue with our balanced capital allocation strategy, the Board has authorized a new $100 million share repurchase program, and we plan to continue repurchasing shares opportunistically.

Moving to our outlook on Slide 8. Orders remained strong with book-to-bill above 1. However, it should be noted that some of the bookings we received in the fourth quarter include medical and systems orders that are scheduled to ship beyond the first quarter. For the first quarter of 2026, we expect revenue of $235 million to $265 million with some typical seasonality impacting revenue.

We expect adjusted gross margin between 37% and 39%, including a potential impact from tariffs of about 150 basis points. We estimate operating expenses in the range of $90 million to $92 million in the first quarter and anticipate that these expenses will increase moderately during the year as we see opportunities to further accelerate our key growth initiatives.

For the first quarter, we expect to deliver adjusted earnings per diluted share in the range of $0.10 to $0.40 with approximately 42.5 million diluted common shares outstanding. Our adjusted EBITDA is expected to be between $25 million and $40 million.

In summary, we are pleased to report such strong sales in the fourth quarter. Although margin improvement deviated from the expected trend due to underabsorption of fixed costs and the impact of tariffs, product margin remains stable, and we continue to believe that we have significant operating leverage in our model. We continue to invest for the future and our strong balance sheet positions us well to navigate a dynamic operating environment.

I will now turn the call back over to Mark.

Thanks, Tim. In closing, we are pleased with the progress we made in 2025 and encouraged by the early results of our strategic initiatives as well as the scale of the longer-term opportunity ahead. We remain confident in our ability to generate robust revenue growth with our differentiated solutions, which have continued to drive demand even in a subdued industrial environment.

As general industrial activity recovers, this puts us in a good position to outgrow the market. Our market leadership, deep applications expertise and ability to deliver complete solutions enable us to accelerate laser adoption, supplant incumbent technologies and expand our addressable market. 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 in 2026, we are continuing to transform the company to create long-term value for our customers and shareholders.

With that, we will be happy to take your questions.

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

Mark and Tim. Mark, nice to see, by the way, the return to growth on a full year basis. So great to see the hard work paying off here. Mark, thanks for the overview on the strategic update and your kind of comments just now on sort of how to think about longer term, how you're thinking about the strategy.

I guess first question, since we're entering a new fiscal year and I'm looking at some of the segment detail, if we look at cutting, for instance, we're down below 20% of revenue now. And I'm wondering, when you look at some of these sort of core markets relative to your areas of investment, how are you thinking about where cutting is? Do you think that we're stable at the current level? Or do you think there could be some further downside there that might offset some of the new growth businesses?

And I guess the point of the question longer term is if we could start to think about targets for growth for the areas that you're investing in from a, I don't know, 2, 3-year perspective, sort of how you're thinking about the TAM opportunity and longer-term growth.

Ruben, so let me start with your questions about cutting. So first of all, if you look at our revenue now for the last several quarters, cutting has been quite stable. Actually, it's been pointing up in the last quarter. We have core OEMs, and those core OEMs, their inventories have now stabilized and they see the benefit that we bring not only in the laser.

Remember that we brought out our rack integrated platform last year, higher power, smaller form factor, lower cost. That's really helped in that market as well. So we've seen that piece stabilize, and then that's allowed us to also see growth in the other parts of the industrial market. And so that's still pointing up for us the industrial.

We're continuing to invest in those core markets, cutting as well as if you look at areas like additive manufacturing, welding, those are core markets for us as well that are growing.

And then you asked about the other areas that we're making investments. We've talked about core investments in medical and micromachining, areas like directed energy. Those are addressing a new TAM for us that's several billion dollars. And what we've said to date is that we expect to see growth in that area of hundreds of millions of dollars over the next several years.

Yes. That's helpful. And I guess if I could just follow up on that point, Mark. Given the directed energy investment in the facility in Huntsville, has anything changed in terms of -- I mean, you've gotten acceptance and it's great to see the system solution CROSSBOW there. How would you assess that opportunity from here? Are you getting more interest now that you're out in the marketplace? It sounds like you would be given the investment in Huntsville. But any update on sort of how you're thinking about that market, if that's changed, your view on that market over the last few months.

Absolutely. So thanks very much, Ruben. So let me just review for a moment that CROSSBOW is a product for us. It's a full system with all the pieces that can stand on its own for both military and civilian type applications. You've seen the recent issues at airports especially. The system itself, again, we've been targeting the Group 1 and Group 2, the smaller class drones. We brought the product out in the fall.

So this was released first at the DSEI show in London and then followed on at the USAA show in Washington, D.C. And actually, we had a show, the Singapore Airshow, just about a week or so ago. We've had very, very good customer interest in that area because of the key differentiation that we bring. Again, this is based upon our single-mode high-power lasers that we make in volume for industrial applications along with the surrounding photonics components that we make in volume and systems.

So we can really do this at scale. So this offers the customer really a disruptive cost, volume, quality. And it's a commercial product with a part number. So this is getting a very good interest we have a great customer list now, and we're working to convert that interest into orders.

That's great, Mark. Just a quick follow-up. A quick follow-up for Tim then to finish off here. Tim, on the margin commentary, and I get the leverage and excited about the leverage. But you got the tariff impact. It sounds like that's going to persist through the year. Is there a way to think about sort of revenue levels that would be required to absorb the fixed costs to get back to the sort of longer-term targets on the margin side, so let's say, lower end of that target, 45%?

Yes, I think on the Q4 results, we called out that the underabsorption really impacted gross margin by 150 basis points. So if you take the 37.5% that we reported, you add that back to 150 to 200 basis points, you're actually close to 40% at that point on $270-odd million of revenue. That's with a 200% tariff headwind overall.

Our guidance estimates that the tariff headwind will be more moderate in Q1 at about 150 basis points, so more in line with what we had in Q2 or Q3. And so revenue improving beyond this level should continue to drive improvement in that absorption and get gross margins above the 40% level. It's clearly a target that we've got out there and want to do that.

We're also looking at how to optimize operations even at more moderate revenue levels, right? There's a little bit of a task that, that takes, but we want to really drive some more operating efficiency even below $300 million during the course of this year. And I hope to report progress on that.

I think there are other benefits that are still not coming through fully, that we've got product cost reductions still ongoing. So Mark mentioned the RI, the rack unit for the cutting market. But we're going to start rolling out the higher-power diodes across a much broader swathe of the product line and action out with the cost reduction initiatives on the products and drive improved product gross margin. There are other cost reduction initiatives as well around the bond that we're working on, too.

And then you've got some pricing initiatives too where you're trying to offset some of the tariff impacts. So overall, I think we're making good progress even though gross margin was a little bit light for the revenue level we reported in Q4. But we're pretty confident about the direction that we can take at the moment on this.

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

So just given the early traction with CROSSBOW, I'm wondering, any plans to step-up investment in directed energy applications and particularly with the facility that you have now or possibly expand the CROSSBOW product offering?

Jim, thanks for the question. So what I can tell you is that what we've launched to date is what we call the CROSSBOW Mini. So that's a 3-kilowatt based system for kind of the shorter range. Again, this is for Group 1 and Group 2 drones. We do have a road map that will increase the power level of that. We've talked about a 6 to 8-kilowatt kind of product also on our road map. We're not heading towards the megawatt-type systems. We're not doing government contracting. This is really about a commercial product that we can deliver in volume and really targeting the smaller class drones. We're excited about it.

Got it. And Mark, maybe sticking with the new product focus. What are your expectations around the new medical product in 2026?

Yes. No, thanks for that question. So just to review medical, we've developed a new road map. So that's one of the key areas that we're investing in. We talked about the product that we got FDA clearance on in Q3 and then launched in Q4. So this was a new product in urology that has what we call StoneSense as part of it. So it can tell the difference between stone and soft tissue. That was the first the road map.

And I just want to remind you also that we also, in the last year, we picked up a new major customer. So that combination, we expect to give us growth into 2026. And I'll say also that in 2026, we'll be launching additional products in that road map. And that road map continues on for the next couple of years. And what we said is that over the next years that we expect the business to double or triple.

And just one quick final question for me. You sound like you're encouraged by what you're seeing with cleanLASER. I'm just wondering if there's maybe a greater appetite on pursuing other inorganic opportunities just given the strength of the balance sheet? And if so, maybe what areas might be of interest?

Yes. No, happy to talk about that, Jim. So first, let me just talk about it in terms of capital allocation. So as I look at capital allocation, first and foremost, for us is investing in our organic growth as we have a fantastic set of road maps and technologies that we're pursuing there. And next, in the M&A standpoint, it's really around tuck-in acquisitions. And cleanLASER was a great example where we can augment adjacent markets and get to some areas faster.

And cleanLASER, just to dig into that for a moment. That's gone really well for the company and it's integrated very well, and we have very good combined road maps going forward. And it did better than our targets initially. So again, just to say the areas that we're looking at, and we are actively looking at M&A opportunities, again, in the tuck-in size. We've talked about it as being in the kind of revenue range of $50 million to $200 million in revenue and, again, areas that can really allow us to accelerate our accelerate in some of the markets we're going after, technologies, those areas. So really, that kind of tuck-in type.

Got it. Congratulations on the quarter.

Thanks.

[Operator Instructions] Our next question comes from Scott Graham with Seaport Research Partners.

Congratulations on the quarter and outlook. I wanted to maybe understand the improvement in welding sales a little bit more. You mentioned a battery. And I'm just wondering, is that all storage? Or is there some EV in there as well? And then what other drivers did welding benefit from this quarter?

Yes. Thanks very much, Scott. So yes, welding has been an important area for us and batteries, as you pointed out. So drivers for that area are -- EV is one of them. And just from a driver standpoint, electric vehicles have seen 20% year-over-year growth. And also then stationary storage, as you mentioned, is an accelerating area as well. That's seen a growth of about 50% year-over-year. So those are the base drivers.

We have very differentiated technology that applies to the whole area of batteries. We have specialized lasers plus the monitoring of the beam and actually the weld monitoring that's in situ combined with beam delivery in the process. So it's a very important piece to that battery area, and it's important both in EV, the higher end of EV and stationary storage. It especially becomes important as you have higher currents and thicker bus bars. Our technology is even more important there.

And I should say battery for us goes beyond those as well. We also have important areas in consumer batteries as well as specialized areas like medical batteries and it encompasses the areas that I told you, including areas like foil cutting and specialized welding, cleaning. All of those are key areas for us that apply to the battery processing.

Great. And then the other question was simply around Huntsville. Could you kind of tell us a little bit more about that? Will it only be for the directed energy? Or is there an opportunity to add some other product manufacturing there?

Yes. Thanks, Scott. So just to point out, it's a small site in Huntsville. Huntsville is a very important area for a couple of reasons, one, because of the personnel available in that area. But also it's an area that has cleared airspace. So we can do the testing there. So that's an important piece of that.

First and foremost, it's around the R&D and small-scale production for the directed energy, but it also gives us a footprint in that region to apply some of our industrial technologies to that growing region as well. Huntsville area is a growing area for industrial for some of the military and defense arena.

Our next question comes from Rodney McFall with Northcoast Research.

I'm on today for Keith Housum. I was just wondering if you can maybe provide some updates on the competitive environment, especially in Asia. I'm wondering if you're seeing any pricing pressures start to seep out of cutting and into more advanced applications.

Yes. Thanks for the question. So in Asia, really in China, cutting is a very small part of our business. It's in a couple percent kind of range. The biggest areas that we're operating in that area are areas where we're highly differentiated. So we've talked about the battery area, additive manufacturing, some of the micromachining areas. So those are areas where we have key differentiation and so our pricing is able to hold up in those areas.

Understood. And then just a quick follow-up to Scott's question. As you're seeing a shift from EVs to stationary storage, is that margin accretive? I mean, do you guys see like higher volumes of those devices just because these storage devices are larger? Just any color you could provide there would be great.

Yes. So the way I would look at it is so we're applying our technology across that area. So the battery factories are making batteries for EV and for stationary storage. The stationary storage ones tend to be on the higher end because capacities are higher currents or higher, but they're similar to the higher end of EV. So our technologies apply to really across that area. And again, it's that differentiation that we provide with the combination of the very specific laser beam type plus the monitoring of the weld, actually being able to see in situ if the weld is good or not, combined with the beam delivery and the process as well. That provides something that's highly differentiated.

And it's important because it means that they can see quality control. They can tell whether the batteries -- whether you're overpenetrated or underpenetrated in the welds. And that has to do with quality and reliability as well as safety. So all of those pieces point to how we have a key place in that area. And as you mentioned, that higher end, it's even more important because the higher currents have thicker bus bars in the batteries, and that's true in the stationary storage as well as the higher end of EV. And that's an even bigger driver towards our solutions.

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

Tim, I was wondering if you can give us any additional color on the bookings that you saw by region. Any variability? It sounds like the overall order activity was pretty heavy.

Yes. It was pretty broad-based, I mean, having coming with that kind of a number you'd expect it to be. North America was very good on the back of medical and systems orders. So it's really good to see that pick up on the systems side. Europe actually performed a bit better. I'd say it's still a little bit of a weaker region, but we actually had a very good set of orders there.

There was also some good systems orders, particularly on the cleaning division with cleanLASER. There was actually a big order that came in from a major customer that we may not have won had cleanLASER not being part of IPG. So that was a very important part of the whole and some of the synergies that are being realized out of that acquisition.

And then Asia was strong, both Japan, China. Korea had a good quarter. So it was pretty broad-based, Jim, I'd say Europe is just a little bit -- it's starting to show some improvement, but it's a little bit weaker than some of the other areas still. I think that's reflected even in the PMI data where it's improved. But still a little bit behind North America, China and Japan.

Got it. And Mark, you mentioned at least in the presentation, you highlighted strong demand related to semiconductor. Remind us of your exposure there, how you're thinking about the growth there in 2026 just given the investment that we're hearing about across the semiconductor sector.

Yes. Thanks, Jim. So the places that we play there, it's really in the lithography, metrology and inspection part of the segment there. And we have new products that we've been developing that are now aligning well with road maps in those areas. And we've really focused on improving not only performance but quality in that area, and that's really helped with our engagements there.

It's a relatively small area for us today, but it's an area where we have very good engagements. And really, it shows the differentiation that we have in these core technologies across the company that allow us to insert in those road maps. Because, as you know, those road maps, you need the combination of very, very good and high-performance technology at the front edge, but you also have to have the quality and the ability to produce these things in volume, and every unit has to be the same. So it's been a very good mark for us to see that growing.

[Operator Instructions] Our next question comes from Scott Graham with Seaport Research Partners.

I was wondering, you talk freely about micromachining and additive manufacturing. Can you just maybe remind us what is in those areas, where the applications or the end markets were both? Just provide a little more clarity there.

Sure. Let me start with additive, Scott. So additive manufacturing, just to remind you, that's centering of powdered metal. So the laser actually creates -- where a printer would create a dot or a pixel, here you create what's called a voxel. So it's a volume element that's created. And then you build up the part. And so that's important for a number of reasons. You can actually produce things that can't be machined with traditional methods. So that's important. And some of the materials are also important.

And I have to say that this is an area where we're highly differentiated. We have a key piece of that market because the lasers have to be single-mode, they have to have very high performance and they have to have low noise and they have to have very high reliability. And these are all pieces that are important there. And we work together with these companies on their road maps, and we have key next-generation products that also allow them to go significantly

faster. And so from a market side, these are actually covering now -- it's an area that's been growing. And it's covering areas that go from aerospace all the way to consumer type devices, where they're able to make parts again that would be very difficult to machine. And they're making parts in a wide range of materials from titanium to things like copper. So our lasers play across each of those. And again, the market drivers are relatively broad. And we've seen that area growing, and we've had good growth in that area throughout 2025. And again, indicators are good now.

And then you asked about micromachining. When we talk about micromachining, that's really talking about very precision cutting, drilling, material removal. That plays a lot into areas like microelectronics, where being able to make small changes in the materials are important in displays, in things like multilayer circuits being able to interconnect from layer to layer. These are areas that are important areas, like solar cells, where you need to make interconnection from layer to layer or machine away small windows and improve the performance of the cells.

So think about very small on the micron level holes or ablation, material removal, cutting, very micro welding. Those are all areas that we would classify in the range of micromachining.

We have reached the end of the question-and-answer session. At this time, I'd 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 are 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.

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 of approximately 1. While uncertainty in the demand environment persists, leading indicators such as PMIs continue to show improvements, and we remain cautiously optimistic going into the year-end.

Now I'd like to take a step back and offer some broader perspective on the longer-term trajectory of our business and the progress we're making on our strategic initiatives. Over the last 17 months, I've been methodically working to transform the organization, creating a disciplined high-performance culture that is fully prepared to take on the opportunities that lie ahead of us. This transformation involves moving IPG from a founder-led approach to a team-led operating model that can support further growth. Last quarter, I highlighted some of the additions I have made to strengthen our executive leadership team. This top talent has brought deep expertise and fresh perspective, and they are already having a significant impact on our execution.

The results we're delivering today show that the strategy we outlined earlier this year is taking hold and is beginning to drive meaningful improvement across our businesses. Our progress reflects disciplined execution, sharper focus and a stronger alignment around our growth priorities. The steps we've taken to streamline operations, strengthen decision-making and accelerate product development are translating into better performance and greater consistency across the business. Our focus remains on sustaining this momentum, balancing operational discipline with investment and innovation to position IPG for long-term profitable growth. The powerful combination of innovation and execution is driving progress across our key growth initiatives.

Our fundamental strategy is based on converting incumbent processes and applications to our differentiated laser-based solutions. This enables us to expand existing laser use cases, create new laser applications and extend our reach into new high-growth applications such as medical, micromachining and directed energy. These are large opportunities with the potential to significantly expand our addressable market. We continue to strengthen our position in core industrial applications such as welding and cutting by focusing where differentiation matters most and where our technology delivers a clear performance or cost advantage. This is evidenced by our business wins and positions us to outpace the market as industrial production recovers.

We're also moving up the value chain with our world-class laser applications capability that enables us to integrate our fiber lasers into differentiated subsystems systems to solve our customers' most challenging problems. This approach allows us to capture a greater share of customer spend and deepen long-term partnerships. We have already demonstrated these benefits in welding, which has become our largest application. Our unique solutions enable safer and more reliable welding processes for thin foils and alloys used in advanced batteries for EV and stationary storage applications. We are also accelerating the adoption of lasers in other large industrial applications, displacing incumbent technologies.

By combining our laser technology with deep applications expertise, we are solving complex challenges for our customers where precision and efficiency matters most. Laser cleaning is a great example of this approach. Customers convert to laser cleaning from conventional abrasive or chemical methods because our laser solution offers greater speed and control, is easy to automate and provides a safer and environmentally superior outcome. Lasers will continue to be adopted, driven by these advantages, and we are leading the change, accelerating broader implementation across the industry. Finally, we're penetrating new nonindustrial applications in markets where laser-based solutions also offer clear cost benefits and superior outcomes relative to incumbent approaches. We are focused on medical, micromachining and directed energy verticals where our innovative laser-based solutions provide strong competitive advantages. I'm pleased to report that we're making meaningful progress across each of these opportunities.

In medical, we've been making strategic investments in urology applications. Our thulium lasers provide a superior solution for eliminating kidney stones and have demonstrated improved results versus legacy laser processes. On previous calls, I discussed a new customer we won earlier this year that has helped to drive strong revenue growth in the business in 2025. I'm happy to report another major milestone on today's call, FDA clearance and the upcoming launch of our next-generation urology system. This new system incorporates our proprietary StoneSense and advanced pulse modulation technologies, which deliver improved precision and control continuing to enhance results in kidney stone removal procedures. Shipments are expected to begin in the fourth quarter. This marks another important step in expanding our medical portfolio and demonstrates how our innovations continue to advance patient care and broaden our reach beyond industrial applications. We're executing against a clear road map that we believe will drive significant revenue growth including recurring consumables revenue over the next 2 to 3 years.

Last quarter, we discussed CROSSBOW, a scalable and cost-effective laser defense system that can neutralize the threat of smaller Group 1 and Group 2 drones. CROSSBOW is a disruptive turnkey directed energy system enabled by our single-mode lasers, systems expertise and our high-volume manufacturing capabilities. CROSSBOW can operate as a stand-alone system or can be integrated into layered defense architectures. This system was showcased during 2 recent defense shows DSEI in London and AUSA in Washington, D.C. Interest was high from both defense and commercial customers for protection of critical military and civilian assets. We are working on converting leads into orders and are having conversations with multiple potential customers. We're proud to announce the opening of our new IPG defense customer center and production facility in Huntsville, Alabama, which is dedicated to supporting the CROSSBOW product line.

Over the last few months, there have been multiple examples of large international airports that were forced to shut down all flights due to the incursion of drones. We are optimistic that our solution can become a standard approach across many situations and scenarios to deal with these ever-increasing threats. We believe this growth strategy best aligns our differentiating laser technology, market leadership and deep applications expertise to solve the most challenging problems and enables us to deliver a compelling value proposition that makes IPG a trusted partner in the industries we serve.

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 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 came in at the top of our expectations at $251 million, flat sequentially and up 8% on a year-over-year basis or 11% excluding divestitures. Foreign currency increased revenue by approximately $3 million or 1% this quarter. GAAP gross margin was 39.5% and adjusted gross margin was 39.8%, above our guidance and was driven by improved manufacturing cost absorption and a decrease in inventory provisions, partially offset by higher cost of products sold and increased shipping costs on a year-over-year basis. The impact of tariffs was 140 basis points in line with our expectations. We continue to work on mitigating tariffs, and the impact will likely continue in the fourth quarter. Operating expenses were flat sequentially but above last year's level, primarily due to the investments we are making to support our strategy and strengthen our organization, which Mark highlighted earlier on this call. GAAP operating income was $8 million, and our adjusted EBITDA was $37 million, slightly above the top end of our guidance. GAAP net income was $7 million or $0.18 per diluted share. Adjusted earnings per diluted share was $0.35 in the third quarter at the top end of our guidance.

Moving to a summary of our balance sheet and cash flow on Slide 7. We ended the quarter with cash, cash equivalents and short-term investments of $870 million, $30 million in long-term investments and no debt. During the quarter, we spent $21 million on capital expenditures and $16 million on repurchasing IPG shares, supporting our balanced capital allocation framework of investing in growth and returning cash to shareholders. As expected, operating cash flow started to improve significantly in the second half of the year, more than offsetting CapEx and driving positive free cash flow in the quarter. Looking ahead, we will likely come in well below $100 million in CapEx this year due to the timing of expenditures for our major investment in Germany. We still expect CapEx to decrease to about 5% of revenue and free cash flow to improve once the project is complete, but the timing of this project may keep next year's CapEx at approximately the same level as in 2025.

Moving to our outlook on Slide 8. For the fourth quarter of 2025, we expect revenue of $230 million to $260 million and adjusted gross margin between 36% and 39%, including a potential impact of tariffs of about 140 basis points. With investments in the growth of our business, and strengthening the organization, including leadership, we expect our operating expenses to remain elevated between $90 million and $92 million in the fourth quarter. We anticipate delivering adjusted earnings per diluted share in the range of $0.05 to $0.35 with approximately 42.5 million diluted common shares outstanding. Our adjusted EBITDA is expected to be between $21 million and $38 million.

In summary, we are pleased to see further signs of continuing revenue stabilization coupled with margin improvement while investing in our strategic initiatives. We continue to believe we have significant operating leverage in our model. Our strong balance sheet gives us a significant advantage given the near-term uncertainty in the operating environment.

I will now turn the call back to Mark.

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.

Good morning, and welcome to IPG Photonics' Second Quarter 2025 Conference Call. Today's call is being recorded and webcast. At this time, I'd like to turn the call over to Eugene Fedotoff, IPG's Senior Director, Investor Relations for today's 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 second quarter results and the overall demand environment. Then he'll 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, and then we'll open the call for questions.

Let me remind you that statements made during this call discuss our expectations or predictions of the future are forward-looking statements. These forward-looking statements are subject to risks and uncertainties and can 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 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 5, 2025 only and the company assumes no obligations to publicly update any or publicly provide any updates or revisions to any such statements.

During this call, we will be referencing to 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 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.

Thank you, Eugene. Good morning, everyone. Second quarter revenue came in above our expectations, increasing 10% sequentially and 2% year-over-year, excluding divestitures, our first year-over-year revenue increase since 2022. Our results were driven by a combination of a modest demand improvement in multiple markets and geographies as well as our continued focus on our strategy to drive profitable growth.

We're investing in key strategic initiatives targeting a $5 billion TAM that offers us hundreds of millions of dollars in revenue growth opportunities, and we are starting to see results. By quickly adjusting our operations, we were also able to ship approximately $10 million out of the $15 million in customer orders that we believe were at risk of being delayed due to tariffs and were not included in our second quarter guidance.

Starting with our materials processing business. We saw sequential demand improvement in welding, cutting and marking applications with some growth in e-mobility and general industrial markets. Our unmatched capabilities in lasers and welding process monitoring technologies, combined with deep applications expertise, continue to differentiate IPG in the marketplace. This enabled us to secure key wins in EV manufacturing despite ongoing uncertainty in the market. In China, renewed capacity investments in battery manufacturing drove growth in our welding.

On the industrial side, a stabilizing demand environment supported sequential growth in welding, cutting and marking applications. Booking trends are encouraging. With demand showing signs of improvement and book-to-bill at approximately one on our higher second quarter revenue as we move into the second half of the year. We have also seen improvement in stabilization in the leading indicators, such as PMIs and the industrial production through June, but the demand environment remains uncertain.

We also expect demand for our products will benefit from increased onshoring and local investments in automated production. We are also excited that early returns from our growth investments helped to drive revenue in the quarter. Our strategic focus on developing innovative lasers and photonic solutions to expand into medical micromachining and advanced applications showing results.

In advanced applications, we achieved another quarter of record revenue driven by higher demand across all categories, primarily in directed energy, semiconductor and scientific applications. Last quarter, I shared that strategic investments to grow our advanced applications business allowed us to achieve a key milestone 6 months ahead of schedule.

I'm thrilled to announce that we've now delivered multiple units of our first laser counter UAV solution, Crossbow to Lockheed Martin. This disruptive turnkey directed energy system is enabled by IPG's laser systems expertise and high-performance commercial single-mode lasers and supported by our high-volume manufacturing capabilities. Crossbow is a scalable and cost-effective laser defense system that can neutralize unmanned aerial threats and can operate as a stand-alone system or integrate into layered defense architectures.

Over the past 6 months, both IPG and Lockheed Martin have conducted extensive field testing and customer demonstration of Crossbow, validating the system's operational effectiveness against the increasing threat of smaller class Group 1 and Group 2 drones. We'll be showcasing Crossbow this September at DSEI in London, one of the industry's leading defense exhibitions, and we anticipate strong interest from both defense and commercial customers for protection of critical military and civilian assets. This is another example of how IPG leverages our core laser and photonics technologies to address critical market needs.

Turning to our other growth initiatives. Micromachining delivered strong revenue compared to the prior year despite some shipment delays related to tariffs. This is a high potential market for IPG, where we see strong alignment between our technologies and the key applications of our customers.

As we shared last quarter, we are also making good progress in medical with a new urology customer that is already helping to drive medical revenue growth. Looking ahead, we expect momentum to continue with additional product introductions planned for Q4 2025, 2026 and beyond as we execute on our strategic development road map. The traction we are seeing across micromachining, medical and our other focus areas reinforces that our teams are executing well and that these investments are laying the foundation for long-term growth.

Finally, our capital allocation strategy is an integral part of our growth strategy. As we said before, our primary focus is on organic growth investments in strategic M&A. We expect to spend approximately $100 million on CapEx in 2025 to expand capacity and capture growth opportunities. Within M&A, we are evaluating tuck-in opportunities with a range of $50 million to $200 million in revenue.

Our revenue and competitive position in cleaning applications has benefited from the cleanLASER acquisition that we made at the end of last year and we continue to target companies that offer differentiated technology or market access to accelerate strategic growth initiatives.

During the quarter, we continued to opportunistically return cash to shareholders, repurchasing $30 million of IPG stock, building on the $1 billion in share repurchases over the past 3 years.

Since joining IPG just over a year ago, I've been focused on setting the foundation to drive profitable growth, including strengthening the organization. We achieved a recent milestone on this objective with the appointment of 5 key leaders, including 4 recent hires to help advance our strategy and support continued global growth. These leaders have a proven track record of driving strategy and execution. They each bring distinct strengths, deep expertise and a shared commitment to collaboration and innovation.

With these new appointments to our executive leadership team, we are shaping a stronger IPG, better equipped to execute with speed, serve our customers with excellence and drive our next chapter of profitable growth. I'm pleased to welcome them to the team and excited about what we will be able to accomplish.

I am proud to report that we've been effectively adapting to the dynamic operating environment by leveraging the flexibility of our global manufacturing supply chain to minimize the impact of tariffs. We've demonstrated agility, shifting production across regions to better serve customers. We also continue to work on alternatives to optimize our tariff exposures. As a result, we were able to ship most of the orders that were previously anticipated to be delayed due to tariffs and longer customs processing. While new tariffs have recently been announced, our global footprint and supply chain flexibility position us well to continue meeting our customers' needs.

As I mentioned earlier, our second quarter book-to-bill ratio was approximately 1% on higher revenue and we are encouraged by signs of further demand stabilization in our business. Industrial production has been improving and inventories at some of our cutting OEM customers have normalized, supporting a return to more typical purchasing behavior.

We don't believe the recent increase in demand is driven by customers pulling orders forward in response to tariffs. That said, the demand environment continues to be sensitive to external factors so we are approaching the second half with cautious optimism.

In closing, I'm encouraged by the progress that we're seeing, both in the stabilization of our core business and in advancing our strategy to drive laser adoption in markets with high growth potential. While tariff-related pressure and uncertainty persists, we remain focused on what we can control and confident in our ability to navigate this environment while executing for profitable growth.

With that said, 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 5. Revenue from materials processing decreased 6% year-over-year as a result of divestitures and lower sales in cutting, welding and additive manufacturing applications partially offset by higher revenue in micromachining and the acquisition of cleanLASER. Revenue from other applications increased 21%, driven by higher sales in medical and advanced applications.

As Mark already mentioned, we saw sequential improvement in revenue in cutting, welding and marking. Welding revenue grew on customer wins and improvement in industrial demand and EV battery investments primarily in China. Cutting revenue also grew sequentially and was nearly flat compared to the prior year as the cutting OEM business showed some stabilization in Europe and an increase in demand in Asia and North America. Marking and engraving sales were also more stable.

Our cleaning revenue improved sequentially and continued to benefit from cleanLASER. Mark already highlighted strong results in our medical and advanced applications in the quarter, so I won't go over them again. Our emerging growth products performed well in the quarter, increasing to 54% of sales, driven by a wide variety of laser sources, subsystems and systems.

Moving to the revenue performance by region on Slide 6. Sales in North America increased 31% sequentially and were down 4% year-over-year. Sequential growth was primarily driven by higher sales in medical and advanced applications as well as improved sales to cutting OEMs. Despite more stable sequential performance, welding revenue was down compared to the prior year due to soft demand from EV manufacturing in the region.

Sales in Europe were stable, with less than a 1% sequential decline and down 11% year-over-year, excluding $11 million in divestitures. Lower cutting and welding sales, as a result of soft industrial demand were partially offset by clean laser. Revenue in Asia increased 4% sequentially and 14% year-over-year, benefiting from higher sales in welding and cutting as well as advanced applications.

We have continued to see a strong demand recovery in e-mobility, coupled with our business wins in EV welding applications. Sales to additive manufacturing were lower in the quarter due to timing of shipments, while demand remains strong.

Moving to the financial performance review on Slide 7. Revenue came in above our expectations at $251 million, up 10% sequentially and down 3% on a year-over-year basis. Foreign currency increased revenue by approximately $4 million or 1% this quarter. Gross margin was 37.3%, flat year-over-year. Adjusted gross margin was 37.8% at the top of our guidance and was driven by improved manufacturing cost absorption and a decrease in inventory provisions, mostly offset by higher cost of products sold due to geographic and product mix and increased shipping costs. The impact of tariffs was 115 basis points, which was better than our expectations.

Operating expenses were above last year's level, primarily due to the investments we are making in key areas that are central to our strategy as well as investments in strengthening our organization, which Mark highlighted earlier on this call. GAAP operating income was breakeven and our adjusted EBITDA was $32 million, slightly above the top end of our guidance. GAAP net income was $7 million or $0.16 per diluted share. Adjusted earnings per diluted share which includes stock-based compensation, but exclude amortization of intangibles, other acquisition-related charges, foreign exchange loss and discrete tax items was $0.30 in the second quarter, above our guidance range.

Moving to a summary of our balance sheet and cash flow on Slide 8. We ended the quarter with cash, cash equivalents and short-term investments of $900 million and no debt. During the second quarter, we spent $15 million on capital expenditures and $30 million on repurchasing IPG shares, supporting our balanced capital allocation framework of investing in growth and returning cash to shareholders.

We now expect CapEx of approximately $100 million in 2025 as we expand capacity, primarily in Europe. We expect operating cash flow to improve significantly in the second half substantially offsetting CapEx. Looking ahead, we expect CapEx to decrease significantly and free cash flow to improve next year.

Moving to our outlook on Slide 9. For the third quarter of 2025, we expect revenue of $225 million to $255 million and adjusted gross margin between 36% and 38%, including a potential of a slightly higher impact of tariffs. With investments in the growth of our business and strengthening the organization, we expect our operating expenses to remain elevated at between $89 million and $91 million in the third quarter. We anticipate delivering adjusted earnings per diluted share in the range of $0.05 to $0.35 with approximately 42.5 million diluted common shares outstanding. Our adjusted EBITDA is expected to be between $22 million and $36 million.

In closing, we are pleased to see signs of continuing revenue improvement coupled with results from our strategic initiatives. And we believe we have significant operating leverage in our model. Our strong balance sheet gives us a significant advantage given the near-term uncertainty in the operating environment.

With that, we'll be happy to take your questions.

[Operator Instructions] Our first question comes from Jim Ricchiuti with Needham & Company.

Congrats on the quarter. First off, on the book-to-bill, I'm wondering if you could provide any color on book-to-bill by region? Was there much variability in terms of the regional bookings?

Jim, thanks very much for the question. Good to hear from you. Actually, book-to-bill was 1 -- and really just about 1 across all regions. That was, of course, on -- go ahead. Sorry.

No, please, Mark.

I was just going to say that, that was also on top of the higher revenue as well. So we're quite pleased with that.

Got it. My follow-up, Mark, is on the directed energy commentary. I'm wondering how you're thinking about the opportunity for IPG over the next few years? And just relative to maybe the other emerging growth opportunities you're targeting and can you say, for instance, how many customers you're working with in this area?

Yes, sure. So thanks, Jim. So the directed energy, again, is part of our -- part of the work that we're doing taking the key technologies within IPG. So this is the lasers as well as the broader photonics and the applications understanding to really direct it to some key areas of growth. And of course, the advanced is one with the directed energy as well as the medical and micromachining areas. But specifically, in directed energy, what I can say is that this is a very interesting market for us in terms of market size, it's a little bit hard to estimate but it's a developing market. There's kind of billions of dollars spent each year on the order of $1 billion in the U.S. And our solution addresses a key segment of the market. And that's the key part that we believe is growing.

So this is -- as I talked about on the call there, this is addressing the smaller class drones, the Group 1 and Group 2 drones, which is -- the biggest issue today or, let's say, a very significant issue today, both in warfare, we've seen that as an issue as well as in civilian infrastructures where there's incursions in -- incursions in airports, incursions at borders and incursions in stadium. It's a big issue today.

So from a market standpoint, the Crossbow is a turnkey system that directly addresses that small drone threat. We have the partnership that we talked about with Lockheed, which is addressing one part of the market, we believe, again, the market is a broader one that has both opportunities in the defense sector, but also the civilian the cilia piece. And we'll be -- of course, I've mentioned that we've done extensive testing with Lockheed that that's going very well and that we'll be bringing the system to the DSCI show in September, where we'll have a chance to talk to a broader customer base as well. But overall, very excited with the progress the team has made.

And again, this is a great application for us because it's the combination of our core technologies with the single-mode lasers as well as the photonics. And then it's key for us because, again, this is something that we can bring into our commercial manufacturing infrastructure where we're manufacturing volumes of the single-mode lasers but also systems and subsystems. So we can do this at a very disruptive price point and -- cost point. And that's why we believe that this is a unique position to be able to address the smaller drone class at a cost point that could be broadly used.

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

Mark, I wanted to start with maybe -- just walking through the outlook, it's great to see the progress and some signs of stabilization. But when we look at the Q3 guidance, maybe you can just walk us through the puts and takes of that guidance. So you had $10 million that you had previously anticipated out of the $15 million come through in Q2. And maybe just an update on how you're thinking about potential tariff impact as a portion of that guidance for Q3?

And then you had a comment about cautious optimism for the second half. And I'm just wondering what kind of visibility you might be getting from your customers as you think about the second half, i.e., do you think that there's going to be continued stabilization and maybe improving bookings into Q4?

All right. Thanks very much. So a couple of the pieces here. Again, we're very happy to see the book-to-bill of 1. And again, that book-to-bill on top of the higher revenue. As you mentioned, we were able to ship about $10 million of the $15 million that we expected to move into Q3 because the team did a fantastic job of being able to mitigate the tariff issues because we have this flexibility, as we talked about, to be able to move the manufacturing from region to region and optimize the tariff situation. We believe we'll be able to do that also, of course, going forward.

And we did see very good demand in material processing. We are seeing the industrial businesses -- the industrial markets -- there's been improvement over the last few quarters. You've seen that some of that improvement in PMI. So we're seeing that industrial pick up. And we're seeing it in material processing broadly across each of the regions and broadly across many of the applications, including the areas of welding. We talked about the EV pickup. We've seen that also in cutting. So we've seen our cutting -- the inventories of some of our OEMs have normalized. So we're seeing that area pick up.

And we've seen increases -- continued demand increases in things like additive manufacturing, as well as, again, broad-based, we saw strong medical. We have -- we've picked up another customer as we talked about in medical that's attached to our road map of urology. So that's -- that's continuing to see growth. So again, we're seeing kind of broad-based improvement, I would say.

And I would say cautious optimism and the reason I'm saying cautious optimism because, of course, there's still tariff uncertainties, and we're still in a macro environment that hasn't completely recovered for sure. So that's really my comments on that piece.

We went through it -- started the usual process on generating guidance, so there's nothing particularly unusual in there. I think the only thing I think that's good is that even at the midpoint, we're slightly above where the Street was. And I think that's the first time in quite a while that we've been able to guide at the midpoint that it is mildly positive. So I think we're more than bouncing along the bottom at the moment. We've probably got a little bit of lift off at the moment.

A little bit indeed. And yes, I can't remember the last time, yes, that you guys had a guide above our numbers. So that's great. If I could follow up on Jim's question, Mark, on the defense stuff. I would love to understand how you're thinking about high energy as well? There's been some awards and actually, just yesterday, another award for 100 kilowatt system. And so is that part of your strategy longer term, perhaps? Or are you focused more on this lower cost stuff that you talked about?

Yes. So what I would say is that we've been playing in the overall market in directed energy for many years. We have very high performance, I'd say the best single-mode lasers that are applied broadly in the marketplace as well as our amplifiers. So those tend to play in many of those programs. But the high power is not what Crossbow is. The system is really focusing on threats from these Group 1 and Group 2 drones, the smaller drones that are more widespread and can be addressed with the relatively low power using the -- using our high brightness single-mode lasers. So that's really the area that we're talking about here.

And we think that, that's, as I mentioned, is a significantly growing market because it's -- it's one of the biggest issues today. If you -- as you're reading, it's a big issue on the battlefield today, these small drones that you can buy for hundreds of dollars can inflict major damage. And then also, it's an issue in the civilian infrastructure, boarders, et cetera, as well, and we're starting to see more of that, and it's only increasing. So we think that's a really good area for us to play.

Great. And if I could squeeze one more in for Tim. Tim, on the gross margin, I might have missed it, but could you give -- as part of that 36% to 38% gross margin number, it sounded like a little bit of a higher impact from tariffs. Do you give the inventory absorption number that is impacting the gross margin?

I mean relative to Q2, we are still -- we had an improvement in underabsorption that we set benefited gross margin a bit. We're still relative to peak efficiency, probably 500 basis points of getting back to that more optimal level. But we saw a meaningful improvement, a couple of hundred basis points improvement in the second quarter and expect that to flow through to Q3 as well.

Our next question comes from Scott Graham with Seaport Research Partners.

Congratulations on a nice quarter. I wanted to ask a couple of questions here, including piggybacking off of what you just said about gross margins [indiscernible]. But first, could you kind of tell us how the order book looked as the quarter progressed? And maybe any specific end markets in particular, anything you could mention would be helpful?

Yes, I don't mean in dollars. I kind of mean year-over-year because we all know that June is typically the largest month for dollar orders. I'm just hoping as on a year-over-year basis, you could talk about the progression.

Yes. I mean I think year-over-year, the total increase -- the total value of bookings increased. We haven't given that number, but it was up compared to Q2 '24. I think the overall tone during the quarter was significantly improved compared to a year ago. April was actually quite a strong bookings month, so it wasn't back loaded. Our revenue happened to be a bit more backloaded in the quarter, with June being very strong on revenue. That probably reflected the fact that the bookings in April were pretty good. May was a little bit weaker and then June picked up again.

So we're actually -- we weren't scrambling to get to this number at the end of the quarter. It was easier than it has been on not just a year ago, but even the last couple of quarters where bookings have been more weighted to the end of the period.

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

I just wanted to ask about the systems business, a smaller part of your business, obviously. But first year-on-year sequential increase that we've seen in a while, and I wanted to understand what some -- what may have drove that? I assume some of that may be the cleanLASER business. But can you elaborate on what you're seeing there?

Yes. Certainly, Jim. So a couple of things. First of all, we're very excited with cleanLASER. That's going very, very well. That acquisition that we did at the end of last year. Integration is going very well. And they've been continuing with their traction in the market. But we're also seeing -- we've also had some increases in other areas of our systems. We're making micromachining systems and systems in welding and such as well.

I don't know, Tim, if you have anything you'd add?

I think you've covered. I think just on the robotics side, we had a better quarter on the large-scale gantry robotic systems as well and a pretty good quarter on nLIGHT well too.

And on the Medical business, it sounds like you're encouraged by the ramp you're seeing with the second customer in the urology area. I wonder if you would help us understand whether there's been any change in the overall competitive environment in this area of the business?

So let me speak to that, Jim. So let me just step back for a moment and just say that urology is one of the key areas that we're investing in. So it's the medical side, the micromachining, the advanced. And in that urology road map, we have a broad base of our capability in that area, and we're bringing out new systems. So we talked about the fact that we're bringing something out in Q4 and then a whole road map of growth.

We have the strongest position on the thulium lasers in urology, and we're continuing to grow as we picked up this new customer. That's bringing our share up and continuing to drive our share in that marketplace.

Our next question is from Scott Graham with Seaport Research Partners.

Sorry about that. The gross margin, the minus 500 basis points, Tim, could you provide a little bit more color around that, if you would?

Yes, sure. I think the positive takeaways from gross margin were that we had better manufacturing efficiencies. So we had a benefit from lower underabsorbed costs. We've made statements. So that's a real focus of ours of trying to get that improved. It helped a little bit. The revenue is up a bit. The second side of it is, we've got inventory more under control over the last 12 months. The inventory provisions that we incurred were a bit lower.

Offsetting those benefits, we did have really related to product mix, both on a geographic and product basis, a little bit of an impact to gross margin due to lower product gross margins. But in that regard, we've actually got cost reduction initiatives across 4 or 5 different areas that we're starting to roll through the business model. So we expect that product gross margin to improve.

I mean just a couple of examples of those as, for example, the RAC integrated higher-power lasers are starting to be introduced more fully. We're looking at some of the micromachining lasers with higher power output and better specification that the build of material won't change on. We're automating the production of some of our consumable fibers for medical. And there are other areas that we're working on to get the product cost down. So we expect that to bounce back.

And then the tariffs, if you really compare Q2 to Q1, the tariff impact was 115 basis points. You add that back to both the adjusted and unadjusted gross margin, you're back close to 39% on an adjusted basis and 38.5% on a GAAP basis.

Very good. Yes. Very thorough response to my question, Tim, thank you really a lot for that. It would be nice also if you guys got a little bit of help from your end markets. And I think there are a couple of companies that have reported so far that have indicated that, hey, look, once this tariff uncertainty, once that cloud starts to lift a little bit, there's going to be an increase in great projects are going to be greenlight and things are just going to be a little bit better.

I was wondering if you were kind of hearing that from your customers? A big part of your revenue basis, general industrial across the world, and it's just kind of hoping if you heard anything from that from your customers, if you could share that from your general industrial market?

Scott, this is Mark. So as I talked about, we've seen -- we've obviously seen some pickup. We see the book-to-bill strong. We've seen the improving in the various regions. The but we're still in some -- we still have some uncertainty. I'd say, again, it's what I said, I think my customers are saying the same thing that they have a cautious optimism looking forward. There's still some uncertainty with the tariffs and there's some uncertainty in the market, but I'm hearing, let's say, cautious optimism.

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

I'm just wondering if you can comment about welding market outside of China, in particular, United States?

Yes. Mark, so we've seen good growth in welding globally. So I can say that the strongest growth that we saw was specifically in EV and the biggest piece of growth there was in China, but we do have -- we have had broad-based growth, and we've seen growth also quarter-on-quarter with LightWELD in welding. So we are seeing some increase.

I'm just wondering, too, if you can comment about the margin profile of your backlog? Is that similar to what you're expecting in the third quarter?

Yes. I mean the mix on that is not fundamentally different going into the quarter mark.

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

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