3IPG Photonics Key Stats IPG Company OverviewWorld’s Leading developer and manufacturer of high-performance fiber lasers, fiber amplifiers, and diode lasers that are used for diverse applications.Vertically integrated business model has led to industry leading margins.Diverse Global Customer baseLargest customer accounted for 11% of sales in 2013Sell to OEMs, System Integrators, and End UsersNumerous applications and industries that use IPG productsOffers low, mid, and high power lasersIPG Photonics Key StatsMarket Cap$3.54 Billon2013 Revenue$648 Million2013 Net Income$156 MillionOperating Margin34%Net Margin24%Leading developer and manufacturer of high-performance fiber lasers, fiber amplifiers, and diode lasers that are used for diverse applications, but primarily materials processingFiber lasers are a relatively new generation of lasers that offer a number of advantages.Offers lines of low, mid, and high power lasersSell to original equipment manufacturers (OEMs), system integrators, and end usersVertically integrated companyDesign and manufacture most of the key components used in the finished productSemiconductor diodes, optical fibers, finished fiber lasers, amplifiersOffer complementary productsLower manufacturing costs, control quality, rapidly develop and integrate advanced products, protect technology
4Revenue by Region Europe: $205,426 31.8% of Rev North America: $116,93518% of RevEurope:10% Germany ($65,147)Asia:10.5% Japan ($67,981)29.7% China ($192,134)Other:0.1%Asia:$324,46150.1% of Rev
5Advanced Applications Laser ApplicationsMaterials ProcessingCutting and WeldingMicro-processingIPG’s largest Source of RevenueMedicalSurgerySkin and Tissue ResurfacingKidney Stone TreatmentAdvanced ApplicationsCommunicationSource in fiber Optic Communications“the highest power ever documented while retaining beam quality and electrical efficiency” and that the fiber laser consumes half the power of more conventional solid-state laser. – Lockheed Martin
7Who are the End Users? Automotive Steel Cutting and Welding Brazing and welding auto framesGeneral ManufacturingFlat sheet, tube, and 3D cuttingMarking, engraving, and printingBrazing and hardening3D printingHeavy IndustryDrilling for natural resourcesWelding and cutting thick plates for ships and rail carsHardening and welding pipes in nuclear, wind turbine, and pipeline industriesAerospaceWelding titanium air framesCladding partsPercussion drilling of partsSemiconductor and electronicsComputer disk manufacturingMemory repair and trimConsumerCutting and marking parts for electronics and appliancesCredit card markingWelding razor blades and batteries
8Fiber Lasers - Function Electrons excited by pumping into excited state.Specialized material settles into meta excited state.All atoms in meta excited state release photons at once; released gradually through from mirrored chamber.Utilize fiber optic cables doped with rare minerals to store excited electrons.Initial pump energy provided by Diode pump laserBeam can be more finely controlled with gratings at release point.
9Value Proposition of Fiber Lasers Efficiency – dissipates heat over the entirety of the cable, reducing energy loss.Precision – fiber lasers offer straight, focused beams, increasing power and accuracy.Maintenance – mirrors used in other lasers require frequent, extremely complicated alignment; fiber lasers avoid this problem entirely.Convenience – lighter and smaller due to the removal of large mirrored chambers.Performance – output beam is virtually non-divergent over wide power ranges which enables higher precisionLower costs – purchase price generally lower than YAG lasers and also many CO2 lasers2-3 times more efficient than diode pumped YAG lasers3 times more efficient than CO2 lasers15-30 times more efficient than lamp-pumped YAG lasersLower maintenance costs than conventional lasersEase of useNo moving parts = no adjustments of internal componentsCompact sizeSmaller and lighter in weightMore durableUser can choose wavelength and have precise control of the beamHave been around for 4 decades but recent adoption attributed to improvements in output power levels, costs, and superior performanceImproved optical components such as diodes and active fibers have increased the power of fiber lasersPower output now exceeds conventional lasersHistorically, semiconductor diodes represented the majority of the costs of fiber lasersMade them unable to compete on price previouslyAdvancements in technology and increased volume have drastically brought down average cost per watt of power
10Vertical IntegrationOccurs when a company expands into areas at different points along the same production path.A company that controls its suppliers has backward integration.A company that controls its distributors has forward integration.Banana MicrochipsSun MicrochipsBanana PhonesLowers costs and improves margins.Additional competitive advantage.The Banana StoreBestbuy
11Vertical Integration Components Complete control over manufacturing process.Patents on diode pumps, special fibers, optical components, amplifiers, and gratings.Diodes and other components more reliable and powerful than others on the market.ApplicationsExtensive application testing facilities – offers process development services.Does further R&D on new applications of more powerful lasers.
12Investment ThesisConventional lasers are getting older (20+ years)Companies looking to replace older lasersMarket is mostly concentrated with conventional lasersFiber lasers are a cheaper, more powerful, and more reliable alternativeIPG is the leader of the fiber laser space.Great opportunity for IPG to steal market share from competitors and further innovate its productsRecent insider sales have lead to an overreaction from the market, driving the prices down.The Street is concerned about adoption rates of the disruptive technology.The Street is overly concerned about increased competition from low-cost producers due to temporary slowdowns in bookings from key market sectors, like China.
13Breakdown by Product Line % revenueForecast assumptionsHigh Power54%Forecast strong growth in material processing.Difficult for first generation lasers to compete in pricingsince efficiency of fiber lasers allows high wattagesUV Lasers will add additional product line for moreprecise machining and memory usage.Pulsed17%Revenue will decline due to increased Chinese competitionMedium Power11%Revenue will increase in material processing (correlated to high power growth)QCW4%Revenue will increase in fine welding applications as they replace Nd:YAGLow Power2%Decrease in revenue due to stronger competition in Asia and from established gas laser producers which can manufacture low power lasers at a lower price point
14Market Penetration by Application Highest projected growth High power applications (cutting and welding) Marking Fine Processing Micro-processing (semiconductor, packaging, flat panel display, solar) Non-metal processing Slowest projected growthCutting – flat sheet cutting, tube cutting, 3D cutting3D printing market could be a catalystWelding – Car body scanning welding/ seam welding and brazingMicro-processing - size of technology is getting smaller which benefits laser makersOther examples)High-strength steel in automotive manufacturing to decrease weight of vehiclesGrowth in additive manufacturing to produce complex partsCutting sapphire crystal and glass for use in smart phonesMiniaturization of parts and electronicsNew products will be able to address unpenetrated markets.
17Valuation Current Price - $66.86 Price Target - $79.80 (19.35% return) CaseAssumptionsP/E MultiplePrice TargetBear20%Competitors are able to break into high power market (16% q/q); Chinese competition forces greater than expected decline in other segments (-14% q/q)17$63.45Base50%IPG maintains technological advantage, high power growth is strong (22% q/q); Chinese impact limited to smaller segments (-10% q/q)20$80.52Bull30%High and medium power growth is stronger than expected (26% q/q); Chinese impact reduced (-7% q/q)21$89.50Current Price - $66.86Price Target - $79.80 (19.35% return)
18Industry Share Valuation 201320142015Total Laser Industry Revenue4,4804,7044,939% Growth5%Total Fiber Laser Revenue9111,0931,31220%Market Share23%27%IPG's marketshare of Fiber Lasers71%69%67%IPG Fiber Laser Revenue647754879Cost of revenue302355413% of Revenue46.7%47.0%Gross profit344.7399.8465.8Gross Margin53.3%53.0%Total operating expenses121.0141.8167.0Operating Margin18.7%18.8%19.0%Operating income22425829934.6%34.2%34.0%Net income153181209Net Margin23.7%24.0%23.8%Earnings Per ShareBasic3.073.48$4.02Diluted2.954.02Current Price - $66.86Price target byMarket share value:$80.46 (20.34% upside)
26Valuation – Operating Expenses Cost of revenue66777981889295103108111% increase17%3%0%8%5%2%9%Gross profit768993104102114120123% Growth18%4%-4%Gross Margin53.3%53.5%53.9%52.3%52%54%53%Operating expensesResearch and development8.810.511.510.912.813.415.615.917.318.218.8% of Revenue6.2%6.3%6.7%6.4%7.5%7.0%8.0%Sales and Marketing126.96.36.199.07.87.67.48.24.1%3.9%4.2%4.0%3.8%3.7%3.5%General and Administrative11.813.213.012.913.113.514.114.815.28.3%7.7%7.6%6.8%6.5%Loss (Gain) on foregin exchange(0.5)(0.1)1.6(1.4)0.91.01.11.2-0.3%-0.1%0.9%-0.8%0.5%Total operating expenses26.030.033.032.731.535.537.638.037.240.142.143.418.3%18.1%19.2%19.1%18.5%19%Operating income49.558.859.856.657.768.764.666.567.373.777.579.7-5%-6%1%10%Operating Margin35.0%35.4%34.7%33.2%33.8%35.7%33.4%34.0%Interest Expense-0.10.00.10.20.0%0.1%Other income (expense)-1.3-1.51.7-0.7-1%Income before taxes58.355.159.668.264.866.767.573.977.780.014%Provision for income taxes14.517.917.717.520.719.520.020.222.223.324.0Tax Rate29.3%30.4%32.1%30.1%30.0%Net income from continuing operations35.040.940.637.447.545.446.747.251.854.456.020%16%12%25%OtherNet income20.3%16.0%11.7%24.8%12.2%9.0%19.8%20.0%Net Margin24.7%24.6%23.6%21.9%23.3%23.5%23.7%23.9%