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IPG Photonics Corp (NASDAQ:IPGP)
Q4 2019 Earnings Call
Feb 13, 2020, 10:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning, and welcome to IPG Photonics Fourth Quarter 2019 Conference Call. [Operator Instructions] At this time, I would like to turn the call over to James Hillier, IPG's Vice President of Investor Relations for introductions. Please go ahead, sir.
James Hillier -- Vice President of Investor Relations
Thank you, Darryl, and good morning, everyone. With us today is IPG Photonics' Chairman and CEO, Dr. Valentin Gapontsev; Chief Operating Officer, Dr. Eugene Scherbakov; and Senior Vice President and CFO, Tim Mammen. Statements made during the course of this call that discuss management's or the company's intentions, expectations or predictions of the future are forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause the company's actual results to differ materially from those projected in such forward-looking statements. These risks and uncertainties include those detailed in IPG Photonics' Form 10-Q for the quarter ended June 30, 2019, and other reports on file with the Securities and Exchange Commission.
Copies of these filings may be obtained by visiting the Investors section of IPG's website or by contacting the company directly. You may also find copies on the SEC's website. Any forward-looking statements made on this call are the company's expectations or predictions only as of today, February 13, 2020. The company assumes no obligation to publicly release any updates or revisions to any such statements. For additional details on our reported results, please refer to the earnings press release and Excel-based financial data workbook posted to our Investor Relations website. We'll post these prepared remarks on our Investor Relations website following the completion of the call.
With that, I'll now turn the call over to Valentin.
Valentin P. Gapontsev -- Founder, Chief Executive Officer and Chairman of the Board
Good morning, everyone. We delivered fourth quarter revenue slightly above our guidance range on strengths in the U.S. market and new products. The global market economic backdrop, and the competitive landscape in China was the main challenge. However, we are responding with product cost reductions in differentiated new features and accessories for our core products. Furthermore, we're leveraging one of our largest R&D investments in the laser industry to launch leading-edge laser products and systems for new markets. This new solution, which represent about 1/5 of total sales enhance our growth and margin profile and provide greater geographic and end-market diversification. Also weaker microeconomic trends have reduced demand for our core product in the near term. We introduced new lasers and new features that enhance productivity and flexibility for the industry.
In 2019, we saw a record number of high-powered lasers, increasing sales of sources at one kilowatt and greater by near 23% in total, up to 14,500 units. These numbers include sales growth of laser with power of one to 4-kilowatt of [Indecipherable] type by 60%, and ultrahigh power laser of at 10-kilowatt and greater by more than 25%. However, this extremely impressive growth did not compensate our revenue losses caused by very aggressive artificial stimulated growth of fiber with the power price in Chinese market. It's absolutely unfair competition. It's but it's obviously different trough Multiple IPG customers are launching new cutting systems using our 12-kilowatt cutting applications eightfold. Many of these are sold with our new ultra high power cutting sets. In addition, we sold our first laser with high peak power and adjustable mode beam capability. HPP products delivered peak energy, twice the average power of the laser, increasing cutting speed and quality by reducing scrap through converter nesting of parts.
Our a new AMB laser permit the broadest range of beam tunability, enabling spot wells with welding and enhancing the speed of electrical vehicle reproduction. When combined with our unique high-power pulse laser four for cutting and ultra high power CW laser for welding, we see significant opportunity in the vertical in the market this year. Our fiber laser increased customer return on investment by delivering the industry highest power work efficiency [Indecipherable] and going with industry-leading beam quality. Competitors, however, often struggle to maintain power even after only several hundred hours of operation. IPG lasers delivered piece of mind and of our lifetime cost, while enhancing end user productivity. IPG also offers the highest brightness through 50-micron core diameter fiber, providing our customers with more than 70% higher productivity in cutting thin metal versus which is a competitive compete in way that enhanced micron fiber. Augmenting our laser solution with high-power optical head is a key differentiator versus our laser competitors. In 2019, we delivered very good sales of optical heads and other beam delivery accessories, growing sales of this product by 10%.
We also shipped our first volume order for LDD process monitoring, our patented real-time welding monitoring solution. LDD enables greater use of laser-based welding in automated production in later month, and we are puts in multiple million dollar plus opportunities with this technology in such associated laser product sales. We sold a record number of systems for material growth sales in 2019 with the revenue increasing 33%, excluding Genesis, which we acquired in December 2018. Standard and custom systems for the eco and battery production, medical device manufacturing, pipe welding, cleaning and inspection application drove systems growth. We plan to, on average, change the set unique expertise in robotic system integration to accelerate with the processing within the transportation, aerospace and industrial end markets. Product innovation remains core for IPG success. But in 2018, new product sales were 19% of total revenue and 24% in the fourth quarter alone.
Sales of green pulse lasers, used to improve our solar sales efficiency increased by more than 60% in 2018. Sales of ultrafast pulse lasers increased more than 80% year-over-year off a small base, with more than 50 new projects for these lasers across a wide range of applications as processing glass, ceramic, circuit boards, OLED, fumes, batteries and solar cells. And reason constant pulse energy, expand the portfolio of new green ultraviolet and and ultrafast pulse lasers. We expect revenue of these products to grow rapidly over the coming years and become a more meaningful percentage of total sales. Sales of medical increased 80% in 2019, as our Thulium Laser solution, they received approval in China and the U.S. We expect sales into urology and other soft tissue applications to ramp over the coming years off our base. Our medical laser business model include consumable fibers and continuing revenue stream that benefits as the number of installed system increase. Sales of our RGB Luminaire Laser System for cinema application increased more than 100% in 2018.
We continue to invest in transformative new products within new application areas as well, including new medical treatments and infrared lasers for spectroscopy, inspection and sensing application and ultra high power single-mode laser for aerospace and defense. We willed away on our core screening strengths and strong cash from mobile to optimize investment in strategic initiatives critical to the long-term success of the company. The initiatives include a great mix of high-power laser, along with differentiated features and solutions in new markets and applications. We expect to grow faster for these new product areas, enabling IPG to deliver strong growth in revenue and cash flow. I want to thank our talented employees for their hard work during the challenging year.
As you are, I remain confident in IPG's ability to execute during this period, delivering on our mission to make our fiber laser technology the tool of choice in mass production. By the away, I will Dr. Eugene Scherbakov, IPG's Chief Operating Officer, to participate in our earnings calls. As many you know, Eugene is a long-serving member of IPG's executive leadership team with extensive operational and technical knowledge of our business. He will be able to provide you with additional insights into IPG's operational performance during this quarter.
With that, I will turn the call out to Eugene.
Eugene Scherbakov -- Chief Operating Officer, Managing Director of IPG Laser GmbH, Senior Vice President, Europe and Dire
Thank you, Valentin, and good morning, everyone. I'm pleased to join you today and on future calls to discuss the operational trends in our business. IPG remains the clear market leader in fiber laser with hundreds of megawatts of installed capacity. In 2019, we shipped 52 megawatts of total optical power, increasing 14% year-over-year. We continue to see aggressive prices among China-based competition, which intensified toward to the end of the second quarter last year. Since that time, pricing has been more stable, and for the year, the decline of average price per kilowatt has affected the dollar value of units sold. But our ability to rapidly reduce cost has limited the gross margin impact from these price reductions. Our team is focused on cost reduction throughout the manufacturing process that we believe we will significantly reduce the cost of our high-power laser solutions from one up to six kilowatts, which accounts for a majority of our high-power units sold.
When combined with the full benefit of the cost actions we undertook in the second half of 2019, we believe that these measures will help us sustain our industry-leading margin profile and cash returns. We will continue to manage our cost structure to business environment, targeting gross margin of 45% up to 50%. Excluding inventory provisions, we are at the bottom of this region range during the fourth quarter. We executed well in controlling manufacturing expenses, decreasing them by more than 10% from third quarter. This benefit was mostly offset by a reduction of costs absorbed into inventory business lower production level. Power has enabled us to generate cash from inventory as the reduction in the value of inventory on hand was greater than inventory provisions. Examining our performance by region, revenue in China decreased 21% year-over-year and represented approximately 30% of our total sales.
As we had expected, performance was impacted by weaker demand due to the U.S.-China trade conflict, slowdown in capital investment and greater than average price declines. In Europe, revenue decreased 17% year-over-year. The demand environment in Europe remains very challenging as the key macroeconomic indicators remain weak in the region. Revenue in North America increased 30% year-over-year driven by acquisition of Genesis. Excluding Genesis sales, North America increased 23% year-over-year with strong growth in welding, surgical and communications applications. Our growth in North America is a testament to our diversified portfolio strategy.
We're increasing adoption of our beam-delivered accessories, and complete laser solution was augmented by growth in advanced applications, communications and medical laser products. Sales in Japan decreased 37% year-over-year. Similar to Europe, the macro economy in Japan remains weak. However, we continue to work in of a number of substantial laser welding project in the region. Sales in Korea increased 2% year-over-year on strength and battery welding. And sales in Turkey decreased 80% year-over-year given macroeconomic pressures affecting cutting business in the region.
With that, I will turn the call over to Tim to discuss financial highlights in the quarter.
Timothy P.V. Mammen -- Chief Financial Officer and Senior Vice President
Thank you, Eugene, and good morning, everyone. Revenue in the fourth quarter declined 7% year-over-year to $307 million. Revenue from materials processing applications decreased 11% year-over-year, and revenue from other applications increased to 42%. Sales of high-power CW lasers decreased 15% year-over-year, and represented approximately 51% of total revenue. Reduced revenue from high-power CW lasers in cutting and welding was partially offset by strength in other materials processing applications. Pulsed laser sales decreased 33% year-over-year, with growth in green and ultraviolet pulsed lasers offset by lower sales of pulsed lasers for marking and fine processing applications. System sales increased 69% year-over-year, including Genesis, and increased 43% year-over-year, excluding Genesis. Medium-power laser sales decreased 32% on softness in additive manufacturing and the transition to kilowatt scale lasers in cutting, while QCW sales increased 14% year-over-year. Other product sales increased 6% year-over-year driven by growth in beam delivery accessories and service revenue.
For the full year 2019, revenue declined 10% year-over-year and 10% on an organic constant currency basis. Q4 GAAP gross margin was 40.5%, which declined 1,000 basis points year-over-year. Excluding higher inventory reserves, Q4 gross margin would have been 45.2%, and normalizing for a full bonus accrual, gross margin would have been 44.1%. Compared with the year-ago period, higher inventory reserves reduced gross margin by 570 basis points. Less favorable absorption of manufacturing expenses reduced gross margin by 250 basis points, and the acquisition of Genesis reduced gross margin by 180 basis points. Fourth quarter GAAP operating income was $243,000, and operating margin was 0.1%. Excluding higher inventory reserves, foreign exchange and charges related to asset impairment and restructuring, Q4 operating margin would have been 20.9%. And normalizing for a full bonus accrual, operating margin would have been 17.8%. As a reminder, our fourth quarter expenses did not include an accrual for employee bonuses because of 2019 underperformance relative to our budget. For modeling purposes, you should assume quarterly bonus expense of approximately $4 million in cost of sales, and $5 million operating expenses in 2020.
Net loss was $4 million or $0.08 per diluted share. Higher inventory reserves and charges related to impairment of goodwill and other long-lived assets and restructuring reduced EPS by $0.99. In addition, foreign exchange losses reduced EPS by a further $0.08, and discrete tax items benefited EPS by $0.08 as well. Exchange rates relative to the U.S. dollar had been the same as one year ago. We would have expected revenue to be $4 million higher and gross profit to be $2 million higher. The effective tax rate in the quarter was 245%. The effective tax rate was increased by nondeductible charges related to impairment of goodwill and other long-lived assets and restructuring and decreased by certain discrete benefits in the quarter. On a non-GAAP basis, excluding these effects, the underlying fourth quarter tax rate was approximately 27%. We ended the quarter with cash, cash equivalents and short-term investments of $1.18 billion, and total debt of $42 million. More than 60% of our cash is held in the U.S. with most of the remaining cash balance in Germany. Effective operational execution resulted in cash provided by operations of $130 million during the quarter. Capital expenditures were $26 million in the quarter, and $134 million for the year versus our revised target of less than $150 million.
During the quarter, we repurchased 105,000 shares for $15 million. For the full year 2019, we repurchased $41 million worth of stock and have $84 million remaining on our current buyback authorization. We ended the year with $285 million of shippable backlog, down 16% year-over-year, and total backlog, including frame agreements of $693 million, down 3% year-over-year. Fourth quarter book-to-bill was 1, in line with normal seasonality. Turning to guidance. We believe we have significant long-term growth opportunities in laser welding, fine processing, electric vehicle batteries and our portfolio of new products addressing opportunities in micro-processing, medical systems and beam delivery solutions. Current demand for our leading-edge laser solutions remains mixed, with strength in North America and emerging regions, such as India and Southeast Asia offset by ongoing macro softness in Europe and Japan. Prior to the government-extended Lunar New Year holiday, there were signs that business in China was firming with order flow having picked up in December and January. However, ongoing business disruption related to the novel coronavirus outbreak makes forecasting our business in China and the impact on global demand very challenging at this point.
China is a large and important market for IPG with repercussions for other markets, and we continue to monitor the situation closely. For the first quarter of 2020, IPG expects revenue of $220 million to $250 million. The company expects the first quarter tax rate to be approximately 26%. IPG anticipates delivering earnings per diluted share in the range of $0.00 to $0.30, with 52.9 million basic common shares outstanding and 53.6 million diluted common shares outstanding. This guidance assumes approximately $45 million in reduced revenue and $0.45 lower EPS from business disruption related to the novel Coronavirus outbreak. This estimate is based upon the facts and understandings we have at this time. As discussed in the safe harbor passage of today's earnings press release, actual results may differ from our guidance due to factors, including, but not limited to, goodwill and other impairment charges, product demand, order cancellation and delays, competition, tariffs, trade policies, health epidemics and general economic conditions. Our guidance is based upon current market conditions and expectations, assumes exchange rates referenced in our earnings press release, and is subject to risks outlined in the company's reports with the SEC.
With that, Valentin, Eugene and I will be happy to take your questions.
Questions and Answers:
Operator
[Operator Instructions] Our first questions come from the line of John Marchetti of Stifel. Please proceed with your question.
John Marchetti -- Stifel -- Analyst
Thanks very much. I was hoping we could just spend a minute on some of the commentary that you talked about seeing some strength in the order book, obviously, in December and January, out of China. Recognizing that, that's likely very much up in the air right now given everything that's going on there, but just hoping you could spend a couple of minutes talking about where you were seeing some of that strength. And then maybe as we look out a little bit further into 2020, you may be looking around, maybe geographically, where do you see some of the bright spots and some of the risk points ex-China as we go through the year? Thank you
Timothy P.V. Mammen -- Chief Financial Officer and Senior Vice President
I think that in a general pickup in demand in China in terms of order flow, a little bit, we saw that in December. It helped the book-to-bill equal 1. And then certainly, in January before the Lunar New Year and the Coronavirus disruptions, the order flow in China has really been pretty positive across OEMs for cutting applications. I haven't had a chance to look at the detail of where that was really coming from yet, but we've looked at the total number, so we'd have to pass that through in a bit more detail. But it was certainly a good start to the year, and we're showing significantly better tone than we've seen over the previous four or five months. In terms of the rest of the geographic regions, I mean, we look at the same macroeconomic data that you would, and we continue to see that the underlying strength in the local economies is largely driven by strength in the U.S., which continues to hold up well.
Sentiment perhaps isn't quite as strong as it was a year ago, but we've also got the benefit in the U.S. with a much more diverse product line with new applications coming on-stream, referenced some of the cinema and medical opportunities are expected to grow very strongly. So I think the U.S. is a reflection of where we'd like to see the whole business flow globally with that diversification. Some of the medical will also we were selling some of the medical lasers, for example, in India and China. Starting to sell them in China, so that should be a bit of a benefit there. I'd say, globally, Europe looks more at least it was looking a lot more stable, and order flow in Europe at the beginning of the year has been reasonable.
Europe is obviously a key. They will add a lot of export-driven industries, so it's going to be interesting to see whether some of the impact to China, which is really uncertain at the moment, offset some of the stabilization, if not even a bit of strength in Europe. I was quite pleased to see where European order flow had been in the first six weeks of the quarter. Japan remains weak, but orders in January were reasonable there. Korea was reasonable. I think macroeconomic-wise, Japan is the other weak area at the moment.
John Marchetti -- Stifel -- Analyst
Thank you.
Operator
Our next questions come from the line of Tom Diffely of D.A. Davidson. Please proceed with your question.
Tom Diffely -- D.A. Davidson -- Analyst
Yes, good morning. So I was curious on the orders that picked up in December and early January. Have you since seen those quarters pushed out or canceled? Or is it just a lack of new orders filling the void?
Timothy P.V. Mammen -- Chief Financial Officer and Senior Vice President
We haven't had I mean, in relation to the shutdown, Tom, over the last two weeks in China?
Tom Diffely -- D.A. Davidson -- Analyst
Correct. Yes.
Timothy P.V. Mammen -- Chief Financial Officer and Senior Vice President
So no, we just don't have any indication of whether they're just going to be pushed out or delayed and taken later. It's a very fluid and changing situation with people back in our major offices only on Monday. So we don't know whether it's going to lead to a big pickup in Q2 because demand recovers or whether it is a permanent push out for the year. We also have not had any orders canceled, and the general theory I mean, one of the comments from our general manager in China is that people are keen to get back to work to offset the losses they're incurring. Whether that can happen or not is an open question, right? This is a very changing situation. Even overnight, there's a bit more negativity around the way they're diagnosing the virus, and certainly, that's having an impact on the U.S. market today and Europe. So it's just such a changeable situation. It's not really possible to give you anything more definitive than the estimates we've made as of today.
Tom Diffely -- D.A. Davidson -- Analyst
Okay. And that's helpful. And then as a follow-up, just a little bit more maybe on the battery, the auto battery market, what type or size of laser is used in that space? And what do you think the long-term prospects are from a market point of view?
Timothy P.V. Mammen -- Chief Financial Officer and Senior Vice President
There's a wide variety of lasers used in battery processes. Dr. Scherbakov knows a lot about this. So he'll cover some of that.
Eugene Scherbakov -- Chief Operating Officer, Managing Director of IPG Laser GmbH, Senior Vice President, Europe and Dire
Yes, there is a different kind of applications for battery. Battery welding is one of the applications. The second one, it's weldings also case for battery. And for these applications, our customers using different kind of lasers. But the last lasers we should supply to our existing and some potential customer, these options, ABB, MBB options, adjustable mode beam diameter. And the first result demonstrates a very good result. Just experiments demonstrates very good results. And from this point of view, we see a good future for our high-power lasers, first of all.
Valentin P. Gapontsev -- Founder, Chief Executive Officer and Chairman of the Board
For us, growing demand is foreseen for cutting, I would say, it's very special where you can super high-speed cutting, and they use our green laser now, I would say, the supply products were required, but so when we will meet this requirement. But batteries are growing business, and also, system business for automation of the production of battery production, also, we're talking with some major Tier one players in this market.
Eugene Scherbakov -- Chief Operating Officer, Managing Director of IPG Laser GmbH, Senior Vice President, Europe and Dire
And also important that such kind of battery are now using the different automotive customers. And for example, we received a very big enough orders for other lasers, and together, with our online monitor, produced by LDD. In this case, it's very important applications, and we see that also big interest in for such kind of combinations. I mean our lasers, online monitor, welding monitor, especially for battery production.
Tom Diffely -- D.A. Davidson -- Analyst
Okay, thank you for the color.
Timothy P.V. Mammen -- Chief Financial Officer and Senior Vice President
And then Tom, the other part of your question was, this is continues to be a decades long a decade-long decades, perhaps, long investment cycle. It's really the transition to electric vehicles is going to happen in the volumes that everyone is expecting. If you're going to get to 25% or 30% of vehicles, there's probably over $1 billion of laser-based investment that's required over a 10-year period. So that's still hasn't changed at all at this point in time.
Tom Diffely -- D.A. Davidson -- Analyst
Okay, thank you, Tim.
Operator
Our next questions come from the line of Jim Ricchiuti of Needham & Company. Please proceed with your question.
Jim Ricchiuti -- Needham & Company -- Analyst
Thank you. Good morning. So one of the things that I was kind of struck by in the quarter was the strength you're seeing in the ultrahigh power segment of the market. And so what does that reflect, just this shift in demand within China to move at an accelerating pace to ultra high power?
Eugene Scherbakov -- Chief Operating Officer, Managing Director of IPG Laser GmbH, Senior Vice President, Europe and Dire
Of course, there are some trends, first of all, in China, because in China, this customer, much more flexible in comparison to the other countries. And some of these customers already used our, for example, 20-kilowatt laser for cutting applications. They produce special machines. But for us, it's much also very interesting because we are not supplying on the lasers, it's supplying our optical [Indecipherable] for these high power lasers. And in this combination, there is also special produced fiber, we can generate a good revenue. But also some customers now start to ask about 35-kilowatt laser for cutting applications. And such kind of trends also we saw in Japan and with some delay also in Europe.
Jim Ricchiuti -- Needham & Company -- Analyst
Got it. And Tim, if I may. Just with respect to the Q1 guidance, I assume there's going to be a considerable headwind from underutilization impacting gross margins in Q1. Is there any way to think about gross margins in the near term?
Timothy P.V. Mammen -- Chief Financial Officer and Senior Vice President
Yes. I mean, unfortunately, this quarter is probably one of the most difficult quarters that we would have had since 2009. So the gross margin that we're factoring in, in that guidance is below to 40%. We're using operating expenses that will be a bit higher than they were in Q4 in the sort of $76 million to $78 million. If you exclude the impact related to the reduction in demand for China, gross margin would have been closer to the 45%. It would have been slightly below at the top end of the range, 45%. And at the bottom end of the Q1 range, it would have been about 40%. So Q1, even if you add back in the impact of Coronavirus, it was obviously going to be a difficult quarter for us. We would have expected that, if the order trends had held up, to really transition into a stronger Q2 based upon what we've seen on order flow. So it is a difficult Q1, and probably, as I said, one of the more difficult quarters we've had for the last 10 years in that context.
Jim Ricchiuti -- Needham & Company -- Analyst
Got it. And last question for me is just with respect to the U.S. business, ex-Genesis, was there anything unusual in terms of larger pieces of business that contributed to that growth?
Timothy P.V. Mammen -- Chief Financial Officer and Senior Vice President
There are some battery welding projects we talked about that went into ultimate custom was a European automotive entity. That was a nice order that we took. It was with the LDD that Eugene mentioned. U.S., generally, we'll see a pickup into Q4, right? So you had that benefit in a similar way that we had it before. That was probably the largest single order I can reference. You had some benefit coming from a pickup in medical, but that's going to carry on. We've already got a significant large order that was booked in January for the medical business for this year. Those are the two things I can think of. We had a 100-kilowatt laser order in the U.S. that didn't actually ship, it's going to ship in January. And one of the other benefits, by the way, on the ultra high power was the talking about the overall ultra high power, the 120-kilowatt in Germany, by the way, did ship. So that benefited some of the ultra high power numbers as well.
Jim Ricchiuti -- Needham & Company -- Analyst
Got it, Thank you, Appreciate it. Thanks a lot.
Timothy P.V. Mammen -- Chief Financial Officer and Senior Vice President
No problem, Jim.
Operator
The next question is coming from the line of Michael Feniger of Bank of America Merrill Lynch. Please proceed with your question.
Michael Feniger -- Bank of America Merrill Lynch -- Analyst
Hi, guys, thanks for taking my question. Just first off, Tim, could you just help us? I know you talked about order flows picking up in December and January. Obviously, it's difficult to forecast. I'm just is that something that you sequentially see? Can you help us understand what gave you comfortability there to I know it's reassuring that order flows were firming. I'm just curious, is that like how is that seasonally just how the business typically trends? Or did you feel like there was actually some pickup more than seasonality, given the depressed markets before that?
Timothy P.V. Mammen -- Chief Financial Officer and Senior Vice President
That's an interesting question. Normally, January is a weak month for order flow in the last two years. So the beginning of 2018, coming off a depressed, sorry, the beginning of 2019, coming off a depressed end to 2018. We also had quite strong order flow in January in China and other areas. That drove the overall strength in the business in the first half of last year, which then obviously tailed off when you got to the end of June. So you saw a similar strength, if not even a bit more positive, I think, than last year overall in the first few weeks of this year. Obviously, you're latching on a little bit to this positivity or we are you want to see those trends carry on. We want to see those trends carry on through Q1 and into Q2, and we wouldn't want to see, obviously, a slowdown halfway through the year. We want to maintain this momentum, but the general tone was pretty good.
Valentin P. Gapontsev -- Founder, Chief Executive Officer and Chairman of the Board
Press review [Indecipherable] we have absolutely a record order flow, much higher than any other before. But what fourth quarter was a practical so far that in total. We expect that January would be way big platform compared to any other years.
Michael Feniger -- Bank of America Merrill Lynch -- Analyst
That's helpful. And just, if I understand, Q1 is difficult just with the cost savings that's occurring now, we can all try to have our own forecast on the macro. But with how you're managing the business, just with the cost savings you're trying to achieve, if we see a revenue base of $350 million and we're through the inventory charges, Tim, how can we think about maybe a gross margin range at that type of revenue number?
Timothy P.V. Mammen -- Chief Financial Officer and Senior Vice President
So $350 million, I'm comfortable of being back into the midpoint of the 45% to 50%. If you can get back up to like the $400 million, which seems a long way off at the moment, it's closer to 50%. And then operating expenses at that level would probably be around $80 million a quarter. So a bit above 20% in operating margins trending to slightly around 25%, I should think. But we're comfortable with at this point in time with that. I think the big caveat around that is so long as there isn't a massive change in pricing again, and we continue to make some cost reductions that we've got rolling into the business model over the next two quarters or so.
Michael Feniger -- Bank of America Merrill Lynch -- Analyst
And that is the if I could squeeze one more in, just on inventories. I think you mentioned, I believe, for the quarter, it was over a 550 million 550 basis points hit to gross margins on inventories. Are you with where you are now, obviously, there's no crystal ball on the macro. But like how are you feeling with your inventory position right now? And how we or do you think we're through some of those charges?
Timothy P.V. Mammen -- Chief Financial Officer and Senior Vice President
Yes. We went through a really detailed review of inventory, not just in Q4, but you saw you've seen elevated provisions even in Q2 and Q3 compared to normal. We believe that we've dealt with potentially excess items, and certainly, the slow-moving items that we've identified, and we'll be targeting being more in a normal range of 1% to 1.5% provisions per quarter. Of course, if demand doesn't come back, it you have to caveat that statement with relative to where demand was. But if you're getting back to like $300 million to $350 million, or $330 million to $350 million in revenue, I'd be very comfortable with where we stand on inventory. I think the other good thing was it wasn't just the inventory provisions that took inventory down, there was really good execution by the manufacturing groups around the world so that we actually generated $20 million of cash from inventory in the quarter, which was a great thing to see.
Michael Feniger -- Bank of America Merrill Lynch -- Analyst
Appreciate it. Thank you.
Operator
Our next question comes from Joe Wittine of Edgewater. Please proceed with your question.
Joe Wittine -- Edgewater -- Analyst
Thank you. Just some product questions for me, trying to understand how much a tailwind rising power levels could be in 2020. It sounds like the 12s are finally coming to market in the west, it's been a while coming. And then in China, wondering if you're seeing a continued extension at kind of the highest end of ultra high power, 20s, etc.?
Timothy P.V. Mammen -- Chief Financial Officer and Senior Vice President
A question about the shift continuing shift, and how much a benefit it can be.
Eugene Scherbakov -- Chief Operating Officer, Managing Director of IPG Laser GmbH, Senior Vice President, Europe and Dire
Yes. Benefit definitely the economic benefit for us. And first of all, in the end, there are no competition for such benefit powered lasers, it's clear. And also for different kind of applications. I already talked about cutting applications, but also for welding applications, special material welding applications also. As much as possible, they use only high-power lasers. It's high efficiency and so on. And from different kind of applications, high-power trend definitely will give us additional benefits.
Joe Wittine -- Edgewater -- Analyst
Okay. And then on high-peak power...
Valentin P. Gapontsev -- Founder, Chief Executive Officer and Chairman of the Board
Let me tell you, we now have the time when this year, we expect serious growth in high-power demand for advanced applications. They have much more budget. Potential customer with whom we're working, received this year much better high budget than before it went for the volume introduction to the use practical use, high-power different solutions we are working for.
Joe Wittine -- Edgewater -- Analyst
And what are those advanced applications? Could you elaborate further? Are those within macro, cutting and welding, still?
Valentin P. Gapontsev -- Founder, Chief Executive Officer and Chairman of the Board
No, no, no. It's other applications.
Eugene Scherbakov -- Chief Operating Officer, Managing Director of IPG Laser GmbH, Senior Vice President, Europe and Dire
And special material process areas.
Valentin P. Gapontsev -- Founder, Chief Executive Officer and Chairman of the Board
And it's placed mainly as application, not material processing.
Joe Wittine -- Edgewater -- Analyst
Understood. Thanks. And then switching gears to high peak power CW, the calls there, I would assume, are still under way. And I think you said you shipped one. So I'm assuming you have some more insights into the market acceptance. So as that product is fully commercialized, what sort of kind of kind of penetration are you expecting throughout the broad cutting business? I mean could that product be half of your cutting sales in the future once fully rolled out, more or less? Any help there would be great.
Timothy P.V. Mammen -- Chief Financial Officer and Senior Vice President
So I think on HPP, there continues to be a number of different customers that are evaluating the product within their cutting applications. It's still relatively unclear as to what percentage of total sales it can end up being, Joe. I think we'll have more clarity on that as we go through this year and customers start to introduce product, incorporating that feature within it. There's a bit more clarity, I'd say, over AMB, particularly for welding applications, where there's a lot of acceptance of that. We've always said the AMB would be a very strong performer on welding, given the reduced splatter and improvement in quality there.
Joe Wittine -- Edgewater -- Analyst
Okay. Great. And then, finally...
Valentin P. Gapontsev -- Founder, Chief Executive Officer and Chairman of the Board
In the second quarter, we introduced new families of the mid-power laser with HPP option. It's an absolute new level competing in performance to compare existing current laser to our competition, nobody from China, so don't want help -- nothing similar. So the deal with HPP will still grow very fast. It's HPP option for a new generation of the mid-powered lasers, including -- but also new performance and new quality with [Indecipherable] HPP option. And also much more because they exist in a way that also will allow us to increase the gross margin very essentially for mid-power lasers to retained very high profitability, which was in spite of the drop of price.
Joe Wittine -- Edgewater -- Analyst
Interesting. Finally for me, on the consumer electronics portion of your business, especially the fine welding piece. Have you received any indication on orders for the mid part of the year related to smartphones prior to the holiday and quarantine? I'm trying to assess how prudent it is for our models to assume an uptick in those investments in that part of the supply chain, given I think everyone believes it's going to be a stronger year for smartphone production from a unit perspective, coming off of a few quiet years.
Timothy P.V. Mammen -- Chief Financial Officer and Senior Vice President
No, we don't have any indication yet on likely orders. The general view is from the laser supply side. It's probably going to not be a huge catalyst in terms of a typical biannual, there should be some pickup, but it's not going to be a massive driver as it was in 2017. For example, they continue to repurpose some of the existing lasers into production lines, even for newer phones. So it's not as those going to drive like doubling of QCW sales or anything like that this year, Joe.
Joe Wittine -- Edgewater -- Analyst
Okay, super helpful. Thanks, Tim.
Operator
Your next question comes from the line of Mark Miller of The Benchmark Company. Please proceed with your question.
Mark Miller -- The Benchmark Company -- Analyst
Thank you for taking my question. Just wanted to look at looking at the backlog and framing agreement went up year-over-year, but orders were down. Can you provide some color on that?
Timothy P.V. Mammen -- Chief Financial Officer and Senior Vice President
No, I think the total backlog, Mark, was down 3%. So including frame agreements, it points to being a reasonable start to the year, but still a little bit uncertain. I think we focus a lot on the shippable side. So there's still some underlying demand there in terms of the frame agreements. There's a lot of frame agreements that have been put, for example, to get particularly higher power and ultra high power licenses. So there's clearly, if the economy is stabilized, I think that's the biggest trend that could come out of that is that you'll see the demand cycle for those ultra high power lasers, which require licenses increase. That will be the biggest read through I would go with on the frame agreement side of it. But it still requires more certainty on the macro, and clearly, resolution on not resolution, but some stability in relation to the current situation in China. I think where we were more focused on rather than what the closing backlog, the bookings in Q4 were the book-to-bill was 1. So that was reasonable given that we're at slightly above our guidance range. Our real focus on bookings, though, had been on the positive trends we've seen in January and even the first week of February, excluding China, obviously.
Mark Miller -- The Benchmark Company -- Analyst
In terms of the backlog, too, in terms of the mix, is this a higher margin mix or similar to what you've seen? And can we expect some improvements from the backlog in terms of margins?
Timothy P.V. Mammen -- Chief Financial Officer and Senior Vice President
I referenced that some of the frame agreement backlog will be driven by licenses getting for ultra high power lasers in the 10, 12, 20 and even in China moving toward potentially higher balances. That's all got a margin benefit to us in Q4. You actually, I think, saw and Valentin referenced this as well, the low end of the cutting market remained relatively stable in Q3 and Q4, that would have been a margin impact to us. So you see a recovery in ultra high power, then you see some orders coming from some of these other advanced applications at ultra high power, that has a margin benefit. We're selling more AMB lasers into the battery loading application, that has a benefit. And we're combining for the welding with the LDD, that has a benefit. And then key to everything as well is driving growth of ultrafast technology and green lasers, which also have extremely high-margin on them. They wouldn't be significant volumes of those in backlog at the moment, but growth of those business during the year is a target for the company.
Mark Miller -- The Benchmark Company -- Analyst
Thank you.
Operator
Our next questions come from the line of Nick Todorov of Longbow Research. Please proceed with your question.
Nick Todorov -- Longbow Research -- Analyst
Thank you. Good morning guys. Tim, you highlighted the strength in welding. Can you talk about mix within that? Maybe I'm assuming it's more AMB with lasers. But is it systems or lasers? Can you give us any color on mix and welding?
Timothy P.V. Mammen -- Chief Financial Officer and Senior Vice President
There's some benefit on systems, but there was also the significant order I mentioned for battery processing in the U.S. that benefited welding. That wasn't actually AMB, but it was order that was supplied with the LDD, the real-time welding monitoring and welding heads as well. There is some pickup in QCW in Q4 that would have been outside of systems, that would have been a driver as well as some of the welding performance. In the fourth quarter, there was some revenue recognized on some other welding systems, though, as well, which benefited stuff. A lot of the stuff that goes through Genesis, though, is obviously welding-based applications, not exclusively, but largely welding-based applications.
Eugene Scherbakov -- Chief Operating Officer, Managing Director of IPG Laser GmbH, Senior Vice President, Europe and Dire
Agriculture.
Nick Todorov -- Longbow Research -- Analyst
Okay. I understand that in other markets like Europe and China, it's difficult to forecast. But North America seems a little bit more stable. Are you willing to take a hit on what is the outlook you can see from North America, particularly in the core cutting markets for 2020?
Timothy P.V. Mammen -- Chief Financial Officer and Senior Vice President
I think I referenced that earlier in the call that we continue to see a reasonably robust demand environment, not just across the core cutting applications, but across numerous different applications in the U.S. And we're targeting reasonable growth on the U.S. for this year across all of these, not just the cutting and welding, but some of the newer applications, such as medical, semiconductor, advanced applications, deposition technologies, for example, like high-power cladding applications. And then the systems business as well is largely focused, even outside of the acquired business, the organic systems business the medical devices, for example, performed very well last year. There's a new system that's being introduced, stent cutting, which we think enhances our competitive dynamics in that market as well. So there's a lot of diversity in the U.S. business that would be helped by a stronger macro environment here compared to the rest of the world.
Valentin P. Gapontsev -- Founder, Chief Executive Officer and Chairman of the Board
And now until end of last year, second half last year, made a great drop. Now we go into a new level of cooperation in the implementation of welding laser welding technology to the many segment of industry. We signed now with very serious long term agreement with very big Tier one plays in aerospace and transportation. And so we become the real long-term partner in mainly in the development, the joint development of the new welding processes, including not only to sell ways like before for them, but provide them full complete solution, new process for special for each kind of the welding of material parts and so on. Then full automation system in providing and identifying ready production lines. It's a long-term cooperation with more and more such large, the Tier one in the corresponding segment of market, ways in the market. In the U.S., in the Europe, and so on. In material this -- not only metal processing welding, but also in the other material processing, and also one. It's not just a retail sales of long-term cooperation, where you see this partnership with biggest players in the market. It's open for us to work on the opportunity.
Nick Todorov -- Longbow Research -- Analyst
Understood, Thanks guys, Good luck.
Operator
Our final question comes from the line of Krish Sankar of Cowen & Company. Please proceed with your question.
Krish Sankar -- Cowen & Company -- Analyst
Hi, thanks for taking my question. I had two quick questions. One is, Tim, on your commentary on gross margin, I understand the biggest impact to gross margin is today from under absorption. So when you look at the revenue range of $300 million to $400 million on a quarterly basis, gross margin were up 45% to 50%. Is the inherent assumption service systems is a similar percentage of the total revenue than it is today? And then a quick follow-up for Dr. Scherbakov. Is the EV opportunity mainly on the welding side? Thank you.
Timothy P.V. Mammen -- Chief Financial Officer and Senior Vice President
So in terms of gross margin, in terms of the recovery to $350 million or $400 million, you'd actually expect the laser business to perhaps recover a bit more quickly than proportion of growth in systems, even though we're targeting very strong growth in systems. So there'll be a little bit of a margin benefit, but the systems would still be a drag relative to the top end of that range, like on a an equivalent basis compared to where we were before. If you excluded the systems, you'd be above 50%, slightly above 50%.
Eugene Scherbakov -- Chief Operating Officer, Managing Director of IPG Laser GmbH, Senior Vice President, Europe and Dire
Okay. Of course, applications are not only connected to battery welding or cutting or foil. Also, there exists some big opportunity to use our high-power laser for welding body and wide welding for vehicle And from this point of view, also we see a very good perspective for our lasers.
Krish Sankar -- Cowen & Company -- Analyst
Thank you very much, folks.
Operator
Thank you. At this time, I will turn the call back to James Hillier for closing remarks.
James Hillier -- Vice President of Investor Relations
Thank you for joining us this morning and for your continued interest in IPG. We're looking forward to speaking with you over the next few weeks and our next quarter's call. Have a great day, everyone.
Operator
[Operator Closing Remarks]
Duration: 59 minutes
Call participants:
James Hillier -- Vice President of Investor Relations
Valentin P. Gapontsev -- Founder, Chief Executive Officer and Chairman of the Board
Eugene Scherbakov -- Chief Operating Officer, Managing Director of IPG Laser GmbH, Senior Vice President, Europe and Dire
Timothy P.V. Mammen -- Chief Financial Officer and Senior Vice President
John Marchetti -- Stifel -- Analyst
Tom Diffely -- D.A. Davidson -- Analyst
Jim Ricchiuti -- Needham & Company -- Analyst
Michael Feniger -- Bank of America Merrill Lynch -- Analyst
Joe Wittine -- Edgewater -- Analyst
Mark Miller -- The Benchmark Company -- Analyst
Nick Todorov -- Longbow Research -- Analyst
Krish Sankar -- Cowen & Company -- Analyst
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IPG Photonics Corp (IPGP) Q4 2019 Earnings Call Transcript - Motley Fool
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