Greetings, and welcome to IPG Photonics Fourth Quarter 2020 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 Director of Investor Relations for introductions. Please go ahead, Sir.
Thank you, operator, and good morning, everyone. With us today is IPG Photonics Chairman, CEO, Dr. Valentin Gapontsev, Chief Operating Officer, Dr. Eugene Scherbakov, and Senior Vice President and CFO, Timothy Mammen. Statements made during the course of this call that discuss management's or the company's intentions, expectations, or predictions for 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 the impact of the COVID-19 pandemic on our business and those detailed in IPG Photonics' Form 10-K for the period ending December 31st, 2019, and our reports on file with the Securities and Exchange Commission. Copies of these filings may be obtained by visiting the investor 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 prediction as of today, February 16, 2021, only. 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 the Excel-based financial data workbook posted on our investor relations website. We will post these prepared remarks on our investor relations website following the completion of this call. With that, I'll now turn the call over to Valentin.
Good morning, everyone. We are pleased with our fourth quarter results as we delivered revenue that was 10% higher than the fourth quarter of 2019 and above our guidance range. In addition, book-to-bill was above one in the fourth quarter as we saw the traction in order flow that had started in the third quarter continue during the fourth quarter and into 2021. We're continuing to benefit from the advantages of our leading-edge products, technology differentiation, low-cost production capabilities, and the global footprint. We continue to see strong revenue in China, which was significantly higher on a year-over-year basis, as volume growth more than offset lower selling prices in the region. We are also pleased to see a sequential improvement in revenue in Europe and strong sequential revenue growth in North America in the fourth quarter.
Our system sales also improved modestly but continue to be below last year, primarily due to the impact of the economy from COVID-19. We're demonstrating good progress in our core markets, thanks to our technology differentiation and low-cost production capability. In high-power lasers, we delivered strong year-over-year growth in both our rack-mounted 1 kW-4 kW lasers for the high-volume market and our ultra-high power lasers for leading-edge cutting systems, as sales of lasers above 6 kW increased 34% compared to the fourth quarter in 2019 and were 56% of total high-power sales. At the high end of the market, we're benefiting from an increase in order volumes for our 20 kW and 30 kW ultra-high-power lasers and optical heads.
These lasers not only enable 50%-100% faster cutting speeds than our 15 kW devices but are capable of processing materials with 20 mm-50 mm thickness or even greater. This improvement in productivity and flexibility, coupled with superior beam parameters, record wall plug efficiency, and reliability, is driving the replacement of plasma cutting machines, other non-laser solutions, and low-power laser solutions. We booked the first orders for the new unique ultra-compact rack-mounted U Series of lasers for low-cost cutting systems, and we expect to start shipping them shortly in volume. Not only do these lasers provide extended optical performance, record power-to-volume ratio, and full protection against humidity, they are also significantly lower in cost to manufacturers. As a result, we expect this new design to improve gross margin for this product.
We continue to focus on growing sales in other applications that are outside of our traditional cutting and welding markets. Last quarter, we launched our revolutionary innovative handheld laser welding system, and the initial customer response has been extremely positive. We believe this system has a great potential for IPG as it replaces traditional hand welding products used in metal fabrication, like TIG or MIG. The product offers orders of magnitude higher welding quality and speed with much greater precision, flexibility, and ease of use to our customers around the world. In addition, for the first time, the product will simultaneously provide the highest quality pre-cleaning and after-cleaning of the weld surfaces and weld itself, respectively.
We have already sold a number of units in the last few weeks only and believe that there are many thousands of customers in the U.S. alone, and many 10s of thousands worldwide, that could be interested in this unique product. During the fourth quarter , emerging products and application sales were 28% of total revenue, increasing 22%. We are pleased with the performance of a number of products that are the key to the diversification of our revenue. Examples include high-power nanosecond pulse laser used for foil cutting and cleaning in electric vehicle battery processing, as well as for ablation and cleaning, sales of medical lasers and consumable medical fibers. Our gold thulium fiber laser solution for urology and green laser sales for solar cell processing.
With record backlog, we expect sales of green lasers to continue to grow fast as our green pulse lasers are enabling a significant improvement in solar cell efficiency. In addition, high-power lasers for defense application performed well year-over-year. Despite the impact of the pandemic, ultraviolet and ultrafast pulse lasers into emerging microprocessing applications show strong growth for 2020. Our Adjustable Mode Beam, AMB, lasers continue to gain traction in the welding industry, most notably in electric vehicle battery welding, and as a result, we received significant orders for AMB lasers in Q4. Our AMB products offer superior speed and weld quality over competing solutions, thanks to broadest range of beam tunability, which enables spot or seam welding. The multiple QCW laser for high-speed spot welding application brings significant cost savings due to an increase in welding productivity and decrease in electrical consumption.
Beyond material processing, we continue to develop new soft tissue medical treatment, mid-infrared laser for molecular level resolution online spectroscopy, inspection, sensing, and biomedical research applications. We are continuing development of our new generation of analog and coherent digital silicon photonic devices for super high speed and highest volume data processing for data telecom, and many other advanced future applications. Furthermore, we're extremely pleased by the growth we saw in advanced applications and medical applications. Research and development has been a driving force behind IPG's success since the company's inception. We spent 10% of our total revenue on R&D in 2020, and have over 650 people in research and development, including many scientists and engineers who continue to develop new leading-edge solutions for our customers, helping drive efficiency and productivity in their operations, and making our fiber laser technology the tool of choice in mass production.
More than 20 years tool of choice in mass production. Nobody can compare most of this absolutely in quality and other things. I would like to thank our employees for their strong execution during our fourth quarter , despite the continuing challenging operating environment. As a result, the well-being of our employees, their families, our customers, our partners, and communities we operate and remain our highest priority. With that, I will turn the call over to Eugene Scherbakov.
Thank you, Valentin, and good morning, everyone. The impact of COVID-19 on our production capability continues to be minimal, and we are focused on ensuring the safety of our employees with social distancing and enhanced cleaning and filtration measures in place. Otherwise, we are operating normally. Despite the increase in COVID-19 cases in Northern Hemisphere this fall and winter, production remained fully operational, and we have managed COVID-related absences effectively. We are very pleased with performance of operations during the fourth quarter as production ramped to meet the increase in demand, enabling us to exceed the top end of guidance range, and report fourth quarter of year-over-year growth in more than two years. We're proud of the improvement in underlying gross margin driven by an increase in revenue, product cost reduction, and product mix improvement.
Total SG&A and R&D expenses were $76 million in the fourth quarter , continue to benefit from lower travel and trade show expenses, again, pandemic-related restrictions. As the business activities start to pick up and some restrictions are lifted and life normalized in the second half of 2021, we would expect our operating expenses to increase as well. We remain committed to supporting our R&D while controlling the total operating expenses to drive operating leverage trough the company. We continue to benefit from the reducing of the cost of devices, our vertical integrations, and from expenses reduction initiative we undertook in the second half of 2019. Examining our performance by region, revenue in China increased 52% year-over-year, representing approximately 42% of total sales. Demand and order flow in China remained resilient during the quarter, orders booked in 2021 prior to Chinese New Year have been strong.
While we face aggressive competition in the region, we believe that our products have superior performance and reliability, and we are seeing the strong growth and demand for our ultra-high power lasers. In Europe, while revenue decreased 5% year-over-year due to the effect of COVID-19, it did grow sequentially. In addition, in Europe, order flow continued to get better despite the increasing restriction in Europe due to lockdowns. Similarly, revenue in North America decreased 11% year-over-year, but grew 37% on a sequential basis, with a good improvement in material processing sales for lasers and systems, and year-over-year growth in medical and advanced applications. North America booking continued to be strong even relative to expansion of order flow in Q3 2020. Sales in Japan decreased 29% year-over-year.
While economy in the region continues to be negatively impacted by COVID-19, some regional macroeconomic indicators have improved in the recent months. Sales to the rest of Asia increased 6% year-over-year, continuing to recover from the second quarter trough, and also benefit from shipment of green lasers to renewable energy. Sales in Turkey decreased 2% year-over-year and grew 21% sequentially. Economic indicators continue to show improvement from significant contraction early in the year, and this is one factor behind the improving direction of our business. In addition, it seems that there is some optimism for improving investment cycle driven by equipment upgrades related to requirements for the flexible processing, automation, and energy efficiency. Our leading-edge fiber laser technology offers significant productivity gains, electrical efficiency, and lower cost of ownership over the other lasers and non-laser tools.
An increasing focus on the environment impact and commitment to the net zero emissions for large industrial manufacturers is creating additional opportunity for our lasers. Bodes well for our long-term growth objective. We already starting to see it with electrical vehicle and electrical vehicle battery production, and are likely to see it with other industries. We believe that efficiency is likely to become a more meaningful driver in displacing processes that energy intensive, such as plasma cutting or legacy welding processes. Despite the challenging operational environment that we faced in year 2020 due to the COVID-19, we believe that we are well-positioned as we enter year 2021.
In addition, we continues to believe that the breadth and depth of our product offering, our vast diversity advanced material and components technology platform, our efficient R&D model, our strong balance sheet, and free cash flow provide us ample flexibility and respond to business disruptions. With that, I will turn the call over to Tim to discuss financial highlights in the quarter.
Thank you, Eugene, and good morning, everyone. Revenue in the fourth quarter was $337 million and increased 10% year-over-year, driven by growth from most of our key product lines. Revenue from materials processing applications increased 10% year-over-year, and revenue from other applications increased 12%. Sales of high-power CW lasers increased 17% and represented approximately 55% of total revenue. Sales of ultra-high-power lasers above 6 kW represented 56% of total high-power CW laser sales. Pulse lasers sales increased 55% year-over-year, with strong growth driven by our high-power nanosecond pulse lasers used in EV battery manufacturing, green pulse lasers used in solar cell manufacturing, as well as higher sales of our new UV and ultrafast pulse lasers, which were partially offset by lower sales of low-power pulse lasers for marking applications. Systems sales decreased 20% year-over-year due to COVID-19 but did improve sequentially.
Medium power laser sales increased 25% as there was some recovery in additive manufacturing and other fine processing applications. QCW laser sales decreased 16% year-over-year due to lower sales for aerospace and drilling applications. Other product sales decreased 11% year-over-year, primarily due to lower telecom sales. Q4 gross margin was 44%, which increased 310 basis points year-over-year. The additional inventory charge reduced gross margin by 410 basis points. Excluding this impact, gross margin benefited from lower cost of products and a decrease in unabsorbed costs as a percentage of sales as compared to the year ago period. The additional inventory charge of $14 million was related to optical components that have been replaced by components with better performance. Fourth quarter GAAP operating income was $65 million, and operating margin was 19%.
During the quarter, we recognized a foreign exchange loss of $5 million, primarily related to the depreciation of the U.S. dollar versus the euro. Q4 net income was $49 million, or $0.92 per diluted share. The additional inventory charge and the foreign exchange loss reduced EPS by $0.27. The effective tax rate in the quarter was 24%. If exchange rates relative to the U.S. dollar had been the same as one year ago, we would have expected revenue to be $12 million lower and gross profit to be $8 million lower. We ended the quarter with cash equivalents, and short-term investments of $1.4 billion and total debt of $38 million. Strong operational execution resulted in cash provided by operations of $85 million during the quarter. Capital expenditures were $26 million in the fourth quarter.
We expect 2021 capital expenditures will be in the range of $150 million-$160 million for the full year. Total capital expenditures in 2020 were significantly below our initial budget as we delayed some projects. Some of these projects are now rescheduled for 2021. 2021 CapEx includes facilities and equipment expenditure for production, R&D, and sales activity to support our future growth. During the quarter, we did not repurchase any shares. In total, fourth quarter book-to-bill was above one, and we were pleased with order flow across all of our main geographic regions. Geographically, most areas continued to show improvement, with the only area that remains weak being Japan. For the first quarter of 2021, IPG expects revenue of $310 million-$340 million.
Company expects the first quarter tax rate to be approximately 25%. IPG anticipates delivering earnings per diluted share in the range of $0.90 - $1.20, with 53.2 million basic common shares outstanding and 53.9 million diluted common shares outstanding. The improvement in macroeconomic indicators is now more broad-based. If sustained, gives us optimism for 2021. We are a little cautious given the resurgence of COVID-19 in Europe and North America, as well as the uncertainty surrounding vaccination rollout. Return to normalcy is unclear at this time. These uncertainties continue to make forecasting our business challenging in the medium term. Our first quarter guidance remains subject to significant uncertainties, including the impact on the global business environment and the expected recovery from COVID-19, economic trends, growth from emerging product revenue, competition, and the lack of long-term binding order commitments.
That said, we continue to benefit from near-term growth opportunities in ultra-high power cutting, electric vehicle battery processing, renewable energy, micro-processing, medical procedures, and advanced applications. We believe the strides we are making in higher power products within our core materials processing business and new solutions are enhancing our competitive position. 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.
Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. We ask that you please limit to one question and one follow-up. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Our first question comes from John Marchetti with Stifel. Please proceed with your question.
Thanks very much. Tim, Valentin, I was wondering if maybe you could just talk about some of the puts and takes on the longer-term view. I know you mentioned that the underlying fundamentals continue to get a little bit better here, but as we're looking out through the course of the year, all else being equal, would you expect that we're back to sort of getting back in line with a double-digit revenue growth range, maybe off of 2019 as opposed to 2020, given that 2020 was such a challenging year?
Yeah. We're not going to comment on annual guidance or targets there, so except for your last comment, John, I think, talking about puts and takes, there were a number of them articulated in the script. First of all, the continuing shift to higher power lasers for cutting applications. A lot of the new product introductions, we're very optimistic about the handheld welder and growth in revenue from that. All of our emerging products in Q4 performed really exceptionally well across a pretty broad portfolio of items that are starting to drive incremental growth. Whether it's the green lasers, the high power nanosecond pulse lasers for EV, some increasing traction for ultra-fast and UV. Medicals performed very well during the whole course of the year with the lithotripsy application. Other newer product introductions, the multi-channel QCW for displacing YAG lasers in spot welding. We had good orders for AMB.
If you continue to see traction and momentum across what is now a pretty broad base and diverse set of products and applications, and we continue to see improvements in, we referenced again some of the key macroeconomic indicators that we follow. Certainly, this year looks like it could be set up for being significantly better than the last two years we've been trough. I mean, the key issue will be to get out of some of the volatility that we've seen that sometimes impacted the second half of a year, as happened in 2019, or has resulted in a slow start to the year as the pandemic did last year. The main target is to get out of more of the volatility and get to sort of consistent year-over-year growth on a quarterly business, and we've got significant drivers for that.
Got it. Tim, maybe just as a follow-up on the gross margin side. As we're looking out over the next several quarters, any expectations that we should assume maybe some additional charges like we saw this quarter? Really treat that more as a one-off here in 4Q, and we're back to a more normalized environment for gross margin as we're looking out over the first half and into 2021. Thank you.
Yeah, I'm much more definitively expecting a normalized gross margin print over the coming year. During the course of the year, not just in Q4, given some of the volatility related to the pandemic, we have had significant inventory provisions and charges. The final charge in the end of the quarter, I think, positions us well for a more normalized operating position going forward. I think we've got a good start to the year in that context as well. On the other side, on gross margin, we've got other benefits coming through from some of the product mix as we continue to grow revenue, better absorption of fixed costs. For example, the ultra-compact laser starting to generate more meaningful revenue. There's a meaningful improvement in gross margin we expect from that.
Even taking the design changes on the ultra-compacts and rolling them into higher power lasers up to, I think 7 kW or 8 kW, up to 8 kW they're going to be used in. There's a lot of other initiatives on cost reductions as well that we're optimistic about.
Thanks, Tim.
As [Spencer is speaking], we expect so that this year our gross margin will return back to our usual frames, above 50%. We're very careful in forecasting because the situation for quarter three, quarter four is not certain at all. Quarter one, quarter two absolutely promising on the progress. Three and four, still not definitely. Our guidance is still very, very careful, very conservative.
Understand.
Our next question comes from Tom Diffely with D.A. Davidson. Please proceed with your question.
Yes. Good morning. Thanks for the question. When you look at the strong activity, it sounds like you had pre-Chinese New Year in China on the order front. Do you expect China to grow as a percentage of the order book over the next couple of quarters, or is that being matched by growth in some of the other regions?
Tom, relative to Q1 last year when China order flow slowed down dramatically and then it really picked up in April and May, I would expect in total China order flow to remain relatively consistent as a percent of the total because the growth in Europe and North America is also starting to recover more meaningfully. There's the growth in some of the emerging products as well that are not just strong in China, but are strong elsewhere. Tonally, we expect more of an even contribution and a rather less China-centric focus, perhaps, on revenue for the year. Notwithstanding that, China order flow has really been very strong prior to Chinese New Year.
For example, not just of shippable orders, but even of frame agreements has been very, very good, and those are generally placed to get licenses so that shipment can take place during the course of the year.
Remarkable, the most frame orders, enormous quantity of frame orders is practically double to compare to last year for last two quarters. The major of these orders is for high power, above 10 kW-15 kW. When they asking for license to get license. It's enormous growth of high power from the point. We expect nobody can supply them, of course. It's nobody. It's all only we can supply working more than 15 kW, 10 kW, 15 kW working on lasers here with so on. All they turn to IPG, all China turn to IPG today. It's a lot. It's Europe and America is much more neutral here. They much less still, because major integrators, cutting system integrators in Europe, in the U.S., they don't have own high-power lasers. Don't have. They stop in 10 kW practically.
China extremely active in the 15 kW-30 kW level.
Okay. No, thanks for the extra color. That's helpful. Then as a follow-up, how big is the EV battery market right now for lasers, and where do you think that goes over time?
I don't have a definitive number on that in terms of where it is today. The message we give on it is that it is a potential decade-long investment cycle. If EV vehicle production is going to get to the levels that are expected, people are talking about 25%, 40%, even 50% of total vehicle sales over 10 or 15 years, it will drive hundreds of millions of dollars of laser-based investment for EV battery manufacturing and even laser-based investment for EV auto vehicle manufacturing itself. It's a long-term significant opportunity with hundreds of millions of dollars of laser-based processing required for that. Even I've noticed some of the older battery technologies like cylindrical, which we're not using much laser-based processing, seem to be evaluating lasers more and more now.
Okay, great. Thanks for your time today.
Awesome.
Our next question comes from Nikolay Todorov with Longbow Research. Please proceed with your question.
Thanks. Good morning, guys. Tim, in the last upcycle, you guys have been very consistent on putting about 60% incremental gross margin. How should we think about the incremental gross margin? You highlighted multiple cost initiatives. Should we think about that 60% as a base case, or you could see some upside? Also, can you talk about what are the limitations of rolling that ultra-compact design above 8 kW ? Then I have a follow-up. Thanks.
I think some of the incremental gross margins are probably not far off where we were historically, maybe a little bit below that 60%. The one thing below the line we're cautious on is as we get into a more normal environment, we tried to call this out on the script, is that it's operating expenses. You get more travel and trade shows and other activity in a more normal environment. OPEX will probably pick up in the second half of the year a little bit, so that drop-trough won't be straight to the bottom line. In terms of the other question about migrating the design of the ultra-compact to higher power lasers, perhaps, Eugene, you'd like to talk about that and a potential rollout over time?
In principle, we have several generations of compact lasers. I'm talking about high-power lasers, of course, with power more than 2 kW, 3 kW. The first stage was already demonstrated, and we already shipped thousands of such kind of lasers. The next step was to use a rack-mounted compact laser for high-power applications. I mean, with power more than 1 kW, 2 kW, 3 kW, and 4 kW. Again, such kind of lasers already supplied to our customer, effectively for, first of all, for cutting, also for welding applications. The next generation, which we are introducing this year, it's much more compact, its output level up to 8 kW. It will be the next stage, the first result demonstrated very good performances. We are absolutely sure that it will be the next generation of ultra-compact, rack-mounted laser, first of all, for cutting applications.
Very important that based on this design, we can dramatically reduce our cost of production and, of course, to propose to our customer better price. Such kind of situation with compact and ultra-compact lasers.
Okay. Very helpful. Thanks. Just to follow up, maybe can you guys talk about the adoption curve that you expect for the handheld welding laser? Sounds like you guys have received, you mentioned extremely positive feedback. How much do you think do you have to educate the customer or to kind of prove their point? It seems like they're seeing the benefits outright. I'm just trying to see what are you thinking in terms of the adoption curve.
Eugene, do you want to take it?
Our estimation is enormous. Only U.S., we investigated more than 24,000 only small job shops which use this manual welding instrumentation. 24,000 only U.S., also large OEM, like automotive and other work also use. Even if each of them will buy only one unit, it's 24,000 units. 24,000 units, like $300 million. Only one unit. Typical that small job shop use 10. Not one, two, buy 10. Overall, let's count minimum 5x more. It's 100,000 shops. We now provide for testing for this estimation, only U.S., more than 70 such job. They talking it's fantastic devices. Let's imagine only speed of welding. Speed of welding increased 6x 6- 7x . Six or seven times. Quality of welding, much, much higher than with regular, but also simultaneously it clean, immediately clean surfaces in pre-welding and after welding.
They with TIG and MIG, regular, they have to use chemicals then to clean this. Quality of final surface not very sufficient. They don't need to make nothing. One time put by laser beam in additional mode operation, the same laser beam, and all clean up easily. The people with so fantastic improvement, they only waiting. We delay delivery only due to some formal bureaucratic qualification for electrical emissions. Now we have received in the U.S. all this emission. It started only a few weeks, started to ship first unit, really to sell to customer. Before, we collected all orders first. We believe this year only we'll sell some thousands units. Next year, it would be tens of thousands units.
It's really very fast introduction market, and we don't see competition who can make similar during next one or two years. Even later would be difficult because we have very innovative new technology, which any Chinese, nobody have today.
The other point, it's easier to use as well.
Hmm.
It's easier to use, so the training of the welder and the skill of the welder.
Yes, very easy to use. If the normal welder, you have to train many months, even more, it could be some talent. Here, don't need. Any person, your student, after only few hours demonstration, presumably introduction, can weld immediately.
Practically, it's available to everybody today. It's also enormous benefit because quantity of professional welders now decrease and decrease.
Got it. Thank you.
Our next question comes from Jim Ricchiuti with Needham & Company. Please proceed with your question.
Hi. Thank you. Good morning. On the topic of the handheld lasers, I'm wondering, are you going to market any differently with this product offering, just given the size of the market and the price points? How are the gross margins on this product?
In terms of going to market, at the moment, we're rolling it out in a phased manner with some of the key. We've had a lot of job shops come in to evaluate it, and we're also looking at potentially some distribution arrangements. We'll potentially also have to expand some of the sales force as volumes ramp up to support what is a much broader base customer list compared to our typical OEM base. We're continuing to evaluate how best to get to that efficient model around it, Jim. Typically, we've invested in the stuff as we've grown the revenue on it to get that return simultaneously. We may use a few more distributors around this as well. The gross margins, by the way, on the product are very good, benefiting from some of the design improvements around the ultra-compact lasers.
Follow-up question is, you showed a nice recovery in the U.S. and North America, at least on a sequential basis. I'm wondering, as you look at that business over the next couple of quarters, how sustainable do you think it is? Is it broadly based, and are you feeling comfortable that that recovery in the U.S. is sustainable?
Yeah. The underlying materials processing business has improved. In fact, some of the order flow in Q4 was for some of our specialty AMB lasers for battery processes was also in North America. We still have some revenue to recognize on advanced applications. Medical growth will continue to be, it's not going to be quite as strong as it was last year because it came off such a small base. The medical business has continued to perform well. We've got increasing visibility into medical sales in the second half of the year. The green lasers going to Southeast Asia, although they're made in the U.S. at the moment, the backlog for those I've mentioned is good. I'd say the only thing we don't have longer term visibility into, and which is more uneven and lumpy, is some of the advanced applications, right?
You're still waiting for some commercialization of the defense applications for that revenue to become more consistent and really start to grow consistently quarter-over-quarter and year-over-year.
Thank you.
We're talking about increased share of products which do not relate from China. It is product for another applications than traditional cutting and welding of metal sheets. If we report this year, we increase potential up to 28%, but we are target to increase up to 50% during couple of years. 50%. The most of this product, new product, which we, for another application we develop, introduce in the U.S. It increase essential sales in the U.S., also increase gross margin in the U.S. If before, the major contribution to the net income in the U.S. we receive from sales of diodes. Temporarily, last two years, sales of diodes decreased. Income from diodes decreased also. Now we return back for further growing the diodes sales. It's all the profit from diodes.
It's our cluster growth of this other applications, sales from U.S. and made, developed in the U.S., not developed in Germany, and it is sales only in the U.S. mainly, but some from before. It's real American company. We've become one of the major generation, real major generator of the revenue. Our target to make real, not just research center, but also real manufacture. [audio distortion].
Thank you.
Our next question comes from Michael Feniger with Bank of America. Please proceed with your question.
Hey, guys. Thanks for squeezing me in. Tim, I recognize that you may not want to comment directly on one of your competitors. I was just hoping to get a sense of the big picture here. Some investors fear that with this bidding war, could it create a bigger competitor that could be much more aggressive, attacking the industrial markets, being price aggressive with scaled-up R&D? Maybe you can help us understand the competitive landscape in laser technology a little bit more, how IPG positions itself to maintain that leadership. Does this type of bidding war, even if it's not direct to IPG, does it validate some of the mega trends that are accelerating with automation, EV, dual supply chains? Do you see more consolidation going forward around laser technology and automation markets? Just curious on your thoughts on that one.
There's a lot of different elements to that question, Mike. The first is we're not going to make a comment on the transaction and the bidding war that's going on out there. I think the point is really to focus on where IPG's strengths are in not only the core industrial markets, but also in a lot of these emerging product offerings. In our core industrial markets, none of the parties that are involved in the process that is ongoing at the moment really have any core strength and capability where IPG's core strength and capability is. We view this as being separate from our core strategies and capabilities. In addition to that, we've got a lot of emerging product development in areas that we've talked about that are driving our growth with inherent advantages around the products that we have.
Whoever the competitor is, IPG's fiber laser technology is unique in very many different ways, and we have this fundamental strength that comes from the vertical integration, the speed to development, the ability to get cost out, and as you can see from an increasingly diverse product portfolio. I think the main point that we make on this is that we get a significantly higher rate of return on our internal R&D and making limited, very specific acquisitions that relate to our ability to leverage our own technology. We don't view ourselves as being a consolidator in the industry. With regard to some of the other trends, I think, yes, they're perfectly apparent, right? The flexibility, the automation, the increasing acceptance of lasers across many different applications and technologies. Flexibility, we call out, for example, energy is becoming perhaps more fundamentally a driver for IPG.
We're the only company that has an electrical efficiency approaching 50%. Nobody else is close to us on that. You really have to, I think, look into some of the very specific benefits that we have and advantages we have, rather than look at what may or may not be a larger scale company that will have competitive advantages against us. We don't think that they will. Finally, beyond this, there has already been quite a lot of consolidation within the industry. There's a limited number of large targets that are left out there. The largest other competitor that's out there for us is actually a private [company, TRUMPF]. Consolidation has already taken place a bit more meaningfully to varying degrees of success, I'd say.
Perfect. Thanks for that, Tim. Just following up, if we take the higher end of your Q1 guidance and you see a typical 15%-20% sequential growth in Q2, you're kind of starting to knock on that $400 million sales figure level. Do you have more confidence around the ability to drive gross margins above 50% at that point? Just help us understand what type of margins when we start getting into these type of buckets of revenue ranges.
I think Valentin alluded to that earlier in the call that certainly getting back to the top. I'm a little bit more conservative around it, but getting back to the top end of our 45%-50% guidance range. Then, really, if you start to see revenue get back up to that $400 million level without guiding above that at the moment. We've got all these cost reduction initiatives, and Valentin's increasingly comfortable that we're going to get back into what I would call more of an optimal gross margin operating model, as compared to just being best in class, which we are at the moment.
Our next question is from Mark Miller with The Benchmark Company. Please proceed with your question.
Thank you for the question. You've indicated several times about the opportunity in battery welding for EVs, but there's a chip shortage going on that's impacting auto sales. Do you see that having any impact on you over the next couple quarters?
No, Mark, we don't think that the chip shortage in the semiconductor industry is going to affect us. Even though it is affecting the auto industry, in terms of some facilities shut down, we don't expect it to have an impact on our growth, and we don't have any visibility into it having an impact on us. We do not have any similar supply chain issues facing us at the moment, given our vertical integration, and we also have inventory of electronic components, for example, that we've built up.
Germany sales were also down sequentially year-over-year. Is that at COVID also like the case in Japan?
I haven't looked at the German numbers particularly. Overall, Europe was up sequentially. You saw, I can't remember exactly where it is. There may have been some slight variation in where revenue in Europe was generated. Overall, Europe we're actually pleased with in total. Rather than looking at Germany specifically, we look at the whole of Northern Europe and then Italy, and even in Western Asia, Turkey, there was some sequential improvement even though it was only single digits. Yeah, I haven't got any more commentary around that. I think Europe was better.
Thank you.
Our next question comes from Joe Wittine with Edgewater Research. Please proceed with your question.
Hey, thank you. Good morning. I wanted to ask on welding, obviously, EV battery is up on AMB, and there's also a ton of interest in the LightWELD, which isn't surprising. Tim, beyond that, how are you viewing the broader macro welding market adopting laser? That includes both standalone lasers and then your systems mix as the broader cycle turns here and cost of capital as well. Could there be a tipping point in play for that market where the adoption has been slow over time?
Eugene will address this question, [Terry].
About welding market. Now it's driving by, first of all, EV applications, battery welding, battery cutting, and foil cutting and so on. In principle, our advantage is that we are not supplying today for such kind of processes only lasers. We're supplying also our components, I mean, different kind of optical heads for cutting or for welding, plus monitoring system like LDD, plus single mode laser, specially produced for such kind of applications. Finally, we start to produce a complete system for battery welding. Already supplied to some customers, automotive customer, now we already supplied additional such kind of system to the customer.
For us, it's not a new product, but nevertheless, for us, it's a new activity, and we see it's a very good opportunity for us to supply, again, not only lasers, not only components for these applications, but complete systems in Europe, in China, and also in United States. In total welding market, it's growing well. Of course, not only connected to the automotive applications, not only to EV vehicle, but also for other applications. For example, basically, of course, first of all, from different kind of metal welding. This demand is growing, definitely, year-over-year.
Okay. I wanted to go back to the comments on rolling out features from the ultra-compact designs to higher power units up to 8 kW. I guess I'm curious there, what sort of trade-offs do you need to make? Is it efficiency or could it be flexibility and durability? Going forward from a product offering perspective, do you plan to offer those units side by side, these 8 kW, for example, with the ultra-compact functionality versus your kind of existing full featured, if you will? I think that'd be interesting. Thanks.
First of all, when we will produce this such kind of ultra-compact lasers, we also produce the special components of these lasers, of course. This is why we have to dramatically decrease our cost of production for such kind of laser. You see, such kind of lasers we are producing, first of all, for cutting applications. Our customers must be ready to adopt this laser to their systems. Of course, they need some time to also change their design and to implement our ultra-compact laser for these applications. To exchange, it will be not exchange, it will be the new machines. It will be much more compact, much more efficient final machines, for example, for cutting. From this point of view, we'll see very good opportunity. First of all, of course, better efficiency, better compactness, but first of all, better price for our customers.
Okay.
I remind all of you that, for example, to replace CO2 laser for cutting by fiber laser, we worked 10 years, not one, not two. In fact, from beginning, it was obvious. Fiber laser much better from point of cutting quality, from point of cost, as many customers use it, so on. 10 years we spent it now with practical CO2 cutting business. It's 10 years, not one, two, three, five, 10 years. You like that immediately during only a few months we replace all this with any new product, even fantastic new product. It's not serious to talk. It's a long process. Now we dominate in cutting business. Nobody trusts at all. Start to talk, "Oh, it's only for very thin metal, then so on.
Never will cut even then 2 mm, 3 mm, then never will cut 5 mm. Now 50 mm we're cutting successfully, not only the CO2 laser. Cutting now, we replace full plasma, which CO2 never talk about replace plasma, for example, and so on. It's a long way. Not to be so naive that we make it much shorter than other people, but it takes time, in any case.
[Terry], the only other part to your comment was there is no trade-off. We've never introduced a new product that has less reliability or lower electrical efficiency. This uses all the same optical components, but it has a much more compact electromechanical and sophisticated design around the electromechanical. There isn't really a trade-off in terms of those parameters.
Oh, perfect. That's great, [Kelly]. Just what I was looking for. If I could squeeze one more in. 20 kW - 30 kW, curious what geographies those units are shipping to, if that's just kind of the Pentas and et cetera of the world in China or is there interest in the West? What are the relevant applications there? I'm assuming from a cutting perspective, you run into some edge quality issues at that power level.
Power level now not limited only 20 kW or 30 kW. Recently, they received a request for 40 kW laser for cutting applications. Of course, we are ready to supply such kind of laser for these applications. First of all, applications is for cutting. Some part number of these lasers also using for welding application, but for very special applications, like for special materials and so on. Mainly for cutting applications. You are right. Unfortunately, the first customer now in China for such kind of applications. Not in Europe, not in United States.
Okay, well, thanks, and congratulations.
Thank you.
As a reminder, please limit to one question and one follow-up. Our last question comes from the line of Paretosh Misra with Berenberg. Please proceed with your question.
Thank you. Good morning, and thanks for taking my question. Just curious with that CapEx guidance for the year, $150-$160, can you provide some color as to some of the bigger projects included in that CapEx range and anything worth flagging as potential future growth driver?
CapEx, first of all, we have to shift some CapEx construction, new building, first of all, for this year in 2020, because this construction industry practically works only for 20%-30% all time COVID on the way, they did not get the right materials at the right time and so on. Overship, they promised, for example, one month delivery, but we wait half of year to deliver, to get even windows and so on. It was awful that time for construction. Now we need a lot of additional first assembly facilities. We need a lot of because to install new production line. We need new equipment. We need for mass production and so on. It's a lot of time. We have to improve, we're creating now what we invested now, we're investing for future. It will work what we will need through two, three years.
If we won't involve, won't build these new facilities , won't buy, install this equipment technology now, then through two, three years, we would be absolutely short in production and so on. We don't want to have future. It's normal. We still very small investment. We will double this investment more. We prefer to invest in this to increase facility, increase our production, not to hold the money in the bank or to make some of this absolutely not efficient acquisition, new businesses. We're not buying new businesses. We're not buying at all. We're buying only some technology group with some technology. We increase our technology choice. It's our strength, it's our future, but not just to buy absolutely different business, not possible to weld even very good businesses, but to manage all these absolutely different businesses and become the large company, not manageable at all.
We don't need such a mixture.
Understand. I really appreciate. Sorry, guys.
It's okay, Paretosh. Next question.
Oh, okay. Yeah, sorry. My follow-up was that I was hoping if you could provide some high-level color as to how pricing and volume changed last year. Any color you could provide would be great.
On a year-over-year basis, pricing was down in a more normalized 10%-15%. It has been basically, though, much more stable over the last three quarters since Q2, Q3, Q4. Sometimes when you see an improving demand environment, some of the antics of the Chinese competitors are not so extreme. The other part of this that we've talked about is that we're being more disciplined around pricing. We believe that the value of the fiber laser technology is still extremely high, and that at the current pricing in the market, we're already displacing many existing laser and non-laser technologies, and that more fundamental changes in pricing to drive that adoption are not required. It's been good to see a bit more stability. You've obviously also had some benefit going to higher power levels for cutting applications where you have a competitive advantage.
Outside of that, the emerging products, for example, even high-power nanosecond pulse lasers are very almost exclusive to IPG, where we have a good ASP for some of those applications. Mix has been a bit of a benefit too.
Great. Thank you so much.
That concludes today's 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 for your continued interest in IPG. We look forward to speaking with you over the coming weeks, and we'll be participating in a number of virtual investor conferences this quarter. Have a great day, everyone.
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