IPG Photonics (IPGP) Q3 2025 Earnings Transcript

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Date

Tuesday, Nov. 4, 2025, at 10 a.m. ET

Call participants

• Chief Executive Officer — Dr. Mark Gitin
• Senior Vice President, Chief Financial Officer — Tim Mammen
• Director of Investor Relations — Eugene Fedotoff

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Risks

• Tim Mammen stated, "The impact of tariffs was 140 basis points, in line with our expectations," for Q3 2025. Tariff headwinds are expected to continue into Q4 2025.
• Operating expenses are expected to remain elevated, with guidance of $90 million to $92 million for Q4 2025, reflecting continued investments in growth and leadership.

Takeaways

• Revenue -- $251 million, flat sequentially and up 8% year-over-year, or 11% excluding divestitures.
• Materials processing revenue -- Increased 6% year-over-year, driven by higher sales in welding, additive manufacturing, cleaning, and micromachining.
• Emerging growth products -- Accounted for 52% of sales, down from 54% in the prior quarter, with year-over-year growth but a slight sequential decline.
• Regional performance -- North America sales decreased 16% sequentially but increased 8% year over year; Europe sales grew 11% sequentially and 4% year-over-year excluding $7 million in divestitures; Asia revenue rose 5% sequentially and 15% year-over-year, driven by welding for battery applications.
• Gross margin -- Gross margin reported at 39.5% for Q3 2025, adjusted gross margin at 39.8%, exceeding internal guidance due to improved manufacturing cost absorption and lower inventory provisions.
• Operating income -- Operating income was $8 million for Q3 2025; adjusted EBITDA was $37 million, slightly above the high end of management guidance.
• Earnings -- Net income was $7 million or $0.18 per diluted share for Q3 2025; adjusted earnings per diluted share was $0.35.
• Cash position -- $870 million in cash, cash equivalents, and short-term investments; $30 million in long-term investments; no debt.
• Capital expenditures and buybacks -- $21 million spent on capex, $16 million on share repurchases.
• Book-to-bill -- Approximately one, reflecting steady order activity.
• Medical laser milestone -- FDA clearance received for the next-generation thorium medical laser, with shipments beginning by year-end.
• Crossbow directed energy -- Multiple potential customer conversations underway, strong defense and commercial interest demonstrated following recent industry showcases.
• Guidance -- Operating expenses are expected to be between $90 million and $92 million for Q4 2025, adjusted EBITDA is anticipated to be between $21 million and $38 million in the fourth quarter.
• Capex outlook -- Capex is expected to decrease to about 5% of revenue after the completion of a major project in Germany, but may remain at current levels next year due to project timing.
• Key industry win -- Continued market share gains globally in battery-related welding, across Asia, Europe, and the U.S., serving both electric vehicle and stationary storage applications.

Summary

The earnings call detailed that IPG Photonics (NASDAQ:IPGP) achieved the top end of internal guidance on revenue, margin, and profitability for Q3 2025, supported by product mix improvements and cost controls. Management highlighted diversification into medical and defense markets, including the FDA-cleared urology laser platform, representing a strategically significant product launch with near-term revenue contribution potential. Leadership reaffirmed sustained investment in innovation and organizational capability, while acknowledging persistent cost headwinds from tariffs and planned operating expenditure increases. Market stabilization signals were noted, but management emphasized that improvements are dependent on region-specific industrial demand recovery and ongoing execution in new verticals.

• Dr. Gitin stated, "So just to reiterate for a moment, we have received FDA clearance and we are launching this. This is a new product in urology. It's a thuleum based system," confirming both regulatory progress and Q4 shipment timing.
• CFO Mammen said, "inventory is up about $20 million. That was an intentional investment in inventory really to reduce lead times to customers and support the business at this point in time," underscoring a deliberate working capital allocation to meet demand.
• The Huntsville, Alabama facility was described as supporting customer validation, product manufacturing, and providing access to cleared airspace for live testing of the Crossbow system.
• Gross margin expansion in Q3 2025 was attributed to improved cost absorption and the rollout of new, lower-cost, higher-power diode lasers within next-generation products.
• Semiconductor market exposure was addressed as "an annuity. That lasts for many years." according to Mark Gitin, with recent design wins contributing to advanced applications revenue in the period.

Industry glossary

• Book-to-bill: Ratio of orders received (bookings) to units shipped and billed (billings) within a specific period, indicating demand relative to supply.
• AMB laser: Adjustable Mode Beam laser; a fiber laser technology that enables the user to control and adjust the mode shape for specific welding applications, enhancing process control and quality.
• TAM: Total Addressable Market; the total revenue opportunity available for a product or service within a specific market.
• Crossbow: IPG Photonics' proprietary high-power, directed-energy laser system aimed at drone-defense and other military/civil applications.
• StoneSense: IPG’s proprietary sensing and pulse modulation technology embedded within the next-generation urology laser system to differentiate tissue from kidney stones and enhance procedural safety.

Full Conference Call Transcript

Dr. Mark Gitin, and Senior Vice President, CFO, Tim Mammen. On today's call, Mark will provide a summary with a quick look at our third quarter results and the overall demand environment. Then walk you through the progress we are making on our long-term strategy. After that, he will turn it over to Tim to provide financial details. Let me remind you that statements made during this call that discuss our expectations or predictions of the future are forward-looking statements. These forward-looking statements are subject to risks, uncertainties that could cause the company's actual results to differ materially from those projected in such forward-looking statements.

These risks and uncertainties are detailed in our Form 10 for the period ended 12/31/2024, and our reports on file with the Securities and Exchange Commission. Any forward-looking statements made on this call are the company's expectations or predictions as of today 11/04/2025 only. And the company assumes no obligations to publicly release any updates or revisions to any such statements. During this call, we will be referencing certain non-GAAP measures.

For more information on how we define these non-GAAP measures, and the reconciliation of such measures to the most directly comparable GAAP measures as well as additional details on our reported results, please refer to the earnings press release, earnings call presentation and the financial data workbook posted on our Investor Relations website. We will also post these prepared remarks on our website after this call. With that, I'll now turn the call over to Mark.

Mark Gitin: Thanks, Eugene. Good morning, everyone. Third quarter revenue was at the top end of our expectations. Flat sequentially and up 11% year over year excluding divestitures. There were a number of positive factors that drove the results this quarter. Stronger demand in battery production driven by e-mobility and stationary storage supported higher sales in welding. With our adjustable mode beam laser, weld monitoring, and beam delivery solutions, we continue to win orders with some of the largest battery and automotive manufacturers across multiple regions. General industrial demand was stable compared with the prior quarter and our cutting revenue was essentially flat and consistent with the past several quarters.

We began shipping the new generation of our high power rack integrated lasers to cutting OEM customers globally. These next generation lasers use our new higher power diodes, have a smaller footprint, and lower manufacturing costs. Demand in additive manufacturing applications was very strong and we won new business with our single mode lasers tailored for that application. Cleaning continued to grow supported by the Clean Laser acquisition. Outside of industrial applications, we delivered year over year growth and built momentum towards longer-term value creation through new product introductions and new business wins. One exciting example of this is the growing interest in our XBow directed energy which I'll touch on shortly.

I'm also pleased to share that we've received FDA clearance for the next generation of our thorium medical laser systems. This is an important step for the business and we expect shipments to start by the end of the fourth quarter. I'll provide more detail on this milestone later in the call. Our financial results improved in the quarter as we increased gross margin, managed operating expenses, and delivered adjusted EBITDA and adjusted earnings per share at the top end of our expectations. Order activity remained healthy with book to bill of approximately one. While uncertainty in the demand environment persists, leading indicators such as PMIs continue to show improvements and we remain cautiously optimistic going into the year end.

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

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

This enables us to expand existing laser use cases in high growth applications such as medical, micromachining, and directed energy. These are large opportunities with the potential to significantly expand our addressable market. We continue to strengthen our position in core industrial applications and where our technology delivers a clear performance or cost advantage. This is evidenced by our business wins and positions us to outpace the market as industrial production recovers. We're also moving up the value chain with our world-class laser application customers' most challenging problems. This approach allows us to capture a greater share of customer spend and deepen long-term partnerships. We have already demonstrated these benefits in welding, which has become our largest application.

Our unique solutions enable safer and more reliable welding processes for thin foils and alloys used in advanced batteries for EV and stationary storage applications. We are also accelerating the adoption of lasers in other large applications, displacing incumbent technologies. By combining our laser technology with deep applications expertise, we are solving complex challenges for our customers where precision and efficiency matter most. Laser cleaning is a great example of this approach. Customers convert to laser cleaning from conventional abrasive or chemical methods because our laser solution offers greater speed and control, is easy to automate, and provides a safer and environmentally superior outcome.

Lasers will continue to be adopted driven by these advantages and we are leading the change accelerating broader implementation across the industry. Finally, we're penetrating new non-industrial applications in markets where laser-based solutions also offer clear cost benefits and superior outcomes relative to incumbent approaches. We are focused on medical, micromachining, and directed energy verticals where our innovative laser-based solutions provide strong competitive advantages. I'm pleased to report that we're making meaningful progress across each of these opportunities. In medical, we've been making strategic investments in urology applications. Our thuleum lasers provide a superior solution for eliminating kidney stones and have demonstrated improved results versus legacy laser processes.

On previous calls, I discussed a new customer we won earlier this year that has helped to drive strong revenue growth in the business in 2025. I'm happy to report another major milestone on today's call. FDA clearance and the upcoming launch of our next generation urology system. This new system incorporates our proprietary StoneSense, and advanced pulse modulation technologies, which deliver improved precision and control, continuing to enhance results in kidney stone removal procedures. Shipments are expected to begin in the fourth quarter. This marks another important step in expanding our medical portfolio and demonstrates how our innovations continue to advance patient care and broaden our reach beyond industrial applications.

We're executing against a clear roadmap that we believe will drive significant revenue growth including recurring consumables revenue over the next two to three years. Our high volume manufacturing capabilities. Crossbow can operate as a standalone system or This system was showcased during two recent defense shows, DESCI in London and AUSA in Washington, DC. Interest was high from both defense and commercial customers for protection of critical military and civilian assets. We are working on converting leads into orders and are having conversations with multiple potential customers. We're proud to the opening of our new IPG defense customer center and production facility in Huntsville, Alabama which is dedicated to supporting the Crossbow product line.

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

Tim Mammen: Thank you, Mark, and good morning, everyone. My comments will generally follow the earnings call presentation which is available on our Investor Relations website. I will start with revenue trends by application on slide four. Revenue from materials processing increased 6% year over year, driven by higher sales in welding, additive manufacturing applications, cleaning, and micromachining, partially offset by lower sales and marketing marking and divestitures while cutting revenue remained nearly flat. Revenue from applications by higher sales in medical, and advanced.

Our emerging growth products performed well in the quarter, increasing on a year over year basis but declining slightly sequentially and accounting for 52% of sales in the third quarter down from our record high of 54% in the prior quarter. Moving to the revenue performance by region on Slide five. Sales in North America decreased by 16% sequentially but were up 8% year over year. Sequentially, sales declined due to the timing of some large orders in welding. And advanced applications while year over year growth was driven by higher revenue in advanced applications and medical as well as improved cutting and cleaning sales. Sales in Europe increased 11% sequentially.

And 4% year over year excluding $7 million in divestitures. The sequential increase was driven by higher sales in welding, cutting and additive manufacturing while the year over year improvement was driven by the acquisition of CleanLaser as well as higher sales in cutting and additive manufacturing. Revenue in Asia increased 5% sequentially and 15% year over year, driven by higher welding sales in China, Japan, and Korea as a result of stronger demand and business wins in battery applications. Our differentiated solution including the combination of our AMB laser weld process monitoring, and beam delivery is improving yields and battery safety and driving adoption by major battery manufacturers in the region. Performance review on Slide six.

Revenue came in at the top of our expectations at $251 million flat sequentially and up 8% on a year over year basis or 11% excluding divestitures. Foreign currency increased revenue by approximately $3 million or 1% this quarter. GAAP gross margin was 39.5% and adjusted gross margin was 39.8%. Above our guidance and was driven by improved manufacturing cost absorption and a decrease in inventory provisions partially offset by higher cost of products sold and increased shipping costs on a year over year basis. The impact of tariffs was a 140 basis points in line with our expectations. We continue to work on mitigating tariffs but the impact will likely continue in the fourth quarter.

Operating expenses were flat sequentially but above last year's level, primarily due to the investments we are making to support our strategy and strengthen our organization which Mark highlighted earlier on this call. GAAP operating income was $8 million and our adjusted EBITDA was $37 million slightly above the top end of our guidance. GAAP net income was $7 million or 18¢ per diluted share. Adjusted earnings per diluted share was $0.35 in the third quarter at the top end of our guidance. Moving to a summary of our balance sheet and cash flow on Slide seven.

We ended the quarter with cash, cash equivalents and short term investments of $870 million, $30 million in long term investments, and no debt. During the quarter, we spent $21 million on capital expenditures and $16 million on repurchasing IPG shares supporting our balanced capital allocation framework of investing in growth, and returning cash to shareholders. As expected, operating cash flow started to improve significantly in the second half of the year, more than offsetting CapEx and driving positive free cash flow in the quarter. Looking ahead, we will likely come in well below $100 in CapEx this year due to the timing of expenditures for our major investment in German.

We still expect CapEx to decrease to about 5% of revenue and free cash flow to improve once the project is complete but the timing of this project may keep next year's CapEx at approximately the same level as in 2025. Moving to our outlook on Slide eight. For the 2025, we expect revenue of $230 million to $260 million and adjusted gross margin between 36-39% including a potential impact of tariffs of about 140 basis points. With investments in the growth of our business and strengthening the organization, leadership, we expect our operating expenses to remain elevated between $90 million and $92 million in the fourth quarter.

We anticipate delivering adjusted earnings per diluted share in the range of $0.05 to $0.35 approximately 42.5 million diluted common shares outstanding. Our adjusted EBITDA is expected to be between $21 million and $38 million. In summary, we are pleased to see further signs of continuing revenue stabilization coupled with margin improvement while investing in our strategic initiatives. We continue to believe we have significant operating leverage in our model. Our strong balance sheet gives us a significant advantage given the near-term uncertainty in the operating environment. I will now turn the call back to Mark.

Mark Gitin: Thanks, Tim. In closing, we are encouraged by the progress we've made and energized by the scale of the longer-term opportunity ahead. We believe we have strong growth opportunities driven by our differentiated solutions have been successfully winning business even in a subdued industrial environment. As general industrial activity recovers, this positions us well to outgrow the market. Our market leadership, applications expertise and complete solutions enables us to drive adoption of lasers, replacing incumbent technologies, and expanding the addressable market. We are excited that our growth initiatives in medical, micromachining and defense are already showing meaningful progress and driving incremental revenue.

While we are cautiously optimistic about the demand environment, we continue to transform the company to create value for our customers shareholders for the longer term. With that, we will be happy to take your questions.

Operator: Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 if you like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the 1. One moment please while we poll for questions. Our first question comes from Ruben Roy with Stifel. Please proceed with your question.

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

Mark Gitin: Yeah. Sure. Nice to talk to you, Ruben. See, first of all, you know, we're quite happy with the performance around the world. As I mentioned, the book to bill continues to be about one globally at this elevated revenue. And it's showing continued strength in each of the regions, in Asia including Japan, Korea and China. Europe is stabilizing and we've been seeing some upside in North America. And we're really encouraged with these early signs of industrial expansion, as you mentioned, to PMIs are tracking a little bit higher now, so with The US about 52.5, the Euro Zone now stabilizing at about 50, China a bit over 50 as well. So, you know, those are positive pieces.

And, you know, even in what has been a muted industrial market, we're really seeing the benefits of our differentiation, right? The technology, the product quality, reliability, and the applications expertise that we've got tie into that the global support infrastructure that we have. Those things are starting to really give us some benefit. And we've seen that in the cutting revenue for example, that's been essentially flat now. And consistent the past several quarters. And I've talked about this before, but our OEM inventories in cutting our OEMs, their inventories really normalized. Happy that we've got our rack integrated platform out.

So, you know, this helps to contribute to how we guide the new product is out now, and it's been qualified by most of our OEM customers. And again, that's the system that has the new diode lasers that's higher power, smaller form factor, lower cost structure. And then as I mentioned in the prepared remarks, we're continuing to get share gains in welding and additive manufacturing. That's going well to cleaning. So, you know, really feel good about that, you know, that we're positioned to outgrow the market as the industrial output starts to improve. And then of course, I mentioned, we're also focused on the key areas that we're investing in the non-industrial areas, right?

So we've focused on the areas of medical, micro machining, and the defense area, the advanced area with our crossbow system and we're seeing some pickups there in each of those areas as well. New customer that we've talked about in medical, new product coming out in Q4 where we're starting to get some shipments. So all of those are contributing well. So overall, I'll say again cautiously optimistic and certainly feel better about the business now than we did a year ago at this time.

Ruben Roy: Great. Thanks a lot for all that detail, Mark. I just had a quick follow-up on that and a quick one for Tim. Just a follow-up, it was nice to hear the e-mobility related welding revenue strengthened a bit. Was that geo-specific or was that something that you saw more broad-based?

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

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

Tim Mammen: Sure. I think, first of all, gross margin, both actually on GAAP and adjusted basis, was strong in Q3. Was actually very pleased with it. Some of the positives on that were that we started to see some improvement in product gross margin which we'd mentioned has been a bit weaker in the second quarter. So that's really good because that shows that some of the cost reduction initiatives that we've got, Mark mentioned that around the ROI laser. We're also trying to roll out the higher power diodes across the platform more broadly, for example. There are other applications where we've introduced lower cost lasers. So that was really pleasing to see that develop during the quarter for me.

The other benefit on gross margin, couple of other ones, inventory provisions were lower. So I'd said that we expect to see those come down in the '3. That, though, did result from growing inventory a bit. If you look at the balance sheet, inventory is up about $20 million. That was an intentional investment in inventory really to reduce lead times to customers and support the business at this point in time. We're not expecting much more moderate impact from inventory in the fourth quarter. So kind of the midpoint of my gross margin guide factors that in. It's not factoring in any other significant increase in tariffs. We're trying to mitigate some of the effective tariffs.

I said clearly, I don't think companies are gonna get rid of the cost of tariffs. Given how pervasive they are. But now we're looking at where we can increase pricing a little bit. We're looking at other programs internally in terms of manufacturing drawbacks of tariffs and things like that. They do take time to put in place. There's a huge amount of data analytics, and approvals that you need to go through to get those in place. But they should start to see some of that tariff impact potentially ameliorate a bit going into next year?

Ruben Roy: Great. Thanks again for all the detail.

Operator: Our next question comes from James Ricchiuti with Needham and Company. Please proceed with your question.

James Ricchiuti: Hi. Thank you. Good morning. Had a couple of questions. First, on Crossbow. Wondering, Mark, how we might think about the opportunity looking to 2026. Sounds like you've got the interest that the research shows that you've protected participated in. Are you working with any other partners at the moment besides Lockheed Martin?

Mark Gitin: So hi, Jim. Me just, know, step back for a minute. So, yes, we're quite excited with Crossbow and just to remind everybody, that's directed at the you know, the smaller class of drones, the Group one and Group two. And we have really a unique position because it uses our high power single mode lasers plus the surrounding photonics that we make and systems. We do this at scale at large volume manufacturing, we're able to deliver that and provide kind of a unique solution. And we demonstrated that or showed that at the two big shows. The DESCI, which is in London, and also at the AUSA just a couple weeks ago in Washington, D.C.

And Jim, I would say is that we had quite a lot of interest quite a lot of leads for that, and that it was both in the military space but also in, you know, in the civilian airspace. That's been a recent just in the last six weeks or so, saw drone incursions shut down major airports. In Europe, Oslo, Copenhagen, Munich all had long shutdowns. So there's interest also in that civilian space. So quite a lot of leads that we're working through.

We have obviously the link with Lockheed but that's not that it's not only Lockheed, and we have conversations going on with, you know, quite a few other potential customers in both the defense and civilian airspace. Areas and globally.

James Ricchiuti: Now if we think about the opportunity, looking out to next year, it sounds like you've got a few line you know, more than a few irons in the fire and that this guess, how do we think about it in terms of material revenue sidekick?

Mark Gitin: Yeah. Sure. Sure. I understand, Jim. So what I would tell you is that, you know, qualifying leads. This does take some time to go through. So, you know, we do expect to get some revenue in 2026. But it takes some months certainly to qualify and turn leads into orders.

James Ricchiuti: Got it. Just with respect to the new urology system, which I guess you're skipping this quarter. Again, similar questions looking out to next year. Is this you know, how significant a product launch is this for you in terms of adding additional momentum in the national market this year?

Mark Gitin: Yes. Thanks, Jim. I'll tell you, you're a little bit garbled in your voice, but I think I the question. And that was around the launch of our new our new urology product here in Q4. So just to reiterate for a moment, we have received FDA clearance and we are launching this. This is a new product in urology. It's a thuleum based system. Next generation. It has a couple of really key features. One is called StoneSense, and the other is really a unique way that we're able to modulate the pulse output and both of those are for basically precision and safety.

The StoneSense actually can tell the difference between hitting a stone and tissue and therefore have you know, additional safety in the process. So we're launching that product. That's the first of a roadmap of new products in urology, and I've been talking about this for several quarters now. And just to point out, I had said several quarters ago that we were targeting a Q4 launch, so that's on track. And the entire roadmap with this being the first product is will give us substantial revenue growth. I also want to point out too that earlier in the year, had announced that we had a second major customer that's a leader also in the urology space.

Remember, we've talked about Olympus before as one. We can't name the other, but it's another large player in the marketplace. And just to remind you also that as we bring out new product in the system side and gain share, that also brings with it recurring revenue because we also make the disposable fibers that go with each of the each of the treatments. So, you know, what I'd say is we're starting to ship the new product in Q4, we're excited about the product. We think it will it will gain us more share in that market.

But I also want to say that it's the first of a number of new advancements that we'll be bringing out over the next couple of years. And we're expecting you know, in urology, which is a $2 billion TAM, we're expecting to significantly grow that, and it's to so it'll be a key part of our growth going forward.

James Ricchiuti: In terms of 2026, if you were to rank this among some of the other opportunities that you're focused on? Where would you place this, say, among the top three or four?

Mark Gitin: Yeah. So, Jim, it is one of the top ones for us. So, you know, when we think about the urology roadmap, we look at that as growing our urology revenue kind of two to three x in the next two to three years. So, I can give you some sense of, how to how to consider that. It is of the larger ones we're looking at. If we if we talk about the investments in the three key areas, you know, based upon our differentiation. We've talked about the urology, the micromachining space, and then of course the advanced area which includes the crossbow.

You know, that together, what I've said is that's addressing about a $5 billion TAM and that over the next several years we're expecting to grow hundreds of millions of dollars in those spaces.

James Ricchiuti: Got it. Thank you. Congrats on the quarter.

Operator: Thank you. Next question is from Scott Graham with Seaport Research. Please proceed with your question.

Scott Graham: Hey, good morning, and congrats on the quarter as well. You just remind us when you talk about tariffs to minus 140 basis points, that's a net number, right, of versus your countermeasures?

Tim Mammen: That's the, yeah. That's the impact on the quarter relative to or a normalized run rate saying Q1 or q second half of last year. So it's net of some countermeasures at the moment that we've implemented. But for example, if you're trying to change pricing, Scott, you gotta go through adjusting pricing. You gotta adjust quotes. You gotta shift the existing backlog. You gotta wait for orders from customers. So you don't see the benefit from something like a change in pricing. For quite a significant period of time.

And then I mentioned that we're looking at different types of strategies to draw back some duties when you're-exporting product or bringing product back into The US that has US content. But again, those take a lot of time to put in place because they're quite complex to do.

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

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

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

So that's what you're seeing and I expect we expect that to stay at about that level going forward.

Scott Graham: Alright. That's very helpful. Thank you.

Operator: Our next question comes from Keith Housum with Northcoast Research. Please proceed with your question.

Keith Housum: Good morning. Good morning, guys. I appreciate it, and good quarter. Just remind me historically, has there ever been an opportunity for budget flushes in the fourth quarter and any potential benefits from the one big beautiful bill that we saw passed earlier this year?

Tim Mammen: In seasonality, in the fourth quarter, sometimes Q4 can be a bit weaker than the third quarter. Depends upon the geographies as the issue, Keith. I mean, you can have slightly lower revenue example, in China where China can be stronger in Q2 or Q3. But then you can get some pull through in other geographies that may or may not offset that. So it's not a particularly meaningful seasonality, I'd say, and it can be a little bit variable from period to period. And then on the one big beautiful bill, no. I mean, what the way that since one big beautiful bill is very complicated.

What it does, you know, there are different ways you have to strategize about that. The way that we've looked at it in terms of preserving some of our permanent deductions that if you accelerate, for example, depreciation, you lose those. We don't see a meaningful change in the effective tax rate going forward related to o b three. You can see some benefit on cash taxes, but not really to the effective tax rate overall.

Keith Housum: Okay. I appreciate it. Helpful. And then, Mark, you briefly mentioned a new facility at Hunt Alabama. Regarding your cross sell opportunity there. Can you just expand a little bit more about what you're going be going down there? Is it going to be manufacturing? Is it just a sales location?

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

Operator: Great. Thank you. Star one. One moment while we poll for questions. Our next question comes from Mark Miller with the Benchmark Company. Please proceed with your question.

Mark S. Miller: Thank you for the question. I just was wondering if you can give us some thoughts about margins for defense related opportunities. Are they similar to corporate margins, or would they be above or below?

Mark Gitin: Yes. Thanks very much for the question. So this is the area, for example, Crossbow is you know, again, in one of the highly differentiated areas, so that's where we're investing in these areas in medical micro machining and this crossbow area, this defense area. So, very high differentiation and therefore margins above what you would see corporate.

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

Mark Gitin: Yeah. So I can tell you, we're actually excited about that. That area. That's an area that we've been concentrating in. So that also falls within that what we call the advanced segment, which has the crossbow in it as well. So the area of semiconductor CapEx, you know, this WFE piece, again, it's where we have significant differentiation. We're working with key suppliers that are in that market. Largely in the metrology inspection lithography space, and, you know, we've gotten some very some design wins in that area recently from that work with very differentiated products. So I really like those. That semiconductor area, because, you know, when you win there, it's really an annuity.

That lasts for many years. And so as those start to roll out, and we've seen some of that, happening, that's why you saw our advanced up a bit this quarter was because of some of the semiconductor pull through.

Mark S. Miller: Thank you.

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

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

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

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