Investor's Business Daily - Yahoo! Finance
November 03, 2008

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Investor's Business Daily
In-Sourcing One Factor Helping Laser Company
Monday November 3, 6:04 pm ET
J. Bonasia

A ton of U.S. companies outsource some manufacturing operations, but IPG Photonics has "in-sourced."

The maker of fiber-optic lasers used in the telecom, medical and defense fields is making a key semiconductor back in-house.

"We had depended on outside suppliers for semiconductor chips, but the market price never allowed us to make a profit," said Tim Mammen, IPG's chief financial officer. "So the only way to go was to develop the semiconductor internally -- to in-source rather than outsource."

IPG Photonics (NasdaqGS:IPGP - News) was founded in Moscow in 1990 by Valentin Gapontsev, a Russian laser expert at the Soviet Academy of Sciences. Today, IPG is based in Oxford, Miss. The company, profitable since 2004, went public in 2006.

IPG's year-over-year sales have risen 23% or more for at least the past 16 quarters. The stock reached a 28-month high above 22 in mid-September, before the economic meltdown. It now trades near 14.

Unlike traditional lasers, fiber-optic lasers send concentrated beams of light through strands of glass no thicker than human hairs. This, says Mammen, makes "the quality of the optical beam very bright, intense and nondivergent. This means it retains its focal point 18om long distances away."

Fiber lasers are more compact, efficient, flexible and potent than standard lasers, and more versatile, Mammen says. They can cut through high-strength steel and perform delicate laser surgeries.

Mammen recently spoke with IBD about fiber lasers.

IBD: What are fiber-optic lasers, and how do they differ from other lasers?

Mammen: We make a new generation of lasers with wavelengths similar to legacy solid-state lasers that use crystals to generate the energy. The other main legacy technology is CO2 (carbon dioxide), which is a gas, rather than a solid crystal or fiber, to create the energy.

We use what is called active fiber. This is similar to communication fiber, but it's very specialized and doped with different rare earth materials. The (laser) light's output is basically the same wavelength, but ours is more intense and less divergent, so it's more powerful.

The other fundamental difference on our laser is the light source. We use a semiconductor diode that converts electrical input into optical input. That is more efficient and reliable compared to some other sources of energy and light that legacy systems use.

IBD: How are fiber lasers an improvement over most standard lasers?

Mammen: The first point 19 the quality of the optical beam generated (with fiber). It's very intense. The output is also more easily scalable, from 10 watts -- less power than a light bulb uses -- to 50 kilowatts, or 50,000 watts, which allows you to cut thick materials.

The electrical efficiency of our devices approaches 30%, vs. legacy lasers with an efficiency range of just 2% to 15%. We also have a lower maintenance cost.

One other benefit is size. A typical 4-kilowatt fiber laser weighs 500 pounds, but solid-state ones weigh 3,000 pounds, and comparable CO2 lasers weigh even more.

IBD: IPG, founded in 1998, got an early lift from all the companies that started installing fiber-optic cable in a bid to provide fast Internet access. How did the dot-com collapse of 2000-01, and rapid downfall of customers such as Lucent, hurt your business?

Mammen: Around the year 2000, our company had grown very rapidly, but 85% of our $52 million in revenue was telecom-based. And $45 million was concentrated within just five customers. And the biggest customer was 44% of sales.

When companies like Siemens (NYSE:SI - News), Alcatel (NYSE:ALU - News) and Lucent (Alcatel and Lucent have since merged) came crashing down, we saw a tremendous decline in revenue. Then we had a contract with a third-party supplier of optical chips that we had to negotiate out of.

IBD: What was your strategy for recovery?

Mammen: Instead of outsourcing to a low-cost center, we decided to produce the semiconductors that go into the diodes. Apart from some technology advantages, this meant the cost was no longer prohibitive for us to make a profit, given the going cost in the market.

We had devised some highly automated production technologies to bring the cost down. The chip we produce has the same technical specs, but the cost of us producing that chip is now 10% of the cost we used to pay our outside suppliers.

But that was only one example. We've developed many other components in-house to bring the cost down, such as high-powered isolators and couplers and optical-combining technologies.

IBD: What other issues are having an impact on the laser industry?

Mammen: Historically, lasers have not been well accepted in industrial applications because they have been very unreliable and complex. But I believe fiber lasers change the perception of lasers in the market, and they are being deployed much more widely now.

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