Timothy P.V. Mammen
Chief Financial Officer and Senior Vice President at IPG Photonics
Thank you, Eugene, and good morning, everyone. My comments generally will follow the earnings call presentation, which is available on our Investor Relations website. I will start with the financial review on Slide 4. Revenue in the third quarter was $301 million, a decline of 14% year-over-year. Foreign currency headwinds reduced revenue growth by approximately 2%. Revenue from materials processing applications decreased 15% year-over-year while revenue from other applications was nearly flat. GAAP gross margin was 44.1%, an increase of 100 basis points year-over-year, which was driven by lower inventory provisions, reduced shipping costs and tariffs, as well as an improvement in absorption of manufacturing costs as a percentage of sales.
On a sequential basis, gross margin continued to improve on lower revenue as we focused on reducing costs, managing inventory and improving manufacturing efficiency. Despite the headwinds to our revenue from a challenging operating environment and reduced capital equipment spending worldwide, I am pleased with the resilience of our financial model and the Company's ability to improve margins and to continue to generate ample cash flow from operations to support current and future investments. FX also -- headwinds also had a negative impact in the quarter. If exchange rates relative to the U.S. dollar had been the same as one year ago, we would have expected revenue to be $6 million higher and gross profit to be $4 million higher.
GAAP operating income was $56 million and operating margin was 18.5%. Net income was $55 million or $1.16 per diluted share. The effective tax rate in the quarter was 19% and benefited from certain discrete items. Foreign currency transaction gains related to remeasuring foreign currency assets and liabilities to period-end exchange rates had a small positive impact on operating income of $400,000 or $0.01 per share.
I'd like to remind you that last year's results benefited from $22 million or $0.32 per diluted share gain on the sale of the telecom transmission business. Excluding the currency transaction gain, asset impairment and recovery of a restructuring charge related to our Russian operations as well as the gain on the sale of telecom business last year, operating expenses were nearly unchanged year-over-year. Sequentially, operating expenses increased primarily in research and development and sales and marketing as we invested in resources to drive future growth while still controlling expenses.
Moving to Slide 5. Sales of high power CW lasers decreased 22% and represented approximately 40% of total revenue. Sales of ultra-high power lasers above 6 kilowatts represented 46% of total high power CW laser sales. The decline in revenue was primarily due to lower demand in flat sheet cutting applications in China and Europe. We continued to see customers outside of China adopting laser technology, but demand has been impacted by the economic uncertainty with OEMs delaying purchasing and reducing inventories.
Pulsed laser sales decreased 25% year-over-year due to lower sales in marking and solar cell applications. Systems sales increased 4% year-over-year with growth in LightWELD offsetting a decline in non-laser systems. Medium power laser sales increased 1%, driven by increased demand in welding and higher sales in 3D printing applications. QCW laser sales were down 4% year-over-year, and other product sales decreased due to lower revenue in advanced and telecom applications.
Looking at our performance by region on Slide 6. Revenue in North America decreased 13%. We saw a strong growth in welding and cleaning applications as well as higher parts and service sales. However, this growth was more than offset by lower sales in cutting, medical, advanced and telecom applications. In Europe, sales increased 3%, and the region continued to perform well given weak -- the weak macroeconomic environment. Revenue growth was driven by welding and semiconductor applications. Revenue declined in cutting, marking and cleaning applications, which were impacted by lower industrial demand and destocking by some OEM customers. Revenue in China decreased 28% year-over-year as demand declined across most industrial applications, including cutting, welding and marking. Additionally, revenue was negatively impacted by competition in the flat sheet cutting market and lower demand in e-mobility applications due to a decline in new battery projects and delayed capacity expansions.
Moving to a summary of our balance sheet and cash flow on Slide 7. We ended the quarter with cash, cash equivalents and short-term investments of $1.1 billion and no debt. Our inventories continued to decrease sequentially and we target further reductions in inventories in the fourth quarter. Cash provided by operations was $86 million and capital expenditures were $26 million during the quarter. We sold two buildings in the quarter, realizing $29 million in proceeds, which means net capital expenditures are just under $55 million year-to-date, well below the same period last year. While maintaining a strong balance sheet, we have been returning a significant amount of capital to shareholders through opportunistic share repurchases. We spent $46 million on share repurchases in the third quarter and approximately $160 million this year.
Moving to our outlook on Slide 9. Third quarter book-to-bill was below 1 times [Phonetic] with macroeconomic uncertainty resulting in project delays and reduced orders in all major manufacturing regions. Leading manufacturing indicators in Europe are trending to the lowest levels since the 2008 recession. While economic indicators in China are mixed, we believe the Chinese cutting market is down 20% to 30% and the timing of an overall recovery in demand remains uncertain despite some government stimulus. Competition from Chinese manufacturers remains stiff. Additionally, project delays related to battery capacity expansion in China provide further uncertainty to the outlook.
Although we have limited visibility into orders beyond the fourth quarter, we continue to believe that battery investment in China should restart in 2024 as electric vehicle sales continue to increase. Investments in battery capacity outside of China is in the early stages and should increase in the next several years as well. We also expect some benefits from government spending and onshoring activities to benefit industrial activity in the U.S. For the fourth quarter of 2023, we expect revenue of $270 million to $300 million. The fourth quarter gross margin estimate is between 41% and 43%. We deliver -- we anticipate delivering earnings per diluted share in the range of $0.80 to $1.10 with approximately 47 million diluted common shares outstanding.
As discussed in the Safe Harbor passage of today's earnings press release, 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 Safe Harbor and the Company's reports with the SEC.
With that, we will be happy to take your questions.
