Q4 2019 Earnings Call
Greetings welcome to Proto labs fourth quarter and full year 2019 earnings call.
This time all participants are.
Listen only mode.
First question answer session will follow the formal presentation.
If anyone today should require operator assistance during the conference. Please press star zero from your telephone keypad.
Please note this conference is being recorded.
At this time I'll turn the conference over to Dan Schumacher Director Investor Relations.
Sure.
You may begin.
Thank you, Rob and good morning, everyone.
With me today, its Vicki Holt, our President and Chief Executive Officer, John Way, our Chief Financial Officer.
Rich Baker, our Chief Technology Officer.
This morning for the market open.
This.
<unk> press release announcing its financial results fourth quarter and full year ended December 31st 29 too.
The release is available on the company's website at <unk> Dot Com. In addition to prepare a slide presentation is available online at the web address provided in our press release.
We would begin I would like to remind.
Everyone that are discussion will include statements relating to future performance and expectations that are where maybe considered forward looking statements and subject to many risks and uncertainties that could cause actual results to differ materially from expectations.
Please refer to our earnings.
Yes relieved in recent FCC filings, including our annual report on form 10-K for information on certain risks that could cause actual outcomes to differ materially and adversely from any forward looking statements made today.
The result in guidance, we will discuss include non-GAAP financial measures consistent.
Our past practice.
Please refer to our press release in the accompanying slide presentation within the Investor Relations section of our web site for a complete reconciliation of non-GAAP to GAAP results.
Now I'd like to turn the call over to Vicki Holt, President and Chief Executive Officer, Proto Labs Vicki. Thanks.
Dan Good morning, everyone.
Thank you for joining us on our fourth quarter conference call I.
I will begin with an overview of our overall business performance in the quarter.
John will provide a detailed look at our fourth quarter and full year financial performance.
Rich Baker and I will then provide.
I didn't overview of a major initiative for 2020.
And finally, John will conclude with our financial outlook.
This morning, we reported 2019 annual revenue of $459 million or growth of 4% in constant currencies, despite a challenging global.
Economic environment.
The fourth quarter played out as we expected quarterly revenue of $112 million and earnings per share of 63.
The midpoint of the guidance ranges, we provided in our Q3 calls.
[noise] macroeconomic headwinds across various industries and.
All the geography, we operate and have resulted in less activity from our customers in 2019.
As we expected with the softer here, we did not see a push from customers to complete projects by the ended the year, resulting in a relatively weak demand through the fourth quarter.
Providing further color on the quarter revenue was down 1% year over year in constant currency.
Slide five in our Investor presentation highlights fourth quarter revenue by geography.
Revenue in our largest market the Americas declined 1% versus the prior Q4.
Demand was especially sluggish in our aerospace and manufacturing end markets well automotive grew in the mid teens off relatively easy comparable in 2018.
Our European region pretty Q4 year over year revenue growth of 4% in constant currency.
Revenue in our medical end market showed strong growth well automotive and consumer electronics decline.
Our Japan region quarterly revenue declined 12% in constant currency.
And your hand business environment.
Exports have weakened with the trade war between.
When the U.S. in China, having an impact.
After business spending is evident both in the latest purchasing managers indices.
And industrial production has declined in recent months.
Transitioning to revenue by service on slide six.
As stated earlier we.
It's relatively weak demand in the last quarter of to hear.
That rang true across all our services, except Threed printing.
[laughter] Threed printing revenue in the fourth quarter of 2019 increased 13% over the prior year.
It is clear that our customers are utilizing.
Okay, Threed printing more in their product development and understanding the specific use cases were threed printing can be utilized for production starts.
Our leadership position in producing high quality parts, it's raining through even in this tupper tougher economic environment and positions us to capitalize on the future.
Your growth in this market as the technologies continue to advance.
[noise] injection molding revenue declined 4.5 per cent compared to fourth quarter 2018.
A portion of this year over year change is driven by a relatively strong Q4 in 28 cheap.
What's the remainder driven by.
Year over year decline in consumer in aerospace industry sector.
CNC machining revenues rose, 1% year over year in Q4.
Lastly sheet metal contributed $5.2 million of revenue in the quarter, representing a decline of 13% year over year.
We talked about our challenges with our sheet metal service in previous calls well our sheet metal revenue was down year over year. The revenue was flat with Q3, showing signs that we have stabilized the surface.
Moving to our full year performance in 2019, Proto labs continue to evolve to better serve the needs of our.
Our customers in a challenging macroeconomic environment.
Our full year 2019 revenue was $459 million represents 4% growth over 2018 at constant currency as shown on slide nine.
Our full year non-GAAP EPS $2 70.
Nine cents down 8% versus 2018.
In 2019, we expanded how we serve customers by launching production capabilities for Threed printing.
Introducing precision color matching for injection molded parts.
And expanding our three D. technologies through the addition of car.
<unk> digital life synthesis Threed printing technology.
These are in addition to other all the love to see actions that we have developed in recent history.
Such as demand manufacturing for injection molding and secondary operation. So I, just had printing laser engraving and threaded insert.
Our challenges that we have not able to fully realize the returns on these service expansion.
Our ability to provide the customer experience our customers have grown to expect from us and expansions of our core service offerings.
And then pair due to the limitations of our systems.
The system women.
Patients have also impacted our ability to realize the full benefits of our acquisition of rapid manufacturing.
In addition, we've had to add manual processes to explore the to support the expanded off first.
Net result is that we are not fully able to capture the market demand for these services well.
Also increasing our cost structure to support manual process impacting both the top and bottom line.
Later in the call, we'll be discussing what we're doing to address these challenges.
Although 2019 was a difficult year, we're confident in our future and we will continue to.
And our position as a recognized leader in the rapidly evolving digital manufacturing base.
John will now provide an in depth to look at our Q4 and full year 2019 financials John.
Thank you, making [laughter] I'll start with our Q4 financial.
And then transition to the full year results for 2019.
Revenue in the fourth quarter was $111.9 million, a decrease of $900000, 4.8% compared to the fourth quarter of 2019.
Currency represented a 250000 dollar headwind in the quarter due to the relative.
The U.S. dollar.
Our fourth quarter unique product developers served increased to 20600 or growth of 1% compared to the prior year.
As we look at the expense portion of your income statement and it's best to look at the sequential performance as we go from quarter to quarter as presented on slide 14.
Certain costs, we attempt to flex football games, such as cost of goods. So well others are more of a long term investment like sales and R&D.
Our non-GAAP gross profit for the quarter was $57.5 million, resulting in adjusted gross margin of 51.4%.
No slightly.
Sequentially from 51.5% third quarter of 2019, as we managed our cost of goods sold to correspond with the revenue.
Adjusted operating expenses totaled $36 million or 32.2% of total revenue for the fourth quarter of 2019.
This compares to $35.1 billion or 29.9 person or revenue in the third quarter.
Adjusted sales and marketing expense was $16.8 million or 15% or revenue in the quarter.
The expense was flat with the third quarter, but increased as a percentage of revenue due to the lowered revenue base.
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Adjusted R&D expense was consistent with third quarter at $7.8 million.
We continue to invest in research and development at this level to expand our capabilities and all services and improve our customer experience an internal systems in order to support the future growth of the business.
Adjusted General and administrative expense was 10.2% of revenue in the fourth quarter up from 8.9% in the third quarter, largely driven by timing of certain expenses, such as legal consulting and a lot of expenses.
On a GAAP basis, we realized a benefit in Q4 2019.
$2.3 million related to the reduction in the valuation of performance shares.
The net result was adjusted EBITDA in the quarter of $28.3 million or 25.3% or revenue compared to 27.5% of revenue in the third quarter.
Our non-GAAP effective.
The tax rate was 20.9% fourth quarter of 2019 compared to 18.3%.
Sure.
[noise] after adjustments our non-GAAP diluted earnings per share in the fourth quarter was at the midpoint of our garden guidance range at 63 cents, representing a 13 cents per share.
Sequential decline.
The main factoring this decline was volume with revenue declining $5.6 million from the third quarter.
We were able to flex or cost of goods sold and hold the gross margin percentage relatively flat. However, the lower volume resulted in an 11 cents per share impact.
Non-GAAP EPS was down 11 cents per share compared to the fourth quarter of 2008.
The lower effective tax rate in 2018 represented a two cents per share benefit last year.
The remaining nine cents per share year over year decrease in NPS was driven by the following Packers.
First we made investments to expand our manufacturing capacity, including the addition of our new CMC facility in late 2008.
Increasing our cost structure for revenue declined year over year, resulting in a six cents per share impact.
Gross margin compression.
We also increased or.
That's been in R&D to expand our product Oh, well and improve our E commerce experience, resulting in a two cents per share impact.
Now turning to cash flow and balance sheet items on slide 15.
Our business continues to produce strong cash flows generating $32.3 million and cash from.
Creations during the quarter.
Capital expenditures totaled 16.1 million in the fourth quarter, consisting of investments to drive and support future growth, including I.T. systems.
An infrastructure facilities investments and production equipment.
We ended the fourth quarter.
Cash and marketable securities balance of $174 million.
Shifting now to our full year results on slide 18.
Revenue for the full year was $458.7 million, a 3% increase over 2018.
Were 4% growth in constant currencies.
We served 47800 unique product developers, starting 2019, an increase of 1800 or 4% over 28.
Non-GAAP gross margin in 2019 was 52% of revenue.
They are to 53.9% to revenue and 28.
The year over year adjusted gross margin compression was driven by the following factors.
Rapid manufacturing at a 50 basis point impact on our consolidated year over year gross margin driven by lower volume in those services.
The addition of our CNC facility in Minnesota had a negative 40 basis point impact on our gross margins.
As we grow our CMC service overtime, well be able to leverage this fixed costs.
Labor increases contributed a 65 basis point impact our labor as a percentage of revenue.
Increased due to wage inflation and manual processes, we had to put in place to support our new service.
Mixer business also had an impact on our gross margins as we have stayed in the past our threed printing business operates at a lower gross margin that our injection molding and CMC services the.
Growth in Threed printing does create a headwind on our gross margin we were able to mitigate this headwind through operational improvements. However, the net result was a 25 basis point negative impact to our overall gross margins.
The remaining 10 basis point compression and from other investments in our operations.
Non-GAAP adjusted operating expenses totaled $144.5 million or 31.5% of total revenue in 29.
This compares to $137.2 million or 30.8% revenue and.
Adjusted sales and marketing expense was 70.3 million.
Dollars or 15.3% or revenue in 2019 compared to $66.6 million or 14.9% revenue in 28.
We continue to invest in sales and marketing to attract new customers and retain our existing customers.
As the industrial sector softened in 2018 or customers had.
Fewer projects during the year as a result, we increased our sales and marketing investment.
To attract or new customers.
Well in the short term this increased our sales and marketing costs. We believe many of these customers will continue to do business with us.
Future years.
As the industrial.
After improves and these engineers have more projects, we will reap the benefits of a larger customer base in the years.
Adjusted R&D expense was $30.8 million are 6.7% or revenue compared to 27.2 million or 6.1% of revenue in 28.
As we have.
David in the past our R&D investments consist of activities to expand their on blow by adding new services and materials.
Segments to improve our existing services and software development supporting our ecommerce platform manufacturing software and internal systems.
Thank you enrich will provide additional details.
So on our system investments in a few minutes.
Adjusted General and administrative expenses was flat at $43.3 million, representing 9.4% of revenue in 2019, and 9.7% or anything in 2018.
During 2019.
All of our operating costs, including Jane I included benefit related to the reduction of incentive compensation compared to 28.
The net result was adjusted EBITDA in 2019 of $121.4 million or 26.5% of revenue compared to 28.4.
Or percent of revenue even 28.
Our non-GAAP effective tax rate was 21.6% in 2019 compared to 20.9% in the prior year.
Taking all this new account, our non-GAAP EPS was $2.79.
2019 down 25.
Centsper share compared to the prior year to year over year decline was driven by the gross margin compression, we discussed earlier and continued investments in sales and marketing research and development.
Despite the economic environment, we generated $116.1 million and cash from operations during the here.
Capital spending was $62.2 million.
We also returned capital to shareholders by repurchasing $33.5 million common stock during the year under our 100 million dollar stock buyback program and have $50 million remaining under this program.
Our cash and marketable.
These balance of 174 million.
Is up from 155 million at the end of 2000, maybe.
Now I'd like to turn the call back over to victory for an overview of our top priority in 2020.
Thanks, John.
As we enter Twentytwenty the long term future for Proto labs is.
More exciting than ever.
Our ability to fulfill our customers prototyping and low volume manufacturing needs through our unique ecommerce and digital manufacturing solution.
Lets us at the forefront of the manufacturing 4.0 Revolution.
However, our customers have been telling us they want.
Good morning, they want more in terms of services capabilities and they want more in terms of the E Commerce experience we offer.
Proto labs was founded 20 years ago with the mission of providing custom injection molded parts to entrepreneur.
Got it difficult to obtain.
I'd like to advance their invention.
As we have progressive we added more services and capability, our customer base has evolved and broadened.
In addition to service servicing individual product developer, making individual apart.
We now also served.
Companies that are working on projects consisting of multiple parts in different services.
In order to continue to provide excellent experience for the broad use cases of our customers we need to evolve the way, we engage and serve our customers.
With our digital E Commerce model.
Our customer interface and supporting system are essential to the customer experience.
As we look forward to the new decade, and beyond we have realized that we need to evolve our systems to capitalize on the market opportunity and properly serve the long term needs of our customers.
With that.
Im going to turn the call over to Rich Baker, Chief Technology Officer.
Think about an exciting development for Proto labs that will impact 2020 and beyond rich.
Thank you Vicky and good morning, everyone on the call.
I'm here to discuss project, which is a step change.
And our digital threat, we call Proto labs 2.0.
As Vicki mentioned Proto labs, 2.0 project that we've undertaken to enhancing evolve our systems and processes to support our customers in our strategy for the next decade and beyond.
We've been.
Having been responsible for re Architecting systems.
In the past.
I have seen that right systems and architecture are critical to customer experience sales effectiveness organizational efficiency and financial success.
Hurt web 2.0 builds off the digital manufacturing model, but at the core of the company.
An update the customer.
Our phase and supporting systems that will allow us to expand our offerings efficiently.
I joined Proto labs in 2016, because I saw so much potential to expand the business to better serve customers.
I had been a fertile lapsed customers since 2007.
I was well aware of the.
As well the limitations Proto labs offerings.
After I joined Proto Labs, I Didnt assessment of the state of our systems.
I was struck by the amount of energy and resources required to make even relatively small changes to our offering.
I pretty quickly came to realize that the systems largely home grown.
At evolved over the past 20 years, mostly tied to a narrow concept upper left initial manufacturing process.
So somewhat incrementally re factors and expanded that functionality and the company's capabilities the ball.
Well that's created.
With that.
Continuing down this path.
Would have been painfully slow or maybe even impossible.
In a different approach.
But our systems could support and evolve.
'cause evolving customer needs in a scalable fashion.
Now, let me share some of the exciting details of this project what do you plan to launch in the second half of this.
Sure.
For two main parts Proto labs 2.0, the first is ecommerce our interface with customers.
And the second is our back end systems, which support the operations.
We're moving to a modern software architecture advanced development practices.
Our approach.
At the focus our software development.
On building pieces of our digital threats, which are unique to Proto labs.
Then we will integrate these with commercial packages for setter functionality.
We started with E commerce, because this is the most impactful to the customers and will provide the greatest benefit.
The business.
As we were Architecting. This change, we realized improvements were making and presenting our capabilities.
Going to require an advancement in our Bakken support systems as well.
To do this we brought in resources to help with this approach.
And thought leadership as well staff augmentation.
Patient.
This approach allows us to gain expertise leveraging state of the arts software architecture and techniques expanding our capabilities accelerating the development and then transferring knowledge to our stuff.
Help contextualize, what we're talking about and why we need to change let me give.
Three examples.
Our current system was built.
To support an individual ordering one unique prototype part in one service.
Our growing production business.
As additional requirements, which are not currently digitally in April.
For labs 2.0 will support.
Customers managing multiple parts in different services supporting projects and prototype through to production.
Our current system has limited ability to manage information associated with manufacturing quality.
Which is less important for prototype parts, but is required for production orders.
The future interface will offer an intuitive approach to capture this information from customers and allowed to flow through our front end.
And to our manufacturing executions.
Legacy architecture.
Current ecommerce platforms.
Bill on.
His data.
The front end systems share data structures and resources with a backend, making even small changes on the front end potentially impactful to the back.
The new ecommerce.
A hybrid cloud platform, enabling us to make improvements much more rapidly.
Our new architecture.
Will enable us to continuously integrate and deployed in a high availability environment.
These are just a few examples of the band segments, we are making.
Our existing ecommerce architecture cannot sustain the progressing needs of our broad customer base.
Utilizing.
Hybrid cloud Microservices architecture will allow us to benefit from all the modern software capabilities you experience in your favorite ecommerce website.
Well be able to continuously test and evolve ideas.
We can utilize enhancements for outside Proto labs for standard functionality, allowing us to focus our resources on new.
These specific to our digital manufacturing model.
All of this will smooth the path for advancements of our existing services as well as new offers moving from R&D ecommerce.
We will also allow us to integrate our existing acquisitions into the platform that was not possible.
The.
Listings are.
Ultimately per web 2.0 enables us to provide additional services for our customers.
They want much faster, which in turn enhances the value that we delivered to our customers.
These improvements will support the growth.
Yes, well into the future.
Now the Q will discuss long term benefits Proto labs to point out.
Thanks, Rich I am very excited to share with you some of the benefits of Proto labs 2.0 as outlined on slide 22 of our earnings presentation.
As rich described this project was initiated by our desire to better serve our.
Customers and was expanded when it presented the opportunity to better serve our employees.
We are building out a customer facing and back end systems to support our strategy now and into the future.
The long term benefits. This important project includes for.
This improvement.
In the customer experience.
Our internal productivity.
The speed and scalability of the business.
And expanded internal business insights.
The first benefit Proto labs 2.0 will offer is a much improved customer experience.
Yes.
Proto labs go to market strategy continues to evolve more customer focused and this project is an example of that.
The new E commerce platform will be more intuitive than the legacy platform with fewer clicks required to place an order and an overall better buying.
Experience.
We're also adding enhancement, which will make proto labs more valuable to our customers when managing and executing their project to take their ideas from concept to production.
These improvements are examples of how we're listening to our customers and evolving our business to support their needs.
The reward for these improvements will be higher customer satisfaction and improves customer retention.
Proto labs to 2.0 will also enable improved internal efficiencies overtime.
In addition to improving the customer experience for the last 2.0 will equip.
Employees to more efficiently do their jobs.
One area in which we see these improvements in our sales and customer support functions with the reduction in manual work associated with service expansion.
Additionally, the systems enhancements will allow us to eliminate some of the manual.
Well processes, we've had in place on recent bubble up expansion.
Our software resource productivity will also improve with the new environment, requiring less time and resources spent on system maintenance, allowing our teams to focus more on innovation and future growth.
Finally.
The update architecture will also make it easier to integrate acquisitions, including rapid manufacturing providing leverage of our cost structure.
Another benefit of Proto labs, 2.0 will be the ability to improve the speed and scalability of our business.
With the new architecture, we will be able to expand our existing.
On the low and launch new service offerings to customers more efficiently.
After our system is life will be able to launch new offerings and additional services online at a fraction of the time and complexity allowed by our existing.
Not only will the speed at which we publish the offering improved.
The user interface will be more intuitive and Bakken supports just to support the delivery of the service to the customer will be more efficient.
Lastly, Proto labs, 2.0 will enable improved business inside.
This project will provide easier access to data across the enterprise.
Right driving value added analysis.
For the last 2.0 will provide the integration of our marketing platform and our CRM system, providing additional customer focus business insight.
The improvement in the workflows across services, including expansion of services will allow for.
For improved operational reporting.
Well also be able to continually evaluate improve our offering in the marketplace and delight our customers.
In summary, Proto labs, 2.0 represents an exciting future for Proto labs.
Proto labs was founded in 1999, it would absolutely.
Lastly, a revolutionary and novel business model.
And Proto labs continues to be regarded as the leader and innovator in the industry.
To remain the leading ecommerce digitally enabled supplier custom manufacturing parts and services, we knew we had to change it evolves.
As.
As stated for the last 2.0 build out our system to better support our customers and further our strategy.
I'm very excited about the future Proto labs any opportunity to serve our customers in a much broader manner.
Like to thank our teams there, it's really hard and diligent work and.
The last 2.0 to date and for their continued efforts as we approach our plan to go live in the second half of the year.
No John will provide our financial outlook for the first quarter 2020, John.
Thank you Becky.
Our guidance for the first quarter of 2020 as summarized on slide 20.
For.
We currently expect first quarter revenue to be in the range of $111 million to $117 million.
This revenue guidance reflects the current global economy.
Typically the muted manufacturing and industrial production data.
We've also estimated the foreign currency will not have a significant.
In fact on our first quarter revenues compared to the prior year.
Moving to earnings guidance.
Our compensation expense will increase sequentially driven by occurring incentive compensation closer to target as we begin the new year.
The seasonality of payroll taxes during the first quarter and a partial.
Four of our annual Merit increase.
The impact of these items is currently estimated at eight to 10 cents per share.
Okay.
Our non-GAAP add backs for the quarter will include stock compensation costs of approximately $3.5 million and amortization of.
Third and $50000.
We currently estimate our non-GAAP tax rate to be approximately 21% to 22% in the first quarter.
Taking into consideration all the above we expect our quarterly non-GAAP EPS to be between 50, and 58 cents per share in the first quarter.
In addition to the first quarter guidance. We also want to provide some guidance from a financial impacts of Proto labs 2.0, as we prepare to launch in the second half the year.
We estimate that the project will result in increased expenses of approximately $10 million during the course of 22.
These.
Fences consist of.
Costs, we will incur related to system preparedness, such as training and change management activities, including overtime travel and contractor support.
They also include consultants support leading up to the system launch for a period.
Of time.
After we go lives.
These costs will largely be capitalized until we go live and expense during the support period.
We will have a software asset on our balance sheet that we estimate will be approximately $40 million that we will begin amortizing when the system is placed in service.
The recurring.
During quarterly amortization is estimated at $1.3 million to $1.5 million.
Earlier in the call Vicki discuss the benefits associated with this project.
These benefits are longer term in nature with the amount realized in 2020 expected to be minimal due to the second half timing of the system.
Launch.
We are managing the business for the long term, we embarked on the Proto Labs 2.0 project to provide the foundation that will allow us to serve our customers more holistically and capitalize on the current an expanding market opportunities.
Proto labs, 2.0 will impact our financial.
Performance in 2020, however, the project is necessary for us to realize our full potential as a business.
That concludes our formal remarks that we'd be happy to take your questions.
Rob can you please open upon.
Thank you will now be conducting question and answer session.
I would ask a question.
Today. Please press star one from your telephone keypad the confirmation Tony indicate your lines in the question Q.
You mean press star to feel that your move your question from the Q.
Just for choosing speaker equipment, it may be necessary to pick up your handset before pressing the star Keith.
One moment, please what we pull for questions.
Thank you.
First question just from the line of Brian Drab with William Blair. Please proceed with your question.
Good morning, Thanks for taking my questions.
Right.
Hi.
So John first question just.
Related to one of the last comments there.
He said that.
Proto labs 2.0 would affect financial performance in 2020, you gave.
The 10 million and expense, but how how does this.
The effect financial performance more broadly.
Gross margin is it going.
On to take.
Some of the focus off of revenue growth then.
Can you talk a little bit how it affects financial performance more broadly.
Yeah.
So I think.
I haven't quantified the direct impact of the project.
And that.
Will be spread out kind of throughout the year as as we approach.
Go live date.
It is a significant project forward for the company.
And with that we've we've got resources on it.
And then add resources on it in in 2019 as well so it does have an impact to the business.
We are.
Continuing to manage.
Around it.
We still are delivering delivering parts and serving the customers and making sure. We keep our focus there I'll add a little color to that Brian. This is a transformational project for the company that's going to set us up for the next decade and.
It's one that we have prioritized because we know that is necessary for us to.
To be able to continue to service our customers to where they want to be service and also be able to expand our service offerings for the growth that our investors expect from this company. So we prioritize battles for Frank.
Other priorities in 2019, and we'll be doing the same in 2020, well that's not to say that we.
I have continued to add on service expansion this year as we outlined.
Ability to fully realize the benefits of those service offerings have been impacted by the fact that are our systems.
We have not allowed us to create the kind of seamless customer experience that our customers expect from Proto labs. So this new system will allow us to do that allow us to capitalize more on the market opportunity to our service offerings have created and then on the margins.
Weve as we've added these things we've had to put manual processes in place to supplement some of the deficiencies in the system with Proto Labs 2.0, we'll be able to automate a lot of those manual processes, both in sales and customer service as well as some that are in the fulfillment.
Baskets.
That's going to give us the productivity improvements to begin to really drive some that margin. So yes. We prioritize this it's we're very very good reasons up to set us up to the next decade.
Okay and can you just say again with the timing is when does this project completed on its fully implemented.
Yes, so we're expecting it still live in the second half and as we proceed throughout the year AD and meet milestones will be able to be more clear and you'll hear more about that.
Okay.
This isn't something that you would expect to.
The work on this project to be continuing into 2021 2022. This is this is something you're going to get done.
On this year go lives will be this year now theres always work once we go lives. So for example.
The rapid manufacturing acquisition not in scope on go live that will come after.
We talked about the fact that this system will allow us to integrating in integrating acquisitions much more efficiently.
So it makes sense to get this place before we put we did that integration. In addition, we've been working on some of the.
Software enhancements and quoting enhancement sheet metal business that will be able to be rolled into that.
When we let me bring that business into the.
Fold after the got lot.
Okay, and then just one follow up related to that.
One of the benefits as Youre, saying here is going to be.
Easier integration of acquisitions.
Obviously spent some challenges with the last two acquisitions.
Can you just.
Tell us a little bit about what.
Types of acquisitions you'd be looking out at this point again and also as you know.
As you answer that I'm, just thinking about what services.
You can add at this point given your operating off a much bigger base now and I'd imagine any new service that you would go out and look to acquire.
And just be by definition would have a a lower smaller addressable market then things.
Then the ones that you've added in the past.
So I'll take that Brian.
So I think right now our focus is on getting this this project.
We are.
Turning to look at our our strategy and ultimately how we serve our customers better over the long term in helping them get their products to market.
As a lot of things that that could go into that.
As we we've looked at those strategies will continue to evolve that but right now.
I wouldn't expect.
Acquisitions to be our primary focus the primary focus is going to be on getting getting this project.
Okay, Alright ill follow up later thank you.
Thanks.
Our next question. This from the line of Andrew Desk I agree with fair.
Sure. So your question.
Yes can you hear me.
Yes, hi, good morning, I just wanted to quickly ask one last follow up on total labs to battle.
Well that help you potentially accelerate your on demand business longer term and then secondly, I'm not sure if someone addressed this already I was on another call are you.
Any impact in terms of demand from the Corona virus outbreak, even though you're not in China.
Yes, Okay I'll take a stab at that bridge you might want to add some additions as we talk about.
Production business on clearly one of the things were addressing in the upper left 2.0 ecommerce experience.
Variance is the fact that we service more than just a product developer we service a number of persona, particularly as you on launch into the production business. So we separate supply chain managers here event, and the new and by the way we need to serve up our production.
Offer in a way that's understood by those buyers. So we knew that coming in and we've designed those kinds of enhancements in the new E commerce experience to make it easier for our customers understand the offered by the offer and to take advantage of and rich I don't if you want to add anything to that on on demand.
Any fracturing or production.
Thanks Ricky.
Couple of things one.
There are lot of requirements for production that are not directly related to the part that we produced by the poly apart. We produce is quite good but once you go into production there were a lot of things.
It's related to quality in certifications that need to be managed and if you can't demonstrate that you're.
Capture process under control and you have all the documentation to back that up that represents risk for someone in their supply chain and so we need to be able to show all of those other things that supply chain type people need.
And we need to also be able to deliver those are backend digitally enabled way and so that's what we're building out here so that should help us across all services, adding production capabilities.
And then I'll just on address current a virus. So let me just to answer that by saying on as you know one.
The.
The advantages that Proto labs.
Rapid churn.
Model provides our customers is that ability just respond to supply chain disruptions. So that's clearly value proposition that we deliver customers that being said as of this date.
We have not seen a major impact.
As a result at the current a virus we on but we we do want to make sure that our customers understand that this is something we can do to help them should they have a supply chain disruptions that presents challenges because our.
Our injection mold tooling objectionable part B and C. Parts are all made in country and we can we can respond pretty rapidly.
Great. Thanks, you.
Our next question is from the line of Greg Palm with Craig Hallum. Please proceed with your question.
Yeah, Thanks, and good morning.
Everyone.
Good morning, Greg.
So thanks for all the details on.
Proto labs 2.0, so I mean, I think you've you've given us enough where the why behind this makes sense you know it's not entirely clear of the why now. So was are you know what specific.
Bigger that really influenced the timing of this announcement or maybe a little bit more color on the why now would be helpful.
Oh by the announcement on the why.
We've been working on this for a while yeah, we recognized.
Really back in 2017, we needed to evolve our E commerce experience.
And so this has been a project work we've been working on for some time on the why now is it's really basket, we're going to be going live. This year. We really wanted you to be aware of how this event will impact our 2020 financial performance.
But also we're so excited and talk about how it's going to.
Set us up to the next decade as well so.
Why now as we're pretty firm on where the timeline as for go live and it's going to impact our performance John I don't know if you want to add.
That covers.
Well, yeah, sorry, I guess all.
Not necessarily just the announcement I'm just more curious it sounds like.
Been making.
In some investments and over the past few quarters, but you're certainly accelerating things here with a pretty big investment spend. So the question is why now in terms of really accelerating those investments or was this sort of the plan all along.
Yes, I think as Vicki mentioned.
We.
Looking at the system and as as we were trying to make changes and rich addressed this on the call as well as we're trying to make changes.
It was just cumbersome.
And not efficient and we weren't building a stable foundation.
So I think maybe rich I'll turn it over to you and.
I had some further color.
So.
[music].
Everyone on this call is either an investor or.
Talking about being an investor and so we all appreciate what a good business. It is.
So how do we get more of that business. This is the thing that will help us get more of that core business that has.
Nice margin and that we can expand on that customers are asking for so sooner would've been better.
There's only so fast you can produce.
And test and validate these types of business systems and so now we're at a point, where we have some confidence that we have dates and we can estimate what the impact.
On the.
Full year and so it's time to talk about it.
And we've been going I would say about as fast as prudent.
As I mentioned, we've done a lot of things to accelerate that with.
Staff augmentation or with other people we brought in.
So we've got about as fast as possible.
And would have been even better to haven't done two years ago or five years ago, but I can't I don't have a time machine.
The other thing I'll just add as this transformation that we're going to it's not a typical I'll start off on E Commerce digital businesses.
Often start a business and we started back in 1999.
And it was.
Basically a home grown architecture and software base.
Now there has been technologies evolved over the last 20 years and there is modern technology stated the our technology that we can deploy that's really going to speed up our ability to respond to build this robust ecommerce.
Variants that.
Customers, they definitely expected in a BDC world and more and more we're gonna be leading that b to B world and we're really excited to be able to be in a position to do that.
Okay makes makes sense thanks for the color there.
John to be clear I mean in.
In terms of financial performance implications are we expecting any topline hit from this or is it really too early to make that estimate.
Yeah I think.
It's tough to assess that right now.
And we provide our quarterly guidance I think as we go.
Through the year and assess how them the markets performing well, we'll keep you updated on on what that guidance will be.
But as up right now we're looking at it as as a benefit for customers.
I think they will like the changes and the experience, but we'll continue to us.
Okay.
Okay, and so the Q1 20 guidance for revenue there Theres no unheard impact either positive or negative correct. No Im will impact you want to know Q on Q1 forecast based upon our best available information at this point in time based on where we are in the quarter and as you know we're.
On demand manufacturer with only a six to seven day backlog. So we look at the at the projections in in industrial activity in the regions in which we operate in a number of other indicators to come up with what we believe is the is the best quarterly revenue forecast based on where we sit.
Thanks.
Okay, and just just last one as a follow up on that I mean, any change in sort of the broader macro or at least order environment relative to kind of what you saw in Q4.
Yes, the only thing I'll say as it you know as you.
Typically in our seasonality January started pretty soft to end this.
We were the holidays fell the first week of January was incredibly soft. So we haven't really in total being a big pickup from where we were in the fourth quarter Jana.
I think the only thing I'd add is that's not a typical thing from any other year January always starts a little slow for us it ramps as.
We don't through the quarter that difficult.
Part for US is what's the slope of that ran through the quarter. We don't have great visibility to March so.
Yes, we've given you the best information, we have right now.
All right understood. Thanks for the time.
Great.
Our next question from the line of Jim Ricchiuti with Needham and company. Please proceed with your question.
Hi, Thanks, good morning, so it sounds like you're being.
Purposely they on when this goes live I can understand why.
Would you anticipate some benefit.
From.
This 2.0.
In Q4 or is the benefit that you're anticipating is really looking out to 2021.
Yeah, Yeah I think.
Again, I think as we view it.
I think it'll be a positive change for our customers.
But it will be a change right and in general.
People don't always like to change at the beginning they do over the long term.
I think for modeling purposes, as as we're looking at it and as I said.
Our our prepared remarks, I'm not anticipating a big benefit in 2020, I make the benefits will come in in 2021 and beyond.
And.
Is this.
Going to be stays Dan.
If I heard you correctly earlier, the rapid piece of this will.
The.
Implemented.
In 2021 do you anticipate having this season.
For the Threed printing portion of the business or is this really focus mainly on the core legacy business.
Yeah, Threed printing has been scope for bell lots of that'll be.
You will see the benefits of that in our integrated system with customers right from the beginning it's just the sheet metal and expanded CNC offering from the rapid Mac manufacturing, which will be.
Integrated posted a lot.
Okay, and John if I heard you earlier I thought I heard you say that.
You know the expense associated with this which I guess you called out as 2020 is about 10 million spread out over the course of your can you give us some sense is too.
Some of that expense.
Being incurred as it relates to your guidance for Q1.
One.
Yes, there is a little bit of expense in in Q1.
It actually starts to pick up more in Q2, as we're doing testing in training and getting ready for or go live in the back half.
So and then.
During the period.
Right. After go live you've got.
Support period.
And on land in there and the amortization.
So yeah, I think we'll be able to provide more color as we go through the year.
In in more visibility as we get into the guidance for Q2.
And is this.
Being implemented outside of the U.S. in Europe.
Yes, it will be implemented in Europe and in North America.
And we'll spot Oh, yes, second say, so we'll just be Europe, and North America.
And the timeline for Europe is the same as North America.
Well, we'll provide those.
At this we'd go further and and progress towards our go live date.
Okay. Thank you.
Thank you.
At this time almost.
Sure for closing remarks.
Great. Thank you for joining us today, we are confident in the long term prospects and the strength of our business.
Since model, our differentiated technology enabled digital manufacturing platform has demonstrated the ability to help companies an entrepreneur get their product to market faster than their competition with Proto labs 2.0, we continue to innovate with our technology interface and service offering to enhance our customers experience.
I want to thank the Proto labs employees for their continued efforts as well as our customers for their support we look forward to updating you on our progress during our next call. Thank you.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.