Q2 2020 Proto Labs Inc Earnings Call
[music].
Welcome to the total lab second quarter 2020 or any Paul.
Hi, all parts of it says Arnie listen only mode. A brief question and answer session will fall the formal presentation and then require operators during the conference. Please sorry.
Okay.
I know this conference is being reported and it's now my pleasure to introduce your host Daniel Schumacher Director of Investor Relations. Thank you you may begin.
Thank you Michelle and good morning, everyone.
With me today, Vicki Holt, President and Chief Executive Officer.
John way, our Chief Financial Officer.
This morning before market open Proto labs issued a press release announcing its financial results for the second quarter ended June Thirtyth 2020.
The releases are available on the company's website Proto labs Dot Com. In addition to prepare slide presentation is available online at the web address provided in our press release.
Before we begin I would like to remind everyone that our discussion will include statements relating to future performance and expectation.
Our we're maybe considered forward looking statement.
Subject to many risks and uncertainties that could cause actual results to differ materially from expectations.
Please refer to our earnings press release, everything I see see 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 results and guidance, we will discuss include non-GAAP financial measures consistent with our past practice.
Please refer to our press release from the accompanying slide presentation within the Investor Relations section of our company website 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 they stand.
Morning, everyone and welcome to our second quarter 2020 earnings Conference call. Thank you for joining up today.
I would like to starts by expressing how proud I am a bit Proto labs team and how we handle the first half 2020.
Like all businesses, we've had to a ball considerably in the first six months at the year.
<unk> has rapidly adopted to change guided by our core value teamwork Trust as achievement.
As I mentioned on our first quarter call. Our top priority is to keep our employees can indeed, a customer safe.
Our manufacturing and office teams worldwide have done an incredible job of ensuring employee safety, while continuing to delight customers with our industry, leading digital manufacturing services.
Every one of our manufacturing facilities have remained operational throughout the global pandemic.
The safety of our employees is extremely important to me and our a central manufacturing in place or Mike Heroes.
I would like to thank them all for what they do to make Proto labs, a great organization.
We have some confirmed cases of Kogas Nike, but we believe they occurred outside of our facilities and we have been able to greatly limit the impact to other employees.
Our new cleaning <unk> sanitizing standard operating procedures in all our manufacturing facilities have continued since the beginning of the Cobot 19, Canada.
In addition to new procedures that minimize employee attraction, our digital manufacturing model offers an advantage improve practicing social dismissing compared to more manual traditional manufacturing operations.
Upon entry into our manufacturing or office facilities, we are conducting rapid temperature screenings via infrared camera technology and put in place a mandatory basket policy in all of our facilities.
We are following local guidelines in each of our location and the vast majority of our office employees continue to work remotely.
Well I'm not surprised I am very impressed with the agility and creativity with which our employees have adapted to the changes thus far in 2020.
Hey, Chris just like to cope with 19 pandemic provides an opportunity for Proto labs to demonstrate the value our digital business model could provide.
Our purpose is to accelerate innovation from development through commercialization and we've been able to deliver on that purpose. During this crisis.
The way, we interact with customers has not changed it's weird ecommerce technically technology enabled the company.
Through the second quarter, we continue to prioritize spores two equipped the medical system to treat patients cobot 90, and provide customers with additional consultation design assistance to get parts designed and manufactured rapidly.
Our digital manufacturing model allows us to help our customers rapidly produce parts to respond to cope with 19, including testing preventing the spread.
Or caring for patients that have contracted the virus.
Today, we manufactured and shift over 8 million parks to be incorporated into products responding to cut that 19 at many different medical related customers, resulting in $12 million of revenue recognized in the second quarter.
We are grateful and proud to continue to serve our customers and contribute to the fight against the snow virus.
Now turning to our financial results in the quarter today, we reported second quarter revenue of $107 million, representing a decline of 8.1% over the second quarter of 29 team and a 7.4% sequential decrease.
Our revenue decline is a result with the broad challenges impacting our customer base and also include the $12 million of covert 19 related revenue.
On a monthly basis, our second quarter revenue trend played out as follows.
As we noted in our Q1 call April revenue was down approximately 4% year over year.
Global industrial manufacturing activity was severely impacted by cobot 19, and stay at home orders in April.
Our business was aided by $5 million good revenue from covert 19 related orders in April.
Hey, what's the softest month in the quarter with activity picking up slightly in June.
The covert related business continued through may and helped to mitigate the softness we experienced in the rest of the business during the month.
[noise] to gain additional insights and this uncertain market. We conducted a survey of over 500 customers across a variety industries in order to learn how customers and supply chains have been impacted by covert 19th.
73% of respondents indicated they are working remotely.
43% have experienced a decrease in demand for their products.
Regarding timing and development schedules.
58% of our customer surveyed have seen delayed development project timing and 33% I've seen reductions in project funding.
These changes are reflected in our revenue performance in a number of unique product developer served in the second quarter of 2020.
I will now transition to second quarter 2020 revenue by geography highlighted on slide five of earnings presentation.
America's revenue declined 5% compared to the second quarter 2019.
Revenue declined significantly in our industrial and consumer end markets in the Americas.
Our aerospace customer and market continued its strong performance in 2020 during the second quarter.
Automotive also increased year over year.
Europe second quarter revenue declined 20% year over year or 18% in constant currency.
Demand was off in all European customer end use markets.
In Japan revenue declined 21% or 23% in constant currency.
Overall, our business declined 8% year over year at constant currency during the second quarter of 2020.
Revenue by service for the second quarter is presented on slide six of earnings presentation.
Injection molding revenue grew 4% compared to the same period in 2019 due to strong demand for Copel 19 related components.
Excluding cobot 19 revenue year over year injection molding revenue declined 17%.
Threed printing CNC machining and sheet metal were all down year over year has muted demand was not offset by demand for cobot 19 revenue in those services.
Turning to earnings we reported second quarter non-GAAP EPS of 59 cents per share down only two cents sequentially.
Our revenue in the second quarter.
The earnings in the second quarter excuse me.
Were down primarily due to lower volume and fixed cost absorption, partially offset by lower variable compensation and discretionary spending.
We continue to manage expenses as demand remains soft, including labor and variable manufacturing cost leadership in board compensation reductions and tightly controlling discretionary spend.
John will dive deeper into our financial performance during the quarter a little later on the call.
Despite the challenging economic environment, we are still focused on investing in and executing on key strategic initiatives to position our business for strong growth in the future.
Our portal Web 2.0 systems project is a Prime example of this commitment.
To maintain our position as the leader in digital manufacturing. We continue to push ahead on work related to portal up 2.0, including development documentation validation training and testing.
As a reminder for left 2.0 is assistants project, we've undertaken to enhance and evolve our systems and processes to support our customers and our strategy for the next decade and beyond.
There are two main components Proto labs to point out.
One to enhance our E commerce platform and customer experience.
And to to approve the functionality and interconnectivity of the backend systems, which support our operations.
Proto labs to point out will allow us to come out of this pandemic stronger than we entered.
We continue to operate under a plan to go live with the new systems in Europe by the end of 2020, followed by the Americas and 2021.
We recognize that there is both external and internal risk to that plan.
Externally travel restrictions and social dismissing due to cope with 19 pandemic.
Could present challenges and delays in assisting our operations in Europe with work necessary to go lives.
Internally as we continue to test our new systems and prepare for the go live event unforeseen issues could arise and push that are tend to go live date.
Our focus is on ensuring that the customer experience is favorable in the new system.
Although we've been conducting user acceptance testing for months, we're happy to report that we completed our first round of life customer beta testing in early July with 212 customer participants from 15 countries across Europe.
Feedback on the customer facing component put a left 2.0 was extremely positive.
Other participants described the new customer experience, a streamlined intuitive modern and easier to use than our card system.
As expected the first beta test of any new software system. Our recent test also uncovered areas that need attention. Prior to watch our teams are working diligently to address that these areas complete development validate and Terrestar systems as we approach our planned go live date.
We will continue to focus on user testing in the U.S. as well as testing the system the business processes and our employees training to ensure we are ready to serve our customers with the rapid and reliable service they expect more Proto labs.
I'm, so proud of our teams and their work on Proto labs 2.0 to date.
The level of teamwork across all functions and regions all while transitioning to remote working environment is extremely impressive.
Our teams are working hard every day to make Proto labs, a stronger more successful company with highly differentiated leading edge technology.
In summary, the first half of 2020 has presented a great deal of challenges to all businesses and Proto labs is no access.
We have a solid financial foundation, and a healthy balance sheet to weather the uncertain environment.
In addition, the team has demonstrated the resiliency of our dynamic digital manufacturing business model.
We will continue to flex costs, where we can to match demand, but we will not sacrifice the long term growth of the company.
Our gels are agile and creative employees will be there to help our customers succeed as they begin to come back to work and re accelerate development projects to meet the needs of their customers as momentum built and the recovery.
With that I'd like to turn the call over to John for an in depth look at our financial performance in the second quarter as well as our outlook for the third quarter.
Thank you Vicki.
Second quarter financial results beginning on page page of our presentation.
Revenue in second quarter was $106.6 million, a decrease of $9.4 million over the same quarter in 2019.
Foreign currency, representing a 350000 aren't headwinds in the quarter, resulting in revenue decline of 7.8% in constant currencies.
We serve 17000 unique product developers in the second quarter.
As a reminder, our unique product developers served metrics numerous individual product developers purchased parts faster and the corresponding quarter.
Thanks, It's held the results our customer survey many of our customers have been impacted by corporate banking stay at home orders and does not shutdowns.
The pain, 0.2% decline and product developers served with greater than our year over year revenue decline due to the relatively large order size. The corporate related orders were $12 million and the revenue coming from a relatively few individuals.
Turning to slide 10 term you'd income statement.
Our non-GAAP cost her revenue decreased $20 million compared to the first quarter, resulting in gross margin of 50.1%.
This reduction was earnings health and very focused efforts of our fight managers to align satcom and a significant variability from week to week across our manufacturing services.
The reduction in cost of revenue did not corresponding to the revenue decline due to the challengers and adjusting our fixed cost structure, resulting in 110 point 810 basis point sequential decline in gross margin.
Continuing with the operating expenses non-GAAP operating expenses totaled $34.6 million in the second quarter down $3.7 million sequentially, reflecting our focus on controlling variable and discretionary costs.
We have eliminated essentially all of our discretionary spend and our prudently managing costs given the uncertainty with respect to the demand for our servers.
Aside from I spend introductions, lower incentive compensation expense or trade show activity and travel or the largest drivers of lower operating expenses.
Non-GAAP operating expenses as a percentage of revenues in the most recent quarter was 32.5% don't think 33.3% in the first quarter of 2000.
Non-GAAP sales marketing was 15.2% of revenue down from 16.1% of my second quarter, 2019, and 15.3% from the prior quarter.
Sequentially and 1.4 million dollar decline in sales and marketing expense.
What's driven by lower variable compensation travel expense and a reduction in trade show activity.
Research and development expense on a non-GAAP basis than the second quarter was $8 million down from $8.5 million in Q1, <unk>, primarily due to lower incentive compensation.
Our R&D expense did increase compared to prior year as we continue investing from one to 2.0, a key priority to drive future business performance.
Non-GAAP general and administrative expenses were $10.4 million in the quarter down $1.9 million compared to Q1.
As our hunger first quarter GMI, including additional allowance for doubtful accounts of approximately $1 million accounting for a portion of the reduction.
The remaining sequential decline was driven by lower incentive compensation accruals executive pay reductions and lower travel and entertainment.
GAAP operating income was $14.4 million or 13.5% revenue in the second quarter.
Adjusted non-GAAP operating income was $18.7 million or 17.6% or revenue.
On a GAAP basis, our tax rate was 16.6%.
From a 21.9% second quarter 2019.
The year over year decline in our GAAP tax rate was primarily due to an increase in the research and development tax credit.
Well as an increasing tax benefits associated with equity compensation.
On a non-GAAP basis tax rate was 18.1 person in the second quarter compared to 22.7% in the same period in 2019, principally due to the higher R&D tax credits.
On a GAAP reporting basis net income totaled $12.6 million, resulting in diluted earnings per share of 47 cents per share.
Adjusting for the after tax costs and stock compensation amortization of intangibles and unrealized foreign currency gains our non-GAAP diluted earnings per share in the quarter was 15 restaurants.
Presenting of 12 cents per share decreased from the prior year kind of sequential decrease of two cents per share.
Breaking down the sequential earnings per share change further work volume resulted in a five cents per share reduction. This reduction was partially offset by three cents per share benefit, resulting from a lower effective tax rate.
Now turning to cash flow on slide 11.
We generated $31 million in cash from operations during the quarter.
Even on our revenue growth is not at historical levels. Our business continues to produce very strong cash flows due to the digital nature of our quoting and manufacturing platforms.
Capital spend on second quarter was $19.9 million, including Thats, something probably moved to 2.0 investments in facilities in Europe, and equipment, primarily X y and Threed printer to expand our threed printing capabilities.
[noise], given our strong cash generation and balance sheet, we continued our opportunistic stock buyback strategy under a tenbfive one plan during the second quarter.
Where your return on capital to shareholders by repurchasing 38000 shares of our common stock at an average price at $70, maybe one cents.
Total purchase price of $2.7 million.
We have $35 million remaining under our buyback program.
We ended the second quarter, when the cash and marketable securities balance of $175 million up from $167 million abandoned the first quarter.
In addition to our strong cash position our balance sheet remains free of debt.
Now turning to third quarter guidance.
On our last earnings call in late April.
We did not provide formal revenue and earnings per share guidance for the second quarter because of a vast global economic uncertainty.
Although the global pandemic is still actor and macroeconomic conditions remain unpredictable. We believe it's prudent to provide forming third quarter revenue guidance based on what we're saying, let's start <unk> third quarter and our historical experience should provide additional transparency to shareholders.
Our third quarter 2020 guidance as summarized on slide 16.
We currently expect third quarter revenue and arrange of 98 million to $110 million compared to $106.6 million My second quarter.
The second quarter included $12 million Suncoke 19 related orders and we believe are nonrecurring.
This resulted in revenue baseline that $95 million as we entered the third quarter.
As we progressed through the second quarter, maybe revenue was a trough and we saw a slight improvement in June.
So I revenue trends have remained fairly consistent at June and we estimate July revenue will be down approximately 11% compared to July 2019.
We have increased the range of our revenue guidance given the ongoing uncertainty related to cope with 90 and the impact stay at home owners have had on our new unique product developer counts.
Uh huh.
Given the broader range, our revenue guidance and the magnitude of impact on earnings per share at either end of the range. We believe it is more meaningful to provide qualitative information related to the expense cuts of our business.
We will continue to manage our cost structure in response to the revenue levels at each of our services.
We expect our non-GAAP third quarter gross margin to be between 49 and 51%.
We expect to manage our non-GAAP operating costs generally in line with poor below second quarter levels.
Our non-GAAP add backs for the corner will include stock compensation costs of approximately $3.6 million and amortization of approximately $725000.
We currently estimate our non-GAAP tax rate to be approximately 21% to 22% and of course third quarter.
18.1% in Q2, resulting in a three cents per share headwind.
One for the reminder, as it pertains to guidance beyond Q3.
Upon placing promomats 2.0 make a service well begin amortizing the system, which will result in approximately $1.5 million an expense per quarter.
In addition, we estimate that we will incur an additional $1.5 million to $2 million in expenses each quarter for a couple of quarters related to contractors and other go live related costs.
I'll now turn the call over to big person fine Okay.
Thank you John.
Before I turn the call over to the shelf for question I wanted to comment on Proto labs commitment to supporting a diverse workforce and an inclusive culture.
At Proto labs, we do not tolerate races.
And have a culture.
Which is focused on respect for all our employees.
However, our employees clearly want to continue to improve and make a difference in our communities. So we'll be taking the following actions.
We are establishing a diversity and inclusion task force made up a passionate employees across the company.
We will focus in three areas.
Employee education.
Each our practices around recruitment development and career advancement.
And collaborations and partnerships in our communities to promote diversity into quality.
Proto labs is committing to take action to make sustainable change for our employees and our communities.
Going forward, we will continue to provide customers the world class digital manufacturing services. They have come to expect for Proto labs, while maintaining the health and safety, if our employees communities and customers.
As an E commerce digital on demand manufacturer, we are very well positioned to help our customers navigate challenges. They currently face and future changes in their business.
We will continue to respond and adjust our cost structure, where we can to manage our business performance in the short term.
But we will continue to drive the business the head and ensure our position digital manufacturing leader continued long into the future.
This concludes our formal remarks, now John and I would be happy to take your questions. Michelle can you. Please open up a line for today.
Thank you will now be conducting a question and answer exactly.
Thank you ask your question. Please press star one.
Pat economies Intel and wanted to take your line is in the question you [laughter] sorry.
Well the question from the yeah.
Using speaker equipment, maybe necessary to pick up your hands that before passing the <unk> one we pull for your question.
Our first question from the line of Brian Drab with William Blair. Please proceed with your question.
Hi, good morning, Thanks for taking my questions.
Hi, good morning, Brad.
I think from so you mentioned they clearly that you know may was that the softest month can you.
Talk through what the customer activity is looked like it as we move through the months here and and and then the July as.
Have a June and July.
Have you seen continued improvement in those bonds.
May what's the trough it picked up some in in June.
In July has stayed pretty consistent with with June activity I think that I mentioned in my comments that important looking so there's an estimate for July because where we finish out the weak, but no somewhere in that 11% range down 10 to 12 something like that.
Okay. Thanks, and then you know how how have.
Yeah, I'm looking at the different service lines and how how have the different service line spin been trending and and maybe you could comment on why it looks like.
You know injection molding holding up quite a bit better then then CNC in this environment, even if you exclude or actually you know specifically if you exclude the cobot related orders.
Yeah. So yeah injection molding as you know as I, most differentiated service and and in this type of the of supply chain disruptions and need for speed in areas like Cobot 19.
We really provides significant customer value. So I think you could that I think that's probably a good reason why it's holding up a little bit better again, it's up when you include coal that if you exclude cobot injection molding down 17%. So it's still significantly impacted by on the economic situation that we're dealing with.
Okay, Yeah, yeah understood.
And I'll just ask one one more for now I guess you know <unk> can you talk about what you're expecting for gross margin. I think you mentioned I've got to a couple of conference calls going simultaneous swing here, but what's the expectation for gross margin for the balance of the year and you know where where do you see that and then no none.
Our meant when things are become a little bit more normal what what do you think you can do with gross margin 21, Yeah and and then also you know how does Proto labs to point, all play into that and potentially help gross margin.
Yeah, So oh lost a lot in that question.
I think as we've talked about it.
Volumes significantly impacts, our our gross margin and and our ability that to flex.
Okay.
With higher volumes, we can drive improvement in the gross margin.
No I think for the third quarter, we provided guidance in the range of 49 to 51, which is essentially bookends where where.
We finished here in the second quarter, Yeah, again volume is going to be a big driver of where that goes in the fourth quarter and into 2021.
And I think we'll we'll just have to continue to watch where that that plays out but.
As we returned to growth that's when we'll see improvements and Matt Damon gross margin over the long term.
John have you cigarette not on the call, yet where I'm sure how how big an impact alphaform and rapid each had on gross margin can you give us those numbers again, if you haven't yeah. So new Hampshire is about 230 basis points.
I would impact on on a quarter.
And then.
Threed printing and in Europe was about 130 basis points.
Okay, and where where are those gross margins that you know the absolute gross margins now and those business is roughly.
Uh huh.
They are currently sitting at you know the Europe three D is.
Just below 10% and its rapid businesses in the mid twenties.
Okay. Thanks very much.
Thank you. Our next question comes from online Greg.
Alan Capital Group. Please proceed with your question.
Yeah, I guess starting off.
He did provide guidance last quarter I'm curious how did you know the quarter compared to your old internal expectations that I guess outside help scaling the cobot related revenue and end markets that surprise significantly either to the upside or downside.
Yeah. It played out about as we expected it to when we were in when we gave the guidance. We gave a lot of color as you recall around April I as of May was a little softer than what we thought but it rebounded I'm a little bit in June.
In terms of end markets, yeah, not a lot different <unk> aerospace has been very strong for us as you know we play not in the commercial aircraft part of aerospace, but more in the satellite communications space side of aerospace and that's been really strong for us all year.
The other maybe a little bit of pricing auto was up slightly here in North America.
But that might be a surprise, but not significant so yeah. I don't think anything else really surprise I guess, you know Europe's been very slow to recover or you think with some of the opening up happening in Europe, we see some it faster recovery there some of our speculation as a lot of the economies in Europe are very export oriented in.
In the manufacturing space and again, we play in the industrial manufacturing space, so with the weaker export economies.
That could be impacting Europe, even though they're opening up a little bit yeah. Greg I think you know maybe if I look back.
Our call was at the end of April we have a lot of uncertainty at that point in time, I think as as we continue to progress I'm sure. They through the quarter. It ended up maybe a little bit better than than.
Where we were or where we were expecting but we had a pretty wide range just because we didn't really no I think.
One area that you know we did outperform was and I mentioned that called <unk> ability of for playing managers to really dialed in and match.
The cost structure to what the revenue was coming in for the next week really helped or hurt our gross margin in these these uncertain times and and as.
As you think about it.
Across the individual plans are injection molding plants were really busy because of the that cobot order. So they were trying to flex up well a lot of our other plants were trying to flex down and our planned managers just did a great job of managing those costs.
Yep.
I guess as well.
You know more to the cost structure I mean, it seems like there are number or trends coming out of its pandemic that could really accelerate growth and adoption of your services.
And.
Sure you non demand did get all sort of what goes on I.
I guess I would've thought they have started to ramp up spending this year or whether Q3 or second half was the sales and marketing just try to take advantage already going on but it seems like you keeping it really really tight lid.
In the near term so how do I reconcile that to your comments you know Vicki about not sacrificing long term dropped two times a lot of maybe it's just more discretionary spending but seems like wanted environment or what do you want to take advantage of it you know sort of a land grab opportunity here.
Yeah, we are doing quite a shifting to make sure that we are on taking advantage of the situation, so, particularly in marketing and we've been shifting to a much more digital appearance in marketing and also taking advantage of our leadership to thought leadership in the area of supply chain disruption as well as E commerce.
So we've had some great opportunities to showcase the company across a number of different venues, but in a very digital away and that's one of the advantages that we have weakened we can pivot digitally very easily since we are such a bit of digital company. So and those are some lower cost approaches to marketing as compared to trade shows.
You can be quite expensive. So I think we pivoted and our investing appropriately in growth we want to make sure that we are managing our costs in this uncertain environment and if you end up being Oh, I said frivolous and the spend at a point.
In time, when many of our customers as I mentioned in the survey results that we got a really were working remotely and their projects have been delayed or often reduced funding. So yeah, let's spend where it makes sense in order to get the revenue growth.
Okay, and John just to be clear your as it relates to Proto labs to point out can you just repeat what you got about.
The additional amortization and expense did that occur when we'd Europe goes wide or is that happened that when Europe goes live it happens the Americas, maybe you can just go over that one more time.
Yeah actually when we placed the asset into service, we will we will start amortizing. It 'cause. It is one system built for for the entire company. So once we placed into service and the monthly expense will be roughly $500000 a month.
And then because of that one and placed in service. We still will have some of my contractors that back cost flips from capitalize expense are capitalized costs to two expense as we continue to go live.
And work through that process.
And you said Q4 would go lives correct.
Yes.
Sorry, that's sort of unplanned.
Okay Alright.
Thanks.
Thank you. Our next question comes from the line of Jim Ricchiuti with Needham and company. Please proceed with your question.
Hi team yet Mike Cikos here on the line for Jim Ricchiuti, just the just a couple of quick questions here. The first want to make sure that I understood correctly, but b. The co. Good 19 related revenue. The 12 billion that you guys you called out that is entirely flowing into that injection molding.
Service line and then the second item.
Sorry again.
No no, it's not entirely and injection molding, but the vast majority of it is.
Thanks, Mike, 90%, plus it's just phones are injection molding yeah.
Yeah, it's about <unk> and.
I guess coming back to the we got that discipline that you guys. Great. Please show curious could you help parse out how much of that is tied to the incentive comp versus discretionary spending and then if I'm thinking about the.
Guidance in commentary, if we're looking to Q3, where the additional benefit or cost control coming from if we're thinking about opex being.
Either stable could down sequentially.
Yeah, so the incentive comp was.
About a million a half or so oh that cost reduction.
No I think as we look to Q3, we said flat to down in in the operating expenses.
No I think it's just continuing to look at and the areas of of where we're spending and looking at opportunities related to that.
So.
Again the.
Cobot kinda hit us in March.
And when we were developing plans so that cost reductions as we've been managing cost weve been kind of picking up momentum is as we've gone through the year.
So that momentum I think we'll carry have carried on through.
Through the end of that second quarter end to end at the third quarter. So I think a good chunk of it will be being run rate.
You know I think we had some expenses in Q2.
Even related to safety of our employees, making sure that we've gotten masks and protective equipment and things like that that flow through that and we've got most of that stuff on on hand, now on and won't be incurring some of that expense.
Okay, and if I'm.
Speaking about the recovery that you guys just being now June similar activity in July versus where we weren't may being trough.
Curious.
What are the some of the end market the service line, where you're seeing some of the I guess better improvement versus some of the market that are tending to lake right now.
And so when we say improvements.
June was a little bit better than the trough in May June and July is pretty consistent with June maybe a tad better.
So we continue to see.
The strength in our in our aerospace segments.
But the rest of the segments are pretty evenly split in terms of where recovery time, maybe a little bit better with computer electronics.
And then we're seeing in general from automotive.
So it's still it's it's pretty broad brushed manufacturing industrial segments remain weak so industrial machinery and equipment remained pretty weak.
So it's very gradual it's not it's not of the by any stretch the imagination.
Okay understood and then just final housekeeping item here I know you guys you're talking about that.
All at 1.5 billion, a quarter and amortization ones Proto labs to that all goes like and then there was also the contractor costs and other go lot costs up about 1.52 million a quarter I'm just wanted to make sure I understood that correctly. So the contractor Angola costs for 1.5 to 2 million how.
How should we be thinking about is that going to be multiple quarters, that's going out.
Okay think about two quarters. It is how we're currently planning now and you know that said that it gives a little bit of uncertainty around that but that I would think of that is a onetime cost for for a couple of quarters. After we go lives.
Whereas the amortization, obviously would be recurring.
And those will those will obviously turn on alongside the amortization and so we should expect.
I guess, when we lose an aggregate for those first two quarters then.
Yeah, Unfortunately that bad.
The way it will work right, but but some of those contractors that are here are helping us develop that the system. When we go lives. We ceased capitalization so that cost turns from a capitalized item to to an expense at the same time when when we started hammer decide amortizing the system.
Sure Alright appreciate the color guys. Thank you very much.
Thank you our next question.
Hi, Andrew the gas vary with Aaron Berg. Please proceed with your question.
Hi, Good morning up just a few questions for me as well first.
Just a quick one follow up to Mike you mentioned the commercial aerospace was strong I mean can you give us maybe an idea.
What how did it skew like the defense versus commercial aerospace.
I'm, sorry, [laughter] defense versus Oh, yes. It is definitely more on the defense side as well as the what I would call space and telecommunications side of aerospace we are not really big on the commercial aircrafts side.
Got it and I'm, just maybe some high level questions in terms of I think you mentioned in the prepared remarks.
Yeah.
58% of your customers have delayed.
Project timing.
Terms of the development cycle can you can you maybe let US know if this has to do with some of the physical testing labs being shot during the last few months Oh shit to.
Color more virtualized portal typing.
Anything on that would be helpful.
Yeah, I think that's a combination of both so we do a lot with yeah. The large industrial testing labs and many of those were shut down for a good part of early part of second quarter, starting to get some reopening of some laughs I'm limited basis, but that's why we did that survey really wanted to understand what like.
Happening with our customers and protect our product developers and how are they being able to do their jobs. During this period of time, it and it's difficult again, who said 73% of them are working remotely and they they've seen decreased in demand for the products that they support and their development cycles.
Have been pushed out or seen reduced funding 33% of seemed coverage could just funding. So it helps us understand a little bit about what's happening with our product developer served there just out there with fewer projects today.
And that and that's what we're seeing reflected in in the underlying weakness in our revenue as they begin to come back to work, which they will and as they begin to drive innovation, which manufactures will do in order to recover on the other end of this this economic shocks.
We're seeing we will see them get back to work and we will see them again, placing orders against that we're dealing with.
A structural change in how they are working right now.
That's helpful. One more for me is comes up on competition can maybe update us how our legacy competitors like that machining.
Places doing today and then and then maybe also can you let us know if there any emerging competitors on the on the <unk> from a service Bureau perspective.
Yeah, So I really don't know how they're doing to be honest with you I yea I would think that they're seeing especially on the CNC machine. The same kind of reduction in demand that we're saying which given.
Some of their financial structures might be more difficult for them. We do see we do quite a bit a secret shopper. We're following what's happening with what pricing in those end markets. We've seen some softening in some of that pricing is some of those smaller mom and Pops, who are working more I'm, just making sure they're covering their cash.
Cash needs might be picking up some business that price points that are lower than they might have historically picked up. So we we respond to those as we hear them get into so prudently, but we are seeing some some competition there haven't seen any new service bureaus emerge and the only other kind of emerging competitors are the once we've spoken about.
Before which are more and the the broker kind of model with E Commerce.
Got it thank you very much thanks.
Thank you. Our next question comes from the line of Ben Rose with Battle Road Research. Please proceed with your question.
Yes, good good morning, Vicky and and John I'm, a few questions for me no firstly on the medical in the medical device area could you speak to how the business is performing X cobot 19, I know that.
Your largest vertical, but maybe just some trends or color.
On the performance of that segment.
Yeah. So if you take a medical segment and you pulled the cold good business out.
It actually declined by 14%.
Okay.
Any general commentary there or is it just kind of across the board or uncertain in any way across the board I mean, a lot of the product developer assert that we that we survey in our but in a survey that I mentioned on many of them are in that advice space and they're working from home and some other projects have been either.
Diverted or or slowed down in this environment. Yeah. If you think about those businesses to any of the elective procedures aren't aren't happening right now so a lot of those segments that work, we're doing business with their businesses is hurting quite a bit so there.
No they're trying to figure out the path forward and they're managing their costs pretty tightly to right now as well.
Okay.
And with regard to your current current current capacity.
Both in the U.S. from Europe, perhaps John you could speak to the level of.
Capacity that you're operating at now and then either for John or Vicki do you have is is there a formal policy in place with regard to.
Furloughs or.
Dressing specific workers that may not be needed.
For.
Lead time over the next quarter or too.
Yeah, So I'd say from a capacity standpoint, we we've got capacity in in each of our facilities and I think if you just go back to some of the historical trends of both the revenue we had produced historically.
I haven't done that the actual calculation because it's in the times. When you look at it is just one more looking to add the the machine capacity as far as the labor.
Thank God.
Reiterate like that the team has done a great job both of flexing that flavor.
Yeah.
We are built for a certain amount of variability. So we have a flexible staffing model that that we can flex up and down. Unfortunately in some of our plants, we have had to do some furloughs and.
And.
Taking some actions like that.
But you know we're managing those costs to correspond with the volumes that are coming in and our booking to drive the growth. So it can bring those those employees that are taking advantage of government programs in each of the areas in which we work on Germany Gotta shared for program on UK is got to for a lot program and.
In a couple of the states that we have had to take furloughs here in in the United States. They have shared work programs as well so really working try to minimize the impact of our employees that continued to cover health care benefits and they remain yeah on our headcount and helped bring them back as soon as cash.
When we see the recovery occur.
That sounds good and then and then finally, a at least at least for now.
I'm intrigued by the customer survey that you took sounds like a great idea to get to go to handle on customer thinking at this point for sure I was curious where there any questions in the survey that addressed.
Customer expectations heading into the fall weather.
They might see a return to normal or a pick up in project activity.
Yeah, Yeah, we did not ask that we were really just focused on what does that they were doing at this period of time I'll. Just say you know as we talked to customers. They share the same level of uncertainty, though we do.
So I I think that.
People are customers are very hesitant also to predict kind of what the next few months are gonna look like I think we're all being very responsive being very agile and adaptive.
<unk>.
Okay. Thank you very much.
Thank you we reached the end of our question and answer session I'd like to turn the call back over to Mr. well for any closing remarks.
Thank you I would like to say Proto labs employees for their efforts in the first half of 2020 and through these extremely uncertain times I definitely think our customers for their continued support we're committed to pushing this company forward through the challenges and changes we will continue to prove our offering our company culture.
And our financial performance in the near term, we will continue to adapt and grow as an organization and over the long term, we're committed to driving greater shareholder value. We look forward to reporting to you on our progress during our next call. Thank you.
Thank you. This concludes today's teleconference. You may disconnect. Your lines. The time. Thank you for your participation have a wonderful day.
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