Q4 2020 Proto Labs Inc Earnings Call
[music].
Greetings and welcome to the photo labs fourth quarter and year end 2020 earnings call at.
At this time all participants are in on Stonily mode of beef.
A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero from your telephone keypad. Please note that today's conference is being recorded.
I'll now turn the conference over to Daniel Schumacher Director of Investor Relations. Mr. Schumacher you may begin.
Thank you, Rob and good morning, everyone.
With me today are Proto labs, President and Chief Executive Officer, Vicki Holt, Vice President and general manager of the Americas, and the incoming President and Chief Executive Officer, Rob the door.
And Chief Financial Officer, John Way. This morning, Proto Labs issued a press release announcing its financial results for the fourth quarter and full year ended December 31 2020.
The release is available on the company's website. In addition of prepared 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 expectations that are or may be 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 press release, and recent SEC 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.
Please refer to our press release and the accompanying slide presentation at the Investor Relations section of our company website for a complete reconciliation of non-GAAP to GAAP results now.
Now I'd like to turn the call over to Vicki Holt, President and Chief Executive Officer of Proto Labs Vicki.
Thanks, Dan and good morning, everyone.
Thank you for joining us today for our fourth quarter and full year 2020 earnings conference call.
Before we go through our 2020 financial performance and look ahead to 2021.
Wanted to take a moment and reflect on 2020 a year of change.
As we all know 2020 net.
Any unforeseen challenges due to the COVID-19 pandemic the began suddenly in the first quarter.
I am very proud of how Proto labs for expanded.
Our employees took these challenges in terms of into opportunities to better serve our customers and contribute to the fight against the pandemic.
Proto labs employees displayed incredible adaptability guided by our core values of teamwork trust at the achievements.
Throughout the pandemic, our top priority has been to keep our employees communities and customers safe, while continuing to delight our customers.
Our digital manufacturing model allowed us to help our customers produce parts at market, leading turnaround time to respond to COVID-19, including components for ventilators of diagnostic equipment as well as personal protective equipment for health care providers.
In total we generated $18 million of revenue from COVID-19 related customer projects.
We are humbled and grateful that customers have trusted us to assist in the fight against COVID-19.
In addition to helping the world innovate despite the pandemic Proto labs also took actions to transform for the future throughout 2020.
Most notably we accomplished our number one priority entering 2020, the successful launch of Proto labs to point out.
Our employees demonstrated outstanding productivity as we diligently worked through launch day amidst new working environments.
As you know we launched a refreshed system in Europe in November and I am happy to report that Proto Labs, two point of went live successfully in the Americas on February 1st.
Both launches went as expected and initial customer feedback has been very positive.
Today, we remain in the hyper care monitoring phase as we continue to make improvements in response to customer and internal user feedback as is customary with any system launch.
Proto labs, two point of offers a much improved customer experience and will allow us to maintain and extend our position as the leader in digital manufacturing.
As the economy continues its gradual recovery, we expect higher customer satisfaction and retention moving forward.
This exciting new growth platform is the result of the multi year effort of our incredible employees, who have worked tirelessly to accomplish our top priority and continue to inspire and innovate as we serve our customers.
2021 will be a transformative year for Proto labs and marks the beginning of a new chapter.
We have already made significant strategic progress early this year, including the launch of Proto labs 2.0 in the Americas and acquiring three D hubs positioning us to serve our customers and realized growth as the market recovers in 2021 and beyond.
As one chapter begins another and and as you May know this is my last earnings call as President and Chief Executive Officer of this wonderful organization.
I am proud to serve alongside a great team of employees at Proto labs for the last seven years and I am confident that Rob the door will lead the company to great success.
Rob will assume the role of President and Chief Executive Officer on March 1st of you.
We will hear from him later in this call as he provides an overview of our long term strategic objectives and 2021 priorities.
Yeah.
Turning now to our financial results for the fourth quarter of 2020, we are pleased to report fourth quarter revenue and earnings within our expectations.
Revenue of $105 million represents a year over year decline of 6% as global economic activity remains below levels from a year ago.
Our fourth quarter revenue declined 2% compared to third quarter of 2020 in line with recent seasonality patterns.
Revenue by geography for the fourth quarter is highlighted on slide five of our earnings presentation.
America's revenue declined 6% year over year of 3% sequentially consistent with overall customer demand trends.
Similarly, Europe for fourth quarter revenue declined 8% year over year, 12% in constant currency consistent with third quarter results.
In Japan revenue declined only 1% of completed compared to the same period, a year ago five per cent in constant currencies and improved 21% for kind of sequentially.
Turning to earnings we reported fourth quarter non-GAAP diluted earnings per share of <unk> 50 per share in line with our expectations for the quarter.
Our earnings in the fourth quarter were down sequentially as anticipated primarily due to the impact of launch of Proto labs to point out in November and lower seasonal volumes.
Our fourth quarter performance resulted in a full year of 2020 revenue of $434 million, representing a decline of 5% compared to 2019 or 6% in constant currencies.
Please see slide seven through 10 for additional information on our 2020 revenue performance.
Given the emergence of the global pandemic.
And the sudden substantial drop in global economic activity as well as other unforeseen challenges of 2020, we responded very well as we focused on the health of our employees servicing our customers and our long term business opportunities.
Our 2020 non-GAAP diluted earnings per share were $2 36 <unk>.
Compared to $2 79 in 2019, as we managed costs, where appropriate and continue to invest in our future in the form of our Proto labs 2.0 project throughout the year.
John will now provide a more detailed for you into our financial results John.
Thank you Vickie our.
Of our detailed fourth quarter financial results begin on page 11 of our presentation.
As Vicki mentioned fourth quarter revenue of $105 $2 million represents a 2% sequential decline consistent with the seasonality patterns of our business.
We serve the 18157 unique product developers on the fourth quarter down 3% sequentially.
Turning to slide 13, and our detailed income statement, our non-GAAP gross margin on the quarter was 51% compared to 51, 7% on the third quarter.
The sequential gross margin decline was primarily due to increased compensation driven by the holidays on the fourth quarter.
Turning to operating expenses, our total non-GAAP operating expenses totaled $37 $4 million in the quarter compared to $33 3 million in the third quarter the.
The majority of the sequential increase in operating expense was directly tied to Proto labs to point out as described in our guidance during the third quarter call.
As a reminder, we were capitalizing the cost of resources working on the project prior to going on.
As the system was placed in service these cost for expense, representing a sequential increase in R&D expense of approximately $3 million.
With the asset placed in service mid quarter, we incurred $750000 on depreciation.
During the fourth quarter.
Quarterly depreciation will increase to approximately $1 $5 million in Q1 and will remain at that level each quarter going forward.
Additionally, our GAAP operating expenses included $427000 for the transaction costs in the quarter that did not relate to the ongoing operations of the business and I've been on adjusted out for non-GAAP purposes.
Yeah.
On a GAAP reporting basis net income totaled $9 $6 million.
Elting in diluted earnings per share of <unk> 36.
Adjusting for the after tax costs of stock compensation amortization of intangibles nonrecurring transaction expenses related to the acquisition of three D hubs and unrealized foreign currency gains our non-GAAP diluted earnings per share in the quarter were 50.
Representing a 13 cents per share decrease from the prior year and the sequential decrease of 17 cents per share.
Breaking down the sequential change in earnings per share further.
Increased operating expenses related to Proto labs to Plano launch represented a negative sequential impact of <unk> 11 per share.
The impact of lower volume was <unk> <unk> per share the remaining <unk> <unk> was driven by lower gross margin and various changes on operating expenses on the other income.
Yeah.
Transitioning now to our full year 2020 financial results, which begin on slide 15.
Revenue of $434 $4 million declined 5% compared to 2019.
We served over 40000 product developers during 2020, the decline of 15, 7% compared to the prior year.
The number of product developers served with non correlated to revenue due to the mix of business with injection molding average order size greater than that of CNC machining.
2020, non-GAAP gross margin was 51%, 51% compared to 52% in 2019.
The year over year decline in gross margin was primarily due to mix changes and the challenges to absorb fixed costs, while responding to the lower volume driven by the COVID-19 pandemic.
Total non-GAAP operating expenses totaled of $143 $7 million in 2020 compared to $144 5 million in 2019.
During 2020, we were able to manager of expense below prior year levels and continue to invest in the future through Proto labs to point out on.
Our R&D expense increased $3 $7 million during the year principally related to the expense recorded in the fourth quarter related to the launch of our system as previously discussed.
This increase during the year was offset by reduced sales and marketing spend due to lower travel and converting to virtual trade shows on the other innovative marketing tactics to engage customers as well as other cost management activities, including executive and board compensation reductions.
2020, GAAP net net income was $59 million, resulting in diluted earnings per share of $1 80 net.
Adjusting for the after tax costs of stock compensation amortization of intangibles and nonrecurring transaction expenses and the unrealized foreign currency gains on our non-GAAP diluted earnings per share in 2020 for.
$2 36.
Presenting of 42 cents per share decrease from 2019.
Breaking down the year over year impact on EPS the expenses associated with the investment on Proto labs, two porno represented the 11th year over year reduction in EPS.
Lower volume was driven by the global pandemic of credit to a 12 cents per share impact.
The impact of lower gross margin was <unk> 14 per share.
The remainder of the year over year change in non-GAAP earnings per share was due to costs associated with the adapting to the evolving work environment and maintaining our organizational structure to support the long term opportunities for the business.
Now turning to cash flow on slide 18.
We generated $107 million on cash from operations during 2020 compared to $116 1 million in 2019.
Even during the challenging here our business produces very strong free cash flow due to the digital nature of our manufacturing operations.
The strong cash flows allow us to invest in the future growth of the business, including Proto Labs, two point now and our recent acquisition of <unk> hubs.
The capital spend in 2020 was $47 million.
Including the completion of Proto labs, two point on progress on the new facility in Germany to consolidate our three D printing operations.
And the facility expansion in our injection molding and CNC operations in the United Kingdom.
On December 31, 2020 of our cash and marketable securities balance was $221 million in January we funded the $130 million cash portion of the closing consideration to acquire three D hubs with cash on hand.
2020 was the most difficult backdrop represents the space. Yes, we adapted continued our strong cash flow generation proceeded with the investments to support the long term growth of the our business and continue to have a very strong debt free balance sheet.
I'll now turn the call over to Rob for an overview of our longer term strategy in 2021 priorities.
Thanks, John.
And thank you all for being with us today.
I'm very excited to step into the role of President and Chief Executive Officer on March one.
On behalf of all for less of employees.
Thanks, Vicki for her passionate leadership over the past seven years, we will Miss you and we wish you all of that.
The Proto labs, we have a tremendous opportunity ahead of us and I look forward the program with all of our employees to drive our long term success.
To capture that opportunity, we have three primary long term strategic objectives and our priorities in 2021 fit into these three objectives first to create a world class customer experience for digital manufacturing.
Second to expand our portfolio of customer offerings to meet the broadest set of customer and it gets on.
And third to further invest in our employees.
Serving our customers has always been our focus and we are better positioned to serve our customers today than we have ever been on our history.
Years ago, we began with the objective of assisting companies and accelerating their product innovation by delivering high quality custom parts of unprecedented speeds.
We built our business by adding new services and expanding our envelope of capabilities to manufacturer of broader set of parts.
In order to serve these additional needs for our customers.
Our customers the value of this and continually ask us to provide even more services and capabilities.
We recently announced two important milestones that create the foundation for our expanded capabilities into the future.
The successful launch of Proto labs to point out.
And the acquisition of three D hubs.
As Vicki stated earlier both of these initiatives are cornerstones in the foundation of the platform that we're building to expand how we serve and delight our customers and support the long term growth of the business.
Our first objective is to create a world class customer experience for digital manufacturing.
Our successful launch of Proto labs, two point now represents the first priority.
On the roadmap to the subjective.
The refresh of front end user experience platform combined with the backend systems achieved through the multiyear for labs to point on project provide a strong base with modern architecture that we can build upon more efficient.
The system went live in the Americas of couple of weeks ago, and the feedback from customers has been positive.
While we were live in both the Americas and Europe now.
We're not done investing in the customer experience.
We have a backlog of additional features and capabilities to further improve the customer experience that we will continue to develop and release throughout 2021.
We will also begin the process of bringing our sheet metal service into the Proto labs two point of system.
Furthermore, we look to unify the customer experience to incorporate our recent trading hubs the acquisition and have all of our capabilities available to our customers in one seamless platform.
We will continue to learn from our customers that make improvements and with the modern architecture of making those improvements will be faster and easier than it was in the prior environment.
Our second strategic objective is to continue to expand our capabilities to provide customers with the most comprehensive digital manufacturing offer in the world.
For <unk> session.
Much of our growth has been driven by the improvement and expansion of our offerings the.
The envelope expansions have been the focus of our R&D efforts as we reinvent manufacturing with an obsessive dedication for speed.
The acquisition of three D hubs represents an important step in the expansion of our capabilities.
As it is of strategic shift.
Three hubs is highly complementary to our existing in house digital manufacturing offerings.
And brings the Proto labs of premium network of manufacturing partners to provide access to virtually any custom parts.
That our customers need.
The.
On the <unk> hubs will allow us to expand how we serve customers in two major ways.
First by expanding the breadth of capabilities, we offer through the complementary network of the premium manufacturing partners.
And second by offering a broader range of pricing and lead time options to meet very customer needs and use cases.
This will increase our ability to serve our customers.
If we can't make it we will find the right manufacturing partner to make it for you.
With a variety of delivery times and pricing options.
I just described our ultimate vision and it is a truly exciting market leading vision for digital manufacturing.
We have work to do realize that vision.
We will be thoughtful as we continue to build out of the complete offer in each of our manufacturing services and bringing two organizations together to provide a.
Single unified customer experience.
In the near term Proto labs, and <unk> hubs will continue to operate independently while working together to develop a robust integration plan that will allow us the best serve our customers.
The first element of our long term strategy the customer experience is critical as we develop this plan.
We are fortunate the <unk> Hot springs strong expertise in the customer experience area.
We'll be working with our colleagues of <unk> hubs to ensure the invention of the eventual combined offer of seamless and provides the best customer experience possible.
Allowing us to capitalize on the massive market opportunity over the long term.
We will continue to invest in R&D.
To drive organic envelope expansions and build out the <unk> platform as we continue to reinvest manufacturing by broadening our capabilities and expanding the digital thread across our services.
Our third strategic objective and priority for 2021 is to continue to support our employees and drive professional and personal growth.
Our employees are instrumental in ensuring we achieve our long term strategic objectives.
2020 showcase of the adaptability of our workforce and in 2021, we will continue to evolve and embrace new and more efficient ways to work towards our long term goals.
In addition.
The diversity equity and inclusivity are very important to all of us at Proto labs.
And we will continue to educate celebrate an advocate to make us a stronger team in 2021.
As I mentioned, there is a tremendous opportunity ahead of us and the Proto labs team must work together the capture it and drive our shared success.
The executive leadership team and I will provide further detail regarding our evolution of the company and our long term strategic objectives during the virtual Investor and Analyst Conference later this year.
Now I will turn the call over to John for our outlook.
For the first quarter of 2021.
Thanks, Rob.
Consistent with past practice, we will provide quarterly guidance, including formal revenue range and quality of qualitative summary of our cost expectations in the first quarter of 2021 as outlined on slide 25.
As we look to the first quarter, we have experienced improvement in our business. However activity has not yet returned to pre pandemic levels. As a result, we expect first quarter revenue to be in the range of $108 million to $118 million compared to $105 2 million in the fourth quarter.
With the closing of the <unk> hubs the acquisition during the quarter, we reported a partial quarter of revenue of approximately $5 million.
We expect foreign currency to have of 1 million to $1 $5 million favorable impact on the revenue assuming the foreign currency rates remain at current levels.
Our revenue guidance reflects continued uncertainty in the macro environment, our Europe business in particular will likely be impacted in the first quarter by Brexit and new lockdown measures, creating demand challenges on some of the recovery slopes.
January revenue was relatively flat with December and early February trends have remained fairly consistent on January.
As a reminder, our typical seasonality patterns. It starts with a relatively soft january with activity increasing to a comparatively strong march making visibility for the quarter challenging.
This year, we Havent added a challenge with the addition of <unk> hubs as we've learned patterns of that business.
Now turning to expenses as.
As we did throughout 2020, we will continue to manage our cost structure in response to the revenue levels in each of our services and across our overall business.
As Rob mentioned in his comments, we are of a backlog of projects that we will be investing in including the ultimate the integration of <unk> hubs to capitalize on the long term opportunities in front of us.
We expect our non-GAAP first quarter gross margin to be approximately 48% plus or minus 50 basis points.
Our gross margin forecast is slightly lower than the fourth quarter of 2020 due to the addition of three new hubs, which currently operates at a lower gross margin than the legacy Proto labs business and the result in a headwind of approximately 200 basis points.
We also have factored in slightly higher compensation costs for potential inefficiencies as we begin working on our new systems combined with merit increased benefit cost and increased incentive compensation.
Turning to operating expense, we expect the total non-GAAP selling general and administrative expenses to be between 41% and $43 million up from $37 $4 million.
These projected first quarter expenses include the following components that are incremental to the fourth quarter.
We will incur a full quarter of depreciation expense of $1 $5 million related to our prototypes to Plano system, representing an increase of $750000 over the fourth quarter.
We will also be expensing of full quarter of resources related to Proto labs to point out that were capitalized for a portion of the <unk>.
Fourth quarter, resulting in the additional expense of approximately 500002 of million dollars.
The addition of three D hubs for approximately 75% of the first quarter will result in increased operating expense of two to $2 $5 million.
And the final key driver is an increase in compensation cost of approximately $1 $5 million related to increased payroll taxes in the first quarter. The timing of our annual merit increase anticipated increases in employee benefit costs and incentive compensation.
Additionally, our GAAP results will be impacted by the transaction cost and the increased intangible amortization associated with the acquisition of <unk> hubs and the onetime equity compensation expense associated with our CEO transition.
We currently estimate our non-GAAP tax rate to be between 21 and 22% in the first quarter.
I also want to provide an update on our anticipated R&D expense beyond the first quarter of 2021.
As Rob described in his comments, we have a tremendous opportunity ahead of us and moving out of a roadmap of R&D projects to help us capitalize on that opportunity as.
As we progressed through the year quarterly R&D expenses will decrease slightly in comparison of the first quarter levels of some of the external contractors that have been dedicated to the project roll off while the remaining employees and contractors shift on Proto labs to point out to other projects.
I'll now turn the call over to Rob for final comments.
Thanks, John.
For a lot of space many challenges in 2020, and I am very proud of how our team responded.
We achieved strong financial performance in the midst of the global pandemic and sudden decline in customer demand, while most importantly, continuing to invest in our long term future success.
As we enter 2021.
We will continue our strong execution and prudently manage business performance in the short term, while continuing to invest to maintain our position of the digital manufacturing leader we.
We will continue working towards the best in class digital manufacturing customer experience and the broadest digital manufacturing offer for custom parts.
These two strategic objectives will allow us to become the go to supplier and customer and custom manufacturing.
That concludes our formal remarks now of Biggie, John and I will gladly take your questions.
Rob can you. Please open the line for Q&A for sure. Thank you at this time, we'll now be conducting a question and answer session. If you'd like to ask a question. Please press star one from your telephone keypad and the confirmation tone will indicate your line is one of the question queue Keybanc.
Do you mean for us start to feel that your mood for your question from the queue for park.
Just sort of using speaker equipment, it may be necessary to pick up your handset before pressing the star of keys, one moment, please while we pull for questions.
Yes.
Thank you. Our first question today comes from the line of Brian Drab with William Blair. Please proceed with your question.
Hey, good morning, everyone and thanks for taking my questions.
The only Brian morning, Brian.
And Vicki it's been great working with you. Good luck in the next chapter and we'll Miss you here of William Blair.
Brian.
And John I, just wanted to start by saying I think you missed the line and the guidance no EPS guidance.
And I'm just curious what the thinking is there given there's so many moving parts I guess that would have been helpful to have the EPS guidance on this particular quarter I'm just wondering what your thought processes.
Yes, Brian I think over the past few quarters, we've given the revenue range and then the qualitative information on the expense lines and actually when I do my modeling that that actually works out better.
Does the revenue range really can can swing that EPS range quite of bit, whereas in our expense levels, particularly in the operating expense.
From right now through the first quarter or are in a pretty tight range.
Don't move that materially with revenue, so I actually find that providing that qualitative information when when I'm doing the modeling actually works out better to get you a better EPS range.
Okay. Okay. Yeah, Thanks will work work with that.
And then one thing I was looking at here and I just wanted to get your take on the scene. When you look at the unique Prada.
Product developer count.
I'm looking at.
For the fourth quarter move sequentially.
And in a normal year seasonality has the developer count down about 3% sequentially in the fourth quarter and we saw that the same seasonality this year, but the IDE.
I'm wondering why it's not up.
More or why the why that metric wasn't a little bit better in the fourth quarter. It seems a little light in the fourth quarter in terms of developers.
One thing I'm looking at is it typically the third quarter is up about 10% from the first quarter.
And this year the third quarter was down 10% from the first quarter. So it's still it still seem like there is room to go.
The makeup.
For some of that and have some gains relative to that lower level I'm just wondering.
Are you concerned about that and you know why why why do you think youre not seeing more of kind of a rebound sequentially as we emerge from the debt for the pandemic.
Yeah, Brian I think as you look at it you got to look at the individual services and the performance related to it.
When you look at it from that perspective, they are correlated.
So our CNC business has been hit the hit the hardest.
As we look at it in revenue is down the most in that service.
The average order size of of our CNC order is lower than that of injection molding.
Look at the full year I mean, we did have.
The $18 million of Covid related orders those tended to be larger orders than than we've experienced historically, so larger orders from relatively few product developers so the.
The combination of the mix change with a little bit of Covid as we look at kind of the full year and even as we progress through the quarters.
Is.
The relatively expected or or makes sense to us as we're looking at it.
Yeah, the CNC business of that.
That was impacted by the pandemic and what we're seeing in the market and the.
That's where we will be looking to recover as we go into 2021.
Okay, Great and then I'll ask one more on getting get back in line, but the rollout it sounds like it went as planned.
The web two point on Europe.
Are you seeing any bright.
Bright spots there in terms of like.
Leading indicators of this will have a material impact on the level of customer interaction and customer retention.
As it is at two two later I'm just wondering if there is any anything that you can glean from that as we try and project the impact of as you roll it out in the Americas.
Sure. This is rob so.
We went live in Europe in November and we went live in the U S February 1st So just a few weeks ago.
On the best the initial indicators that we have as a new customer.
<unk> and customer counts coming to the website and.
Blows in customer orders all of which have been.
Very good very strong and we've gotten a number of.
Great great positive feedback from customers.
And the fact that we went first in Europe, we were able to discover any any little hiccups or challenges there.
That really helped us to mitigate a lot of things as we went live in the U S. So it's still early we're only a few weeks into the launch here in the U S. But initial indications are good.
Okay. Thanks very much.
Our next question is from the line of Jim Ricchiuti with Needham <unk> Company. Please proceed with your question on it.
Hi, good.
Good morning.
The two jumps off briefly so I heard your comments of bad.
The flatness in January February and I'm just wondering.
It sounds like that's consistent with some of the normal seasonal patterns, but I'm. Just wondering is there is there any color that you can provide with respect.
To some potential.
Potential recovery in some of your end markets or is it just too tough.
The really tell at this moment.
Yes, I can take that so when you look at January it was pretty flat with December that's pretty normal January normally start very slow as product developers emerge from the holidays and begin to get back to where it kind of picks up throughout the.
The months asset debt.
Normally this year, but.
Total debt was pretty flat with December.
And so it is this is a very difficult quarter for us to forecast historically, because the the big ramp occurs starts slow and then we have a stronger March we fully expect that to happen this year as well, but with a huge kind of uncertainty with the global.
On the recovery that adds another degree of complexity and really determining exactly what is going to be happening in February and March where the bulk of the uptake.
The growth of the quarter occurs so it based on base.
For let's say, it's kind of as we expected it to be and as it is normally performed and we will be watching for signs of that recovery as we move through the quarter.
Got it and John a question for you again I apologize if you may have covered this.
But.
As we think of that 'twenty one.
And.
The potential that you might have to be you might be layering back some of the temporary cost actions or benefits that you saw in 'twenty just as it relates to.
The COVID-19, what yeah, whether it's travel related or trade show or anything like that is there any.
What color you could provide on that as to whether that is going to be at all beating for as we think about operating expense over the balance of the year.
Yes, I think.
We tried to provide the color for where our first quarter operating expense levels will be.
And I think you know.
As you project forward looking at those levels.
It's probably the right place to start.
We will be looking at.
Where volume is coming in and what costs, we can manage and adjusted as we adjusted to the volumes.
As I said, we also will be continue.
Continuing to invest in our R&D and you will see the that line item, maybe come down a little bit from Q1.
But.
We'll continue kind of at those levels. So I think I would use.
For your modeling purposes, right now I would use those first quarter levels.
Adjusted to include the full quarter of three D hubs and then we'll provide guidance as we go along.
That'll be a little bit volume dependent.
Got it okay.
Thank you Vicky.
The key best of luck.
Thanks, Jim.
As a reminder, you May press star one to ask a question.
Next question is from the line of Kenny balance with Baird. Please proceed with your question.
Yes.
Good morning, everyone.
Okay. Good morning America.
So my first question.
Because I guess related to three D hubs could you just talk about.
Your expectations for kind of growth in that business.
And how.
That could impact.
Yes, the revenue over the course of the year.
In terms of.
Yes.
Yes, whether that business is more geared towards prototyping and I'm just kind of the demand trends that you saw on that business and obviously there is some COVID-19 related revenue.
In 2020 of related to three D. Hubs. So just thinking about kind of how the cadence of revenue will look on that business throughout the year.
Yes.
Ken I think it is of a new business for us as well we've done our diligence we see the opportunity as we were looking at it we were acquiring the the platform to build off of and really serve our customers in a broader manner.
As we looked at it I think we talked about 2020 of revenue was about $25 million for that business and.
And we expect growth off of that number.
In the 2021 now the pace of that growth I think is going to depend on.
On a few factors one of just being the global economy, and how things perform there.
But also where and.
How we can capitalize on opportunities related to two of our legacy business as well as we come together as an organization.
So I think.
As we progress through the year, we will provide that quarterly guidance on an update related to it I think.
Big picture, we expect growth from from the levels. They were operating at in 2020.
I would just add debt.
The.
<unk> point around around the platform that this creates for US. This is a really exciting platform for us to serve our customers much more comprehensively on holistically.
We're excited about the long term growth as a result of that in terms of the little bit to characterize the nature of the business you asked about prototyping of production.
They play in both of those and they do it across all four of the services right. So there's a lot of commonality on synergy there with CNC being the largest right now, but as we work together with their integration planning between the two teams.
That's what we'll be doing over the course of this year.
To maximize on capitalize on those opportunities for synergy.
Great and then as a follow up.
In terms of the end markets.
He was the kind of roughly similar similar too.
Proto labs today is there any anything you'd point out there in terms of.
The type of customer base of <unk>.
Yes, it will have any any type of material impact on Proto labs going forward.
Well so as I said this the services to the types of parts of that they produce are very highly aligned.
In terms of the for services we offer.
They bring the benefit of again as we talked about on broader envelope of opportunities and a broader range of price points. So the.
For the customer overlap is actually.
Relatively small in terms of the individual customers that we serve so so that's the opportunity for synergy and.
The end markets are similar.
I would say that they also they'll have a larger <unk>.
<unk> of their revenue in Europe, so it actually does complement.
For the core of Proto labs business that has a much larger percentage of the north and North America. So it gives us the stronger European presence.
Awesome. Thank you I'll hop back in the queue now.
Thanks.
Thank you at this time I will turn the flow back to Rob of the door for closing remarks.
Well. Thank you for your time this morning, I am pleased with our execution in 2020, providing we can perform well in <unk>.
Proving that we can perform well in any economic conditions.
I want to thank all Proto labs employees for their extraordinary efforts on a very challenging year and for their continued efforts as we drive our 2021 priorities forward.
I also want to thank our shareholders for their continued support of Proto labs throughout the challenging year.
Over the long term, we are committed to improving our customer experience and our manufacturing services offerings, creating significant shareholder value along the way.
And once again I want to thank Vicki for her tremendous leadership over the past seven years.
We look forward to providing you additional information on our long term strategy in 2021 priorities and our virtual Investor and Analyst Conference. Later this year. Thank you.
Thank you. This concludes today's conference you may disconnect your lines of at this time. Thank you for your participation.