Q1 2024 Proto Labs Inc Earnings Call

Operator: Greetings. Welcome to Proto Labs' first quarter 2024 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Jason Frankman.

Greetings and welcome to Proto Labs first quarter 'twenty 'twenty four earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. Please note. This conference is.

Being recorded.

Now I'll turn the conference over to Jason Franklin, Vice President and corporate controller. Thank you you may begin.

Jason Frankman: Thank you, Sherry, and welcome, everyone, to Proto Labs' first quarter 2024 earnings conference call. I'm joined today by Rob Bodor, President and Chief Executive Officer, and Dan Schumacher, Chief Financial Officer. This morning, Proto Labs issued a press release announcing its financial results for the first quarter ended March 31st, 2024. The release is available on the company's website.

Jason Frankman: Thank you Sherry and welcome everyone to Proto Labs first quarter 2024 earnings conference call.

Jason Frankman: I'm joined today by Rob the door, President and Chief Executive Officer, and Dan Schumacher Chief Financial Officer.

Speaker Change: This morning, <unk> issued a press release announcing its financial results for the first quarter ended March 31, 2024. The release is available on the company's website.

Jason Frankman: In addition, a prepared slide presentation is available online at the web address provided in our press release. Our discussion today 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.

Speaker Change: In addition, a prepared slide presentation is available online at the web address provided in our press release.

Speaker Change: Our discussion today 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.

Speaker Change: 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.

Jason Frankman: The results and guidance we will discuss include non-GAAP financial measures consistent with our past practice. Please refer to our press release and the accompanying slide presentation in the Investor Relations section of our company website for a complete reconciliation of GAAP to non-GAAP results.

Speaker Change: The results and guidance, we will discuss include non-GAAP financial measures consistent with our past practice. 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 GAAP to non-GAAP results.

Jason Frankman: Now I'll turn the call over to Rob Bodor. Rob. Thanks.

Speaker Change: Now I'll turn the call over to Robert or Robin.

Robert Bodor: Thanks, Jason. Good morning, everyone, and thank you for joining our first quarter 2024 earnings call. We demonstrated strong operational and financial execution in the quarter, delivering first quarter revenue at the top end of our guidance range and earnings above expectation. These results were driven by the continued execution of our two strategic priorities. Increasing the number of customers using our comprehensive offer and driving higher revenue per customer through larger orders in all services, we delivered strong gross margins, earnings, and cash flow. I'll now expand on the progress being made across our two priorities, and then Dan will take us through the results momentarily.

Robert: Thanks, Jason Good morning, everyone and thank you for joining our first quarter 2024 earnings call.

Robert: We demonstrated strong operational and financial execution in the quarter delay.

Robert: Delivering first quarter revenue at the top end of our guidance range and earnings above expectations.

Speaker Change: These results were driven by the continued execution of our two strategic priorities.

Speaker Change: Creasing, the number of customers using our comprehensive offer and driving higher revenue per customer through larger orders in all services.

Speaker Change: We delivered strong gross margins earnings and cash flow.

Speaker Change: I will now expand on the progress being made across our two priorities and then Dan will take us through the results momentarily.

Robert Bodor: First, we continue to increase the number of customers using our comprehensive office fulfilled through both the factory and the network. The combined offer brings immense value to customers, enabling them to use Proto Labs as a single source manufacturer throughout the product lifecycle, from prototype to production to end of life. We have seen that those customers that use Proto Labs across both the factory and the network spend approximately double what all other customers spend, demonstrating the significant synergy and value that our customers derive from the combined office. Over the past few years, we've significantly expanded our offering and now serve more production needs than ever before. Yet, we are in the early innings of customers fully utilizing our combined offer.

Daniel Schumacher: First we continued to increase the number of customers using our comprehensive also.

Daniel Schumacher: Fulfilled through both the factory and the network.

The combined offer brings immense value to customers, enabling them to use Proto labs as a single source manufacturer throughout the product lifecycle from prototype to production to end of life.

Daniel Schumacher: We have seen that those customers that use proto labs across both the factory and the network spend approximately double what all other customer spend.

Daniel Schumacher: Demonstrating the significant synergy and value that our customers derive from the combined offer.

Daniel Schumacher: Over the past few years, we've significantly expanded our offering and.

Now served more production needs than ever before.

Yet we are in the early innings of customers fully utilizing our combined offer.

Robert Bodor: In fact, last year, less than 5% of the 53,000 Total Proto Labs customer contacts purchased parts fulfilled through both the factory and the network. This clearly presents a huge growth opportunity for Proto Labs, and I am very excited about this potential. We have been, and continue to be, very focused on accelerating the continued adoption of our combined offer in order to capitalize on the attractive growth opportunities to add new clients and increase share of wallet. We have also made progress on our second strategic priority, which is to drive higher revenue per customer through larger orders in all services. Of note, revenue per customer contact increased 5% year-over-year in the first quarter.

Daniel Schumacher: In fact last year less than 5% of the 53000 total Proto labs customer contacts purchase parts fulfilled through both the factory in the network.

Daniel Schumacher: This is clearly presents a huge growth opportunity for Proto labs.

Daniel Schumacher: I am very excited about this potential.

Daniel Schumacher: We have been and continue to be very focused on accelerating the continued adoption of our combined offer in order to capitalize on the attractive growth opportunities to add new clients and increase share of wallet.

Daniel Schumacher: Yeah.

We also made progress on our second strategic priority, which is to drive higher revenue per customer through larger orders in all services.

Daniel Schumacher: No revenue per customer contact increased 5% year over year in the first quarter.

Robert Bodor: We are benefiting from recent technological advancements in our offering, which allow us to win more in production. In the factory, we're beginning to see early returns on investments in production, including robotics, our patented automated mold polishing process, and machine perception in our quality verification process. We have also greatly supplemented our production offer with expanded capabilities and AI-enabled pricing options through the network. We believe that Proto Labs has the strongest brand in the industry, known for our reliability and quality for the last 25 years. Let me now bring these remarks to life with several examples of how we're helping our customers positively impact the world. These customer examples begin on page six of our slide presentation.

Daniel Schumacher: We are benefiting from recent technological advancements.

Two our offering which allow us to win more in production in the factory, we're beginning to see early returns on investments in production, including robotics.

Daniel Schumacher: Our patented automated more polishing process and machine perception and our quality verification process.

Daniel Schumacher: We have also greatly supplemented our production offer with expanded capabilities and AI enabled pricing options through the network.

Daniel Schumacher: We believe that Proto labs has the strongest brand in the industry known for our reliability and quality for the last 25 years.

Robert Bodor: The first two examples highlight our role in enabling the profound advancements taking place in medical devices, specifically Advanced Prosthetic Equipment. BioDapt has used Proto Labs as its custom parts supplier since its founding in 2010. As showcased on our website and a recent press release, BioDap creates custom prosthetic equipment for elite adaptive athletes via our world-class factory CNC machining service. Our ability to iterate and rapidly manufacture high-performance custom prosthetic equipment allows us to serve BioDapt and provide bespoke, highly-engineered solutions for elite athletes such as Mike Schultz, founder of BioDapt and former X Games and Paralympic Games gold medalist Circleg, another manufacturer of advanced prosthetic equipment that enables amputees in East Africa to live active lives, needed a way to mass produce a design that can be adjusted to each individual while being highly affordable.

Daniel Schumacher: Let me now bring these remarks to life with several examples of how we're helping our customers positively impact the world.

These customer examples begin on page six of our slide presentation.

Daniel Schumacher: The first two examples highlight our role in enabling the profound advancement is taking place in medical devices, specifically advanced prosthetic equipment.

Daniel Schumacher: Bio that is use Proto labs is their custom parts suppliers since its founding in 2010.

Daniel Schumacher: As we showcased on our website in our recent press release Biodot creates custom prosthetic equipment for elite adaptive athletes by our world class factories CNC machining service.

Daniel Schumacher: Our ability to iterate and rapidly manufacture high performance custom prosthetic equipment allows us to serve bio adapt and provide bespoke highly engineered solutions for elite athletes, such as Mike Schulze founder of bio adapt and former X games and Paralympic games gold medallist.

Daniel Schumacher: As well as Noel Lambert former Division, one lacrosse athlete, who is training to compete at the 2024 Paralympic games.

Daniel Schumacher: Circling another manufacturer of advanced prosthetic equipment that enables amputees in East Africa to live active lives.

Needed a way to mass produce a design that can be adjusted to each individual while being highly affordable.

Robert Bodor: Our Proto Labs network provided design input and affordably manufactured high-strength stainless steel CNC machine components for CERCLEG's prosthetic system in the high volumes that they required. I am deeply proud of the fact that we can play a role in helping society through our work with pioneering medical device companies like BioDapt and Circle. Whether they need rapid prototyping for custom high-requirement products or affordable manufacturing of critical components at high production volumes, we can bring unique value to our customers throughout the life cycle of their products through our combined. The next example that I'd like to share comes from our work with NASA, where we delivered custom metal components within 48 hours of their design.

Daniel Schumacher: Our Proto labs network provided design input and affordably manufactured high strength stainless steel CNC machine components for circulates prosthetic system in the high volumes that they required.

Daniel Schumacher: I am deeply proud of the fact that we can play a role in helping society through our work with pioneer and medical device companies like bio depth and circling.

Daniel Schumacher: Whether they need rapid prototyping for custom high requirement products or affordable manufacturing of critical components and high production volumes, we can bring unique value to our customers throughout the lifecycle of their products through our combined offer.

Daniel Schumacher: Yeah.

Daniel Schumacher: The next example that I'd like to share comes from our work with NASA or.

Daniel Schumacher: We delivered custom metal.

Daniel Schumacher: Components within 48 hours of their design.

Robert Bodor: Our unique, highly automated digital factory enables us to serve NASA's needs faster than anyone else in the world. Over the years, our diesel manufacturing offer has propelled NASA's design evolution and accelerated their innovation. In February, NASA partnered with Proto Labs at the PowerSource Global Summit, where they crowd-sourced requirements and design constraints for a tool to capture gases on the Moon's surface.

Daniel Schumacher: Our unique highly automated digital factory enables us to serve nasa's needs faster than anyone else in the world.

Daniel Schumacher: Over the years, our diesel manufacturing offer has propelled masses design evolution and accelerated their innovations.

Daniel Schumacher: In February NASA partner with Proto labs at the power source Global summit, where they crowd sourced requirements and design constraints for a tool to capture gases on the moon surface.

Robert Bodor: Conference attendees used generative design software to design metal components for lightweighting that could be manufactured using Proto Labs' 3D printing and CNC machining capabilities. Once ordered, Proto Labs manufactured the parts in less than 24 hours. Less than 48 hours after they were designed, the physical parts were delivered to NASA at the conference, enabling these experts to innovate and move science forward. Proto Labs is uniquely positioned to achieve this feat for NASA as the only digital manufacturer in the world that combines the digital thread with speed, reliability, and quality.

Conference attendees used generative design software designed metal components for light weighting that could be manufactured using proto labs' three D printing and CNC machining capabilities.

Daniel Schumacher: Once ordered Proto labs manufactured parts and less than 24 hours.

Daniel Schumacher: Less than 48 hours. After they were designed the physical parts were delivered to NASA at the conference.

Daniel Schumacher: These experts to innovate and move science forward.

Daniel Schumacher: Proto labs is uniquely positioned to achieve this feat for NASA.

Daniel Schumacher: Only digital manufacturer in the world that combines the digital thread with speed reliability and quality.

Robert Bodor: This is a great example of the positive impact we can have for our customers by utilizing our unique capabilities to empower the world's most innovative organizations to bring new ideas and products to market. As I stated at the beginning of the call, we continued to execute well on our priorities during the first quarter, which drove strong financial and operational results. We are pleased with our progress to date and remain focused on executing on our strategic initiatives and generating strong financial results.

Daniel Schumacher: This is a great example of the positive impact we can have for our customers by utilizing our unique capabilities to empower the world's most innovative organizations to bring new ideas and products to market.

Daniel Schumacher: As I stated at the beginning of the call we continue to execute well on our priorities during the first quarter, which drove strong financial and operational results.

Daniel Schumacher: We are pleased with our progress to date and remain focused on executing on our strategic initiatives and generating strong financial results.

Robert Bodor: I want to thank our entire team for their continued dedication to excellence and positioning Proto Labs for success and value creation. Dan will now provide additional financial detail on our first quarter results, as well as our outlook for the second quarter of 2024. Dan. Thanks, Rob. And good morning, everyone.

Speaker Change: I want to thank our entire team for their continued dedication to excellence and positioning Proto labs for success and value creation.

Dan will now provide additional financial detail on our first quarter results as well as our outlook for the second quarter of 2024, yeah. Thanks, Rob and good morning, everyone. Our financial results begin on page 10 in the slide presentation.

Daniel Schumacher: Our financial results begin on page 10 of the slide presentation. As Rob mentioned, we delivered first quarter revenue at the top end of our guidance range and Earnings Above Expectation, driven by an uptick in order growth relative to the beginning of the year as well as strong performance in higher-margin services. First quarter revenue of $127.9 million was in our guidance range and grew 1% year-over-year in constant currency. Proto Labs network revenue was $23.9 million, a quarterly record, up 38% in constant currency.

Daniel Schumacher: As Rob mentioned, we delivered first quarter revenue at the top end of our guidance range.

Daniel Schumacher: And earnings above expectations, driven by an uptick in order growth relative to the beginning of the year as well as strong performance in higher margin services first.

Daniel Schumacher: First quarter revenue of $127 9 million within our guidance range and grew 1% year over year in constant currency.

Daniel Schumacher: Proto labs, the network revenue was $23 9 million a quarterly record up 38% in constant currency.

Daniel Schumacher: First quarter U.S. revenue grew 4% year-over-year, while European revenue was softer than expected, declining 9% year-over-year in constant currencies, primarily due to large orders in the first quarter of 2023 that did not recur this quarter. In addition, the Eurozone and UK manufacturing sectors continued to contract in the first quarter on the basis of weak demand.

Daniel Schumacher: First quarter U S revenue grew 4% year over year.

Daniel Schumacher: While Europe revenue was softer than expected.

Daniel Schumacher: Declining 9% year over year in constant currencies, primarily due to large orders in the first quarter of 2023 that did not recur. This quarter. In addition, the eurozone and U K manufacturing sectors continued to contract in the first quarter on the basis of weak demand.

Daniel Schumacher: Turning to slide 12 in Revenue by Service, first quarter injection molding revenue grew approximately 1% year-over-year in constant currency. Injection molding part growth was particularly strong due to continued larger orders. CNC machining revenue grew 3% year-over-year in constant currency, driven by continued growth through Proto Labs Network. First quarter 3D printing revenue was flat year over year. Sheet metal revenue declined 16% year-over-year in constant currency.

Daniel Schumacher: Turning to slide 12 and revenue by service.

Daniel Schumacher: First quarter injection molding revenue grew approximately 1% year over year in constant currencies.

Daniel Schumacher: Injection molding parts growth was particularly strong due to continued larger orders.

Daniel Schumacher: CNC machining grew 3% year over year in constant currency driven by continued growth through Proto labs network.

Daniel Schumacher: First quarter <unk> printing revenue was flat year over year.

Daniel Schumacher: Sheet metal revenue declined 16% year over year in constant currencies.

Daniel Schumacher: As previously mentioned, our sheet metal service is more exposed to the computer electronics verticals, which experience continued industry-wide software changes. We have right-sized the business and are monitoring it carefully. First quarter non-GAAP gross margin increased 30 basis points sequentially to 45.6%, driven by improvements in factory gross margin. Proto Labs' network non-gap gross margin was 31.7%. First quarter non-GAAP diluted net income per share was $0.40, above the midpoint of our guidance range of 30 cents.

Daniel Schumacher: As previously mentioned our sheet metal service is more exposed to the computer electronics vertical which experienced continued industry wide softness.

Daniel Schumacher: We have right sized the business and are monitoring it carefully.

Daniel Schumacher: First quarter non-GAAP gross margin increased 30 basis points sequentially to 45, 6% driven by improvements in factory gross margins.

Daniel Schumacher: Laughs network non-GAAP gross margin was 31, 7%.

Daniel Schumacher: First quarter non-GAAP diluted net income per share was <unk> 40.

Daniel Schumacher: Above the midpoint of our guidance range of 30.

Daniel Schumacher: This outperformance was driven by revenue coming in near the top end of our guidance range and better than expected gross margin. Gross margin exceeded our expectations due largely to stronger than anticipated factory revenues and injection molding in the Americas, one of our higher-margin services. We are pleased with the improvements we've seen in factory gross margins as we drive continued innovation in automation and efficiency as the world's most advanced digital manufacturer.

Daniel Schumacher: This outperformance was driven by revenue coming in near the top end of our guidance range and better than expected gross margins.

Daniel Schumacher: Gross margin exceeded our expectations due largely to stronger than anticipated factory revenues in injection molding in the Americas, one of our higher margin services.

Daniel Schumacher: We are pleased with the improvements we've seen in factory gross margins as we drive continued innovation and automation and efficiency as the world's most advanced digital manufacturer.

Daniel Schumacher: Non-GAAP EPS of $0.40 was down $0.06 sequentially, primarily due to higher operating expenses, including higher incentive compensation and other seasonal costs that increased sequentially in the first quarter. The increased SG&A costs were partially offset by higher volume and an improvement in factory gross margins.

Daniel Schumacher: non-GAAP EPS of <unk> 40 was down <unk> <unk> sequentially, primarily due to higher operating expenses, including higher incentive compensation and other seasonal costs that increased sequentially in the first quarter.

Daniel Schumacher: The increased SG&A costs were partially offset by higher volume and an improvement in factory gross margins.

Daniel Schumacher: Turning to cash flow and balance sheet highlights on slide 13, our industry-leading cash flow generation model produced $21.3 million in first quarter cash from operations. We repurchased $16 million of common stock in the quarter, equivalent to 85% of our free cash flow. As of March 31st, 2024, we had $112.9 million of cash in investments on our balance sheet and zero debt. Turning now to Forward-Looking Guidance. Our guidance for the second quarter of 2024 is outlined on slide 15. We expect to generate second quarter revenue between $122 and $130 million. After strong orders from the end of January through the beginning of March, we saw some softening of larger orders as we have

Daniel Schumacher: Turning to cash flow and balance sheet highlights on slide 13.

Daniel Schumacher: Our industry, leading cash flow generation model produced 20, $21 3 million in first quarter cash from operations, we repurchased $16 million of common stock in the quarter equivalent to 85% of our free cash flow.

Daniel Schumacher: On March 31, 2024, we had $112 9 million of cash and investments on our balance sheet and zero debt.

Daniel Schumacher: That carried through the month of April. We do expect year-over-year revenue growth in the second quarter. We expect foreign currency to have a negligible impact on revenue compared to the second quarter of 2023. Moving on to Earnings Guidance We anticipate non-GAAP add-backs in the second quarter to include stock-based compensation expense of approximately $4.5 million and amortization expense of $1 million. We currently estimate a non-GAAP effective tax rate of 24% plus or minus 50 basis points for the second quarter. In summary, we expect second quarter non-GAAP earnings per share between 30 and 38 cents. That concludes our prepared remarks. Operator, please open the line for questions.

Speaker Change: Turning now to forward looking guidance.

Speaker Change: Our guidance for the second quarter of 2024 as outlined on slide 15, we.

Speaker Change: We expect to generate second quarter revenue between 122 and $130 million.

Speaker Change: After strong orders from the end of January through the beginning of March we saw some softening of larger orders as we approached the week of Easter.

Speaker Change: That carried through the month of April we do expect year over year revenue growth in the second quarter.

Speaker Change: We expect foreign currency to have a negligible impact on revenue compared to the second quarter of 2023.

Speaker Change: Moving to earnings guidance, we anticipate non-GAAP add backs in the second quarter to include stock based compensation expense of approximately $4 5 million and amortization expense of $1 million.

Speaker Change: We currently estimate our non-GAAP effective tax rate of 24% plus or minus 50 basis points in the second quarter. In summary, we expect second quarter non-GAAP earnings per share between 30 and 38.

Speaker Change: That concludes our prepared remarks.

Operator: Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Brian Drab, with William Blair. Please proceed.

Speaker Change: Operator, please open the line for questions.

Speaker Change: Thank you him if he would like to ask a question. Please press star one on your telephone keypad.

Speaker Change: <unk> Tomo indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue and for participants using speaker equipment may be necessary to pick up your handset before pressing the star keys.

Speaker Change: Our first question is from Brian Drab with William Blair. Please proceed.

Brian Paul Drab: Hi, good morning. Thanks for taking my questions. Morning, Brian. Good morning. I'd like to just start on the orders. I think I have the picture, but could you maybe put a finer point on it? So when we talked to you on February 9th, the year had been getting off to a pretty slow start, and it sounds like it has picked up. And I guess, in terms of the whole business or just large orders that seem to pick up in the later part of February and March but then slow down in April. Can you just elaborate on that?

Brian Paul Drab: Hi, good morning, Thanks for taking my questions.

Brian Paul Drab: Brian I think the morning.

Brian Paul Drab: Like to just start up on the orders I think I have the picture, but can you just.

Brian Paul Drab: Maybe put a finer point on it so when we talked to you in February 9th.

Brian Paul Drab: The year had been getting off to a pretty slow start and it sounds like it picked up.

Brian Paul Drab: And.

I guess in terms of the whole business or just large orders, but that seemed to pick up and in the later part of February and March but then slowed in April can you just elaborate on that.

Robert Bodor: Yeah, so we saw, you know, at the beginning of the year, the end of last year and the beginning of this year, really a softer order period for us than we've had historically, and we saw an order pickup in January, and that continued to be strong through February and the beginning of March. But as we started approaching the Easter period, it was a bit softer, and that continued through April. Our guidance is based on, as we always do, we've looked at the order trends, and the guidance is indicative of that.

Speaker Change: Yeah. So.

Speaker Change: We saw you know.

Speaker Change: At the beginning of the year end of last year and beginning of this year.

Speaker Change: Really a softer order period for us than we've had historically and we saw an order pickup in January and that continued to be strong through February and the beginning of March.

Speaker Change: But as we started approaching the Easter period, it was a bit softer and that continued through April.

Speaker Change: Our guidance is based on as we as we always do we've looked at the order trends and the guidance is indicative of that in terms of you're asking about specific.

Robert Bodor: In terms of specific areas or geographies, I mean, as we talked about in the script, we had really strong, larger injection molding orders through that timeframe, and those were primarily in the Americas, which you can see in our results in terms of our strength by region.

Speaker Change: Areas or geographies I mean, we talked about in the script, we had really strong larger injection molding orders through that timeframe and those were primarily in the Americas.

Speaker Change: You can see in our results in terms of.

Speaker Change: Our strength by region.

Brian Paul Drab: Got it. Thanks.

Speaker Change: Got it thanks, and then can I ask about gross margin because gross margin.

Speaker Change: And again above our 45%.

Brian Paul Drab: And then, can I ask about gross margin? Because gross margin, you know, again, above 45 percent, it's just been, it's been moving in the right direction. Is that, you know, sustainable? And can you remind me, I don't know if you said this, but within the... within the network, where are we with gross margin in the first quarter?

Speaker Change: It's been moving in the right direction is that a sustainable.

Speaker Change: And can you remind me I don't know if you said, but it within the.

Speaker Change: Within the network, where are we with gross margin in the first quarter.

Daniel Schumacher: Yeah, so I would say a couple of things, Brian. First, you know, we started, you know, we saw improvements last year in gross margin in two areas. One is in the network, and that has to do with continuing to improve our algorithm for both pricing and sourcing through the network, as well as, you know, expanding our MPs into different geographies so that as we go into the first quarter of this year, we historically had a stronger impact from Chinese New Year, which causes the capacity in our MP network to be a bit lighter, and for us to be more challenged from a gross margin perspective.

Speaker Change: Yeah, So I.

Speaker Change: I would say a couple of things Brian first.

Speaker Change: No.

Speaker Change: We started we saw improvements last year and gross margin.

Speaker Change: In two areas one is in the network and that has to do with <unk>.

Continuing to improve our algorithm for both pricing and sourcing through the network as well as you know expanding.

You know our MPS.

Different geographies, so that as we go into the first quarter of this year. We we have historically had a stronger impact from Chinese new year, which causes the capacity in our MP network to be a bit lighter and for us to be more challenged from a gross margin perspective, our algorithms and expanding our <unk>.

Daniel Schumacher: The second thing, and Rob talked about it and I talked about it as well, we've increased automation in our facilities around both robotics, our patented automated mold polishing, and our quality labs, and those things add efficiency, especially when we get larger orders. And we started seeing that last year and an improvement in our margins last year, and that continued into the first quarter.

Speaker Change: So we're seeing helped us to maintain margins over 31% in the network in the first quarter.

Speaker Change: The second thing and Rob talked about it and I talked about it as well we've increased automation in our facilities around both robotics, our patented automated mold polishing, our quality labs, and those things add efficiency, especially when we get larger orders and.

Speaker Change: We started seeing that last year and an improvement in our margins last year and that continued into the first quarter I would say absolutely.

Daniel Schumacher: I would absolutely say, as we continue to maintain larger orders, we should be able to continue that type of margin in the factory. On the network side, you know, we've been in this very uneven environment from a macro perspective. And, you know, we're very pleased with where our network gross margins are, which are at the high end of our range. I wouldn't want to extend that range right now until we maybe get into a different macro, and if we're able to still maintain that high margin, you know, through that period.

As we continue to main larger orders.

Speaker Change: Maintaining larger orders, we should be able to continue that type of margin in the factory.

From the network side.

Speaker Change: We've been in this very uneven environment from a macro perspective.

And.

Speaker Change: We're very pleased with where our network gross margins are which are at the high end of our range I wouldn't want to extend the range right now and so we maybe get into a different macro time.

Speaker Change: And if we're able to maintain that high margin through that period.

Brian Paul Drab: Yeah, definitely within the network, the gross margin has been at the high end of expectations, and you know, I've seen obviously the automation in the factory is very impressive. Can you, last question for me, can I just push a little harder? Do you think that consolidated gross margin can stay above 45 throughout 2024?

Speaker Change: Yeah definitely within the network. The gross margin has been at the high end of expectations and you know I've seen obviously the automation in the factories, it's very impressive.

Speaker Change: Can you.

Speaker Change: Yes.

Speaker Change: Question for me can I, just push a little harder do you think that consolidated gross margin can stay above 45 throughout 2024.

Daniel Schumacher: Yeah, I mean, with the limited visibility that we have, you know, I'm not going to say for Q3 and Q4 because, you know, I'm not going to try to forecast what that volume will be right now. But I would say the guidance, our earnings guidance for the next quarter assumes flat to slightly down gross margin percent just based on the midpoint being a lower volume number than in the first quarter. But that's maintaining a kind of healthy efficiency and healthy margins.

Speaker Change: Yes.

Speaker Change: The limited visibility that we have.

Speaker Change: Yes.

Speaker Change: I'm not going to say for Q3, and Q4, because I'm not going to try to right now forecast what that volume will be but I would say the guidance our earnings guidance for the next quarter.

Speaker Change: Soon.

Speaker Change: So flat to slightly down gross margin percent just based on the midpoint being a lower volume number than in the first quarter, but thats, maintaining kind of healthy efficiency and healthy margins.

Speaker Change: Yeah, Thanks very much.

Operator: Our next question is from Greg Palm with Craig Hallam Capital Group. Please proceed.

Speaker Change: Our next question is from Greg Palm with Craig Hallum Capital Group. Please proceed.

Gregory William Palm: Yeah, good morning everybody. Thanks for taking the questions. I wanted to dig into guidance just a little bit and kind of what you said about April specifically. Can you just... Maybe give us some sense of how you approach the guidance? Is it essentially based on what you saw in April and the assumption that maybe it improves from there? Or is it based on things stabilizing at these levels, just a little bit more color? Because I think normally Q2 is seasonally stronger than Q1. So I just wanted to get some sense on how you're approaching the guidance.

Gregory William Palm: Yeah. Good morning, everybody thanks for taking.

Gregory William Palm: Taking the questions I wanted to dig into guidance, just a little bit and kind of what you said about April specifically can you just maybe give us some sense on how did you approach. The the the guidance is it essentially based on what you've seen in April and the assumption that maybe need to improve.

Gregory William Palm: From there or is it based on things stabilizing at these levels, just a little bit more more color because I think normally Q2 is seasonally stronger than Q1. So just wanted to get some sense on how you're approaching the guide.

Daniel Schumacher: Yeah, you know, it's interesting in this environment, Greg, if you take a look at us last year, Q2 was not seasonally stronger than Q1. And so, you know, we are looking at the order input, as you just said. We're looking at, you know, what our businesses are seeing in terms of quotation trends. And based on that, we are, you know, developing a range that we think is where the revenue is going to end up being.

Speaker Change: Yes, it's interesting in this environment, Greg if you take a look at it as last year.

Speaker Change: Q2 was not seasonally stronger than Q1, and so you know where.

Speaker Change: We are looking at.

Speaker Change: The order input as you just said.

Speaker Change: We're looking at.

Speaker Change: What our businesses are seeing from a from a quotation trend and based on that we are developing a range that.

Speaker Change: That we think is where the revenue is going to end up being.

Daniel Schumacher: It's a challenging environment, right, to forecast, because, as I talked about in the last call, we had soft orders coming into the quarter as well. We went through a period where orders were fairly strong, and now they're softening again. And so we used the same information that we had going in, in terms of what our orders were at, and where April came in to help project the quarter. I will say something else, though, on top of that.

Speaker Change: It's a challenging environment right because <unk>.

Speaker Change: <unk> forecast because as I talked about in last call, we have <unk> to come into the quarter as well we went through a period, where the orders were fairly strong and now they are softening again and so so we used our same information that we have going in in terms of what our orders at where did April come in to help protect the quarter.

Speaker Change: I will say something else, though on top of that you know we've shown last year in this uneven type of macro environment that we can grow and that's what we're focused on right now and the middle of the guide.

Daniel Schumacher: You know, we showed last year in this uneven type of macro environment that we can grow, and that's what we're focused on right now. And the middle of the guide and our first quarter both indicate that we are growing. And that's what we're focused on.

Speaker Change: And our first quarter, both indicate us growing and that's what we're focused on.

Gregory William Palm: Yep, makes sense. Okay, I appreciate that. And then, thanks for providing a little bit more color on sort of the customers and the cross-sale opportunity. And I think you mentioned that 5% of customers are currently using both services. Did I hear that right?

Speaker Change: Yeah makes sense, Okay. I appreciate that and then thanks for providing a little bit more color on you know sort of the customers and the and the cross sell opportunity and I think you mentioned that 5% of customers are currently using both services did I hear that right.

Robert Bodor: Yeah, less than five. Yeah. Less than five. Where was that number a year ago? You know, where do you want it to be, whether it's a year from now or a couple years from now? And, I guess more importantly, what are you doing internally to increase that number?

Speaker Change: Less than five less.

Speaker Change: Less than five where was that number a year ago, you know where do you want it to be whether it's a year from now or a couple of years from now and I guess more importantly, what are you doing internally to increase that number.

Gregory William Palm: Yeah, I appreciate the question. Thank you.

Speaker Change: Yeah I appreciate the question. Thank you.

So if you're asking what's what's driving.

Robert Bodor: So, you know, if you're asking what's driving the cross-selling that we're seeing, the answer is we are. This is very fundamental to our strategy. This is what our sales and marketing teams are focused on. You know, we've over the last several years expanded our offering dramatically, both through the network and through the factory in terms of being able to take larger quantity orders and do production more efficiently. And we're starting to see that traction, right?

Speaker Change: The cross selling that we're seeing are the answer is we are.

Speaker Change: This is very fundamental to our strategy. Our this is what our sales and marketing teams are focused on.

Speaker Change: We've over the last several years expanded our offering dramatically.

Speaker Change: Both through the network and through the factory in terms of being able to take larger quantity orders into production more efficiently and.

Speaker Change: And we're starting to see that traction right.

Speaker Change: We've got over 53000 customers that we serve.

Robert Bodor: over 53,000 customers that we serve who are used to relying on us for prototyping and have been asking us for, you know, more opportunities to work together on different use cases and needs that they have. And we're now able to bring that to them and able to support them through the life cycle of their products. And so we are working very aggressively to bring that to our customers, right? At the beginning of the year, we changed the brand, united around Proto Labs with the network.

Speaker Change: Who are used to relying on us for prototyping and had been asking us for you know moral more opportunities to work together in different use cases and needs that they have.

Speaker Change: And we're now able to bring that to them and able to support them through the lifecycle of their products and so we're working very aggressively to.

Speaker Change: To bring that to our customers right at the beginning of the year, we changed the brand United around Proto labs.

Speaker Change: With the network and we've been communicating this to our customers and our salespeople have been approaching our customers with these these broader offerings to.

Robert Bodor: And we've been communicating this to our customers, and our salespeople have been approaching our customers with these broader offerings to capture some of these opportunities. And so we're seeing that this has traction, right? And as you point out, we're absolutely in the early innings with this, right? We are just scratching the surface. I'm pleased with how quickly, you know, the number grew from zero to what it is today. And I'm just really excited about attacking the remaining 95% of our customers and bringing this opportunity to them because I think this is clearly a huge growth potential for us.

Speaker Change: To capture some of these opportunities and so we're seeing that have traction right and as.

Speaker Change: As you point out we are absolutely in the early innings with this right. We are just scratching the surface I am pleased with how quickly.

Speaker Change: The number grew from zero to what it is today.

Speaker Change: And I and I'm, just really excited about attacking the remaining 95% of our customers right and bringing this opportunity for them.

Speaker Change: Because I think that this is clearly a huge growth potential for our business.

Gregory William Palm: Yeah, that makes sense. Okay, I will leave it there. Thanks.

Speaker Change: Yeah. It makes sense, Okay, I will leave it there thanks.

Speaker Change: Great.

Operator: As a reminder, it is star 1 on your telephone keypad if you would like to ask a question. Our next question is from Jim Ricchuti with Needham & Company. Please proceed.

Speaker Change: As a reminder, this star one on your telephone keypad, if he would like to ask a question. Our next question is from Jim Ricchiuti with Needham and company. Please proceed.

James Andrew Ricchiuti: Hi, good morning. Yeah, just given the... The variability that you're seeing in the business, the softening you've seen more recently, is that in any way, is there much of a difference, Europe versus the U.S., or are you seeing any change in any particular vertical?

James Andrew Ricchiuti: Hi, good morning.

James Andrew Ricchiuti: Just given the the variability that youre seeing in the business.

James Andrew Ricchiuti: The softening we've seen more recently is that.

James Andrew Ricchiuti:

James Andrew Ricchiuti: Much of a difference Europe versus.

James Andrew Ricchiuti: U S or are you seeing any change in any particular vertical.

Daniel Schumacher: Yeah, I would say that, Jim, the softness is more just to do with larger orders, and I think more of that softness is in the U.S. than it is in Europe from a quarter-over-quarter perspective.

Speaker Change: Yes, I would say that.

Speaker Change: Jim the softness is more.

Speaker Change: Just just to do with larger orders and I think more of that softness is in the U S than it is in Europe from a quarter over quarter perspective.

James Andrew Ricchiuti: Got it. And remind me, you were impacted, at least by the comparison in Europe, by some larger orders that you had in the year-ago period of Q1. What did that look like in Q2 of last year? I'm just trying to think about how we might see that portion of the business bounce back in Q2.

Speaker Change: Got it and remind me you you were impacted at least by the comparison in Europe by some larger orders yet that you had in the year ago period of Q1.

Speaker Change: What did that look like in Q2 of last year I'm, just trying to think about how.

Speaker Change: How we might see that portion of the business bounce back in Q2.

Daniel Schumacher: Yeah, so when we're talking specifically about Europe, our factory side of the business in Q1 of last year in Europe had some really large orders that didn't repeat into Q2. So, you know, last year's Q2 European number for the factory was lower than its Q1 number. And so that's part of the reason why you saw the decline that you did in Europe was really tough compared with Q1 of last year due to the timing of larger orders within Europe.

Speaker Change: Yes, so when were talking specifically about Europe.

Speaker Change: Our factory side of the business in Q1 of last year in Europe had some really large orders that didnt repeat into Q2 so.

Speaker Change: Last year's Q2, Europe number for the factory was lower than what it's Kew.

Speaker Change: Q1.

Speaker Change: Number was and so that's part of the reason why you saw the decline that you did in Europe was really tough comps with Q1 of last year from the timing of larger orders within Europe.

Speaker Change: Got it.

James Andrew Ricchiuti: Got it. How should we be thinking about OPEX, you know, as we think, as a, you know, step up in OPEX from... Q4 to Q1. As you look out over the balance of the year, any thoughts on how we should be modeling office? Yeah, I think OPEX will be slightly higher.

Speaker Change: Hum.

Speaker Change: How.

Speaker Change: Should we be thinking about Opex, you know as we think.

Speaker Change: Yes.

Speaker Change: Reasonable step up in.

Speaker Change: Opex from.

Speaker Change: Q4 to Q1 as you look out over the balance of the year and any thoughts on how we should be modeling opex.

Daniel Schumacher: Yeah, I think OPEX will be slightly higher in Q2 versus Q1. We have some, you know, additional investments we're making in the business. There's some more expenses from a trade show perspective, and so we expect a slight uptick in OPEX from Q1 to Q2.

Speaker Change: Yeah, I think opex will be slightly higher in Q2 versus Q1, we have some.

Speaker Change: Additional investments, we're making in the business. There is some more expense from a tradeshow perspective, and so we expect a slight uptick in opex from Q1 to Q2.

James Andrew Ricchiuti: Okay, thank you. Thanks, Jim. There are no further questions at this time. We will conclude today's conference.

Speaker Change: Okay. Thank you.

Speaker Change: Thanks, Tim.

Operator: There are no further questions at this time. We will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.

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There are no further questions at this time, we will conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.

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