Proto Labs, Inc. (PRLB) Q1 2015 Earnings Report, Transcript and Summary

Greetings and welcome to the Proto Labs First Quarter 2015 Earnings Conference Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It’s now my pleasure to introduce your host, Bill Dietrick, Vice President of Marketing. Thank you, sir. You may begin.

Thank you, operator, and good morning, everyone. This morning, before the market opened, Proto Labs issued a press release announcing its first quarter financial results for the quarter ended March 31, 2015. The release is available on the company’s website, at protolabs.com. Before we get started, during the course of this conference call, the company will provide financial projections and make other statements about its business that are forward-looking and subject to many risks and uncertainties that could cause actual results to differ materially from expectations. A detailed discussion of the risks and uncertainties that affect the business is contained in the company’s Annual Report filed on Form 10-K and other SEC filings, particularly under the heading Risk Factors. Copies of these filings are available online from the SEC or on the Proto Labs’ website. The company’s projections and other forward-looking statements are based on factors that are subject to change, and, therefore, these statements speak only as of the date they are given. The company does not undertake to update any projection or forward-looking statement. In addition, to supplement the GAAP numbers, we have provided revenue growth on a constant currency basis and non-GAAP adjusted net income and basic and diluted net income per share information that excludes the after-tax costs of stock compensation, amortization of intangibles, and the non-cash unrealized foreign currency activity. We believe that these non-GAAP metrics provide meaningful supplemental information, are indicative of our core operating results, and are helpful in assessing our historical and future performance. A table reconciling the GAAP information to the non-GAAP information is included in our financial release. Now I'd like to turn the call over to Vicki Holt, President and Chief Executive Officer of Proto Labs. Vicki?

Thanks, Bill. Good morning, everyone. Thank you for joining us on our first quarter 2015 conference call. With me today is John Way, our Chief Financial Officer. I'd like to begin with an overview of the first quarter financial performance and some operational highlights. Then I'd like to focus on the progress made during the quarter on the initiatives that we've laid out in our year-end conference call in February. John will provide more detail, look at our quarterly financial results, and our outlook for the second quarter of 2015. Following that, we will be happy to take your questions. Proto Labs generated $58.5 million in revenue in the first quarter, setting another quarterly record. This represented an increase of 27% over the prior year's quarter. Revenue grew nearly to 31% on a constant currency basis, adjusting for the $1.75 million negative revenue impact of foreign currency in the quarter. Our FineLine acquisition continues to exceed expectations with revenue up $4.5 million, a 79% increase over first quarter of 2014. This growth exceeds the growth rate FineLine experienced prior to the acquisition and we are encouraged to see the impact of our sales and marketing capabilities. Our additive manufacturing revenue now represents about 8% of our total revenue. Revenue in North America increased by 36% year-over-year. Without the contribution from FineLine it grew 23% representing strong growth across all service lines. We continue to see good momentum in Japan with revenue up 43.5% on a constant currency basis and 23% on a dollar basis. We added new sales management and fulfilled our largest order in Japan's history, which represented 5% of first-quarter revenue in Japan. In Europe, revenue increased 10% on a constant currency basis from the first quarter of 2014. When translated to dollars, revenue declined 5%. Analyzing European revenue, volume for our services increased 15% year-over-year. This was offset by the currency impact and a reduction in the average price per part reflecting the variability and the complexity and size of the parts ordered by our customers. We have taken steps to address the slower growth in Europe. We've hired additional sales reps, brought in new marketing leadership and promoted Jackie Schneider to a new role as Vice President, Global Sales to provide functional leadership to our sales model around the world. We believe these steps will be instrumental in building our sales momentum in Europe, but it will take a few quarters to take effect. We remain cautious regarding the outlook in Europe. However, leading indicators, such as growth in prospects and quoting activity are good. We expect overall revenue to grow in Europe throughout the year, driven by the demand we see for all our products, including lathe-turn parts, new materials and additive manufacturing, which we expect to launch in Europe in the second half of 2015. We generated net income in the first quarter of 2015 of $10.5 million, or $0.40 per diluted share. Excluding the after-tax costs of stock compensation, amortization of intangibles and the non-cash unrealized loss related to foreign currency translation, non-GAAP net income was $11.9 million, or $0.45 per diluted share. This compares with non-GAAP EPS of $0.41 per fully diluted share in the first quarter of 2014. Now, I’d like to turn to an update on the key business initiatives that we discussed last quarter. Our first initiative is to refine our sales and marketing efforts to address the specific needs of certain market segments that we serve. We are focused on generating high-value prospects in key industry verticals and developing marketing and sales strategies targeted at helping potential customers understand how Proto Labs services can enhance their business. In the first quarter, we launched new marketing automation software, and we recently launched new sales customer relationship management tools. These tools will enable more targeted marketing campaigns to industry verticals. In addition, we’ve added resources to lead our marketing segmentation efforts worldwide. To continue our strong sales momentum, we have significantly expanded our sales and marketing staff. Today we have to 220 employees in sales and marketing compared to 164 last year. We are seeing positive results of this investment in North America as evidenced by this 36% year-over-year growth. Our European sales organization is restructuring sales account responsibility to support the wide and deep selling strategy which has been so successful in North America. Our second initiative is the continued investment in our web presence. During the fourth quarter, we launched two new web-based features designed to enhance our customers’ experience. The My Account single sign-on was a critical integration step following the acquisition of FineLine. It also provides our customers access to all three of our services through one login step. Customers can view parts and order history for their FineLine 3-D printed parts as well as Firstcut machined and Protomold injection molded parts. In addition, they can get a quote right from their dashboard. This feature has been very well received and contributed to the strong revenue growth we saw during the quarter. As you recall, in our fourth-quarter earnings call, we announced the January introduction of our platform-neutral Protoviewer [ph] for Protomold. In March, we launched platform viewer for Firstcut and we completed both of these upgrades on our sites in Europe and Japan in Q1. This feature provides our customers with information on the manufacturability of their parts as part of the interactive quoting system regardless of their technology platform. The third initiative is envelope expansion and additional processes to drive growth worldwide. We fully launched lathe-turned parts in North America prior to the end of the quarter as planned and we're on track for Europe in Q2. While it's early, we've been pleased with the reception of this offering so far and anticipate steady growth. We're on track to introduce the lathe process in Japan's in the second half of 2015. Within the scope of envelope expansion, we continue to add materials to our offering including three new low alloy steel materials in MIM and optical grade LSR within our Protomold injection molding service offering. Sales of liquid silicone rubber and metal injection molding introduced in the second quarter of 2014 continue to grow. FineLine additive manufacturing is also a strategic component of our growth. The growth at FineLine in Q1 demonstrates the benefits of its combination with Proto Labs and the success of our cross-selling efforts. The additive manufacturing service offering allows us to reach customers earlier in the development cycle. The acquisition has also brought Proto Labs valuable product developer and engineer contacts as a resource of future revenue growth and cross-selling. In Q1 2015, Proto Labs served over 11,000 product developers and engineers, a 44% increase over Q1 2014. As we discussed, we are launching additive manufacturing in Europe in the second half of 2015. Although there is still much work ahead, all aspects of this launch are on track. Finally, we continue to focus on customer service and we’re proud that Proto Labs received the 2015 Manufacturing Leadership Award for Innovation Process Leadership from Frost & Sullivan. This award recognizes our services as bringing true value to customers’ innovation processes and our support of innovation through our Cool Idea! Award. In Q1, we announced our latest Cool Idea! Award winner, Hush Technology, the world’s first smart earplug combining sound elimination foam and noise-masking technology to keep unwanted noise out, while allowing important alerts in. Proto Labs helped Hush Technology with critical test samples needed to validate the design using our additive manufacturing services. We will then follow up by providing an initial run using our injection molding service. So in summary, we made good progress on all of our strategic initiatives in the first quarter, and we remain focused on our continued execution. With that, I’ll turn the call over to John for further comments on our financial performance. John?

Thank you, Vicki. Revenue during the first quarter was $58.5 million, an increase of $12.5 million or 27% over the same quarter in 2014. Excluding the impact of currency, sales growth was 31% year-over-year. Protomold, Firstcut and FineLine revenues were $37.6 million, $16.4 million and $4.5 million, respectively. Our revenue in the first quarter came from over 11,000 unique product developers and engineers, a 44% increase over the first quarter of 2014 and an increase of 778 or 7.6% sequentially. Average revenue per product developer was down compared to the first quarter of last year as a result of including FineLine revenue and product developers, the negative foreign currency impact and lower revenue in Europe. Revenue per product developer in North America excluding FineLine and in Japan both increased year-over-year. Gross margin increased from 59.9% in the fourth quarter to 60.2% for the first quarter of 2015, but decreased from 63% for the comparative period last year. Contributing to the decline in the gross margin from the prior-year was the lower gross margin on our additive business which represented approximately 110 basis points. Additionally, foreign currency had a negative 220 basis point impact on our gross margins. These headwinds were partially offset by improved productivity. Our operating expenses were in line with our previously communicated guidance, with sales and marketing expense of $8.9 million or 15.1% of revenue, and research and development of $4.3 million or 7.3% of revenue. Operating income was $15.8 million in the first quarter of 2015 compared to $14.4 million in the same quarter of 2014. Operating income as a percentage of sales improved from 26.2% in the fourth quarter to 27.1% in the current quarter. Diluted earnings per share in the first quarter of 2015 were $0.40, adding back the after-tax cost of stock compensation, amortization of intangibles and the effect of the non-cash unrealized loss on foreign currency, our non-GAAP diluted earnings per share in the quarter were $0.45. The non-cash unrealized foreign currency loss is a result of carrying net assets including cash denominated in euros. The recent fluctuation in the euro exchange rates resulted in an unrealized loss reflected in other income below operating earnings in the income statement. This item has been adjusted for non-GAAP earnings due to its non-cash, non-operating nature. A reconciliation of net income and EPS to non-GAAP net income and EPS was included in our earnings release this morning. Our spending and capital during the first quarter of 2015 totaled $6.2 million and included equipment installed in our manufacturing facilities, computer software and hardware and final expenditures related to occupying our Plymouth facility. For the full year, we anticipate capital expenditures of approximately $40 million to support our growth targets including additional manufacturing equipment and the planned purchase of an additive manufacturing facility. During the first quarter, we generated operating cash flow of $15.4 million. Cash and investments totaled $137.2 million at the end of March compared with $128.4 at December 31, 2014. I would now like to provide some guidance into our projected results for the second quarter. We currently expect Q2 2015 revenue to be in the range of $61 million to $64 million. This revenue guidance includes an estimated $2 million negative impact related to the exchange rates compared to the second quarter of 2014. Stock compensation costs for the quarter will be approximately $1.4 million. Amortization of intangibles related to FineLine will be approximately $185,000. Taking into consideration all of the above, we expect our quarterly non-GAAP EPS to be between $0.46 and $0.50 per share. I’ll now turn the call back over to Vicki for some closing remarks.

Thank you, John. Before we open up the call for questions, I’d like to reiterate our confidence in the outlook for continued strong revenue growth and enhanced profitability for Proto Labs during 2015. We are executing on our plan, product rollouts are proceeding as anticipated, and we’re seeing even greater traction on our 3D printing service than we initially expected. Our sales and marketing efforts are moving forward and we expect to see growing evidence of its success in terms of increased brand awareness and sales as the year unfolds. We are successfully increasing the number of product developers and engineers we serve. Most importantly, we see strong demand for all our products and services. So this concludes our prepared remarks. Kevin, I’ll now open up the call for questions.

Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question today is coming from Troy Jensen from Piper Jaffray. Please proceed with your question.

Hey congrats on the nice results.

Thanks, Troy.

Vicki, so quickly I’d like to just spend some time on some of the new services and maybe get a sense for somewhat quantifying kind of what you think the contribution could be. So I think LSR we thought that was a couple of million last year and can that double and do we think of delayed services as a year behind LSR?

Yes, so I think the way you've got to look at this is, yes, I do believe we're going to see continued growth in LSR. When you look at LSR and MIM, LSR will be a bigger contributor than MIM, but both of them will contribute to our growth as we go into 2015. And that magnitude that you mentioned is in the range of what I can – what we can expect. Lathe-turned parts we launched in North America towards the end of the first quarter, so it's very early yet to see the results there, but I think it will have a measurable impact on 2015 and will be part of the growth that we're going to see in Firstcut that's going to contribute to that 25% growth rate that we expect. So, yes things are going well. The response has been really very strong. Customers like the quality. And we see customers saying, yeah, I'm glad you're finally into lathe-turned parts, so the response is good and we are on track for Europe in the second quarter.

All right and then also then so the additive FineLine sub did great in the quarter. John, I think you mentioned CapEx purchase. To my knowledge I think they are expanding in Europe internally within the CapEx is for US. Can you just talk about the size of the facility you're looking at versus kind where you are at currently?

Yes, so, I mean, that's the driver. We need additional floor space because of the growth we're experiencing there. We're assessing the options down in North Carolina and looking at facilities. It will be a meaningful increase to the space we have and set us up for the growth that we expect to continue. Size will depend on what's available in the market.

It will be a significant increase for space. And there is CapEx associated with Europe as well. We're using – we are building out within the Telford facility, but it does require some infrastructure as well as, of course, places to handle and manage the process. So we're on track for that. We've got some nice pictures of construction and progress there. Things are going well.

Okay, then last question for you Vicki on the sales and marketing, you said 220 up for 164. Can you just give us a sense for what those numbers are for Europe, specifically kind of what you've invested to-date and where do you think investing into?

Yes, so the way to look at that I'd say is pretty relative to what the sales are relative to that number. So when you look at the year-over-year increase, you've got North America representing right about 70% and Europe the rest. So we've made some good adds in Europe. It's a model where we have to add in three sales regions because of language, so we have a sales location in Germany that covers that whole kind of region with Germany, Eastern Europe, Austria, that area. And then we have France that covers Spain, Netherlands, Italy, Portugal that area. And then we have the UK. So we have to add in each of those locations, so our cost of sales will be a little bit higher in Europe than it is in North America because of language, but we are going well with that. We’re getting some good talent in there and as I mentioned we're restructuring how we do some of our account distribution to really facilitate the wide and deep strategy that has been so successful in North America.

All right. Understood, good luck.

Thanks.

Thank you. Our next question today is coming from Brian Drab from William Blair. Please proceed with your question.

Good morning.

Good morning, Brian.

Good morning.

So, first, I just wanted to ask, within Protomold, can you talk, I don’t know if you gave these numbers in the prepared remarks, but growth in the parts business versus the mold business overall?

Yes. The way I’d answer that is, when you look at our – the growth in Protomold quarter to quarter and year-over-year, it’s pretty similar in parts and molds. So it was not a lot of differentiation this quarter. The variability was not as big as we’ve seen in previous quarters.

Okay. And does that hold true across the U.S. and Europe as well?

Yes.

Okay. And then, in your press release, of course, there is some information regarding customer companies that isn’t there today, does this mark a discontinuation of giving us the existing and new customer company numbers?

Yes. As we’ve said, the last – actually, three quarters in 2014, we think the product developer data better reflects really the better growth indicator. We continue to take the customer data through the end of the year just for consistency. But we’ve been indicating our indication, our intention to stop that in 2015. So I think really product developer data is a better indicator.

Especially, as we deploy strategies to go wide and deep within existing customers. So we intend to increase our footprint with our existing customers. Still we'll be bringing new customers on, but that data becomes less relevant from an internal metric perspective.

Okay, yes that's understood. And then the number that you reported for the total, the unique developer growth, that includes FineLine, of course, at this point, right and could you give us a sense for what the core business did in terms of unique developer growth excluding FineLine?

Yes, so, yes, that does include FineLine. The core developer growth was north of 20%, just north of 20% excluding that. We are seeing some cross-selling so that the overlap between the two has been increasing, so those numbers are continuing to get better.

And could you possibly give us any further granularity around the core developers in terms of revenue per core developer, at least directionally, up or down?

Oh core developer…

Yes so, the revenue per developer was down year-over-year in the quarter, I assume that's a lower price point at FineLine and less revenue per developer is going to FineLine?

Yes, so revenue per developer was up in the US and Japan when you carve out FineLine. And Europe, the biggest driver there was the currency impact, but was down slightly even after you adjust the currency out. So, I think hopefully that’s the information.

Yes, that's helpful. And then I guess just a last one here, the marketing and sales expense of 15.1% was a little higher than I think we were expecting. Why was that or was that, in your view, is that according to plan and what should we expect for the balance?

Yes, the spend is actually according to plan and we did say it last call, we do expect to be at the high end of that sales and marketing target model here, because we said before we will invest when we have really good sales and marketing tactics and initiatives to deploy and we've got some really good things that we're doing here. So and you can see that come through with the product developer data and a really strong growth data. We will be heading towards the high-end of that range this year.

So is what we saw in the first quarter what we should expect do you think for the balance of the year or is it…

Yes, that's 15%.

It is my sense then for the last call was that would be more in the 14% to 15% range, but it seems like we’re going to be like you're saying now right at the high-end.

Yes. I think it's relatively consistent. We've said we'll be around the 15% range and I think from a sales and marketing perspective that's where we will continue to expect to be.

Okay. Thanks very much.

Thank you. Our next question today is coming from Jim Ricchiuti from Needham & Company. Please proceed with your question.

Thank you. Good morning. Question on FineLine. Last three quarters, we're seeing, you are accelerating revenue growth there and I wonder if you could just expand a little bit more about the success of that business, how much of that is really coming from now the cross-selling initiatives that you have underway? Is there anything else you can point to that you're seeing in that business?

Yes, Jim, I think that is a great question because I think it really illustrates the power of our digital manufacturing model as it crosses all of our services and the value we bring our customers with the positioning there. So, we said when we acquired an additive manufacturer that 70% of our current customers said they used additive manufacturing services. So we knew that there was going to be a lot of cross-selling opportunity within our current customer base. And then when we brought in FineLine, we were so pleasantly pleased to see that there was less than a 2% crossover. So that creates cross-selling opportunities also in the other direction. Also, the other thing that we said very early in the acquisition is our – we really felt one of the key values that we brought to the combined business is being able to take our successful sales and marketing engine and put it against that additive manufacturing business. And we did that very quickly. Our team did an excellent job integrating and we finished the acquisition, we did it in April of 2014, it was April 23. And I’d say, as we crossed the end of second quarter into early third, a lot of the integration of sales and marketing had taken place. We had already started putting our marketing engine against it, and then our sales people were trained. We’ve been, over the course of the rest of the year, making sure our sales people had the visibility they need to close on quotes. But it’s that engine that’s really driven this and also I think the value that we can now bring our customers to be able to go all the way from additive manufacturing to a machined part to an injection molded part. So I think it’s the power of the business model and the total suite of services we offer.

Got it. Vicki, when would you anticipate training to begin as you introduce this service in Europe? And would you expect to have this service for a full quarter by Q4?

We should have a full quarter by Q4. We should have a full quarter by Q4. Now, we will be starting this, this is an organic model at this point and so we will be starting with our stereolithography, SLA, so we won't have the full array of additive services as we launch. As you know, in North America we have SLA, SLS, and DMLS and we'll be launching with SLA in Europe in the second half.

Got it. And one final question if I may, John just on the same subject of FineLine, initially when you made the acquisition there were some concerns about the margin profile of that business and yet we are still seeing very healthy gross margins even as this business grows. Can you comment at all about the profitability of the business?

Yes, I think, as I said, when you look year-over-year, it is a little bit dilutive to our overall gross margins. But the business is growing nicely and is very profitable, as you said. We are continuing to look at opportunities to expand those margins including the quick turns and just productivity and process flow. But as we look at it right now, it is a little bit dilutive to our overall margins.

We do expect it to grow faster than the other services in 2015. So as you can see, that dilution was a little bit larger in the first quarter than the fourth quarter. It was 80 basis points in the fourth quarter. It was 110 basis points here in the first quarter.

Got it. Thanks very much. Operator: Thank you. Our next question today is coming from Scott Schmitz from Morgan Stanley. Please proceed with your question.

Thanks, and congrats on the quarter. Vicki or John, I wanted to touch on the revenue outlook, so on a constant currency basis its 19% to 25%. I know you're coming off of year-over-year comparison, but can you talk about what else is embedded in that? Is it just still kind of a cautious outlook in Europe or anything that helps us understand when we can get back to 25% per your guidance?

Yes. So you're absolutely right. Currency is having a little bit of a bigger impact than we had anticipated frankly when we started the year on the top line growth. On the other thing to keep in mind is second quarter of 2014 was a pretty big jump over 2013. It was a 33% increase in that quarter. So that also has an impact as to how we look at the total year-over-year growth in 2015. So overall, our long-term growth target remains at 25%, but the impact to that currency may have a dampening effect on that this year.

Okay. And then as a followup to that, I know there were earlier questions on the sales and marketing expense, but do you still expect improved leverage in the back half of the year to get close to your 29% operating margin?

Yes. So I think as you saw this quarter, we improved both gross margin and our operating margins. We continue to expect to drive improvement in those. As Vicki noted, the currency is having a bigger impact than we originally anticipated, but we do continue to expect an uptick in both of those. But we will continue to carry the sales and marketing and research and development at the high end of those ranges as we've discussed.

Okay. So if growth does come in at 25%, you feel fairly confident that you can achieve the 29%? Is that a fair way to think about it?

Right.

Right. Okay.

Yes by the end of the year.

By the end of the year.

By the end of the year, so maybe, not the full year basis, by the end of the year.

Great. Thank you.

Thank you.

Thank you. Our next question today is coming from Andrea James from Dougherty & Company. Please proceed with your question.

All right. Thanks, guys. Good job on all this execution. What are your thoughts on strategically moving into end use parts or manufacturing more early run production? I guess, I’m just curious about if there is opportunity there and if you’re looking at it.

Yes, good question, Andrea and it’s really interesting. We today do produce parts for our customers that are end production parts and early run parts, and we’re doing that today. One of the things that you’re going to see from us and we’ve started doing some of that is actually communicating a little more proactively with our customers to help them understand how our business model can really help them and enhance their business in that early stage production and low-volume production. Over time, we actually will look at adding things to our business model in the form of envelope expansions to be able to do more of that. But that will be R&D development, similar to what we do with new processes, as we enhance what we can do within our model in an automated way, in a scalable way, in a way that is in a web-based front-end. But we do quite a bit of production parts, for our customers today, early stage.

What are the advantages of expanding that capability or doing that on a bigger scale? I mean, is it a faster – I was just curious why, does it take away any manufacturing resources from Proto parts or…?

Yes, for the most prototypes, well, first of all, the advantages are twofold; first, customers would love to have us expand further capabilities in that area. Because if you think about the dynamics that are happening in the marketplace today, you've got very short product life cycles that are out there and customers need to innovate and get products out to market quickly and it takes time to get tooling, so to be able to have us help them accelerate that process. There is also mass customization or mass personalization that’s taking place. In a digital model like we have, allows our customers to cost-effectively produce low-volume production. And so they would love to have us to have the capabilities to do everything that traditional manufacturers do around quality and predictability, but do it within our model. We can't do everything those traditional manufacturers do today. So customers have some compromises they need to make and many of them do make those compromises. Over time I think being able to add additional capabilities here not only opens our available market but really provides tremendous value to our customers and that's what we are hearing. It's really a pull coming from them as much as a push coming from us.

So helpful. Thank you.

Thank you. Our next question today is coming from Bobby Burleson from Canaccord Genuity. Please proceed with your question.

Hey, good morning, Vicki and John.

Good morning Bobby.

Good morning, Bobby.

You are seeing good momentum in tough currency environment. I had a couple of quick ones on FineLine. Given that this is more of a dream field opportunity in Europe, what have you guys been able to kind of investigate in terms of cross-selling opportunities once you launch in Europe and whether or not those cross-selling opportunities measure up to what you are seeing in North America?

Yes. We've seen a similar percent of customers, who claim they use additive manufacturing services. So that's a positive. Close to that 70% not quite as high but close to that 70%, but we are more cautious around what we expect here in first year growth since it will be a new service that's being added to our website, to our customer base introduced in an organic fashion. And so it maybe a little bit slower on the uptake. Plus we're going in with a single with just stereolithography and not the full array that we have in our portfolio in additive manufacturing and North America at this point.

Okay. And then just on the different technologies that you have in North America, DMLS sometimes takes a while to kind of ramp and I'm wondering how well utilized those machines are now and how much more headwind is there and whether or not there's any kind of meaningful capacity additions for DMLS or any kind of laser-based or other type of metal printing technology in the future?

Okay. Well, those are really two questions. Let me answer the first one first and that is, we’re seeing very strong demand in DMLS, and we continue to invest in additional capacity there. So it’s a really strong offering for us. I think part of that is the skill set that our team has in Raleigh for DMLS. We manufacture excellent quality DMLS parts and that’s well-known in the marketplace. As far as other technologies, we are always on the prowl for what are some additional promising technologies in the additive manufacturing space. There is a lot of activity there. We stay very well tuned in to what those developments are. And if there is one that meets the needs of our customers in a cost effective way and from a quality point of view, we’ll be investing in new technologies. But at this point, I think, we’ve mentioned before, we use Concept Laser for DMLS, but we are technology-agnostic, and we are exploring what is out there and technology developments that are underway.

Okay, great. And then just one last quick one, when you look at how you’re trying to get a deeper penetration at certain customers, how is FineLine helping in that presence that you guys have with these customers where you can come in and say, we are now a strategic partner, and you should probably propagate the technology across all of your engineering teams. Does FineLine help you with that or is it really the combination of all of the new initiatives that you have being added on to the core business?

It’s a combination of everything. But it certainly is one more tool in our tool chest to be able to go to the customer and make sure that we can fill their needs. But this wide and deep strategy that the acquisition has helped us in a couple of ways; first, it does add a very important component to our range of services, so that’s a piece of it that you mentioned, just like lathe-turn parts. It’s a very important component to our machining services. So that’s a piece of it. The other nice thing – benefit that we’ve gotten from the acquisition are all of those additional product developers that we've now got into our database that we can then use those contacts to continue to go wide and deep with our customer base. So our greatest close rate comes from colleague referrals. So we work that, our sales team works that very hard to try to go deeper and deeper within companies.

And I think the other benefit related to that is FineLine gets us engaged with customers earlier in the product development cycle. The product developers will use 3-D printing earlier in the cycle.

Okay, great. And just quickly on that same topic, is there an effort on the side of the customer if they are going to engage with you more broadly to kind of centralize that process and maybe try to get better pricing from you? What are you kind of seeing there in terms of those types of responses from customers?

Yes, we really haven't seen pressure on pricing, so as you know our model, we price based on the complexity of the part, the material that's used, the quantity. So we price based on what, we haven't seen pressure on that. I guess the bigger pressure comes from things like they'd like to see enhanced our website and other services to make that easier. That takes time. So we talked about our initiative to continue to enhance our web-based presence and we're going to continue to do that and over time be working on tools that we can generate to help it become easier for strategic customers to get exactly what they want on our web-based front end. That's an investment in development.

Right. Thank you.

Thanks.

Thank you.

Thank you. Our next question today is coming from Jason North from Jefferies. Please proceed with your question. Mr. North, your line is now open. Perhaps your phone is on mute.

Sorry about that. Congrats on the quarter and even with currency is moving more against you then you had anticipated, delivered well and also maintained the guidance for the year. Is that more of a function of the constant currency growth being stronger than expected throughout the year or is it these initiatives in marketing that are bearing fruit?

Yes, I think it is execution on every single front. Marketing is doing a great job bringing in the quantity of prospects that we need and frankly the quality and that's resulting in some really good strong quoting activity. Our sales team is closing it. The new services, I think are going to add and the needed kind of, boost that we need to get to be able to maintain our 25% growth rate over time. So I think it's the combination of everything. I should not belittle our operations team continuing to add capacity because as you know, as we grow we've got to add floor space, add machines, bringing on people in order to make these parts. And so our operations teams have been doing a fantastic job keeping up with the growth.

And do you think that means there could be an acceleration when we start anniversarying some of the currency headwinds at the back part of the year?

It would be nice to see currency move the other direction, so that could help us absolutely.

I'm saying just when we get into the Q3 and Q4 we have anniversary one the year started declining will that reveal some undergoing acceleration growth or is this just…?

I guess, as I'm looking at it, I'm not planning on that just because of the big move in the currency really wasn't until the tail end of the fourth quarter and really in the first quarter. So as we get to the end of the year, if we have a recovery, I’m hoping it would get to neutral. I’m not expecting benefits out of it.

Thank you.

Thanks, Jason. Operator: Thank you. Our next question today is coming from Ben Hearnsberger from Stephens, Inc. Please proceed with your question.

Hi. Thanks for taking my question. First, for John, maybe a follow-up on FX assumed in the guidance. Does that assume exchange rates as they are today or did you make an assumption around maybe the dollar continuing to strengthen assumed in that $2 million FX revenue headwinds?

You know what? I tried to triangulate a number of different factors, current exchange rates, average for the first quarter, volume in each of the countries and currencies we’re looking at. So it’s kind of a blend of those looking at it and looking at a bunch of different analyses in the way we sliced it, it came in that $2 million range. So it’s a number of factors. I’m not projecting improvement. That’s for sure.

Okay. And then, I guess, we could do the math, but I don’t know if you have any commentary around the expected profitability impact that you’ll see with regards to FX assumed in your guidance.

Yes, so looking at it, I think, it will probably be kind of in the range that we experienced here in the first quarter on a percentage basis. So you’re looking at the gross margin in that same relative range, so as I look at it probably $1 million, $2 million, $3 million, something in that range.

Okay, great. That's helpful. And then, I wonder Vicki here on the marketing automation platform rollout, where are you in that rollout and what additional capability or functionality do you get out of this platform that you didn't have before?

Right. Yes, the marketing automation rollout took place kind of in the middle of first quarter, so we're a few weeks into it. And it gives us the ability to be much more precise in terms of our drip campaigns and our nurturing campaigns with our prospects by vertical, by type of customer and we get additional, some really nice tracking and measurement tools that are going to allow us to be a lot more precise to measure the success of each of these program, so if we can target our dollars better, and it's tied directly into our customer relationship management tool as well. So, as you know, one of the keys here is linking that marketing activity that's generating the prospects and creating the quoting to our sales team that's closing them and turning that into customers. So those are the – our key metrics are really right in there. The number of prospects we bring in and then how we move them from prospect to quoting to customer. And this integrated tool is going to allow us to create a lot better linkage and create some really tailored tools for our marketing team, but also for our sales team as we implement segmentation and drive for more sales effectiveness as well.

Okay. And then my last one, you mentioned that you remain cautious in Europe, but you've got some indicators there that remain positive such as quoting activity. Can you give us more color on that or just kind of, give us a sense maybe for how that quoting activity has improved maybe on a year-over-year or sequential basis that gives you some confidence there?

Yes, I'm not going to give you the exact numbers, I will say, it's good. I mean, our prospects growth, record prospect growth, we haven't seen prospect growth this high, so it’s that's great. And I think that's the result of the marketing changes we made in the second half of last year. So if you recall, we really took the bull by the horns there and made some changes in marketing and drove some things I think that's driving the prospects and frankly the quoting activity. My caution is that we are pretty early in some of the restructuring and sales and so that sometimes takes some time a couple of quarters to have full effect. So as we restructure our sales organization, realign our accounts, do some additional training on our sales team, set the expectations, sometimes that takes a couple of quarters to really deliver. So that's where my caution lies, but those early indicators are good, real good.

Okay. So, maybe just one quick follow-up, so you would think it would be a 4Q event where we see Europe really pick up? We have easier comps in the back half of the year and it sounds like these initiatives should really start to kick in a couple of quarters out which I guess would put us right around 4Q?

Yes, I have the confidence in that. I have the confidence in the team, the leadership we've put in place. Jackie Schneider who is our Global Sales leader is just phenomenal. John Tumelty over there in Europe and the team, I feel very comfortable we're going to execute on this. We just got to put the tools in place and that will take a little time.

Hey, great. Thank you. Operator: Thank you. Our next question today is coming from Ben Rose from Battle Road Research. Please proceed with your question.

Good morning. A question for Vicki. Was there any discernible change in the vertical industry mix during this first quarter and whether or not that’s the case, are there any verticals that you could call out that were particularly strong?

Yes. We’re now measuring the verticals, so that’s our first step. So, as we launch our segmentation, we’re looking at that and trying to see where our initiatives are really gleaning results. I will say, consistent with what we’ve seen, the medical space and the aerospace continues to grow faster and consumer electronics all continue to grow faster than our business at large. So these are segments where our value proposition really resonates. And when you look at those segments and compare it the 27% growth rates, all three of those segments are growing faster than that.

Okay. And then just a follow-up on that would be, does that compare well, how does that compare to your European business? So, in other words, are you seeing the same strength in terms of those verticals? And then I just have a follow-up.

I don’t know the answer. I think you’re, I don’t know the answer to that. I apologize.

Yes and in different geographies, different segments are performing better based on the production, but I don’t have the data right in front of me. I'm sorry.

Okay. Thanks. Okay, that’s it. Thank you.

Thank you. Operator: Thank you. We’ve reached the end of our question-and-answer session. I’d like to turn the floor back over to Ms. Holt for any further or closing comments.

Thanks, Kevin. Thank you joining us today. I want to thank all of our employees for their passionate focus on executing our strategy and congratulate our Minnesota-based employees on being recognized as one of the 100 best places to work for in 2015 by Minnesota Business Magazine. We're excited about the opportunities for our business and look forward another great year in 2015 and we look forward to updating you on our progress next quarter. Thanks very much for joining us.