Proto Labs, Inc. (PRLB) Q4 2015 Earnings Report, Transcript and Summary

Greetings, and welcome to the Proto Labs Fourth Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Bill Dietrick, Vice President of Marketing for Proto Labs. Please go ahead, sir. William M. Dietrick - VP-Global Marketing & Head-Media Relations: Thank you, operator, and good morning, everyone. This morning, before the market opened, Proto Labs issued a press release announcing its fourth quarter and full-year financial results for the period ended December 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 for both total revenue and revenue earned through legacy operations, adjusted consolidated statements of operations and adjusted net income and basic and diluted net income per share information on a non-GAAP basis. The non-GAAP adjusted consolidated statements of operations and non-GAAP adjusted net income each exclude the costs of stock compensation, amortization of intangibles, unrealized foreign currency activity and transaction costs, and a bargain gain related to the Alphaform acquisition. 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? Victoria M. Holt - President, Chief Executive Officer & Director: Good morning, everyone. Thank you for joining us on our fourth quarter conference call. With me today is John Way, our Chief Financial Officer. The fourth quarter was a strong end to another very good year for Proto Labs. I'll begin today with an overview of the fourth quarter financial performance and some operational highlights. I'll also review some of our key accomplishments in 2015. Then, John will provide a more detailed look at our financial performance for the fourth quarter and full year 2015. Following that, we will talk about our priorities for 2016 and also comments on the financial outlook for the first quarter and full year of 2016. Finally, we will provide information as to our current thinking on our long-term financial targets. After that, we will be happy to take your questions. 2015 marked another year of strong growth, illustrating the tremendous value our technology-enabled digital manufacturing model brings to our customers. Proto Labs, once again, delivered significantly more quality custom parts reliably and quickly to an increasing number of product developers, allowing them to take their ideas from concept through to commercialization faster and more effectively and with less risk. In the fourth quarter of 2015, Proto Labs generated $74 million in revenue, a 32% increase over the prior-year and another quarterly record for the company. Alphaform, the German company we acquired in the fourth quarter, contributed approximately $5.1 million in revenue in Q4. Excluding Alphaform, revenue in the fourth quarter was $68.7 million, an increase of 22.5% year-over-year. Foreign currency had a $1.4 million impact on revenue in the quarter. Adjusting for this impact, revenue grew 34% in constant-currency, 25% excluding Alphaform. Adjusted net income in the quarter was $13.4 million, or $0.50 per diluted share. Alphaform operations generated a loss of approximately $500,000, or $0.02 per share. The Alphaform performance was slightly better than our initial expectations, driven by favorable revenue in the quarter, due to continued orders on a terminated contract during the transition period that will not recur in the first quarter. We saw excellent growth in constant currencies across geographies. Europe, excluding Alphaform, remained strong at 35% growth. Japan grew 54% and revenue in the U.S. was up 22%. Unique product developers and engineers served continues to be a key metric for our organization, as it represents not only our ability to attract new customers, but also captures our penetration of our existing account. During the fourth quarter, we served 12,414 product developers. This represented an increase of 21.3% over the prior year. Looking at revenue by business line on a consolidated basis, injection molding grew 23% year-over-year to $44 million, setting another quarterly record for this business line. Liquid silicone rubber continues to gain traction and we've been very pleased with the growth in it sales. We expect continued strength from injection molding as new marketing efforts and sales incentives targeted at driving this business are implemented in 2016. CNC Machining increased 19% in the fourth quarter to $19.6 million. The lathe process has been introduced globally. It's been well received by customers and is gaining momentum in the market. We anticipate continued strong growth of this service in 2016. And finally, 3D printing remains very strong with the legacy business, excluding Alphaform, growing at 69% to $6.6 million in the fourth quarter, reflecting expanded customer awareness of our capabilities and our active cross-selling efforts. Including Alphaform, our 3D printing revenue exceeded $9 million and represented 12% of our consolidated revenue. There's strong demand for 3D printed parts in Europe. We began with the organic launch of stereolithography services during the third quarter and accelerated the rollout with the acquisition of Alphaform to offer our full suite of 3D printing services in Europe. The integration of Alphaform is tracking to plan. During the fourth quarter, we completed the training of our combined sales force on our full suite of service offerings. We implemented a manual order interface that allows us to take orders over Proto Labs' website to be fulfilled out of Germany. We've continued our outreach to the Alphaform customer base, as well as to new accounts throughout Europe. Customer reaction to date has been positive, and we're confident in the enhanced market opportunity. We will hold off aggressively marketing SLS and DMLS, until we've completed further integration with our digital manufacturing model in our new Munich manufacturing site to ensure we continue to meet our brand promise to our customers. And, finally, our new team members from Alphaform are fully engaged and excited about Proto Labs' future in Europe. Innovation is something we enable every day, and we continue to seek worthy innovations to support through our Cool Idea! Award program. During the fourth quarter, there were two recipients. Echo Laboratories has developed a hybrid microscope called Revolve that merges two different types of microscope into one and replaces the conventional eyepieces with an iPad. It eliminates the need to purchase two separate instruments, resulting in cost savings and freeing up lab space for users. Proto Labs Cool Idea! Award provided machined aluminum parts for both prototyping and low-volume production for this microscope. Ascent Aerosystems received a Cool Idea! Award for prototype parts for its Sprite, a small, durable drone the size of a water bottle. We're very proud of this program and the support Proto Labs provides to further innovation across a range of industries and applications. I also want to call your attention to a white paper on our website, illustrating the tremendous value Proto Labs' business model brings to our customers. Entitled "Lockheed Martin's Small Drone With a Big Spirit," the article described how Proto Labs' automated design for manufacturability feedback and quoting system accelerated development and commercialization of this new product for Lockheed Martin. We are very proud of the ways we help our customers reach their goals faster and more cost effectively. I'm also very proud of what the Proto Labs team accomplished in 2015, positioning the company for further profitable growth. We had another record year of financial results. We generated $264 million in revenue, an increase of 26% from 2014, or 29.6% on a constant-currency basis. Net income was a record $46.5 million and we reported non-GAAP EPS of $1.97 per share. We generated $58.6 million in cash from operations and ended 2015 with a cash and investment balance of $146 million. We completed our second acquisition in early October purchasing Alphaform, a leading 3D printing company in Germany, and are on schedule in integrating the operations. We are excited about the opportunity this acquisition provides in terms of expanding our European market presence with an established customer base, excellent workforce, and solid manufacturing capabilities in Germany. Our sales team has been very successful in its cross-selling initiative. For example, FineLine, the U.S.-based additive manufacturer we purchased in 2014, experienced approximately 20% growth in sales prior to the acquisition. In 2015, we increased the revenue growth in this service by 77%. New product launches have been very significant and are going well. Sales of liquid silicone rubber launched in mid-2014 have exceeded our plan. We've introduced our lathe process globally and are seeing expanding customer interest. The introduction of SLA capability in the UK was completed on schedule and is gaining momentum with customers in the UK and Europe. And our launch of SLS and DMLS capabilities was accelerated with our acquisition of Alphaform. The build-out of a new larger facility in Raleigh is on track and will support the continued growth we anticipate in 3D printing. Our customers value our reliability, quality, and speed. In support of our brand promise, we added capacity to our manufacturing operations in the form of equipment and labor. In conjunction with this, we also initiated lean process improvement to help drive operating efficiency. This was a very productive year for the company, and our success is a reflection of the strength, dedication and hard work of the Proto Labs employees. Before I provide more detail on our expectations for 2016, I'll turn the call over to John for further comment on our 2015 financial performance. John?

Thank you, Vicki. We continue to produce excellent top-line growth, reporting revenue of $73.8 million in the fourth quarter, an increase of $17.7 million, or 31.6% over the same quarter in 2014. Fourth quarter's legacy revenue came from 12,414 unique product developers, a 21% increase over the same quarter of 2014. Consistent with historical seasonal patterns, the number of product developers in the fourth quarter was relatively flat with the third quarter. Average revenue per product developer increased 3% on a constant-currency basis, compared to last year. Our unique product developer count does not include Alphaform data, as this information is not available in a comparable format. Gross profit for the quarter was $41.3 million, an increase of $7.7 million over the comparable period for the prior year. Gross margin was 56%. This compares with 59.9% in the fourth quarter of 2014 and 59.4% in the third quarter of this year. Alphaform had a negative 260-basis-point impact on our gross margin. Foreign currency exchange rates had a negative impact on gross margin of 90 basis points year-over-year. The remaining fluctuation reflected additional investments in capacity across our broader portfolio of services to ensure we meet our brand promise. Our operating expenses were $24.7 million, or 33.5% of revenue in the quarter, compared with 33.8% in the prior year. Our marketing and sales organization is critical to driving the continued growth of our business. Sales and marketing expense was in line with our previous guidance at $10.8 million, or 14.6% of revenue for the quarter. We invested $4.9 million, or 6.6% of revenue in research and development this quarter. Fourth quarter operating expenses also included transaction costs of $343,000 associated with the Alphaform acquisition. These costs have been added back to adjusted net income in our non-GAAP reporting. Operating income was $16.6 million in the fourth quarter of 2015, compared to $14.7 million in the same quarter of 2014. On an adjusted non-GAAP basis, operating income increased to $18.7 million, or 25.3% of revenue, compared to $16.1 million, or 28.7% of revenue in the prior year. In addition to the higher than anticipated contribution from Alphaform revenue and earnings, we also recorded a bargain purchase gain of $344,000 from the transaction. This gain is a result of the accounting treatment required when acquiring assets at a price below their fair market value. We have not yet finalized our purchase accounting on this transaction. This gain has been adjusted out of our non-GAAP earnings as it is not derived from our core operations. Our effective tax rate was 30.2% this quarter, reflecting the benefit of the permanent enactment of the R&D tax credit passed in December. The favorable tax effective – the favorable effective tax rate driven by the change in tax law resulted in a benefit of $0.01 per share that was not included in our previous guidance. Net income in the quarter totaled $12 million, resulting in diluted earnings per share of $0.45. Adding back the after-tax costs of stock compensation, amortization of intangibles, the effect of the unrealized losses on foreign currency, and adjusting for Alphaform transaction costs and bargain purchase gain, our non-GAAP diluted earnings per share in the quarter were $0.50. For the full-year 2015, revenue was $264 million, a 26% increase over 2014. Adjusting for the negative foreign currency impact of $7.5 million, revenue growth was 29.6%. Our operating income for the year was $67.1 million, or 25.4% of revenue, compared to $60.5 million, or 28.9% in 2014. The drivers of the 350 basis point reduction in operating margin include the following: Our business required increased investment in marketing and sales to continue to generate our strong growth rates into the future. These investments had 100-basis-point impact on our margins. The Alphaform acquisition had a negative 70-basis-point impact on the year. We are confident the acquisition will prove to be a good investment over time, despite its dilution to our financial metrics in the short-term. The remaining margin reduction was driven by our gross margins. In addition to Alphaform, there are several factors that play into the reduction of our year-over-year gross margin percentage, including investments in capacity, foreign currency, investments in building out lean manufacturing processes, launching and scaling new service offerings and dilution from the exceptional growth in our slightly lower margin 3D printing business. We were able to mitigate a portion of these headwinds through productivity improvements in several areas of the business. Now, turning to our cash flow statement. Our capital spending was $44.4 million during 2015 as compared to our prior guidance of $48 million. The lower than anticipated capital expenditures related to timing of cash payments associated with our new facility in North Carolina that will be paid in 2016. Included in the CapEx were investments associated with the Alphaform transaction of $4.7 million and costs associated with the acquisition and build-out of the North Carolina facility of $7.6 million. The balance represents investments in manufacturing equipment across all our services and computer software and hardware to support future growth of our business. In 2015, we generated cash from operations of $58.6 million. Cash and investments increased $17.3 million during the year to $145.6 million at December 31, 2015. I would now like to turn the call over to Vicki to begin our discussion of what to expect in 2016. Victoria M. Holt - President, Chief Executive Officer & Director: Thanks, John. We remain focused on our key strategic priorities for the year that will enable us to continue to expand our position as the world's fastest provider of custom injection molded, CNC Machined and 3D printed parts. First, we must fully integrate Alphaform into our operations to ensure we will reliably deliver the customer experience and high-quality parts our customers have come to expect from us. We will continue to focus on marketing and sales excellence, investing in activities that have proven to be successful in driving our revenue growth and refining strategies to drive sustainable long-term growth. These activities include leveraging our CRM and marketing automation platforms, investing in training and continued evolution of our marketing segmentation approach. One change related to our marketing efforts that you may have noticed on this call, is I've been referring to our business lines by their function versus their brand-name. Instead of Protomold, Firstcut and FineLine, Proto Labs provides injection molding, CNC Machining, and 3D printing services. We've learned through our expanded outreach efforts that the branding was confusing to customers. For example, they asked, was Protomold the same as Proto Labs? How does Firstcut relate? As a result, we've made the decision to deemphasize the service brand names to avoid this issue. With a focus on a single brand, Proto Labs, we believe we can more effectively leverage our marketing spend and enhance overall brand awareness. Moving onto additional 2016 initiatives. We will increase our investment in R&D activities to continue to make advancements in our business. This includes enhancing our customer facing web capabilities to continue to improve our customer's experience with Proto Labs. We'll invest in our manufacturing software to enable – to expand our competitive moat and drive further envelope expansions across all our services. We will continue to develop and test new products and processes as part of our Protoworks effort. One new product offering in our injection molding service that we anticipate introducing in 2016 is overmolding. Overmolding is a process, which molds part made with one material over a part made with a different material. Think of a toothbrush. It has a grip handle made with an elastomeric type material, molded over another rigid plastic like polypropylene. Over molding used often in medical, consumer electronics, and other consumer products, has been one of the envelope expansions our customers have been asking for, for years. We're very excited to have this technology available to our North American customers by year end 2016. Our strong growth in 3D printing and our growth in Japan will require us to add manufacturing facilities in 2016. The North Carolina move will happen in the first half of the year with the Japan move occurring in the second half of the year. These moves require a careful coordination to ensure that we continue to deliver real parts really fast. We have experience with these moves and are confident in our ability to execute. And, finally, we will focus on improving our operational efficiency through implementation of lean process improvement and other continuous improvement efforts. 2016 will be another exciting year for Proto Labs, as we expand our capabilities globally to serve more product developers with more custom parts reliably and quickly. We are very good at executing strategy, and this year was no exception. And 2016 will be no exception. We will continue to drive profitable growth despite the current economic environment, demonstrating the unique value we provide our customers. I will turn the call back to John now for a discussion of the financial outlook for 2016.

Thanks, Vicki. I'd like to begin with some general thoughts on 2016. As a management team, we're focused on driving long-term growth in revenue, earnings and earnings per share. In order to accomplish these long-term goals, we will make investments and other decisions that may impact short-term financial metrics with the ultimate goal of driving sustainable growth in our operating results. In an effort to align with the majority of your financial models, we'll be providing guidance on an adjusted non-GAAP basis. This reporting will not impact how we manage or operate the business. We anticipate continued strong growth in our business, including the contribution from Alphaform. We're targeting revenue growth for 2016 between 25% and 30%. We anticipate our GAAP operating income as a percentage of revenue to be between 23% and 26% and non-GAAP operating margins to be in the 25% to 28% range. This compares to GAAP operating margins of 25.4% and non-GAAP margins of 28.4% in 2015. The primary drivers impacting our operating margins include the following. Alphaform will have a negative impact of 100 basis points to 150 basis points on our operating margins. This impact is predominantly reflected in our gross margin line item. As we have stated previously, we expect Alphaform to be breakeven in 2016, which impacts our financial metrics, but not our operating earnings dollars. As we turnaround this business, it will provide a meaningful contribution in future years. The next driver is research and development. As Vicki noted previously, we'll be increasing our research and development expense. These incremental investments will have an approximately 50 basis point impact on operating margins. We will be expanding our operations in 3D printing and in Japan. These expansions will increase capacity and set us up to support our future growth, but will carry greater cost in the short term. Moving to facilities while maintaining our delivery requires coordination and will have an impact on productivity during the moves. The impact of these items will be partially mitigated by improved productivity and operational efficiency throughout our business. Now some additional information to help you with your financial modeling. Due to the dilutive impact of Alphaform, we anticipate gross margins to be in the 56% to 59% range. We anticipate marketing and sales to be in the 14% to 15% of revenue range on a GAAP basis, resulting in 13.5% to 14.5% on a non-GAAP basis. With the increased investment, we expect GAAP R&D to be 7% to 8% of revenue, or 6.5% to 7.5% on a non-GAAP basis. GAAP general and administrative costs will be 10% to 12% of revenue, or 9% to 10.5% on a non-GAAP basis. We currently anticipate approximately $60 million in capital expenditures during 2016. This includes approximately $4 million carryover from 2015 related to the 3D printing facility. The estimate also includes an additional $10 million to $15 million in real estate, including the completion of the North Carolina facility, the Japan facility, and potential initial investment associated with the expansion of our European operation at the end of 2016. Maintenance capital, approximately 2% of revenue, or $5 million to $7 million. The remaining capital is manufacturing equipment and IT investments to support our growth worldwide. Now, I'd like to turn to our expectations for the first quarter of 2016. We currently expect Q1 2016 revenue to be in the range of $72 million to $76 million, representing revenue growth of 23% to 30% over the prior year. This revenue guidance includes an estimated $4.5 million to $5 million related to the acquisition of Alphaform. While we enjoyed the benefits of the non-recurring revenue in the fourth quarter at Alphaform, we will experience a short-term sequential revenue headwind in Q1 as a result. We estimate exchange rates will have a $500,000 negative impact compared to the first quarter of 2015. Our Q1 margins will be impacted by costs associated with the building we are vacating in Germany and expenses associated with the continued build-out and move preparation in North Carolina. We currently estimate our tax rate to be 32.5% in Q1. Stock compensation costs for the quarter will be approximately $1.6 million. Amortization of intangibles related to the FineLine acquisition will be $186,000. Taking into consideration all of the above, including $0.02 to $0.03 per share dilution from Alphaform, we expect our quarterly non-GAAP EPS to be between $0.43 and $0.48 per share. Finally, I'd like to provide a little color on our current thinking about our long-term financial model. A lot has changed in our business since our original target financial model was provided. We have acquired two businesses, we have added several services, and we have recognized that we need to invest in our business to continue to achieve the exceptional financial performance this company has produced. These investments have impacted our short-term financial metrics, but we believe they were necessary to support our long-term objectives. And as a result, we are refreshing our long-term financial targets to align with our expected returns on these investments. We are moving our revenue growth target to a range. The old target model was approximately 25% annual growth. We remain extremely optimistic about the size and robustness of our markets and the outlook for continued strong growth. We recognize, however, that the percentage revenue increase will fluctuate not just quarter-over-quarter but year-over-year, particularly as we become larger. Therefore, we are revising our annual revenue growth target to a range of 20% to 25%. We expect our GAAP operating income to be in the range of 26% to 29% of revenue and non-GAAP operating margins of 28% to 30%. Finally, some additional information to help you with your financial modeling. We target gross margins of 58% to 62%. This is an improvement over the current level as we improve the Alphaform margins and continue to drive operational efficiency in our manufacturing operation. We anticipate marketing and sales to be 13% to 15% of revenue on a GAAP basis, resulting in 12.5% to 14.5% on a non-GAAP basis as we continue to capitalize on the market opportunities in front of us. We will continue to invest in R&D over the long-term to drive our competitive advantage and as a result, we expect GAAP R&D to be 6.5% to 8% of revenue, or 6% to 7.5% on a non-GAAP basis. GAAP general and administrative costs will be 9% to 10% of revenue, or 8% to 9% on a non-GAAP basis. These modestly revised long-term target ranges demonstrate our continued confidence in Proto Labs' outlook for very strong revenue growth and profitability. To assist you in better understanding the information just discussed, we have provided slides detailing our 2016 outlook and our long-term financial targets on our website under the Investor Relations section. That concludes our prepared remarks. Operator, will you now open up the call for questions?

Our first question today is coming from Brian Drab from William Blair. Please proceed with your question. Brian P. Drab - William Blair & Co. LLC: Good morning. Congratulations on a great 2015. Victoria M. Holt - President, Chief Executive Officer & Director: Thanks, Brian.

Thanks, Brian. Brian P. Drab - William Blair & Co. LLC: Hey, John, did I miss it or did you give a range for EPS for 2016?

I didn't give a range for EPS. I provided it in the terms of our operating margins. Brian P. Drab - William Blair & Co. LLC: Okay. And you said for non-GAAP G&A 9% to 10.5%?

Just want to make sure I'm consistent here. Non-GAAP G&A for 2016... Victoria M. Holt - President, Chief Executive Officer & Director: 9% to 10.5%.

Yes, 9% to 10.5%. Brian P. Drab - William Blair & Co. LLC: Okay. And what was that on a GAAP basis, because that seemed a little bit high?

10% to 12% on a GAAP basis. I think what you're seeing there is Alphaform. So Alphaform has the majority of their costs from a G&A perspective hit that line and as we grow into that business, I think there is a little bit of an increase there. That's probably what you're seeing. Brian P. Drab - William Blair & Co. LLC: Okay. That makes sense. And can you quantify what the revenue was associated with those, sounded like, end-of-life orders at Alpha in the fourth quarter? Victoria M. Holt - President, Chief Executive Officer & Director: Yeah. As we mentioned earlier, when we did the acquisition, there were several contracts that were in place with Alphaform that, frankly, didn't reflect the way we do business, which is really based on the pricing of the – geometry of the part and moving directly with the product developers. So we have moved forward to cancel those contracts, renegotiate a different forward-looking position. But our revenue going forward there is uncertain, since it's a complete change in how we interface with those customers. So, at this point, it's unlikely that will recur. It's not what I would call hugely significant, but because we hope to be replacing that volume with volume that we will generate from our website and our e-commerce-based business. But we will see an impact in the first quarter, as we go through that transition between an old way of doing business and the new digital manufacturing, e-commerce, web-based approach that Proto Labs use. Brian P. Drab - William Blair & Co. LLC: Okay.

Yeah. Brian P. Drab - William Blair & Co. LLC: Is it fair to kind of guess – go ahead, John.

Yeah. So I mean, to break it out, $5.1 million is what we recognized in the fourth quarter. I guided to $4.5 million to $5 million. The majority of the downside of that is those contracts. Brian P. Drab - William Blair & Co. LLC: Okay. And sorry to bounce around, but I'm going to go back to those – the margin guidance for 2016. If you look at the selling and marketing, non-GAAP, I believe, you said 13.5% to 14.5%. Is it fair to assume that as we have lately that we still hover around the high end of that range in 2016?

Yes. That is fair. Brian P. Drab - William Blair & Co. LLC: Okay. And then just I'll ask one more question and pass it on. But on gross margin, how much of – this is a multipart question, though. How much of the 260 basis point impact from Alpha is transitory or one-time in nature, and what gross margin level do you expect the company to exit 2016 at?

Yeah. So I think looking at that, the 250 basis point to 260 basis point impact that we saw in the fourth quarter will recur at about the same level in Q1. For the full year, we're projecting an impact of 100 basis points to 150 basis points on gross margin from Alphaform. Victoria M. Holt - President, Chief Executive Officer & Director: We'll continue to see quarter-to-quarter improvements, particularly after Q1. In Q1 we've got some additional costs associated with the building that we're exiting there. So – but Q2, Q3, Q4 we'll see quarter-to-quarter improvement as we begin to put our business model on the Alphaform assets and the great people that we have there. But that will be a transition period that'll take us all the way through 2016 and probably well into 2017 with the intention of moving that business to gross margins that are closer to the level of our legacy 3D printing business. Brian P. Drab - William Blair & Co. LLC: Okay. Is the rough math – this rough math accurate? I guess roughly accurate? But if you have 260 basis points impact now, 100 basis points to 150 basis points average for the year, is Alphaform sort of like a 50 basis point headwind as when we complete 2016, is that the goal?

It's probably in the right range as we look at it. Brian P. Drab - William Blair & Co. LLC: Okay. Thanks very much.

Thank you. Our next question today is coming from Jim Ricchiuti from Needham & Co. Please proceed with your question. Jim A. Ricchiuti - Needham & Co. LLC: Hi. Thank you. Good morning. I just wanted to ask about the target gross margin longer-term. Just given the pieces of the business, and given the growth that you're seeing in 3D printing, that portion of the business, I wonder if you could help walk us through what might get you to the high end of that margin profile.

I think as you look at it, I think there is lot of components within there. We've launched a number of new services in the last year and those services right now are subscale. And as we're growing into them, we have to add capacity. And when you add capacity to service that has lower revenue, it has a greater impact on the short-term margin. So as some of those scale up, we'll see some improvements there. We also are deploying our lean process improvement initiatives and see some opportunities in that over time. As well as the 3D printing margins have improved, since we've acquired FineLine. And we think we can continue to drive that growth there. So I think it is just a combination of all of those components that will help us drive improved margins over time. Jim A. Ricchiuti - Needham & Co. LLC: But John, just from a structural standpoint, you don't really, doesn't sound like you see much of a drag longer-term from 3D printing in the Alpha business.

Yes, so I think 3D printing will always have a little bit lower margins. As we've experienced, but we've been able to show that we can improve those margins through efficiency in our manufacturing operations. I think there will be... Victoria M. Holt - President, Chief Executive Officer & Director: And the launch of quick turns. I mean, there's things that we've done that have improved the margins pretty significantly in the FineLine acquisition. We'll be deploying those same tactics with the European operations. So through our business model, web-based approach, use of quick turns and continued focus on what we're calling Proto Excellence, which is our operational lean continuous improvement efforts, I think, we've got margin opportunities across each one of our segments. Jim A. Ricchiuti - Needham & Co. LLC: Okay. That's helpful. And just switching gears a little bit. Was the production parts portion of the business – can you give us a sense of what that was in the quarter? And, I guess, just given the concerns that some people have about slowing economic growth, I wonder, is that – does that – do you have any window into what's happening out there just as it relates to that part of the business? Victoria M. Holt - President, Chief Executive Officer & Director: Yeah.

The split in – the production parts versus molds remained pretty consistent in Q4, compared to what it has been historically. The economic challenges are out there. But in our results that we've seen so far, it hasn't really impacted us that much. Victoria M. Holt - President, Chief Executive Officer & Director: Right. And, remember, we play a role in prototyping low-volume production, helping customers commercialize new products they're continuing to innovate. So we've got a lot of, actually, tailwinds behind us, as manufacturers look to bring new innovative products to market in this period of time. And we help them scale those very cost-effectively. So our parts business is often part of that continuation between prototyping to testing and then onto commercialization of the products launched. Jim A. Ricchiuti - Needham & Co. LLC: Got it. And last question and I'll turn it over. Japan has been, obviously, a smaller market for you. You're stepping up some investments there. Can you talk a little bit about whether you're thinking about that market, has it changed at all, or are these just some necessary investments you have to make? Victoria M. Holt - President, Chief Executive Officer & Director: Yeah. We're continuing to grow nicely in Japan. So we're completely out of space, so we've got no floor space to support what's been really nice growth there. We've continued to invest in our sales and marketing team in Japan and you're starting to see the result. I mean, fourth quarter was 54% year-over-year increase, so it's really strong. So it just continued investment in a market that has a good number of 3D CAD seats, and it represents an opportunity for us to continue to build a number of product developers that we serve and go wide and deep with the customer base we're continuing to grow there. Jim A. Ricchiuti - Needham & Co. LLC: Okay, thanks. Congrats on the quarter.

Thank you. Victoria M. Holt - President, Chief Executive Officer & Director: Thanks.

Thank you. Our next question is coming from Troy Jensen from Piper Jaffray. Please proceed with your question. Troy D. Jensen - Piper Jaffray & Co (Broker): Hey, Vicki and John. Congrats on another really strong quarter. Victoria M. Holt - President, Chief Executive Officer & Director: Thanks, Troy.

Thanks, Troy. Troy D. Jensen - Piper Jaffray & Co (Broker): Hey. So Vicki maybe just a follow-up on the previous question here. Just the industrial exposure that you guys have, are you seeing any specific verticals, maybe feeling some signs of weakness now? Victoria M. Holt - President, Chief Executive Officer & Director: Yeah. You know how widespread we are across all the verticals. We service just about every vertical in the whole industrial production mix. And, frankly, we haven't seen any that have shown particular weakness year-over-year. What I will say is that with our segmentation approach going a little bit more specific into the medical, the aerospace, and the automotive markets, those are growing a little bit faster than our business in general, which is I think the result of a little more targeted approach in those markets, but the others have not really seen any big dip. So, again, I think it's a reflection of where we play in the whole product development life cycle. And we are not in the big large mature end uses that might see a decline. Troy D. Jensen - Piper Jaffray & Co (Broker): All right. That is fair. And then quickly on new services here, so overmolding, should we think of that similar to LSR and lathe, where the first full year it's kind of low single-digit millions and ramping aggressively over that? And then to that point, is overmolding the service that Brad [Cleveland] got everybody excited about, being [indiscernible] (47:13). Victoria M. Holt - President, Chief Executive Officer & Director: Let me answer the first one first. So, yes, I would think about it just like liquid silicone rubber in that the first few quarters after introduction, it takes a while for customers to realize and understand what we're doing and incorporate us into their project planning. And also I just want to gauge – and this I'm announcing a little bit early, we won't even be soft launching this product until probably early second quarter with a full launch at year-end. So this year the impact will be very small. But next year we will begin seeing that as customers adopt it. I think customers have been asking for this one for years, so I think our injection molding customers will be very excited to have an ability to buy prototypes and low-volume production of overmolded products under our model, I think they'll be thrilled. And I will say that this is one of the ideas that Brad contemplated when he was here. I wouldn't say it's the particular one that he was referencing when he talked about that a couple of years ago. Troy D. Jensen - Piper Jaffray & Co (Broker): All right. Thank you. So just quickly then on lathe and LSR. So are those in the mid-single-digit millions for you guys right now? Victoria M. Holt - President, Chief Executive Officer & Director: Yes. Troy D. Jensen - Piper Jaffray & Co (Broker): All right. Perfect. All right. Well, good luck in – go ahead, John. Victoria M. Holt - President, Chief Executive Officer & Director: Lathe a little bit lower than that, but LSR right in there. Troy D. Jensen - Piper Jaffray & Co (Broker): All right. Perfect. Good luck in 2016. Victoria M. Holt - President, Chief Executive Officer & Director: Thanks.

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

Hey. Thanks for taking my question. This is Brandon in for Ben. Just real quick on the revenue per user. I see it grew pretty nicely year-over-year. Is this really a mix shift that's causing this? I would kind of assume with FineLine growth that may be down a little bit.

Yeah. That's exactly what's causing it – that and foreign currency would be the two big components there.

Got it. And then maybe if you could, what kind of on the three-segment level, your long-term growth rate now, op model, what kind of anticipated growth rate does this kind of bake in for all three? Does it assume 20%-plus in Firstcut and Protomold going forward or how should we think about that? Victoria M. Holt - President, Chief Executive Officer & Director: Well, I think the way we really need to look at it is we have a portfolio of services with that product developer right in the center. And we're going to supply that developer with injection molded, CNC Machine, or 3D printed parts that meet their needs. And the growth rate by service is going to vary quarter-to-quarter and year-over-year. I think overall, we feel very comfortable with the long-term model of 20% to 25% and next year – or this year 2016, we feel good with the 25% to 30%.

Yeah. I guess I would look at it just on a relative basis, without giving specific growth rates for each. I think 3D printing will grow faster than the overall average. CNC Machining will probably be in that range and the injection molding will be a little bit lower. But generally speaking, I think the combination of all of them will produce the growth ranges we've been providing.

Got it. Thanks for the color there. I appreciate it.

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

Hey guys. Thanks for taking my questions. Victoria M. Holt - President, Chief Executive Officer & Director: Hi, Bobby.

Hi. So, I guess, just kind of going back to your strategic initiatives. Can you update us on the progress of the first of those initiatives, specifically it was the – just wondering what the early results are coming out of the vertical market segmentation? And then also, just new customer acquisition. You guys are also trying to focus, I guess, a little bit more on strategic customers, so just wondering, early results that you're seeing there over the last year. Victoria M. Holt - President, Chief Executive Officer & Director: So, the segmented approach to the market is really, we call it more of an evolution than a revolution, you know, just flip a switch. So our initial focus has been taking a look at a couple of industry verticals that our business model really resonates with, where speed is important, where there's a lot of iterations and we bring a lot of value, so that'd be medical, aerospace and automotive. And we're doing that with very tailored messaging, speaking the language of the industry and equipping our sales team with specific, industry-specific talking tracks as they deal with customers and speak with them about their programs. And the early success has been, the growth in those segments has been a little bit higher than our average, so we are pleased with that but we're really in the early innings of segmentation and learning a lot about what works and doesn't work and continue to evolve it, but we are pleased with that and I think it's going to bring the results. In terms of strategic selling, we're continuing with training to develop strategic selling skills among our sales force. The growth in the number of larger customers continues to grow, so we get more and more companies who do $0.5 million more with us. So that means we're going wide and deep and continuing to build those more strategic partnerships. So that's going well and, again, those are two elements that are driving the nice growth rates and the results that you've seen.

Great. And then on the overmolding, I guess soft launch early Q2, full launch end of this year, have you guys identified an overall TAM or, I guess, the specific piece of the TAM that you guys can address? Victoria M. Holt - President, Chief Executive Officer & Director: Yeah. It's really hard to get that pinpointed. In our space to really understand what portion of overmolding market, really to get that good size of what is overmolded. And then also what portion is really relevant to our TAM. So it is an important segment within injection molding. You know that the TAM that we've got out there in injection molding is almost to $4 billion, I think it's $3.8 billion TAM for injection molding. And I, certainly, think this is one of those envelope expansions that helps us with that.

Okay. Great. And then, I guess, just the last piece of this is that 20% to 25% long-term growth – when you think about kind of whether or not – given yours is at the high end or at the low end, do you see that mainly as a function of strengths for your core kind of Protomold business, how that performs in the year? Or is it really uncertainty about how sustainable these really high growth rates are for 3D printing? What are the main kind of dials that could push you to the high end or low end of that range? Victoria M. Holt - President, Chief Executive Officer & Director: I think it could be – again, the variability that we have week-to-week and month-to-month in demand is pretty high. So it really could be all the services hitting. And we have a really nice growth rate in that 25-plus percent that could drive that. So it reflects the variability in our business. And the difficulty that we have in actually pinpointing it quarter-to-quarter. We have a seven-day backlog of orders. So it is – there will be variability. We're an on-demand manufacturer.

Okay. Great. Thank you. Victoria M. Holt - President, Chief Executive Officer & Director: Does it help?

Yeah. Very helpful. Victoria M. Holt - President, Chief Executive Officer & Director: Okay. Thank you.

Thank you. We've reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments. Victoria M. Holt - President, Chief Executive Officer & Director: Thank you for joining us today. We're proud of the results we've generated in 2015, and we look forward to continuing our success in 2016. Once again, I'd like to thank you all for being here today, and I want to thank our employees for their outstanding performance. We look forward to updating you next quarter. Thank you.