Proto Labs, Inc. (PRLB) Q1 2016 Earnings Report, Transcript and Summary

...will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host today, Mr. Bill Dietrick. 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 open, Proto Labs issued a press release announcing its first quarter financial results for the quarter ended March 31, 2016. 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 operation, 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, and 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? Victoria M. Holt - President, Chief Executive Officer & Director: Thanks, Bill. Good morning everyone. Thank you for joining us on our first quarter conference call. Also with me today is John Way, our Chief Financial Officer. I'll begin today with an overview of our first quarter financial performance and operational highlights. John will provide a more in-depth look at our financials during the quarter and also our outlook for second quarter revenue and earnings, then we will be happy to take your questions. Revenue in the first quarter of 2016 totaled $72.6 million, an increase of 24% over the prior year's first quarter and within the range of guidance we provided during our Q4 call in February. Adjusting for the negative $400,000 impact of foreign currency on the quarter, revenue grew 25% on a constant currency basis. Alphaform, the German company that we acquired in the fourth quarter of 2015, contributed $4.9 million in revenue. Excluding Alphaform, legacy revenue in the first quarter was $67.7 million, 16% above revenue in the same period of 2015. Looking at our performance by geography, revenue in the U.S. increased 15%, revenue in Europe, excluding Alphaform grew 28% on a constant currency basis. Revenue in Japan was up 2% in constant currency. Turning to revenue by service, first quarter injection molding revenue totaled $43.2 million, an increase of 15% over the prior year. CNC machining revenue also grew 15% year-over-year. 3D printing remained very strong, doubling in revenue over the prior year and growing 46% excluding Alphaform. Demand for 3D printing services continues to grow in both North America and Europe. We're moving into a new 3D printing facility in Raleigh, in phases and are now manufacturing SLS parts there. We expect the move to be completed during the second quarter and are very pleased with the smooth transition accomplished by our team, while at the same time, shipping a record number of 3D printed parts and delighting our customers with our outstanding service. The integration of Alphaform is tracking to plan. We've been focused on incorporating our 3D printing operation software into our facility in Munich and we went live this week with this software. With our software now in place, we're confident that our digital manufacturing operations will meet our customer brand promise. Therefore, we're beginning a more proactive marketing effort of our 3D printed services in Europe this week to engage new customers and drive sales. This acquisition offers a lot of opportunity and we're looking forward to capitalizing on it. While the first quarter revenue was within our guidance, our growth was below our longer term target in three areas of our business. Revenue from injection molding, especially the parts component, revenue from CNC machining and growth in Japan. I would like to review each of these factors and how we're addressing them. During the quarter, we experienced a slower than historic growth rate in injection molding parts. Customers use our on-demand manufacturing service for end used production parts for their products right when they need them. We believe the slowdown in parts orders is related to the general reduction in industrial production in our key geographies. As a reminder, there are two components of our injection molding business. First, is the initial order of a mold that we refer to as the mold business. Approximately half the time, we receive at least one order for follow on parts on those molds to refer to these subsequent orders as injection molding parts. Our parts business is an on-demand service and as a result, we have very little visibility into the timing or quantity of the follow-on orders with our backlog generally running under seven days. We believe economic conditions have also tempered growth of our CNC machining service. When we look closely at the data, we continue to see our customers both long term customers and relatively new customers reordering but not at historic expected levels. This caution has been confirmed in anecdotal discussions that our sales people have had with customers. And they want to be clear, orders for CNC machines parts are growing, just not as the rates we have experienced in recent quarters. We are confident that as economic conditions improve, we will see growth return to historic level. In Japan, we have seen the impact of an economic slow down where there is excess capacity at traditional injection molding and CNC machine shops. I was in Japan two weeks ago and met with our sales force who remained very confident in the outlook for growth this year. Revenue in Japan grew 41% in 2015 and 28% over the trailing 12 months. Due to the size of our operations in Japan, we anticipate revenue growth will fluctuate from quarter-to-quarter. We have increased the sales and marketing team there in both number and talent. They have been trained and are moving forward aggressively to drive sales. We're on track to move to a new facility in Japan in the third quarter to accommodate the expected growth in our operation. We're out of space at our current site, and the new facility provides three times our current manufacturing floor space that will allow us to support our future growth and add additional services such LSR and 3D Printing to Japan in the future. Product developer growth remains strong. During the quarter, the number of unique product developers and engineers served grew 20% to a record 13,249. Looking ahead, we are confident the initiatives we began in the second half of last year to capitalize on new market opportunities are the correct strategy. And we will continue these efforts. They include segmented and targeted marketing efforts, changes to our sales compensation, redirection of resources and continuing our strategy to go wide and deep with our customers to become a vital strategic partner. An example of a strategic relationship with the customer would be Johnson & Johnson's Ethicon Surgical Products division that manufactures medical devices. The leadership within their product development team took the time to truly understand the power of Proto Labs' technology and business model. They are regularly utilizing Proto Labs' design for manufacture abilities feedback on "to improve product designs". And they've incorporated our quick turn delivery of prototypes into their strategic product development project plans to reduce time to market by as much as six months. Leadership at J&J have told us that this collaborative effort has delivered significant value by allowing more iterations to improve product design and speed to market. There are many examples of Proto Labs beginning to engage customers more strategically, but I must remind you that while we are confident we are on the right track, developing these relationships takes time and is a major transformation for the company. We currently monitor our suite of services to ensure that they meet the demands of the market and our internal objectives. Based on this review, we have made the decision to exit three services, including Metal Injection Molding or MIM, magnesium thixomolding and also the resin resale business, which came with the Alphaform acquisition. MIM and thixomolding require long sales cycles and a high degree of technical market education to generate a relatively low volume of orders. While the Proto Labs launch was a technical success, and the customer satisfaction for these services was high, the number of new parts designed annually in these niche manufacturing processes is lower than our expectation, resulting in order volatility and related profitability that did not meet our targets. These two services represented approximately 1% of our revenue over the last 12 months, with significant variability from quarter-to-quarter. We also determined that the resale of resin is a non-core business for Proto Labs and would continue to be dilutive to margins. It represented about $1 million in revenue in the first quarter within the Alphaform business. Customers have been notified that we will no longer be taking orders for these services after May, exiting these businesses will free up time and resources to focus on our services with higher growth and profit potential. To finish up on our financial performance, we posted non-GAAP net income of $11.7 million in the first quarter or $0.44 per share within the range of our guidance. As anticipated, the earnings were affected by lower gross margins from Alphaform as we complete the integration and ramp up the digital manufacturing efforts there. John, will provide more details on our financial performance in his remarks. While, the revenue growth this quarter was lower than our historical and our long-term model target, we are confident that our strategic sales and marketing initiatives will restore our revenue growth rate over the long-term. Proto Labs has seen fluctuation in demand from quarter-to-quarter in the past, and we successfully addressed these revenue growth slowdown. We're confident we will achieve revenue growth rates at our target model over the long-term. Moving to other highlights, we were very pleased to receive several industry and community awards in the quarter. In March, we received Frost & Sullivan's Manufacturing Leadership Award for the second year in a row. In June, I'll be giving the presentation at the Manufacturing Leadership Summit on how digital manufacturing accelerates innovation. As part of the presentation, I will be highlighting our support of two strategic customers: Johnson & Johnson, as previously mentioned at this call, and Lockheed Martin, a relationship we discussed last quarter. Both organizations used our services to reduce cost, improve design, shorten product development lifecycle and bring creative new products to market. We also received the 2016 Community Impact Award from the City of Minneapolis in the Youth Initiative Category for the efforts of the Proto Labs' foundation in support of STEM education in underserved areas of our community. Being active in our communities by providing stem support and sponsoring volunteer activities is an important component of our culture and we were honored by this recognition. And finally, Don Krantz, our Executive VP and Chief Technology Officer was recently named the Titan of Technology by the Minneapolis/St. Paul Business Journal. This was a very prestigious and fitting award for a key contributor to Proto Labs success and a wonderful way to honor Don who is retiring at the end of the quarter following a 10-year career at the company. His successor is Rich Baker who joins us next week. He has 18 years of experience of technology leadership in several leading advanced manufacturing firms, including NanoVox, PaR Systems, and MTS Systems and Dow Chemical. As previously disclosed, Jackie Schneider, Vice President of Global Sales is leading Proto Labs to pursue her passion of working in a startup company. We want to thank Jackie for her efforts in building the sales organization to help take this company from a small business when she started to almost $300 million today. We will be evaluating in how we would like to fill her role, including the scope of responsibilities and skills and experience that would be most desirable to achieve our long-term growth. We have a strong sales team in each of our regions that will continue to execute on our strategy. These regional sales teams will report to their respective regional leadership with Bill Dietrick as Head of Marketing assisting in the sales leadership efforts. We also announced that Archie Black, President and CEO of SPS Commerce, a global software company has joined our Board of Directors. Archie's experience in operating a rapidly growing technology based company will be a welcome addition to our board. With that, I'll turn the call over to John for further comments on our first quarter and financial performance. John.

Thank you, Vicki. Revenue in the first quarter was $72.6 million, an increase of $14 million or 24% over the same quarter in 2015. Legacy revenue in the first quarter came from 13,249 unique product developers. This represented a 20% increase over the first quarter of 2015. Our unique product developer count does not include Alphaform as this information is not available in a comparable format at this time. Average revenue per product developer decreased 3% on a constant currency basis compared to the first quarter last year. The decline in revenue per product developer is reflective of the mix of our business with strong growth in 3D printing and lower growth in our injection molding parts business. Gross profit for the quarter was $39.7 million, an increase of $4.4 million over the comparable quarter of the prior year. Gross margin was 54.6%. Alphaform had a negative 380 basis point impact on our gross margins in the quarter. Excluding Alphaform, gross margin on the legacy business was 58.4% as compared to 58.6% in the fourth quarter and 60.2% in the first quarter of 2015. The fluctuation compared to the first quarter of 2015 was primarily related to additional investments in capacity to ensure we meet our brand promise to customers as we have discussed in previous quarters. The first quarter represents a trough in our gross margins. We will see improvement in our gross margins at Alphaform and in our legacy business in the second quarter and throughout the year. Our operating expenses were in line with our guidance at $24.5 million, a $200,000 reduction from the fourth quarter of 2015. Sales and marketing expense totaled $10.9 million or 15.1% of revenue for the quarter. We invested $5.3 million, or 7.3% of revenue in research and development in the quarter. Operating income was $15.1 million in the first quarter of 2016, compared to $15.8 million in the prior year. On an adjusted non-GAAP basis, operating income was $17.1 million or 23.5% of revenue, compared to $17.4 million, or 29.7% of revenue in the prior year. The reduction in operating margin relates to the dilution from the Alphaform acquisition and the investment in manufacturing capacity that we have discussed in prior calls. Our effective tax rate was 32.4% in the first quarter. Net income totaled $10.7 million, resulting in diluted earnings per share of $0.40. Adding back the after-tax costs of stock compensation, amortization of intangibles, and adjusting for the effect of the unrealized gains on foreign currency, our non-GAAP diluted earnings per share in the quarter were $0.44. Alphaform represented a $0.04 negative impact on earnings per share. During the first quarter of 2016, we generated cash from operations of $16.9 million. Cash investments increased $11.5 million from the end of fourth quarter to $157 million at March 31st 2016. Now I'd like to turn to our expectations for the second quarter. We currently expect Q2 revenue to be in the range of $75 million to $80 million, representing revenue growth of 17% to 25% over the prior year. This revenue guidance includes a headwind in the second quarter of approximately $500,000 related to the exit of our resin resale, metal injection molding and thixomolding. We also estimate exchange rates will have an approximately $300,000 or 50 basis point negative impact compared to the second quarter last year. Stock compensation costs for the quarter will be approximately $1.7 million. Amortization of intangibles will be approximately $186,000. In addition, we are evaluating our equipment related to the services we are exiting for impairment that may result in a charge in Q2. We currently estimate our tax rate to be approximately 32.5% in Q2. Taking into consideration all of the above, including approximately $0.02 per share dilution from Alphaform, we expect our quarterly non-GAAP EPS to be between $0.46 and $0.50 per share in the second quarter. That concludes our formal remarks. Vicki and I will now take your questions. Operator, can you please open up the line?

. Our first question comes from Troy Jensen with Piper Jaffray. Please proceed with your question. Troy D. Jensen - Piper Jaffray & Co (Broker): Hey, thanks for taking my time. Good morning Vicky and John. Victoria M. Holt - President, Chief Executive Officer & Director: Good morning, Troy.

Good morning, Troy. Troy D. Jensen - Piper Jaffray & Co (Broker): So, quick Vicki, if we can focus a little bit on injection modeling I mean 60% of your revenues and kind of biggest chunk, right. Just curious it feels like that was an area that you might have mentioned in previous calls as an area to focus as far as really trying to reaccelerate growth there and maybe the 3D print in this direction kind of prevented that? So, just curious how much are you guys planning on trying to get the injection molding side, I mean the story there was always the huge, huge market fractional share gains could really drive good growth for you? Victoria M. Holt - President, Chief Executive Officer & Director: Yes. We still believe that, again the TAM is large there, huge market and we bring a lot of value in injection molding. We did refocus a little effort on injection molding here in the first quarter but great results on the mold side of things, so we moved that needle in the right direction. Injection molding tooling is a little more challenging of a sale than a 3D printed part nearly because you're looking at a bigger investment on the part of the customer. So we saw some improvement there. But we report injection molding, if we report both the mold and part and we actually saw growth in both mold and parts but when you take a look at the detail underneath that there are some segments where we actually saw a little bit of contraction particularly, one set or more impacted by the economic cycle. So, things like industrial equipment where spaces like 3D printers for example, we actually saw quarter to quarter declines in revenue. Industrial equipment that might go into semiconductor or oil and gas applications also saw quarter to quarter decline but despite declines in those segments we grew overall, and as you saw injection modeling grew by 15%, so we're growing the markets there but in some parts area were used for production, we did see a little bit of an impact we think from the economy. Troy D. Jensen - Piper Jaffray & Co (Broker): I mean, do you think we can get that back into your business model range of 50% to 50% or excuse me on with the 20% 25% growth? Victoria M. Holt - President, Chief Executive Officer & Director: 20% 25%? Absolutely. Absolutely no doubt about that. We bring tremendous value in injection molding both in the prototyping phase, in terms of helping customers commercialize the product to low volume production and then actually also when customers have products that have relatively low numbers of production parts due to customization or just the niche they are servicing, we are sometimes the only option for them to get low volume part. So, I think we've got lots of opportunity here for growth for continued brand recognition in injection molding and we are very confident we can get that back to the 20% to 25% range. Troy D. Jensen - Piper Jaffray & Co (Broker): All right. Good to hear. Maybe a couple of quick for John though, so, John on Alphaform acquisition I think it says 380 bps impact to margin and I get that I am just curious how much of that is one-time expenses that will fall off now, how much of that drops out if we exclude this resins business so it's other revenue category that's come along with Alphaform. What I am trying to get to is, can you help us out with the gross margins for Q2 with some of these things reversing? Victoria M. Holt - President, Chief Executive Officer & Director: Yes. So, the biggest component there is really is revenue, so if you look at that cost structure that we have currently, we've got excess capacity. So, we've got the building, and we've got our workforce there that's lined up to produce volumes in excess of what we are producing. What impacted us a little bit this quarter was that the mix of the business. So, like you said the resin business actually came in stronger, which actually increased our cost because those are our third quarter party outsourced costs, so that's having an impact on that gross margin. That's roughly 50 or 60 basis points, and we'll see that improvement over the next two quarters as that goes away. And another component there, we're reconfiguring the floor space, and I've spent time setting that up so we have more streamlined operations to support that greater workflow and had people in and the workforce working on that. In the fourth quarter they were taking a lot of vacations, so they were getting paid kind of off the balance sheet, and that had a benefit in the fourth quarter depending on those costs were flowing through the P&L in Q1. So, those are kind of the big drivers there. So, we will see improvement in the gross margin, one as that resin resale business goes away, but also as we start to layer on the new volume from the 3D printing. We'll be able to keep our cost relatively flat, but pulling the revenue through will have a significant impact. Troy D. Jensen - Piper Jaffray & Co (Broker): All right, got it. I guess, could you help us at all with like a potential like a number or range? I know you said historically or just three months ago that the 2016 target for gross margins is 56 to 59. Do you think we can get back to the low end of that range here in June quarter?

Yes, and I think that's – the whirlwind of that range is probably the right way to look at it, and then we will keep climbing from there. Victoria M. Holt - President, Chief Executive Officer & Director: Yes. The biggest thing that's going to help drive that Alphaform margin that's where we need to be will be volume, and sales revenue, because we got a fixed cost component when we acquired that business of both the work force and the equipment that we need to cover. And we are on track for this integration. We did not plan on turning our marketing and sales engine in a big way until we had the software in place, and we literally turned that on this week. We went live this week. So, with that, we are now literally this week going live with our marketing – our sales of marketing, more aggressive sales and marketing activities for 3D printing in Europe, and I'm confident when we turn that on, we will begin getting Proto Labs customers at our price points coming in to our European business in 3D printing, and we will be able to start getting those margins up. Troy D. Jensen - Piper Jaffray & Co (Broker): All right. Good luck, Vicki and John. Victoria M. Holt - President, Chief Executive Officer & Director: Thank you.

Thank you.

Thank you. Our next question comes from Brian Drab with William Blair. Please proceed with your question. Brian P. Drab - William Blair & Co. LLC: Hi, good morning. Victoria M. Holt - President, Chief Executive Officer & Director: Good morning, Brian.

Good morning. Brian P. Drab - William Blair & Co. LLC: So, Vicki and John, are you guys surprised somewhat that given the macro wasn't great in 2015, especially second half of 2015 when you did 25% plus organic revenue growth, that you saw this kind of drop off or decline from fourth quarter to first quarter? I think you were surprising a lot of people there second half of last year with that growth. Victoria M. Holt - President, Chief Executive Officer & Director: Yes. Brian P. Drab - William Blair & Co. LLC: And we are starting to think that maybe we were missing something, but now you are saying the parts business has slowed down. So, can you just give more color there? Victoria M. Holt - President, Chief Executive Officer & Director: Yes, Brian, it's a good question. And I will say we were somewhat surprised as we sat here in fourth quarter we got – I think there were a couple of questions in February on our call that we had not seen the economic decline that many of the companies that are in the industrial production space we're seeing, and we haven't. And I will say here in the first quarter we grew 16%, so we grew organically, 24% in total, 16% organically. But it was a little bit lower than what we had expected within a range but at the low end of that range. And as we looked at the data, we did find that there are some sectors particularly where we're used for production parts where we saw an impact. And then also I think we are at the beginning of the year, many companies took a look at – we believe many companies took a look at some of their spending in this environment of – little bit of uncertainty, and maybe pacing some of their spending on some of the projects that they've got. So, we are an on-demand manufacturer, so we see that really quickly with the lead times that we've got. So, it's parts just a little, but again we are confident that as things recover our business model is still very, very powerful in our customer base, and we will get back into that 20% to 25% range. Brian P. Drab - William Blair & Co. LLC: Okay. Thanks and Vicki did you – did I hear you say specifically that your customers that are manufacturers of 3D printers saw a slowdown in orders or you saw a slowdown at least for them? Victoria M. Holt - President, Chief Executive Officer & Director: Yes, that's one space. I mean among others than industrial equipment, but three – companies that buy our products that go into their 3D printers in total, that saw a decline year-over-year. Brian P. Drab - William Blair & Co. LLC: Okay. And then one last one regarding the discontinuation of MIM, thixo and the resale resin. So, for the full year, will we take out about I guess $2 million or $3 million in revenue for thixo and MIM and maybe $3 million out – $1 million a quarter or I guess it doesn't sound like it's that much in the second quarter, how much should we take out for the full year for these discontinuations? Victoria M. Holt - President, Chief Executive Officer & Director: So, first I will say that, we are going to continue to produce parts for the next six months for our customers to help them with the transition. So, we want to work very closely with our customers so that we have a way to help them transition to a different source that they were planning to use us for production parts. So, we will still be selling – we will continue to sell mold that they would like to proceed with their mold orders here through the months of May as well. So we'll see some sales.

Yes, so it will be kind of over the next two quarters that we will feel it. The resin business will be done at the end of May, so we'll feel about $350,000 impact in Q2 and then another $700,000 approximately in Q3 related to that. And then as Vicki said MIM and thixo will be winding down, that one we are going to be taking orders and talking to our customers to see what those volumes are. But the range of the numbers over the next 12 months is what you said $2 million to $3 million of pressure as that business winds down. Brian P. Drab - William Blair & Co. LLC: John, that resin business in the fourth quarter last year was how much?

It was a little bit low the million. Brian P. Drab - William Blair & Co. LLC: Okay.

It's in that other category that we've broken out, it was about $800,000 I think. Brian P. Drab - William Blair & Co. LLC: Got it. Okay thanks a lot. Victoria M. Holt - President, Chief Executive Officer & Director: Thanks, Brian.

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

Hey thanks for taking my question. I wanted to look a revisit the full year guide the model you guys put out on the last call, in light of slowing growth in 1Q and implied sub 25% growth in 2Q, is that full year guidance for 25% to 30% revenue growth still good, or do we need to rethink or reevaluate that?

Yes, Ben, we do have short times in our business as an on-demand manufacturer. Our backlog is 7 days. So we've provided guidance and will continue to provide guidance kind of on a quarterly basis. And I do think – as you are looking at in and questioning that, that range is going to be a challenge; I mean just doing the math would show that. So I do think we'll have to readjust or look at that from that perspective. But right now, we've got visibility – we've got Q1 under our belt, we can provide guidance on Q2 and as we're watching basically this economic situation and the impact of our customer we've got to wait for that to pick-up.

Okay. And in light of maybe some slower growth, should we rethink these cost levels, are you going to maintain kind of high-end of your spending range in light of kind of what we are seeing on the topline or are you going to start to adjust it downward?

Yes. So, I think from a percentage of revenue levels, we will manage those costs. So, sales and marketing, I think we are going to continue to invest at about that 15% level. We do want to make sure that we are investing to drive the revenue growth and continue to penetrate the opportunities there. But, we do want to be prudent in how we are doing that and make sure we are aligning with the revenue. Similarly, on the manufacturing side we've put in some more processes to make sure that we've got our costs aligned with the revenue that we see coming in and I am confident that we will see some benefit there, as we go through the year. So, I think as you look at the percentages that we've guided related to revenue I think those are all still valid.

Okay. And one last question on cross-selling and you may not be able put this data out, but you maybe provide some color if you can of the 13,000 or so unique developers you had in the platform this quarter how many used multiple services across the platform? Victoria M. Holt - President, Chief Executive Officer & Director: Yes. So, when you look at it as an individual product developer level there is probably only about 15% to 20% of the individual product developers that i.e. multiple products but when you look at it at a customer company level the vast majority of our top customer companies by across all three services. And that kind of makes sense when you think about it because you've got different developers who tend to focus in different parts of a process, so within customer companies you look at our top 500 customer companies – vast majority by multiple products.

Okay. Thank you.

Thank you. Our next question comes from Bobby Burleson with Canaccord Geuity. Please proceed with your question.

Yes, good morning. Thanks for taking my questions.

Good morning. Victoria M. Holt - President, Chief Executive Officer & Director: Hi.

So, I was just wondering Vicki, if we look at the MIM and the thixo molding exiting those businesses wondering when the initial decision was made to get into those services. And what if anything has changed in that valuation process? Victoria M. Holt - President, Chief Executive Officer & Director: Yes. Good question. Yes. So, the company is started working on MIM and thixo technology development as early as 2013, it was a very challenging technical problem to solve and team did a fantastic job on re-inventing the manufacturing process for metal injection molding and thixo molding in a way that we could do it with cost effectively with low volumes. So, huge breakthrough. But I think what we – and the market itself, in terms of the total size of the market, I think we did a pretty good job assessing that and the market growth rates in that market, we did a pretty good job assessing. What we didn't really understand until we got into this market, is that there are the volume of unique new parts being designed every year is lower than they are in some of the other processes that we serve.

Okay. Victoria M. Holt - President, Chief Executive Officer & Director: Like injection molding of thermoplastics, injection molding of thermo stuff like, liquid, silicone rubber or even machines part, now because of that actual volume unique parts is lower that's where we see the philosophy for our model to really make sense. And we just did not see that this was going to be able to scale to the level that things need to scale for our digital manufacturing models and meet our profitability target and also had a very – it's a niche manufacturing technology and used of lot of sales and technical sales resources to close relatively few part.

Okay. Victoria M. Holt - President, Chief Executive Officer & Director: And so, this allows us to redirect those resources on metal – on injection molding for thermoplastics, injection molding for thermos stuff or CNC machine parts and get a little more productivity from that sales and market expense. So, it's a combination of lower volume of unique products that come in that we really didn't expect and getting that sales and productivity out of sales and marketing.

And probably that also creates challenges from a profitability perspective because we've got the equipment and the staff that is underutilized from a capacity perspective, so we are actually carrying the cost to run more volume through but, having the lower volumes...

Understood. Okay. Thank you. And then just one more quick one, strategic engagements curious once the agreements reached how long it takes for that to kind of flow through in organization in terms of using Proto Labs? Is that a long process once an agreement is reached, is there additional selling that you guys need to do within the organization, just a little bit more color on how we can think of that going forward? Victoria M. Holt - President, Chief Executive Officer & Director: Right. So at least, we want to talk about an example like J&J that helps you get a appreciation for this. So, we talked about the J&J Ethicon division, it's one division of Johnson & Johnson and the advantage that we got within that division by having senior leadership really understand our model that helps drive through much more quickly because the senior managers will go to their developers and their engineers and really encourage the use of Proto Labs and it does accelerate our growth within that group. We still have to penetrate other products of Johnson & Johnson. So it's a longer – it's a process that takes time and it is the use of word agreement not only to get a court agreement, it's really getting that understanding by the customer how to unlock the power for the labs because we can bring so much value to them but usually it takes somebody who's got some strategic insight that can kind of understand how to incorporate us into their business.

Okay. Great. Victoria M. Holt - President, Chief Executive Officer & Director: So, it takes a little bit of time. It takes a very different kind of selling engagement which we're early – it takes time for us to kind of shift our selling model, our transactional selling model has been very successful for this company. So, we are not abandoning the transactional selling model what we are doing is adding a strategic selling model on top of it. So it takes some time.

Okay. You know, there was one more thing I forgot to ask. Thanks. John, one of the things that was mentioned I think was Q1 year-over-year growth organically 16% on a constant currency basis, did you guys fall within your 20% plus target range?

No. Constant currency had about a 70 basis point impact on the quarter. So, yes, I mean, we are below that target range on the legacy business.

Okay. Thanks.

Thank you. Our next question comes from Jim Ricchiuti with Needham & Company. Please proceed with your question. Jim Ricchiuti - Needham & Co. LLC: Thank you. Good morning. Vicki, you've alluded to I think with the parts business you have a decent window on demand almost in real-time. And I'm wondering how that business attract as you went through the quarter and maybe what you are seeing thus far in the month of April. And if there is any flavor you can give us geographically? Victoria M. Holt - President, Chief Executive Officer & Director: So, how attractive is – January was slow. January was a lot slower than what we had expected to be. So, once again, I think there is a little bit of – wind back to January and the rhetoric in the industrial space. There was a lot uncertainty in the market place. So, I think we saw some companies being very cautious on spend. It continued to build pace throughout the quarter, so continue to move up, but there wasn't a big spike in March, it's very steady, steady improvement. And it is that state at where we are today that is informing our second quarter guidance, and as John said, we are on-demand manufacturer with a 7 to 10 day backlog of orders. As we see a change, we will adjust that guidance. So, as we see that improve, we will adjust it. But at this point I think it's prudent for us to be conservative in that guidance given where we are. Jim Ricchiuti - Needham & Co. LLC: Fair enough. Next question – final question from me is just on new products. Given the exit from the MIM's market and thixo, how should we think about the bogey for new products? I mean, I guess you are in these areas for about three years or so and representing about 1% of revenues. Is there a way for us to think about new products for you guys, and what you would like to see from them over a certain period of time? Victoria M. Holt - President, Chief Executive Officer & Director: Yes. So, let me give you an example of a couple of products we've launched that are scaling at the rates that we expected we need for our model. One is liquid silicon rubber, it's scaling very, very well with strong year-over-year growth, strong number of new parts volumes, new unique parts coming through. And the other one would be our lathe turn parts, new process that's launched in CNC machining that's tracking where we want it to be. We learned a lot through this, the MIM and thixo launch around what we need to really understand with a new service that we launch and how it needs to fit into our model. So, I don't think we will make this mistake again. There are new processes that we have in Proto Works in R&D that fit our model very well, and then we will be launching new services as we go forward that will broaden the TAM and allow us to bring the Proto Labs' unique digital business model to a broader number of services. So, we will continue to do that, and I think we learned a lot through this process. Jim Ricchiuti - Needham & Co. LLC: If you were to look at LSR and the lathe turn parts, is there any way for you to help us maybe get a better handle on what – how meaningful that's been other than saying it's scaling I am just kind of curious. Is there any way for us to get our arms around that? Victoria M. Holt - President, Chief Executive Officer & Director: We don't really break out individual materials or processes. I could just say that those are definitely contributing in a meaningful way to our growth. Although the biggest growth is I've said a number of times is bringing in more product developers and having them buy our full suite of services. Jim Ricchiuti - Needham & Co. LLC: That's helpful. Thanks.

Thanks. Our next question comes from Michael Weisberg with Crestwood Capital. Please proceed with your question.

Hi, everyone. When I think of your major end markets, I think of aero, medical, auto and I am wondering, first have you seen the parts slowdown in those end markets? Victoria M. Holt - President, Chief Executive Officer & Director: Not as much in medical, not as much in aerospace, auto no, industrial machinery is the biggest category where we have seen a drop off. It is difficult because it's a customer by customer situation as well, so individual customer companies are just so many of them, so you got to know what their story is. So, I'm not saying there wouldn't be any in an auto category or in a medical category. But generally if you look at these top 100 customer companies, we saw an impact – greatest would be in industrial machinery and equipment.

And I think I would add to that that as you look at our revenue across industries, it's more than just those three, a good portion of our revenue is from industries outside those that you just named.

Okay. And did you see it more in the United States than in Europe where the revenue growth was faster? Victoria M. Holt - President, Chief Executive Officer & Director: Yes.

Interestingly, because I'm thinking back, didn't you have a real parts slowdown in Europe like third and fourth quarter of 2014? Victoria M. Holt - President, Chief Executive Officer & Director: Yes.

That one was a – maybe a similar type situation, but really was a year-over-year comp challenge as well, and as we look back to 2013, we had really large orders coming through. So the growth in Europe at that time had as much to do with the year-over-year comp as the economy.

And I guess, you threw out semiconductors and gas, is that – company is making industrial equipment for the gas end market, is that how we're supposed to read that? Victoria M. Holt - President, Chief Executive Officer & Director: Yes. I mean, again I can say, we took a look at these top few hundred customer companies and try to understand and it was a theme around when you really looked at boy, this company is down a little bit, why you look as well boy they serviced oil and gas, this one serviced semiconductor. This is a 3D printing company. So you can kind of see a theme with some of these industries that are impacted. Victoria M. Holt - President, Chief Executive Officer & Director: And we match that analysis up with companies whether going through financial challenges and reporting like revenue declines year-over-year or layoff or other things like that. When you look at those customers, our company is that our customers were seeing impacts of those businesses on that.

Yes. Because you don't do much direct to oil and gas, it's just industrial companies that have end customers there that might have been slowing as a result. Victoria M. Holt - President, Chief Executive Officer & Director: Correct.

Correct.

All right. Got it. Small... Victoria M. Holt - President, Chief Executive Officer & Director: Sorry, just wanted to keep adding with it, despite those things we still grew the business by 16%. So I think, yes, you got a look at these little headwinds in a few areas, but there are enough tailwinds and the growth in our business model to still grow that 16%.

Right. And then Alphaform there was the resins that were in the others business, and presumably that's goes away? Victoria M. Holt - President, Chief Executive Officer & Director: Yes.

Yes.

And then it looks like there was maybe $1 million non-3D from Alphaform and I don't know where you put that and does that stay or go away also? Victoria M. Holt - President, Chief Executive Officer & Director: That will stay. That is injection molding and fits in that category.

So that part will stay. Victoria M. Holt - President, Chief Executive Officer & Director: Yes.

And is the thought on out the same, you expect to make money there second half this year? Victoria M. Holt - President, Chief Executive Officer & Director: Yes. So we're now six months into the integration process and we've learned a lot about the trajectory that we're going to be able to move our margins. They will steadily improve and we do believe that we will be breakeven by the end of the year. We – so it's a little bit slower than what we had expected. We see no reasons why we won't be able to over time move the Alphaform 3D printing business to margins that are comparable to what we have in our legacy 3D printing business. So no reason, why we can't get there but as we look at the trajectory after six months into integration, we think it will be pushed out maybe a quarter or so to really get to that.

So, you will lose money, but at a lesser rate in the second half? Victoria M. Holt - President, Chief Executive Officer & Director: Correct, correct.

And then what... Victoria M. Holt - President, Chief Executive Officer & Director: There will be steady improvement in margin.

And then presumably be profitable in 2017? Victoria M. Holt - President, Chief Executive Officer & Director: Yes.

Correct.

And so the core level of revenues at Alpha is going to be what like $3 million or $4 million a quarter?

Yes. About $4 million and then growing with as we turn on the 3D printing marketing and sales.

That's great. Thanks a lot. Victoria M. Holt - President, Chief Executive Officer & Director: Thank you.

Thank you. At this time, I would like to turn the call back over to management for closing comments. Victoria M. Holt - President, Chief Executive Officer & Director: Thank you again for joining us today. I want to thank our employee around the world for their continued passion and executing our strategy. We remain very confident about our outlook for enhanced revenue growth and profitability during 2016 and beyond and we look forward to updating you next quarter. Thanks very much.