Greeting, and welcome to Proto Labs Q2 2016 Earnings 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. I would now like to turn the conference over to your host, Mr. Jason Frankman. Thank you. You may begin.

Thank you, operator, and good morning, everyone. This morning before the market open, Proto Labs issued a press release announcing its financial results for the second quarter ended June 30, 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 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 cost of stock compensation, amortization of intangibles, impairment on assets associated with discontinued manufacturing processes, charges related to the exit of facilities 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…

Thank you, Vicky. Revenue in the second quarter was $75 million, an increase of $11 million or 17% over the same quarter in 2015. Legacy revenue in the first quarter came from 13,519 unique product developers. This represented a 14% increase over the second quarter of 2015. Our unique product developer account does not yet include Alphaform as this information is not available in a comparable format at this time. Average revenue per product developer decreased 4% compared to the second 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 and CNC machining businesses. Gross profit for the quarter was $42.2 million, an increase of $4.7 million over the comparable quarter of the prior year. Gross margin was 56.4%. Alphaform represented a negative 310 basis point impact on our gross margins in the quarter. Excluding Alphaform, gross margin on the legacy business was 59.5% as compared to 58.4% in the first quarter, and 58.7% in the second quarter of 2015. As anticipated, we saw improvement in the gross margins in our Alphaform business, as well as our legacy operations in both the United States and Europe this quarter. These improvements reflect the manufacturing efficiencies achieved through our Lean/Continuous Improvement process that we recently embarked upon. Our operating expenses were $27.4 million or 36.5% of total revenue for the second quarter of 2016. These expenses include non-recurring expenses of $873,000 related to the exit of our metal and magnesium injection molding operations and expenses associated with the exit of facilities in North Carolina and Japan. Adjustment for those items, operating expenses were $26.5 million or 35.4% of revenue. Sales and marketing expense totaled $11.5 million or 15.3% of second…

Our first question comes from the line of Troy Jensen with Piper Jaffray. Please state your question. Troy D. Jensen - Piper Jaffray & Co. (Broker): Vicki, I guess, I wanted to focus on the sales disruption comment you made. I think all of us knew about Jackie's departure, but can you just kind of quantify how much turnover has happened in your sales organization? Victoria Holt - President & Chief Executive Officer: Yeah. Thanks, Troy. Yeah. We've had – there's been a couple of changes in sales management; the sales leader in North America and one of the sales managers, who actually had an illness. And so with that, if you think about our sales force, it's a relatively young sales force. We added a lot of sales people in 2015 and even in the first part of 2016. And the sales manager to salesperson ratio is very important and that relationship is important. Now we did bring in a couple of really strong sales managers in the second quarter. They're new. They're good. They're getting their feet on the ground. So that, coupled with the new sales processes that we're putting in place and the discipline around moving sales through the sales cycle from point of upload, all the way through to close and the stages that they move through and some of the metrics that we're now measuring, which are more leading indicator metrics around the quality of the calls, the relationships, the quality of the interactions that are taking place, is just causing a little bit of disruption. As you think about it, change always causes a degree of disruption, particularly as people are adopting new practices, learning how to master and really use those practices effectively. So we're in a bit of a transition period, but I'm really pleased to see that we're starting to get some excitement among the sales team with the tools and the training that we're giving them; and I think we're going to see some good traction from that. Troy D. Jensen - Piper Jaffray & Co. (Broker): All right. Understood. And then, maybe a couple for John. Can you just talk about linearity through Q2? I mean, was the quarter kind of always tracking a little light or did something happen in the last month?

Yeah. I think it was tracking light pretty much throughout the quarter. And I think there were pockets where we saw some nice uplifts in orders and had strong growth in Europe and Japan. But for the most part, it was tracking relatively light through the quarter. Troy D. Jensen - Piper Jaffray & Co. (Broker): Okay. Then, my last question and I'll cede the floor, if I look at your 3D business, it looks like it's been about $9.1 million for each of the past three quarters, and this is after reporting just spectacular growth post the acquisition. So, curious to know why you're seeing such a slowdown in sequential growth here in the 3D business? And I get the Alphaform business, maybe that's fallen off, but maybe can you separate FineLine versus Alphaform?

Yeah. I think if you recall the conversation related to Alphaform, we acquired some contracts that we knew that we had to run off related to the large volume production of 3D printed parts. So we had revenue both in the fourth quarter and the first quarter related to those contracts that, as we wound those down, that's getting reflected in those numbers. So if you look at the progression of the legacy business, it's continuing to progress and grow; and grew about $400,000 in the quarter. Victoria Holt - President & Chief Executive Officer: Yes. Troy D. Jensen - Piper Jaffray & Co. (Broker): All right. That's fair. Well, good luck in the second half. Victoria Holt - President & Chief Executive Officer: Thank you.

Thank you.

Our next question comes from the line of Brian Drab with William Blair. Please state your question. Brian P. Drab - William Blair & Co. LLC: Hey. Good morning. Victoria Holt - President & Chief Executive Officer: Good morning, Brian. Brian P. Drab - William Blair & Co. LLC: Okay. First, just on the G&A sequential step up, and I may have just missed this, but what explains the big step up sequentially and what are you expecting for G&A as a percentage of sales for the year at this point?

So I think there's a couple of things related to G&A to talk about. One is the non-recurring expenses. So we had a charge related to our MIM and thixo equipment as we discontinue those businesses, as well as some costs associated with the exit of facilities in North Carolina. And then, we've also got (24:40) in Japan as well, as we entered into our new facility. So we've got some duplicative costs in Japan, as we were executing the move and exiting the old facility. So we've got some of those costs there. In addition to that, we built the budget this year assuming higher revenue growth than we're experiencing. And developed a plan related to executing to achieve that growth. That included certain projects related to R&D and other integration of Alphaform and other matters like that. And we've been executing on those. But as a result of that, our spending levels are a little bit higher assuming that we would have higher revenue and that's something we're going to have to adjust here in the back half of the year. Brian P. Drab - William Blair & Co. LLC: Okay. So it sounds like a lot of these non-recurring expenses continue into the third quarter you mentioned. And they actually – some new ones are going to be hitting in the third quarter, at least they're stepping up. But as we move into fourth quarter and the beginning of next year, is it fair to assume that we're going to have less of this non-recurring, going on that will be down with Japan, the consulting related to sales, the recruiting cost, the MIM and thixo, we're past that. I mean this is kind of an unusual period.

Yes. So we will have duplicative costs in Japan and as well as costs associated with the move through the third quarter. And we'll have some of those consulting cost and recruiting costs related to our sales force that will be in the third and probably a little bit in the fourth quarter, as well. But yeah, there is an unusual spike in those costs that will normalize. Brian P. Drab - William Blair & Co. LLC: Okay. And then in the first quarter, you saw a material decline in orders from roughly 20 customers of your top 100 customers, at one point you explained it in this context. And I'm wondering, A, how did orders from those customers compare with the first quarter – in the second quarter. And then, B, regardless of what those specific customers did, can you share a comparable analysis from the top 100 from 2Q 2015 versus 2Q 2016. And then, if I could add a C, as well, I mean, what industry verticals still are the sources of weakness? Victoria Holt - President & Chief Executive Officer: Okay, Brian. Yeah. So, basically when you look at those top customers that showed some weakness in the first quarter, we see a similar weakness. They're kind of flattish compared to first quarter, but when you look at it compared to prior year, we're still seeing that year-over-year weakness with those specific customers in those specific verticals. And that brings – it brings you to the look of the vertical. So when you look at our industry verticals – I'll just focus on the Americas since that's really where we're having the challenging year-over-year growth below our expectations. I mean, we're still growing, still grew 6%, but as you know, that's far below our expectation. So…

The majority. Victoria Holt - President & Chief Executive Officer: ...the majority of that 30% we think is production. Brian P. Drab - William Blair & Co. LLC: Okay. Okay. And then within CNC and 3D printing, is there anything you'd consider production making end use part? Victoria Holt - President & Chief Executive Officer: There's probably some, but small. I mean, I would think in CNC and 3D printing, you're talking 5% or less would go into production part. Brian P. Drab - William Blair & Co. LLC: Okay, okay. I'll get out of the way here. Thank you very much. Victoria Holt - President & Chief Executive Officer: Thanks, Brian.

Thanks, Brian.

Our next question comes from the line of Ben Hearnsberger with Stephens. Please state your question.

Hi. Thanks for taking my question. I'm curious, when you think about planning for your 3D printing business over time, how do you think about growth in that segment maybe over the longer term? Victoria Holt - President & Chief Executive Officer: So first of all, we're an on-demand manufacturer. So we really have to look at where the order activity is coming and how quickly that's ramping and what we're seeing from quoting activity in order to anticipate capacity additions. We've now got in place, in both North America and in Europe, substantial floor space in order to continue to add equipment. So what we do in order to determine when we need to add another piece of equipment is we take a look at the current volume of orders, the quoting activity, the prospect growth, and the lead time associated with pieces of equipment to determine when it makes sense for us to add. So we basically will be adding additional capacity as our demand continues to grow. And we've had good strong demand. As I mentioned, our 3D printing business is up 29% year-over-year in the second quarter. So we will be adding equipment in the individual processes as we see that demand occur.

Is it safe to assume – and I know it's a smaller base, but is it safe to assume you expected 3D printing piece of your business to outpace your legacy business, of course, this year but over the next few years? Victoria Holt - President & Chief Executive Officer: I think for the next couple of years, we really think that 3D printing plays a very important role in the product development life cycle and particularly in the concept phase. And it also is a very novel technology that engineers are excited to be able to utilize. So we're really happy to have that within our portfolio. It gives us that full pocket value from the customers. So we think that that will be growing and reaching something around 15% of our sales as it gets to more of an equilibrium.

Okay. And John, can you give us the gross margins for the legacy business, including molding and milling, and then break out FineLine and Alphaform?

Yeah. So, Alphaform had a 310 basis points impact on our gross margins in the quarter. So that leaves the legacy business at 59.5%. And FineLine continues to operate in that, just above 50% range. So the injection molding and Firstcut are just a shade over 60%.

Okay. And how does that for the legacy business, molding and milling, how does that compare to 2Q 2015?

So, it's up about 80 basis points.

Okay. Do you see a lot of runway there? I know you're doing a lot of things around lean and some inventory planning. Do you see a lot of room to continue to grow that? I know it's very volume dependent, but...

Yes. It's a little volume dependent. But I think we're just beginning to implement our lean process improvement. Some of that will impact or reduce our inflationary costs and offset some of that to allow us to maintain. But we do see that there's opportunity that continues to drive margins there.

Okay. And maybe one last one for Vicki. On the sales model, I know you mentioned there are some things that work and there are some things that are not working. Can you walk through some of the best practices as you look across your organization and some things you want to push out across the organization? And then, maybe some of the things you're trying to step away from? Victoria Holt - President & Chief Executive Officer: Yeah. So, let me put it into two buckets. We have a historical approach that Proto Labs has used really since the beginning of the company's start-up and that is, marketing brings in prospects, and our sales team works to move those prospects and uploaders to a close transaction. And within that historic approach, there are some opportunities for more best practices than we've been deploying. And some examples that I'll use will be: the approaches that our sales managers need to be taking to coaching and mentoring and developing the sales team; the use of metrics in doing that, particularly leading indicator metrics that are really tied to the close rates; the use of moving a customer through sales stages in a sales cycle and measuring how each sales rep is moving their customer base through that – stages of the sales cycle and help coach them so they can continue to improve. So there's certain aspects of that, that blocking and tackling of driving that more transactional part of the sales activity, that we're really focused on improving. But longer term, the piece that we've got to start layering into our model is a stronger strategic selling engagement. We have been adding some strategic account managers to our team, but the approaches that we're taking, the sales process around strategic account management has not been deployed and a process has not been put in place to the degree that they need to get the success we need. So we've now developed a roadmap of how we want to move that strategic selling model forward, and it will take us time to implement that. And then, will take us even more time to build the relationships with the customers that are going to bring the result. But it is that engagement, coupled with continued productivity improvement in our traditional model, that's going to allow us to restore the revenue growth rates in the Americas that we've seen in the past.

Okay. Thank you very much.

Our next question comes from the line of Bobby Burleson with Canaccord. Please state your question.

Hey, guys. So, just a couple of quick ones. I was wondering, on the cutting tools correlation that you mentioned, whether or not that's something that leads or lags, and by how much, your Firstcut business? Victoria Holt - President & Chief Executive Officer: Yeah. Bobby, I don't know if it's a leading or lagging. What I will say is cutting tools are disposable. It's a disposable that's consumed by machine shops or injection molding tooling shops as they're making parts or tools. And the fact that it's down 9% tells you that those consumables – that segment is a little bit weak right now. So despite that, we grew in the Americas by 6%. So is it a leading or a lagging? Frankly, I don't know.

Okay. And then, you called out, obviously, the sales disruptions as part of the impact in the Americas. And I'm wondering, can you quantify that in terms of how much growth you might have expected had you not had this transition that you're going through? Is there any way to kind of get a sense for the size of the impact? Victoria Holt - President & Chief Executive Officer: I think it's impossible to really put a firm number on it. I will tell you, I do think there has been some disruption. Any time you have a leadership change disruption occurs, and any time you have new processes you're having to learn, new approaches, new metrics that you're being measured against, it's going to cause a degree of disruption. It's very difficult to actually be able to quantify that, but I think it's all about change management. I'm really sure that the changes we're putting in place are going to be positive changes. We're seeing some real positive comments from our sales team. They like the better structure. They like the coaching they're getting. They're starting to see little better results on moving things through those stages that I mentioned, the stages of selling. So I think we're doing all the right things and we just have to stick to it and stay committed to the discipline of executing it, and I'm confident the results will be there.

Okay. And then, Europe grew nicely, and you mentioned you're benefiting from German presence and your Alphaform brand. And I'm wondering sort of what's the conviction on continuing growth in utilization levels at Alphaform and the associated benefits to gross margin as we look at the balance of this year? Victoria Holt - President & Chief Executive Officer: Yes. So, as you know, we turned on marketing as late as May in Alphaform. We didn't want to turn on marketing for the 3D printing Alphaform until we had all of our manufacturing processes with the kind of software that we use to optimize and be able to turn orders. So we turned that on in May; we saw a really nice jump in quoting. We're seeing a really nice jump in how order is coming through the web which are orders that are priced based on our geometry so we're feeling good about that. But we still have a ways to go, but we're making some great progress. As you know some of our traditional customers who were under some very burdensome contracts fell offs, we've got to rebuild that sales revenue with revenue that we generate from our sales and marketing engine and from our web. And it's starting to happen, and so, it's just going to take a little bit of time.

Okay. And then, just one last one. You're talking about how important the strategic engagement is with customers going forward. And I'm wondering, would there be potentially different pricing arrangements? If strategic customer decided to maybe use Proto Labs kind of at broadly signed up for your services till we get some kind of volume discounting? Or sort of – what are the incentives, I guess, the financial or economic incentives for the customers? Victoria Holt - President & Chief Executive Officer: Yeah. We have such a valuable business proposition to the customers. So, we reduced their time to market, we can save millions of dollars in R&D and get them to revenue faster. We can take a look at economic models around low volume production that are completely different than paradigms they've seen before because of our strong digital business manufacturing model. So, I don't expect major discounting. But the issues – the challenges we have is, we've got to engage the customers strategically for them to understand our business model and then understand what challenges are they having as a company, and how can Proto Labs, very differentiated digital business model help them solve those problems. That's the consultative selling approach. That is very different than coming in to a customer and saying, I make real parts really fast. What does that mean? We've got to really help the customers understand how our business model can help them solve their really significant tangible business issues and then have us deliver tangible sustainable business outcomes. That's the shift (43:34).

Great. Thanks. Victoria Holt - President & Chief Executive Officer: Yeah.

Thank you.

Our last question comes from Jim Ricchiuti with Needham & Company. Please state your question. Jim Ricchiuti - Needham & Co. LLC: Thank you. Vicki, I'm wondering as we see some of the actions you're taking in the Americas on the sales side to begin to try to accelerate growth, where will we see it initially? Will we see it more in the injection molding or in the CNC machining area? I'm wondering is one area of the business more of a leading indicator as you make these changes? Victoria Holt - President & Chief Executive Officer: Yeah. So, I think you could see it in any one of the services. Remember our business model, we've got that product developers at the center of our universe. So what does that product developer need to take his product to market faster. In some cases, it will be 3D printing, in some cases, CNC machining, and other injection molding. So, I think you'll see it across any of the services. All of them moving at the same pace. Same time is probably never going to happen. But the point, I think, we're going to be a lot more effective in meeting the needs of the customer and closing those individual opportunities as they come forward to us with some of the things, the blocking and tackling that were taking place here in the third quarter, late second and as we go into third quarter. So, you could see it in any of the processes. Jim Ricchiuti - Needham & Co. LLC: All right. And then as far as bringing on, I believe you alluded to him as – that person as a Chief Revenue Officer. It doesn't sound like there is a – necessarily an eminent development there. But can you give…

Ms. Holt, I am showing now further questions at this time. Would you like to make any closing remarks? Victoria Holt - President & Chief Executive Officer: Yes, please. Thank you. Thanks, again, for joining us today. I want to thank all of our employees for their continued hard work and dedication to Proto Labs. We remain confident about our long-term outlook and we look forward to updating you next quarter. Thanks very much for joining us.

This conclude today's conference. Thank you for your participation. You may disconnect your lines at this time.