Proto Labs, Inc. (PRLB) Q3 2017 Earnings Report, Transcript and Summary

Greetings and welcome to the Proto Labs' Third Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would like to turn the conference over to your host, Mr. Dan Schumacher. Please go ahead, sir.

Thank you, operator, and good morning, everyone. This morning before the market opened, Proto Labs issued a press release announcing its financial results for the third quarter ended September 30th, 2017. The release is available on the company's website at protolabs.com. Before we get begin, I would like to remind everyone that our discussion will include statements relating to future results and expectations that are or may be considered forward-looking statements and subject to many risks and uncertainties that could cause actual results to differ materially from expectations. Please refer to our earnings press release and recent SEC filings including our Annual Report on Form 10-K for information on certain risks that could cause actual outcomes to differ materially and adversely from any forward-looking statements made today. Additionally, the results and guidance we will discuss include non-GAAP financial measures consistent with our past practice. Please refer to our press release within the Investor Relations section of our company website for a complete reconciliation of non-GAAP to GAAP results. Now, I'd like to turn the call over to Vicki Holt, President and Chief Executive Officer of Proto Labs. Vicki?

Thank you, Dan. Good morning everyone and thank you for joining us on our third quarter conference call. With me today is John Way, our Chief Financial Officer. The Proto Labs team produced a record performance in the third quarter by many different metrics. We reported record quarterly revenue of $88 million. This represented an increase of 12.7% over the prior year and was at the high end of with our guidance range for the quarter. Adjusting for discontinued services and the impact of foreign currency, revenue growth was 13.8% over the prior year. Our revenue growth was driven by serving a record 16,909 product developers this quarter, an 18.5% increase over the prior year. Looking at our performance by region, our focus on sales productivity continues to show positive signs. Revenue in the United States, our largest market, produced record revenue and strong growth of 13.3% over the prior year. Europe revenue will also a record, and grew 15.9% on a reported basis. Year-over-year European revenue growth benefited from foreign currency exchange rates. Adjusting for currency, revenue growth was 11.7%. Revenue in Japan declined 8.6% in constant currency. Although our relatively small revenue base in Japan often results in quarter-to-quarter variability, we are disappointed in our third quarter results in the region. Winning business in Japan often requires developing longer term relationships in order to effectively earn sustainable business with our customers. The value our services bring to the market is strong, but the approach we take to engage customers will need to be tailored to the market. Both David Fein and I had been in Japan in the past two months to work with the team and review strategy to drive sustainable performance. We're putting in place many of the disciplined processes that are now showing results in the United States and our evaluating potential distribution opportunity to expand our market presence. Moving to revenue by service, all our services delivered record level of revenue in the third quarter. Injection molding increased 6.5% over the prior year. CNC machining grew 24.7% and 3D printing grew 12.7% from the prior year. Injection molding grew $2.7 million or 5.7% sequentially. This growth included the early results of our on-demand manufacturing service which we launched in June and expect to be a key driver of our injection molding growth over the long-term. Our CNC machining service continues to show strong this quarter. Our strong performance in the service is evidenced of the progress we're making in our sales productivity initiatives. As we discussed last quarter, enhancements we've made in our manufacturing software also contributed to our CNC growth. We will continue to make investments in our CNC service to capture more market share. 3D printing produce growth of 12.7% compared to the same quarter in 2016. Growth was solid in the Americas and was essentially flat in Europe. We achieved record GAAP net income of $13.2 million in the third quarter or $0.49 per diluted share. Our non-GAAP net income was also a record of $50.0 million or $0.56 per diluted share and exceeded our guidance range for the quarter. Overall, we're very pleased with our financial performance. We produced revenue and earnings at the top end or above expectations continuing to serve an increasing number of product developers and generate a strong cash flow. On October 6th, Proto Labs' employees celebrated Manufacturing Day as celebration of modern manufacturing to inspire the next generation of manufacturers. We hosted customers at our Plymouth, Minnesota facility for the event. Proto Labs has a strong business model that provides tremendous value to our customers and Manufacturing Day was another good opportunity for our Executive team to highlight our capabilities and connect with customers. Our line-up of speakers included Dr. Stephanie Board, Vice President of R&D at Abbott Electrophysiology Group. She shared with the audience the case study for the launch of a medical device commercialized this past year. Proto Labs was able to not only help Abbott launch this product on a tight timeline and on-budget, but our fast and cost-effective model allowed them to test multiple designs of the product with surgeons and ensure they landed on the design which best fit the needs of their customers. It continues to be very inspiring to see how Proto Labs impacts our customers' business in such a positive way. Developing relationships with these types of customers helps us to understand why they use our services and why they don't. This knowledge and insight, it helps guide our priority to expand the envelope of our services to be able to fulfill more of our customers' needs. In the past year, our R&D investment has allowed us to expand our suite of services to include the overmolding, insert molding, PolyJet technology 3D printing, multi-jet fusion 3D printing and injection molding on-demand manufacturing. We are excited about an opportunity to utilize our digital manufacturing model to aid our customers in accelerating innovation. Understanding our customers better is prevalent all -- across all our region. In addition to the Manufacturing Day event, we also had the fortunate opportunity to host several Japanese companies as part of the Annual [Indiscernible] Management Mission, sponsored by Toyota at our Plymouth, Minnesota facility. This year the [Indiscernible] event visited Boeing, GE Digital, Caterpillar, Harley Davidson, Stratasys, Under Armour, and Proto Labs. This event allowed us to showcase our capabilities to 39 Executives from 29 Japanese companies and engage in dialogue about how we accelerate innovation and add value to their business. It was exciting to learn how their -- about their challenges and how we could be the solution. We left the day with a context that we're utilizing to develop relationships and bring additional business to our Japan region. We entered the year with three primary priorities for 2017 and during this call; we have demonstrated our progress and achieving these objectives. The first priority is to drive productivity in our sales marketing investments. During this call, we've highlighted sales productivity to our continued revenue growth across all our services. Although there's more progress to be made in each region early returns are positive. Our second priority is to continue to expand the envelope of our existing services to be able to fulfill more of our customers need. We have made significant progress during the year and this will -- can be an ongoing priority as we try to accelerate innovation by providing more of a total solution to our customers. A third priority for the year was to achieve strong gross margin. While our gross margin metric do not meet the goal we stated at the beginning of the year, we do feel we've made a stride on this front. We discussed the number of services that we launched in the past year adding capabilities and bringing them to market requires investment and resources, focus and effort. Many companies are losing money for a period of time during product launch. We have not only launched significant new service expansion. We have been able to bring those capabilities to market while maintaining our overall gross margins. This was accomplished through planning and execution during product introduction combined with achieving the benefits of our being process improvement initiative called for Pro Excellence in our existing services. As we had discussed in prior call, our margins on 3D printing in Europe are not what we would like them to be and will continue to be an area of focus. John Way will discuss gross margin details during his comments. And finally as you recall we announced in the second quarter conference call that our VP, GM of the European region John Tumulty has decided to retire. After a thorough search, we are excited to welcome Bjoern Klaas to our Proto Labs team as VP, GM of the Europe. Over the past five years, Bjoern has held key position with global power supply our [Indiscernible], most recently as the company's VP and GM of the ColorMatrix Group. Bjoern's experience in international leadership and his knowledge of the manufacturing industry will be invaluable to continue to grow our European operations. I would like to thank John Tumulty for all he has done for Proto Labs and for his continued support as he transitions the role to Bjoern through the end of the year. Third quarter was a very good quarter for Proto Labs and we are committed as a team to continue to deliver more. We remain focused on accelerating innovation by helping our customers get their products to market as efficiently and effectively as possible. We will continue to work with our customers to help them understand how our on-demand manufacturing service can help them mitigate risk, reduce cost and unlock new revenue streams and low volume now customized products. And with that, I'd like to turn the call over to John.

Thank you, Vicki. Revenue in the third quarter was a quarterly record of $88.1 million, an increase of $9.9 million dollars or 12.7% over the same quarter in 2016. Last year's third quarter included a $1.1 million of revenue related to metal injection molding and magnesium injection, services we have discontinued. Adjusting for the impact of discontinued services and the positive $446,000 impact of foreign currency, revenue growth was 13.8%. Our revenue this quarter came from 16,900 unique product developers and 18.5% increase over the last year. Average revenue per product developer increased approximately 2.5% sequentially. Gross profit for the quarter was $49.3million, an increase of $4.6 million or 10.3% over the comparable quarter of the prior year. Gross margin was 56% of revenue, a decrease of 50 basis points from the second quarter. As Vicki discussed in her comments, the launch of new services has an impact on gross margins until there is sufficient volume to operating scale. In addition our 3D printing business in Europe had a negative 240 basis point impact on our consolidated gross margins for the quarter. As we've discussed this challenging year has proven to be more difficult than originally anticipated. We have action plans to drive incremental volume through our operations and are pursuing options to reduce our cost structure to improve this performance. Operating expenses totaled $29.9 million or 34% of the total revenue in the third quarter of 2017. As a percentage of revenue, operating expenses were down from 36.5% last quarter and 35.5% in the third quarter last year. Sales and marketing expense was 15.7% of revenue down from 17.8% last quarter. This sequential decrease was due to the normal tradeshow activity in all the regions in the second quarter of each year. Our operating income increased 14.3% to $19.4 million or 22% of revenue in the third quarter compared to $16.9 million or 21.7% of revenue in the same quarter last year. Net income totaled $13.2 million resulting in diluted earnings per share of $0.49. Adding back the after tax cost to stock compensation, amortization of intangibles and the effect of unrealized gains on foreign currency or non-GAAP diluted earnings per share in the quarter for $0.56. Now turning to our cash flow, we generated $19.6 million in cash from operating activities this quarter. Capital spending was $10.9 million during the quarter. With the continued strong cash generation of our business, our cash and investment balances increased $10.9 million during the quarter to $227.8 million on September 13th. The investments we've made in our business to engage our customers and expand our capabilities to meet more of their needs are demonstrating returns and helping us accomplish our financial goals of driving revenue growth and operating earnings over the long-term. Now I would like to turn to our expectations for the fourth quarter. We currently expect Q4 revenue to be in the range of $85 to $90 million. This revenue guidance includes an estimated $1 million in foreign currency benefit compared to the prior year. Adjusting for the impact of discontinued services and currency, this guidance will result in revenue growth of approximately 15% for the full-year. Moving to earnings guidance. We estimate gross margin to be flat to slightly down sequentially. Each year, there's pressure on our fourth quarter margins due to the holiday indication pay in each of our regions. We estimate our adjusted non-GAAP operating expenses will remain relatively consistent at approximately 32.5% of revenue. We currently estimate our tax rate to be approximately 32.5% to 33% in Q4. Taking into consideration all of the above, we expect our quarterly non-GAAP EPS to be between $0.52 and $0.58 per share in the fourth quarter. That concludes our formal remarks. Now Vicki and I will happy to take your questions. Natalia, can you please open up the lines for Q&A.

Thank you. [Operator Instructions] Our first question comes from Brian Drab with William Blair. Please proceed with your question. William -- Brian your line is live.

Hello.

Hi, Brian.

Yeah, can you hear me?

Yes.

Yes, we can hear you now.

Troy, you are on.

Troy is here.

Troy is our next question from Piper Jaffray.

Thanks. I think you're great results left Brian speechless.

That’s right.

Hey, so just I mean the...

What’s going on? Hello.

Our next question comes from Jim Ricchiuti. Please proceed with your question.

Troy is speechless as well all of a sudden.

I don't know what's going on here, but we'll see.

Now, let's see if I can get a question in. A couple of things. Vicki I wonder if you could talk a little bit about -- or John about the initiatives to get the 3D printing business in Europe on track. Sounds like it clearly is taking longer, you've got not only a demand issue, but it's clearly been a bigger drag it seems on margins?

Yes, yes. Let me talk about that Jim. First of all our strategy in 3D printing is to be the leading industrial supplier of 3D printing parts globally. And the way we do that is we've been extremely effective here in North America is by focusing on the quality of the products that we deliver, the material selections that we offer, and speed. So, it's an operational excellence business from a quality point of view, being able to utilize the best variety of industrial-grade in materials and speed. We're learning as in Europe, we've got ways to go there and now we've made some progress from operational point of view, improving the quality as well as our delivery service which has improved significantly with big improvement in on-time delivery rates, the 97% to 98% range. We still have work to do on the material side to differentiate ourselves. We have three new materials we're going to be launching in the first quarter, we're going to be launching a fiber filled glass -- fiber filled nylon material, a glass-filled nylon material both in our selective laser stitching process and we'll be launching the HP multi-jet fusion in the first quarter. So, those elements that we need to do to compete there we've got to differentiate ourselves versus a cadre of suppliers who make what I call basic parts within the 3D printing. And we've got to make sure that we can differentiate ourselves with quality materials and speed. The other piece we're constantly working on is our costs. So, we're working on ways that we can improve cost, the operational excellence, improve the [Indiscernible] breaks, issues like that as well as the productivity of our labor. And lastly, we have taken some steps to take a look at our asset structure and making sure that we have got assets there that can produce those high quality products. John, you may want to talk a little bit about that and how it's impacted gross margin.

Yes. And the best one of the components of gross margin this quarter. So, as we look at the assets and where we're getting returns, there were some assets in the operations that just weren't productive. So, we decommission those. It caused a little bit of a financial hit here in this quarter, but helps improve the cost structure as we go forward and we'll continue to look for those opportunities to reduce kind of that fixed cost structure.

The trends are moving in the right direction not as fast as we'd all like to see them, but they are moving right direction.

John of that 240 basis point hit that you took, how much of that might have been due to what you just alluded to?

So, the 240 basis points, just to be clear, is the impact of the 3D printing on our overall gross margins. And that's relatively consistent with where we have been operating. If I look at the sequential, we're down 50 basis points about 20 of them -- a little over 20 of those 20 basis points is related to the German answer right now.

Okay. And final question I'll jump back in the queue and let see if we get these guys on as well. Just with respect to the on-demand manufacturing service. Any early signs that you can point to some traction whether you can talk a little bit about where you seem to be seeing some early progress. And are you still on track for launching this in early 2018 in Europe?

Yes. So, first, I'm really pleased with the launch here in North America, response is really good. And the early signs that I can say that support that is quoting activity is very high and the pipeline is robust. But the one thing with on-demand manufacturing -- well, tooling in general have a longer time from initial quote to close as you might expect that the CMC machine 3D printing that's fairly short. So we've got that timeline with tooling that is a common involve probably -- tooling as well as production tooling. But you might expect making -- getting a final close on a production part is going to be even longer than what we're seeing with prototyping because of all of the approvals that need to take place from multiple influencers in a customer whether the supply chain manufacturing P&L owners when you're looking at a production part. So it is going to take longer. We are really encouraged by the amount quality that we have and the robust pipeline that we have. With respect to Europe, we're working on the early on -- getting business ready for this launch takes a little bit of time. So we're working on all of the steps that we need that need to be in place to launch on demand manufacturing in Europe for that business readiness point of view. We will be launching in 2018 may not be first quarter. We may be doing some early beta launch in full launch maybe more toward the second half of the year.

Got it. Okay. Thanks very much.

Our next question comes from Brian Drab. Please proceed with your question.

Well, can you hear me?

We can hear you, Brian.

I'm just going to I'm just going to run two questions here. I am on two calls simultaneously, but I want to hear you talk a little bit if I could about the margins that you expect in the low volume production business going forward. You know I think there's some concern that you know there's it's going to be difficult to maintain the kind of typical 60% or thereabouts type of gross margin in injection molding if you're going to be increasing the volume significantly? And then can you also comment on you know what we should expect for selling and marketing as a percent of sales? Thanks

Okay. So on the on-demand manufacturing; I guess I'll start with reminding everybody that about 50% of our overall injection molding business today is bad on demand. Low volume production business and we are experiencing strong margins there. So as we look at it as we modeled -- we've modeled it to be margin neutral in the current timeframe. And that's -- as we look forward. I think time will tell us as it plays out and if orders continue to come in longer related to it. But we are still talking about low volume production. So we're not going into large volumes that is very commoditized where we're staying in the areas that we're playing in today. We just haven't approached customers and have an offering related to that. So I don't anticipate significant pressure on our margins as we ramp-up that business. I think your second question was on the sales and marketing spend and we do have some seasonality in the sales and marketing spend. Q2 is high season for trade shows in all of our regions. And so you're seeing higher spend in Q2 lower in Q3. I think it probably normalizes at the 16% to 16.5%. We're going through our budgeting process right now for next year and we'll be able to provide better guidance on that going forward. But you know that 16% to 16.5% that we've been talking about consistently I think continues to be there.

Just to be clear on the 16 to 16.5 was that GAAP or non-GAAP?.

GAAP.

Okay. Thank you very much.

Our next question comes from Troy Jensen. Please proceed with your question.

Thanks. I guess my question is going to be on the injection molding business, Vicki. You think that's the only segment that's really kind of a lagging here and if you think about you've added overmolding, you've added insert molding and the on-demand services on injection molding So what do you think that segment of the business is not recovering like the others?

Yeah. Well, it is recovering from where it was prior year. So we're starting to see some improvement in their growth rate. It is our largest segment so large numbers isn't there but I think the other thing that happening in injection molding is as we continue to bring customers and we're learning that is very important that we can provide more of a total solution in injection molding as we can share gain there is relative to traditional suppliers or traditional injection molder that tend to provide a complete solution. So we have to continue to expand that envelope. It takes time to convert customers there and gain share because you're moving them from a traditional manufacturer over to Proto Labs. They've got to learn how to use our process. So I think we're seeing some nice trash. I was actually really pleased with the uptake that we were seeing an injection molding appropriate.

And I think the other component there is you know we've been focused on helping our salespeople crate training developing them and their productivity is showing. I think is showing a little bit more in the CMC and even you know the 3D printing business because the selling cycle is shorter. So I think as the efforts we deployed continue to gain traction as they're developing relationships with the customers and understanding customers a little bit better over the longer-term and better helpful in injection molding as such.

Okay. And a follow-up question here, three months ago you guys guided sales and marketing to be about 17% of revenues and came closer to 15%. Just curious at that deviation was -- are you seeing evidence of your sales execution improving? Or was it just other expense lines we're ramping and you kind of offset that?

Yes. It was 15.7% on a GAAP basis and I think that guide was there. I think it is two components one is the timing. So if you look at it over a longer time horizon and we did benefit from the revenue being at the top of the range. So I do think it is some of the productivity coming through. So the expense is in line with where we expected and it's coming in a little bit higher.

Okay. Last question I'll see the floor. But you know historically the key guys have provided like business model targets a growth rate forecast given the business to stabilize and improving now. Any thoughts on what kind of a sustained growth rate could be pretty good?

Yeah. You know Troy, we are staying really focused on what we need to do to continue enhance customer experience and continue to bring our customers more of a total solution to drive the revenue growth over the long-term. And at that point we continue to get quarterly guidance.

Okay. Understood. Keep up the good work.

Okay. Thank you.

Our next question comes from Weston Twigg with KeyBanc Capital Markets. Please proceed with the Question

Yeah, hi, good morning, this is Daniel calling in for Weston. That's just a couple of questions. First, do you have a rough impact on the potential impact to your gross margin in the quarter from say like rising commodity prices such as aluminum or any impact on resin prices in the quarter?

Yeah, yeah. We really -- we generally have those on our customers and our pricing model. So we would not see any impact in our case based on those changes.

Okay. Okay. I guess my follow-up might be really but with your new multi-jet fusion process, I'm curious if there's a typical end market that's become disproportionally popular for you guys like be it auto or medical? Thanks.

Yeah not really, Daniel. Multi-jet fusion is really a broad range of industrial end users that are using 3D printing, certainly aerospace better by pure electronics consumer products. So it's a pretty broad range. Nothing really is sitting out there. And again it's early in that launch too. So we just -- we just launched that to a full market in June. But coding activity is good and customer response has been good to the service.

Good. Thanks.

Thank you. Our next question comes from Greg Palm with Craig-Hallum. Please proceed with the question.

Morning. Thanks for taking the questions here. Just curious on the revenue side nicely above expectations above the guided range. Was just curious kind of what your opinion drove the upside in the quarter?

Yeah, we had really strong sales revenue growth in our CMC machine business. I like to say that some of that really is some of the early signs that our sales productivity focus is really beginning to show signs -- positive signs. It -- CMC machine has a shorter close range and so therefore, productivity improvement would be seen earlier in that service. So, we feel good about that although. We're also I'm sure benefited by just general industrial climate, particularly here in North America. So, I'm sure we get a little bit of the tailwind from that as well.

Any commentary based on end-market, what drove some of the outperformance?

I love that, much of it [Indiscernible] it's really been across every market. Med device, auto, consumer -- computer electronics, industrial equipment, each one of them showed some nice improvement quarter-to-quarter.

Got it. Maybe moving on to gross margins obviously a little bit weaker than what we were expecting here. And especially given the upside to revenue, what's it going to take to get back up to that kind of high 50s, 58% 59% level. Is that something you still see achievable in the near or medium term or no?

Yes, I think one of the key drivers will be improving that 3D printing business margins in Europe and so we feel -- we're very focused on that. And then the other thing we mentioned in the call, we launched a lot of new services this quarter and when you do that, you have to put in place the equipment and the manpower in order to deliver that service. But initially your utilization of that equipment and those assets are not at optimum to drive your margin improvement. So, actually, I'm really pleased, we've been able to maintain our margins and launch as many services as can and displaying how long it taking us to improve the margins in Europe, we're doubling down on that. We'll be taking some additional steps there to continue to drive cost -- make sure our costs are aligned and launch what we need to do to differentiate ourselves in that market.

Okay, fair enough. Well I guess last one from me. Are you on digital inspection reporting recently? I was just curious what the feedback has been from both the existing customers and maybe the opportunity to gain sort of new share new customers with that new service offering.

Yes, it's -- other lines for me how being edged we are and how disruptive we are because the response has been good with a lot of curiosity, but I will say customers are still opting for traditional more expensive much slower and much more inefficient first article inspections and pass. They are -- some of them are requesting digital inspector report to get some experience with that. But it underscores for me, the engineers are slow to change and it takes time for these disruptive technologies to really take hold. Over the long-term I'm very encouraged because it will help our customers reduce their cost, help them manage their supply chain in a more digital way, so they will get other benefits from that. And it will increase speed. So, over the long-term, I think it's going to be a very, very good service, but it does underscore how disruptive we are and how we leading edge we are because it's very new to our customers.

Interesting commentary. Thanks for the color.

Our next question comes from Jon Fisher with Dougherty & Company. Please proceed with your question.

Thank you. Good morning. Just to follow-on on the revenue question prior caller. Would you be willing to venture a guess as far as allocating the strength in the revenue this quarter between the general macro and the early signs of payoff of the investments in salesforce and sales technology that you gave in the beginning of the year and the end of last year?

As you know it's so difficult to do within our business. The on-demand and having many, many, many customers and constantly bringing in new customers, sharing is a big part of our business model. So, very difficult to do. You could look at industrial production growing at more than 2% to 3%. So, we're in excess of that excluding discontinued businesses of 13.8 that you might allocate the majority of it to our share gain and our continued strength of our business model. But as even last year, we had a poor fourth quarter is difficult to differentiate.

Sure. That's fair. Just kind of looking at the Q4 revenue, just a couple of questions there. One, the guide from a bracketing standpoint, the quarter could either decline sequentially or increase sequentially. Do you have a feel for kind of in a normal year Q4 versus Q3, should the revenue sequential be flat to up or are flat to down in a normal year for your business?

I think as we look at the seasonality patterns and look at things like day content because of the holidays and stuff like that combined with the uncertainty related to the holiday season, it tends to be just from that a little bit lower Q3 to Q4. But December is kind of always the wildcard. We've had years where there's a big push and December comes in really strong because people are trying to finish the projects before the end of the year. We have also had years like last year where December is really soft going into the days. So, it's hard to tell what normal is. But as you look at date content and the people going around on holidays and some of those things, it does tend to be a little bit lower than Q3.

Okay. And then answer kind of dovetails or leads into the last question I want to ask on Q4 revenue. Now that you're basically through the end -- through October, do you have a feel for the type of revenue that you're going to see in Q4? Is it more a longer tail, bigger projects that will probably -- or potentially have some carry over into the beginning of next year? Or is it the type of revenue type of business that is as you describe going to be, yes, it's going to wrap up in Q4 and we want things done before the holidays, so we can enjoy time with our families. Thank you.

I think it's very consistent with the mix that we have in our general business. I mean we've got a lot of prototyping business that -- we're making prototype that you're done. We've got as John said, about half of our injection molding business is going parts which will roll over.

I can tell you that sitting here today; we don't have any orders that are shipping in January -- still this quarter.

Yes.

Okay. Thank you.

Our next question comes from Ben Rose with Battle Road Research. Please proceed with your question.

Hi. Hi and good morning. Just another question on the CNC machining business, was there any difference in terms of the customer mix in terms of new versus returning customers for this quarter, given the standout performance there?

No, it's about the same. We usually have 85% of our customer companies are existing I've done business get 15% new companies every year -- every quarter. So that's pretty consistent.

Okay. And on the injection molding side, I guess in the past you've spoken to a rough mix of half the revenue coming from molds and about half coming from injection molded parts, is that also fairly consistent in the quarter?

Yes. No big change. We have a little bit higher in parts as a percentage, but not significantly.

Good. Again on the 3D printing side, is there any discernible change in terms of the mix in terms of customer use of metal printed parts? There's it's obviously been a lot of discussion recently in terms of the development of that particular segment, but are you seeing any uptick there from your customer base?

Yes. We’ve got a lot of interest in DMLS and metal 3D printing. Actual growth rates DMLS or the metal versus the plastics has not been higher. So, it's been pretty consistent. There's a lot of interest tough in metal 3D printing, but we continue to see growth in selective laser centering, the HP multi-jet fusion growth. So, we're seeing growth in plastics as well.

Okay, great. And then just one final question if I may. I know that a big focus at least coming into the first part of the year was taking a closer look at some of your major accounts. And I gather trying to determine whether there are some larger opportunities there. And Vicki could you just speak to you know the progress that you're seeing on the large accounts side.

Yes. So, we have -- in North America, we segmented our customers into a couple of categories. We've got -- we're the largest enterprise company, we've got what they call focus accounts which are accounts that each customer rep has within their book of business that they are focusing and then we kind of have the tail. And in that effort -- and in that initiative we're putting together strategic account plans for all those and beginning to execute on that. What I will say is that this kind of selling, more strategic senior executive selling where relationships at senior levels drive results takes a lot more time. So, we are seeing some really strong customer account plans, we're seeing execution to that, we're seeing relationships being built. But the actual impact on the revenue, I think it's going to take some time.

Okay. Thank you very much.

Thank you.

We have a follow-up question from Brian Drab with William Blair. Please proceed with your question.

Hi. I'm off this other call now and I apologize if these are been asked, so you can just tell me read the transcript, if necessary. Quality analysis being requested in terms of like a percentage of injection molding work, can you give us any sense for what kind of -- as a percentage of the total work, how much is including quality analysis whether third-party or in-house?

I don't have that off the top of my head Brian. Lots of interest on on-demand manufacturing and somebody did ask a question on this and I'll just reiterate, it's been interesting, there's a strong demand for -- [Indiscernible] inspection and interesting to mention inspection report, but customers are slowly adopting new technology which is we're right at the leading edge of digital manufacturing and it's been interesting to see the reaction because they're learning, but to make a shift to be able to accept the digital inspection report and not an FAI is a big step for them.

Okay. And then how are things going with your HP printer and is that in full production at this point I guess?

Yes, in North America it is. So, we've got three here, and it's going well and we're worked out. We need to do to be able to produce high quality parts and so we feel good about that. We are going to be launching the multi-jet fusion in Europe in the first quarter.

Okay. And then John you mentioned -- I heard you mentioned gross margin down sequentially in the fourth quarter, did you say how many basis points -- roughly how much down sequentially?

I said flat to slightly down. So, just a little bit of pressure. Generally flat, maybe 20, 30 basis points down.

Okay. And then are you seeing anything -- this is the last one. Are you seeing anything in terms of a competitive landscape from other companies that say they do what you do, not from the traditional shops or from in-house, but from rapid CNC machining and rapid injection molding companies, any material change over the last three to six months?

No material change there.

Okay. All right thank you very much.

Thank you.

Thank you. At this time, I would like to turn the call back over to management for closing comments.

Great thank you and thanks for joining us today. We remain excited about the outlook for Proto Labs. We continue to leverage our differentiated technology-enabled digital fracturing platform to serve our customers. We'll continue to develop deeper relationships and expand our capability to provide efficient and cost-effective solutions to serve our customers in their prototyping and low volume production needs. I want to thank Proto Labs employees for their efforts over this past quarter. And I'm going to thank our customers for their support. We're committed to enhancing our revenue growth and driving long-term shareholder value and we look forward to reporting to you on our progress during our next call. Thank you.