Greetings and welcome to the Protolabs' First Quarter 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Dan Schumacher, Director of Investor Relations. Thank you. You may begin.

Thank you, operator, and good morning, everyone. With me today is Vicki Holt, our President and Chief Executive Officer; and John Way, our Chief Financial Officer. This morning before the market opened, Protolabs issued a press release announcing its financial results for the first quarter ended March 31, 2018. The release is available on the company's website at protolabs.com. Before we begin, I would like to remind everyone that our discussion will include statements relating to future performance 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 the 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 Protolabs. Vicki?

Thank you, Dan. Good morning, everyone. Thank you for joining us on our first quarter conference call. Protolabs began 2018 with a strong start, as reflected in the press release that we issued today. We reported record quarterly revenue and record net income in the first quarter. Both our revenue and our earnings per share were just above our guidance range. This quarter is the first full quarter that includes the results of the Rapid Manufacturing acquisition that we completed at the end of 2017. The results of this acquisition combined with our strong business performance and the benefits of the tax law changes are reflected in our financial results. We reported revenue of $108 million in the first quarter. This represented an increase of 34% over the prior year. In addition to our revenue growth, we continue to serve a record number of product developers. Our unique product developers served increased 22% to 18,057 compared to the prior year. The number of unique product developers does not yet include the individuals served on the Rapid Manufacturing system. Looking at a breakdown by geography, the U.S., our largest market, produced record revenue and strong growth of 40% over the prior year, including the benefit from the RAPID acquisition. Europe increased 17% with growth rates benefiting from foreign currency translation. On a constant currency basis, revenue growth was 2%. This growth rate was impacted by three large orders in Q1 of 2017, totaling $1.5 million, providing a difficult year-over-year comparison. Without those orders, the constant currency growth rate would be approximately 12%. Our Japan region grew 21% on a reported basis and 15.5% in constant currency. Moving to revenue by service, injection molding grew 7% from the prior year, CNC machining grew 67%, and 3D printing increased 22% from the prior…

Thank you, Vicki. Revenue in the first quarter was $107.7 million, an increase of $27.6 million or 34% over the same quarter in 2017. As Vicki stated, our revenue growth this quarter benefited from the inclusion of the first full quarter of activity from our acquisition of Rapid Manufacturing. The acquisition added sheet metal as an additional service and expanded our CNC service. To help with sizing, the RAPID business had approximately $11 million of revenue in the first quarter of 2017. In addition, foreign currency represented a $2.7 million tailwind in the quarter with the remaining increase representing organic growth. Gross profit for the quarter was $57.9 million, an increase of $12.6 million over the comparable quarter of the prior year. Gross margin was 53.7%. This compares with 56.5% in the first quarter last year and 56.2% in the fourth quarter of 2017. The RAPID acquisition represented a 200-basis-point headwind to our consolidated gross margins this quarter. Our European 3D printing business also continues to impact our overall gross margins. As we stated in our fourth quarter earnings call, we have been looking for opportunities to reduce our cost structure and improve performance related to this business. As a step to accomplish this, we have reached an agreement to divest our Finland operations to the local management team that was finalized early in the second quarter. In addition to the reduction in cost structure, the divestiture allows us to focus on our operations in Germany to serve the 3D printing needs of our customers in Europe. Operating expenses totaled $36.2 million or 33.6% of total revenue for the first quarter of 2018. As a percent of revenue, operating expenses were down from 36.2% last quarter and 34.4% in the first quarter last year. On a non-GAAP basis, operating expenses…

Thank you. We will now be conducting a question-and-answer session. Our first question comes from the line of Brian Drab with William Blair & Co. Please proceed with your question. Brian P. Drab - William Blair & Co. LLC: Good morning. Congrats on a great quarter.

Thanks, Brian.

Thanks, Brian. Brian P. Drab - William Blair & Co. LLC: Hey. John, can you just give a little more detail around the contribution from RAPID in the quarter? And just clarify, I think – if I heard you correctly, I think you may have said first quarter 2017, first quarter 2018 was $11 million?

No, that 2017 is correct. So, let me give you a little more color on that. Brian P. Drab - William Blair & Co. LLC: Yeah.

So, sheet metal, you can see standing alone, right? So, that's very visible. So when you look at our CNC service, things are already starting to get blurred between the two operations, principally in the sales force. So, as we're taking orders for CNC, we're routing them to the appropriate manufacturing facility. So, we're already starting to blend what is RAPID-related growth versus Protolabs-related growth. So, I think the most appropriate measure is really to look at last year and then we've grown on top of that. And there also is – I'll remind you there's the wire and cable business that's flowing through other revenue, that's a little over $0.5 million. Brian P. Drab - William Blair & Co. LLC: Okay. And what else is in other right now?

There's a few other, like, third-party services that we're doing for customers and a few of those things. Brian P. Drab - William Blair & Co. LLC: Okay. So, is it fair to kind of guess if this is – I mean, can you just not even guess or could I say around $6.2 million from sheet metal, $4 million or $5 million CNC from RAPID and then the $0.5 million in wire harness, is that in the ballpark?

Yeah. I mean, I think that gets you close to the right range.

It really is getting very difficult to separate the CNC business, just because it's very blended. I mean the orders come in and then we route them to the best place to manufacture. So, it's very difficult to separate those business. It did contribute to the strong growth, I mean 67% year-over-year growth in CNC did benefit from the acquisition of that business, but also there's strong underlying growth in the CNC machining business for us. Brian P. Drab - William Blair & Co. LLC: Got it. Does that blurring of the lines have impact on the developer count because you're clear to say that it's not including developers associated with RAPID?

Yeah. So, the orders that are processed through our legacy systems, we can capture those very cleanly. The orders that are captured through the Rapid Manufacturing systems, that's where we still have some work to do to pick that up. So, on where is the order produced and the manufacturing plant, so gross margin, I can assess the impact very cleanly. It really is when you're talking organic or inorganic revenue growth, that gets blurred really quickly. Hope that makes sense. Brian P. Drab - William Blair & Co. LLC: Yeah, it does. Yeah. Okay. And then, can you size the headwind to gross margin from the Europe 3D printing operation in the quarter?

So the headwind there – the gross margins are roughly just about 10% in the first quarter in Europe for 3D printing. So, continues to be a challenge for us. So...

I think, we're doing the right thing there. Yeah, go ahead. Brian P. Drab - William Blair & Co. LLC: I was just going to say, was that about $4 million, $5 million in revenue in the first quarter in that operation?

Yeah about $4 million. Yeah.

I think, we're doing the right things there. I think divesting the Finland business to management there allows us to really focus our 3D printing revenues through that Germany plant, which will help improve utilization. So, basically taking some fixed cost out of that business is helpful. And then, I think, the additions that we're making with materials in different higher end industrial services will continue to allow us to differentiate ourselves there. So, the initial launch of the Multi Jet Fusion has gone quite well. We're really pleased. We're a little bit ahead of what we had expected to be here at the end of first quarter, so that's strong. And then adding the elastomeric materials with the PolyJet is also another nice addition that we're bringing to play. We've also added some additional filled nylon materials, which further differentiates our services there in Europe from more commodity suppliers. So, we're not happy with the progress, but we are pleased with the responses we're starting to get from customers. We're happy that we're back up to double-digit growth rates there and that'll be an important element. So, we're working this one hard. Brian P. Drab - William Blair & Co. LLC: Okay. And then, I have like 20 more questions, but I'll just ask two more quick ones. The divestiture takes place on what date and the gross margin expectation as you – maybe if you could give us any sense for what the target would be exiting 2018 for gross margin and then I'll get back in line. Thanks.

Yeah. So, it was completed already, so early April. So, effectively, it'll be the double quarter. Finland will be out of the operations in Q2. Gross margin, we're still looking at the 54% to 54.5% range on gross margin as we're looking at the full year. Brian P. Drab - William Blair & Co. LLC: Okay.

And I'll just add. We're still committed to the Nordic region. We actually opened a sales office in the Nordic region this quarter and have continued to augment our sales team there. So, we're very committed to the region. It's just the manufacturing assets just didn't make sense.

Yeah. Just reducing the fixed cost structure and consolidating those operations. Brian P. Drab - William Blair & Co. LLC: Okay. Thank you very much.

Thank you. Our next question comes from the line of Troy Jensen with Piper Jaffray. Please proceed with your question. Troy D. Jensen - Piper Jaffray & Co.: Hey, good morning and congrats also on the great results.

Thanks, Troy.

Thank you, Troy. Troy D. Jensen - Piper Jaffray & Co.: Hey, so Vicki or John, I guess either one of you. Just to focus on injection molding, I'd love to hear just an update on overmolding and insert molding. And then ultimately, if you were to strip those out, what do you think the organic kind of base business is for injection molding growth?

Yeah. So, Troy, I'll answer that. Overmolding and insert molding are certainly some really nice additional options for our customers and they continue to bring value there. So, this is the kind of business that to continue to grow, we continue to add to the envelope of what we do in order to meet more and more of those customers' needs. So, insert molding and overmolding are two of those growth elements. Adding a full suite of inspection services is another one. And I'll say on-demand manufacturing is a – it's a longer selling process when you're going to be taking over as the production supplier to a customer. But I am really pleased with the number of programs we've got in flight, and the conversations that we're having with customers about what we need to do to be able to be a production supplier for their low volume production needs and they're very excited on working with us on that. But it's a longer sale process, involves many more decision makers at the customer. But I'm convinced that our strategy to have an on-demand manufacturing offering, injection molding, will be successful and we're really pleased with the conversations we're having right now. Troy D. Jensen - Piper Jaffray & Co.: Okay. Understood. And how about, Vicki, for you, too. If you just kind of go back through time, you had a lot of different variety of kind of sales initiatives, sort of top-down sales, national account managers. I mean what's kind of the focus now on sales and maybe just give us an update on some of these prior initiatives?

Yeah. So, those initiatives are – they're continuing to be evolved and enhanced as we operationalize them. So, we certainly have continued to segment our customers into those customers that can bring us the greatest lifetime revenue and profitability, and there we're focusing our sales teams on the wide and deep strategies there. They're developing, I think, really robust, strategic account plans with very concrete actions on how we're going to get moved deeper with those customers and they're executing on it, and we're getting results. So, I'm really starting to – we're really starting to get some traction with those key accounts. The other thing that we're doing is this very long tail, it was kind of rest of world, which represents thousands of customers. We're getting a lot more efficient in how we can have our website and our website manage those customers through the process and make them more self-serve. That's another big piece about driving the productivity of our sales team to focus on those customers that are going to have a larger total return to us over time. We'd like the long tail, they're great customers, we make money on them, but they tend to be thousands of smaller transactions that we'd really like the Internet to handle those on a self-serve basis. So, those are a couple initiatives that are really starting to get some traction, you're starting to see a little bit of that in our results in terms of productivity with sales spend.

Thank you. Our next question comes from the line of Jon Fisher with Dougherty & Company. Please proceed with your question. Jon Fisher - Dougherty & Co. LLC: Thank you. Good morning. Very good quarter. Just wanted to talk on Europe. Obviously, the double-digit 3D printing growth is a positive. From a strategy standpoint, the introduction of Multi Jet and PolyJet, were you doing that proactively to try and drive better performance and faster growth out of 3D printing in Europe, or was that reactive to, you know, now we're starting to see some stabilization there, we're starting to see some positive performance, so let's start to add some resources and capabilities to see if we can leverage that momentum a little bit better?

I think, Jon, as we look at it, we're focusing on areas where we can have a differentiated service offering. And I think, with Multi Jet, we've gained some expertise and got some feedback from HP actually that we can make parts on their machines better than anybody else. So, with differentiated service, that's where value comes in. So, that's the areas that we're focused in attacking that market. Jon Fisher - Dougherty & Co. LLC: Okay. When you step back and look at the big picture of the total addressable market for what Protolabs can do and provide for its customers, where do you see penetration? What do you think the penetration level is of that total addressable market and kind of what do you see, is that market growing or expanding?

Yeah. So, we've talked before about our total available market in excess of $8 billion and we still feel very confident that that's where the size of the market is. What we're learning is as we move through from prototyping also into on-demand manufacturing of low volume production, our value proposition really resonates and it gives the customers tremendous value in terms of risk reduction in their supply chain, ability to handle uncertain demand and really an economic model that allows them to go after mass customized applications for their product and live with the rapid, very short product life cycles that they deal with. So, value propositions are very strong. The selling process is longer and that's the piece we're working through right now. But we feel very comfortable that there's a long runway that actually we're at the beginning of the next level of runway, which is the on-demand manufacturing penetration with our customer base, where we think we've got very low penetration there.

And then, I think there's also all the other tailwinds that we talked about in our Investor Day in the product lifecycle shortening and speed to market really becoming more and more important. So, I think, the market continues to grow for the services like ours.

And customers deploying what I call product 4.0, which is agile product development in dealing with the short product lifecycle. I just had a review just the other day with one of our account managers on their account plans and made a very large telecommunications company that recognize they need to iterate every year on their products in order to stay up with demand. They can't afford to do that with big expensive tooling. They need to find a way to use Protolabs for that, because every year, they're going to be introducing a new upgraded product. So, those are the kinds of things that our model solves big problems that these companies have. Jon Fisher - Dougherty & Co. LLC: Okay. Thank you for the detail. One final question from me. On the sheet metal opportunity, as far as a cross-selling opportunity, now that your sales force and team have access to that business and that opportunity, when would we expect to see kind of the first signs of them benefiting from being able to cross-sell that service to your current customers or just proactively going out and finding new customers for sheet metal service?

Yeah. So we've been pretty clear on the integration plan with sheet metal. You're not going to see a big pop on that till 2019. Our focus in 2018 is on building our capabilities to scale that business. So, capacity additions, also working on software solutions to help allow that business to scale. The reason Protolabs scaled so well in an area of increasing demand is that we are very software-enabled, that allows us to grow without having to add a lot of various (00:36:04) and hard-to-find skilled labor. So, that's a piece that we've got to have in place before we completely open the faucet of our sales force on cross-selling and that won't be till 2019. Jon Fisher - Dougherty & Co. LLC: Okay. Thank you for the color.

Thank you. Our next question is a follow-up from Brian Drab with William Blair & Co. Please proceed with your question. Brian P. Drab - William Blair & Co. LLC: Hi. Thanks. I was going to say a couple more here, but any impacts from the recent volatility in the price of aluminum.? And I think that your COGS as a percentage of COGS materials is something like 20% of COGS and can you talk about that and what position aluminum has in terms of the ranking of your raw materials?

Yeah. So, raw materials are not our largest cost factor as you mentioned. And our pricing policies and processes generally pass through raw material increases. So, there's no real impact. Brian P. Drab - William Blair & Co. LLC: Okay. Got it. And then, you mentioned the second quarter dynamic with the selling and marketing. I'm wondering in the third quarter and fourth quarter, is there anything that we should think about that would prevent the earnings not being above what you were able to report here in the first quarter?

Not being above. Brian P. Drab - William Blair & Co. LLC: Yeah.

Trying to make sure I caught your wording there correctly. No. I think as we look at progression of earnings, it really is going to be based on the demand and the volume. And as we're looking at it now, I would project it consistent with kind of the seasonality patterns that we've experienced historically. I wouldn't anticipate the 2016 fourth quarter. So, I think we'll just continue to progress as we go throughout the year. Brian P. Drab - William Blair & Co. LLC: Okay. And I apologize if someone asked this already, I was typing up a note here as I'm listening to the call. But can you give any sense for the breakdown – I mean, because these orders come in for a low volume production and prototyping that get routed to one of those two directions now in injection molding. So, you have the data, I mean, can you tell us anything about the percentage of the injection molding jobs that are being routed toward low volume production versus prototyping?

All I can say is that we still have more of tooling going through prototyping than we do on-demand manufacturing. Yeah, so it's not – I mean, there's still more going there, which means we've got a huge opportunity as this on-demand manufacturing service continues to mature. Brian P. Drab - William Blair & Co. LLC: Is this, like with the term vast majority, be appropriate to say – in terms of what's going to prototyping still versus low volume production?

Yeah, because I think as you look at it even as we bifurcated, there's a tail on molds that were made three and four years ago that are still pulling through and driving a significant portion of the injection molding revenue. So, yeah, it'll progress over time. Brian P. Drab - William Blair & Co. LLC: In terms of parts business off of those molds?

Yes, correct.

Yes, correct, correct. Brian P. Drab - William Blair & Co. LLC: Okay. And then, the last question I'll ask for now is can you give us a sense for the percentage of orders that are incorporating anything beyond the basic level of inspection that you would provide for free, or said another way, what percentage of orders include incremental revenue associated with inspection?

Yeah. I don't know that we're going to break down revenue components to the level of detail that you're looking for. Brian P. Drab - William Blair & Co. LLC: I didn't think you would the level I'm looking for. Can you make any – I mean, sequentially, they're gaining traction just directionally.

Yes, it is. I mean the additional services. It's just not a big revenue generator on its own. It's an enabler for the on-demand manufacturing service, but it does sequentially grow in terms of the number of additional services that our on-demand manufacturing customers are selecting in order to get more of a total solution that they need for production parts. Brian P. Drab - William Blair & Co. LLC: I guess, do you think that that is as important to winning and gaining low volume production work and orders as you did initially when you introduced that offering?

Yes, I think it's important. It is important to bring that total solution. You can't get across the finish line without some of those things. Brian P. Drab - William Blair & Co. LLC: Okay.

It's just not, in itself, a big revenue generator.

And it's one of many things that you need to have the full production offering for customers. Brian P. Drab - William Blair & Co. LLC: Right. Okay. Thanks a lot.

Thank you, Brian.

Thank you. Our next question comes from the line of Ethan Potasnick with Needham & Company. Please proceed with your question. Ethan Potasnick - Needham & Co. LLC: Yeah. Hi, guys. This is Ethan Potasnick filling in for Jim Ricchiuti. I'm sorry if this is duplicative, but could you guys share whether or not you guys are seeing any turn in the European 3D printing business?

Yeah. We did see double-digit growth in the quarter, which is a little bit of a turn for us. So, we weren't quite that high earlier. So, we're pleased with that level of growth. It's a competitive market in Europe, a little bit different competitive market dynamics. But we're navigating our way through that, we're focusing on technologies and materials that are a little more differentiated and we're really positioning ourselves with customers that value those technologies, med device, computer electronics, things like that. Ethan Potasnick - Needham & Co. LLC: Okay. Thank you.

Thank you. There are no further questions at this time. I would like to turn the call back over to Ms. Holt for any closing remarks.

Thank you, and thank you again for joining us today. We remain excited about the outlook for Protolabs. As we look ahead, we are confident that the current market trends are favorable to our strength and our business model. Our differentiated technology-enabled digital manufacturing platform has demonstrated the ability to help companies and entrepreneurs get their products to market faster than their competition. We continue to innovate with our service offerings and technology interface and features to enhance our customers' experience. I want to thank the Protolabs employees for their efforts over the past year. And I want to thank our customers for their support. We're committed to enhancing our revenue growth and driving greater shareholder value over the longer term and we look forward to reporting to you on our progress during our next call. Thank you.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.