Proto Labs, Inc. (PRLB) Q1 2019 Earnings Report, Transcript and Summary

Greetings, and welcome to Proto Labs First Quarter 2019 Earnings 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. It is now my pleasure to introduce your host, Mr. Daniel Schumacher, Director of FP&A and 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, Proto Labs issued a press release announcing its financial results for the first quarter ended March 31, 2019. The release is available on the company’s website at protolabs.com. In addition, a prepared slide presentation is available online at the web address provided in our press release. 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 actual outcomes to differ materially and adversely from any forward-looking statements made today. The results and guidance we will discuss include non-GAAP financial measures consistent with our past practice. Please refer to our press release and the accompanying slide presentation 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?

Thanks, Dan. Good morning, everyone. Thank you for joining us on our first quarter conference call. This morning we reported first quarter revenue of $113.5 million, representing growth of 5% over 2018 or 6.9% in constant currencies. Our adjusted earnings per share were $0.69, representing $0.02 per share decline compared to the first quarter of 2018. As we analyzed our performance in the first quarter of 2019, the revenue growth in our legacy services was approximately 11% in constant currencies. The challenges we experienced in the first quarter related primarily to the services acquired in the Rapid Manufacturing acquisition. The revenue and earnings growth from our acquisition of Rapid Manufacturing did not meet our expectations this quarter. As we discussed in our earnings call on February 7, we did not experience the increase in demand for the acquired sheet metal and expanded CNC services, when we began selling these services to the legacy Proto Labs’ customers on January 1. In fact, the revenue from the services produced in the acquired facilities declined $2.5 million or 21% compared to the first quarter of 2018. As we discussed in the fourth quarter earnings call, when we integrated the two sales teams, we distributed – distributed accounts and disrupted the entire sales organization by realigning accounts to allow our customers to be managed by one account manager rather than two. One other factor is that we standardized our offer to improve the reliability and throughput of our operations. Rapid historically operated as a traditional machine shop without a standardized offer, frequently accepting non-standard work that is not scalable. The acceptance of these orders often resulted in late deliveries, extended lead times on standard orders and dissatisfied customers. Our customers have told us they value Proto Labs reliability, quality, and speed. In that order we standardized the product offer to ensure we could consistently and reliably meet our delivery commitments at scale, anticipating stronger demand when we opened up the services to all of the legacy Proto Labs customers. This change resulted in some turnover in the customer base that was greater than anticipated. We believe this is the right approach over the long-term as we focus on reliably servicing our customers with quality products and on time delivery. I will discuss actions we are taking to drive demand in the Rapid services later in the call. As we look at our first quarter revenue by geography, the Americas, our largest market, produced revenue growth of 4.3% over the prior year. Rapid services was the primary driver of the lower growth rate compared to the prior periods. Revenue growth in our America’s legacy services was 9.3%. Europe produced year-over-year revenue growth of 6.6% or 14.8% in constant currency. Europe’s growth rebounded nicely after a slow December as customer purchasing picked up even with the uncertainty of Brexit. Our Japan region grew 20.8% or 23.2% in constant currency. Our distribution partnership with Misumi in Japan continues to accelerate demand in the region. In total, our business grew 6.9% in constant currency. Moving to revenue by service, injection molding produced record revenue and increased 7.7% compared to the first quarter of 2018. CNC machining year-over-year growth was 3.1%. Our CNC service includes an expanded offer acquired in the Rapid transaction. The revenue produced out of the acquired operations was down $1.3 million compared to the prior year. Our legacy CNC operations grew 8% in the first quarter of 2019 after experiencing tremendous growth of over 40% in the first quarter of 2018, creating a difficult year-over-year comparable. First quarter 3D printing revenue was also a record and increased 17.5% from the prior year with both the Americas and Europe growing at similar rates. Our growth is representative of our ever expanding thought leadership in this space. In the quarter, we teamed up with Wohlers and Associates to announce a new immersive course, a design for additive manufacturing. The two like minded organizations are bringing decades of combined additive manufacturing experience to help engineers and designers develop methods and strategies to get the most from different 3D printing technologies. This follows announcements in previous quarters of joining GE Additive partner network and becoming a founding member of MIT’s Center for Additive and Digital Advanced Production Technologies. Finally, our newest service sheet metal contributed $5 million of revenue in the quarter representing a decline of 19.5% year-over-year. Turning to earnings, we reported first quarter non-GAAP EPS of $0.69 per share representing a year-over-year decline of $0.02 per share. Our current period earnings were impacted by the lower than anticipated volumes of our Rapid services and investments we’re making in our sales and marketing, and research and development areas to facilitate growth. Our investments are focused on continuing to be the world’s largest and fastest digital manufacturing source for Rapid prototyping and on demand production. Our achievements in this space continue to be recognized and first quarter was no exception. In the quarter, the National Association of Manufacturers recognized Proto Labs as a manufacturing leadership awards winner for its outstanding achievement in engineering and production technology. Our manufacturing engineers developed tool path generation software that achieved extremely smooth surface finishes for injection mold without increasing milling time. We continued to make advancements in our services to shorten our lead times and expand our part envelope in a digital manner. Now for an update on our 2019 priorities. As we discussed in our last earnings calls, we have four priorities for this year; continue to evolve our go-to market model; enhance our customer experience; improve our overall efficiency as a company; and improve the performance of the acquired Rapid operations. Our efforts related to the first and last priorities are focused on improving the performance of the Rapid services. As a management team, we were very excited to expand the breadth of our capabilities and continue to offer differentiated services to our existing customer base. The launch of these services did not generate the volume we had planned and it has the full focus of my management team to realize the full potential and promise of these new offerings. Based on our experiences in the first quarter, there are four primary actions we are taking to improve performance. First, in the first quarter we restructured the Rapid sales organization, including changes in sales leadership. Our New Hampshire sellers are getting comfortable with a new books of business and selling all our Proto Labs services. In Q2, we will continue to train and share best practices to improve our go-to-market success. Second, we will continue to invest in marketing to highlight the availability of our expanded service offerings to drive increased demand. Third, we will reduce the publish lead times of the sheet metal business. We are able to do this based on automation and capacity investments we’ve made in the business. This promise of unprecedented speed is something our customers have learned to expect from us and allows us to take share from the market. And finally, we continue to analyze our data and see opportunities to implement value based pricing and better leverage our quoting engine to improve close rates. In the quarter, we will take advantage of these opportunities and win more business. The investment thesis has not changed, 70% of our customers continue to use sheet metal services. Our excitement for these new services has not diminished. We will continue to drive improvements in our go-to-market strategy, operations and offerings to delight our customers and grow this business. Our other priorities to continue to enhance our customer experience and improve our overall efficiency, include projects that are being worked by our R&D and software teams. We will provide further updates on these priorities as the year progresses. While the growth in the first quarter was not as strong as we would have liked, our future opportunities remain strong and we will continue to focus on execution of our priorities to drive business performance. With that, I would like to turn the call over to John.

Thank you, Vicki. Revenue in the first quarter was a $113.5 million, an increase of $5.7 million or 5.3% over the same quarter in 2019. Foreign currency had a slightly larger negative impact than we expected, representing a $1.7 million headwind in the quarter. Turning to product developer growth, our first quarter unique product developers served increased to 20,573 or 9% growth compared to the prior year. Gross profit for the quarter was $58.9 million, an increase of $1 million over the comparable quarter of the prior year. Gross margin was 51.9%, a sequential decrease from the 52.5% we reported in the fourth quarter of 2018. This compares with 53.7% in the first quarter last year. Year-over-year gross margin comparison in the first quarter was due to the following factors. First, the investment we made in expanding the capacity of the Rapid operations combined with lower than anticipated volume drove an 80 basis point headwind to our consolidated gross margins in the first quarter of 2019 compared to the first quarter of 2018. Next higher facility costs associated with our new CNC facility created a 50 basis point decrease in gross margin. Finally, the remaining 50 basis point decline was driven by a number of factors including business mix and annual wage inflation. Operating expenses totaled $39.4 million, or 34.7% of total revenue for the first quarter 2019, up $400,000 from Q4. Sales and marketing was 16.4% of revenue in the quarter compared to 15.4% in the prior year. The increase investment related to an increase in headcount to drive long-term growth, expenses associated with integrating the Rapid sales force and the investments in developing a voice of customer capability. Research and development expense increased to 7.1% of revenue compared to 6.2% of revenue in the prior year. These investments related to continuing to add engineering talent to expand their part envelope in each of our services and investments to evaluate new technologies and 3D printing. GAAP operating income was $19.4 million or 17.1% of revenue in the first quarter. Adjusted non-GAAP operating income was $23.4 million or 20.6% of revenue. On GAAP basis, our tax rate was 21.1%, up from 17.6% in the first quarter of 2019. The GAAP tax rate is influenced by a number of factors each quarter with the timing of exercise the stock up – stock based compensation being a significant variable. On a non-GAAP basis, the tax rate was 21.3% in the first quarter compared to 23.5% in the prior year. On a GAAP reporting basis, net income totaled $15.5 million, resulting in diluted earnings per share of $0.57. Adjusting for the after-tax cost of stock compensation, amortization of intangibles and unrealized foreign currency losses, our non-GAAP diluted earnings per share in the quarter was $0.69, representing a $0.02 decrease from the prior year and a sequential decrease of $0.05 per share. In summary, our financial performance this quarter was impacted by building capacity and staffing or anticipated volumes in acquired sheet metal and expanded CNC services that did not materialize. The inclusion of expenses or a full quarter on our new CNC facility, it was placed in service at the end of the fourth quarter to support future growth, and investments in sales and marketing and research and development. Now turning to cash flow. We generated $18 million in cash from operations during the quarter. Our cash from operations for lower than recent quarters, primarily driven by timing of payments of certain liabilities including annual incentive compensation. Capital spend in the first quarter was $12.7 million, mainly due to investments in equipment, systems and IT infrastructure. We also returned capital to shareholders by repurchasing $17.3 million, or 157,700 shares of common stock. We ended the first quarter with a cash and marketable securities balance of $139 million, down from the $155 million at the end of 2018. Now, I’d like to provide our expectations for the second quarter of 2019. We currently expect Q2 revenue to be in the range of $114 million to $120 million, our growth in the range of 4% to 9%. This revenue guidance reflects the following factors. The services of the Rapid Manufacturing business will improve sequentially but will likely be down year-over-year. We estimate foreign currency will have approximately $1 million negative impact on our Q2 revenues compared to the prior year. Moving to earnings guidance. We estimate our operating costs, including sales and marketing expense will be higher than Q1 due to normal seasonality of trade shows. Our non-GAAP add-backs for the quarter will include stock compensation costs for approximately $3.5 million and amortization of $900,000. We currently estimate our non-GAAP tax rate to be approximately 21% to 22% in Q2. Taking into consideration all of the above, we expect our quarterly non-GAAP EPS to be between $0.66 and $0.74 per share in the second quarter. That concludes our formal remarks. Now Vicki and I would be happy to take your questions. Operator, can you please open up the line for Q&A?

[Operator Instructions] Our first question comes from Brian Drab with William Blair & Company. Please proceed with your question.

Hey, good morning. Thanks for taking my questions.

Good morning, Brian.

I guess, of course, let’s just start with Rapid, please. So a couple of questions here, I’ll roll into, into ones since I’ve only got allocated two questions. So the sheet metal business performance maybe in April versus what you saw last year, and sequentially, can you give us an update on the last 25 days? And then maybe can you comment on the turnover in more detail in the customer base there and was that more on the sheet metal side or on the CNC side? And I’ll just leave it there for now.

Yes. So we continued to see gradual improvement in our – all of our metrics in both sheet metal and in CNC, but it is gradual improvement and so we do expect to see sequential improvement in sales revenue on both sheet metal and the new CNC offer out of Rapid Manufacturing in Q2. Although, as we mentioned, it’ll probably still be slightly negative year-over-year, but better than what we’ve experienced during the first quarter as we continue to execute on the actions that we identified and refine both the offer, the pricing and the way that the sales team is implementing the strategies with the customer. So we expect to see that to continue. In terms of the second part of your question, which was…

About the turnover, was it more in sheet metal or in CNC?

Yes, no, it was split between both of them. And think about this in this way, Brian. They were a traditional machine shop. And a traditional machine shop did not have a standard offer at all. And often a sales team would come in with something that is really out of the scope of scalable, capable operation to continue to scale. And they would drop in those orders and disrupt the entire flow. We’ve now gone to a standard offering and really optimize the flow so that we have reliable on-time deliveries. As you know, our customers expect 98% on-time delivery routinely even as we scale. And so that’s a different philosophy, a different approach to managing a machining operation or CNC or sheet metal operation than a traditional manufacturing. That’s what allows us to deliver the type of customer satisfaction that we deliver. And our customers will tell us that is part of the value that’s there. So we felt very – it was very, very important for us to put that offer in place and in advance of moving forward with turning on the engine to the Proto Labs sales organization and the Proto Labs customers so that we can ensure those experiences that they have with this new offer, meet the expectations of the Proto Labs brand promise. So I’m confident over the long-term this is the right thing to do, but we did see customer turnover in both of those businesses and the revenue growth also did not pick up as we had expected it to do as rapidly. We expected that.

So what has been the bigger factor though in the year-over-year decline in that business? Is it the disruption in the sales force or is it you making the conscious decision that you wanted to move away from non-standard business and what percentage of the Rapid business was non-standard that that you’re just not doing anymore? Which of those issues is bigger?

Yes. I think they’re both a factor. So you think about it, it’s a different way of selling. The sales team in New Hampshire is selling now a standard offer as opposed to just taking anything that maybe out there and trying to fit it into a box and make it work. Now they have to sell a standard offer. So it’s a different way to go to market. So that is a change and that is causing some of our – the sales team in New Hampshire to really struggle with how to go to market in that way, doing a lot of training, had a little bit of turnover in that sales team, which is not unexpected as well. So it’s really difficult to tease those two apart, but there is, it is happening across both services and there’s some business which really is not scalable, which we – which doesn’t fit into the standard offer and is now outside of the range.

Okay. Thanks. I’ll have to pass it along for now. Thank you.

Thank you. Our next question comes from the line of Andrew DeGasperi with Berenberg Capital. Please proceed with your question.

Good morning. I guess the first question on the expanded CNC efforts. It seems obviously that business you flagged has been weaker. Are they the same issues you have with sheet metal or is that just really isolated to the account consolidation? And then secondly, could you maybe just talk about Europe? I mean, it was surprising growth given that the region is a bit weak, generally. Just some additional comments on that would be appreciated.

Yes. So the impact of everything, I mean, so we have the standard offer that was initiated, which is a different way of going to market. And by that I mean you’ve got a standard offer, standard lead times and approach that has taken to – the business that we take, that is a big part of the disruption in the go to market model, but the other piece is the changes in the sales operations. And as I mentioned to Brian, it’s really hard to tease the two apart and it did happen across both offers. So we now have a standardized offer with the expanded CNC offering and we have a standardized offer in sheet metal with standard lead times and a standard approach to the market. That’s what – that’s part of why Proto Labs can scale the way we scale and service our customers with the level of reliability that we do, is standardizing non-standard work and that’s a change. In terms of Europe, Europe is executing – European team is focused on executing on our go to market model with an approach of really identifying targeted customers and strategically engaging with those customers at some different levels. So there’s good things happening there. The teams been focused over the last year provided some of the growth rates that we have on 3D printing. As you know, we added a number of services in 3D printing in the second half of 2018. We’re now beginning to see some of the benefits of those adds as we go into 2019. So, yes, I agree, this is good strong growth and good start of the year in Europe.

Great. And one last question. In terms of timing of this effort to turn around Rapid, do you think this is a still a 2019 event? They could at least get to flat versus last year?

Oh yes, I think we’ll be – as you look at the second half of the year, I think we’ll be starting to see some growth versus prior year, particularly by the fourth quarter definitely. It’s improving in the second quarter. At this point, I think it may be slightly negative.

Got it. Thank you.

Thank you. Our next question comes from the line of Troy Jensen with Piper Jaffray. Please proceed with your question.

Hi. Good morning and thanks for taking my questions.

Good morning, Troy.

Hey, Vicki. Maybe just to start with you, Vicki, I just – I’d like to focus just kind of on the organic business. I think I heard you say maybe 8% to 10% organic growth for CNC and injection molding, and maybe it was a low-double digits with constant currency. But can you just talk about; do you think that part of the business is hitting plans? What do you think like a sustainable growth rate is, is it high-single digits or is it kind of mid-teens for the kind of the core?

Yes. I think what we’ve said is low- to mid-teens for the core is what we think is sustainable over the long-term. You’re going to see fluctuations. I was actually really pleased with some of the growth that we saw in our legacy business. Yes, CNC growing the legacy part of that, so not the expanded offer, but the legacy part growing 8% on top of a 40% organic growth in 2018. So that means that very large share gain that we executed in 2018, we held on to those customers and continue to grow. So that looked good. We are – as we’ve said before, the traction on getting on demand manufacturing services across all of our services is a – it’s a steady improvement. We’re seeing that coming through a little bit in our injection molding business with the growth that we’re seeing in on demand manufactured molds there. So – but those are long-term sales and it is a longer term strategy, but we’re starting to see some good progress there. So I actually felt pretty good about 11% growth over what was a pretty tough comparable in 2018 in constant currency in the legacy business.

Fair. So then, but for you guys to really kind of sustain a kind of a mid-teens, we’re really going to need the on demand aspect to improve a little bit more or?

Maybe on demand, and we need the Rapid Manufacturing sheet metal and the strategy, and we still believe in that investment thesis around the Rapid Manufacturing acquisition of those services is that we will turn on our legacy customers to sheet metal and the expanded CNC offer and be able to gain share in those markets. So over the longer term, we’re looking for growth from those businesses to augment that.

All right, perfect. All right. Thank you. Good luck.

Thank you. Our next question comes from the line of Jim Ricchiuti with Needham & Company. Please proceed with your question.

Thank you. Good morning. Yes, I just want to focus on gross margins in the Rapid business. So in – I think at the time of the acquisition they were around 40% or so. As you move to more of a standardized service, is there room to see those margins go up? Maybe you could just talk a little bit about the margin profile of that business today. And then a follow-up is just in light of the problems you’re having, I think the question is, are there any competitive pressures that you’re also seeing out there in either the legacy business or the Rapid business?

Yes. Jim, this is John. I’ll take the first one and then I’ll let Vicki take the second one. So the gross margins, yes, I mean, that’s part of the strategy in what we’re doing with the operations, streamlining the operations, utilizing software to both increase the throughput and improve those gross margins as we get consistent volume flowing through there. Right now it largely is the volume, right? So, we need to get more volume to pull those gross margins up. And over time, yes, we think that that the opportunity is for those gross margins to be above that 40% where we acquire them.

And Jim, your question on the competitive environment, is that focused specifically on the sheet metal and the expanded CNC offer or in general?

It’s actually in both areas, Vicki. Just because as I look at the legacy business, I thought would this kind of an economy you might be seeing a little stronger growth. So it’s actually a question on the competitive environment in both areas.

Okay. So as I look at the sheet metal and the CNC offer, we now have three months of data under our belt with the new offer going to market. And with that we’re analyzing data that comes in to be able to better understand exactly what’s happening with close rates and competitive environment that’s going to allow us to learn a lot more about that market and to be able to tailor approach, our quoting engine and even some of our value based pricing in order to win more business. So that’s a big part of the actions that we’re taking as we move into second quarter, we’ve been doing some of that as we’ve been going through the March, April timeframe, we’ll to refine that. One of the great things about Proto Labs business is we get a tremendous amount of data coming from our e-commerce web-based model and all the uploads we get and being able to understand how our pricing algorithms and our offering impacts with the market and the competitive environment. So that’s really good information that’s going to allow us to hone this and learn more and get better. And there is competition out there. As you know, our whole business model doesn’t really create additional demand. We actually service the demand that’s out there more efficiently and more effectively than the competitive environment and take share that way. When you look at our business in general, I do think, and we’d mentioned this, I think at the last call on the fourth quarter call as well. We are seeing competitors, both traditional manufacturers trying to find ways that they can change their business to better compete with disruptive technology companies like Proto Labs in the market. And then you also see some emerging business technology – emerging technology companies that are not exactly like Proto Labs, but are looking to have an impact. We follow them very closely. We’re continuing to look at ways to enhance our customer’s experience, which is what we’ve mentioned, what we’re doing with some of our investments in software and R&D in order to make sure we remain the leading manufacturer of custom prototypes on-demand manufactured parts of digitally and with an e-commerce model. We believe that we are that leader today, but we are appropriately paranoid to stay ahead of that and continue to work to enhance that model.

Okay. Thanks very much.

Thank you. Your next question comes from the line of Greg Palm with Craig-Hallum. Please proceed with your question.

Yes, thanks. Good morning. I wanted to piggyback off of an earlier question on Europe. I’m curious if you have information by geography, which geographies we’re strongest within that region, and more so whether you think there was any benefit from, I don’t call if inventory builds are stockpiling from UK companies and in preparation for Brexit?

So our – the growth was pretty well across all regions, probably with our northern in our central is doing better than what it costs Southern, which is France, Italy, Spain. But generally pretty good across all regions. Yes. In terms of stockpiling parts, I don’t think we see that in our business very much. So we did not see huge increases in sales of specific, for specific customers as you know, we’re on demand and pretty low volume prototype and low volume production supplier. So I don’t think we saw any big impact with inventory built.

Got It. And, I guess just, my second question as it relates to the unique product developers that, that growth rates specifically decelerated from kind of what the rate was for the previous six to eight quarters. So was just kind of wondering if you attribute most of that slow down to some of the execution issues that you’ve talked about or if there’s something else going on there?

No. I think it is largely related to the CNC growth. And as we’ve said before, CNC grew over 40% and in Q1 of last year, and just the number of developers that we grew in the CNC business was, was very strong, continued to see the growth this quarter as well. Just not at that a sizable rate that we had experienced in the prior year.

Okay. Thanks. I’ll hop back in.

Thank you. Our next question comes from the line of Ben Rose with Battle Road Research. Please proceed with your question.

Yes. Good morning Vicki and good morning John. Just a question on the CNC machining as it pertains to kind of your core CNC machining. I know that you mentioned, that there was a new CNC facility put in place, I think it was in Minnesota during this – during this first quarter. Did that have any impact at all on kind of the core or legacy CNC revenue this quarter?

It did not have impact on the revenue, it did have some impact on the margin. So that moved to a place in the fourth quarter. It was an awesome moves that our team executed. No injuries. We maintained over a 95% on time delivery throughout the whole transition. It is in Minnesota. It’s in a location called Brooklyn Park, Minnesota, which is a little bit north of the city. But it’s operating very well, strong on times, strong customer satisfaction, but it did have an impact on the margin.

Okay. And with respect to the still relatively new on-demand manufacturing for injection molding, I think you mentioned Vicki, there was some progress there. Could you talk about maybe some examples in terms of early industry adopters, I think you mentioned there was some activity on the mold side in particular?

Yes. Well, I’d have to make sure I would talk about something that I’ve got approval from the customer to talk about. And so I don’t have that off the top of my head. We have had some really nice success, particularly in our med device space where, again, time to market is really important but also getting – being able to launch and meet customer needs there, in a Rapid fashion with low volume production is important, because there’s a lot of medical devices that are tailored to very specific individual use cases. And that’s where our business model just brings up awesome solutions there. So we’ve seen some nice Med device wins. We’ve seen some good wins across some consumer product areas where we’re seeing some products coming in that are tailored to. Again, very specific use cases with uncertain demand. And so to be able to launch with Proto Labs rather than, and other vendor, it really allows you to launch with a lower total cost of production, particularly with uncertain demand. So we’re a really good solution and those two use cases.

Okay. Thanks very much.

Thank you. Our next question is a follow-up from Brian Drab with William Blair & Company. Please proceed with your question.

Okay. Thank you. So just a few follow-up questions. John, can you tell us what the gross margin was – have performed in the first quarter?

So the impact was a 270 basis points on the overall gross margin. So that puts it just below 20% in the high teens.

Okay, thanks. And then, the Japan initiative, and that new strategy or the incremental volume that you’re generating through the partnership seems to be going really well. And can you just comment on that and what the opportunity is, maybe for expanding that type of partnership in Japan and also what has the gross margin been on that incremental business through the partnership?

So in total, let me just to comment first on the earnings in total, our earnings in Japan continue to improve. I think it’s helped a lot by the incremental volume that is being brought in from both the partnership as well as the core business which is growing as well. So I feel very comfortable with the margins, that we’ve got overall in that business. The partnership is going really well. Currently in Japan, it’s really focused on CNC machining. But we are also talking with Misumi to see if there are approaches that we can take collaboratively to bring some injection molding services to their customer base efficiently and allowing their customer base to take advantage of the long-term relationship they’ve had with Misumi to be able to purchase some injection molded products from Proto Labs as well. So we’re looking to see if that’s, that’s an approach that can bring some value. Beyond that, I can’t comment. I know that I will tell you that Misumi does have very strong position throughout a number of regions in Asia, but at this point I won’t comment further about taking that beyond Japan.

Okay. Then I won’t ask my next question on that. I’m just going to ask about Korea, but it sounds like we’ll talk about that later. And, just the last question for now on the selling and marketing, I just want to make sure – $18 million and I’m talking on a non-GAAP basis but, is $18 million in the first quarter and I guess John, we modeled that up slightly in the second quarter related to the Rapid conference and maybe some other activity and then it comes back down in terms of dollars in third and fourth quarter.

Yes. And I think if you look back over history, you can see that second quarter we have the uptick in the tradeshow then it comes back down. So yes, you’ve got that right.

Okay. And for the year in terms of non-GAAP percentage of revenue for selling and marketing, is this going to work out to something around that – the level that we saw in the first quarter, like the 16% level?

Yes. That’s where we’re currently 24%

Okay. Thank you.

Thank you.

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

Thank you again for joining us today. We remain confident and excited about the outlook for Proto Labs. As we look ahead, we’re confident that the current market trends are favorable to our strengths 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 customer’s experience. I want to thank the Proto Labs employees for their efforts in 2019. I also want to thank our customers for their support. We are committed to driving greater shareholder value in 2019 and over the long-term. And we look forward to reporting to you on our progress during our next call. Thank you very much.

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.