Proto Labs Inc (PRLB) 2014 Q4 法說會逐字稿

Greetings and welcome to the Proto Labs fourth-quarter 2014 earnings call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Bill Dietrick. Thank you, sir, you may begin.

Thank you, operator. Good morning, everyone. This morning, before the market opened, Proto Labs issued a press release announcing its fourth-quarter and full-year financial results for the period ended December 31, 2014. The release is available on the Company's website at ProtoLabs.com.

Before we get started, during the course of this conference call the Company will provide financial projections and make other statements about its business that are forward-looking and subject to many risks and uncertainties that could cause actual results to differ materially from expectations. A detailed discussion of the risks and uncertainties that affect the business is contained in the Company's annual report filed on Form 10-K and other SEC filings, particularly under the heading Risk Factors. Copies of these filings are available online from the SEC or on the Proto Labs website.

The Company's projections and other forward-looking statements are based on factors that are subject to change and therefore, these statements speak only as of the date they are given. The Company does not undertake to update any projection or forward-looking statement.

In addition, to supplement the GAAP numbers, we have provided non-GAAP adjusted net income and basic and diluted net income per share information that excludes the after-tax cost of stock compensation and amortization of intangibles. We believe that this non-GAAP number provides meaningful supplemental information and is helpful in assessing our historical and future performance. A table reconciling the GAAP information to the non-GAAP information is included in our financial release.

Now, I would like to turn the call over to Vicki Holt, President and Chief Executive Officer of Proto Labs. Vicki?

Thanks, Bill. Good morning, everyone. Thank you for joining us today on our fourth-quarter 2014 conference call.

With me today on the call is John Way, our new Chief Financial Officer. John joined us in December and he's had a very busy two months coming up to speed on the Company while closing the 2014 books.

John is a seasoned financial executive with a lot of experience in managing high-growth companies. He has been the CFO for two private equity-backed companies as well as several divisions of UnitedHealth Group, including Optum Collaborative Care. At Optum, John played a key role in developing and executing the strategy that took the business from its creation to $3 billion in revenue. We are very happy he is here and believe he will be a significant asset in helping Proto Labs get to the next level.

This morning, I would like to begin with an overview of our 2014 financial and operational results, including an update on our new services in the Fineline integration. I will also provide a little color on our strategy for 2015. Then, John will offer a more detailed look at our quarterly financial results and our outlook for the first quarter of 2015. Following that, we will be happy to take your questions.

Proto Labs, once again, achieved record quarterly revenue for the fourth quarter of 2014. Revenue totaled $56.1 million, a 27% increase over the fourth quarter of 2013. This includes $3.9 million of revenue from additive manufacturing services through our Fineline acquisition. Without this, fourth quarter revenue would have been $52.2 million, an increase of 18% over the prior year. I would like to note that Fineline grew 48% over Q4 2013, reflecting the benefits of the combined organization.

We experienced record quarterly revenue across all three of our geographic regions on a local-currency basis. Revenue in North America increased 35% year over year. In Europe, overall sales revenue in local currency increased 10% from the fourth quarter of 2013, but when translated to dollars, revenue growth was 3%.

While we continue to experience relatively flat demand in our Protomold parts business, it was offset by strong growth in Protomold molds and Firstcut with both of these services setting sales records in the quarter. We remain cautious regarding the outlook for our parts business in Europe; however, we do anticipate continued overall growth in Europe throughout 2015 driven by demand for all of our products, including lathe-turned parts and additive manufacturing.

In Japan, we posted record quarterly revenue in yen representing a 25% increase over prior year. However, when converted to dollars, the growth was 10% and it was not a record.

Globally by product line, the Protomold service grew 16% in the quarter versus prior year and the Firstcut service grew 24%. As noted earlier, the Fineline service year-over-year revenue growth was 48%.

When dissecting the Protomold revenue growth for the fourth quarter, sales of molds to support prototypes grew by 28%. However, the sales of parts on previous sold molds grew only 7% versus prior-year fourth quarter, largely reflecting a decline in sales of parts in Europe. The decrease was partially impacted by large orders in Q4 2013 that did not recur in 2014. On a full-year basis, the revenue from parts within Protomold service grew 20%.

We continue to face volatility and predictability challenges in our Protomold parts business. To mitigate these challenges we are continuing to work with our customers to understand their needs, educate them about our on-demand production solutions, and increase our visibility to potential future orders of parts.

We know that our future parts revenue is dependent upon current mold sales, and our strong quarterly sales growth of Protomold molds is a good leading indicator of strong parts sales in the future. In addition, we are continuing to build our talent in strategic selling, which supports more parts sales as our strategic customers learn how they can leverage the Proto Labs business model across the product lifecycle of their products.

We generated net income in the fourth quarter of 2014 of $10.2 million or $0.39 per diluted share. Excluding the after-tax cost of stock compensation and amortization of intangibles, non-GAAP net income was $11.2 million or $0.43 per diluted share. This compares with non-GAAP EPS of $0.39 per fully diluted share in the fourth quarter of 2013.

The fourth-quarter results represent a solid finish to an excellent year for Proto Labs. During 2014, we made substantial progress on a number of important initiatives that will position us for continued growth, and we maintained strong financial performance.

For the year, revenue grew 28%, excluding Fineline, revenue growth was 23%. GAAP gross margin was 61.3% against our target of 61% to 63%. We maintained a 29% GAAP operating margin in line with our target model. Full-year adjusted EPS was $1.73 per share, an 18% increase over the prior year.

We made significant operational progress in 2014. We introduced two new services, liquid silicone rubber and metal-injection molding, and have been offering them with quick-turn expedite capabilities since April. We believe these services represent a substantial opportunity for the Company because traditional manufacturers cannot easily or cost effectively manufacture prototype or lower volume production using these processes. By applying our software-based technology, Proto Labs can provide an effective alternative source to this underserved market.

In anticipation of the growth of these services, we expanded our manufacturing capacity and moved our liquid silicone rubber production out of the Protoworks R&D facility into our full production manufacturing plant in Plymouth, Minnesota. We estimated that our new services would generate revenue of approximately $3 million in 2014 and they met this expectation. We expect these services will be a substantial contributor to our growth in 2015.

We also began the soft launch phase of lathe-turned parts in our Firstcut operation during 2014. The soft launch has been proceeding as planned. We have identified parts that would more appropriately be turned versus milled, and feedback from customers on the quality and timeliness of our lathe operations has been very positive. We are on track for our full launch in North America and Europe later this quarter and in Japan in the second half of 2015.

To ensure we have the capacity to accommodate our growth, we opened a new facility in Plymouth, Minnesota in May of 2014. The new building has approximately 175,000 square feet of manufacturing floor space that will allow us to double the manufacturing output in the future.

In the fourth quarter, we began preparations to relocate our Protomold milling operation into Plymouth where we have more space for additional equipment and operational synergies with our Firstcut milling operation. The move and installation of equipment was a major undertaking and was completed in January without disruption to customer orders. In addition, we added capacity to our manufacturing facility in Europe in 2014.

We completed our first acquisition purchasing Fineline, an additive manufacturing or 3D printing company based in Raleigh, North Carolina. The acquisition was completed last April and is highly complementary to Proto Labs. Roughly 70% of our customers use additive manufacturing in the product development process. We have worked very hard to integrate Fineline into our Company as quickly as possible, and we have made a lot of progress in just eight months.

During the fourth quarter, we completed the installation of stereolithography, selective laser centering and direct metal laser centering equipment in the Raleigh facility. This expands the capacity of our additive manufacturing by nearly 80% and will allow us to pursue the additional revenue opportunities we see ahead for 3D printing in 2015 and beyond.

This capacity addition paved the way for the launch of quick-turn for our Fineline service offering, which began in January. We expect to see margin improvement for Fineline with the launch of quick-turns.

Our sales staff has been trained in cross-selling 3D printing services. We now have integrated Fineline, Protomold and Firstcut data on product developers and engineers served.

In 2014, we served over 21,500 product developers and engineers, representing a 34% increase from the prior year. This illustrates the fact that there was very little customer overlap between Fineline and Proto Labs customer bases and demonstrates the significant opportunity we have for cross selling. Fineline content is integrated on the Proto Labs website, and we have fully deployed our sales and marketing engine to generate orders for our additive manufacturing service.

In the fourth quarter, we launched our My Account single sign-on, which gives our customers access to all three of our services through one login step. This allows customers to view parts and order history for their Fineline 3D-printed parts as well as Firstcut machined and Protomold injection molded parts. In addition, they can now get a quote right from their dashboard. This single My Account release was a very important integration step for our customers' experience.

On a full-year basis, Fineline sales in 2014 increased 30% over 2013. The Q4 and full-year year-over-year growth was significantly higher than market growth and Fineline's historic growth rate. This illustrates the strong synergies with Proto Labs' suite of services and the effectiveness of our sales and marketing engine to drive organic growth. We expect to deliver continued growth for 3D-printed parts throughout 2015.

During 2014, we made strategic investments to expand our sales and marketing efforts. We had added sales staff across geographies to drive growth. Our strategies include new customer acquisition, targeting strategic customers, increasing the number of product developers and engineers we serve in these companies and becoming a strategic partner.

We have also added experienced marketing staff in North America and Europe, including several key people with experience in Internet and social media. These investments in talent provide the foundation for sustained growth.

In 2015, we will be executing on our growth strategy with a focus on four strategic imperatives. First, we will be segmenting our market by key vertical end markets and how the customers use our services. Building on our success in growing sales to strategic customers, we will be developing relevant marketing and sales strategies and tactics for each segment. This is expected to increase brand awareness, the number and quality of prospects and our close rates.

Second, we will continue to invest in our world-class web presence. Our business model relies on web-based commerce. One of the key value propositions to our customers is our rapid interactive quote and the ease of doing business on our website. We will continue to invest in this website and our robust technology infrastructure to deliver more value to our customers and continuously improve the customer experience.

An example of one of these improvements was launched in Q4 and it was our platform neutral ProtoViewer. This enhancement makes it even easier for our customers to view their interactive quote that highlights the manufacturability of their part, regardless of their computer technology platform.

Third, we will be leveraging investments in envelope expansions and new processes to drive growth globally. Examples of this include launching lathe-turned parts globally, expanding LSR sales in the US and Europe, and launching Fineline 3D printing services in Europe.

Lastly, we continuously work to improve the customer experience, especially, with respect to ease of use. An example of this was the Proto Labs' proposed revision service we launched on our website in 2014, which allows our customers to accept a change and place an order faster and more easily.

With the clarity of our strategy, and to facilitate its execution, we have made several organizational changes. Rob Bodor has assumed a new role of Vice President, General Manager of the Americas where he will lead multifunctional execution in this region. Don Krantz has assumed the role of Executive Vice President and Technology Officer with leadership over our global product management team, e-commerce, technology services, including software and IT and Protoworks. Jackie Schneider assumes the role of Vice President, Global Sales and has responsibility for driving sales excellence across our organizations around the world.

With that, I will turn the call over to John for further comments on our financial performance. John?

Thank you, Vicki. Revenue during the fourth quarter of 2014 was $56.1 million, an increase of $12 million or 27% over the same quarter in 2013. Additive services revenue related to our April acquisition of Fineline was $3.9 million. Without the revenue from Fineline, our revenue would have increased $8.1 million or 18% when compared to the previous year.

Protomold and Firstcut revenues were $35.7 million and $16.5 million, respectively. International revenue during the fourth quarter totaled $13.8 million or 25% of total revenue, compared to $13 million or 29% during the fourth quarter of 2013, reflecting the negative effects of currency of approximately $900,000 during the quarter.

Our legacy Protomold and Firstcut revenue in the fourth quarter came from 8,773 unique product developers and engineers, a 20% increase over the fourth quarter of 2013. Average revenue per product developer was down slightly on a consolidated basis compared to the fourth quarter of the previous year, as a result of the variability in our Protomold parts revenue and the foreign currency impact. With the integration of Fineline data, our unique product developers increased to 10,231 for the quarter.

Gross margin decreased to 59.9% for the fourth quarter of 2014 from 62.7% the year before. Contributing to the decline in the gross margin from the prior year was the lower gross margin on our additive business, which represented approximately 80 basis points.

Manufacturing capacity investments in support of existing and new services also had an approximately 80 basis point affect on the gross margin. Additionally, foreign currency had 110 basis point impact on our gross margins.

I would like to provide some additional color on this impact. In Europe we have sales in both euros and British pounds whereas the production costs are incurred in British pounds. The change in the euro rate versus the British pound, as well as the translation to US dollars, drove this margin degradation.

As we gain market momentum on the recently introduced processes and our product offerings in general and release quick-turns for Fineline, we anticipate that gross margins will return to our target range with the improved utilization.

Operating income was $14.7 million in the fourth quarter of 2014, compared to $13.9 million in the same quarter of 2013. As a percentage of sales, 2014's fourth-quarter operating income was 26.2% and 2013's was 31.5%.

Research and development expense was $4.7 million or 8.3% of revenue for the recent quarter, compared with $3.5 million or 7.8% of revenue last year. The increase was a result of software projects associated with integration activities of Fineline as well as ongoing Protoworks initiatives.

Sales and marketing increased to $8.1 million or 14.5% of revenue, compared with $6.2 million or 14% a year ago. As Vicki discussed, we have invested in sales and marketing staff and training in order to pursue the growth opportunities in the market. Our inside sales force and customer support employees totaled 208 at the end of December 2014, an increase of 61 employees from December 2013.

Diluted earnings per share in the fourth quarter of 2014 were $0.39 per share. Adding back the after-tax costs of stock compensation and amortization of intangibles, our non-GAAP diluted earnings per share in the quarter were $0.43 per share. A reconciliation of net income and EPS to non-GAAP net income and EPS was included in our earnings release this morning.

Our spending on capital during 2014 totaled $43.5 million. This includes $13.5 million related to our new Plymouth facility, $7 million related to the purchase of our manufacturing facility in Telford, England and $5.8 million related to investments in equipment for additional capacity for Fineline. During 2015, we anticipate capital expenditures of approximately $40 million for additional manufacturing capacity and an additive manufacturing facility to support our growth.

During 2014, we generated strong operating cash flow of $57 million, and cash and investments totaled $128.4 million at the end of the year.

I would now like to provide some guidance into our projected results for the first quarter of 2015. Including Fineline's results, we currently expect revenues in the first quarter of 2015 to be in the range of $56.5 million to $59.5 million. This revenue guidance includes an estimated $1.5 million negative impact related to exchange rates.

Stock compensation costs in the first quarter will be approximately $1.4 million. Amortization of intangibles related to Fineline will be approximately $185,000.

Taking into consideration all of the above, we expect our quarterly non-GAAP EPS to be between $0.43 and $0.47 per share. Our guidance philosophy will continue to be conservative in light of the European economy and its impact on our business. Finally, our long-term targets are 25% annual revenue growth and annual GAAP operating margins of 29%.

I will now turn the call back over to Vicki for some closing remarks.

Thanks, John. Before we open up the call for questions, I would like to reiterate the reasons that we remain confident about the outlook for Proto Labs. We have a large available market. We have focused strategies to capitalize on the opportunities, including investments in our sales and marketing capabilities. We are realizing strong results from the expansion of our product offering, including additive manufacturing, and we'll continue to be proactive in delighting our customers.

Our margins were impacted by capacity investments, foreign currency, and investments in sales and marketing and technology this quarter; however, we expect them to return to our targeted levels. We are excited about the opportunities for our business and are focused on enhancing customer experience to achieve our long-term objectives and enhance valuation for our shareholders.

This concludes our prepared remarks. Operator, we will now open up for questions.

(Operator Instructions)

Our first question comes from Troy Jensen, Piper Jaffray.

Congrats on the nice results, Vicki and John.

Thanks, Troy.

A question maybe for Vicki, Q4 ex Fineline was up 18% year-over-year. I understand the headwinds with Europe and currencies, but have the targets always been 25%? I'm curious to know if we can get back to a 25% organic growth, or did the 25% includes tuck-in acquisitions like Fineline and new product introductions?

We do feel that we can get back to a 25% organic growth, particularly on an annual basis. There could be quarter-to-quarter fluctuation with that. Reasons, as we've talked before, we've got a large available market.

Now, to do that, we do feel we've got to employ some additional tactics in sales and marketing to achieve that. One of the things I talked about was our focus on segmentation. We have made some significant investments in our sales and marketing staff, here in the second half of 2014, in order to be able to build the capabilities to execute on that segmented market strategy.

We will be segmenting by key verticals, so these would be targets like the medical market, aerospace, industrial equipment, lighting, electronics. And really tailoring our messaging from a marketing point of view, sales tactics and approaches in order to capitalize on what we think is a really strong value proposition, large total available market. And to really get the penetration that we need there.

Troy, just to clarify a component within your question. The new processes, those definitely are organic and we will continue to look to harvest those.

I think maybe just a point of clarification how we are looking at it, we have experienced some significant growth in Fineline, since the acquisition, from the investments in our sales and marketing. It's starting to get a little bit blurry as to what's acquired revenue versus what is organic in the revenue base.

Okay, that's fair. Speaking on Fineline, as far as these synergies, I know the growth rate was very good, probably better than industry has seen in the fourth quarter here.

What's left in the integration? When do you think we see a more rapid ramp? Not that -- I make it go back to the growth rate was good, but just curious if there's still efficiencies or synergies that can accelerate it?

Right. We are essentially done with the integration, but your point is, are there additional synergies? Absolutely.

You saw in the data the number of product developers that the Fineline business has added to our database. So cross-selling opportunities are huge.

We also intend to continue to make investments in our website in order to allow our customers to be even more delighted with the kind of consultative services that we can provide with the suite of services that Proto Labs has to offer. So, there is certainly continued synergy that we are going to tap, but the integration itself is essentially done.

I tell you, let me just stop by saying, I am so proud of this team for what we accomplished in eight months. This was this Company's first acquisition and the team did a phenomenal job on getting this Company integrated very, very quickly into a single Proto Labs.

Okay. Last question. I know you guys hit it on the call. I just missed it. Can you just give me the European growth, assuming constant currency?

10%.

10% year over year. Okay. Thank you. All right, good luck in 2015.

Thanks, Troy.

Thanks, Troy.

Our next question today coming from Brian Drab from William Blair.

Good morning. Congratulations on a great quarter, great year.

Thanks, Brian.

I guess continuing on the Fineline discussion just for a second. Was Fineline capacity constrained in the fourth quarter, at least at the beginning of the quarter?

No. No, I think we're in good shape. As you know, we had to put the capacity in place in order to launch quick-turns, which we did a few weeks ago. It's going great so far. That's a nice service we can offer our customers.

We were not capacity constrained. We had a very strong -- year-over-year growth, as we mentioned, was 48% for additive manufacturing versus where Fineline was as an independent company in fourth quarter of 2013.

Okay. I guess I'm thinking about it as a positive. I'm wondering if there was -- if you would have had the capacity online for the full quarter, if you would have done more than $4 million in revenue? But you're saying, the answer to that is, no, you weren't capacity constrained at any point during the quarter?

I would say that as our metals capacity continued to come up during the quarter that helped. So I wouldn't say we were capacity constrained.

Okay. Then on the selling and marketing expense, so 14.5% of a record revenue result in the quarter. Then the guide suggests at the low end of the guidance of $0.43, similar to the level that you did this quarter on $56.5 million in revenue.

It looks like you are suggesting selling and marketing expense of maybe 14% to 15% for the first quarter as well. Can we expect you to stay at the high end of this selling and marketing range of 13% to 15% throughout 2015?

Yes, that's a -- probably, I mean -- I would -- that's fine to model it that way.

Yes, Brian. That's what we are currently planning is at that range.

We are testing a lot of things from a sales and marketing perspective. To the extent something gets traction then we would deem it a worthwhile investment, we may accelerate that. Right now, that's the right -- looking at that range and the top end of that is the right place to be.

Okay. Given the strong revenue result in the quarter -- in the fourth quarter, did you have opportunity to invest a little bit more in selling and marketing than maybe you were originally planning at the beginning of the fourth quarter?

No. We really executed to our plan very well, by the way. I think we brought on some fantastic talent. We are beginning to really get ourselves -- our minds, around what we need to do with segmentation, which has been the great step. We've built the sales force in each region of the world. That's been a strong add.

Starting to do some really nice training. I feel good with where we are entering the first quarter with the investments that we've made in sales and marketing.

Okay. Can you comment on the proposed revision function? What sort of impact might that be having? Can you quantify in any way, maybe your conversion rate, how that's changing, conversion from quote to order? Is that improving?

It has improved. We don't go give those numbers out publicly, but I will say, first of all, we're able to use the Proto Labs Proposed Revisions. We can't use it everywhere, so it really depends on the configuration of the part and what needs to be done, but we're using it at the target rate that we expected. We are getting several points of improvement in close rate when we use it.

It's just a great, easy way for an engineer to say, oh, that's what you want to change? You've already changed it on my CAD. Great, I will click add to my cart and there it goes. We do see a nice uptake taking close rate with that.

We've now got that deployed globally. It's a little bit earlier in Japan. We're only about one quarter into the Proto Labs Proposed Revisions, but they are also seeing an uptick in Japan.

Europe came in after the US. They're seeing some good results, so it is a nice add.

Okay. Then one more for you, Vicki. Have you had any success in developing some meaningful, deeper partnerships with any major customers? Is there potential to partner with one or more large customers in 2015 that could result in a meaningful increase in revenue?

We continue to build really strong strategic relationships with our customers. One way I'd like to describe it is we are making a lot of traction here. We look at customers who buy $0.25 million or more from us as really strategic, because when you are at that kind of level, you are doing more than just buying a couple of prototypes from us. You are using us in a strategic way.

We have been able to increase the number of companies that buy $0.25 million or more from us this year by 32% over the prior year. Our sales from these are up 33% year-over-year.

We really are developing these more strategic relationships, and these companies, depending on what their model is, what their needs are, are using us in very strategic ways across the product life cycle, from prototyping through scale-up and even some things around end of life. It's beginning to get some really nice traction.

Okay, thanks very much.

Our next question from Jim Ricchiuti from Needham & Company.

Good morning. This is actually Brad in for Jim. How are you guys?

Good morning, Brad.

First off, how should we think about the contribution from LSR and metal injection molding in Q4 and then looking into 2015? I know you said substantial, but is there anything else, any other color you can provide?

The only thing I will say is that we continued each quarter, we launched it in April, each quarter saw nice growth over the prior quarter as more product developers and customers begin to understand what our capabilities and we gain penetration, we expect that to continue into 2015. And in 2015, our new services will be a more substantial contributor to that 25% year-over-year growth.

Okay. Can you talk about how the business tracked in Europe through the quarter relative to what you saw in Q3?

Through the quarter, what we did see was sequential quarter-to-quarter growth in parts. Even though year over year our parts sales in Europe were down, but in part due to a very large parts order in Q4 of 2013, which did not recur. Sequentially, we did see growth in our parts business from Q3 to Q4 in Europe.

Mold sales and our Firstcut sales were very strong in the fourth quarter, as I mentioned. That bodes well also for parts sales and growth into the future. You've got to sell a mold before you're going to sell the part, so that's a very strong leading indicator.

Then, Japan was up 25%. Considering the macro environment that appears pretty strong, how would you characterize the business environment in Japan going into 2015?

Remember that's a very small region for us, so the growth doesn't make a huge impact.

Right.

What we see there is we've made some really nice investments in the team there that are going to really pay off. We've added to our sales leadership. We've brought some additional marketing support.

As we look at taking our marketing approaches globally, and our sales approaches globally, I think that's going to begin to have a stronger impact in Japan as well. I feel good about the trajectory of that team going forward.

Okay. Last for me, can you just remind us about the strategy for Fineline in Europe and timeline for expanding the 3D printing service there? Thank you.

We are expecting to be launching additive manufacturing in the second half, in Europe.

Great. Thank you.

Our next question today is coming from Holden Lewis from Oppenheimer.

Great. Thank you, good morning.

Morning.

Just wanted to get a little bit more color on this decline in sales per developers on an organic basis, taking out Fineline? Obviously, it's unusual for it to go down. It was down 1.5% this quarter.

Based on your guide, it looks like -- assuming you grow unique developers 20% again, it looks like you are probably going to see sales per developer down again. Particularly when you have these new services coming on and growing and being impactful. Can you give a little bit more color as to why you're seeing those -- a couple of quarters here of sales per developer being negative?

Sure, Holden. This is John.

I think that's a consolidated number. I think we have to break it down a little bit to really understand it. When you break it down to the regions, the geographic regions, sales per developer is actually up in the US and up 3% for the quarter and 4.5% for the full year. The US, we continue to tick up.

Really, Europe is dragging us down there. Back to what Vicki said, we had a large customer with a large order in Q4 of 2013. That skewed that number higher. Then, you've got the foreign currency impact that hit us here in the fourth quarter here.

If you look over a longer time horizon, over the two-year time period, the CAGR on that growth is 4.5% in Europe, too. It's a little more choppy because of that large parts sale.

Are you able to strip that large customer out to look at what that would have been ex that?

Yes, I am. I will have to follow up with you on that, but it is on a common-currency basis. It's just the translation will drag it down a little.

All right, so excluding currency and excluding that one order, you would have seen sales per developer in Europe up? We don't know the number, but it's up?

Yes.

Last thing, just as my follow up I think to maybe build on the prior question. You talked about $3 million incremental revenues in MIM and LSR in 2014. If we throw MIM, LSR and then the turns in lathes all together, so you don't have to be particularly specific on any new service. Can you give a sense of how much incremental revenue you are expecting from essentially the 2004 introductions in 2015?

What we'll say, that is included in the 25% year-over-year growth we're looking at. We have targets for each of those within our plan, that we expect them to be more substantial going forward. We really don't break it down by individual material, so to speak.

Liquid silicone rubber will grow year-over-year. Our high-temperature plastics will grow year-over-year as well. Our metals, our hard metals and soft metals in Firstcut will grow as well including lathe. We expect them to be more substantial.

Those new services, what they do for us as well, not only do they grow but they allow us to have a broader suite of services to meet the needs of our customers. We've become a destination where they know they can get the part they need and the material they need and the process that they need so that the experience becomes enhanced. I think it also helps us with overall acquisition of customers and bringing new product developers into the fold.

Okay, so your long-term revenue goal is obviously 25%. That also is what you would expect to do in 2015 given that contribution?

Correct.

Thank you.

Thank you.

Our next question today is coming from Andrea James from Dougherty & Company.

Good morning, thanks for taking my questions.

Hi, Andrea.

Hey, good morning. The $40 million in CapEx, what portion of that is expanding Fineline into Europe? Is that a majority of it? I'm just curious what percentage it ticks up?

No, we've got floor space in Europe to add the equipment in there, so it does include the equipment for expanding additive. Our challenge with floor space in the Fineline operations today. There is $12 million to $15 million of buildings and building improvements in that number for next year, largely related to floor space for additive manufacturing.

In North America.

In North America.

Oh wow, so you're going to be -- I'm just trying to get a sense of -- because last year. Could you just put it in the context for me? You did the big expansion into Plymouth. Is there going to be something on the magnitude of that, or globally, you're looking at where you can add floor space in places?

We're looking at the Fineline operations and assessing real estate options in North Carolina right now. There may be something to the scale of what we did in Plymouth this year to expand that facility.

Awesome. When would that first start to contribute, though? Would that be more of a 2016 thing?

Yes.

Yes.

Then one more thing, you said you were going to target marketing by vertical. I was wondering, I know you guys are really fragmented. I was just wondering what does that look like for what you guys have to do internally?

Have you identified your verticals? How many of them will there be?

First of all, we've got fantastic data for us to analyze and to try to understand what segments of vertical segments and even what size companies tend to get the greatest value from our value proposition. That's how we've done the segmentation. We've identified six verticals that we are going to be focusing on initially.

You are right, Andrea, we are very fragmented. When you look at our total number of vertical, I have got Bill Dietrick here right now, so you might be able to help me. I think we have got over 40 identified as verticals that we put customers into.

We've really identified six where we've got good, strong, value propositions. We've got customer bases that we know it will resonate. That's what we are going to be targeting initially.

We will be developing very relevant content for those verticals, speaking in the language that they understand and making sure that we can drive that conversion. Bill, you want to add anything to that?

The only other thing that I would add is, is that we have invested in a new marketing automation platform that we will be rolling out here within the next month or so. That will improve our ability to segment our markets and target the industries that we know are the best industries for us. It will also allow us to measure the ROI on all of our marketing campaigns and improve our conversion rate. We are just around the corner from launching that new platform and that will help our ability for the segmentation.

This is great. It sounds like you have got 40 verticals and of those, 6 show the most promise. Can you tell us what the six are?

They are markets such as medical and aerospace.

Automotive.

Automotive, lighting, industrial equipment.

Thank you. I appreciate that, the thorough answers.

Thank you. Our next question today is coming from Scott Schmitz from Morgan Stanley.

Thanks for taking my question and congrats on the quarter.

Thank you, Scott.

I just wanted to verify first on the Protomold business. Is the deceleration, is it just a function of the parts business in Europe? Or are there any other areas that you are seeing a little bit of weakness in right now?

What I will tell you is that year-over-year parts business -- it is parts business in Europe. Now, we are a little bit flat in North America in parts sequentially, but that is indicative of the lumpiness that happens with that parts business within Protomold.

It's non-demand manufacturing platform, and it really depends on the demand from the customer base and it will fluctuate quarter-to-quarter. In general, the year-over-year reduction in growth is the European parts business.

Got it. I think you said you expect some growth in 2015. Is there any other -- how are you thinking about that in terms of magnitude?

Is it similar to the rate we saw in 4Q on a constant-currency basis? Any other color you can provide on your thinking as to what Europe grows next year?

I think it should be a little higher than what we saw year-over-year. Like we said, we have a very challenging comparable with Q4 of 2013 with that large customer. So you strip that out, it's going to be higher on a constant-currency basis going into 2015.

Okay, great. Finally, for me, Vicki or John, I'm not sure who wants to take it. Just on the gross margin trends, I know I think, John, you said gross margins improve with utilization.

Any other color or how we think about through the year? Do we get back to the 61% range? Anything else you can add to that?

We added some capacity in the second half of the year and until that capacity is at a higher utilization, it's a little bit of a drag on the margins. That happens with any investment. The new services also have capacity in them as well to drive more revenue and push more volume through there.

Also, we are launching the quick-turns, or did launch the quick-turns for our Fineline business. We expect improvements there, too, and also feel that the new facility in Plymouth, with the layout and the streamlining of our processes and the flow, will help our productivity. I think we've got a number of things going that should help us get back there.

We continue to work on manufacturing productivity all the time. We've done a lot this year, opened a new facility. We completed in January the combination of our Protomold milling operation into Plymouth. Lots of change.

And as you can imagine, as you put that through a manufacturing plant, it can cause some inefficiencies. Once that gets lined out, people get into their new roles, you start driving the productivity improvement again. I feel comfortable we will get back into the target range on gross margin.

By the end of the year?

Oh yes.

Okay, great, thank you.

Thank you. Our next question today is coming from Bobby Burleson from Canaccord Genuity.

Hi, Vicki and John. Thanks for taking my questions. Congrats on a strong 2014.

Thanks, Bobby.

Following up on some previous Fineline questions. I was wondering, in terms of the capacity you guys put in place, how much DMLS capacity you guys have now? How, roughly speaking, well utilized was it in Q4? In other words, how much headroom is left in terms of utilization?

We've added a little over doubled our DMLS capacity in 2014 from when we did the acquisition. We've got a little headroom. I will say that service is growing even faster than the total. That's one we are watching closely.

It is a piece of equipment that has a little bit longer lead time, the DMLS equipment, so we have got to stay on top of that. We've got capacity through probably the first half, and we will be watching demand growth closely on that.

Great. And then in terms of the expansion of Fineline into Europe, is there a parts business that you have in mind as well for that Fineline activity? What is the sense, in terms of the mix of prototyping and actual part production you might be doing?

Today, when we look at our additive manufacturing 3D printed parts, the vast majority are for prototypes. I think, over time, I mean I think it's a timeline. It's very difficult to predict. You are going to see companies that are looking to design products for production. We will be able to build some production type business with an additive process.

I think that may be a little bit further out. I expect, in the near term, our additive manufacturing services will be used primarily for prototyping. But we are seeing some interest in certain types of products that the engineers design them in and can effectively produce a production part with an additive manufacturing process.

Great. The last one for me is with the additional equipment -- it sounds like you don't need more floor space in Europe for Fineline, you have plenty of floor space. The equipment that you plan on installing, just globally, for Fineline this year, is there more DMLS?

Just on the metals topic, in general, are you looking at one flavor of metal process? Or are you exploring multiple processes for different types of parts? Thanks.

I will answer the first question first. That is, we will be putting in place, in Europe, our full product portfolio of stereolithography selective laser sintering and direct-metal laser sintering so that we can offer our customers in Europe the same additive manufacturing experience that they have here in North America.

In terms of technologies, I think we said before, our current equipment for DMLS is concept laser, but we are technology agnostic. I think that's one of the beauties of our business model.

We're focused on the customer and bringing the customer the technology that best meets their needs. Again, we're focused on the industrial customer. We're not focused on the consumer.

We are constantly looking out at the technologies that are being developed and commercialized across broad digital manufacturing spaces. So additives certainly being one, but any other areas where we might be able to digitize the manufacturing process like what we did with liquid silicone rubber.

What are the types of processes that our customers need? And we will add them. We're not married to one technology. I think that's one of the beauties of our business model.

Great, thank you.

Thank you. Our next question today is coming from Steve Dyer from Craig-Hallum.

Morning, Vicki. Morning, John.

Morning, Steve.

Most of mine have been answered by now. I just want to make sure I can synthesize all of the financial stuff that has been thrown around.

For the year, it's safe to assume that -- or your thinking in terms, anyway, of getting back to the 25% revenue growth, organically, gross margin, somewhere in that 61% range, GAAP operating margin in the 29% range. That's assuming euro stays here, a little bit more elevated sales and marketing expense throughout the year. Is that, generally, the framework?

Yes, as we look at the full year. Those are the full-year numbers. There may be some volatility within given quarters, but that is correct.

Got it. Okay.

Then the balance sheet, obviously, remains a huge asset, I think, for you guys. Are you still on the lookout for tuck-ins? If so, how we should we this about maybe the areas you are looking or the cadence of what we might see?

As we've said before, our business model, we're not an acquisitive business model by nature, but if an acquisition would help us drive forward our strategy, like the Fineline acquisition did, we'll certainly look at that. We have developed -- we have a nice portfolio of properties within our pipeline. We are pretty selective, and it has to add to the strategy and has to allow us to accelerate where we are going.

We are looking at the whole ecosystem from actually manufacturing, as well as the software side of things. We will see what comes. At this point, we will be cautious around acquisitions and make sure they add the kind of value that the Fineline acquisition clearly is adding to the execution of our strategy.

Got it. Okay. Thank you.

Thank you.

Our next question today is coming from Michael Weisberg from Crestwood Capital Management.

Good morning. Your comments about the gross margins, currency is going to be a drag 2015 versus 2014, isn't it? Does that mean you can get back to -- can you still get back to normalized gross margins this year?

Yes, so you are correct. Currency, we are expecting currency to continue to be a drag in 2015. With all of the components that we talked about earlier, we do expect gross margins to get back up into that targeted level.

Remember, in the fourth quarter we were at 59.9%. That's had a number of components to it. 80 basis points with Fineline.

We're doing some things with quick-turns that we think are going to really help our margins in additive manufacturing, about 80 basis points, where some of the capacity additions we added that we really had grown into. As well as maybe some of the, as we mentioned, the disruption when you are consolidating assets and the productivity that you lose in that. We will get that behind us pretty quickly.

There's about 110 basis points associated with the currency that, you are right, will linger. Our target model is 61% to 63%, and I feel comfortable we will get back into that target model.

Great. What did you say mold growth was in the fourth quarter?

28%.

28%.

One final one, it looks like sales and support were up over 40% year-to-year. Is that built out, or is there going to be a continued build in that as we go through 2015?

I'll answer that two ways. First, I don't think it was quite 40%. It was like 30% -- but it was a big investment in sales and marketing, I don't deny that. We really looked at talent as well as what we needed to do for the growth.

We do have some digestion to do of what we have added, so I'm not going to -- I don't expect that to be a similar kind of add this year. But, as our revenue grows, we will be increasing sales and marketing expenditures to stay within our target sales and marketing expense as a percent of sales.

We will continue to invest. We do have a little bit of digestion to do of the adds that we have made here in the second half that have been really great talent that give us a great foundation for 2015.

Thank you.

Thank you.

Our next question today is coming from Ben Hearnsberger from Stephens.

Thanks for taking my question. When I think about last year, I think about it as being an investment year in terms of services. This year it sounds like it's an investment year in terms of getting out and marketing those services.

How do you guys think about seeing leverage off all this investment that you made over the last year and expect it in the coming year?

I think that is a great way to look at it. Now, we are investing in the launch one more service in 2015 and that will be lathe-turned parts globally, as well as launching 3D printing Fineline services in Europe. So there's some big investments in additional launches.

I think that's a good way to look at it. We've added a lot this year in terms of new services and talent to the organization. Now, we're really focused on implementing our sales and marketing strategies, overlaying segmentation on top of that, and some an additional tactics in sales and marketing to drive awareness. And also to really get high-quality prospects into our systems that are going to allow us to improve our close rate. I think that's a good way to look at it, Ben.

Ben, maybe one thing to add related to that. We are getting in the territory where we are becoming a larger organization, so we are getting into the law of large numbers. I'd just like to remind you, our gross margins are in excess of 60% and our operating margins are 29% plus, so those -- that's strong performance for our business. Yes, I think there is leverages, but I think we do need to continue to invest to make sure we continue to grow at that rate.

Understood. Thank you.

Vicki, I think in the past you've mentioned that we can expect LSR and MIM to ramp similar to how we saw Firstcut ramp? Is that --

No. LSR and MIM, first, LSR is a material, in a way. It's part of our Protomold service.

It is a unique material. It's a liquid silicone rubber. It's a thermo set. We hadn't offered that before. I would put it in the category of a material within Protomold that really widens our offering, which is good.

Metal injection molding, or MIM, it's an emerging process, unlike machining. Machining is a very prevalent traditional manufacturing process which we digitized with the Firstcut. We've taken a large, traditional manufacturing process and converted it to a digital manufacturing process with Firstcut. So the TAM there is huge.

If you look at metal injection molding, we've digitized a traditional metal molding market. But that metal injection molding space as compared to total machining is a smaller total available market.

Okay. Thank you for clarifying.

Last question for me, you mentioned some initiatives in place to try to stimulate that parts business. I was just curious if you could give us some more detail on that? Then really, how much of that parts business do you think you really have control of versus how much is more driven by the macro environment?

That's a really good question. Let me just first add what we're doing to get a handle on that parts business is really understanding how customers use us when they do purchase production parts. They use us in really three ways.

One, is they would use us in scale-ups. If they have a hot product that they are launching, and they go through prototyping with us, and they really need to get to market quickly. They will use us for bridge tooling and for early market introduction, while it takes a long time for them to get products launched, if you get steel tooling built for large-scale production. That causes big surges in a quarter and then it drops off to almost nothing.

The second way that we are used is really for on-demand manufacturing throughout the lifecycle of the product. Usually, it's where there is a smaller total volume of the product, maybe they sell 5,000 to 10,000 of the finished product per year. Demand may be unstable and having an on-demand manufacture allows them to meet their customers' needs without having to make big batches of things that may never sell.

The third is end of life, as a product goes out, end of their life cycle, they just need a few parts.

We are understanding that and we're working with our sales and marketing teams to be able to communicate those to new customers to try to see where we may be able to meet their needs strategically. It's tied very closely with the strategic selling work that we are doing with our sales teams to go wider and deeper and become more solution offerings and more strategic with those customers.

Now, the second part of your question is what does that do with your predictability? By nature, we are an on-demand manufacturing house, so the predictability will really depend on the demand for the products that our customers put our products into. It will, by nature, be more variable.

The fact that you would also have these surge demands when helping a customer go to market quickly, by nature, creates a surge in demand that might not be repeatable. That's going to be part of the business going forward that we are just going to have to get used to.

Okay, that's very helpful. Thank you.

Thank you.

Thank you. We've reached the end of our question-and-answer session. I would like to turn the floor back over to Management for any further or closing comments.

Thank you. Thanks for joining us today. We hope we were able to convey the sense of excitement we see in the opportunity ahead for Proto Labs and our confidence in our ability to execute our growth strategy. I would like to express my sincere thanks to the dedicated Proto Labs team, who worked very hard to generate these results.

I would also like to thank our customers and our shareholders for their support. I look forward to updating you on the progress next quarter. Thanks, very much.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.