Proto Labs Inc (PRLB) 2016 Q3 法說會逐字稿

Greetings, and welcome to the Proto Labs Third Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Jason Frankman. Thank you, Mr. Frankman. You may begin.

Thank you, Tim. And good morning, everyone. This morning, before the market opened, Proto Labs issued a press release announcing its financial results for the third quarter ended September 30, 2016. The release is available on the Company's website at protolabs.com.

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

The Company's projections and other forward-looking statements are based on factors that are subject to change, and therefore, these statements speak only as of the date they are given. The Company does not undertake to update any projection or forward-looking statement. In addition, to supplement the GAAP numbers, we have provided revenue growth on a constant currency basis for both total revenue and revenue earned through legacy operations, adjusted operating income and adjusted net income, and basic and diluted net income per share information on a non-GAAP basis.

The non-GAAP adjusted operating margin and non-GAAP adjusted net income each exclude the costs of stock compensation, amortization of intangibles, impairment on assets associated with discontinued manufacturing processes, charges related to the exit of facilities, and unrealized foreign currency activity. We believe that these non-GAAP metrics provide meaningful supplemental information are indicative of our core operating results, and are helpful in assessing our historical and future performance. A table reconciling the GAAP information to the non-GAAP information is included in our financial release.

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

Thank you, Jason. Good morning, everyone. Thank you for joining us on our third quarter conference call. With me today is John Way, our Chief Financial Officer. I will begin with my prospectus on the current environment in which Proto Labs is operating, followed by an overview of our third quarter financial performance and operational highlights. John will provide a more in-depth view of our financials and our outlook for the fourth quarter revenue and earnings. Then we'll be happy to take your questions.

But before I address the quarter, I'd like to acknowledge the recent passing of Brad Cleveland, our former President and CEO. Brad joined Proto Labs in 2001, and was instrumental in building the business into the globally publicly-traded digital manufacturing company we are today. Brad was admired and respected by all our employees and everyone who knew him. Brad was an accomplished businessman, but he was so much more. He was an outstanding member of the community, coach and mentor, husband, father, and friend. We honor Brad and his contributions to Proto Labs. He will be missed.

The environment in which Proto Labs customers compete today is ripe with megatrends that are favorable to our business model. Proto Labs is a business that helps companies and entrepreneurs get their products to market faster than their competition. We accomplish this with a highly differentiated technology-enabled digital manufacturing platform.

The current trends in the market require companies to be more innovative and nimble, as the Internet of Things, mass customization, and quickly-changing demands from consumers require accelerated product development, and result in shorter product lifecycles and shorter production runs. We are in a strong position to capitalize on this long-term trend.

However, there is uncertainty in the market right now due to the election in the United States, Brexit in Europe, and other factors. And that uncertainty is impacting the economy, and our business is not immune to that impact. We remain confident in our growth opportunities, and we will achieve them through expanding our customer base, increasing our part envelope, and launching new services.

Our largest growth opportunity remains expanding our relationships with our broad base of existing customers and attracting new customers. In the current environment, we have not been growing at our historic levels. We've taken this opportunity to review our sales process, and assess what is working and identify areas we can improve upon. Finding the right Chief Revenue Officer to help us evolve our process and execute our strategy globally, will be critical to helping us establish deeper relationships with customers and moving the Company to the next level.

The search is on track, and we anticipate announcing a new CRO in early 2017. But while we're searching for our CRO, we are not standing still. We've hired sales managers and expanding our coaching. We've fine-tuned our sales process and implemented enhanced sales training and reinforcement programs, and we've change our hiring practices and the profile of the sales reps we hire.

This is an ongoing process, and will take some time to deliver the desired results. But we are confident these efforts will improve the effectiveness of our salesforce. And when the uncertainty in the market lifts, this foundation will put us in the position to capitalize on the opportunities that are ahead of us.

Our next opportunity for growth is envelope expansion. Proto Labs is committed to expanding our envelope within our existing offerings to serve the growing needs of our customers. The overmolding offering that we discussed last quarter, was launched ahead of schedule and is now fully available to our customers. Overmolding is the process that bonds two different materials together, and it's used in a wide variety of applications. Customer demand and our ability to produce quality parts quickly has allowed us to move to full launch mode in September, earlier than we had anticipated. Feedback to date has been excellent, and we anticipate this product line will ramp steadily. We believe it has the potential to become a significant offering for us, much like our experience with liquid silicon rubber, introduced two years ago.

We also moved from soft launch to full launch of our 5-axis CNC machining. This capability will allow us to manufacture higher quality CNC machined parts across more complex geometries. We are continuing to work on other areas in our R&D facility, and will continue to expand our offering based on customer demand.

We have significant upside in the geographies in which we're operating, as evidenced by the fact that we are underpenetrated in the German market. This was part of the strategy behind the AlphaForm acquisition, to establish a presence in Germany. We're seeing the benefits of having a physical location in Germany and that, combined with our ability to offer 3D printing to our existing customers, will drive growth in Europe.

Now turning to our quarterly results, we delivered on our financial commitments this quarter with revenue at the top end of our guidance range, and earnings above our guidance. Revenue in the third quarter of 2016 was a record $78.2 million. This represented an increase of 15% over the prior year, and was slightly above the high end of the range of our guidance for the quarter. AlphaForm, the German company we acquired in October 2015, contributed $4 million in revenue. Excluding AlphaForm, the legacy revenue in the third quarter was $74.2 million, representing 9.7% growth on a constant-currency basis.

Non-GAAP net income was $13.5 million in the third quarter, or $0.51 per share. This was above the high end of our estimates, and reflected a combination of factors; including revenue at the high end of our expectations, improved gross margins, management of operating costs, and a lower than anticipated tax rate.

Our gross margins improved 80 basis points from the second quarter to 57.2% in the third quarter. The improvement in gross margin was the result of improved margins in our German operation and the benefit of our focus on lean manufacturing in the US and European operations.

Despite some headwinds related to costs associated with our facility moves and our search for our CRO, we executed on the management of our costs. This included management of our employee hiring, use of contractors, and overtime. John will cover these items and other financial matters in more detail.

Turning now to some additional operational highlights, our 3D printing business has remained very strong. 3D printing revenue, excluding AlphaForm, grew 30% year over year, and set a new quarterly record. And this was accomplished while we completed the transition to our new facility in North Carolina. We have more than tripled our factory floor space in our new 77,000-square-foot facility, providing us with the ability to expand operations as the 3D business continues to grow.

All our 3D printing processes, SLS, DMLS, and stereo lithography; are optional in the new facility and delivering on customer requirements. To kick off our new facility, we held a Manufacturing Day event on October 7th, primarily for our customers who wanted to see our new building. The day included brief formal remarks, an update on 3D printing trends by industry expert Terry Wohlers, a discussion with our managers, and tours of the facility. Customers were very enthusiastic, and most importantly have been pleased with the output from our new space. I congratulate our team in North Carolina on their excellent execution of a very critical project. This was a major transition, and it occurred without any disruption to customer orders and delivery.

Japan demonstrated another quarter of double-digit revenue growth. This growth came despite the shutdown of our manufacturing operation for 3 days, as we moved to a new facility. This was a significant move, not only for manufacturing, but also the sales and administrative operations in Japan. We held a grand opening earlier this month with our customers. The updates from management and plant tour were extremely well-received, and customers are pleased to see that we have the capacity to serve their growing demand. I'm proud of our Japanese team for the smooth transition.

Efficient, high-quality manufacturing operations are a critical component to our strategy. We were therefore pleased to receive a Minnesota manufacturing award in 2016. This award is given annually by the Minnesota Business Magazine, based on a review by an external panel of industry experts. This year, Proto Labs won in the large company category for overall excellence in manufacturing.

And with that, I'll turn the call over to John for a more detailed look at our financial results.

Thank you, Vicki. Revenue in the third quarter was $78.2 million, an increase of $10.4 million, or 15% over the same quarter in 2015. Foreign currency was a 40 basis point headwind for the quarter, as the unfavorable impact of the weak British pound was offset by benefits related to the yen and the euro. The quarter also included $1.1 million in revenue from our discontinued businesses that will not recur.

Revenue in the Americas increased 9.5%. Revenue in Europe, excluding AlphaForm, grew 9.4% on a constant currency basis. Revenue from Japan was up 17% in constant currency.

Turning to revenue by service, injection molding totaled $46.4 million in the third quarter, an increase of 11% over the prior year. CNC machining revenue totaled $21.8 million, and grew 10% year over year. Revenue from 3D printing was $9.9 million, up 63% or 30% growth excluding AlphaForm.

Legacy revenue in the third quarter came from 14,271 unique product developers. This represented a 14% increase over the third quarter of 2015. Our unique product developer count does not include legacy AlphaForm data, as this information is not yet available in a comparable format. Average revenue per product developer decreased 3.9% compared to the third quarter last year, reflecting a slight shift in the mix of our business.

Gross profit for the quarter was $44.7 million, an increase of $4.4 million over the comparable quarter of the prior year. Gross margin was 57.2%. AlphaForm represented a negative 190 basis point impact on our gross margins in the quarter, an improvement from the 310 basis point dilution in the prior quarter. Excluding AlphaForm, gross margin on the legacy business was 59.1% compared with 59.5% in the second quarter, and 59.4% in the third quarter of 2015. As anticipated, we saw improvement in the gross margins at AlphaForm, as well as our legacy operations in both the US and Europe this quarter. These improvements were offset slightly by the dilution of our Japan and 3D printing margins due to the increased facility costs associated with the new buildings.

Operating expenses totaled $27.8 million, or 35.5% of total revenue for the third quarter 2016. They included non-recurring expenses of $731,000 associated with the exit of facilities in Japan. Adjusting for those items, operating expenses were at $27.1 million or 34.6% of revenue.

Sales and marketing expense totaled $11.8 million, or 15.1% of third quarter revenue. We invested $6 million or 7.6% of revenue in research and development in the quarter. Administrative expenses were $10 million, or 12.8% of revenue. These costs included duplicative facility costs in Japan and North Carolina, and costs associated with our search for a CRO.

Operating income was $16.9 million in the third quarter of 2016, compared to $17.4 million in the same quarter of 2015. Adjusting for the non-recurring facility costs in Japan, stock-based compensation, and amortization; our adjusted non-GAAP operating income was $19.6 million, or 25% of revenue, compared to $19.8 million or 29.3% of revenue in the prior year. The year-over-year reduction in operating margin relates to the dilution from the AlphaForm acquisition, increased investments in sales and marketing and research and development, and increased general and administrative costs associated with our new facilities, infrastructure investments, and recruiting costs.

Our effective tax rate was 31.8% in the third quarter. This was better than anticipated, due to favorable tax adjustments associated with the finalization of our 2015 tax returns.

Net income totaled $12 million, resulting in diluted earnings per share of $0.45. Adding back the after-tax costs of stock compensation, amortization of intangibles, and adjusting for the non-recurring items and the effect of the unrealized gains on foreign currency; our non-GAAP diluted earnings per share in the quarter were $0.51.

Non-GAAP EPS of $0.51 per share exceeded our guidance due to the performance across all the lines of our P&L. Revenue was at the top end of our guidance range. Gross margins improved 80 basis points. We managed our operating costs effectively by rationalizing hiring, reducing contractor and overtime spend, and reducing discretionary expenses such as travel. And our tax expense was lower than anticipated.

We also continued to drive strong cash flows, generating cash from operations of $19.6 million in the third quarter. Capital expenditures were $8.6 million in the quarter, with $6 million related to facilities. This resulted in a cash and investment balance of $175.6 million at September 30th, an increase of $11.3 million from the end of the second quarter.

Now, I'd like to turn to our expectations for the fourth quarter of 2016. We currently expect Q4 revenue to be in the range of $70 million to $75 million. This revenue guidance reflects the following factors. The fourth quarter marks the anniversary of the AlphaForm acquisition; however, I will remind you that the prior year included revenue from unprofitable contracts that have since been terminated, as well as the resin distribution business that has been discontinued. [These] items result in a $1.5 million headwind when looking at year-over-year growth.

The discontinuance of our metal and magnesium injection molding services will result in an approximately $1 million sequential reduction. The effect of foreign currency is estimated to negatively impact Q4 revenue by approximately $500,000. Orders this month have been softer than anticipated. Additionally, December is one of the hardest months for us to predict. Looking at our historical results, some years we have experienced a surge, as product developers try to complete their projects before the end of the year. Other years have been lighter, due to vacations over the holiday season. In the current environment, these factors lead us to be cautious in our revenue outlook.

Moving to earnings guidance. There are several factors to consider. These include the predictability of our revenue as we close the year, our ability to adjust labor to expected volumes is limited by the requirements to meet anticipated future demand, and the fact that we have four paid holidays for our US employees that result in labor expense in the quarter without the corresponding production. And we will continue investment in sales and marketing to drive revenue growth.

Our non-GAAP add-backs for the quarter will include stock compensation costs of approximately $1.7 million, amortization of $163,000, and facilities-related charges of $160,000. We currently estimate our tax rate to be approximately 32% to 32.5% in Q4.

Taking into consideration all of the above, we expect our quarterly non-GAAP EPS to be between $0.36 and $0.44 per share in the fourth quarter. We acknowledge that this earnings guidance range is broader than we have historically provided. This is a direct result of the limited visibility of our revenue for the fourth quarter. With the high margin and on-demand nature of our business, there are a limited number of costs we can eliminate in the short term without damaging the long-term health of the business. That being said, we will manage our costs at or below the third quarter levels, as we complete the year.

Now, I'd like to turn the call back to Vicki.

Thanks, John. As you can see in the fourth quarter guidance, economic and other external factors will impact the rate at which we grow. Our goal is to help our customers get their products to market efficiently and cost-effectively. We remain focused on the needs of our customers, and are committed to managing our costs appropriately to meet those customer needs. We're confident in our ability to drive growth over the long term, which will deliver greater shareholder value.

That concludes our formal remarks. Now, John and I would be happy to take your questions. Operator, can you please open the line for Q&A?

(Operator Instructions). Troy Jensen, Piper Jaffray

Hi, Vicki. Hi, John. Thanks for taking my question here. Hey, so John, so help me out with some math here. 3D printing you said was about $10 million, and AlphaForm was $4 million. If I strip that out, I get $6 million. And that's what I'm showing you guys did last year. That $6 million--

No. So, AlphaForm that revenue is about 50% injection molding and 50% 3D printing.

Okay.

So, it's $2 million in 3D printing revenue at AlphaForm.

Yes, perfect. Okay. I understood that. So-- and I guess for Vicki or John here; I mean if I look back, you guys haven't had a down sequential Q4 since it looks like 2011. It might have been disguised last year with the AlphaForm acquisition. But how much of this is macro versus maybe the sales hires that aren't in place? I'd just love to get a little bit more color on the guide here. It's a little bit surprising.

Yes. Yes, it's always difficult to tell if there's-- how much of the impact is coming from the economy versus some of the changes that we've got going on with sales. I will say that the sales hires, we do have a lot of new hires. So you've got sales reps that are ramping, as opposed to fully ramped, which has an impact.

But we also look at the economic impact. We've got the industrial production down 1.5%, since we follow the consumption of machine tools. Those were down 8.3% in August. So there's still some softness in the economy that we think is impacting the overall uploads and the demand.

All right. That's fair. And then if I ask-- just one more here on the overmolding; a full launch scheduled soon here. You said it's going to kind of track with what we saw with liquid silicon rubber. Am I right to think that liquid silicon rubber was $2 million to $3 million in the first year, any maybe kind of doubled the year after? Or do you think overmolding could grow faster than we saw with LSR?

Yes. So I'd say LSR kind of tracked that over a two-year period of time. And so I think we can see something-- we'll see something similar to that with overmolding. And overmolding did go into full launch in September. So we're now out there and getting some really nice upload interest there, and expect that to continue to ramp into 2017 and 2018.

Is that full launch in all three geographies?

Full launch in US and Europe, and it will be launching here in Japan in the fourth quarter.

Great. I appreciate it. Good luck in Q4.

Brian Drab, William Blair

Good morning, Vicki and John. Can you at all quantify what you're seeing in October in terms of orders compared with last year, or September, or with any relevant period?

Well, I will say is it's coming out softer than we had anticipated. We had a fairly strong August and September. And we're seeing October starting off softer than where we were in August and September.

Okay.

And again, with the lack of visibility and 7-day backlog of orders, and unpredictability of December, our conclusion was to be a little cautious with revenue guidance.

Got it. And on AlphaForm, if my notes are correct, AlphaForm did about $2.5 million in 3D printing in the first quarter of this year. And then you plugged it into your software infrastructure in May of this year. And now we've got $2 million in 3D printing in the third quarter. I'm just wondering is this the typical European seasonality with August being close to zero, or are there other issues?

Yes. I think the other thing to remember there is those unprofitable contracts. We carried them in Q4 and as well as Q1. So it took us some time to run those off. So that clouds the information a little bit. And you are seeing the Q3 European effect of there's a lot of holidays taken in the month of August.

Okay. That's helpful. And then what's-- did you say what the mix is now at AlphaForm? You've got $2 million in 3D printing. What's the other $2 million composed of?

It's injection molding. I mean there's $100,000 of other stuff this quarter. But the majority is injection molding.

Okay. And that resin business is gone at this point?

It's gone.

Okay, and then John, did you say specifically what the gross margin headwind is related to Alpha in the third quarter?

Yes, I did. It's 190 basis points. So, we saw a nice improvement in the gross margins this quarter.

Okay. Okay, I think that's all from me for now. Thanks very much.

Jim Ricchiuti, Needham & Company

Hi. Thank you. Good morning. John, how should we think about this headwind on gross margin from Alpha in Q4? It sounds like you're making steady progress. But I'm just wondering, could we see further improvement of this magnitude in Q4?

I think as I'd look at Q4, just with what we're seeing from a revenue perspective, and the uncertainty of the holiday season, I'm anticipating relatively flat in Q4, with then steady improvement as we go into next year.

Got it. Okay. And any unusual costs we should be aware of in Q4? I mean you broke out the costs, I think, related to Japan. But is there anything else we should be mindful of in Q4?

No. There's the little bit related to Japan. I think the other thing impacting us that I mentioned is we've got the paid holidays for our manufacturing staff. It happens every year. But this year we will be experiencing that as well. Other than that, nothing unusual; we'll continue to manage those costs.

Okay. And Vicki, maybe a question for you; I wonder if you could just give us an update on where you are in terms of the search for a CRO. And just in general, maybe talk a little bit about some of the processes and changes you're already implementing within the sales organization that might begin to have some benefit going forward, as the economy picks up a little bit.

Yes. Great. Actually, the CRO search is going really well. I'm really pleased with the level of talent we've been able to attract. I mean I think it's-- as you know, it's a really exciting business model that we have, great growth story. So it's going well. And we're in those final kind of stages of whittling it down to a candidate. And we hope to be announcing something in early 2017.

As far as the changes that we've made, we've done a couple of things. We've changed the profile of the sales rep that we're hiring, really trying to position ourselves with people who are going to have the skillset to ramp more rapidly, but also ramp more rapidly with the business acumen to have the strategic conversations with customers.

So it's going to take time. Because they're going to have to learn our business and build customer relationships. But that's going to give us a better foundation to drive more strategic relationships with customers. We've also identified a more disciplined sales process, got that put into Salesforce.com. And we're really tracking how our customers are moving the prospects throughout that sales process, to hold them more accountable for driving the results day to day.

And then we've put a lot of training in place. We've got a seven-module training program. We're through three modules so far this year. We started this in the middle of the year. So we're through three, and halfway through the fourth module now. And that kind of sales training is also going to give a relatively new salesforce the foundation they need for growth as we move into 2017. So, a lot of foundational work being done right now.

Great. Okay, thanks. That's helpful.

Ben Hearnsberger, Stephens

Hey. Thanks for taking my question. It sounds like October orders have been slow kind of across the board. Is there any specific end market you'd call out?

No. It's just generally the same end markets that you've seen that we talked before. We're seeing some softness across industrial machinery, across machine shops or any other kind of injection molding that might have been using us for overflow. And some of those end markets like oil and gas and ag equipment that have been just slow in the economy. So it's basically the same theme that we've seen over the last couple of quarters.

Okay. And your 3D printing business is outpacing molding and milling. I'm curious if you see any sign of customers trading down to a 3D printed prototype versus your legacy services.

I think that's happening a little bit in CNC plastic. So our growth in CNC plastic is not as strong as it is in CNC metal parts. So I think you're seeing a little bit of trade-down there to 3D printing. And again, as we've said, we're really focused on delivering the customer with the manufacturing service that best meets their needs to accelerate growth. So we'll adjust accordingly to meet those needs.

Can you tell us the plastic versus metal mix in CNC?

It's skewed more heavily to metal than plastic. So metal is going to be two thirds of it.

Okay. And then one last question; I know it's early and you don't have a lot of visibility. But as you think out to 2017, obviously the macroeconomic picture remains tough. I guess, how aggressively do you expect to re-budget expenses for the macro environment to try to hold some of this margin?

You know, I think we need to make sure that we've got the structure in place to drive the long-term growth. But I think what you've going to see us doing is being much more cautious on adding expense to manage the growth. We're going to be looking to grow with what we've got in place today.

Okay. Thank you very much.

Jon Fisher, Dougherty & Company

Good morning, and thank you for taking my questions. First question, just given the current trends in October and kind of the guidance on Q4, how much of a leading indicator for Q4 business trends does that portend for Q1, the kind of the start of a new calendar year? Is customer behavior, if it's bullish towards the end of the year, does that sustain itself in Q1 or if it's cautious at the end of the year, does that sustain itself?

And then the second question would be just kind of a follow-on to the prior OpEx question. On R&D spend and G&A spend, how close to kind of year-over-year flat can you hold that spending without disrupting the growth potential of the business? Thank you.

Sure. So the first question, as we look at Q4 and what does that portray to Q1; we can't really tell. I think as we saw this year, Q1 caught us a little by surprise. And we think that's related to budgetary cycles. And it's something that we'll definitely be watching as we enter the New Year. But I don't think Q4 is a predictor of Q1. But it is definitely something we will be watching.

As it relates to operating expense, we're going through our annual budgeting process right now. I think the way I would answer it is we will be managing those expenses tightly as trying to adjust our expense levels to what we're seeing from a revenue perspective on a real-time basis. So going through the budgeting process now, and we'll manage those expenses appropriately.

Okay. Thank you.

(Operator Instructions). Brian Drab, William Blair.

Hey, just a couple more questions; what are you expecting for selling and marketing expense as a percentage of sales in the near term, in 4Q, and any other color on that line item?

Yes. So we're continuing to invest in our sales and marketing efforts to drive growth. A little bit of that's going to be dependent upon the timing of when we bring people in. But I would anticipate it increasing here over the next couple quarters, as we add the resources and add the spend to drive that growth.

Is there an upper limit that you-- at least that you can give us, John? And this is-- could it go to 17%, could it go to 16%?

So we're going through the budgeting process right now, and trying to figure that out for 2017. I think what I would say is that range that you just gave is probably the right range. We'll probably land somewhere between those two numbers.

Between 16% and 17%?

Yes.

Yes, that's where I would peg it.

For fiscal 2017?

Yes.

Okay. And then since you're rethinking that guidance, do you have any comments on following a year where you're going to do high-single-digit organic revenue growth, the long term guide for 20% to 25% growth?

I think, as we said, we remain very, very confident in the long-term growth of the business model, particularly with the environment in which our customers are operating in. But right now, given the lack of visibility that we have and the impact that we seem to be seeing with the economy, we're really going to be sticking to quarterly guidance right now.

Okay. Thank you.

Jon Fisher, Dougherty & Company

Hey, just a follow-up to that question as far as the long-term business model. When you look at the margin profile over all of the business, both from a gross margin standpoint and an operating margin standpoint, do you think the business over the long term is sustainable, low 60s gross margin, mid 20s operating margin? Or just given the dynamics that you're seeing or as you take the business model up market into larger enterprises, would you expect the natural margin sustainability of the business to be at lower run rate levels?

Yes. The way we're currently looking at it, gross margins I would expect in the high 50s to low 60s, and continuing to drive those results. So I think that's the right place to be looking at that. From the operating expense, I think that's [narrowing]. And we'll be looking very closely at it. I think we might have a little short-term uptick in the sales and marketing as a percent of revenue to drive that growth. And we'll be looking to leverage that spend over the long term. But we'll also be looking at controlling the costs from an R&D and G&A perspective to keep those operating margins where we want them to be, and see improvements from where we are today.

Okay. Thank you.

There are no further questions at this time over the audio portion of the conference. I would now like to turn the conference back over to management for closing remarks.

Thank you, again, for joining us today. We are optimistic about the outlook for Proto Labs, as we continue to make progress in expanding our operations and positioning the Company for future revenue growth. I want to thank all of our employees for their continued efforts and dedication to Proto Labs. And I look forward to providing an update on our efforts during the next call. Thank you.

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