Proto Labs Inc (PRLB) 2017 Q3 法說會逐字稿

Greetings, and welcome to the Proto Labs Third Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Dan Schumacher. Please proceed, sir.

Thank you, operator, and good morning, everyone. This morning, before the market opened, Proto Labs issued a press release announcing its financial results for the third quarter ended September 30, 2017. The release is available on the company's website at protolabs.com.

Before we begin, I would like to remind everyone that our discussion will include statements relating to future performance and expectations that are or may be considered forward-looking statements and subject to many risks and uncertainties that could cause actual results to differ materially from expectations.

Please refer to our earnings press release and recent SEC filings, including our Annual Report on Form 10-K for information on certain risks that could cause actual outcomes to differ materially and adversely from any forward-looking statements made today.

Additionally, the results and guidance we will discuss include non-GAAP financial measures consistent with our past practice. Please refer our press release within the Investor Relations section of our company website for a complete reconciliation of non-GAAP to GAAP results.

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

Thank you, Dan. Good morning, everyone, and thank you for joining us on our third quarter conference call. With me today is John Way, our Chief Financial Officer.

The Proto Labs team produced a record performance in the third quarter by many different metrics. We reported record quarterly revenue of $88 million. This represented an increase of 12.7% over the prior year and was at the high end of our guidance range for the quarter.

Adjusting for discontinued services and the impact of foreign currency, revenue growth was 13.8% over the prior year. Our revenue growth was driven by serving a record 16,909 product developers this quarter, an 18.5% increase over the prior year.

Looking at our performance by region. Our focus on sales productivity continued to show positive signs. Revenue in the United States, our largest market, produced record revenue and strong growth of 13.3% over the prior year.

Europe revenue was also a record and grew 15.9% on a reported basis. Year-over-year, European revenue growth benefited from foreign currency exchange rates; adjusting for currency, revenue growth was 11.7%.

Revenue in Japan declined 8.6% in constant currency. Although, our relatively small revenue base in Japan often results in quarter-to-quarter variability, we are disappointed in our third quarter results in the region. Winning business in Japan often requires developing longer-term relationships in order to effectively earn sustainable business with our customers. The value our services bring to the market is strong, but the approach we take to engage customers will need to be tailored to the market.

Both David Fein and I have been to Japan in the past month to work with the team and review strategies to drive sustainable performance. We're putting in place many of the disciplined processes that are now showing results in the United States, and are evaluating potential distribution opportunity to expand our market presence.

Moving to revenue by service. All our services delivered record levels of revenue in the third quarter. Injection molding increased 6.5% over the prior year. CNC machining grew 24.7%, and 3D printing grew 12.7% from the prior year.

Injection molding grew $2.7 million, or 5.7% sequentially. This gross included the early results of our on-demand manufacturing service, which we launched in June, and expect to be a key driver of our injection molding growth over the long term.

Our CNC machining service continued to show strong growth this quarter. Our strong performance in this service is evidence of the progress we're making in our sales productivity initiative. As we discussed last quarter, enhancements we've made in our manufacturing software also contributed to our CNC growth. We will continue to make investments in our CNC service to capture more market share.

3D printing produced growth of 12.7% compared to the same quarter in 2016. Growth was solid in the Americas and was essentially flat in Europe. We achieved record GAAP net income of $13.2 million in the third quarter or $0.49 per diluted share. Our non-GAAP net income was also a record of $15.0 million or $0.56 per diluted share and exceeded our guidance range for the quarter.

Overall, we are very pleased with our financial performance. We produced revenue and earnings at the top end or above expectations, continued to serve an increasing number of product developers and generated strong cash flow.

On October 6, Proto Labs employees celebrated Manufacturing Day, a celebration of modern manufacturing to inspire the next generation of manufacturers. We hosted customers at our Plymouth, Minnesota facility for the event.

Proto Labs has a strong business model that provides tremendous value to our customers, and Manufacturing Day was another good opportunity for our executive team to highlight our capabilities and connect to with customers.

Our lineup of speakers included Dr. Stephanie Board, Vice President of R&D, at Abbott Electrophysiology Group. She shared with the audience the case study for the launch of a medical device commercialized this past year. Proto Labs was able to not only help Abbott launch this product on a tight time line and on budget but our fast and cost-effective model allows them to test multiple designs of the product with surgeons and ensure they landed on the design which best fit the needs of their customers.

It continues to be very inspiring to see how Proto Labs impacts our customers' business in such a positive way. Developing relationships with these types of customers helps us to understand why they use our services and why they don't. This knowledge and insight has helped guide our priority to expand the envelope of our services to be able to fulfill more of our customers' needs.

In the past year, our R&D investment has allowed us to expand our suite of services to include overmolding, insert molding, PolyJet 3D printing, Multi Jet Fusion 3D printing, and injection molding on-demand manufacturing. We are excited about the opportunity to utilize our digital manufacturing model to aid our customers in accelerating innovation. Understanding our customers better is prevalent all -- across all our regions.

In addition to the Manufacturing Day event, we also had the fortunate opportunity to host several Japanese companies as part of the Annual Chubu Industrial Management mission, sponsored by Toyota at our Plymouth, Minnesota facility.

This year, the Chubu event visited Boeing, GE Digital, Caterpillar, Harley-Davidson, Stratasys, Under Armour and Proto Labs. This event allowed us to showcase our capabilities to 39 executives from 29 Japanese companies and engaged in dialogue about how we accelerate innovation and add value to their business.

It was exciting to learn how their -- about their challenges and how we could be the solution. We left the day with contacts that we're utilizing to develop relationships and bring additional business to our Japan region.

We entered the year with 3 primary priorities for 2017, and during this call we have demonstrated our progress on achieving these objectives. The first priority is to drive productivity of our sales and marketing investments. During this call, we highlighted sales productivity through our continued revenue growth across all our services. Although, there's more progress to be made in each region, early returns are positive.

Our second priority is to continue to expand the envelope of our existing services to be able to fulfill more of our customers' needs. We have made significant progress during the year and this will be an ongoing priority, as we strive to accelerate innovation by providing more of a total solution to our customers.

Our third priority for the year was to achieve strong gross margins. While our gross margin metric did not meet the goal we stated at the beginning of the year, we do feel we've made strides on this front. We discussed the number of services that we launched in the past year. Adding capabilities and bringing them to market requires investment and resources, focus and effort.

Many companies often lose money for a period of time during product launch. We have not only launched significant new service expansions, we have been able to bring those capabilities to market while maintaining our overall gross margins. This was accomplished through planning and execution during product introduction, combined with achieving the benefits of our lean process improvement initiative called Proto Excellence in our existing services.

As we just have discussed in prior calls, our margins on 3D printing in Europe are not where we would like them to be and will continue to be an area of focus. John Way will discuss gross margin details during his comments.

And finally, as you recall, we announced in the second quarter conference call that our VP/GM of the European region, John Tumelty, has decided to retire. After a thorough search, we are excited to welcome Bjoern Klaas to our Proto Labs team as VP/GM of Europe.

Over the past five years, Bjoern has held key positions with global polymer supplier PolyOne, most recently as the company's VP and GM of its ColorMatrix Group. Bjoern's experience in international leadership and his knowledge of manufacturing industry will be invaluable to continue to grow our European operations.

I would like to thank John Tumelty for all he has done for Proto Labs and for his continued support as he transitions the role to Bjoern, through the end of the year.

Third quarter was a record quarter for Proto Labs, and we are committed as a team to continue to deliver more. We remain focused on accelerating innovation by helping our customers get their products to market as efficiently and effectively as possible. We will continue to work with our customers, to help them understand how our on-demand manufacturing service can help them mitigate risk, reduce costs and unlock new revenue streams in low volume, mass-customized products.

And with that, I'd like to turn the call over to John.

Thank you, Vicki. Revenue in the third quarter was a quarterly record of $88.1 million, an increase of $9.9 million or 12.7% over the same quarter in 2016. Last year's third quarter included a $1.1 million of revenue related to metal injection molding and magnesium injection molding, services we have discontinued.

Adjusting for the impact of [discontinued] services and a positive $446,000 impact of foreign currency, revenue growth was 13.8%. Our revenue this quarter came from serving 16,900 unique product developers, an 18.5% increase over last year.

Average revenue per product developer increased approximately 2.5% sequentially.

Gross profit for the quarter was $49.3 million, an increase of $4.6 million or 10.3% over the comparable quarter of the prior year. Gross margin was 56% of revenue, a decrease of 50 basis points from the second quarter.

As Vicki discussed in her comments, the launch of new services has an impact on gross margins until there is sufficient volume to operate at scale. In addition, our 3D printing business in Europe had a negative 240 basis point impact on our consolidated gross margins for the quarter. As we have discussed, this challenge in Europe has proven to be more difficult than originally anticipated. We have action plans to drive incremental volume through our operations and are pursuing options to reduce our cost structure to improve this performance.

Operating expenses totaled $29.9 million or 34% of total revenue in the third quarter of 2017. As a percentage of revenue, operating expenses were down from 36.5% last quarter and 35.5% in the third quarter of last year.

Sales and marketing expense was 15.7% of revenue, down from 17.8% last quarter. This sequential decrease was due to the normal trade show activity in all regions in the second quarter of each year.

Our operating income increased 14.3% to $19.4 million or 22% of revenue in the third quarter compared to $16.9 million or 21.7% of revenue in the same quarter last year.

Net income totaled $13.2 million, resulting in diluted earnings per share of $0.49.

Adding back the after-tax costs of stock compensation, amortization of the intangibles and the impact of unrealized gains on foreign currency, our non-GAAP diluted earnings per share in the quarter was $0.56.

Now turning to our cash flow. We generated $19.6 million in cash from operating activities this quarter. Capital spending was $10.9 million during the quarter. With the continued strong cash generation of our business, our cash and investment balances increased $10.9 million during the quarter to $227.8 million on September 30.

The investments we have made in our business to engage our customers and expanded our capabilities to meet more of their needs, are demonstrating returns and helping us accomplish our financial goals of driving revenue growth and operating earnings over the long term.

Now I would like to turn to our expectations for the fourth quarter. We currently expect Q4 revenue to be in the range of $85 million to $90 million. This revenue guidance includes an estimated $1 million in foreign currency benefit compared to the prior year. Adjusting for the impact of discontinued services and currency, this guidance will result in revenue growth of approximately 15% for the full year.

Moving to earnings guidance. We estimate gross margin to be flat to slightly down sequentially. Each year, there is pressure on our fourth quarter margins due to the holiday and vacation pay in each of our regions. We estimate our adjusted non-GAAP operating expenses will remain relatively consistent at approximately 32.5% of revenue.

We currently estimate our tax rate to be approximately 32.5% to 33% in Q4. Taking into consideration all of the above, we expect our quarterly non-GAAP EPS to be between $0.52 and $0.58 per share in the fourth quarter.

That concludes our formal remarks. Now Vicki and I will be happy to take your questions. Tanya, can you please open up the line for Q&A.

(Operator Instructions) Our first question comes from Brian Drab with William Blair.

Can you hear me?

Yes, we can hear you now.

Troy, are you on?

Troy's here.

Troy's our next question from Piper Jaffray.

I think your great results left Brian speechless. So just...

What's going on, hello?

Our next question comes from Jim Ricchiuti.

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

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

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

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

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

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

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

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

Our next question come from Brian Drab.

Well can you hear me?

We can hear you, Brian.

I'm just going to log 2 questions here because I'm on 2 calls simultaneously. But I want to hear you talk a little bit, if I could, about the margins that you expect in the low-volume production business going forward. I think there's some concern that there is -- it's going to be difficult to maintain that kind of typical 60% or thereabouts type of gross margin in injection molding if you're going to be increasing the volume significantly. And then, can you also comment on what we should expect for selling and marketing as a percent of sales?

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

Just to be clear on the 16% to 16.5%, is that GAAP or non-GAAP?

GAAP.

Our next question comes from Troy Jensen.

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

Yes. Well, it is recovering from where it was prior year. So we're starting to see some improvement in that growth rate. It is out largest segment, so, of course, the law of large numbers is in there. But I think the other thing that's happening in injection molding is, as we continue to bring customers in, we're learning that it is very important that we can provide more of a total solution in injection molding as we -- share gain there is relative to traditional suppliers or traditional injection molders that tend to provide a complete solution. So we have to continue to expand that envelope. It takes time to convert customers there and gain share, because you're moving them from a traditional manufacturer over to Proto Labs. They've got to learn how to use our process. But I think we're seeing some nice traction. I was actually really pleased with the uptick that we were seeing in injection molding growth rates.

And Troy, I think the other component there is we've been focused on helping our sales people, right? Training, developing them, and their productivity is showing. I think it's showing a little bit more in the CNC and even in the 3D printing business, largely because the selling cycle's shorter. So I think as the efforts we've deployed continue to gain traction, as the developing the relationships with the customers and understanding customers business a little bit better over the longer term, that will help pull in injection molding as well.

Okay. And a follow-up question here. 3 months ago, you guys guided sales and marketing to be about 17% of revenues and it came in closer to 15%. Just curious if that deviation was -- are you seeing evidence of your sales execution improving? Or was it just other expense lines were ramping and you kind of offset this?

Yes, so it was 15.7% on a GAAP basis and I think that guide was fair. I think it's 2 components. One is the timing. So if you look at it over a longer time horizon, and we did benefit from revenue being at the top end of the range. So I do think it is some of the productivity coming through. So the expense is in line with where we expected and the revenue's coming in a little bit higher.

Okay. And last question, I'll cede the floor. But historically, Vicki, you guys have provided like business-model targets or growth rate forecasts. Given the business seems to have stabilized and improving now, any thoughts on what kind of a sustained growth rate could be for you guys?

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

Our next question comes from Weston Twigg with KeyBanc Capital Markets.

This is Daniel, calling in for Weston. Just a couple of questions. First, do you have a rough impact on the potential impact to your gross margin in the quarter from, say, like a rising commodity prices such as aluminum or any impact in resin prices in the quarter?

Yes. We really -- we generally pass those on to our customers in our pricing model. So we would not see an impact in our case based upon those changes.

Okay. I guess, with my follow-up, it might be early, but with your new Multi Jet Fusion process, I'm curious if there is a typical end market that's become disproportionately popular for you guys like be it auto, aero or medical?

Yes, not really, Daniel. Multi Jet Fusion, it's really a broad range of industrial end users that are using 3D printing, certainly aerospace and med device, computer electronics, consumer products. So it's a pretty broad range, nothing really is standing out there. Again, it's early in that launch too, so we've just launched that to our full market in June. But quoting activity's good, and customer response has been good to the service.

Our next question come from Greg Palm with Craig-Hallum.

Just curious on the revenue side. Nicely above expectations, above the guided range. Was just curious kind of what, in your opinion, drove the upside in the quarter?

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

Any commentary based on end market? What drove some of the outperformance?

(inaudible) update. It's really been across every market. Med device, auto, consumer, computer electronics, industrial equipment, each one of them showed some nice improvement quarter-to-quarter.

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

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

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

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

Our next question come from Jon Fisher with Dougherty & Company.

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

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

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

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

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

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

I can tell you that sitting here today, we don't have any orders that are shipping in January and (inaudible) is still this quarter.

Yes.

Our next question comes from Ben Rose with Battle Road Resource (sic) [Research].

Just another question on the CNC machining business. Was there any difference in terms of the customer mix? In terms of new versus returning customers for this quarter? Given the standout performance there?

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

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

Yes, no big change. I think it was a little bit higher in parts as a percentage than -- but not significantly.

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

Yes. We've got a lot of interest in DMLS in metal 3D printing. Actual growth rates of DMLS or the metal versus the plastics has not been higher. So it's been pretty consistent. There's a lot of interest though in metal 3D printing but we continue to see growth in selective laser sintering and the HP Multi Jet Fusion saw some growth. So we're seeing growth in plastics as well.

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

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

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

Quality analysis being requested, in terms of like a percentage of injection molding work, can you give us any sense for what kind of -- as a percentage of the total work, how much is including quality analysis? Whether third-party or in-house?

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

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

Yes, in North America, it is. So we've got 3 here, and it's going well. And we're -- we've worked out what we need to do to be able to produce high-quality parts and so we feel good about that. We are going to be launching the Multi Jet Fusion in Europe in the first quarter.

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

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

Okay. And then are you seeing anything -- this is the last one, are you seeing anything in terms of the competitive landscape from other companies that kind of say they do what you do, not from the traditional shops or from in-house but from rapid CNC machining and rapid injection molding companies. Any material change over the last 3 to 6 months?

No material change there.

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

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

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.