Proto Labs Inc (PRLB) 2018 Q3 法說會逐字稿

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

It is now my pleasure to introduce your host, Daniel Schumacher, Director of Investor Relations. Thank you. You may begin.

Thank you, operator, and good morning, everyone. With me today is Vicki Holt, our President and Chief Executive Officer; and John Way, our Chief Financial Officer.

This morning, before the market opened, Proto Labs issued a press release announcing its financial results for the third quarter ended September 30, 2018. The release is available on the company's website at protolabs.com.

Before we begin, I would like to remind everyone that our discussion will include statements relating to future performance and expectations that are or may be considered forward-looking statements and subject to many risks and uncertainties that could cause actual results to differ materially from expectations. Please refer to our earnings press release and recent SEC filings, including our annual report on Form 10-K, for information on certain risks that could cause actual outcomes to differ materially and adversely from any forward-looking statements made today.

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

Additionally, this quarter is the third full quarter that includes the results of the Rapid Manufacturing acquisition that we completed at the end of 2017 and therefore is a component of our year-over-year comparisons.

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

Thanks, Dan. Good morning, everyone. Thank you for joining us on our third quarter conference call. Proto Labs had another strong quarter, building on our success in the first 2 quarters of 2018. We continued to execute on our key priorities for the year, resulting in record quarterly revenue and earnings in the third quarter.

Proto Labs again demonstrated strong performance across all our geographies and in each of our services.

We reported record revenue of $115 million in the third quarter. This represented growth of 31% over the prior year. In addition to our revenue growth, we continue to serve a record number of product developers. Our unique product developers increased 23% to 20,792 compared to the prior year. Our product developer count this quarter now includes customers served out of our Rapid Manufacturing operation in New Hampshire.

Looking at a breakdown by geography; U.S., our largest market, produced record revenue and strong growth of 34% over the prior year, including the benefit from the rapid acquisition. Europe also produced record quarterly revenue with year-over-year growth of 18%.

Our Japan revenue grew 36%. In Japan, we are experiencing strong demand and are evaluating additional distribution models in this region to help drive growth and increase our brand recognition. One example is distribution partnership with MISUMI. MISUMI, a well-known multinational distributor of standard parts to manufacturing companies was eager to work with us to extend our service offering to include quick turn custom parts.

Moving to revenue by service; injection molding produced record revenue and increased 8% compared to the third quarter of 2017. CNC Machining continues to be a strong growth driver in 2018, reporting record quarterly revenue and 50% year-over-year growth. While this year-over-year growth benefited from the acquisition of Rapid, we are also experiencing strong organic growth in all regions.

3D Printing quarterly revenue was also a record and increased 25% from the prior year. We continue to demonstrate leadership in the 3D Printing space in the regions we serve. In the past, we have discussed efforts to improve volumes and profitability within our European 3D Printing business. This quarter, we saw significant improvement as Europe with our fastest growing 3D Printing region. The European 3D Printing business is beginning to respond to our efforts to improve the performance of this business and will continue to be a priority area for Proto Labs.

Finally, Sheet Metal, our newest service contributed $6.5 million of revenue in the quarter. As a result of continued strong operation and growth in each of our individual service offerings, we are becoming more of a total solution for our customers. The majority of our top customers have utilized every one of our core services in 2018. Our relationship with Parker Hannifin demonstrates the evolution of how our customers are using us to provide more of a total solution.

Parker Hannifin engineers recently designed a wearable exoskeleton to help patients with paralysis regain the ability to walk. These engineers turned to Proto Labs to enable a highly iterative design process without sacrificing time-to-market. Utilizing our Injection Molding, CNC Machining and 3D Printing service offerings saved their R&D team months of development time. This is just one example of how our integrated service offering is resonating with customers in the marketplace.

Now for an update on our 2018 priorities. As previously discussed, we have 3 key parties this year: Grow revenue by expanding our customer base and penetrating our existing customers; enhance our capabilities by expanding our services; and increase the scale of our operations, including the integration of Rapid Manufacturing.

Our first priority is to grow revenue by expanding our customer base and penetrating our existing customers. Our strong revenue growth and increased number of unique product developers served, including the acquisition of new customers with Rapid demonstrates substantial progress in this area. Refining the way we engage with our customers has helped us produce record revenue growth in each of our services.

Continuing to expand the services we offer is our second priority. The acquisition of Rapid added Sheet Metal as a service and expanded our CNC capabilities. Our R&D investments are focused on continuously improving the size and complexity of parts we can produce in each service. These service expansions enable us to engage with customers differently and provide solutions like the Parker Hannifin example we discussed earlier.

Our final priority is to increase the scale of our operations. Our focus throughout the integration of the Rapid acquisition has been to add capacity in New Hampshire. We are on track with our plans and will be offering these services to all our customers in 2019.

In addition, with the expansion of our services, we are evaluating the user experience of our customers and working on enhancements to our e-commerce platform to improve the consistency, the ease-of-use across our services and the overall customer experience.

We're also adding scale through the introduction of our new CNC facility in Brooklyn Park, Minnesota. With the exceptional growth we have experienced in CNC, we are in need of additional floor space. The transition to this new facility will occur during the fourth quarter and it will be fully operational before the end of the year.

We are pleased with another quarter of over 30% growth with strong earnings. We continue to focus on the execution of our priorities to drive strong results in -- as 2018 comes to a close.

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

Thank you, Vicki. Revenue in the third quarter was $115.4 million, an increase of $27.3 million or 31% over the same quarter in 2017. As Vicki mentioned, our revenue growth this quarter benefited from our acquisition of Rapid Manufacturing. To help with sizing, the Rapid business had approximately $11.8 million of revenue in the third quarter of 2017. Foreign currency was fairly negligible, representing a $200,000 detriment in the quarter, with the remaining growth representing organic growth.

In addition, the new revenue recognition accounting standards adopted in the beginning of 2018 had a favorable impact to the revenue this quarter. These accounting standards require us to recognize revenue on in-process orders. We ended the third quarter with a greater backlog than we began the quarter, resulting in a $1.5 million net revenue benefit. We expect this benefit to reverse in the fourth quarter.

Gross profit for the quarter was $62.4 million, an increase of $13.1 million over the comparable quarter of the prior year. Gross margin was 54.1%, a sequential improvement from the 54% we recorded in the second quarter. This compares with 56% in the third quarter last year.

Consistent with prior quarters, Rapid has about a 200 basis point headwind to our consolidated gross margin that accounts for the majority of the year-over-year change.

There are a few other puts and takes embedded in our gross margin results. First, we drove improvement in our 3D Printing gross margin in Europe through revenue growth, additional services and cost management initiatives. On the flip side, we are experiencing wage inflation in some of our markets. Overall, the net impact to our gross margin was a sequential increase.

Operating expenses totaled $37.4 million or 32.4% of total revenue for the third quarter 2018. As a percent of revenue, this was lower than last quarter's 34%. On a non-GAAP basis, operating expenses were 29.5% of revenue compared to 31.1% last quarter and 31.7% in the third quarter of 2017.

Sales and marketing expense was 14.6% of revenue, an improvement from the 15.7% in the third quarter of 2017 and 16% in the second quarter. These results were favorable to our expectations, partially driven by revenue coming in at the high-end of our guidance range. The favorability was also driven by the timing of our hiring during the quarter, with some start dates pushing into Q4 rather than during the third quarter as anticipated.

We are realizing productivity improvements in our sales teams and this is resulting in leverage of this expense. However, sales and marketing as a percentage of revenue in the third quarter is lower than we expect in the future quarters.

GAAP operating income increased 29.2% to $25 million or 21.7% of revenue in the third quarter. Adjusting for stock-based compensation and amortization, our non-GAAP operating income was $28.8 million or 24.9% of revenue compared to $21.7 million or 24.6% of revenue in the prior year, representing a 32.8% growth in adjusted operating earnings, outpacing our revenue growth of 31%.

On a non-GAAP basis, our tax rate was 19.6%, down from 22.5% in the second quarter of 2018. During the quarter, we completed an IRS audit for the 2014 to 2016 tax years. The completion of the audit resulted in a resolution of uncertain tax positions for these periods. This favorable audit outcome, combined with the revised IRS guidance related to R&D tax credits, resulted in the lower effective tax rate for the quarter.

On the GAAP reporting basis, net income totaled $20.9 million, resulting in diluted earnings per share of $0.77. Adding back the after-tax cost of stock compensation, amortization of intangibles and unrealized foreign currency gains, our non-GAAP diluted earnings per share in the quarter was $0.86, representing a 52.4% increase over the prior year.

Our earnings per share were above our guidance range for the quarter due to the following factors: Revenue, including the revenue recognition adjustment, was slightly above the top end of our guidance range, representing a $0.02 per share benefit. Our operating expenses were below where we projected, partially due to the timing of hires and certain other expenses, representing a $0.04 per share benefit. The lower effective tax rate, primarily driven by favorable results of the IRS audit, resulted in a $0.03 per share benefit to our quarterly earnings per share.

Now turning to cash flow. We generated $25.6 million in cash from operations during the quarter. Capital spend in the third quarter was $18.7 million, including continued investment in our new Brooklyn Park facility and additional equipment to support our global growth, particularly in the CNC business as well as investing in systems and IT infrastructure. We ended the quarter with a cash and marketable securities balance of $153 million on September 30, up from $145 million at the end of last quarter.

Now I'd like to provide expectations for the fourth quarter of 2018. We currently expect Q4 revenue to be in the range of $112 million to $117 million or growth in the range of 19% to 24%. This revenue guidance reflects the following factors: Q4 2017 included the financial results of Rapid Manufacturing for the month of December, impacting the year-over-year growth rate. We estimate foreign currency will have a negligible impact on our Q4 revenues compared to the prior year. Revenue recognition will also impact the fourth quarter. Within our business, we tend to have more backlog entering Q4 than we anticipate having at the end of Q4. This results in a change in our seasonality patterns compared to historical experience and we estimate will have a negative sequential impact of approximately $3 million.

Moving to earnings guidance. We will be moving our CNC operations into our new facility in the fourth quarter. We estimate the cost of the move plus bringing a new facility online will have an impact of $0.02 to $0.03 per share. We estimate our operating costs, including sales and marketing expense, will be higher than the third quarter levels. Our non-GAAP add backs for the quarter will include stock compensation costs of approximately $3 million and amortization of $800,000.

We currently estimate our non-GAAP tax rate to be approximately 19% to 20% in Q4. This estimated effective tax rate includes a benefit related to the resolution of uncertain tax position due to the expiration of statute of limitations. In addition, we will finalize our 2017 tax return, including the impact of tax reform during the fourth quarter.

Our final calculation of the tax impact of tax reform is expected to result in an approximate benefit of $1 million compared to our initial estimate. This favorable result will be included as an adjustment to arrive at our non-GAAP results, consistent with how we handled the tax reform impact in 2017.

Taking into consideration all the above, we expect our quarterly non-GAAP EPS to be between $0.77 and $0.83 per share in the fourth quarter.

That concludes our formal remarks. Now Vicki and I would be happy to take your questions. Operator, can you please open up the line.

(Operator Instructions) Our first question is coming from Brian Drab of William Blair.

You're breaking up, Brian.

I'm sorry, his line seems to drop out of the queue. We'll move on to the next question.

Our next question is coming from Troy Jensen of Piper Jaffray.

Vicki, how about just an update on the on-demand manufacturing initiatives that the Proto Labs has?

Yes. Great. Thanks for the question, Troy. So it's proceeding as we expected. And as you know, when you move into on-demand manufacturing instead of just focusing on the product development, engineer and our value proposition to accelerate innovation, we're dealing with a longer selling cycle, we're also dealing with a total -- often a very new set of individuals within the customer base, so you're talking to supply chain and you're talking to operations people. And the third element that is part of the mix is we're learning that in addition to being able to offer a full suite of inspection services, when you're competing with a traditional injection molding house, for example, there are other capabilities that we need to be able to provide in order to give the solutions necessary to win the business as compared to a traditional manufacturing operation, but this could be something like some special operation that a traditional manufacture may be doing. So we're working to add some of those special operations in a way that fits with fertilized business model and it's taking us a little bit longer than expected, but we're making progress there. We're relatively pleased with the progress we're making with on-demand manufacturing.

Any sense on how much longer before we really see the potential acceleration in this business?

Well, we're seeing some growth in it today. As you know, we're seeing the prototyping business is having less iterations in Injection Molding due to the impact of 3D Printing. So I think as we are close to that double-digit growth rate, I think a lot of that is the impact of on-demand manufacturing. So we are seeing an impact, so we're pleased with where we are.

Okay. How about just changing gears here. You talked about one of the initiatives being expanding service offerings. Is that just cross-selling Rapid or are there other new services you plan to launch next year?

So -- oh, next year. We continue to have a really strong R&D pipeline. We usually don't talk about things until they're actually launched. But a lot of the capabilities you'll be seeing as we go into 2019 (inaudible) expansions of the part sizes and the complexity of the parts that we're able to offer customers, which allows us to meet more of their expectations. So we've got a good, nice, robust R&D pipeline.

Okay. And then how about, John, can you just go over -- can you explain that $3 million? I think it was a potential drag on the revenues from this accounting change?

Yes. Part of the reason we highlighted that is because it was a change sequentially. So effectively, what happened is, as we end the quarter, you look at one of the orders that are in process and the result of that was pulling $1.5 million of revenue forward from Q4 into Q3 from what we traditionally would have done prior to this revenue recognition guidance. So because of that, we've taken $1.5 million out of Q4 and moved it into Q3. So Q4 will be a little bit lower than we would have historically experienced. Plus I think at the end of the year, we tend to have less orders in process just because of the holiday season, so we expect that impact to happen there.

Our next question is coming from Brian Drab of William Blair.

So I was just trying to clarify on the revenue accounting change. So is one way, John, to think about this as third quarter revenue adjusted would have been $114 million or I guess, not adjusted but excluding the accounting change would have been $114 million. And for fourth quarter, your guidance midpoint would be $117.5 million. Am I thinking about that right?

I think, definitely, on the Q3, you've got it right. I think that just shifting that into Q4, I think the guidance midpoint probably would be like $116 million.

Okay. So I've got it. So borrowing from 1 quarter, the other -- the difference of that -- basically it's $1.5 million. So you're saying the midpoint as stated at $114.5 million. You'd add the difference there between the...

Add that $1.5 million back in that got pulled into Q3.

I got it. So $116 million. I got you. Okay. And then regarding Sheet Metal, I just wanted to hear the latest on the timing of that rollout and how that's going. I can tell from the recent e-mail that I got from your marketing department that you're starting to sell it, and I think that's according to plan. The sales team is going to start selling it, but it doesn't show up on your website yet, which I know is according to plan. When will you start to show it on the website? And just how is that rollout going?

Yes. So again, our focus this year has been building capacity and to make sure that when we do turn on the sales and marketing engine, we can fulfill in a way that's consistent with Proto Labs brand promise. So that's been a big part of what we've been doing this year. We're really pleased with how that's going. We are now in the process of starting to do a little bit more marketing and turning on a few salespeople to make sure we're testing how that's working. And we expect in the first quarter, we will be able to have our full sales team selling the full service offering, including the Sheet Metal. In terms of full integration on the website, there will be links. But in 2019, customers will still be moving over to the Rapid Manufacturing instance to actually place the orders. So it will still have that little clunkiness in the experience. I mentioned in my comments we've got an investment that's taking place in our e-commerce software and technology in order to address a lot of the customer experience, things we want to do to improve how the customer actually orders across all of our services. It's very comprehensive, and it will be a nice step change improvement to what our customers see and that will also be rolled out in 2019.

Okay. Got it. And when in 2019 do you think -- can you be any more specific on that by any chance?

Yes. Definitely by the end of the year. Yes.

Okay. Got it. And then CNC just continues to grow so rapidly. Can you talk a little bit about how you're able to sustain that growth even on now what are quite difficult comparison?

So we're -- I think what you're seeing here right now particularly in the strong economy is the strength of Proto Labs' business model and our ability to both scale and our ability to very, very reliably meet customer demand even in a time of strong demand. We're seeing a very strong increase in new customers coming into the CNC Machining service that have never used this before, which is a great sign. And usually when that happens, we do see those customers return and have it be sustainable. That all being said, we also know that we're in a very strong economic climate right now. And that -- and the fact that we can scale and the fact that we can reliably service even in a period of very high demand is something that's a benefit that you -- it will be hard to predict as we go into potentially some economic headwinds in 2019. The question is, when will those occur? How big of an impact will that be? I don't think anybody can predict that today.

All right. And then, John, can you just give us the headwind in terms of basis points that Rapid would have contributed to margin -- to gross margin and the same for Alpha?

Yes. So Rapid continues to be about 200 basis points, so still in that range. Alphaform, we saw improvement in the Alphaform gross margins this quarter or the 3D Printing in Germany really as we look at it. Impact there is a little under 150 basis points.

Our next question is coming from Jim Ricchiuti of Needham & Company.

Just on the subject of Alpha and it sounds like you're also seeing some nice top line growth in that part of the business. Vicki, what do you think is happening there? Is it the -- just stronger economy over there or some changes you're making that you've made organizationally that's leading not only to better margins, but stronger growth?

Yes. There's a couple of things happening there. First, we've added services. So we have expanded our service offering to really focus on the more unique materials that the industrial customer likes to see as well as a broader range of actual 3D Printing capabilities. We've included the Multi Jet Fusion technology in Europe now, and we also have PolyJet elastomeric material and even liquid silicone rubber with (inaudible) 3D Printing model, so that's all helped. The second thing that we've done is we've really honed in some of our marketing efforts. And I think those are starting to pay off with some of the messages we're delivering into the market to differentiate us as 3D Printing high-quality supplier, focused on the industrial customer and delivering what they need. And I think the third area is frankly continuing to have our sales team be comfortable with selling that service and cross-selling it along with Injection Molding and CNC Machining. And as that experience continues to develop, we're bringing in new customers and doing more cross-selling. So I think it's a combination of what that team has done. And coupled with that by the way has been really strong operational excellence. So we've invested in the manufacturing capabilities and the operational excellence that we've got in Germany that's allowing us to service those customers very reliably, on time and with high-quality parts. So I think it's a combination of things.

Got it. John, you alluded to some wage inflation that you're seeing. It was not surprising. I mean, we're hearing that elsewhere. I'm just wondering though with plans to expand increased capacity in different areas of the business, how challenging is that going forward just in terms of hiring and just, in general, the outlook in that part of the business?

Yes. I think you've hit it on the head. The wage inflation is a component of the cost and that's something that I think we can manage through other levers that we have in the business. I think the more challenging aspect is attracting and retaining the right workforce. I think we've got the benefit of a very strong business model with a very good company culture that helps attract and retain talent, but it is a very competitive environment. So we continue to look at those things, look at not just compensation, but the other things that we can offer to employees to attract and retain them, but that -- I think that is the bigger challenge of the 2.

But at this point, it still is pretty manageable. You still feel like you guys are able -- just given the ramifications, you're able to attract the people you're looking for. Just with respect -- geographically, just in light of some of the macro concerns, have you seen or detected any change in any of the areas of the business just in light of some of the macro issues that have popped up in -- call it, in the last couple of months?

Yes. From an overall perspective, that's an interesting one to try to tease out of our underlying data because we serve so many different customers and truly understanding what is their buying behavior and how is it changing and are they buying more onshore because we manufacture locally. It's really tough for us to tease that out. I think that is a potential positive long-term trend for us. But as far as the current quarter and the impact on the current quarter, it's really tough for me to tell.

But bottom line, just so what you're seeing in the U.S. is clearly just aligned with what we're seeing in -- broadly speaking in manufacturing activity and that you're not seeing any change there.

Yes. I don't think so. I mean, as you know, we are growing at a higher organic growth rate than general manufacturing activity. But a part of that is, we continue to penetrate the marketplace and gain share because of the value that Proto Labs service offering gives to manufacturers. So we continue to see share gain, which is good. But yes, I don't really see anything that's changed this quarter versus the previous quarters.

And last question for me, Vicki. You kind of suggested that there's going to be some new product services in 2019. Any -- maybe you talked about it, but timing on that. Is that over the course of the year? Should some of these -- should we start to see some of this early in the year?

Yes. Most of what you're going to see in 2019 is going to be continued expansion of our capabilities within our services, so being able to produce larger parts, more complex parts. So those are the things that our customers are telling us they need and the kinds of things we're going to be offering.

And the margin...

They'll come out throughout the year as we have this year as well. I mean, we've continued to expand. As we continue to develop our software and our capabilities, we've seen a few things coming out this year as well. They are not big splashes because they are expanding our CNC and our Injection Molding and our 3D Printing capabilities. The big new service offering, of course, is Sheet Metal, which will be having all of our sales team be able to cross-sell that as we go into 2019.

Our next question is coming from Greg Palm of Craig-Hallum Capital Group.

I guess, John, maybe starting with you. If I think back -- on the guidance, if I think back a couple of years ago, in 2016 you had the big fall down in Q4. On the flip side of that, last year, I know, we were in a pretty favorable budget environment where you had a nice sort of bump up. So I know you gave some color around Q4 guidance. But from a macro perspective, any expectation you're taking into account as it relates to the guidance?

Yes. Q4 is one of those quarters for us that the -- and the December volume is very difficult for us to predict. And I think as you highlighted, in 2016, it went one way and in 2017, it returned to be strong. I did go back and really have looked at our seasonality patterns and everything all the way back to 2010. And if I strip out the past 2 years a little bit, kind of guided expecting coming to normal circumstances that we have seen throughout the year, so looking at kind of a consistent pattern there. But as you highlighted, it is very difficult to predict.

Got it. That makes sense. And Vicki, just trying to reconcile your comments. I think earlier in the call, in response to a question, you had suggested sort of economic headwinds as we get into 2019, but it doesn't sound like you're seeing much in your business right now. I mean, I know it's too early to sort of give 2019 guidance, but anything that we should sort of be aware of or how you're sort of initially thinking about next year?

All I can say is we read exactly what you read and the comments are predicting some kinds of slowdown maybe in the second half, but we haven't seen it yet and who knows. It's a very strong demand environment today as we all know, and I think everybody can -- with the cycles that happen in manufacturing, you got to assume there's going to be some kind of cycle. I can't predict when it's going to be. We're not seeing it now.

I guess, just last one, I guess if there was one thing to slightly pick at in the quarter, just the deceleration in the Injection Molding growth. You got back to double-digits last quarter and went to high single-digits this quarter. What -- anything specifically you're seeing in that segment and kind of what -- how you're thinking about that going forward?

Yes. I think over time our on-demand manufacturing offer is going to continue to help that business. What you see is quarter-to-quarter fluctuation and we always are going to fluctuate quarter-to-quarter. So we're pleased with where we are.

Our next question is coming from Ben Rose of Battle Road Research.

Question to start out for Vicki. As I understand it, a significant part of the growth strategy has been penetrating more deeply in 2 existing accounts by way of serving more product developers. Could you maybe give us an update on where you think you are in terms of -- if you look broadly at some of your larger accounts, where you think you are in terms of having penetrated those accounts versus additional opportunities particularly with some of the newer services?

Yes. Yes, we're -- it's really starting to get some traction. So we're really starting to go wider and deeper within our existing customers. We're seeing more and more larger customer companies in our portfolio. But as I mentioned before, it's not a shift away from bringing in new companies as well, it's both. And that's been the balancing act we've been driving for and it's working. We're bringing in more and more customer companies, but we're also going wider and deeper within existing customers. And it's happening at the same time. And I think that we're -- you're starting to see that traction in our selling efforts and we're getting more refined on that.

And Ben, I think -- embedded in your question there, I think as we look at individuals customers, I think we have penetration opportunity and kind of a cost support. I think there's significant opportunity in continue to penetrate the existing orders we have.

Okay. That's very helpful. And if you look at the ongoing strength on the CNC Machining side even exclusive of the benefit from Rapid, are there specific verticals that are driving more use of metal materials, machine materials and their parts versus maybe traditionally having used plastics or just any kind of commentary you could make on the industry use cases for CNC Machining would be helpful.

Yes. So when you look at CNC Machining, our largest industry vertical is actually consistent with where we are on a consolidated basis and that's medical. Next would be computer electronics. Aerospace pops up a little bit higher in CNC Machining than it does in our consolidated, so that would be our third largest industry vertical followed by general manufacturing and industrial equipment.

Okay. That's helpful. And then just looking at the Injection Molding business, typically there has been a pretty good mix between the ratio of molds to parts. Is there anything that's changing there? Are you seeing customers come back to print more parts from molds that they've created?

Yes. I think we are seeing -- starting to see a little bit of a shift there, but not significantly. So the parts component is starting to creep up a little bit as a percentage of the overall injection molding, so it's a little over that 50%. But I think that's something that will continue to evolve over the long term as we look at that, but...

Particularly as our on-demand manufacturing service offering continues to develop, then you're going to have more parts. And the good thing is that we've really been very successful in being able to do that and have a comparable gross margin that's within parts and molds. So it's actually a very big -- it's a huge positive.

Okay. Sorry, just a couple of other quick ones, if you don't mind. On the 3D Printing side, in the U.S., are you seeing more rapid adoption of metal printing versus traditional plastics printing within that business?

Yes. I will say that our metal 3D Printing business has grown faster than our plastic 3D Printing business over the last quarter.

And the same is true in Europe as well as the U.S. So I think that trend is consistent.

And in Proto Labs, this is really well differentiated there because we produce very, very high quality of parts in metal 3D Printing. And that growth is being realized -- that value is being realized by the industrial customer, and it's growing quite well in both regions.

Okay. And if I may just, John. On the tax rate, I realize it's a little early to be forecasting 2019, but should we assume a tax rate closer to 20% for 2019 than, say, 25%?

So I think in both the third quarter and the fourth quarter, we've got some cash reserves that are rolling off and benefiting the effective tax rate. As I look forward to 2019, I would say we're probably closer to the 22% than where we are currently and what we're projecting for Q4. So kind of somewhere in between where you're looking at. That's where I would have modeled right now.

Our next question is coming from Brian Drab of William Blair.

Just one quick follow-up on the developer account. Can you do some clarification as to how comparable the developer count is year-over-year and even second quarter to third quarter?

So third quarter was the first time that we included the product developers from the Rapid acquisition. So as we go back, we will restate those comparable numbers. I don't have them on my fingertips, but I can probably give them to you in a follow-up call for Q2, so you can look at it. As we look at year-over-year, we didn't have Rapid last year, so I think the -- in Q3, so those would be as comparable as the revenue numbers would be.

Is there any -- and I'll follow-up with you, but is there any estimate at the moment regarding how many developers would be associated with Rapid?

Yes. So this is where you get into the double counting in the elimination component, Brian. So

Yes. And CNC particularly, right?

And in Sheet Metal.

And in Sheet Metal. So as we look at the customer base, there is some overlap and -- especially as we go forward. And part of the benefit is to sell those services to our existing customers and penetrate those accounts. So I think looking at it, seeing the 31% revenue growth versus the 23% product developer growth, I think you are seeing some of the overlap in some of that volume going through Rapid is coming from our existing customers. It comes with the opportunity.

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

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

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