Greetings. Welcome to Proto Labs First Quarter 2024 Earnings Call. Please note, this conference is being recorded. I will now turn the conference over to Jason Frankman, Vice President and Corporate Controller. Thank you. You may begin.

Thank you, Sherry, and welcome, everyone, to Proto Labs' First Quarter 2024 Earnings Conference Call. I'm joined today by Rob Bodor, President and Chief Executive Officer; and Dan Schumacher, Chief Financial Officer. This morning, Proto Labs issued a press release announcing its financial results for the first quarter ended March 31, 2024. The release is available on the company's website. In addition, a prepared slide presentation is available online at the web address provided in our press release. Our discussion today will include statements relating to future performance and expectations that are or may be considered forward-looking statements and subject to many risks and uncertainties that could cause actual results to differ materially from expectations. Please refer to our earnings press release and recent SEC filings, including our annual report on Form 10-K for information on certain risks that could cause actual outcomes to differ materially and adversely from any forward-looking statements made today. The results and guidance we will discuss include non-GAAP financial measures consistent with our past practice. Please refer to our press release and the accompanying slide presentation at the Investor Relations section of our company website for a complete reconciliation of GAAP to non-GAAP results. Now I'll turn the call over to Rob Bodor. Rob?

Thanks, Jason. Good morning, everyone, and thank you for joining our first quarter 2024 earnings call. We demonstrated strong operational and financial execution in the quarter, delivering first quarter revenue at the top end of our guidance range and earnings above expectations. These results were driven by the continued execution of our two strategic priorities: increasing the number of customers using our comprehensive offer and driving higher revenue per customer through larger orders and all services. We delivered strong gross margins, earnings, and cash flow. I'll now expand on the progress being made across our two priorities, and then Dan will take us through the results momentarily. First, we continue to increase the number of customers using our comprehensive offer fulfilled through both the factory and the network. The combined offer brings immense value to customers, enabling them to use Proto Labs as a single-source manufacturer throughout the product lifecycle, from prototype to production to end of life. We have seen that those customers who use Proto Labs across both the factory and the network spend approximately double what all other customers spend, demonstrating the significant synergy and value that our customers derive from the combined offer. Over the past few years, we've significantly expanded our offering and now serve more production needs than ever before, yet we are in the early innings of customers fully utilizing our combined offer. In fact, last year, less than 5% of the 53,000 total Proto Labs customer contacts purchased parts to fill through both the factory and the network. This clearly presents a huge growth opportunity for Proto Labs, and I am very excited about this potential. We have been and continue to be very focused on accelerating the adoption of our combined offer to capitalize on the attractive growth opportunities to add new clients and increase share of wallet. We also made progress on our second strategic priority, which is to drive higher revenue per customer through larger orders and all services. Of note, revenue per customer contact increased 5% year-over-year in the first quarter. We are benefiting from recent technological advancements to our offering, which allow us to win more in production. In the factory, we're beginning to see early returns on investments in production, including robotics, our patented automated mold polishing process, and machine perception in our quality verification process. We have also greatly supplemented our production offer with expanded capabilities and AI-enabled pricing options through the network. We believe that Proto Labs has the strongest brand in the industry, known for our reliability and quality for the last 25 years. Let me now bring these remarks to life with several examples of how we're helping our customers positively impact the world. These customer examples begin on Page 6 of our slide presentation. The first two examples highlight our role in enabling the profound advancements taking place in medical devices, specifically advanced prosthetic equipment. BioDapt has used Proto Labs as their custom parts supplier since its founding in 2010. As we showcased on our website and a recent press release, BioDapt creates custom prosthetic equipment for elite, adaptive athletes via our world-class factory CNC machining service. Our ability to iterate and rapidly manufacture high-performance custom prosthetic equipment allows us to serve BioDapt and provide bespoke, highly engineered solutions for elite athletes, such as Mike Schultz, Founder of BioDapt and former X Games and Paralympic Games Gold Medalist, as well as Noelle Lambert, former Division 1 Lacrosse Athlete, who is training to compete in the 2024 Paralympic Games. Circleg, another manufacturer of advanced prosthetic equipment that enables amputees in East Africa to live active lives, needed a way to mass-produce a design that can be adjusted to each individual while being highly affordable. Our Proto Labs network provided a design input and affordably manufactured high-strength stainless steel CNC machine components for Circleg's prosthetic system in the high volumes that they required. I'm deeply proud of the fact that we can play a role in helping society through our work with pioneering medical device companies like BioDapt and Circleg. Whether they need rapid prototyping for custom high-requirement products or affordable manufacturing of critical components in high production volumes, we can bring unique value to our customers throughout the lifecycle of their products through our combined offer. The next example that I'd like to share comes from our work with NASA, where we delivered custom metal components within 48 hours of their design. Our unique, highly automated digital factory enables us to serve NASA's needs faster than anyone else in the world. Over the years, our digital manufacturing offer has propelled NASA's design evolution and accelerated their innovations. In February, NASA partnered with Proto Labs at the Power Source Global Summit, where they crowd-sourced requirements and design constraints for a tool to capture gases on the moon's surface. Conference attendees used generative design software to design metal components for lightweighting that could be manufactured using Proto Labs' 3D printing and CNC machining capabilities. Once ordered, Proto Labs manufactured the parts in less than 24 hours. Less than 48 hours after they were designed, the physical parts were delivered to NASA at the conference, enabling these experts to innovate and move science forward. Proto Labs is uniquely positioned to achieve this feat for NASA as the only digital manufacturer in the world that combines the digital thread with speed, reliability, and quality. This is a great example of the positive impact we can have for our customers by utilizing our unique capabilities to empower the world's most innovative organizations to bring new ideas and products to market. As I stated at the beginning of the call, we continue to execute well on our priorities during the first quarter, which drove strong financial and operational results. We are pleased with our progress to date and remain focused on executing our strategic initiatives and generating strong financial results. I want to thank our entire team for their continued dedication to excellence and positioning Proto Labs for success and value creation. Dan will now provide additional financial detail on our first quarter results as well as our outlook for the second quarter of 2024.

Thanks, Rob, and good morning, everyone. Our financial results begin on Page 10 of the slide presentation. As Rob mentioned, we delivered first quarter revenue at the top end of our guidance range and earnings above expectations, driven by an uptick in order growth relative to the beginning of the year as well as strong performance in higher-margin services. First quarter revenue of $127.9 million was in our guidance range and grew 1% year-over-year in constant currencies. Proto Labs Network revenue was $23.9 million, a quarterly record, up 38% in constant currencies. First quarter U.S. revenue grew 4% year-over-year, while Europe revenue was softer than expected, declining 9% year-over-year in constant currencies, primarily due to large orders in the first quarter of 2023 that did not recur this quarter. In addition, the Eurozone and U.K. manufacturing sectors continued to contract in the first quarter on the basis of weak demand. Turning to Slide 12 and revenue by service. First quarter Injection Molding revenue grew approximately 1% year-over-year in constant currencies. Injection Molding parts growth was particularly strong due to continued larger orders. CNC Machining grew 3% year-over-year in constant currencies, driven by continued growth through Proto Labs network. First quarter 3D Printing revenue was flat year-over-year. Sheet Metal revenue declined 16% year-over-year in constant currencies. As previously mentioned, our Sheet Metal service is more exposed to the computer electronics vertical, which experienced continued industry-wide softness. We have rightsized the business and are monitoring it carefully. First quarter non-GAAP gross margin increased 30 basis points sequentially to 45.6%, driven by improvements in factory gross margins. Proto Labs network non-GAAP gross margin was 31.7%. First quarter non-GAAP diluted net income per share was $0.40, above the midpoint of our guidance range of $0.30. This outperformance was driven by revenue coming in near the top end of our guidance range and better-than-expected gross margins. Gross margin exceeded our expectations due largely to stronger-than-anticipated factory revenues in Injection Molding in the Americas, one of our higher-margin services. We are pleased with the improvements we've seen in factory gross margins as we drive continued innovation in automation and efficiency as the world's most advanced digital manufacturer. Non-GAAP EPS of $0.40 was down $0.06 sequentially primarily due to higher operating expenses including higher incentive compensation and other seasonal costs that increased sequentially in the first quarter. The increased SG&A costs were partially offset by higher volume and an improvement in factory gross margins. Turning to cash flow and balance sheet highlights on Slide 13. Our industry-leading cash flow generation model produced $21.3 million in first quarter cash from operations. We repurchased $16 million of common stock in the quarter, equivalent to 85% of our free cash flow. On March 31, 2024, we had $112.9 million of cash and investments on our balance sheet and zero debt. Turning now to forward-looking guidance. Our guidance for the second quarter of 2024 is outlined on Slide 15. We expect to generate second quarter revenue between $122 million and $130 million. After strong orders from the end of January through the beginning of March, we saw some softening of larger orders as we approach the week of Easter. That carried through the month of April. We do expect year-over-year revenue growth in the second quarter. We expect foreign currency to have a negligible impact on revenue compared to the second quarter of 2023. Moving to earnings guidance. We anticipate non-GAAP addbacks in the second quarter to include stock-based compensation expense of approximately $4.5 million and amortization expense of $1 million. We currently estimate a non-GAAP effective tax rate of 24%, plus or minus 50 basis points in the second quarter. In summary, we expect second quarter non-GAAP earnings per share between $0.30 and $0.38. That concludes our prepared remarks. Operator, please open the line for questions.

Our first question is from Brian Drab with William Blair.

I'd like to just start on the orders. I think I have the picture, but can you just maybe put a finer point on it? So when we talked to you on February 9, the year had been getting off to a pretty slow start. And it sounds like it picked up I guess, in terms of the whole business or just large orders that seem to pick up in the later part of February and March, but that slowed in April. Can you just elaborate on that?

Yes. At the beginning of the year, we experienced a weaker order period compared to our historical trends. However, we saw an increase in orders starting in January, which remained strong through February and early March. As we approached the Easter period, order activity slowed down, and this trend continued into April. Our guidance reflects the order trends we've observed. Regarding specific areas, we noted strong larger Injection Molding orders during that period, mainly in the Americas, which is reflected in our regional performance results.

Got it. And then can I ask about gross margin because gross margin again above 45%, it's been moving in the right direction. Is that sustainable? And can you remind me, I don't know if you said, but within the network, where are we with the gross margin in the first quarter?

Yes. I would mention a few points, Brian. First, we saw improvements last year in gross margin in two key areas. One relates to the network, where we improved our pricing and sourcing algorithms and expanded our NPEs into new geographic regions. As we move into the first quarter of this year, we typically experience a stronger impact from Chinese New Year, which lightens capacity in our NPE network and makes gross margin more challenging. However, our algorithms and expanded sourcing helped us maintain margins over 31% in the network for the first quarter. Secondly, as Rob mentioned and I reiterated, we have increased automation in our facilities with robotics, our patented automated mold polishing, and quality labs, enhancing efficiency, especially for larger orders. We started to see improvements in our margins last year, and that trend continued into the first quarter. If we can maintain these larger orders, we should continue achieving this margin in the factory. In terms of the network, we are navigating a somewhat uneven macro environment, but we are satisfied with our network gross margins, which are at the high end of our expected range. I wouldn't want to adjust the range right now until we possibly enter a different macro environment and see if we can maintain those high margins during that period.

Yes, definitely. Within the network, the gross margin has been at the high end of expectations. And I've seen, obviously, the automation in the factory is very impressive. Last question for me, can I just push a little harder? Do you think that consolidated gross margin can stay above 45% throughout 2024?

Yes, with the limited visibility we have, I won't speculate on Q3 and Q4 as I can't forecast the volume for that period. However, our earnings guidance for the next quarter assumes that gross margin percentage will remain flat to slightly decrease, since the midpoint reflects a lower volume than in the first quarter. This is while still maintaining good efficiency and healthy margins.

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

I wanted to ask about guidance, specifically regarding April. Can you provide insight into how you approach guidance? Is it primarily based on what you've observed in April with an assumption of improvement, or do you expect things to stabilize at current levels? I'm curious because typically, Q2 is stronger than Q1, so I'd like to understand your approach to the guidance.

Yes. It's interesting in this environment, Greg, if you take a look at us last year, Q2 was not seasonally stronger than Q1. And so we are looking at the order input, as you just said. We're looking at what our businesses are seeing from a quotation trend. And based on that, we are developing a range that we think is where the revenue is going to end up being. It's a challenging environment right now to forecast because, as I talked about in the last call, we had soft orders come into the quarter as well. We went through a period where the orders were fairly strong, and now they're softening again. And so we used our same information that we have going in, in terms of our orders at where did April come in to help project the quarter. I will say something else, though, on top of that, we've shown last year in this uneven type of macro environment that we can grow, and that's what we're focused on right now. And the middle of the guide and our first quarter, both indicate us growing, and that's what we're focused on.

Yes, makes sense. Okay. I appreciate that. And then thanks for providing a little bit more color on sort of the customers and the cross-sell opportunity. And I think you mentioned that 5% of customers are currently using full services. Did I hear that right?

Yes. Less than 5%. Yes.

Less than 5%. Where was that number a year ago? Where do you want it to be, whether it's a year from now or a couple of years from now? And I guess, more importantly, what are you doing internally to increase that number?

Yes, I appreciate the question. Thank you. So if you're asking what's driving the cross-selling that we're seeing, the answer is we are. This is very fundamental to our strategy. This is what our sales and marketing teams are focused on. We've, over the last several years, expanded our offering dramatically both through the network and through the factory in terms of being able to take larger quantity orders and do production more efficiently, and we're starting to see that traction, right? We've got over 53,000 customers that we serve who are used to relying on us for prototyping and have been asking us for more opportunities to work together in different use cases and needs that they have. And we're now able to bring that to them and support them through the lifecycle of their products. And so we are working very aggressively to bring that to our customers, right? At the beginning of the year, we changed the brand around Proto Labs with the network, and we've been communicating this to our customers and our salespeople have been approaching our customers with these broader offerings to capture some of these opportunities. And so we're seeing that have traction, right? And as you point out, we are absolutely in the early innings with this, right? We are just scratching the surface. I'm pleased with how quickly the number grew from zero to what it is today. And I'm just really excited about attacking the remaining 95% of our customers and bringing this opportunity to them because I think that this is clearly a huge growth potential for our business.

Our next question is from Jim Ricchiuti with Needham & Company.

Given the variability in the business and the recent softening, is there a noticeable difference between Europe and the U.S.? Are you observing any changes in specific verticals?

Yes. I would say that, Jim, the softness is more just to do with larger orders. And I think more of that softness is in the U.S. than it is in Europe from a quarter-over-quarter perspective.

Got it. And remind me, you were impacted at least by the comparison in Europe by some larger orders that you had in the year-ago period of Q1, what did that look like in Q2 of last year? I'm just trying to think about how we might see that portion of the business bounce back in Q2.

Yes. So when we're talking specifically about Europe, our factory side of the business in Q1 of last year in Europe had some really large orders that didn't repeat into Q2. So last year's Q2 Europe number for the factory was lower than what the Q1 number was. And so that's part of the reason why you saw the decline that you did in Europe was really tough comps with Q1 of last year from the timing of larger orders within Europe.

Got it. How should we be thinking about OpEx as we think it is a reasonable step-up in OpEx from Q4 to Q1. As you look out over the balance of the year, any thoughts on how we should be modeling OpEx?

Yes. I think OpEx will be slightly higher in Q2 versus Q1. We have some additional investments we're making in the business. There's some more expense from a trade show perspective. And so we expect a slight uptick in OpEx from Q1 to Q2.

There are no further questions at this time. We will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.