Greetings. Welcome to Proto Labs Third Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce Jason Frankman, Corporate Controller. Thank you. You may begin.

Thank you, and welcome everyone, to Proto Labs' Third 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 third quarter ended September 30, 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 third quarter 2024 earnings call. We had solid execution in the quarter with results coming in above expectations. Despite continued dynamic challenges in the manufacturing sector, our disciplined approach and resilient business model drove solid financial and operational results. Year-to-date, we've grown non-GAAP earnings per share over 10%. Additionally, in the third quarter, Proto Labs generated its highest quarterly operating cash flow since 2020 before the acquisition of 3D Hubs. This was driven in part by continued gross margin improvements in the Factory and the Network, and is a testament to the profitability of our business model against any macro backdrop, driven by our unique comprehensive fulfillment model. However, our revenue growth is flat year-to-date, and I believe we can accelerate our growth by continuing to invest in our priorities and executing our strategy under the realigned organizational structure. As a reminder last quarter, we announced the realignment separating regional go-to-market teams from a new global fulfillment organization in order to focus our regional teams on our customers to drive growth and to enable global efficiencies in fulfillment. Before expanding on the progress made across our realigned structure, I'd like to first cover our strategic priorities. We have made substantial progress on our 2024 priorities to date. As previously mentioned, increasing the number of customers using our comprehensive services across Factory and Network is critical to our growth strategy. In the last 12 months, the number of customers using the combined offer grew 35% year-over-year. We are still in the early stages of exposing the full combined offer to customers, and it is a huge growth opportunity for Proto Labs. Our other main priority for the year is to increase revenue per customer contact. We've made great strides here as well. Year-to-date, revenue per customer or contract is up 5%, demonstrating progress on our shift toward higher-value production orders. Let me now bring this progress to life through the following recent examples of how customers in leading industries with high requirement needs are using Proto Labs for production. The first example comes from a world-class clean energy customer that went to market earlier this year with a fully integrated solar and battery system. Proto Labs manufactured and assembled multiple parts in the Factory to assist the customer in production. Our world-class manufacturing lead times and complete assembly helped the customer ramp more efficiently than ever. That's just one way that we win in production. In another recent case, a high-profile medical instrumentation customer relied on Proto Labs to solve a key need in their supply chain for low-to-mid volume injection molding production parts. In this customer's case, we have had a strong relationship for many years supporting early prototypes through 3D printing. Our recent expanded focus on quality and increased inspection capabilities allowed us to win production business with this customer, and they were able to benefit from our quality and speed to keep their new product launch timeline intact. These examples illustrate how our established brand and position in prototyping enable us to grow in production with our existing customers. I also want to highlight our recent collaboration with Harley-Davidson Factory Racing, which we detailed in a press release at the end of September. Harley's engineering team utilizes Proto Labs' digital manufacturing services to manufacture critical components for their racing motorcycles in just a few days. After a Sunday race, the team has a week to prototype, test, learn, iterate, manufacture and replace critical parts using specialty materials, all before the next race the following weekend. This continuous improvement enabled by Proto Labs' rapid manufacturing has resulted in significant year-over-year improvements in race times and podium finishes. Harley-Davidson Factory Racing has not only leveraged Proto Labs for quick-turn parts but also our global network of manufacturing partners for larger and more complex parts. These examples demonstrate the power of Proto Labs to enable our customers to drive innovation, accelerate time to market, and improve performance throughout the prototype to production cycle. Now I'd like to provide an update on the realigned organizational structure. With regional go-to-market teams now solely focused on revenue generation, the newly created global operations organization is tasked with fulfilling customer part orders by a Factory and Network in the most efficient manner. We continue to refine our portfolio of fulfillment options to optimize consolidated gross margin. At times, this means leveraging our own unique manufacturing capabilities through the Factory and at others, it involves network partners. Since our announcement last quarter, the global ops organization has already begun to find ways to improve fulfillment of customer orders. Specifically, we will leverage our global operations to better fulfill customer orders for metal-added parts and some injection-molded parts in Europe. Accordingly, in October, we announced portfolio reshaping decisions to streamline our operational efficiency. We will close our prototype injection molding facility in Eschenlohe in Germany, and we will discontinue direct metal laser sintering manufacturing services through our factory operation in Europe. We remain fully committed to continue offering all our manufacturing services to customers across Europe, including injection molding and metal 3D printing through other existing Factory and Network fulfillment options. The only changes in how these services are fulfilled are consistent with the realignment to a new global fulfillment strategy. This decision was not taken lightly, and I want to take a moment to thank all impacted employees for their commitment to Proto Labs and to serving our customers. The closure and discontinuation are in no way a reflection of their efforts. We will provide transition services to those impacted and we truly wish them all the best. Looking ahead, we believe these decisions will improve operational and fulfillment efficiency, while bringing the full capabilities of our global operations footprint to our customers. We are acting with urgency to capitalize on our unique ability to meet customer needs, accelerate our growth, and continue to drive industry-leading profitability and cash flows. In summary, we posted solid third-quarter results while continuing to manage through ongoing manufacturing sector challenges. We remain committed to accelerating our growth as highlighted by the actions we initiated at the end of the second quarter to reorganize our internal structure. We continue to win in production, as I illustrated two examples of customers using Proto Labs for high requirement end-use parts. That continued shift will better position the company for growth and value creation over the long term. We are the clear profit and cash flow leader in the industry and are committed to executing on our priorities and increasing value for shareholders. I want to thank our entire Proto Labs team for their tireless efforts to best serve our customers and execute accordingly. I'll now hand it over to Dan to cover our financials in detail as well as our outlook for the fourth quarter. Dan?

Thanks, Rob. Our financial results begin on Page 8 of the slide presentation. Third quarter revenue was $125.6 million, representing a 4% decline from the record revenue we achieved in the third quarter of last year. Revenue was flat sequentially and slightly above our guidance range as order rates picked up more than anticipated through August and September. Turning to revenue by service on Slide 9. Third quarter injection molding revenue declined 10% year-over-year in constant currencies, as we saw weakness in the industrial and consumer electronics verticals. To drive growth in molding, we continue to invest in production capabilities, and our new regional go-to-market teams are making production business a priority. CNC machining was flat year-over-year in constant currencies. We saw strong growth in our network CNC business. Third quarter 3D printing revenue declined 1% year-over-year in constant currencies and sheet metal revenue declined 13% year-over-year. We served 22,511 customer contacts in the third quarter. Revenue per customer contact declined 1% year-over-year, largely due to the decline in injection molding revenue, our highest value per order service. As Rob discussed, growing revenue per customer is a long-term priority of ours, yet there may be bumpiness from quarter-to-quarter, as we shift to more production work. In that respect, year-to-date revenue per customer is up 5% over 2023. Third quarter consolidated non-GAAP gross margin increased 50 basis points sequentially to 46.2% with improvements in both the Factory and the Network. Factory gross margin was 49% in the third quarter, up sequentially from 48.8% driven by continued automation improvements and excellent work by our plant management teams to align staffing with volumes. Proto Labs Network gross margin was 35%, up from 32.8% in the second quarter driven by our AI-powered pricing and sourcing algorithms. Year-to-date, non-GAAP gross margin is 45.8%, up 130 basis points compared to the first three quarters of 2023. We are very pleased with our gross margin improvement, a testament to both our hardworking employees and our resilient, profitable business model. No other company in the digital manufacturing services space can match the margin profile of our combined Factory and Network model. Third quarter non-GAAP operating expenses declined $1.8 million compared to the second quarter of 2024. As a percent of revenue, non-GAAP operating expenses decreased to 35.3% from 36.8% in the prior quarter, driven primarily by lower incentive compensation. In summary, third quarter non-GAAP earnings per share were $0.47, up $0.09 sequentially on flat revenue growth. As Rob mentioned earlier, year-to-date adjusted EPS is up over 10% year-over-year on flat revenue. We will continue to invest our profits to drive future growth through our priority areas, further enabled by the previously addressed realignment. Transitioning to cash flow and balance sheet highlights on Slide 11. Cash flow from operations was $24.8 million, our highest quarterly figure since 2020 prior to the acquisition of 3D Hubs. As I say on every earnings call, our business model generates industry-leading cash flows, allowing us to invest in organic growth and return capital to shareholders. To that end, we repurchased $19 million of common shares in the third quarter. On September 30, 2024, we had $117.6 million of cash and investments on the balance sheet and no debt. Our outlook for the fourth quarter of 2024 is outlined on Slide 13. We expect to generate revenue between $115 million and $123 million. This guidance in corporate order and revenue trends through the first four weeks of the fourth quarter. Further, a sequential revenue decline in the fourth quarter is normal seasonality in our business due to fewer working days and lower orders during the holiday season. We expect foreign currency to add an approximately $1 million favorable impact on revenue compared to the fourth quarter of 2023. Moving to earnings guidance. We anticipate non-GAAP add-backs in the fourth quarter to include stock-based compensation expense of approximately $4.4 million, Germany closure expenses of $4 million and amortization expense of $900,000. We currently estimate a non-GAAP effective tax rate of 20% plus or minus 50 basis points. In summary, we expect fourth quarter non-GAAP earnings per share between $0.28 and $0.36. That concludes our prepared remarks. Sherry, please open the line for questions.

Thank you. Our first question is from Brian Drab with William Blair. Please proceed.

Hi, good morning.

Good morning.

Hi, Dan. Hi Rob. I just wanted to start on gross margins. The gross margin is pretty solid and higher than it's been in a while. Where do you expect to be able to sustain that? And how do you see the fourth quarter in terms of gross margin? And then I'm also asking this question, looking at the Network, which is of course somewhat lower gross margin, and it looks like growth there decelerated some. So I'm just wondering if you're seeing maybe a convergence in the growth rate eventually here in the overall business between the Network and the Factory, and maybe you don't have this headwind in terms of gross margin from the faster growth on the Network side?

Yes. I believe there are two questions here: one regarding gross margin and the other related to growth from the Network. Let’s start with gross margin. The gross margin percentage has improved in both the Factory and the Network. Specifically, Network gross margins are currently exceeding the range we previously shared. We are pleased with our sourcing algorithms and how they enhance profitability in this area. Manufacturing has been contracting, and we are maintaining our margin range at 25% to 30%, despite currently being at 35%. I don't anticipate significant changes in conditions from quarter to quarter, but I do expect Network gross margins to stay above the range in the fourth quarter. On the Factory side, we are increasing automation and effectively managing labor costs, which is leading to improvements there as well. Regarding your comment about Network growth possibly not matching last year’s rates, there may be some truth to that. However, at the core, both Network and Factory gross margins are on an upward trend. Rob, do you want to address the question about Network growth?

Yes, certainly. Thank you, Brian, for the question. So yes. Yes, I think look, so in Q3 of last year, we saw absolutely tremendous growth in the Network, right, north of 80%. On the year-over-year comparison, we grew the Network 11% in the third quarter of this year, building upon that. And we did that in the context of a difficult macro. I think I read the report, we're now at 22 consecutive months of contraction in manufacturing. And so I'm pleased with it. I'm very confident that we can grow the Network even higher in the future and fully expect, the Network is going to continue to be a strong growth engine for our business. And we're seeing customers adopting it, right? I mean we had 35% growth year-over-year in customers adopting our comprehensive offer, buying more from the Network. So I'm pleased with that and do expect it to continue to be a strong growth engine for us.

One more thing, Brian, that was in your question that I did not cover on gross margin. We do expect gross margin to come down quarter-over-quarter. As we go into the holiday season, we're a little more inefficient with our labor as we're using contractors and such and the volume ends up being a little more uneven as you go through that holiday period. So we would expect the gross margin to come down just Q3 to Q4.

Right. Okay. And that's what I see. I mean, obviously, that's typical in the fourth quarter for you.

Yes, it's typical.

Rob, can you update me on how many people are currently using both services? Is it still very early in this opportunity, and are we looking at a low single-digit percentage of customer contacts utilizing both services?

Yes. We are still in the early stages with this absolutely. So I see it as a really big continued growth opportunity for our business. But I'm quite pleased to see the rate of adoption that we're getting in terms of customers buying the comprehensive offer and also more and more customers using us for production and bringing value to them, like in the examples that I shared in the prepared remarks. But yes, overall, we are still in the early innings. I would consider less than 5% of customers. So there's a lot of opportunity for us to continue to penetrate and that's what our go-to-market teams are focused on.

Okay. Great. I'll ask one more question before passing it on. You mentioned this in your prepared remarks. The enhanced inspection capabilities that I've discussed with you seem to be a key strategic initiative, and it's impressive to see their impact in the facility. Can you elaborate on the traction you're experiencing from high-volume work? Clearly, you are facing a challenging environment with overall revenue down, yet revenue per customer has increased. This indicates you are effectively leveraging an important strategy. Could you share more about the progress you’re making with higher volume orders?

We have been undergoing a transformation aimed at enhancing production and offering comprehensive service to our customers throughout their product life cycle. Initially focused on prototyping, we are now increasing our production capabilities to meet a wider range of customer needs. This includes not only manufacturing but also providing necessary inspections and documentation that customers expect in the production process. As we implement these features, our customers have embraced them, leading to significant growth. This growth has resulted in our average revenue per customer being among the highest in our industry, with a continued upward trend as more customers engage with our comprehensive offerings. Last quarter, we experienced a 35% year-over-year growth in the number of customers utilizing these services. I am pleased with the progress, and although we are still in the early stages, we are committed to expanding this initiative, and the positive feedback from our customers reassures us that we are on the right path.

All right. Great. Thank you very much.

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

Hi, good morning. Thanks. Congrats on the quarter, by the way. If we go back to August, you talked about slowing activity, and it sounds like the pace picked up a little bit relative to your expectations. Any sense as to what drove that, that are showing in August, September? Was it just the overall market or some of the things that you've done? And I'm just wondering if you've seen some of that traditional pickup in the daily rates, how has that been trending thus far in October?

Yes. Jim, the market that we are playing in is very uneven is what I would tell you. As I talked about in the prepared remarks, we saw in really June and into July a lower order rate. And what we did see, to your point, is we saw a higher pickup than normal seasonality on our order rate perspective in August and September. But that was starting from a data point of July that was really lower than historical, obviously because we reported that revenue was down. So it was nice to see the pickup in August and September. I would say there wasn't anything in particular that I would point out. I would just say the general business responded better than what seasonality would say from a really low June and July. And as I'm creating the guide, again I'm looking at four weeks of data that I have around shipments and orders and the guide is showing a kind of a normal decline quarter-over-quarter, Q3 to Q4 that we normally see.

I would just say I'm pleased that the go-to-market teams were able to get better than expected traction, right, as we kind of ended the quarter.

Got it. And a nice sequential stop up in operating margins in the quarter. And yes, I'm wondering if there's a way for you to help us with the global operations, organization alignment. How much of that would you attribute to it? Or is this just mainly a function, the revenues came in at the upper end of the range? You saw some nice solid improvement in gross margins as well.

Yes. What I would say is, again, kind of to repeat the two aspects to that gross margin, one being our Network gross margin, which is really about how we continue to improve our sourcing algorithms and improve the pricing within that model. And the second is really on a plant-by-plant perspective in terms of the automation that we're putting in and the tools that we're using to manage our costs in those areas in an environment in which the volume can be volatile. We just continue to improve in those respects, and that's what drove it. In terms of the new organization I'll let Rob talk to that.

As we consider the long-term strategy, our goal is to leverage our global manufacturing capabilities to serve every customer, no matter their region, to the fullest extent. This new structure also enables us to eliminate redundancies and areas within operations that aren’t performing at optimal margins, giving us more flexibility to enhance our efficiency. The recent announcements illustrate our approach, and over time, we anticipate identifying more opportunities to improve our operations, ensuring both healthy profitability for the company and comprehensive service for our customers.

Thank you.

Thank you. Our next question is from Troy Jensen with Cantor Fitzgerald. Please proceed.

Congrats on the great margins and cost controls here.

Thanks, Troy.

Hi, gentlemen, congrats on the great margins and cost controls here.

Thanks, Troy, good morning.

So maybe I'll first start off with the update on the German facility. Was this deal related to the Alphacam acquisition, primarily involving additives in Germany?

Yes, that's right. So these were a couple of the components of the business that we acquired from Alphacam years ago.

Alphacam, okay. All right. Did you do much DMLS in Europe? Or is it all mostly polymers and you did metals in Raleigh?

Yes. So we have both polymers and metal additive manufacturing in Europe in Putzbrunn. And this announcement was specific to the metal DMLS. And so we'll be phasing that out of fulfillment from Germany and fulfilling it instead through a combination of our capabilities in North Carolina and our network partners.

What I would tell you, Troy, similar to our Raleigh operation, DMLS is a good chunk of the business, but it is not the majority of the business in either location.

Okay. All right. I guess, well, two questions come to that then. Can you help me out with the OpEx savings? I know we probably won't see it in Q4, but how much will this reduce OpEx in like the March or June quarters of next year?

Listen, Troy. So this is more of a savings from a gross margin perspective than it is from an OpEx perspective. For instance, in Putzbrunn we're still maintaining the facility. We are just fulfilling the DMLS differently, both through our manufacturing partners and also through Raleigh.

Yes, I understand. We're closing the facility, but it's just a matter of adapting. I get it.

The action reduces the facility, and we have another facility, which is the precision injection molding facility, that we are closing.

Okay. Cool. And I get it, you are doing this because you can get better margins running through the network. Curious if there are other products kind of in your portfolio that makes sense. I guess I'm wondering primarily about Sheet Metal. I see that to me, that's like a lower gross margin product segment that hasn't grown for you guys and would it make sense to kind of run that through the Network business also.

Yes. So yes, last quarter, I think we definitely saw headwinds in Sheet Metal. I'll remind you that's our smallest service and it's got a lot of exposure to kind of the computer electronics segment, which did see slowing last quarter, and actually, we've seen headwinds for several quarters now. I will remind you that we've taken action there. We've rightsized that business. We're monitoring it and operating it very closely. So I would say that the new global structure enables us to I think, have some degrees of freedom around this that we haven't had before. And we're considering all these things as we go forward.

Got it. Okay. Keep up the good work.

Thanks, Troy.

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

Hi, thanks for taking the question here. Maybe just kind of starting with the outperformance. I'm curious if you can attribute any of the outperformance to the sort of the realignment? Rob, it sounded like maybe hint to that, maybe that was a little bit of that. And then just to be clear, as it relates to the order trends, you said pick up in August, September. Have those picked up in October? Have they stayed at similar rates? I'm just trying to gauge kind of the guide of where order rates are for the first four weeks versus kind of what normal seasonality is in the quarter.

Sure. Thanks for the question, Greg. Yes, I'm pleased with how we were able to end the quarter and beat our expectations. The work that our go-to-market team did in terms of driving demand in the second half of the quarter was great to see. I do believe that as we focused our teams through this reorganization, focusing our go-to-market teams on the customers within their region, allowing them to specialize and focus on that, I do believe helped and expect to see that continue to help provide benefits for growth as we continue to go forward with this model.

On the order rate question, no, they have not picked up. I would say it's more that June and July were soft, and then we got to a more normal kind of seasonality in August and September. So there hasn't been a pickup in October, and that's reflected in the guide.

Okay. And the margin performance was impressive. I'm curious on the Network side, have you changed the algorithm all the way you are sourcing stuff? Or do you attribute some of the outperformance, not just this quarter, but year-to-date, is that more of a byproduct of the environment we are in, the fact that a lot of suppliers just have more open capacity right now?

I believe you are correct. I attribute the margin performance to two main factors. First, we launched our pricing algorithm about a year and a half ago, which represented a significant improvement. We have continued to make incremental enhancements since then, and it appears to be positively impacting our margins. Externally, we feel very competitive with our pricing, and we are experiencing strong close rates. Despite being competitive, we are still able to increase our gross margin thanks to the way the algorithm operates, which I find quite satisfying. At the same time, I agree that we are witnessing excess capacity in manufacturing, and this is influencing our current margins in the current macro environment.

Yes, that makes sense. Lastly, I want to clarify the impact on the P&L regarding the recent news about the European facility. What is the expected effect on the P&L? It seems like it won’t significantly affect operating expenses, but there may be some savings in cost of goods sold. Can you provide any quantification on that?

Yes. Nothing that we are going to specifically come out with in terms of specific numbers, but there's a precision molding part of the business that some of that business will be able to be fulfilled through the Network, and some of it will not. So there is some of that business that we looked at as wasn't strategic for our prototype to production strategy. And so there is some revenue that won't be there. But we should see some gross margin improvement overall. I would say, it's not a huge amount because of the relative size of what those businesses are.

I assume the revenue impact is more likely in the hundreds of thousands rather than millions.

Yes. Yes. It's not a huge amount. And what I would say is what that business was doing much more complex molds, but it was very difficult the way they were doing that to take it to production. And so what we're shifting is doing more of those complex molds through the network using steel tools and other types so that we can then take that customer from prototype to production as a part of our strategy. So what we feel is although there might be a short-term impact from that, from the longer term, it's much better aligns with our strategy to move more to production over the long term.

Okay, that makes sense. All right, I will leave it there. Thanks.

Thank you.

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