Greetings and welcome to the Proto Labs First Quarter 2025 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 your host, Jason Frankman, Vice President and Corporate Controller.

Thank you, Shamali. Good morning, everyone and welcome to Proto Labs first quarter 2025 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, 2025. 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 earnings call. We started the year strong, delivering revenue of $126 million near the upper end of our guidance range. Profitability was solid as well, with earnings per share of $0.33 also near the top end of our expectations. We also delivered sequential gross margin expansion and strong free cash flow. While first quarter revenue was down slightly versus the prior year amidst macroeconomic headwinds and manufacturing contraction, we remain confident in our strategy and our commitment to driving growth for the full year. Our first quarter performance sets a solid foundation for growth in 2025 and demonstrates our ability to deliver on expectations in a volatile environment, reinforcing the resilience of our model. In addition, free cash flow during the quarter represented 14% of revenue, reflecting continued industry-leading profitability. Because we believe in the strength of our model, we have continued to return capital to our shareholders by repurchasing our common stock as Dan will discuss shortly. Shifting to an update on our strategic priorities, our hybrid model continues to yield positive outcomes and was successful once again. Customers utilizing our combined offer grew more than 45% over the trailing 12 months and revenue per customer in Q1 increased by 3% year-over-year. We also continue to make significant progress in our initiatives to drive growth as outlined last quarter. First, our marketing investments to further establish Proto Labs as a production manufacturer are gaining traction. Our new messaging is resonating within production buyer channels, reinforcing our brand positioning and expanding awareness. At the start of this year, we made an incremental investment in marketing to inform and educate potential customers about our expanded capabilities across the product lifecycle. We have seen our share of voice in the market increase as a result of this new marketing with over two million views of our prototype to production campaign to date. This has led to an increase in searches for Proto Labs as potential customers look to source their custom on-demand manufacturing. Online searches for Proto Labs are up double-digit percentage points versus last year and this progressively increased each month during the first quarter, so we are seeing accelerated momentum for our production offerings. We will continue to invest in this campaign as we progress through 2025, tailoring to our target industries. Production revenue continued to grow nicely and exceeded our expectations in the first quarter. We are very pleased with customer engagement of our expanded production capabilities. To illustrate our success in production applications, I'd like to highlight some customer examples in aerospace and defense, one of our target industries. Our speed, extensive domestic manufacturing capabilities and ability to produce complex high-requirements parts make us an excellent partner to these innovative organizations. We offer ITAR-certified parts through both the factory and through the manufacturing partners in the Proto Labs Network, enabling aerospace and defense customers full access to our combined offer. Revenue from these customers has increased very nicely in recent years, in part due to increased end-user production orders. We manufacture flight-ready production parts through AS9100-certified facilities, and our metal 3D Printing service is especially valuable as customers seek to design and procure durable, lightweight parts. We serve the largest and most advanced companies in this space including 100% of aerospace and defense companies in the Fortune 500. Organizations like Blue Origin, NASA and Lockheed Martin have all leveraged production at Proto Labs. In one example, Proto Labs is part of a team supporting Blue Origin's Blue Moon Mark 1. The single launch lunar cargo lander will remain on the moon surface providing safe, reliable and affordable access to the lunar environment. NASA has said that the Mark 1 cargo lander could deliver a scientific payload to the moon's South Polar region as soon as this summer. We have also had several aero and defense customers qualify our production solution after auditing our manufacturing facilities. These customers, some of which have used our prototyping services for many years, have already placed orders for production parts in Injection Molding, CNC Machining and 3D Printing. This is a great example of continued growth driven by existing Proto Labs customers leveraging both prototyping and production. Now transitioning to our second initiative to drive growth, our go-to-market reorganization. I am pleased to say that this is yielding positive results, and sales enablement tools and processes are improving our understanding of customer production needs, enabling us to deliver tailored solutions through team-based selling, better serving our customers and driving growth. And third, the optimization of our fulfillment channels to meet customer needs is advancing very well. The closure of our German molding facility has streamlined our global operations as we continue to improve overall efficiency by aligning our manufacturing footprint with our global fulfillment strategy. This decision, which is part of the broader multi-year shaping of our portfolio and began with the closure of our Japan operations in 2022, allows us to better leverage both factory and network capabilities. We are pleased with the results to date and remain focused on continuing to optimize our manufacturing footprint to better serve our customers globally. Turning to tariffs and strategic positioning. We are closely monitoring the evolving tariff policies and their potential impact on our customers and the broader manufacturing landscape. As we've demonstrated recently during the COVID-19 pandemic, we can adapt faster than anyone to support our customers in times of supply and demand volatility. Speed and agility are central to our operations. While there is still uncertainty in regard to tariffs, we believe the current situation unfolding is a strong opportunity to drive growth for several reasons. First, our diverse and strategically located global manufacturing footprint provides resilience and flexibility, allowing us to adapt to shifting supply chain dynamics and serve our customers effectively regardless of geographical shifts. In fact, 90% of our revenue from American customers is already fulfilled by factories in the U.S., through both our digital factories and our network. Our international operations are also highly adaptable, with manufacturing capabilities spanning multiple countries. We are not overly reliant on any single region and can and do shift capacity in response to changing demand. This positions us favorably as companies reevaluate sourcing strategies in response to tariff risks. Next, our pricing models are fulfilled and routing platforms are highly adaptable and driven by artificial intelligence. And finally, we consistently generate strong free cash flow, underscoring the fundamental strength of our business model. This financial stability, which is uncommon in our industry, enables us to invest in growth initiatives and navigate periods of uncertainty. We are actively reviewing pricing strategies to help offset impacts from tariffs, where appropriate, ensuring that we stay competitive while preserving value for customers. The current economic uncertainty is causing customers to be more cautious about demand forecasting, which extends the timeline for shifting supply chains. But again, we believe this environment favors agile players like us. We pioneered on-demand manufacturing over 25 years ago, and we remain the fastest in the world. This is a vital solution for customers whose demand may be volatile or unclear, allowing them to only order what they need and receive delivery in days, not months. Before I hand the call over to Dan, I'd like to close with our 2025 priorities. Our primary focus for 2025 remains driving growth in our key indicators, which are increasing the number of customers utilizing our client offer and increasing revenue per customer. To achieve this, we are, one, leveraging our newly streamlined organizational structure to enhance efficiency and accelerate growth across all areas of our business. Our teams are in place, and they are properly incentivized. Two, we are expanding our production use cases by investing in advanced manufacturing capabilities and refining our go-to-market strategies to better meet customers where they are, positioning ourselves to capture a larger share of this growing market. And three, we're reinforcing our core prototyping business by investing in cutting-edge technologies and optimizing lead times, ensuring we maintain our industry-leading position. Proto Labs' unique combination of factory and network enables us to serve customers across product life cycles, from prototyping through production and into end-of-life. So, in closing, we are confident in our position to navigate evolving market dynamics and deliver sustainable growth, while maintaining industry-leading profitability and cash flow. Our strategic investments and operational efficiencies position us well to capitalize on emerging opportunities and create long-term value for our shareholders. Now I'll hand it over to Dan to cover the financials.

Thanks, Rob, and good morning, everyone. I'll start with a brief overview of our first quarter results, then provide our outlook for the second quarter of 2025. First quarter revenue came in at $126.2 million toward the upper end of our guidance range, and down 1% year-over-year in constant currencies. The first quarter last year included one extra ordering day due to leap year. Our revenue result reflects a 4% sequential increase. Revenue fulfilled through Proto Labs Network was $26.3 million, up 11.5% in constant currencies. U.S. revenue was down 1.2% compared to the prior year. In Europe, revenue was flat compared to the prior year in constant currencies. Turning to revenue by service on a constant currency basis. CNC Machining revenue grew 6% year-over-year driven by strong performance in production and high-requirement CNC parts. Injection Molding revenue declined 7% versus the prior year, mainly due to nonrecurring larger part orders in the first quarter of 2024. Injection molding revenue increased 7% as compared to the fourth quarter. 3D Printing revenue was down 6% year-over-year as order trends lagged our expectations in late 2024 and early 2025. And lastly, Sheet Metal revenue increased 19% over last year, driven by improved offerings and go-to-market efforts. Moving to margins. First quarter consolidated non-GAAP gross margin increased 140 basis points sequentially to 44.8%, mainly due to higher volume and margin improvements on the factory side. On a year-over-year basis, gross margin was down 80 basis points, driven by lower volume and a higher mix of network-fulfilled revenue. Non-GAAP operating expenses increased $3.6 million sequentially in the most recent quarter, driven primarily by higher incentive compensation as well as additional investments in demand generation. We discussed these gross investments last quarter, and Rob elaborated on the progress we've made. We will continue to monitor returns on these investments and adjust as necessary throughout the year. Higher incentive compensation and demand generation spend was partially offset by lower headcount in the first quarter as we restructured teams as part of the new organizational structure. Non-GAAP earnings per share were $0.33, within our guidance range and down $0.05 sequentially. This sequential decline was primarily driven by increased operating expenses and a higher tax rate. As Rob mentioned, we continue to lead the digital manufacturing industry in terms of cash generation. We generated $18.4 million in cash from operations during the first quarter and we returned $20.9 million to shareholders in the form of repurchases or 122% of free cash flow. On March 31, 2025, we had $116.3 million of cash and investments on our balance sheet and zero debt. Our outlook for the second quarter of 2025 is outlined on Slide 15. We expect revenue between $124 million and $132 million. This guidance represents growth of 2% year-over-year at the midpoint and incorporates order and revenue trends to date. We expect foreign currency to have a $300,000 favorable impact on revenue compared to the second quarter of 2024. Moving to earnings guidance. We anticipate non-GAAP add-backs in the second quarter to include stock-based compensation expense of approximately $4.5 million and amortization expense of $900,000. We currently estimate a non-GAAP effective tax rate between 25% and 27% 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, open up for questions.

Thank you. We will now be conducting a question-and-answer session. Our first question comes from the line of Brian Drab with William Blair. Please proceed with your question.

Hi, good morning. Thanks for taking my questions. I will point out, it seems like you’re seeing the unique customer contacts up sequentially, and the revenue per customer up sequentially. So just a couple of things that stand out to me. The customer count is up just modestly sequentially, but moving in the right direction in a tough environment. But I wanted to ask first on the gross margin, a nice improvement sequentially in gross margin. Can you just drill into that a little bit more? And how sustainable this level of gross margin is? And can you get back to some of these levels we saw in 2024 as we move through 2025?

Yes. Thanks for the question, Brian. It's primarily volume quarter-over-quarter, and we had a good pickup in volume in our factory, which caused our factory margins to increase quarter-over-quarter. Our network margins actually were slightly down quarter-over-quarter. I think we've got some challenges usually in the first quarter from a network perspective as it relates to sourcing and Chinese New Year and so forth. So the main driver quarter-over-quarter is that increase in factory volume. As we look at the rest of the year, my guidance implies that margins from Q1 to Q2 will be flat to slightly down. That's really the amount of revenue that we have flowing through network fulfilled versus factories. So we expect higher network revenue quarter-over-quarter, and so that's going to create a headwind. That being said, we are driving improvements in margin in both the factory and the network.

Thank you for your comments on the business and the sequential performance. I'm quite pleased with the 4% sequential performance. As our guidance indicates, we're experiencing continued growth and expect that to carry on into Q2. Last year, we made significant changes and a substantial pivot to prioritize customer focus and production strategy. I'm very happy with the growth we're seeing in our production business as a result. At that time, we introduced several key metrics to track our progress, and I'm pleased to report that they are all improving. We're seeing an increase in average order values, revenue per customer, and the number of customers purchasing our combined offer. Additionally, our production revenues are on the rise. I want to acknowledge the efforts of our go-to-market teams who are helping to educate our customers on this focus. We're investing in this area and running a successful brand campaign that we will continue to promote. Overall, I'm very encouraged as we begin this year.

Okay, thanks. Maybe I'll just ask one more for now since you guys just gave me a lot of detail on my first question. But is there anything to be concerned about related to the Hubs network? Is the tariff situation causing challenges for Hubs?

Yes. Thank you for the question. No, we really haven't seen that. We've got a network that is extremely adaptable. We routinely are able to and, on a real-time basis, move work around across the network and redirect orders based on the customer needs. That flexibility really allows us to adapt very quickly. In fact, even in a normal year, we see substantial shifts across the network in terms of where we're sourcing components. That's what we've been able to do here to adapt to the tariffs. So the network continues to grow, and we've been able to be quite flexible and adaptive to mitigate any impact to our NPs and to our customers during this period.

Okay, thanks. And sorry to slip back to old terminology. I’ll go write down Proto Labs Network 10 times on a piece of paper. It's the right name.

Thank you. Our next question comes from the line of Greg Palm with Craig-Hallum Capital Group. Please proceed with your question.

Yes, good morning. Thanks for taking the questions and congrats on the quarterly results. Can you maybe talk a little bit more about what you're seeing in April, specifically, just in terms of kind of order growth and customer behavior? And specifically, the guide implies a lower margin, I think, Dan, you mentioned it's based on a mix of network. So you're seeing a higher proportion of revenue going to the network so far this month or previous month, April?

Yes. From a trend perspective, we've seen orders consistently improve month-to-month as we've gone through the year. I think on the network side, it started the year softer, due to bigger network orders through Europe. But we're seeing that overall network-fulfilled orders continue to trend up, and so our guide reflects that. We just continue to see, as we're going through the year, improvement in demand.

And you talked about the benefits of your offering, comprehensive offering in times like this. I'm curious, do you have any evidence that the current environment is providing some kind of tailwind, whether that’s onboarding of new customers? What are you seeing out there?

Yes, sure. Yes, so as I'm talking to customers, what we're hearing from them is several things. First of all, excitement around our production offerings, right, and more adoption of those production offerings, right? This is independent of the macro environment. They’ve been asking us for these capabilities for years. Now we're really bringing them to them and promoting it aggressively. So we’ve got these customers who are relying on us for prototyping. And now we’ve got these production solutions, so they can stay with us through their product lifecycle, reducing their risk whenever they have to change a supplier. This makes us more streamlined and cost-effective for them. They’re very pleased with that, and I think that's attributing a lot of our sequential growth and what we're seeing today to that.

Yes, understood. And I guess, just kind of going forward, thinking about the network, are you thinking about building a greater base here in the U.S.? Do you feel like you've got the right amount of production partners here? What do you think?

Yes. I'm pleased with our network and the strong manufacturing partners that we have in all parts of the world. We’ve got plenty of excess capacity right now in our U.S. manufacturing partners. Of course, as we grow and scale, we can onboard and routinely onboard more. So I feel very ready right now. I think we've got the right network, the right set of partners, and we are ready to grow.

Thank you. Our next question comes from the line of Troy Jensen with Cantor Fitzgerald. Please proceed with your question.

Hey, gentlemen, congrats on the much better results. Maybe to start with you, Rob, just on the push into production. If you guys are successful, will you see it more in factory or network? I thought it would be more on the factory side because I think customers need to qualify the partner they're working with, and you guys can control quality better in the factory versus the network. But it seems like you're talking up network as the benefit of tariffs or production.

Yes. Thanks for the question, Troy. So the answer is definitely both. We serve customers with the production of end-use parts out of both our factories and networks. I’m quite pleased with the quality that comes out of the network partners. This is an area of strength in our model, and we aggressively audit and control quality with our network partners just as we do within our own factories. We observe the same quality standards across our organization. However, this varies a bit as we think about it by service, where some services will likely produce more from the factory and others more in the network. But we definitely see it across the board.

Troy, I think one other thing to remind you, we think our network setup is well positioned to do more production-type work. We have a defined base of manufacturing partners. We're ensuring high-quality parts are coming through, and there is more customer interaction through some of our digital tools in order to do those production-type orders through the network. But I'm going to reinforce what Rob said, it's both. It is both production through the factory and production through the network.

And as we see production grow, that's how it's playing out.

Okay. Perfect, and then, Dan, just a follow-up for you. I mean, it's been a while since we've had a normal year. Can you remind us like normal seasonality, is Q3 typically up sequentially and then Q4 down? Is that the case? And are tariffs going to maybe offset that and provide growth throughout the year?

Yes. I have to laugh at what a normal year is, because it’s been a while. Yes, I mean, normally, what we see is that Q1 is up from Q4, slightly down versus Q2. Q2 sees a pickup, Q3 flat to slightly up, and then slightly down for Q4 due to the holidays.

Got you. Do you think tariffs are a factor this year?

Oh my god, Troy. As you said, we haven't had normal in a long time. I feel strong about our guide for the second quarter. It's a changing landscape. But as Rob said, we feel like we're well-positioned both from the number of different fulfillment options we can offer customers as well as our financial strength.

Yes, and the actions that we're taking are gaining traction.

Thank you. Our next question comes from the line of James Ricchiuti with Needham & Company. Please proceed with your question.

Hi. Good morning. What were the network margins in the quarter? I think you said they were down quarter-on-quarter, but did you say what they were?

Yes, we didn't specifically say what the margins were, but they were a little over 31% for the network.

Thank you. Are you seeing headwinds at all from the materials you use? It sounds like you're already evaluating pricing actions; is that an issue for you?

Yes. Thanks for the question, Jim. I think the strength of our model really helps us here. We've got a very robust supply chain for raw materials. We've been able to mitigate a lot of that and have not seen substantial increases in our costs from raw materials as a result of the tariff landscape.

Got it. You've had a couple of quarters of declines year-over-year in 3D Printing. I'm wondering how that business aligns with the overall strategy of driving the production parts. Is there anything we need to think about as you look at that 3D Printing portion of the business?

Yes. Thanks, Jim. I believe you're on the right track. We do a significant amount of production in 3D Printing, but the majority of our service is focused on prototyping. Given the manufacturing contraction we've faced over the past two years, customers are not launching as many new products and are taking longer to do so. This has created challenges for prototyping. That is why we made a significant shift to concentrate on production. We are experiencing strong growth in production overall, including in the 3D Printing segments related to production. However, there are currently challenges in prototyping that are impacting our 3D Printing business.

Got it. Last question, just if we think about the production parts opportunity, there are mature manufacturing markets that you guys are going after. Are you satisfied with how the strategy is playing out in those markets?

Yes. Thanks. What we're seeing is that we've got a differentiated offering that competes well in the higher-margin portions of the production landscape that we target, which are the low to mid-volume production parts. Because of our high levels of automation, digitalization, scalability, and flexibility, we're uniquely positioned in production in those categories. Certainly, where we tend to penetrate fastest is in industries launching more new products. That's where we get to be at the table when they’re developing the supply chain to produce that product. But over time, I fully expect us to penetrate through production well in all industries.

Thanks guys. Congrats.

Thank you. And ladies and gentlemen, we have reached the end of the question-and-answer session. This does conclude today's conference. You may disconnect your lines at this time. We thank you for your participation.