Good day, ladies and gentlemen, and welcome to the Quarter 3 2012 Proto Labs Incorporated Earnings Conference Call. My name is Ian. I'll be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I'd now like to turn the call over to Mr. Bill Dietrick, Vice President of Marketing. Please proceed, sir.

Thank you, operator, and good morning, everyone. This morning, before the market opened, Proto Labs issued a press release announcing its third quarter and first 9 months' financial results for the period ended September 30, 2012. The release is available on the company's website at protolabs.com. Before we get started, during the course of this conference call, the company will provide financial projections and make other statements about its business, including statements about the timing and effect of planned materials expansions in its Firstcut operation that are forward looking and are subject to many risks and uncertainties that could cause actual results to differ materially from expectations. A detailed discussion of the risks and uncertainties that affect the business is contained in the company's IPO prospectus and other SEC filings, particularly under the heading Risk Factors. Copies of these filings are available online from the SEC or on the Proto Labs website. The company's projections and other forward-looking statements are based on factors that are subject to change, and, therefore, these statements speak only as of the date they are given. The company does not undertake to update any projection or forward-looking statement. In addition, to supplement the GAAP numbers, we have provided non-GAAP adjusted net income and basic and diluted net income per share information that excludes the after-tax cost of stock compensation. We believe that this non-GAAP number provides meaningful supplemental information and is helpful in assessing our historical and future performance. A table reconciling the GAAP information to the non-GAAP information is included in our financial release. Now I'd like to turn the call over to Brad Cleveland, President and CEO of Proto Labs. Brad?

Thanks, Bill. Good morning, everyone. Thank you for joining us today on our third quarter 2012 conference call. With me today is Jack Judd, our Chief Financial Officer. I will begin with a brief overview of our third quarter and first 9 months of 2012 financial results, as well as some related commentary. Then, Jack will provide a more detailed look at our financial results and offer our views on the outlook for the fourth quarter. At the end of our remarks, we will be happy to take your questions. In our just completed third quarter of 2012, Proto Labs generated record revenue of $32.5 million, a favorable increase of 21% over our very strong third quarter in 2011. Year-to-date, we've generated revenue of $92.4 million, 26% ahead of revenue during the same period in 2011. Thanks in part to our gross margin for the quarter of nearly 61%, we also had record quarterly earnings. Our net income for the third quarter was $6.7 million or $0.26 per diluted share. The number of customers we have served also continues to grow. From January 1 through September 30, 2012, we have served 2,251 new customers, generating $13.6 million in revenue, and 4,394 existing customers, generating $78.8 million in revenue. Jack will walk through our record financial results in greater detail later. Right now, though, I'd like to provide an update on each of our geographic locations as well as our 3 growth vectors. Our U.S. operations achieved record revenue of $25.6 million during the third quarter or 26% above the same period in 2011. The strong consolidated gross margin for the quarter of almost 61% was in part driven by the excellent utilization of our recent capacity expansions as well as the efficient use of our labor resources. Our European operations achieved record revenue of GBP 3.7 million, a significant improvement over the second quarter. In U.S. dollars, we generated a sequential increase of $0.7 million or 14% above the second quarter. We believe this sequential growth in Europe is attributable to our ongoing marketing and sales initiatives, and the higher revenue was spread among each of our major markets, including the United Kingdom, Germany, France and Italy. These results were particularly rewarding in the face of the macroeconomic challenges in Europe as well as their holiday-intensive summer months. Although our Japanese results are a small portion of our full consolidated results, we are also pleased to report that our third quarter revenue in Japan was 31% above the same quarter last year and up 15% sequentially. Over the coming months, we have a number of ongoing marketing, sales and operations initiatives aimed at continuing to accelerate the revenue growth in Japan, and we remain focused on achieving profitability there by the end of 2014. I'd now like to provide an update on each of our 3 growth vectors, which include expanding our customer base, broadening the envelope of our service offerings and developing additional manufacturing services within our Protoworks R&D center. I'm pleased to report that all of these are moving ahead as planned. Expanding our customer base begins with our ongoing global marketing and sales initiatives that originate in the U.S. and are customized for cultural and language differences before being rolled out around the world. To optimize our efforts in each of our geographic locations, we temporarily assigned some of our top marketing and sales experts from one area to another as a means of promoting the sharing of ideas and the distillation and dissemination of best practices. Over the past year, these exchanges have been between the U.S. and Europe. And for the next year, they will primarily be between the U.S. and Japan, our current area of focus. Our global sales teams also collaborate with each other on key high-potential accounts with operations in multiple geographic locations. We are seeing an increasing positive impact from these efforts. Our second growth vector is to broaden our part envelope. In a manner similar to our worldwide marketing and sales initiatives, our operations teams also collaborate to improve efficiencies and expand the envelope of parts we can offer to our customers. As suggested in our last earnings call, our Firstcut operation recently announced the addition of several new metals to its offering, including 2 stainless steel alloys, 2 low-carbon steel alloys, magnesium and copper. These standard industrial metals are now available through our Firstcut CNC machining service and provide us with an even greater range of real parts we can custom-manufacture for our customers. Initial orders for these new metals have already begun, and we expect revenue from them to increase gradually. In anticipation of this growth, we have recently ordered approximately $1.5 million worth of associated capital equipment. And it is our expectation that over the course of the next year, these new metals will represent a meaningful amount of our Firstcut revenue. Next on the list of material expansions will be the addition of some high-temperature plastics through our Protomold injection molding service, which we currently believe will be available before the end of the first quarter of 2013. Our third growth vector is focused on developing and launching additional manufacturing processes. I've often spoken about our Protoworks initiatives and wanted to let you know that both of our metal molding development projects are making steady progress. Our magnesium thixomolding molding process is routinely producing demonstration parts that we are shipping to selected customers for their evaluation. And the acquisition and setup of our metal injection molding equipment is under way. We do not expect a material amount of revenue from these added processes in 2013, but we remain very positive on their revenue possibilities on a longer-term basis. We also have additional research we are working on within Protoworks. And at the appropriate time, we will talk more about it. I would like to conclude my remarks with a description of why I believe Proto Labs continues to demonstrate the ability to thrive despite ongoing macroeconomic headwinds. In my view, this is due to our breakthrough technology that allows us to serve the ever-increasing need for speed of our very diverse customer base. Our largest customer is typically only about 1% of our annual revenue, our market opportunity is large and mostly untapped and we have an exceptional team of employees who pull it off together. It is the combination of all of these factors that continues to produce gratifying results despite the less-than-ideal macroeconomic conditions. On a related note, since our last earnings call, at the request of investors interested in seeing how this is all accomplished, we have created a virtual tour on our website for your use at protolabs.com that has been very well received by viewers. And I'd like you to take a look at our technology-enabled manufacturing operations for yourself. With that, I would like to turn the call over to Jack for a more in-depth review of our third quarter financial results and our outlook for the fourth quarter of 2012. Jack?

Thank you, Brad, and good morning, everyone. Revenue in the third quarter of 2012 was $32.5 million, an increase of $5.5 million, or 21%, over third quarter 2011 revenue. Protomold revenue during the just completed quarter was $23.5 million, and Firstcut revenue was $9 million. During the quarter, Firstcut revenue represented 28% of total revenue compared to 26% during the third quarter of 2011. Our international revenue was $7.6 million, or 24% of total revenue, during the third quarter of 2012 compared to $7.5 million, or 28% of revenue, during the same period in 2011. During the quarter, our revenue was negatively impacted by changes in currency exchange rates by approximately $100,000. On a year-to-date basis, this number is approximately $300,000. Year-to-date revenue was $92.4 million, an increase of $19.1 million, or 26%, over 2011 revenue. Year-to-date, international revenue was $22.5 million, an increase of 21% over $18.6 million in 2011. Our increases in revenue were driven by both new customer acquisitions and increased orders from our existing customers. Year-to-date, we have now done business with 2,251 new customers, generating $13.6 million in revenue, and 4,394 existing customers, generating $78.8 million in revenue. This compares to 1,965 new and 3,162 existing customers, generating $13.1 million and $60.2 million in revenue, respectively, in the 9 months in 2011. New customer growth is up 15% over 2011. Our gross margin in the third quarter of 2012 was 60.7% compared to 61.7% in the same quarter in 2011 and 59.1% in the second quarter of 2012. Our operating income was $9.6 million, or 29.5% of revenue, in the third quarter. Year-to-date, our operating income is $24.7 million or 26.7% of revenue. Operating expenses were $1.3 million higher in the quarter than the previous year. This increase was mostly driven by the addition of 31 new employees in marketing and sales and $1.8 million in additional spending in R&D that includes our Protoworks initiatives. Company-wide, at the end of September, we had 610 total employees. This compares to 474 and 511 at the end of September and December of 2011, respectively. Our diluted earnings per share in the third quarter of 2012 was $0.26 per share. Adding back the after-tax cost of stock compensation, our non-GAAP diluted earnings per share in the quarter was $0.29. A reconciliation of net income and EPS to non-GAAP net income and EPS was included in our earnings release this morning. At the end of September, our cash and investments totaled $88 million. Our capital spending so far in 2012 totals $14.4 million, almost all of which was spent on factory expansion and additional CNC mills and injection molding process. I would now like to provide some guidance into our projected results for the remainder of 2012. We currently expect revenue in the fourth quarter to be between $31 million and $34 million. Stock compensation costs in the fourth quarter will be approximately $700,000. Our tax rate will be similar to the just completed quarter. Taking all of the above factors into consideration, our quarterly non-GAAP EPS, adding back the after-tax cost of stock compensation, is expected to be between $0.24 and $0.28. Our full year CapEx in 2012 is expected to be approximately $16 million. That concludes our prepared remarks. Operator, we will now open up the call for questions.

[Operator Instructions] Our first question comes from the line of Troy Jensen from Piper Jaffray.

So can we dive in a little bit on the metals here? So first of all, in the Firstcut business, $9 million this quarter. How much of that do you think is aluminum versus plastic?

I think it's around half and half.

Okay. And when you think about the introduction of steel, copper and magnesium here, I'm assuming that's all Firstcut?

Yes.

What -- I mean, you talked about more material contributions, but, I mean, how long before these new -- or it seems steels may be bigger of the 3. But can you just kind of give more color on what you mean about material contributions? And can steel and copper, magnesium catch up to the level that aluminum is currently?

Sure. Yes, this is Brad. We were actually pretty impressed that as soon as we've turned it on before we even announced it, we started getting a significant number of requests for quotes. So we're very optimistic. And stainless steel by far is the #1 most requested metal that we haven't done up until recently. So I think it'll be very significant. But nobody has ever been able to do quick-turn stainless steel before, so we're not really completely certain how big the demand for it is. We just know it's going to be very significant. So we'll see it grow gradually over the course of the next year, and we'll look back and see what fraction it is. My guess is it won't be as big as aluminum, but it's really too soon to tell.

Okay, probably the second highest metal. And then of the 2, copper, magnesium, which one do you think is going to be bigger?

I don't think we have a good sense of that yet. Nobody's been able to do that very fast before either. So we will see. We have a number of customers that are very interested in both.

Okay. And then one for Jack here. Operating margins, non-GAAP, were 31.8% I believe?

Yes.

Jack, I think you've talked about having a business model target here of 28%-plus. I mean, where do we go from here? It seems like -- I guess I would assume that with revenue growth and scale, you guys should be able to expand margins but just wondering if you have any thoughts on an operating margin target.

I appreciate the fact, Troy, that you recognize that we have outstanding operating margins. We sure had a nice P&L in this just completed third quarter, and I think that it shows how well this business can perform when our revenue comes in at expected or above expected levels. And our team does an excellent job of controlling costs, and we get great productivity out of our factory. I don't think I would want to sell at this point anyway that margins would grow from what they were in the third quarter, but we sure like it when they come in, and we sure hope that they continue that way going forward.

I suppose you get some investments here with some metal stuff. But last one and I'll cede the floor. Just can you talk about -- the new customers were great this quarter. What do you think is working best on the sales and marketing effort to attract so many new customers?

This is Brad, Troy. We haven't introduced any dramatically new or different marketing initiatives in the last quarter, but I would say that what this proves is that our very aggressive ongoing direct marketing campaigns worldwide continue to be very well conceived and executed, and we couldn't be happier with the leads that they generate for our sales organization. And then with respect to our sales organization, I think Jack mentioned that we've been scaling that up, and we have exceptional organizations in the United States and Europe and Japan. And we have a lot of really cool initiatives going on. I mentioned one thing in the prepared remarks about coordinating global accounts is going on between the United States and Europe right now. And I'm really excited about that. And we also have a focus on larger accounts, companies that not only are global but are very large in size. And we believe very strongly that we've barely begun to tap that market. So I think if you add all of those things together, that's a great explanation of why not only are we generating new customers but our existing customers business is growing as well.

We have another question. This one is from the line of Brian Drab of William Blair.

First question is, in the second quarter, you were down sequentially in Europe. In this quarter, up materially. Can you talk about the top 1 or 2 things that you saw play out differently in this quarter that drove demand more in the third quarter in that region than the second quarter?

Yes, Brian, this is Brad. We didn't have any specific initiatives that were any different than the normal way we do business. I would say that our colleagues in the U.K. and in Germany and in France continue to work very hard with our very aggressive marketing and sales techniques to find new customers and sell more to existing customers, and those efforts simply are paying off.

Okay, all right. And I guess my numbers are up-to-date here in the model. It looks like your revenue per existing customer is down in 2012 year-to-date compared with 2011. First of all, is that correct? And could you talk about why that might be?

Are you doing a comparison of year -- of revenue per existing customer for all of 2011 versus year-to-date in -- full year 2011 versus 9 months in 2012?

Yes, I'll just tell you the numbers that I'm using. The -- you gave us the 4,934 for total existing customers year-to-date in 2012 and revenue for existing customer -- revenue from existing customers of $78.8 million. So I get $16,000 per existing customer.

No, I mean, I -- those numbers need to -- although -- if you're going to do comparisons, they need to be measured on the same period, the same period.

No, I understand that. So those are my numbers for 2012 year-to-date, all right? 4.9 -- or 4,900 existing customers, revenue of $78.8 million, $16,000 per existing customer. My existing customer count last year is 3,200, $61 million from those customers and revenue per customer of $19,400. But I have it going from $19,400 down to $16,000. I'm wondering if that's correct. And if so, why is that?

I don't have those exact numbers in front of me, Brian. But I think they always need to be looked at, for comparison purposes, at the end of the year because of the vagaries that can happen from quarter to quarter. And so I guess if I'm going to hold any comments or say any comments about whether those numbers are moving or whether there's any significance in it, I would want to comment after 12 months' worth of data.

Okay. Okay. I'll follow up with you more on that later then. And then, Jack, is the $1.5 million related to equipment for -- to accommodate new metals? Is that incremental to your previous CapEx forecast? Or is -- was that expected?

It was somewhat expected and what we've said in the third quarter. And the $1.5 million is almost all to support hard metals.

We have another question for you. This one is from the line of Steve Dyer at Craig-Hallum.

Just, Jack, I think I missed new customer adds in the quarter. Could you repeat those?

Why don't you let me get that number back out, and I will -- you ask another question and I'll get back to you on that one.

Sure. Just with respect to gross margins, this is -- kind of 60-plus is a number that's reflective of very -- pretty high capacity. I can't imagine you're anywhere close to capacity given the Rosemount expansion. And I know you don't like to give out an exact number, but how should we think about that? I mean, can that number work higher? I would think there's a fair amount of capacity left.

I think it's important to look at our capacity from both the square footage of our floor space for which we have a lot of capacity yet to use. And then you can look at the capacity of our equipment and our employees. And we always talk about that. We run a lot tighter. We expand our capacity with people and equipment every quarter. And so this past quarter, when our margin popped up, I think that it's indicative that we ran much closer to our capacity than we had in the first and second quarters when our gross margin was below 60 points.

Let me add one thing, that not only do we manage capacity on square footage and on equipment and people, another way to slice it is we manage capacity on Protomold versus Firstcut. And within Firstcut, we manage capacity on plastics versus metals. And within metals, we manage capacity on soft metals versus hard metals. And we also split it all the way down either in the United States and Europe and in Japan. So there are about 12 different types of capacity that we manage on a real-time basis.

All right, understood. That's helpful. And then secondly, on operating expenses, very good discipline in the quarter. R&D seems to be running at a level less than maybe you had signaled a couple of quarters ago for the Protoworks expansion. How should we read that going forward? Is that sort of there's going to be a little delayed spending? Or are you just finding that you don't need to spend as much as maybe you thought?

I think the amount that we spent in the third quarter probably was very close to what we thought we were going to spend in the third quarter back in May when we did -- when we talked about Protoworks for the first time. I think that R&D spending will go up incrementally quarter-over-quarter. I don't see any large onetime increases in the near future. Steve, for the first 9 months of this year, we've done business with 2,251 new customers in 2012.

Okay. One last question then I'll hop back in the queue. Are you seeing anything new in the competitive environment at all? There seems to be obviously a lot of buzz in the last 6 months about quick-turn parts in 3D printing and how all of it fits together. Are you seeing anything new there?

Yes, this is Brad, Steve. The short answer is no. The slightly longer answer is, as far as 3D printing and additive, it remains our position that we are very complementary and synergistic with those technologies. And I've spoken at length about why that is the case, and I'll be happy to do that again, if someone is interested. And in terms of conventional competitors, it remains true that we still have no significant conventional injection molding or machining competitor in the world that we run into every day.

And we have another question for you. This one is from the line of Peter Misek at Jefferies.

Maybe you gentlemen can walk through the dynamic that we saw during the quarter. I think the results are particularly impressive when we see that we have a fiscal cliff in the U.S., continued European weakness, et cetera. Was there any sort of order changes during the quarter? Was there some kind of pattern that you saw emerge that we see it bottoming out in August, then acceleration in September? The Chinese PMI, help us out. Can you help us understand that? Because the trajectory that -- it appeared to be -- exiting the last quarter and through the summer, obviously it wasn't that strong, and then you guys hit the ball out of the park now. Maybe you can help us understand what the order patterns looked -- ought to look like during the quarter.

Yes, this is Brad. We just focus on our business. And we don't have customers coming back to us talking about China or talking about the macroeconomic conditions anywhere. We recently looked at the number of quotes we do every day, and we're doing like 1,000 quotes a day at the moment and it's obviously rising over time. Well, we do have the ability to look at the data, the quotes. And we can see that in the second quarter, a little less than the third quarter, it took customers a little longer to make decisions and so on. So when we talk about macroeconomic conditions, our customers don't talk about that, they just talk about their projects. They just want their parts. Well, when we look -- what we think is that when we look at the data and we see that customers are taking a longer time to make decisions, we assume that due to the fact that they have economic pressures on their businesses that they're dealing with, and we just continue to focus on executing on our strategy. And all I can say is the second quarter was good, the third quarter was better. But we're used to setting records. It's a very normal occurrence in this company.

Well, in terms of as we look forward, you talked about buying another $1.5 million of capital equipment. Given what you accomplished this quarter and given the introduction of new metals, should we consider that if those new metals take off stronger than we would expect, we would expect a CapEx increase early next year? Will that timing make sense or at some point in the middle of next year?

I think we've given guidance that we expect CapEx to be 8% to 12% of revenue. And really, I see nothing that would indicate that it won't still be that next year. And of course, most of that equipment will be for mills for both plastics, metals, hard metals and injection molding presses.

Right. I guess the thing I'm trying to squeeze out are that's -- what's the reason it'd be wide range. Should we be assuming that given the execution, you should be at the higher end? And we're trying to get trajectory here more than anything.

We'll know better whether it's at the high end or the low end as we go through this fourth quarter and we do our projections for the -- for all of 2013. For right now, I'd just as soon say that that'll be between 8% to 12%, and we'll give you an update in our -- February at our next earnings call.

And then my last question. In terms of free cash flow, I mean, these results obviously are going to lend themselves to some pretty nice cash flow here. And I would have -- I would assume that if you continue to set records, that, that will accelerate. Is there any defined plans, aside from CapEx, that you guys are thinking about what to do with the money or capital plans looking out for next year and beyond? Should we be considering return of capital? Should we be considering factory expense? And what -- how should we be thinking about that?

We're very happy with how the business is generating cash. And as we've talked about in the past, we're going to let it sit on our balance sheet. We're not even 1 year out from our IPO. And if we have some really good ideas on how to use the cash, we'll talk more about it in the future. But for right now, it's going to just sit right on the balance sheet.

We have another question for you. This one is from the line of Greg McKinley at Dougherty & Company.

A couple of quick questions. Capacity utilization goals. I mean, there's obviously a sort of tug-of-war between delivering really strong margins and still making sure you have the availability to deliver 1-day turn times if your customers require it of you. Can you just remind us how you think about that and where you may -- where you sort of see the ceiling on capacity utilization given the flexibility you need to have for your rapid-turn business?

Yes, Greg, this is Brad. Yes, if you've heard a little bit earlier, I was talking about all the different ways we look at capacity around the world, our different services, our different materials and so on. And we often say that when we start to get close to 80% in any one of those 12 different measures, we start to get nervous. So yes, we have on a daily, weekly, even monthly, to some extent, but we have a significant amount of variability in our orders, obviously, because some customers get into a real crunch that maybe just to help them with, which is why we're here. So we always need to have capacity for those very, very quick turns, and our customers pay us for that. So I'd say the general rule of thumb we have is about 80%, but sometimes when we see a growing demand for something like these new Firstcut metals, we might move a little bit more aggressively than that. 80% is a pretty good guesstimate.

And then, Brad, you talked about commercializing a higher-temperature plastics offering within Protomold, potentially, I guess, Q1 of '13. Is there any framework you can give us to understand what you guys assess the market potential of that to be relative to the markets you're currently serving with Protomold?

It will be small relative to the overall Protomold side today. There are a number of plastics that can be molded but require steel tools instead of our standard aluminum tools. It's part of our metal molding initiatives. We've gotten very, very good at making steel tools very quickly, and that will allow us to add half a dozen different plastics, but we do hundreds today.

Okay. And then, Jack, finally, just following up on the customer count data. I wonder if you could just remind me, what were your year-to-date customer counts, existing and new, and related revenues for the 9-month period last year, just to have a good comp?

The new customer count was 1,965, doing $13.1 million. And 3,162 existing customers, doing $60.2 million.

We have another question. This one is from the line of Zach Larkin at Stephens.

First up, Brad, I wondered if you could talk about -- with the new metals that you've introduced, the stainless steel and everything, I know we're very new into that, but have you seen any differences in the industries or potential applications that these orders are coming from? Any commentary there would be helpful.

Well, the little bit of that we know so far is that we have a lot of interest in those metals from all the same industries that are currently buying plastics and aluminum from us. I think probably the most common industry that we do business with is something having to do with medical. And we have a lot of -- hundreds and hundreds of medical-oriented customers who have shown an interest in stainless steel. They also do aluminum. They do a lot of different plastics. But for the most part, we serve every industry that uses plastic or metal parts, and that's almost every industry.

And then, Jack, as you look out to the 4Q guidance, can you give us a sense of what types of assumptions are underpinning that guidance maybe from a margin standpoint?

I expect margins could drop back just a fraction because we will probably add some level of people, preparing for 2013. But all of our -- the EPS guidance I gave anticipates all of those little things that can happen. We do anticipate that Europe will continue to see some headwinds in that number, so we were not -- we're conservative with Europe, as I think would be proper.

Okay. And then I think in the prepared remarks, the data from a geographic standpoint, we had the U.S. But then, Europe was given in pounds. Can we get just kind of U.S., Europe and other broken out in dollar values?

I don't have that information with me right here. I know that we've said it in pounds because of currency exchange.

Right.

So it was not a record in dollars, it was a record in pounds.

Right.

So I think in Europe, it was down just very slightly year-over-year. But I don't have those numbers, I'm sorry.

And we have another question. This one's from Tom Hayes at Thompson Research Group.

Just a question on Europe. On the last call, you had mentioned slightly or a moderating ramp-up in the sales force. I'm just wondering, of the 31 people that you added in the quarter, how many were positioned in Europe? And as far as -- maybe you can give us a little insight as to your ramp-up expectations over the next couple of quarters or adding in Europe.

I think the 31 number is not in the quarter. It's over the -- from 1 year ago. So we've got 31 in the year. So it gives you an idea of the increased costs. I don't have exactly how much is -- but the majority of the people that we've added have been sales and marketing in the U.S. There's probably been half a dozen or 8 that have been added overseas in the period of time.

Okay. And then just from that -- you mentioned when you were talking -- talking a minute ago as far as your CapEx target, is that 12% of revenue? Did I get that right?

Our CapEx target will generally be between 8% to 12% of revenue. And I -- this past year, we've spent an awful lot of money on facilities expansion. And so when we do that, when we buy a building or something, it might pop above 12%.

Okay. And here's the last. I was just wondering if you could maybe talk -- is there any material margin difference between, let's say, the business in Europe and the business in the U.S.?

I'm sorry, could you repeat that question again?

Yes, is there any material margin difference in the business that you're doing Europe versus in the U.S.?

No, the margins are very similar. The P&Ls look very similar between the 2 markets overall in terms of the cost that it does to do sales and marketing and all the other functions. Very similar.

We have another question for you. This one is from Jim Ricchiuti at Needham & Company.

Another question on the new metals. I was wondering if you might be able to give us some sense in terms of what the ASPs are like versus maybe your other products in Firstcut. And is there much of a difference in terms of the margin profile on these products?

Yes, this is Brad. Stainless steel will be more expensive than aluminum. We have also a lot of very expensive plastics that we purchase for our customers. So -- but the new hydrometals, most of them will be significantly more expensive than aluminum. And the actual price, of course, depends upon the geometry of the part and if they're not the customers buying at quick turn. Margins, we expect to be comparable to all of our other materials.

Okay. And with respect, Brad, to some of the color you provided on Japan, it looked like you had a pretty solid quarter there. And I'm wondering if the trends you're seeing there are sustained, would that put you ahead of schedule in terms of your 2014 goal? Or do you feel like you're basically on schedule? But the point I'm trying to get to, I guess, is if these trends continue over the next couple of quarters, it sounds like you're encouraged by what you're seeing?

Yes, we're encouraged, but I'll stick to the 2014 profitability objective.

We have another question. This one is from Nicole DeBlase with Morgan Stanley.

So a couple. Most of mine have been answered. But I want to go back to the question on margins that was asked. I mean, why can't margins grow from here? Is -- would you say the low-30s is the structural ceiling on this business? Or is it because you're investing so much for growth?

Well, Nicole, it's a good question. And I think overall, we're trying to say that we're a revenue growth story. We love our margins. We think that they ought to be noticed by investors for how unique they are and how high they are. But we're not trying to constrain our engine as to the -- we may constrict growth so that we can get another 1 point of operating income. But I do think, over the coming years, is that we should see higher margins than we have the past 2 or 3 quarters.

Okay, that's fair. And I'll ask one more. So how do you guys approach the larger account opportunity? And how is it different than how you approach smaller customers? Is there a big difference in how your sales and marketing employees go after larger customers versus smaller customers?

Yes, Nicole, this is Brad. Yes, there's a pretty significant difference. When we're going after the very large accounts, whether it's, let's say, just domestic or the global accounts, where we're coordinating between our sales people in the United Kingdom and the United States, there's a significantly different approach where we might go off and, let's say, do a seminar for 400 engineers at a major automotive company, which we did recently. Or we might create specific marketing and sales campaigns aimed at -- focused -- or might be at jobs like director of engineering. And that is something we've just begun in the last few years, and we're ramping that up. Historically, we've been very much a grassroots marketing and sales organization. And so we believe, and I think we're showing, that the combination of the 2 strategies can be very effective.

We have another question for you. This one is from Brian Drab at William Blair.

Just a couple more questions, I think. I don't know that you've commented on this yet, but inventory is up quite a bit from last year's levels. Can that be primarily attributed to holding new materials and inventory to broaden the products envelope?

Our inventory would be up because of the tungsten carbide that we bought for end mills. We were worried that we would have a supply shortage of that, and so we bought some in advance, and the shortage never occurred. And so we'll be taking that down over the next year. It's not because of new materials.

Okay. And what was that -- it is material. Can you just elaborate on that tungsten carbide for the...

I'll go back to Brad.

Yes, this is Brad.

Yes.

Tungsten carbide is the material that our end mills are made out of. End mills are the drill bit like components that cut parts.

Right.

And there was a -- there was some news out there that there might be a shortage on that maybe 1 year ago. And so we bought a bunch of that. And the shortage ended up not occurring, so we will -- we're working our way through that now.

Okay. When you buy those tungsten -- when you buy that tungsten carbide, is that in the form of drill bit already? Or is this something that you customize in-house?

It's something that we send out to have manufactured for us. We just wanted to make sure that we have that raw material.

Okay, right. And last quarter, Brad, you gave us a little bit of clarity on how things trended during the quarter. And you -- specifically, you said that in the second quarter, things -- demand started out kind of average, and it softened a bit and then strengthened toward the end of the quarter. Can you make a -- give us a similar assessment of how the third quarter played out?

Sure. I would say there wasn't any particular -- anything particularly noteworthy about any of the months. They were all fairly strong.

And we have a further question. This one's from Troy Jensen at Piper Jaffrey again.

Just one follow-up. Last year in the December quarter, you guys were down almost 5% sequentially. And this quarter, one of your guidance is flat. So -- and I know you guys have limited visibility. I mean, it's just your business model. But what gives you confidence that this year is going to be so much better than last year?

Well, I think we're coming off of a strong third quarter. So that's one of the reasons why we think that it can be better. And we certainly have an awful lot of sales and marketing initiatives that we believe in that have historically provided a lot of leads and a lot of quotes and eventually orders. And so, I think it's confidence in our business.

There's no further questions in the queue at this time at this moment in time, gentleman.

Thank you. Let's go back to Brad.

Well, thank you, everyone, for joining us today. We hope we've conveyed a sense of our confidence in the continuing strength of the Proto Labs business model and our excitement about the growth and opportunities ahead of us. We look forward to updating you on our progress during our fourth quarter conference call. Thank you very much.

Thank you. So thank you, ladies and gentlemen, for your participation in today's conference. That concludes the presentation, and you may now disconnect. Have a good day.