Bill Dietrick - VP, Marketing Vicky Holt - President and CEO John Way - CFO Bill Dietrick - VP, Marketing

Troy Jensen - Piper Jaffray Brian Drab - William Blair Brad Mas – Needham & Company Holden Lewis - Oppenheimer Andrea James - Dougherty & Company Scott Schmitz - Morgan Stanley Bobby Burleson - Canaccord Genuity Steve Dyer - Craig-Hallum Michael Weisberg - Crestwood Capital Management Ben Hearnsberger - Stephens

Greetings, and welcome to the Proto Labs’ Fourth Quarter 2014 Earnings Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Bill Dietrick. Thank you. You may begin.

Thank you, operator and good morning everyone. This morning, before the market opened, Proto Labs issued a press release announcing its fourth quarter and full year financial results for the period ended December 31, 2014. The release is available on the Company’s Web site 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 that are forward-looking and 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 Annual Report filed on Form 10-K 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 Web site. 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 statements. 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 and amortization of intangibles. 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 Vicky Holt, President and Chief Executive Officer of Proto Labs. Vicky?

Thank you, Bill. Good morning, everyone. Thank you for joining us today, on our fourth quarter 2014 conference call. With me today on the call is John Way, our new Chief Financial Officer. John joined us in December and he’s had a very busy two months coming up to speed on the Company while closing the 2014 books. John is a seasoned financial executive with a lot experience in managing high growth companies. He has been the CFO for two private equity backed companies, as well as several divisions of United Health Group including Optum Collaborative Care at Optum John played a key role in developing and executing the strategy that took the business from its creation to $3 billion in revenue. We are very happy he is here and believe he will be a significant asset in helping Proto Labs get to the next level. This morning, I would like to begin with an overview of our 2014 financial results and operational results including an update on our new services in the Fineline integration. I will also provide a little color on our strategy for 2015. Then John will offer a more detailed look at our quarterly financial results and our outlook for the first quarter of 2015. Following that we will be happy to take your questions. Proto Labs once again achieved record quarterly revenue for the fourth quarter of 2014. Revenue totaled $56.1 million, a 27% increase over the fourth quarter of 2013. This includes 3.9 million of revenue from additive manufacturing services through our Fineline acquisition. Without this fourth quarter would have been $52.2 million, an increase of 18% over the prior year. I would like to note that Fineline grew 48% over Q4 2013 reflecting the benefits of the combined organization. We experienced record quarterly revenue across all three of our geographic regions on a local currency basis. Revenue in North America increased 35% year-over-year. In Europe overall sales revenue in local currency increased 10% from the fourth quarter of 2013 but when translated to dollars revenue growth was 3%, but we continue to experience relatively flat demand in our Protomold parts business, it was offset by strong growth in Protomold mold and Firstcut with both of these services setting sales record in the quarter. We remain cautious regarding the outlook for our parts business in Europe. However, we do anticipate continued overall growth in Europe throughout 2015 driven by demand for all of our products including lathe-turned parts and additive manufacturing. In Japan we posted record quarterly revenue in yen representing a 25% increase over prior year. However, when converted to dollars the growth was 10% and it was not a record. Globally by product line the Protomold service grew 16% in the quarter versus prior year and the Firstcut service grew 24%. As noted earlier the Fineline service year-over-year revenue growth was 48%. When dissecting the Protomold revenue growth for the fourth quarter sales of mold to support prototypes grew by 28%. However the sales of parts on previous sold molds grew only 7% versus prior year fourth quarter largely reflecting a decline in sales of parts in Europe. The decrease was partially impacted by large orders in Q4 2013 that did not recur in 2014. On a full year basis the revenue from parts within Protomold service grew 20%. We continue to face volatility and predictability challenges in our Protomold parts business to mitigate these challenges we are continuing to work with our customers to understand their needs, educate them about our on-demand production solutions and increase our visibility to potential future orders of parts. We know that our future parts revenue is dependent upon current mold sales and our strong quarterly sales growth of Protomold molds is a good leading indicator of strong parts sales in the future. In addition we're continuing to build our talent in strategic selling which supports more parts sale as our strategic customers learn how they can leverage the Proto Labs business model across the product lifecycle of their products. We generated net income in the fourth quarter of 2014 of $10.2 million or $0.39 per diluted share. Excluding the after-tax cost of stock compensation and amortization of intangible non-GAAP net income was $11.2 million or $0.43 per diluted share this compares with non-GAAP EPS of $0.39 per diluted share in the fourth quarter of 2013. The fourth quarter results represent a solid finish to an excellent year for Proto Labs. During 2014 we made substantial progress on a number of important initiatives that will position us for continued growth and we maintained strong financial performance. For the year revenue grew 28% excluding Fineline revenue growth was 23% GAAP gross margin was 61.3% against our target of 61% to 63%. We maintained the 29% GAAP operating margin in line with our target model. Full year adjusted EPS was $1.73 per share an 18% increase over the prior year. We make significant operational progress in 2014. We introduced two new services Liquid Silicone Rubber and metal injection molding. And have been offering them with quick turn expedite capabilities since April. We believe these services represent a substantial opportunity for the Company because traditional manufacturers cannot easily or cost effectively manufacture prototype or lower volume production using these processes. By applying our software-based technology Proto Labs can provide an effective alternative source to this underserved market. In anticipation of the growth of these services we expanded our manufacturing capacity and moved our Liquid Silicone Rubber production out of the Protoworks R&D facility into our full production manufacturing plant in Plymouth, Minnesota. We estimated that our new services would generate revenue of approximately $3 million in 2014 and they met this expectation. We expect these services will be a substantial contributor to our growth in 2015. We also began the soft launch phase of lathe turn parts in our Firstcut operation during 2014. The soft launch has been proceeding as planned we've indentified parts that would more appropriately be turned versus milled and feedback from customers on the quality and timelines of our lathe operation has been very positive. We are on-track for our full launch in North America and Europe later this quarter and in Japan in the second half of 2015. To ensure we have the capacity to accommodate our growth we opened a new facility in Plymouth, Minnesota in May of 2014 the new building has approximately 175,000 square feet of manufacturing’s floor space that will allow us to double the manufacturing output in the future. In the fourth quarter we began preparations to relocate our Protomold milling operation into Plymouth where we have more space for additional equipment and operational synergies with our Firstcut milling operations. The move in installation of equipment with a major undertaking and was completed in January without disruption to customer orders. In addition we added capacity to our manufacturing facility in Europe in 2014. We completed our first acquisition purchasing Fineline an additive manufacturing or 3D printing company based in Raleigh North Carolina. The acquisition was completed last April and is highly complementary to Proto Labs. Roughly 70% of our customers use addictive manufacturing in the product development process. We have worked very hard to integrate Fineline into our company as quickly as possible and we’ve made a lot of progress in just eight months. During the fourth quarter, we completed the installation of stereolithography selective laser sintering and direct metal laser sintering equipment in the Raleigh facility. This expands the capacity of our additive manufacturing by nearly 80% and will allow us to pursue the additional revenue opportunity we see ahead for 3D printing in 2015 and beyond. This capacity addition paved the way for the launch of quick-turns for our Fineline service offering which began in January. We expect to see margin improvement for Fineline with the launch of quick-turn. Our sales staff has been trained in cross-selling 3D printing services. We now have integrated Fineline, Protomold and Firstcut data on product developers and engineers served. In 2014, we served over 21,500 product developers and engineers, representing a 34% increase from the prior year. This illustrates the fact that there was very little customer overlap between Fineline and Proto Labs customer bases and demonstrates a significant opportunity we have for cross-selling. Fineline content is integrated on the Proto Labs’ Web site and we have fully deployed our sales and marketing engine to generate orders for our additive manufacturing service. In the fourth quarter, we launched our My Account single sign-on, which gives our customers access to all three of our services through one log-in step. This allows customers to view parts and order history for their Fineline 3D printed parts as well as Firstcut machined and Protomold injection molded parts. In addition they can now get a quote right from their dashboard. This single My Account release was a very important integration step for our customers’ experience. On a full year basis, Fineline sales in 2014 increased 30% over 2013, the Q4 and full year year-over-year growth were significantly higher than market growth and Fineline’s historic growth rate. This illustrates the strong synergies with Proto Labs suite of services and the effectiveness of our sales and marketing engine to drive organic growth. We expect to deliver continued growth for 3D printed parts throughout 2015. During 2014, we made strategic investments to expand our sales and marketing effort. We had added sales staff across geographies to drive growth. Our strategies include new customer acquisition targeting strategic customers, increasing the number of product developers, engineers we serve in these companies and becoming a strategic partner. We have also added experienced marketing staff in North America and Europe including several key people with experience in Internet and social media. These investments and talent provides a foundation for sustained growth. In 2015, we will be executing on our growth strategy with a focus on four strategic imperatives. First we will be segmenting our market by key vertical end-markets and how the customers use our services, building on our success in growing sales to strategic customers we will view developing relevant marketing and sales strategies and tactics for each segment. This is expected to increase brand awareness, the number and quality of prospects and our close rates. Second we will continue to invest in our world-class Web presence. Our business model relies on Web-based commerce. One of the key value propositions to our customers is our rapid interactive quote and the ease of doing business on our Web site. We will continue to invest in this Web site and our robust technology infrastructure to deliver more value to our customers and continuously improve the customer experience. An example of one of these improvements was launched in Q4 and it was our platform neutral Proto viewer. This enhancement makes it even easier for our customers to view their interactive quote that highlights the manufacturer ability of their parts regardless of their computer technology platform. Third we will be leveraging investments in envelope expansions and new processes to drive growth globally. Examples of this include launching lathe-turned parts globally, expanding LSR sales in the U.S. and Europe and launching Fineline 3D printing services in Europe. And lastly, we continuously work to improve the customer experience especially with respect to ease of use. An example of this was the Proto Labs proposed revision service we have launched on our Web site in 2014 which allows our customers to accept the change and place an order fast, faster and more easily. With the clarity of our strategy and to facilitate its execution, we’ve made several organizational changes. Rob Bodor has assumed a new role of Vice President, General Manager of the Americas where he will lead multifunctional execution in this region. Don Krantz has assumed the role of Executive Vice President and Technology Officer with leadership over our global product management team, e-commerce technology services including software and IT and Protoworks. And Jacky Schneider assumes the role of Vice President, Global Sales and has responsibility for driving sales excellence across our organizations around the world. And with that I will turn the call over to John for further comments on our financial performance. John?

Thank you, Vicky. Revenue during the fourth quarter of 2014 was $56.1 million, an increase of $12 million, or 27% over the same quarter in 2013. Additive services revenue related to our April acquisition of Fineline was $3.9 million. Without the revenue from Fineline our revenue would have increased $8.1 million or 18% when compared to the previous year. Protomold and Firstcut revenues were $35.7 million and $16.5 million respectively. International revenue during the fourth quarter totaled $13.8 million, or 25% of total revenue compared to $13 million or 29% during the fourth quarter of 2013 reflecting the negative effects of currency of approximately $900,000 during the quarter. Our legacy Protomold and Firstcut revenue in the fourth quarter came from 8,773 unique product developers and engineers a 20% increase over the fourth quarter of 2013. Average revenue per product developer was down slightly on a consolidated basis compared to the fourth quarter of the previous year as the result of the variability in our Protomold parts revenue and the foreign currency impact. With the integration of Fineline data our unique product developers increased to 10,231 for the quarter. Gross margin decreased to 59.9% for the fourth quarter of 2014 from 62.7% the year before. Contributing to the decline in the gross margin from the prior year was the lower gross margin on our additive business which represented approximately 80 basis points. Manufacturing capacity investments in support of existing and new services also had an approximately 80 basis points effect on the gross margin. Additionally foreign currency had 110 basis points impact on our gross margins. I'd like to provide some additional color on this impact. In Europe we have sales in both euros and British pounds whereas the production costs are incurred in British pounds the change in the euro rate versus the British pound as well as the translation to U.S dollars drove this margin degradation. As we gain market momentum on the recently introduced processes and our product offerings in general and release quick turns for Fineline we anticipate that gross margins would return to our target range with the improved utilization. Operating income was $14.7 million in the fourth quarter of 2014 compared to $13.9 million in the same quarter of 2013. As a percentage of sales 2014’s fourth quarter operating income was 26.2% and 2013’s was 31.5%. Research and development expense was $4.7 million or 8.3% of revenue for the recent quarter compared with 3.5 million or 7.8% of revenue last year. The increase was a result of software projects associated with integration activity for Fineline as well as ongoing Protoworks initiatives. Sales and marketing increased to $8.1 million or 14.5% of revenue compared with 6.2 million or 14% a year ago. As Vicky discussed we have invested in sales and marketing staff and trainings in order to pursue the growth opportunities in the market. Our inside salesforce and customer support employees totaled 2,008 at the end of December 2014 an increase of 61 employees from December 2013. Diluted earnings per share in the fourth quarter of 2014 were $0.39 per share adding back the after-tax cost of stock compensation and amortization of intangibles our non-GAAP diluted earnings per share in the quarter were $0.43 per share. A reconciliation of net income and EPS to non-GAAP net income and EPS was included in our earnings release this morning. Our spending on capital during 2014 totaled 43.5 million this includes 13.5 million related to our new Plymouth facility $7 million related to the purchase of our manufacturing facility in Telford, England and $5.8 million related to investments in equipment for additional capacity for Fineline. During 2015 we anticipate capital expenditures of approximately $40 million for additional manufacturing capacity and an additive manufacturing facility to support our growth. During 2014 we generated strong operating cash flow of $57 million and cash in investments totaled 128.4 million at the end of the year. I would now like to provide some guidance into our projected results for the first quarter of 2015. Including Fineline’s results we currently expect revenues in the first quarter of 2015 to be in the range of $56.5 million to $59.5 million. This revenue guidance includes an estimated $1.5 million negative impact related to exchange rates. Stock compensation costs in the first quarter will be approximately $1.4 million. Amortization and intangibles related to Fineline will be approximately $185,000. Taking into consideration all the above we expect our quarterly non-GAAP EPS to be between $0.43 and $0.47 per share. Our guidance philosophy will continue to be conservative in light of a European economy and its impact our business. Finally our long-term targets are 25% annual revenue growth and annual GAAP operating margins of 29%. I will now turn the call back over to Vicky for some closing remarks.

Thanks John. Before we open up the call for questions, I would like to reiterate the reasons that we remain confident about the outlook for Proto Labs. We have a large available market and we have focused strategies to capitalize on the opportunities including investment in our sales and marketing capability, we are realizing strong results from the expansion of our product offering including additive manufacturing and will continue to be proactive in delighting our customers. Our margins were impacted by capacity investments, foreign currency and investments in sales and marketing and technology this quarter. However, we expect them to return to our targeted level. We are excited about the opportunities for our business and are focused on enhancing customer experience to achieve our long-term objectives and enhance valuation for our shareholders. This concludes our prepared remarks. Operator, we’ll now open up for question. Question-and:

Thank you. At this time we will be conducting a question-and-answer session. [Operator instructions] Our first question today is coming from Troy Jensen with Piper Jaffray. Please proceed with your question.

Sp just a question maybe for Vicki, Q4 ex Fineline was up 18% year-over-year. I understand the headwinds with Europe and currencies, but as the target's always been 25%, I'm curious to know if we can get back to a 25% organic growth, or did the 25% includes tuck-in acquisitions like Fineline and new product introductions?

We just feel that we can get back to a 25% organic growth particular on an annual basis. There could be quarter-on-quarter fluctuation with that and the reason is as we’ve talked before, we’ve got a large available market now to do that, we do feel we have got to employ some additional tactics in the sales and marketing to achieve that and one of the things that I talked about was our focus on segmentation and we’ve made some significant investments in our sales and marketing staff here in the second half of 2014 in order to be able to build the capabilities to executive on that segmented market strategy, so we’ll be segmenting by a key verticals so there should be targets like the medical market, aerospace, industrial equipment, lighting electronics, and really tailoring our messaging from a marketing point of view sales tactics and approaches in order to capitalize and what we think is a really strong value proposition at large total available market and to really get the penetration that we need there.

And Troy just to clarify a component within your question, so the new processes, those definitely are organic and will continue to look to harvest those. And I think maybe just a point of clarification now we’re looking at it, we’ve experienced some significant growth in Fineline since the acquisition from the investments in our sales and marketing and it’s starting to get a little bit blurry as to what’s acquired revenue versus what’s organic in that revenue base.

Speaking on Fineline, as far as these synergies, I know the growth rate was very good, probably better than industry seeing in the fourth quarter here. What's left in the integration? When do you think we see a more rapid ramp? Not that -- I make it go back to the growth rate was good, but just curious if there's still efficiencies or synergies that can accelerate it?

Right we’re essentially done with the integration but your point is are there additional synergies, absolutely, I mean you saw in the data the number of product developers that the Fineline business has added to our database, so cross selling opportunities are huge and we also intend to continue to make investments in our Web site in order to allow our customers to be more delighted with the kind of consultative services that we can provide with the suite of services that Proto Labs has to offer. So there is certainly continued synergy that we’re going to tap but the integration itself is essentially done, I will you tell you let me just stop by saying, I am so proud of this team for what we accomplished in eight months with this first acquisition and the team did a phenomenal job on getting this company integrated very-very quickly into a single Proto Labs.

Last question, I know you guys hit on the call. I just missed it. Can you just give me the European growth, assuming constant currency?

10%, yes.

Thank you. Our next question today is coming from Brian Drab from William Blair. Please proceed with your question.

I guess continuing on the Fineline discussion just for a second. Was Fineline capacity constrained in the fourth quarter, at least at the beginning of the quarter?

No, I think we’re in good shape. We had to put the capacity in place in order to launch quick turns which we did on a few weeks ago and it’s going great so far. So that’s a nice service we can offer our customers. We weren’t capacity constrained we had a very strong year over year growth as we mentioned it's 48% for additive manufacturing versus where Fineline was an independent company in the fourth quarter of 2013.

I guess I'm thinking about it as a positive. I'm wondering if there was -- if you would have had the capacity online for the full quarter, if you would have done more than $4 million in revenue, but you're saying, the answer to that is, no, you weren't capacity constraint at any point during the quarter?

I would say that as our metals capacity continues to come up during the quarter that helped. But I wouldn’t say we were capacity constraint.

And then on the selling and marketing expense, so 14.5% of a record revenue result in the quarter. Then the guide suggests at the low end of guidance of $0.43, similar to the level that you did this quarter on $56.5 million in revenue. It looks like you are suggesting selling and marketing expense of maybe 14% to 15% for the first quarter as well. Can we expect you to stay at the high end of this selling and marketing range of 13% and 15% throughout 2015?

Probably I would best find the model at that way.

Yes Brain and that’s what we're currently planning is that range. We're testing a lot of things from a sales and marketing perspective and to the extent something gets traction and we would deem at a worthwhile investment. We may accelerate that but right now that’s the right looking at that range and top end of that is the right place to be.

Given the strong revenue result in the quarter, in the fourth quarter, then, do you have opportunity to invest a little bit more in selling and marketing then maybe you were originally planning at the beginning of the fourth quarter?

No we really executed to our plans very well by the way I mean I think we brought some fantastic talent. And we were to beginning to really ourselves our minds around what we need to do with segmentation which has been the great step. We've built the salesforce in each region of the world so that’s been a strong add just trying to do some really nice training. So I feel good with where we are entering the first quarter and with the investment that we've made in sales and marketing.

And then can you comment on the proposed revision function? What sort of impact might that be having? Can you quantify in any way, maybe your conversion rate, how that's changing or conversion from quarter to quarter? Is that improving?

Yes it has improve we don’t give those numbers out typically. But I will say first of all we're able to use the Proto Labs proposed revisions. It can be use it as reversal really depends on the configuration of the part and what needs to be done but we're using at the target rate that we expected and we're getting several points of improvement in close rate when we use it. And it's a great easy way for an engineer to say oh that’s what you want to change you've already changed it my tab great I'll add to my cart and there it goes. So we do see a nice uptick taking close rate with that and we've now got that deployed globally. So it's a little bit earlier in Japan we're only about one quarter into the Proto Labs provision but they're also seeing an uptick in Japan and Europe came in after the U.S they are seeing some good results so it's a nice add.

And then one more for you, Vicki have you had any success in developing some meaningful, deeper partnerships with any major customers? Is there potential to partner with one or more large customers in 2015 that could result in a meaningful increase in revenue?

We continue to build really strong strategic relationship with our customer and one way I'd like to start as we are making lot of traction here. We look at customer who buy quarter of a million or more from us it's really strategy that kind of level well while you're doing more than just buying a couple of prototypes form us. You're using us in a strategic way and we've been able to increase the number of companies that buy quarter of a million or more from us a share by 32% over the prior year. And our sales from these are up 33% year-over-year. So we really are developing these more strategic relationships and new companies depending on what their model is what their needs are using us in very strategic way across the product life cycle from prototyping through scale up an even something one end of life. So it is beginning to get some really nice traction.

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

First off, how should we think about the contribution from LSR and metal injection molding in Q4 and then looking into 2015? I know you said substantial, but is there anything else, any other color you can provide?

Yes the only thing I'll say is that if we continued each quarter we launched it in April. And each quarter saw a nice growth over the prior quarter as more product developers and customer begin to understand what our capabilities and game penetration. We expect that to continue into 2015 and in 2015 our new services will be a more substantial contributor to that 25% year-over-year growth.

Okay. Can you talk about how the business tracked in Europe through the quarter relative to what you saw in Q3?

Through the quarter, yes, what we did see was sequential quarter-to-quarter growth in parts. So even though year-over-year our parts sales in Europe were down impart due to a very large parts order in Q4 of '13 which did not recur. But sequentially we did see growth in our parts business in from Q3 to Q4 in Europe. Mold sales and our Firstcut sales were very strong in the fourth quarter as I mentioned, so that bodes well also for part sales and growth into the future. Yet we got a sell a mold before you are going to sell the part. So that's a very strong leading indicator.

And then, Japan was up 25%. Considering the macro environment that appears pretty strong, how would you characterize the business environment in Japan going into 2015?

Remember that's a very small region for us so big growth doesn't make a huge impact. But we see there as we've made some really nice investments in the team there that are going to really payoff. We have added to our sales leadership, we have brought some additional marketing support and as we look at taking our marketing approaches globally and our sales approaches globally I think that's going to begin to have a stronger impact in Japan as well. So I feel good about the trajectory of that team going forward.

Okay. And then last from me can you just remind us about the strategy for Fineline in Europe and timeline for expanding the 3D printing service there? Thank you.

We're expecting to be launching additive manufacturing in the second half in Europe.

And to our next question today is coming from Holden Lewis from Oppenheimer. Please proceed with your question.

Just wanted to get a little bit more color on this decline in sales per developers on an organic basis, taking out Fineline? Obviously, it's unusual for it to go down. It was down 1.5 this quarter. Based on your guide, it looks like -- assuming you grow unique developers 20% again, it looks like you are probably going to see sales per developer down again, particularly when you have these new services coming on and growing and being impactful. Can you give a little bit more color as to why you're seeing those -- a couple of quarters here of sales per developer being negative?

Yes, sure Holden this is John. So I think that's a consolidated number I think we have to break it down a little bit to really understand it. When you break it down to the regions the geographic regions sales per developer is actually up in the U.S. and up 3% for the quarter and 4.5% for the full year. So that U.S. we continue to pick up, really Europe is driving us down there and back to what Vicki said we had a large customer with a large order in Q4 of 2013, so that skewed that number higher. And then you have to the foreign currency impact that hit us here in the fourth quarter. So if you look over a longer time horizon over the two year time period the CAGR on that growth is like 4.5% in Europe too it's a little more choppy because of that large part sale.

Are you able to strip that large customer out to look at what that would have been sort of ex that?

Yes I am I will have to follow-up with you on that but it is growth and on a common currency basis but it's just the translation I will break it down a little.

So excluding currency and excluding that one order, you would have seen sales per developer in Europe up? We don't know the number, but it's up?

Yes.

Yes.

And then I guess last thing, just as my follow up I think to maybe build on the prior question. You talked about $3 million incremental revenues in MIM and LSR in 2014. If we throw MIM, LSR and then the turns in lathes all together, so you don't have to be particularly specific on any new service, can you give us a sense of how much incremental revenue you are expecting from essentially the 2004 introductions in 2015?

Yes what we will say is that is included in the 25% year-over-year growth that we're looking at, we have targets for each of those within our plan that we expect them to be more substantial going forward but we really don't break it down by individual material so to speak. So liquid silicone rubber will grow year-over-year, our high temperature plastics will grow year-over-year as well. Our metals -- our hard metals and soft metals and Firstcut will grow as well including lathe. So we’d expect them to be more substantial. And those new services what they to do for us as well as they not only do they grow but they allow us to have a broader suite of services to meet the needs of our customers. So we could become a destination where they know they can get the parts they need, and the material they need and the process that they need, so that the experience becomes enhanced. So I think that also helps us with overall acquisition of customers and bringing new product developers into the full.

So your long-term revenue goal is obviously 25% but you also that also is sort of what you expect to do in 2015 given that contribution?

Correct.

And your next question is coming from Andrea James from Dougherty & Company. Please proceed with your question.

So the 40 million in CapEx is that like -- what portion of that is expanding Fineline into Europe? Is that a majority of it? Or I'm just curious like what percentage of it?

No we've got floor space in Europe to add the equipment in there so it does include the equipment for expanding additive. Our challenge for floor space in the Fineline operations today, so there is 12 million to 15 million of buildings and building improvements in that number for next year largely related to floor space additive manufacturing.

In North America.

In North America.

So you're going to be -- I'm just trying to get a sense of because last year -- could you just put it in the context for me, you did the big expansion into Plymouth. So is there going to be something on the magnitude of that or kind of globally you're looking at where you can add floor space?

Yes so we're looking at the Fineline operations and assessing real-estate options in North Carolina right now and as there maybe something to the scale of what we did in Plymouth this year to expand that facility.

So and then when would that first start to contribute, though? Would that be more of a 2016 thing?

Yes. Yes.

And then one more thing, you said you were going to target your marketing by vertical and I was wondering, I know you guys are really fragmented and so I was just wondering what does that look like for what you guys have to do internally? And have you identified your verticals? And like how many of them will there be?

So we've got first of all we've got fantastic data for us to analyze and to try to understand where what segments of vertical segments and even what size companies tend to get the greatest value from our value proposition and that's how we've done the segmentation we've identified six verticals that we're going to be focusing on initially. You're right Andrea we're very fragmented so when you look at our total number of vertical I have got Bill Dietrick here right now, I assume he might be able to help me but I think we got over 40 identified as verticals that we put our customers into we've really identified six where we got good strong value propositions and with that customer base as that we know it'll resonate and that's what we're going to be targeting initially. And we will be developing very relevant content for those verticals, speaking in the language that they understand and by making sure that we can try that conversion out. Bill, do you want to add anything to that?

The only other thing that I would add is that we have invested in a new marketing automation platform that will be rolling out here within the next month or so and that will improve our ability to segment our markets and target the industries that we know are the best industries for us. And it will also allow us to measure the ROI on all of our marketing campaigns and improve our conversion rates so we're just around the corner from launching that new platform and that'll help our ability for the segmentation.

So it sounds like you got 40, sort of verticals and of those six show the most promise. Can you tell us what the six are?

I don’t know -- there are markets such as medical and aerospace, automotive, lighting, industrial equipment.

Thank you. Our next question today is coming from Scott Smith from Morgan Stanley. Please proceed with your question.

So I just want to clarify first on the Protomold business. Is the deceleration is it just a function of the parts business in Europe? Or are there any other areas that you are seeing a little bit of weakness in right now?

What I'll say is that year-over-year parts business it is parts business in Europe now we are little bit flat in North American part sequentially but that is indicative of the kinds of lumpiness that happens with that parts business within Protomold it is non-demand manufacturing platform and it really depends on the demand from the customer base it will fluctuate quarter-to-quarter, but in general the year-over-year reduction in growth is European parts business.

I think you said you expect some growth in 2015. Is there any other -- how are you thinking about that in terms of magnitude? Is it similar to the rate we saw in 4Q on a constant-currency basis? Or any other color you can provide on your thinking as to what Europe grows next year?

I think it should be a little bit higher than what we saw year-over-year like we said we have a very challenging comparable with Q4 of 2013 with that large customer so you strip that out it's going to be higher on a constant currency basis going into 2015.

And then finally for me Vicki or John I'm not sure who wants to take it but just on the gross margin trends, I know I think John you said gross margins improve with utilization, but any other color or kind of how we think about that through the year? Do we get back to the 61% range? Anything else you can add to that?

Yes so we added some capacity in the second half of the year and that capacity is at a higher utilization it’s a little bit of drag in the margins and that happens with any investments. The new services also had capacity in them as well to drive more revenue and push more volume through there also we’re launching the quick-turns and did launch the quick-turns for a Fineline business. We expect improvements there too and we also feel that the new facility in Plymouth, with the layout and streamlining of our processes and the flow will help our productivity, so I think there we’ve got a number of things going on that should help us get back there.

As we continue to work on manufacturing productivity all the time, so we’ve done a lot of share open new facilities, we completed it in January the combination of our Protomold milling operation into Plymouth lots of change and as you can imaging as you put that through a manufacturing plant, it can cause some inefficiencies once I get lined out, people get into their new roles you start driving the productivity improvement again. So just comfortable we’ll get back into this target range on gross margin.

By the end of the year?

Yes.

Thank you. Our next question today is coming from Bobby Burleson from Canaccord Genuity. Please proceed with your question.

So just following-up on some previous Fineline questions, I was wondering, in terms of the capacity you guys put in place, how much DMLS capacity you guys have now? How, roughly speaking, well utilized was it in Q4? In other words, how much headroom is left in terms of utilization?

So we’ve added with little over double our DMLS capacity in 2014 from when we did the acquisition, so we’ve got a little headroom I will say that service is growing even faster than the total. So that’s one we’re watching closely it is a piece of equipment that has a little bit longer lead time with the DMLS equipment, so we’ve got to stay on top of that. But we got to pass these through probably first half and we’ll be watching demand growth closely on that.

And then in terms of the expansion of Fineline into Europe, is there a parts business that you have in mind as well for that Fineline activity? What is the sense, in terms of the mix of prototyping and actual part production you might be doing?

So today when we look at our on additive manufacturing 3D printed parts the vast majority are for prototypes I think overtime I mean I think there is -- it’s a timeline it’s very difficult to predict. You’re going to see companies that are looking to design products for production and we’ll be able to build from production type business within additive process, I think that maybe a little bit further out. I expect in the near term our additive manufacturing services will be primarily for prototyping but we’re seeing some interest in certain types of products that are the engineers design them and can effectively produce a production part with an additive manufacturing process.

The last one for me is with the additional equipment -- it sounds like you don't need more floor space in Europe for Fineline, you have plenty of floor space. The equipment that you plan on installing, just globally, for Fineline this year, is there more DMLS? Just on the metals topic, in general, are you looking at one flavor of metal process? Or are you exploring multiple processes for different types of parts? Thanks.

All right, I’ll answer the first question first and that is we’ll be putting in place in Europe our full product portfolio of stereolithography selective laser sintering and direct metal laser sintering, so that we can offer our customers in Europe the same additive manufacturing experience that they have here in North America. And in terms of technology, I think we said before our current equipment for DMLS is concept laser but we’re technology agnostic and I think that’s one of the beauties of our business model. We are focused on the customer and bringing the customer the technology that, that best meets their needs and again we’re focused on the industrial customer, we’re not focused on the consumer. So we’re constantly looking out at the technologies that are being developed and commercialized in across broad digital manufacturing spaces, so additive certainly being one but any other areas where we might be able to digitize manufacturing process like what we did with liquid silicone rubber. So what are the types of processes that our customers need and we’ll add that, so we’re not married to one technology and I think that’s one of the beauties of our business model.

Thank you. Our next question today is coming from Steve Dyer from Craig-Hallum. Please proceed with your question.

Most of mine have been answered by now. I just want to make sure I can synthesize all of the financial stuff that has been thrown around. So for the year, it's safe to assume that -- or you're thinking in terms of any way of getting back to the 25% revenue growth, organically, gross margin, somewhere in that 61% range, GAAP operating margin in the 29% range. That's assuming euro stays here, a little bit more elevated sales and marketing expense throughout the year. Is that, generally, the framework?

Yes as we look at the full year the full year numbers there maybe some volatility within given quarters but that is correct.

And then the balance sheet, obviously, remains a huge asset, I think, for you guys. Are you still on the lookout for tuck-ins? If so, how we should we about maybe the areas you are looking or the cadence of what we might see?

So as we said before our business model we are not an acquisitive business model by nature. But if an acquisition would help us drive forward our strategy like the Fineline acquisition did we'll certainly look at that. So we have developed we have a nice portfolio of properties within our pipeline we're pretty selective and it has to added the strategy and has to allow us to accelerate where we're going. So if we're looking at the whole ecosystem from actually manufacturing as well as the software side of things and we'll see what comes. But at this point I would, we would be cautious around acquisition and make sure they add the kind of value that the Fineline acquisition clearly is adding to the execution of our strategy.

Thank you. Our next question today is coming from Michael Weisberg from Crestwood Capital Management. Please proceed with your question.

Your comments about the gross margins, currency are going to be a drag 2015 versus 2014, isn't it? Does that mean you can get back to -- can you still get back to normalized gross margins this year?

Yes so you are correct currency we are expecting to continue to be a drag in 2015. But with all of the components that we talked about earlier we do expect gross margins to get back up into that targeted level.

Remember in the fourth quarter we were at 59.9 and that’s had a number of components to it. So 80 basis points of Fineline and we're doing some things with quick turns that we think are going to really help our margins in additive manufacturing about 80 basis points were some of the capacity additions that we add it that we really hadn’t grown into as well as maybe some of the as I mentioned the disruption when you’re consolidating assets and the productivity that you're lose in that. We'll get back behind us pretty quickly is about 110 basis points associated with currency that your rate will linger. Our target model is 61 to 63 and I feel comfortable we'll get back into that target model.

And what did you say a mold growth was in the fourth quarter?

28%.

28%.

And one final one, it looks like sales and supports were up over 40% year-over-year. Is that built out, or is there going to be a continued build in that as we go through 2015?

I think it was quite 40% of that 30% but it was a big investment sales and marketing I don’t deny that we have really looked at talent and as well as what we needed to do for the growth. We do have some digestion to do if we added what we have added so I don’t expect that to be a similar kind of adds this year. But as our revenue grows we will be increasing sales and marketing expenditures to stay within our target sales and marketing expense as a percent of sales. So we will continue to invest we did a lot of bit digestion to do of the adds that we’ve made here in the second half that have been really great talent that give us a great foundation for 2015.

Our next question today is coming from Ben Hearnsberger from Stephens. Please proceed with your question.

When I think about last year, I think about it as being an investment year in terms of services. This year it sounds like an investment year in terms of getting out and marketing those services. How do you guys think about seeing leverage off all this investment that you made over the last year and expect it in the coming year?

So I think that is a great way to look at it now we are investing in launch of one more service in 2015 and that will be lathe turned parts globally as well as launching 3D printing Fineline services in Europe. So there are some big investments in additional launches. But I think that’s a good way to look at it we've added a lot this year in terms of new services and talent the organization and now we're really focused on implementing our sales and marketing strategies overlaying segmentation on top of that is one additional tactics in sales and marketing to drive awareness and also to really good high quality prospects into our systems that are going to allow us improve our close rate. So I think that’s a good way to look at it done.

Yes then maybe one thing to add related to that, so we are getting in the territory where we're becoming a larger organization right. So we're getting into the wide large numbers just like to remind you our gross margins are in excess of 60% and operating margins are 29% plus right, so that's strong performance for our business. So yes I think that there is leverage but I think we do need to continue to invest to make sure we continue to grow at that rate.

Vicki, I think in the past you've mentioned that we can expect LSR and MIM to ramp similar to how we Firstcut ramp? Is that…

No, sorry no LSR and MIM first LSR is a material in a way it's part of our Protomold service, it's a unique material -- it's a liquid silicone rubber, it's a thermostat we haven't offered that before but I would put it in the category of a material Protomold that really off widens our offering which is good. Metal Injection Molding or MIM it's an emerging process unlike machining. Machining is a very prevalent, traditional manufacturing process which we digitized with the Firstcut, so we've taken a large traditional manufacturing processing and converted it to a digital manufacturing process with Firstcut, so the TAM here is huge. If you look at Metal Injection Molding we digitize traditional Metal Injection Molding market but that Metal Injection Molding space as compared to total machining is a smaller total available market.

Last question for me, you mentioned some initiatives in place to try to stimulate that parts business. I was just curious if you could give us some more detail on that? Then really, how much of that parts business do you think you really have control of versus how much is more driven by the macro environment?

That's a really good question. So let me just first add what we're doing to get a hand on that parts businesses. So we're understanding how customers use us when they do purchase production parts and they use us in really three ways. One is they would use us in scale up, so if they have a hot product that they are launching and it goes through prototyping with us and they really need to get to market quickly, they will use for bridge tooling and for early market introduction. It takes a long time for them to get products launched if you get steel tooling for built for large scale production. That causes big surges in a quarter and then it drops off to almost nothing. The other -- the second way that we're used is really for on-demand manufacturing. Throughout the life cycle of the product usually it's where there is a smaller total volume of the product maybe they sell 5,000 to 10,000 of the finished product per year, demand maybe unstable and having on-demand manufacturer allows them to meet their customer's need without having to make big batches of things that may never sell. And the third is end of life as the product goes out end of their life cycle they just need a few parts. So we are understanding that and we're working our sales and marketing teams to be able to communicate those to new customers to try to see where we may be able to meet their needs strategically. So its tied very closely with the strategic selling works that we're doing with our sales team to go wider and deeper and become more solution offerings and more strategic with those customers. And the second part of your question is what does that do with your predictability. By nature we're an on-demand manufacturing house, so the predictability will really depend on the demand for the products that our customers put a product into. So it will by nature be more variable. The fact that you would also have these surge demands when you are helping a customer go to market quickly by nature creates a surge in demand that might not be repeatable. So that's just -- that’s going to be part of the business going forward that we're just going to have to get used to.

Thank you. We have reached the end of our question-and-answer session. I would like to turn the floor back over to management for any further or closing comments.

Thank you. And thanks for joining us today. We hope that we were able to convey the sense of excitement we see in the opportunity ahead for Proto Labs and our confidence in our ability to execute our growth strategy. I would like to express my sincere thanks to the dedicated Proto Labs team who worked very hard to generate these results. I would also like to thank our customers and our shareholders for their support. I look forward to updating you on the progress next quarter, thanks very much.

Thank you. That does conclude today’s teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.