Bill Dietrick - Vice President of Marketing Vicki Holt - President and Chief Executive Officer John Way - Chief Financial Officer John Tumelty - Vice President, General Manager, Europe

Brian Drab - William Blair Ben Hearnsberger - Stephens Troy Jensen - Piper Jaffray Jim Ricchiuti - Needham & Company Holden Lewis - Oppenheimer & Company Bobby Burleson - Canaccord Genuity Weston Twigg - Pacific Crest Securities Jason North - Jefferies Ben Rose - Battle Road Research Andy Netzel - Dougherty and Company

Greetings and welcome to the Proto Labs Second Quarter 2015 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It’s now my pleasure to introduce your host, Mr. Bill Dietrick. Thank you, Mr. Dietrick. You may begin.

Thank you, operator, and good morning, everyone. This morning, before the market opened, Proto Labs issued a press release announcing its second quarter financial results for the quarter ended June 30, 2015. 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 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’ 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 revenue growth on a constant currency basis and non-GAAP adjusted net income and basic and diluted net income per share information that excludes the after-tax costs of stock compensation, amortization of intangibles, and the non-cash unrealized foreign currency activity. We believe that these non-GAAP metrics provide meaningful supplemental information, are indicative of our core operating results, and are 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 Vicki Holt, President and Chief Executive Officer of Proto Labs. Vicki?

Thanks, Bill. Good morning, everyone. Thank you for joining us on our second quarter conference call. With me today is John Way, our Chief Financial Officer. Also joining us is John Tumelty, Vice President, General Manager of our business in Europe. John has been with Proto Labs since 2005 when we first launched Proto Labs in Europe and has been the leader of that region since that time. I will begin today with an overview of the second quarter financial performance and some operational highlights. I'll ask John Tumelty to provide an update on our results in Europe and what we see ahead for the region. Then I’d focus on some highlights of progress on our strategic priorities during the quarter. John Way will conclude our formal remarks with a more detailed look at our second quarter financial results and our outlook for the third quarter of 2015. Following that, we will be happy to take your questions. Proto Labs generated $64 million in revenue in the second quarter setting another quarterly record for the company. This was an increase of 21% over the second quarter of 2014. On a constant currency basis, adjusting for the $ 2.2 million negative revenue impact of foreign currency in the quarter, revenue grew 25%. Our results this quarter reflected excellent execution by our employees. Our FineLine additive manufacturing business generated strong growth in the quarter with revenue of $5.4 million, an 86% increase over its revenue in the prior year's second quarter. The strength in additive manufacturing is a reflection of the focus we have placed on expanding customer awareness of this offering as well as the benefits of cross-selling. Additive manufacturing revenue now represents 8.5% of our total revenue in the quarter. We anticipate continued traction with additive manufacturing as it becomes increasingly recognized as a core capability of our company. To accommodate our expected growth in this service, we recently announced the purchase of a 77,000 square foot facility in Raleigh, North Carolina, which will house our expanded additive manufacturing plant. We expect to consolidate our least facilities, which total 21,000 square feet of manufacturing space into the new building in early 2016. The additional floor space will give us ample room to continue to expand capacity for this growing service offering. Firstcut CNC machining service also delivered record sales in the quarter with year-over-year growth of 28% as reported and 32% in constant currency. Our Firstcut CNC machining business benefited from the launch of lathe-turn parts and expansion of our capabilities in machining hard metal. Our Protomold business record revenues and grew 10% as reported and 15% in constant currency. Protomold’s year-over-year growth rate was influenced by sales and marketing resources focused on advertising and cross-selling our new additive manufacturing service. Looking at revenue by region, sales in North America increased 23% year-over-year led by strong additive manufacturing and CNC machining growth. Revenue growth in Europe was a strong 33.5% on a constant currency basis as compared to 12% in U.S. dollars due to the relative strength of the dollar compared to the euro and the British pound. John Tumelty will provide more details about Europe in a moment. We also continued our strong momentum in Japan with revenue up 33% on a constant currency basis, 12% in dollars. This performance was the result of solid execution driven by new sales leadership in Japan. We also achieved record net income in the second quarter of $11.7 million or $0.44 per diluted share. Excluding the after-tax cost, stock compensation, amortization of intangibles and the non-cash unrealized loss related to foreign currency translation, non-GAAP net income was $13 million or $0.50 per diluted share. This compares with non-GAAP EPS of $0.46 per fully diluted share in the second quarter of 2014. I’d now like to turn the call over to John Tumelty for additional insight into our performance in Europe. John?

Thank you, Vicki. It is an honor to participate on the Proto Labs call today. We are proud of our second quarter performance in Europe, which is the result of a focused energy to enhance our marketing efforts and drive sales. As Vicki mentioned, revenue in Europe grew 33.5% on a constant currency basis in the second quarter of 2014. Our revenue strength in the quarter was driven by the actions initiated in Q4 2014 and continued throughout this year to strengthen our leadership in marketing and sales and augment our sales staff. We have added 21 marketing, sales, and support staff since the end of Q3 2014 for a total of 66 customer-facing professionals in Europe. Our enhanced and regionally focused marketing team has made progress in improving our messaging to European customers. The appointment of Jackie Schneider to the new position of Vice President, Global Sales has provided the platform to enable our regional European sales leaders to begin the process of leveraging the best practices developed within North America. As we continue to recruit, train, and develop our sales teams across Europe, we anticipate further improved productivity and continued progress over the next several quarters, despite the general economic environment within Europe. In addition to the enhancements to the customer-facing team, we have several more catalysts that will contribute to continued revenue growth in Europe throughout 2015. We [indiscernible] in Europe in the second quarter and are currently in the process of expanding the range of materials to include steel [ph] and align our capabilities with the U.S. service. We completed our soft launch of additive manufacturing in June. I am incredibly proud of our team in accomplishing this significant milestone. We completed development of the software to enable multiple currencies and languages, built out space to accommodate machines and processes, installed and commissioned the equipment, recruited and trained the initial manufacturing staff, and trained our customer-facing teams in four different countries. Six minutes after the service went live on our European website, we got in [ph] our first customer [indiscernible]. We have already fulfilled a small number of customer orders and the reception to our quality has been excellent. I am looking forward to the full launch of this service in Europe at the end of the quarter. Additionally, demand for liquid silicon rubber, which was launched last year remains strong. We believe these new products and services along with our strengthened processes and solid execution will help us achieve continued growth in Europe. I will now turn the call back to Vicki.

Thanks John. Now, I would like to touch on some of the highlights of progress we made during the quarter on our business priorities that we established at the beginning of 2015. Our first priority is to enhance our sales and marketing effort to address the specific needs of our customers. The new marketing automation software and CRM tools that we put in place in Q1 have begun to deliver results and are helping us to bring more targeted marketing campaign to high-value prospects in key industry verticals. During the second quarter, we reached an agreement with Autodesk to offer access to Proto Labs online quoting system directly from Autodesk Fusion 360 CAD software. The updated Fusion 360 application scheduled for release later this month will have a link to our site that will allow product designers and engineers to easily obtain manufacturability analysis and receive quote for our injection molding and CNC machining services. One measure of our success in building brand awareness in addition to revenue growth is the increase in product developers and engineers. We served 11,822 developers and engineers in Q2, an increase of 28% over the prior year. Our next priority is to continue to expand our envelope globally. We've done this across all three of our service offerings in the quarter. Within Firstcut CNC machining service, we launched lathe-turn parts in North America in the first quarter and in Europe in the second quarter. We are on track to launch lathe-turn parts in Japan by the end of Q3. We've also added brass as a material now available in the lathe process. Reception of the lathe offering has been very positive and we look forward to its growing contribution through 2015 and next year. Also in Firstcut CNC machining, we expanded our hard metal capability. With the exceptional performance of additive manufacturing in the Americas, we are excited to expand that service offering to our other geographies. As John mentioned, we are on track to launch additive manufacturing in Europe during the third quarter beginning with our stereolithography process. We anticipate rolling out selective laser sintering and direct metal laser sintering processes in Europe in 2016. We expect to launch additive manufacturing in Japan in 2016 as well. Within the Protomold injection molding service, we've expanded our capability and can now manufacture significantly larger parts in liquid silicon rubber. And finally, we’ve moved magnesium injection molding also referred to as thixomolding molding out of our Proto works R&D into our Americas Protomold operation as a readily available service. Magnesium injection molded parts offer design engineers the opportunity to design in magnesium, which has an excellent strength to weight ratio. The market for this process is not expected to be large, but our customers who are designing for lighter weight option will now have this material as a choice in both machining and injection molding, allowing them to select the right process for their particular needs. And finally, we continuously focus on customer service. In June, we were honored to receive the Manufacturer of the Year award at Frost & Sullivan's 2015 Manufacturing Leadership Summit. We were one of a select group of well-regarded companies known for the manufacturing excellence, innovation, and customer service. The award is a testament to our unique automated approach, which encompasses our feature rich software upload, ordering capability, and leading digital manufacturing model, which allows us to deliver prototypes and low volume on-demand parts cost effectively and fast. We never stop our focus on improvements to our customer-facing website and service. It’s a cornerstone of the company. This was an excellent quarter for Proto Labs, reflecting hard work, focus on priorities, and strong execution by our employees around the world. Looking forward, we remain committed to driving our operations to achieve long-term financial target. We review these targets periodically, in light of changing economic, currency exchange rates, and other conditions. We recently completed another review and I would like to reiterate that we continue to target a 25% annual revenue growth rate. Although we may not reach this target each quarter, we feel it’s the right goal for the company given the market opportunity. With respect to operating margins, we are adjusting our current year expectations for our GAAP operating margin to a range of 27% to 29%. Our operating margins have been impacted by foreign currency exchange rates and our previously communicated investments in sales and marketing efforts to drive future growth. In addition, it is also affected this year by investments in capacity across our suite of services, lower margin, and new organically launched services, which are still being optimized, and the rapid growth of our additive manufacturing service offering, which carries a strong gross margin, but remains lower than our legacy business. While we continue to gain experience with our newly launched services and focus on productivity improvements and operational efficiency in our operation. We will also continue to evaluate other levers, including pricing to drive improved margins in the business while optimizing for revenue growth. With that, I will turn the call over to John Way for further comments on our financial performance. John?

Thank you, Vicki. Revenue during the second quarter was $64 million, an increase of $11.1 million or 21% over the same quarter in 2014. Excluding the $ 2.2 million negative impact of currency in the quarter, revenue growth in constant currencies was 25% year-over-year. Protomold, Firstcut, and FineLine revenues were $39.9 million, $18.6 million, and $5.4 million respectively. Our revenue in the second quarter came from 11,822 unique product developers and engineers, a 28% increase over the second quarter of 2014 and an increase of 813 or 7.4% sequentially. Average revenue per product developer was down compared to the second quarter last year due to the changes in mix of business, including the strong growth in our FineLine service and the negative foreign currency impact. Gross margin declined from 61.8% in the second quarter last year to 58.7% in the second quarter of 2015. Foreign currency exchange rates had a negative impact on gross margin of 80 basis points year-over-year. Additionally, as Vicki stated, our new services carry a lower margin until they reach sufficient scale and our additive manufacturing business currently carries a lower gross margin as well. The lower additive manufacturing margin had a 90 basis point impact on the Q2 2015 gross margin. The remaining fluctuation was driven by an increased investment in capacity in the form of labor and equipment to meet our commitments to our customers as an on-demand manufacturer of custom parts by reliably delivering quality parts with quick turnaround times. Our operating expenses were in line with our previous guidance with sales and marketing expenses of $9.5 million or 14.8% of revenue and research and development of $ 4.4 million or 6.9% of revenue. General and administrative expenses decreased from 10.5% of revenue to 9.9% of revenue. Operating income was $ 17.3 million in the second quarter of 2015, compared to $16 million in the same quarter of 2014. Operating income as a percentage of sales was 27.1% in the current quarter, consistent with the first quarter of this year. Diluted earnings per share in the second quarter of 2015 were $0.44. Adding back the after-tax cost of stock compensation, amortization of intangibles and the effect of the non-cash unrealized loss from foreign currency, our non-GAAP diluted earnings per share in the quarter were $0.50 per share are. Our capital spending during the second quarter of 2015 was $9.5 million and included additive manufacturing equipment in Europe to support the service launch, equipment to support continued growth in our other manufacturing facilities and computer software and hardware. This capital investment increased our capacity in our Firstcut CNC machining operations by 10%, our additive manufacturing operations by 25% and our injection molding capacity by 8% to support the growing demand across all our services. During 2015, we anticipate capital expenditures of approximately $ 40 million to support our future growth, including the recently announced additive manufacturing facility in North Carolina. During the second quarter, we generated operating cash flow of $12.4 million. Cash and investments totaled $142 million at the end of June compared with $137.2 million at March 31 2015. I would now like to provide some guidance into our projected results for the third quarter. We currently expect Q3 2015 revenue to be in the range of $65 million to $68 million. This revenue guidance includes an estimated $2 million negative impact related to the exchange rates compared to the third quarter of 2014. Adjusting for the impact of exchange rates, this guidance represents revenue growth of 23% to 28%. Stock compensation for the quarter will be approximately $1.5 million. Amortization of intangibles related to FineLine will be approximately $185,000. Taking into consideration all of the above, we expect our quarterly non-GAAP EPS to be between $0.51 and $0.55 per share. This concludes our prepared remarks. Operator, we will now open up the call for questions.

[Operator Instructions] Our first question comes from the line of Brian Drab with William Blair. Please go ahead with your question.

Good morning and congratulations on a great quarter.

Thanks, Brian

Thanks, Brian

So, Vicki, I just want to make sure I heard correctly, so the GAAP operating margin guidance for 2015 is 27% to 29%?

That’s correct.

That’s correct. And then the long-term target of 29%, that’s still in place and did you – can you comment on what you would expect for 2016?

Yeah, yeah, we do believe that the long-term target of 29% is a reasonable one for us to strive. We got a number of levers that we can pull to continue to improve the margins from where we are right now such as operational efficiencies and price optimization. We’ve had to make a lot of investment in this quarter with capacity that we needed to put in place to make sure that our brand promise remains where it needs to be and that is we are a reliable supplier of on-demand parts with very short lead time. And so, I think, right thing for us to be doing to make sure that we continue the growth rate we’ve got and I do believe there is levers that we can pull to move us back towards that 29%.

Okay, great. And then can we drill into the gross margin a little bit and can we think about it sequentially, there is 150 basis points sequential decline in gross margin. I imagine you talked about year-over-year factors, but I imagine sequentially you got FX with pound stronger versus the euro, you had the capacity additions with the lathe process ramping up, additive is slightly higher percentage of sales at 8.5% versus 7.8% in the first quarter. I mean, am I hitting on the reasons, or is there – could you maybe add some clarity to why we are down 150 basis points sequentially?

Yes, Brian, I can - you hit on most of them. So as you stated, foreign currency quarter-over-quarter is a bigger impact, that's about a third of that difference. We also in the quarter had a little bit of maintenance work that we needed to do on some of machines that was about another third in the capacity additions in the form of labor and machines probably made up the majority of the rest, obviously with other puts and takes in there.

Okay, thanks, John. Would you tell us about gross margin for the balance of the year?

So, as we are looking at it and Vicki stated, we've got a suite of services that mix is starting to play in with the FineLine growth that we are experiencing. I would expect it to improve over this quarter and looking at it probably in the 59% to 61% range.

Okay, great. And then on the lathe processing, it seems like this is off to a great start. You haven't quantified and I know because it’s still so early, but you haven't quantified in any way what you think that business could do longer term. Can I ask at this point, do you think the lathe process could account for more than say 20% of your CNC Firstcut business eventually?

Yes, I certainly do. I've mentioned before that when you look at the total available market in machining, more than 20% of the machined parts out there are made with the lathe-turn parts, so it will be ramping up as customers learn to use us. As you know, our customers have to learn to come to us and our marketing have to pull them in and that takes time. But we are very pleased with the start, you saw that our CNC machining service grew 32% on a constant currency basis, very strong growth and the new services that we've launched there have certainly helped.

Okay, great. I've got more questions, I’ll save them. Thank you.

Thanks, Brian.

Thank you. Our next question comes from the line of Ben Hearnsberger with Stephens. Please go ahead with your question.

Hi, thanks for taking my question. I wanted to dig into the success you are having, introducing legacy Proto Lab offering to the FineLine users that you run on board with the acquisition, and I know you don't release a lot of metrics around that, but I was hoping, Vicki, you could just give us kind of a sense for how much success you are having really pushing kind of legacy Proto Labs into that group?

Right. We are cross-selling in both directions more and more every single day. So legacy Protomold injection molding and CNC machining customers is picking up, additive and vice versa, and as we are doing that we are also developing sales tactics and sales strategies to optimize that that are being shared as successes are undertaken. So there is not a metric I can really share with you that’s showing except the growth that we are seeing in product developers served, which is representing the multiple services that we are bringing to market. So we feel really good about the cross-selling. It’s happening every day. Anecdotally, every single day we are hearing more and more opportunities to do that cross-selling and we are developing the tactics to do that.

Okay, great. Maybe another way of kind of getting into would be to look at revenue per unique developer, and I know it was down this year or this quarter driven by some FX and the lower revenue FineLine users, but maybe you could speak to when you would expect that to turn positive?

Yeah, I think, FX and the – both of those are played in the reduced revenue per product developer. So frankly in Europe and in Japan where we really don't have – you are looking at the constant currency basis and you are also looking at no additive manufacturing that speak [ph] of really our sales revenue per product developer actually went up. So it’s in the U.S. where we've got the impact of additive manufacturing in the mix and as that continues to grow faster than the other services, it's going to dampen our revenue growth per developer. However, over the long-term, once we get to a more stable mix, I would expect us to be growing revenue per product developer in the low single-digit.

Sure.

But that’s probably not going to be for a few quarters.

Okay. Sorry, John.

Right.

Yeah, and then maybe another way to look at that is really looking at the mix of business and looking at size of order in each of our services. So our Protomold orders are the largest, so when that grows faster, the revenue per product developer number goes up, when FineLine is the lowest per order, when that service line goes the fastest, it tends to be down. So mix is playing a big component in that.

Sure. And then my last question, on FineLine gross margins, I know the expectation is to ultimately bring them up to kind of legacy Proto Labs gross margins, it sounds like we've got some capacity additions that are going to play out early next year. Can you give us a sense for the timeframe on when we can expect FineLine gross margins to come up to kind of legacy gross margins given the announcement of the capacity additions?

Yes. So, I think as we've talked about in the last couple of calls, we are continuing to analyze the levers we have in opportunities within FineLine. We are confident we can increase the margins from where they are today, but we want to make sure that we are optimally pricing the products as well when we think we have some pricing leverage there and we are testing those currently. We are continuing to analyze and making sure we are very careful with our approaches so we don't dampen demand related to it. So, I think, we will improve those margins, not certain we will get them all the way to all the – to where the legacy margins were, but we are confident we will improve them over time and we will start to see that in 2016.

Understood. Thank you very much.

Thank you. Our next question comes from the line of Troy Jensen with Piper Jaffray. Please go ahead with your question.

All right, thank you. Also want to say congrats on the nice quarter and guide, Vicki and John.

Thanks, Troy

Thanks, Troy

So, on the – Firstcut was up a lot because of the lathe business. Is there any way you can kind of quantify how much contribution was this quarter or is it just too hard to give that out?

It’s too hard to pull out. It’s actually meeting our expectations, I will put it that way and it was a combination of lathe and I also mentioned that we've improved our capabilities in some of our hard metals and steals and that had an impact as well. So it’s a combination of envelope expansions that contributed to that strong growth.

All right, perfect. And then, Vicki, for you, can you expand a little bit on this Autodesk partnership, this is an exclusive deal or is this just for parts, they are going to be using some of the design assessment capabilities too?

Yeah. So we are excited about this opportunity with Autodesk because as you know they are an important part of our ecosystem and we view this relationship as one where it’s an opportunity for us to get our name out in front of more product developers and broad brand awareness and help them feel comfortable to easily go over and get access to our services because it will be a direct link write-off of their software to directly go to our website and get quote. So it’s not just like the yellow pages, it is a direct link and so we are real excited about that. We view this as one of the many tactics that we are employing to drive brand awareness and drive customer acquisition. So we will be able to measure it to some extent, but I think it’s really a brand awareness play, but it’s another one of the marketing tactics that we are deploying to try to get more customers and drive brand awareness.

All right, perfect. And then just one last one for John and this is also on the gross margins. If you go back, Q1, FineLine was 7.8% of sales, this quarter it was 8.5% of sales, but that 70 bps movement had a 90 bps erosion in your gross margins. Was that due to the quick turn capacity that you added? And I guess if we just think about quick turn, if we think about FineLine growing faster than the corporate average, I think you mentioned 61% to 63% gross margins here for the September quarter. It seems like a big jump given the headwinds with the FineLine business?

So, let me clarify a few components of that. So, the 90 basis point is the impact just on Q2, so if we were to exclude the FineLine results from the second quarter, gross margins would have been 90 basis points higher and when we look year-over-year that impacts 30 basis points.

Sequentially.

And sequentially, essentially flat. Okay? So that's a little more color on those FineLine gross margins. And as it relates to Q3, I believe, I said, we are looking at 59% to 61% as the range for Q3.

Okay. Sorry about that. Good luck going forward.

Thanks.

Okay. Thank you.

Thank you. Our next question comes from the line of Jim Ricchiuti with Needham & Company. Please go ahead with your question.

Thanks. Good morning. You showed very nice growth, it looks like across your geographies. I just wanted to maybe turn to North America where you really are seeing some nice demand, it appears in additive and in the CNC machining. The Protomold, is that meeting your expectations in North America?

Yes, our Protomold growth in North America was somewhat impacted by the fact that we really focused a lot of our sales and marketing over the last couple of quarters on integrating our additive manufacturing business. I think that’s the right thing to do. It’s now – we are really seeing some fantastic results are there. And I think it’s been the right approach in order for our customers to really understand our full suite of services. So it’s not widely off our expectations for this year and we will be kind of refocusing a little on Protomold as we go forward to get a better balance. But I think we've integrated the acquisition quite well and it’s now really understood by customers, our sales people, and full suite of services. The other thing that might impact us also on the Protomold is the fact if you had looked back at 2014, we had a really strong Q2 in 2014 in Protomold, so that was a 30% year-over-year growth over 2013, but the comparable is stuff as well.

Got it. That's helpful, Vicki. You gave some color, John, about headcount in Europe. Just how should we think about maybe headcount additions in general across the company, it sounds like there is going to be some additional additions in Europe, but just in general how might we think about that over the next couple of quarters?

Well, yeah, we are constantly – we're growing at 25% per year. So we’re planning to add manufacturing headcount in order to be able to service our customers and as an on-demand manufacturer, we have continued to build our sales and marketing team and we will be doing that in a steady fashion across each of our regions.

But it will be really steady, you are saying? Okay.

Yes.

Yes, I would say, Jim, as we talked about, I think, there was a little bit of a step change in Q3 and Q4 of last year in the sales and marketing headcount, now going forward I would anticipate headcount growth tentative to match our revenue growth.

Got it. And then one final question if I may, just on the additive side in Europe, can you be any more specific in terms of 2016 as you begin to introduce the services, direct metal, laser sintering, is that going to be in the early part of the year, is that the plan?

I will take that question. Realistically, there is a significant amount of work still to do to bring those services into Europe, at least the lead time on the capital equipment. So we will be targeting in the second half of 2016 to launch those services.

Okay. Thank you, John, that's helpful.

Yeah, our full launch of stereolithography doesn't take place until September. So we are in a soft launch now. The team has done – I’d really give that team a lot of credit for getting that up and running as quickly as we did given the amount of work that needed to happen to launch that service in Europe. The team did a great job.

Just on that subject, are you seeing the demand from – early demand, I understand, but I’m curious, is these – is this coming from some of your existing customers primarily or is this coming from newer customers? And I know it's early.

It’s both. We are barely marketing anything to that as we manufacture in Europe. So the fact that our customers are almost watching our website for an update to come on and get involved with, so it’s very, very looking at the moment whilst we ramp up our capability there, but we're taking orders from both new and old customers on a weekly basis.

Thanks a lot. Congrats on the quarter.

Thank you.

Thank you.

Thank you. Our next question comes from the line of Holden Lewis with Oppenheimer & Company. Please go ahead with your question.

Thank you and good morning. I guess a couple of things. First, you sort of alluded to this, I think, with headcount, but how do you feel the leveragability of your various OpEx lines are either for the rest of the year at least going forward to kind of achieve that 29% margin, I mean, do you feel like you will be able to dollars aside just relative to revenue, will you be able to leverage selling or leveraging G&A or leverage R&D or you looking just to ramp OpEx over time at the same rate as revenues?

Good morning, Holden. So, I guess the way I would look at it at least over the next six quarters, so sales and marketing, we will continue to invest there and I would expect in that 15% range of revenue as we continue to drive our targeted growth. Research and development is another area we are going to continue to invest in. So I wouldn't expect any leverage there and the guidance of 6% to 8%, I would continue to expect those investments. And our G&A components, we've added a bunch of services. We have to make sure that we've got the administrative capabilities to keep all of those standing up as well, including our IT and capital investments there. So, you know, over the next six quarters, through 2016, I wouldn't expect significant leverage, maybe after that we will continue to assess that and we will start to see leverage going forward from there.

The other question is, in past quarters, sort of one of the issues affecting the revenue has been the volatility of may be lower volume parts particularly I guess in Europe, really no mention anywhere of the low-volume business as opposed to the prototyping business. Can you maybe give us an update? Is that still – does that seem to be stabilizing? Did we just have one good quarter that’s still hard to predict? Or how do we think about your low-volume business here?

So, our parts business on – the growth in our Protomold parts business has been about the same as our growth in our Protomold mould business this past quarter. So pretty stable – we did have, as we mentioned before, a pretty tough comparable with prior year, but again the growth rate across the whole injection molding service offering both parts and moulds were about the same.

And do you feel like that’s kind of like a one quarter thing or who knows next quarter it could be worse or do you feel like you kind of got a grip on this as it kind of normalize and stabilize and maybe this isn't a story at this point?

Yes, I think that’s the right categorization and I think as we look back in the quarters, a lot of that discussion was Europe and a lot of that – the component of Europe was the large orders in previous periods and the comparables. So there still are times where we are doing bridge tooling to help customers get their products to market quickly, that creates spikes in volumes for us and we will happily take that business and serve that for them. But it is less predictable. But I think your comments are correct. We are seeing things as expected in that line.

So the mix of bridge tooling versus other stuff is just kind of normalized at this point, comps are out of the way, so we just assume it’s stable.

Yes.

Yes.

Yes.

Got it. Thank you.

Thank you.

Thank you. Our next question comes from the line of Bobby Burleson with Canaccord Genuity. Please go ahead with your question.

Hi, good morning. Thanks for taking my questions.

Good morning, Bobby

Good morning, Bobby

Good morning. So most of them have been answered already, but just a couple more on the FineLine business, it sounds like tripling essentially floor space there in Raleigh next year. Can you just talk a little bit about the mix of technologies that you expect to have once that facility is fully ramped, including mainly a focus on how much of that mix is going to be dedicated to direct metals?

Our direct metal laser sintering business is growing nicely, so we will be adding capacity there, but our stereolithography and our selective laser sintering business has also been growing. So we will be investing in all three services in that Raleigh facility and we will be investing as to stay ahead of the demand just like our injection molding and our CNC machining business and additive. We have a commitment to our customers of reliability and speed. So as the demand grows with different services, we will be continuing to add that capacity, that's why we need that floor space. It will happen across all three services.

Okay great. And then, obviously, gross margin has been an area where you guys see some improvement over time that you can benefit from and I am wondering just in terms of larger operation, whether or not we should think of that business as benefiting from economies of scale or do you see it kind of just fragmented in nature to the fact that it’s prototyping and may be one-off parts [indiscernible] economies of scale won’t really answer into that gross margin improvement as much.

I think eventually economies of scale will play into it as we move facilities and observe the increased space and capacity. That will be an offset of that in the near term, but over time I would expect to see some improvement related to those economies.

I think the bigger lever that we have in our additive manufacturing services is optimizing our price while still making sure we are not impacting close rates in the top line, but I think there are some levers that we can pull on pricing.

Okay, great. And do you see that overall the additive business topping out may be at 20% of revenue or is there like ceiling that you would like to hold it under in terms of overall mix?

I don't think there is a ceiling. We like to think that – the product developer customer is the centre for world and we are here to provide them – that developer the suite of services to meet their needs. So I think it’s going to depend on how the market evolves. Now I will say I think additive manufacturing plays a role in the product development life-cycle, usually early in the product development life-cycle and then as customers continue to take their products to market, having an injection molding option and a machining option really allows them to accelerate innovation. So I think it'll be across all three services the growth will continue in the short-term here, I do think additive will grow faster, it’s a very popular process right now. There is a lot of interest by engineers to get experience in additive manufactured parts.

Okay, great. Thank you.

Thanks.

Thank you.

Thank you. Our next question comes from the line of Weston Twigg with Pacific Crest Securities. Please go ahead with your question.

Hi. Yeah, thanks for taking my question. I just wanted to ask on gross margin again maybe if you can help me understand this, some of the lower gross margin this quarter is related to capacity and since you most likely need to continue to add new capacity to grow your long-term 25% annual target, do you think there is some risk to that long-term gross margin target of 61% to 63%, I know that you said you have pricing as a lever, but it feels like if you are in a constant growth rate or growth situation that there could be some risk to that?

Yes, Weston, as I am continuing to look at the business and analyze it, still getting up to speed to a certain extent, I think I can still use that excuse right. When we establish our target, we had essentially two services, so that 61% to 63% range, I think was a tighter range, as we deploy more services I think that range might widen a little bit just as we introduce mix into it, still evaluating them to see exactly where it’s going to fall out, but I wouldn't necessarily say that the top and is a risk, I think it is just a range, it might be a wider range then maybe we had historically, but still relatively tight. I don't think it's a drastic swing, I think as we are concluding new services and launching new services and new geographies that may have some impact there.

Okay that's...

This past quarter did have relatively large investment in capacity and in hiring and training employees literally across every one of our services. So, as John said it is a broader range and we've had to ramp up and as employees become more and more productive you see some improvement there, but we’ve had quite a bit of capacity this past quarter.

That is very helpful. Related to adding headcount can you give any idea, you mentioned the European headcount for sales and marketing, but what’s your total headcount just for sales and marketing right now, can you give us a number just year ago number so we have a reference?

All right. We are now in sales and marketing, 220...

Sales and marketing globally 278.

278, okay, literally last year.

Versus last year, we at this time we were at 205.

Okay very helpful. And then just finally on the Protomold business, the lower growth there, you mentioned you are focusing on the additive manufacturing expansion, is there any chance that there is some cannibalisation happening rather than cross selling, I know that they are totally different businesses, but I'm just kind of curious, what your thoughts are?

No. There is no cannibalisation they are totally two totally different services used in two totally different ways by development engineers. So, there is tons of cross selling opportunity and if a customer is trying to just get a quick easy, very early stage part they are going to maybe want to do it with additive or machining, but if they want to get parts to test form fitting function they are going to need an injection molded part or apart from the service that process that they intend to scale. So, I don't think there is any cannibalisation.

Okay alright very helpful. Thank you.

Thank you. Our next question comes from the line of Jason North with Jefferies. Please go ahead with your question.

Good morning. I was wondering if you could give any further additional investments in sales and marketing and the new things you are trying, if you could give some example of what you're trying out there, also like how widespread across the company is it and you talked about additional plans to expand sales and marketing spend and just how that the new things you try and fit into that?

Right. I will just give you an anecdotal example of how we are doing some of our cross selling let’s say a customer comes in and is asking for a part to be made with additive manufacturing, it’s early in the design process, our sales team is talking to that customer trying to understand what's their ultimate goal with the project, how large volume do they expect to have, many of them will expect to produce larger quantities at some point, so what we're doing is we're going to the customers and saying why don't you also upload your part in Protomold get your design for manufacturability feedback so that then as you do move from an additive part over to eventually an injection molded part you're going to be ready with a manufacturable design and that's really helping us pull customers all the way through the product development cycle into Protomold. So that's an example of the kind of tactics that our sales team is deploying.

Okay then of the additional sales and marketing expenses, how much is the just kind of you’re ramping on kind of legacy a core versus these new investments as we look forward?

So, what we are doing a lot with our marketing now is instead of marketing specific services switching to more of a suite of services to allow to really help our customers understand the value that we can deliver then across a number of processes. So I think that in itself is going to result in a little bit of change versus just focusing on Protomold or focusing on Firstcut, it is a suite of services.

And part of the investments, a big chunk to the investment really is just more resources to reach out and get the messages to customers, or potential customers and follow-up on leads and I think we're looking at the different approaches of how to engage those customers and really understand their needs.

Great thank you. And one follow-up here on for Protomold, I have seen [indiscernible] FX has obviously been a headwind would you expect that to really accelerate once we start to anniversarying some of these FX headwinds starting in Q3?

Q3 has also got some FX headwind in it.

Yes. And as you look at growth rate, we did have a difficult comp with this quarter in Protomold, specifically and ultimately we plan our business at across all the services and the mix is going to change, I would expect it to improve a little bit from a growth rate perspective in the next quarter.

Great, thank you.

Thank you. Our next question comes from the line of Ben Rose with Battle Road Research. Please go ahead with your question.

Good morning Vicki, good morning John.

Good morning Ben

With regard to the vertical mixed this quarter, I was curious if there were any vertical markets that stood out as being stronger or weaker relative to your historical mix?

We continue to get traction in our targeted vertical, which tend to really resonate with our value proposition, so we've mentioned before those verticals that do a lot of iterations when they do product development and accelerating product development is really important to them, so these would be verticals like medical and aerospace those tend to grow faster than our - then the growth rate at large. So we continue to grain traction on that and some of the work that we are doing in segmentation to deliver targeted messages to those segments, I think as part of what's driving that, so we're very relevant to them.

Okay, so those would be two of the strongest even this past quarter.

Correct.

Okay, and going back to the partnership of sorts that you announced with Autodesk this past quarter, I noticed that you also have a similar type of arrangement with SOLIDWORKS, so division and was curious to know is there anything different in kind about these two different relationships, is the Autodesk one sort of a deeper level of integration if you will?

Yes. First, we value the relationships with both of those CAD companies, so it’s part of the ecosystem and they are both really important partners to us, but it is a different service. So, with the SOLIDWORKS we are part of a list of manufacturing partners so to speak on their website, we're not embedded in their software. In Autodesk Fusion 360, which is a software as a service, it is a cloud-based software platform, we are actually in the software. So there is an icon that the customer can click on that will - then can link right over to Proto Lab to our website and take that CAD file that they had been working on in the Autodesk Fusion 360 and link it right over into the Proto Labs website for both machining and injection molding and get design for manufacture ability feedback kind of quote, so it is much more direct.

Okay. Would it be part of your longer term plan though to have that same level of integration with both SOLIDWORKS, as well as the other major CAD vendors or...?

We continue to work on opportunities to cooperate with SOLIDWORKS on innovations that they are working on with their CAD design, as well as others, PTC and Autodesk, they are all important parts of four ecosystem, we are all trying to reach those development engineers and delight them with what we do, so.

Okay. All right, thanks very much.

Thank you.

Thank you. Our next question comes from the line of Andy Netzel with Dougherty and Company. Please go ahead with your question.

Hi, thanks for taking my question, I’m dialed in on behalf of Andrea James.

Hi Andy.

Hi, Vicki. So just curious, does Proto Lab talk to companies that do warranty protection to talk about minimizing those warranty costs?

I don't think so, no.

No. So, I guess maybe put it another way. When you look at our terms and conditions, we make them the best we can to serve those customers. So they upload their files, but the terms and conditions don't exclusively have the warranties in there because largely we use for prototypes.

Also as far as FineLine goes what differentiates that additive manufacturing service bureau is it simply that ability to cross sell and serve customers by multiple touch points or is there something that is beyond that?

Well first having the suite of services is certainly differentiates our Proto Lab’s additive manufacturing from many of the other companies that are out there, but there is couple of other differentiators. We do deploy some additional software that I think makes us much more efficient in how we take the product the order and move that digital threat all the way to the manufacturing floor. So we’ve got some proprietary software and then I think the third differentiator, which is not insignificant, we make high quality parts. We have excellent technology around how we maintain and how we run those machines to make very high quality additive manufactured part for the industrial customer, not the consumer and industrial customers appreciate that.

Thank you.

Thank you.

Thank you. Our next question comes from the line of Holden Lewis with Oppenheimer & Company. Please go ahead with your question.

Thanks. Just a little of piece of housekeeping here, historically or last few years anyway you have achieved sort of 31%, 31.5% tax rate, last couple of quarters it has been more in the 32%, 32.5% tax rate level, is there anything going on there is this sort of the level we should be expecting going forward or is there some reason to think it comes down again?

So, I think there, a couple of components for them one is the mix of business and where our profits are coming from with the introduction of FineLine that's largely in the U.S., which carries a higher tax rate. Other component is some State taxes, as States get more aggressive we’re incurring some of them. So, between the State and the foreign and domestic mix there is a tax provision related to the research credit from the Federal Government perspective that is delayed in getting enacted every year it seems like; so we've tend to get a benefit in the fourth quarter related to that as that gets approved. But I would say 32.5% is a good place to model and when that tax provision goes through we would see a little bit of a down tick there.

Okay, great thank you.

Thank you.

Thank you. Ladies and gentlemen there are no further questions at this time. I would like to turn the floor back over to Vicki Holt for closing remarks.

Thank you for joining us today. I want to thank all of our employees around the world for their commitment, hard work, and excellent execution of our strategy. We’re excited about the opportunities ahead in 2015 and beyond and remain focused on getting the work done. We look forward to updating you on our progress next quarter. Thanks very much.

Thank you ladies and gentlemen. This does conclude our teleconference for today. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.