Proto Labs, Inc.

Welcome to the ProtoLabs Q1 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Dan Schumacher. Mr. Schumacher, you may begin.

Thank you, Alex, and good morning, everyone. With me today are Rob Fedor, ProtoLabs President and Chief Executive Officer, and John Way, our Chief Financial Officer. This morning, ProtoLabs issued a press release announcing its financial results for the first quarter ended March 31st, 2021. The release is available on the company's website. In addition, a prepared slide presentation is available online at the web address provided in our press release. Before we begin, I would like to remind everyone that our discussion will include statements relating to future performance and expectations that are or may be considered forward-looking statements and subject to many risks and uncertainties that could cause actual results to differ materially from expectations. Please refer to our earnings press release and recent SEC filings, including our annual report on Form 10-K, for information on certain risks that could cause actual outcomes to differ materially and adversely from any forward-looking statements made today. The results and guidance we will discuss include non-GAAP financial measures consistent with our past practice. Please refer to our press release and the accompanying slide presentation at the investor section of our company website for a complete reconciliation of non-GAAP to GAAP results. Now, I'd like to turn the call over to Rob Vador, who has held the role of ProtoLabs President and Chief Executive Officer since March 1st of this year. Rob.

Thanks, Dan, and good morning, everyone. Thank you for joining us today for our first quarter 2021 earnings call. I'm excited to take you through our operating and financial results, as well as our top priorities in my first year as CEO. We have a few very important topics for you today, including an update on our Cotolabs 2.0 system launch and performance, our first quarter together with 3DHubs, and an invitation to our virtual investor day later this month. John will provide details on our first quarter financial results and our outlook for the second quarter later in the call. Turning to first quarter financial performance, I'm pleased to report a strong start to 2021 with revenue and earnings within our expectations. First quarter revenue of $116 million was near the top end of our guidance range, representing a year-over-year increase of 1% and a sequential increase of 10%. 3D Hubs contributed $5.8 million of revenue between close on January 22nd and the end of the first quarter, and delivered strong growth of 35% over their prior year results. As with our normal seasonality patterns, revenue started relatively soft in January and picked up as we progressed through the quarter. This was particularly true in our injection molding business. We saw increased demand as global manufacturing activity continued its recovery from the low point in the second quarter of 2020, and we benefited from global supply chain challenges as our customers pursued alternatives to their traditional suppliers. This led to strong order volume of injection molded production parts, not only benefiting the first quarter, but creating a backlog into the second quarter as well. As a result, our first quarter injection molding revenue grew 3% year-over-year and 8% sequentially. We break down revenue by service on slide 6. Our 3D printing revenue increased 8% over the prior year quarter and 8% over the fourth quarter of 2020. Our CNC machining and sheet metal services were both down mid-single digits year over year, but were up over 15% sequentially, reflecting continued increase in global demand. As we look at revenue by region, the Americas produced organic sequential revenue growth of 6.5% while converting to our new ProLabs 2.0 platform mid-quarter. Our European region was impacted by disruptions from logistics changes associated with Brexit and continued COVID-19 restrictions, resulting in organic sequential revenue growth of 3%. Japan revenue decreased 17% year-over-year in constant currencies and was relatively flat sequentially. Moving to earnings, we reported first quarter non-GAAP diluted earnings per share of 40 cents, also in line with our expectations for the quarter provided in February. Our earnings in the first quarter included the operations of 3D Hubs and costs associated with our Portalabs 2.0 systems launch, including a full quarter of depreciation and increased research and development spend. As a reminder, 3D Hubs is a very strategic, long-term investment for our business. We're currently investing to build out the platform and infrastructure to support the significant future growth that we will drive through the platform. Overall, I'm very pleased with our financial performance in the quarter in which we launched our redesigned systems to support our customers and future growth, and completed a transformative acquisition. I've been with Protolabs for over eight years in a variety of capacities, and after two months in my new role, I am more confident than ever in the future prospects of this company. The launch of Protolabs 2.0 and the acquisition of 3D Hubs position Protolabs for strong growth, financial performance, and shareholder value long into the future. I'm excited to work with my colleagues to execute on our strategic objectives, delight our customers, and capture more of our market opportunity. As we continue to emerge from the headwinds of the global pandemic, Protolabs is well positioned, given our market leadership and the bold strategic moves we have made to better serve our customers by improving our e-commerce experience and expanding our offer. Our three priorities for 2021 are, first, to create a world-class customer experience for digital manufacturing, second, to expand our portfolio of customer offerings to meet the broadest set of customer needs, and third, to further invest in our employees. In the first four months of 2021, we made substantial progress on all three. First, and most importantly, Protolabs 2.0 is now live in Europe and the Americas. we've processed over 54,000 orders through the new systems. With this new e-commerce platform, our customers now have access to improved order management, more secondary operations, enhanced quality documentation, streamlined production features, and the ability to manage multiple services in a single project. As with any system launch of this magnitude, we have had our challenges. Our incredible employees have answered the call they arose and deployed software updates with system improvements to resolve them permanently. In March, amid global shortages of resins and capital equipment, driven in part by electronics supply shortages, we saw significant sequential increase in orders. As orders ramped, our facilities were operating below their full run rate efficiency as they adapted to the new systems leading to some on-time delivery challenges near the end of the first quarter. Due to the outstanding efforts of our teams, on-time delivery has improved dramatically in most services and is back to the market-leading Protolab standard that customers have come to expect. In injection molding, the significant increase in production parts orders I mentioned earlier has created a backlog at our US injection molding facility. With respect to our second priority, Continuing to expand our offer to meet the broadest set of customer needs, our transformative acquisition of 3D hubs in January is a significant step toward achieving that objective. This acquisition provides two great benefits to ProLabs customers. First, a complementary network of manufacturing partners to fulfill a breadth of capabilities outside of our current envelope. And second, a broader selection of pricing and lead time options. We are currently working with the talented 3Dhubs team on assessing near-term revenue synergies and planning long-term integration. As we work to unify the customer experience and incorporate 3Dhubs capabilities with Protolabs in one seamless customer-facing platform, we will continue to invest in R&D to provide the best customer experience. In the near term, both organizations will continue to operate semi-independently, while collaborating to develop a robust plan that will allow us to best serve our customers and generate significant shareholder value. Our third priority in 2021, a long-term focus for Protolabs, is to continue to invest in our employees. Our employees drive the success of this company. We're delighted that the three Hubs employees joined our team in the first quarter, and our relationships and productivity will only increase as our interactions and collaborations continue. Throughout 2020 and into 2021, we've demonstrated our commitment to the development of our employees and offer many opportunities for additional training. In 2020, we implemented a customized learning management system and now offer hundreds of online courses across a range of job-specific disciplines that provide our employees with greater access to development resources. Employees are assigned courses to help them expand their expertise in their current position and can also register for courses to help them advance their positions in the organization. We have also launched customized leadership development programs for new managers that focus on how to effectively coach and develop their employees. Furthermore, the safety, mental health, and physical wellness of our employees has always been a top priority for this company. To help them overcome the unique physical and mental challenges brought on by the pandemic, we developed and deployed specialized health and wellness training throughout the year. Aside from our primary 2021 priorities, in recent years we've also prioritized our sustainability and societal impact. We are working to continuously improve our environment, social, and governance practices, and I'd like to take a moment to highlight some of the work we're doing today. ProLabs was recently recognized in the U.S. with the 2021 Sustainability Award from the National Association of Manufacturers for our continued effort to reduce our environmental footprint. These efforts include implementing solar power at our Plymouth, Minnesota injection molding facility, reducing material waste through recycling programs, establishing an internal green team, and making other energy-efficient changes across all of our facilities. We are also tracking our utility, energy, and natural gas consumption so that we can better understand our impact and identify areas for further improvement. There are also several social initiatives in the works that I'm quite proud of. First, we've implemented a Diversity, Equity, and Inclusion Leadership Council to oversee diversity and inclusion efforts at Protolabs. We've also conducted anti-bias training for our employees and are creating employee resource groups as we continue to engage employees on matters that are important to them. In addition, Proto-Givers, an employee-led philanthropic group, organized a fundraiser in the first quarter to raise money for the Minnesota Assistance Council for Veterans to help veterans and their families who are homeless or at risk of becoming homeless by providing housing, employment, and legal services. This is just one example of the great work all of our global locations are doing in their communities. We're in the early stages of our EST journey, and we'll continue to look for ways to build on our strong foundational practices throughout 2021 and beyond. On Thursday, May 20th, 2021, at 10 a.m. Eastern Time, we will host a Virtual Investor Day. During this session, we'll go into greater depth and provide further insight into our long-term strategy and our execution plan to achieve that strategy. I will be joined by several members of our executive leadership team to offer further information on our strategic initiatives for the next five years. We last held an Investor Day event in 2017, and I am truly looking forward to hosting you again later this month. There will also be a chance for current and prospective investor participation in the form of a live question and answer session after our prepared remarks. Please register today at the link provided in the press release we issued this morning. Now, John will provide a detailed summary of our first quarter financial performance as well as our outlook for the second quarter. John?

Thank you, Ralph. Our detailed first quarter financial results begin on page 16 of our presentation. First quarter revenue of $116.1 million represents a 10.4% sequential increase or 5% organic sequential growth in constant currencies. 3DHubs was acquired at the end of January and contributed $5.8 million of revenue between the acquisition date and the end of the quarter. Additionally, changes in foreign currency had a $1.6 million favorable impact on first quarter revenue. We served 22,600 unique product developers in the first quarter, up 8% year-over-year and 24% sequentially. The first quarter growth was largely driven by the acquisition of 3D Hubs, adding just over 3,000 product developers served. We will continue to increase the number of product developers we serve and increase the share of wallet with our existing customers as we execute on our 2021 priorities and longer-term strategic objectives. Turning to slide 17 and our detailed income statement, our non-GAAP gross margin in the quarter of 48.5% was in line with our guidance and compares to 51% in the fourth quarter of 2020. 3D Hubs represented a 190 basis point headwind on overall gross margin due to the lower margin nature of the outsourced manufacturing model. The 3D Hubs gross margin was lower than our target for this business driven by increased shipping and customs costs, as well as higher sourcing costs during the quarter. The 3D Hubs team is actively working on available levers to improve this gross margin performance. The remaining sequential decrease was due to higher staffing costs in the form of overtime and contractor spend in our manufacturing facilities, driven by the progression of orders during the quarter and efficiencies inefficiencies as our operations teams adapted to the new Protolabs 2.0 systems. As we go forward, business mix will play a role in our gross margin and is likely to introduce additional volatility in this metric. Our total non-GAAP operating expenses were $42.4 million in the quarter, compared to $37.4 million in the fourth quarter of 2020. 3DHubs added $2.4 million of non-GAAP operating expenses in the quarter. The remaining sequential increase consisted of the following factors. We had a full quarter of Protoleps 2.0 depreciation, resulting in an additional $600,000 of expense. We incurred incremental overtime in contractor spend associated with going live on the Protoleps 2.0 system, resulting in $600,000 of expense. And the remaining increase was primarily related to an increase in accrued bonuses, payroll taxes, and medical expenses compared to the fourth quarter. Our GAAP operating expenses included non-recurring transaction costs of $2.5 million associated with the 3D Hubs acquisition and an increase in equity compensation associated with our CEO transition and the acquisition of 3D Hubs. Moving to taxes, our non-GAAP effective tax rate in the first quarter was 22.7%, up from 18.2% in the prior quarter. The sequential increase was driven by a provision to return benefit in the fourth quarter that did not recur, a lower research and development tax credit, and net operating losses at 3D Hubs. The net result was non-GAAP diluted earnings per share in the quarter of 40 cents. representing a $0.21 per share decrease from the prior year and a sequential decrease of $0.10 per share. Our non-GAAP adjustments are consistent with our prior practices and are detailed in the appendix of our presentation. The sequential change in non-GAAP earnings per share consisted of the following components. First, the addition of 3D Hubs Business represented a negative sequential impact of $0.08 per share, including lower investment income, and the impact to weighted average shares outstanding. Increased volume in our legacy business and the incremental cost to support that volume represented a sequential increase of $0.04 per share. This volume was offset by increased expenses related to Protolabs 2.0 launch, including depreciation of the system and additional labor during the launch, representing a $0.03 per share reduction. And finally, the increase in the effective tax rate had a two cent per share unfavorable impact on the quarter. Transitioning now to the cash flow statement and balance sheet, summarized on slide 19. We generated $6.4 million in cash from operations in the first quarter, compared to $22.4 million in the first quarter of 2020. Our operating cash flow this quarter was impacted by transaction costs associated with the 3D Hubs acquisition and an increase in our receivables balance as a result of relatively higher sales at the end of the quarter and due to processing efficiencies as customers and employees adapted to the new Protolabs 2.0 systems. The increase in receivables is a timing matter and we are increasing our focus in order to improve cash flow in future quarters. Additionally, the net cash portion of the purchase price in the 3D Hubs acquisition was $127.7 million. On March 31st, we had $93.1 million of cash and cash equivalents on the balance sheet, and we continue to have no debt. Our proven digital manufacturing model will continue to provide strong cash flows and has enabled us to maintain flexibility and invest in future growth. including PROTOLEPS 2.0 and the acquisition of 3D hubs. Turning now to our outlook for the second quarter of 2021. Consistent with past practice, we will provide a formal revenue range and a qualitative summary of our cost expectations in the quarter, as outlined on slide 21. We expect second quarter revenue to be in the range of $117 to $127 million representing sequential growth of up to 9%. We expect foreign currency to have an approximately $2 million favorable impact on revenue compared to the prior year, assuming foreign currency rates remain at current levels. Our revenue guidance reflects the continued recovery in the macro environment. April revenue maintained the strength we saw in March, and early May trends have remained fairly consistent with April. Now turning to expenses. We expect our non-GAAP second quarter gross margin to be approximately 48% plus or minus 50 basis points. Mix continues to be a factor in our second quarter gross margin estimate. As a reminder, we will have a full quarter of 3D hubs included in our second quarter results, and the 3D hubs gross margins are lower than the legacy protolabs business, resulting in additional pressure on overall gross margins. We are also experiencing wage and raw material inflation costs, which we are actively working to mitigate through pricing and other operating efficiencies. Turning to operating expense, we expect total non-GAAP selling general and administrative expenses to be between $43 and $45 million. These projected second quarter expenses include the following components that are incremental to the first quarter. 3D Hub's expenses will be included for the full quarter, adding approximately $1 million of additional expense. We will continue to invest in marketing sales to drive revenue growth. We will also continue to invest in R&D at a rate of approximately 8.5% of revenue to drive our long-term revenue growth. Here are a few other components to consider for the second quarter. We currently estimate our non-GAAP tax rate to be approximately 23%. We anticipate a reduction in the interest income of approximately $250,000 as a result of a lower average cash balance following the acquisition of 3D Hubs. And finally, we estimate our second quarter fully diluted shares outstanding at approximately $28 million. I'll now turn the call over to Rob for final comments.

Thank you, John. The first quarter of 2021 marked the beginning of a new chapter for ProBalabs. The launch of ProBalabs 2.0 and the acquisition of 3D hubs together will greatly expand our ability to delight customers across a very broad range of their needs and use cases. Once integrated, these new capabilities will make Portalabs not only the fastest and most reliable digital contract manufacturer in the industry, but also one of the most comprehensive in our services. In addition, we're well positioned to capture demand as the vaccine rollout continues, lockdowns end, and our customers return to work and accelerate their product development. We will continue to focus on execution and prudently manage business performance in the short term, while also investing to expand our position as the digital manufacturing leader. We will continue working with 3D Hubs to plan and execute an integration that will enable us to offer the best in class digital manufacturing customer experience, and the broadest digital manufacturing offer for custom parts. That concludes our formal remarks. Now John and I will gladly take your questions. Operator, can you please open the line?

Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question is from Brian Drabs with William Blair. Please proceed with your question.

Hi, good morning. Thanks for taking my questions. Hi, Brian. Hi, Brian. So first I'm just curious, the developer count was up meaningfully. That includes developers on the 3D Hubs platform, is that right? And if so, can you give some granularity there in terms of how much 3D Hubs contributed to that metric?

Yeah. It does include the 3D Hubs developers, and that was approximately 3,000 developers in the quarter.

Okay. And the number in the filing for first quarter 20, it didn't change, so it's not adjusted for what? know correct pro forma for what it would have been right okay correct um thank you okay um and then you know 3d hubs is now kind of sprinkled across the different segments and and can you give that breakdown um across cnc and injection molding and etc

Yeah, so in the footnote, you'll see we we broke it out by region. So you are the schedules in the press release. So you can see that as it relates by service, you know, about 60% of that revenue is CNC about 30% is is 3D printing and the remainder is largely largely I am.

Okay. Okay. And then You know, John, I think you said that the gross margin for 3D hubs was below expectations. My memory is that the guidance was for 3D hubs to be about a 200 basis point headwind in the quarter. And for me, that was translating to like 5% gross margin for 3D hubs in the quarter. Can you add some

detail around what you mean by it was below expectations and help help me understand what the gross margin might be going forward for that business yeah so the the gross margin in the quarter was just over 10 um and i think that as you as you do your math you'll you'll see that um and our expectations of long term for that business is 20 to 25 So it's a little below where we expect it to be long-term, and we're working to improve those course margins.

Okay. Yeah, I think my 5% calculation is on a lower revenue number, so that makes sense. So is there anything else, like in terms of purchase accounting or something that put pressure on it to result in that 10% or one-time temporary in nature, or was it just the I guess the logistics and other sourcing costs you mentioned.

Yes, it purely is the logistics and sourcing costs associated with it. Okay.

Thanks a lot.

I think maybe what you're referencing is in the prior conversations, we were working through the mapping of the accounts just to make sure that as we're reporting gross margin, we have the costs in consistent places. So, you know, I think that was creating maybe a little bit of uncertainty as we were talking at the time of the acquisition. But we worked through all of that, you know, since the acquisition in the last couple of weeks.

Yeah, that's what I was referring to. Okay. Thanks.

Thank you. Our next question is from Greg Palm with Craig Howland Capital Group. Please proceed with your question.

Yeah, thanks. Morning, everyone. I guess maybe just starting with kind of a look back on the quarter. I mean, as you look back, what surprised you versus the original guidance that you laid out back in February? It sounds like you maybe got some benefit from all the supply chain changes. related impacts that we're all seeing, but if I back out a little bit of incremental FX benefit, the quarter was still basically in line, and so I'm just curious if there was another part of the business that may be disappointing you versus the guidance, because I'm assuming you didn't have guidance for all the supply chain benefit in there, and I'm not even sure if you can quantify what the impact was.

I think The quarter progressed and was pretty much in line with where we expected. I'd say the biggest difference probably was the uptick that we saw in March. With our typical seasonality pattern, we start the year relatively slow in January and have a pickup in March. That pickup always creates a little bit of uncertainty for us. It was strong and brought that revenue in closer to the top end of the range. On the other factors, I think, like, from being surprised, I think everything else was relatively in line with or was in line with where we guided. So I don't know that there were a lot of other big surprises in the quarter.

Yeah, I would agree. It was well in line. I think the thing we're always dealing with in Q1 is the timing of when we see the pickup and the magnitude of that. So that's what we're referring to.

Okay, makes sense. Any availability concerns as it relates to raw materials or labor? What's your current view on both of those?

Yeah, as we mentioned in the remarks, we're in the midst of a global resin shortage, which is impacting us as well as the well-known electronics shortage, which is impacting some capital equipment. So we're working closely with our suppliers and managing that as best we can right now.

Okay. Okay. And I guess just last one is I'm thinking about it from an industry standpoint. It certainly seems that the digital manufacturing market, lots more buzz, lots more activity. I'm not sure if you can give any evidence of new customers. I guess it doesn't really show it in the count. But there's also a lot of companies that are kind of scaling up, new competitors. One recently announced a transaction to go public. So Just kind of curious how you're thinking about the landscape overall.

Yeah, I think as we're thinking about new customers, I think the count actually is up quite nicely, and I think the addition of hubs or 3D hubs brings a different set of customers to us and broadens that. All along, our goal is to continue to increase the number of customers as well as increase share of wallet with our existing customers and serve them better. And, you know, I think as we progress through the quarter, we're seeing some of that traction.

Yeah. You know, we feel we're really well positioned in digital manufacturing to be able to capture this, and, you know, that's our strategy as we go forward.

Okay, great. Looking forward to hearing a little bit more on all this in a couple weeks. So thanks for the color. Thanks, Rick. Thanks, Rick.

Thank you. Our next question is from Jim Rashudi with Needham. Please proceed with your question.

Hi, this is Tyler Bailey. I'm the co-founder for Jim. Thanks for taking my questions. So firstly, you mentioned the 3,000 new partners that you acquired through 3D Labs. Just wondering if you have any sense of the forecast through the year. What's the potential at, I guess, mid to late next year or the end of this year?

I think as we look at it, we give our revenue guidance for the quarter, and the mix does play into it. I think we're anticipating significant growth in the 3D Hubs business. I don't know that we're in a position or going to be giving product developer guidance for that specific component of the business, but we do expect it to continue to grow and continue to add to our overall product developer count.

Yeah, as we announced around the acquisition, we feel our customer overlap is low, so there's a lot of opportunity there.

Okay, great. And just to kind of, I guess, You go back to your guidance you issued, pretty strong guidance. I wonder if you could talk a little bit about, I guess, sort of the upper end of that guidance, what demand trends that you see that can maybe drive revenue towards that upper end?

So, as we're looking at it, You know, we had a strong march that continued through April. We are seeing strength in our injection molding production parts, and those orders can continue to come in, so continuing to watch that. You know, as we're working with both our suppliers and customers, as Rob mentioned, on the resins, having that supply and ability to fulfill those within the quarter, I think, will be one component. I think 3D Hubs actually is another one that could produce and help us drive towards the top end of that range. And I guess all of our services, we are seeing traction and momentum. So it just depends how the rest of the quarter plays out.

We're happy with the sequential growth in particular that we're seeing across the board.

Just a quick follow-up. Any particular strength in any regions, North America, EMEA?

Q1 or as we're looking forward?

As you're looking forward to the rest of the year.

Yeah, I think... The Americas is a big component of that. Europe, we're still seeing challenges in both the economy as well as the Brexit component of it and the logistics related to some of the changes as a result of Brexit. So the growth in Europe is a little bit challenged. We also have just the normal seasonality with the year ends. Q1 tends to be a little bit stronger than Q2 in our historical patterns. So I'd say America is the big driver there.

I would just add in Japan, you know, the COVID situation is more extreme and it's causing lockdown. So we see more uncertainty in that economic recovery.

Okay. That's helpful. Thank you. And just one last question, and I'll jump back in line. Just wanted to get your, I guess, early observations, reactions from the launch of ProtoLabs. I think you had mentioned you were in, like, a hyper-care monitoring maybe last quarter and just wanted to see if you're moving on to the next phase now.

Yeah, good question. We definitely are moving on to the next phase. You know, as I mentioned in the remarks, we've – We turned it on, and it worked across the board, which was great. And we've processed 54,000 orders, customer orders, in that time. So we continue to be in this kind of hyper-care mode, but we're moving out of that now, and we're excited about what this platform will bring us, as we've talked about.

Great. Yeah, thank you. That was the last of my questions. Congrats on the quarter. Appreciate it. Thank you.

Thank you. Our next question is from Ben Rose with Battle Road Research. Please proceed with your question.

Yes, hi. Good morning, Robin. Good morning, John. Good morning, Ben.

Good morning.

So great to see the progress the company is making. Had some specific questions, starting first on the medical device side. I think you were hopeful that, excuse me, with the end of COVID, that there might be some return to elective procedures. And just curious on the medical devices, are you seeing increased demand for things like implantable prototypes and prosthetics and so forth?

You know, as we look at it, you know, medical continues to be one of our stronger industry verticals and actually is the top. You know, as far as the specific activity, I think we are seeing the companies underneath there continuing with their research and development activity. We also are experiencing a little more in the production part component that I think is maybe indirectly linked to some of the COVID work that we did and the ability to attract customers there. So medical continues to perform well for us.

And I think we're seeing a broadening of applications as people are returning.

Okay. On the automotive side, there's been a lot of buzz around what's happening in terms of EV development. I know that your business traditionally has not been with the larger OEMs, but I know you do work with some of the design firms that they outsource work to. Is there any kind of meaningful improvement from a prototype standpoint for automotive?

You know, actually, year over year, our automotive is actually down a little bit. But I think that was more related to a strong Q1. And, you know, saw the dip in, you know, starting in the second quarter of last year, and then have been progressively improving as we continue through that. So I'd say there's not a meaningful change related to automotive.

And with regard to ProtoLabs 2.0, I realize it's very early going, but I think one of the goals was to increase the number of services that developers might order from you. Do you have any, from your early experience, is there any movement on that front such that there are more services being ordered?

Yeah, well, so first of all, 2.0 brought our 3D printing capabilities onto that shared platform, which I think was an important aspect. And it also helped us unlock more secondary operations and more capabilities that support our production offerings. And we are seeing an uptick in those production offerings. Now, some of that can be tied to seasonality as well as... you know, what we're seeing with the macro economy. So I think, you know, we're still watching that so that we can really parse out all the root causes. But we've been happy with it so far.

Okay. And then one other question. As it pertains to 3D hubs, I know at the time of the acquisition, one of your thoughts on it was that for customers that have longer lead time, you know, requirements that some of the suppliers could help out in that regard. Are you seeing that part of the business as a meaningful contributor to what they're doing?

So I think right now I would say it's too early, right? I think both components of the business are almost operating independently as we're developing the integration plans. I think you're spot on for the long-term progression and as we start to bring really the organizations together. But I think in this quarter, we're largely operating independently and the results are almost standalone.

Okay. And if I may, just one more question for Rob. With the demand environment improving, it would seem that you know, timing would be ripe to, um, increase the outbound, uh, selling and marketing efforts. And just curious to know your thoughts on, on how you're approaching, um, you, you, you had mentioned some, uh, increased investment in sales and marketing. We're just curious to know how you're, how you're approaching that, um, those kinds of activities.

Sure. That's a combination of, um, you know, our, our digital marketing, uh, investments, um, as well as, um, our sales team.

Okay.

Thanks very much. And we're continuing, you know, we've been working on this continued strategy to focus by industry more and more and specialize there. So we're continuing on that path as well, Ben. Okay.

Okay. Thanks very much.

Thank you.

Thank you. Our final question is from David Mizrahi with Berenberg. Please proceed with your question.

Hi there, sorry, just to follow up on operating expenses. So I understand the higher operating expenses for this quarter, but can you just speak about how you're thinking about some of that leverage moving into the back half of this year and into 22? And do you have any goals you're talking to with respect to those operating expenses as well?

Yeah, so I think, you know, provided the guidance for this quarter that is really looking sequentially. commented on the R&D, and with R&D, you know, we're excited to move from the work on 2.0 and start executing on the backlog of projects that we have, really to help drive that customer demand and customer growth. As Rob mentioned, you know, sales and marketing, we're going to kind of continue to invest there. I think the levels at where we're at coming out of Q2, we'll probably try to hold there through the remainder of the year and then reevaluate as we go into 22. And I'd say that the same with GNA, just kind of continue to try to hold it at those levels. So, yeah, I think as we progress through the year, that's what we're looking at.

Great. Helpful. Thanks. And then just also, sorry if I missed this earlier, but can you just walk through again what customer activities look like as we move through the months here and just where you're seeing that continuous improvement? And that's it for me. Thanks.

I'm sorry. Could you repeat the question? Customer activities. Are you talking about kind of demand over time?

Yeah.

Sorry.

Yeah. Sorry.

Sure. So generally in Q1, we see a seasonal lift as we go through the quarter, start slow coming out of the holidays and in January. And then February is usually when we see kind of the inflection and the pickup. And March is seasonally our strongest month in the quarter. So we saw a similar trend this year as in the past. We actually had a stronger than normal seasonal pickup between February and March. Does that answer the question, David?

Yeah, that's great. Thank you. Just wanted to confirm that.

Thank you. Ladies and gentlemen, we have reached the end of the question and answer session. I will now turn the call over to Rob Bedore for closing remarks.

Thank you. Thank you all for your time this morning. I'm pleased with our performance in the first quarter of 2021. and I'm confident in our long-term strategic objectives. I want to thank the ProLabs and 3Dhubs employees for their continued efforts as we drive our 2021 priorities forward. I also want to thank our shareholders for their continued support of ProLabs. We look forward to providing you additional information on our long-term strategy and financial objectives at our Virtual Investor Day on May 20th. Thank you, and have a great day.

This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation and have a great day.