Proto Labs, Inc. Aktie

Greetings, and welcome to the Proto Labs First Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ryan Johnsrud, Investor Relations. Thank you. You may begin.

Thank you. Good morning, everyone, and welcome to Proto Labs' First Quarter 2026 Earnings Conference Call. I'm joined today by Suresh Krishna, President and Chief Executive Officer; and Dan Schumacher, Chief Financial Officer. This morning, Porto Labs issued a press release announcing its financial results for the first quarter ended March 31, 2026. The release is available on the company's website. In addition, a prepared slide presentation is available online at the web address provided in our press release.

Our discussion today will include statements relating to future performance and expectations that are or may be considered forward-looking statements and subject to many risks and uncertainties that could cause actual results to differ materially from expectations. Please refer to our earnings press release and recent SEC filings, including our annual report on Form 10-K for information on certain risks that could cause actual outcomes to differ materially and adversely from any forward-looking statements made today.

The results and guidance we will discuss today include non-GAAP financial measures consistent with our past practice. Please refer to our press release and the accompanying slide presentation at the Investor Relations section of our company website for a complete reconciliation of GAAP to non-GAAP results. Now I will turn the call over to Suresh Krishna. Suresh?

Thanks, Ryan. Good morning, everyone, and thank you for joining our first quarter 2026 earnings call. We are off to a strong start in 2026. First quarter revenue grew 10% year-over-year as we delivered another record revenue quarter. I am very pleased with the balanced execution reflected in our financial results. We achieved double-digit revenue growth significant gross margin expansion and improved operating leverage.

Importantly, this reflects not only continued momentum but measurable improvements in customer engagement, growth and operating performance. These financial results are a credit to the hard work and dedication of our employees as they continue to execute with discipline across the business. I'd like to thank all Proto Labs team members for their outstanding quarter.

So far, in 2026, we continue to see strong traction with larger strategic customers contributing to our higher revenue per customer and reinforcing this as a key long-term growth driver. During the quarter, revenue per customer grew 20% year-over-year, providing evidence of the momentum we have with enterprise customers. In U.S. we grew 12%, marking the fourth quarter in a row of double-digit revenue growth in the region.

I want to acknowledge the leadership of Sean Farrell, and the regional sales and customer success teams for driving that performance. Double-digit growth and significant margin expansion in the first quarter led to strong cash flows and earnings, reflecting in the strength of our business model. In the first quarter, we achieved Proto Lab's highest non-GAAP earnings per share in over 5 years.

Our strong results were fueled by exceptional demand for our CNC machining service, which grew over 20% year-over-year in the U.S. driven by continued strength in aerospace and defense including space, exploration, satellites and drones as well as strong growth in robotics. As we saw in the last quarter, well-funded and innovation-driven markets where speed, precision and digital manufacturing are critical, continue to rely on Proto Labs as we deepen relationships and strengthen our position as a strategic partner.

In April, we joined the Space Foundation, a global space community supporting collaboration and education. This move strengthens our presence in this fast-growing ecosystem as aerospace innovation accelerates rapidly in the new space age. With organizations like NASA, Lockheed Martin and Northrop Grumman as long-standing customers, we continue to support leading-edge programs where speed, precision and reliability are critical. This is especially apparent following ARTEMIS 2 and its successful Lunar mission.

Overall, our first quarter performance reflects continued progress on executing our strategy, which remains centered around serving customers across the product life cycle while building on the core strengths that differentiate us. As a reminder, our long-term strategy is anchored in four pillars: Elevating the customer experience, accelerating innovation, expanding production and driving operational efficiency. While these pillars will guide our business in the next few years, we are encouraged by the early traction we are seeing across each area.

As we focus our investments and prioritize work around these pillars we drove higher revenue per customer, strong growth in CNC machining and operating margin expansion. We continue to see expanding engagement with larger strategic customers in aerospace and defense and medical, reinforcing our conviction that production will become a meaningful long-term growth driver.

We achieved AS9100 certification in our European operations during the first quarter, which expands our ability to support aerospace and defense customers globally. We are now better positioned to deliver high-quality aerospace grade parts while helping customers regionalize their supply chains and reduce disruption. This milestone strengthens our global capability and credibility in aerospace and defense and expands our ability to capture production programs globally.

Moving to our 2026 operational changes. As we've said in our last earnings call, 2026 will be a year of transformation and acceleration focused on improving the customer experience and building systems that will scale Proto Labs over the long term. On our fourth quarter call, we discussed several organizational and operational changes that position Proto Labs for faster growth and improved profitability.

The first change we discussed is ensuring we have the right leadership, structure and operating mechanisms in place. Our product and technology teams are now combined under our CT AIO, Marc Kermisch, ensuring product and technology are aligned and is essential as we accelerate our organic innovation road map to improve our offer and the customer experience.

The second operational change in 2026 is enhanced focus on continuous improvement and quality. In April, Jonathan Blaisdell, joined Proto Labs as Head of our Proto Labs Business Excellence Systems. Jonathan has over 30 years of continuous leadership at Danaher and most recently at Polaris, where he helped embed a lean management system, driving operational and financial improvements. At Proto Labs, he will focus on strengthening our management system, operating rhythms and problem-solving capabilities, so our regions and service lines can execute more effectively at scale and drive productivity.

We are already seeing tangible quality improvements in our injection molding operations during the quarter, we made investments to drastically improve quality with our largest, most strategic injection molding customers. This will improve customer friction and help us expand our production offer. Importantly, the work we are doing is already driving operational benefits and will continue to unlock speed and leverage throughout 2026.

Next, we have established our global capability center or GCC, in India, which will serve as a critical enabler of our long-term strategy. We are in the process of building out our team and presence in the region. We look forward to providing additional updates on our progress in the future. Lastly, the fourth change we called out is a strategic reset in Europe. We have taken deliberate actions to reset the business in Europe, including targeted reductions in the first quarter to align cost structure with current revenue levels and improvements in go-to-market operations. We started some of Europe go-to-market work in late 2025, including alignment to core industries and simplify and increased customer engagement.

I'm proud to say that these efforts are beginning to yield early results. with the region delivering 11% sequential growth in the first quarter, a sign that our teams are executing with discipline and focus. These early improvements are an important step towards stabilizing performance and positioning Europe to contribute to both growth and margin expansion going forward.

I want to thank our European colleagues for their continued dedication as we reset this important part of our business. In closing, as we continue to progress through 2026, our priorities remain clear: elevate customer experience, accelerate innovation, expand our production capabilities and continue operating with discipline. Execution across these areas is already translating into improved growth and engagement, and we believe it positions Proto Labs to deliver accelerating revenue growth and expanding profitability over time.

I am encouraged by our strong start to 2026 and confident in our ability to execute our strategy and deliver durable long-term value to customers and shareholders. With that, I'll turn the call over to Dan to walk through our financial performance and outlook in more detail.

Thanks, Suresh, and good morning. I'll start with a brief overview of our first quarter results. followed by our outlook for the second quarter of 2026. First quarter revenue was a company record $139.3 million, up 10.4% year-over-year. In constant currencies, revenue grew 8.7%. U.S. revenue grew 11.8% year-over-year, while Europe declined 3.4% in constant currencies. .

First quarter CNC machining revenue grew 17.6% year-over-year in constant currencies. As Suresh stated, we continue to see very strong demand for our machining services across several key end markets, most notably, space exploration, satellites, drones and robotics. U.S. CNC machining revenue grew 23% year-over-year. During the quarter, we executed targeted pricing actions in line with machining market dynamics.

Injection molding grew 3.5% in constant currencies as we drove strong performance in large orders with strategic customers. 3D printing revenue was flat year-over-year in constant currencies as growth in the U.S. was offset by weak demand in Europe. We are still seeing strong demand for metal 3D parts in the U.S. And year-over-year, DMLS revenue growth was nearly 30%.

Sheet metal grew 2.3% year-over-year in constant currencies, driven by solid growth in aerospace and defense and industrial tech. Shifting to margins. Non-GAAP gross margin was 46.2% in the first quarter, an expansion of 140 basis points, both sequentially and year-over-year. Higher factory gross margins drove the increase via both volume improvements and pricing increase. Also, mix was a tailwind in the quarter as higher margin factory revenue grew faster than network revenue. First quarter non-GAAP operating expenses were $48.9 million, up $1.8 million compared to the prior year due to higher contractor, license and demand generation spend.

On a percent of revenue basis, adjusted operating expenses were 35.1% of revenue, down 220 basis points year-over-year. This decrease was driven by a combination of 3 factors: First, we made targeted cost reductions in the first quarter, mostly in Europe as part of our strategic reset. There were also some reductions in the U.S. as we look to fund our strategic projects. Second, employee costs were lower than anticipated as we ramp hiring for our strategic pillar projects. We expect to increase SG&A spend throughout 2026 as we invest to execute our long-term strategy.

And third, as part of our drive operational efficiency pillar, we are in the early innings of finding savings and efficiencies that will allow us to invest in growth areas. Adjusted EBITDA was $22.8 million or 16.3% of revenue up from $17.4 million or 13.8% of revenue in the first quarter of 2025. First quarter non-GAAP earnings per share were $0.54, up $0.21 year-over-year driven by volume, factory gross margin expansion and leverage on our operating expenses. $0.54 is the high adjusted EPS figure we've reported since the third quarter of 2020.

We generated $17.5 million in cash from operations during the first quarter. Proto Labs continues to lead the digital manufacturing industry and cash generation, reflecting the strength of our business model. On March 31, 2026, we had $158 million of cash and investments on our balance sheet and 0 debt. Our outlook for the full year and second quarter of 2026 is outlined on Slide 14.

We still expect full year 2026 revenue growth of 6% to 8%. For the second quarter, we expect revenue between $140 million and $148 million. At the midpoint, this implies 7% revenue growth year-over-year. We expect foreign currency to have a $500,000 favorable impact on revenue compared to the second quarter of 2025. Our earnings guidance incorporates the following assumptions for the second quarter of 2026. Non-GAAP add-backs will include stock-based compensation expense of approximately $4 million, amortization expense of $900,000 and restructuring and transformation costs of $600,000. We also expect a non-GAAP effective tax rate between 25% and 26%.

In summary, we expect second quarter 2026 non-GAAP earnings per share between $0.50 and $0.58. That concludes our prepared remarks. Sashi open -- please open the floor for questions.

[Operator Instructions] The first question is from Greg Palm from Craig-Hallum.

Congrats on the solid results. Can you maybe give us a little bit more color on cadence of the quarter. I think you had mentioned that January had started off slow if I recall correctly. So what did you see February, March? What are you seeing so far in April? And just from like an upside standpoint, I think you called out A&D space, but any other end markets that maybe surprised you a little bit to the upside.

Yes. One thing for the quarter, although Europe was down 3% year-over-year, they were up 11% sequentially. So we're seeing some good traction within Europe. Suresh talked about the Europe reset, and we're seeing some benefits and some stronger performance in Europe as we're moving quarter-over-quarter. In terms of what we're seeing, seasonality like in April, that's reflected in the guide. So we have a really decent start to April, and that's reflected in the number that you see, which implies sequential growth quarter-over-quarter, Q1 into Q2. It continues to be the same.

We're seeing strong growth from our large customers. We're seeing strong growth from aerospace and defense end markets. I would also say computer and electronics and industrial commercial machinery performed well as well. And we're seeing that strength continue into the second quarter.

We shift gears to the network. So that was down sequentially barely up on a year-over-year basis on a constant currency basis. What -- any reason for the decel? What are you specifically seeing in that business?

Greg, we are -- overall, we are very happy with our double-digit growth, and this is the second quarter we've delivered that. We will see fluctuations between our fulfilled methods between factory and network. We did see some weakness in network demand in 3D printing. And we are making some changes in our go-to-market areas so that we can work to accelerate network revenue growth in the future, much as we work to drive growth in our factory business.

And I might have missed it, but did you give a network gross margin.

We did not.

We did not. We can get it for you.

Greg. Network gross margin was 31%.

The next question is from Brian Drab from William Blair.

One thing that stood out to me this quarter was the injection holding business and the growth sequentially. I know you called out that the primary growth came from CNC machining year-over-year, but this injection molding result is the best result you've had, I think, in 8 quarters, are you seeing some traction from the new initiatives that you talked about last quarter? What is the main thing driving that growth? And do you think that this kind of $51 million revenue level could be the base like baseline revenue level for the year and we're going up from there or something unusual in the first quarter?

Yes. Brian, we're seeing traction really with some of our larger customers in terms of getting larger orders through injection molding. It's all the things we've talked about in terms of what we're working on from an injection molding perspective. Injection molding is a service that over time, there's less prototype that we're doing, and there's more production that we're doing. And we're just getting better and better at that with our customers. And you can see that in the sequential growth that you talked about.

It's about meeting customer specifications as it relates to injection molding, especially on the larger orders. And they're really using us because we do have -- we can both schedule out over time, orders that they need or if they need them quickly, we can turn them faster than anybody else. So we're getting good traction on some of these initiatives that we've talked about on injection molding, and you can see that in the results.

And then you outperformed in terms of revenue growth in the first quarter. You maintained the full year guidance, can you just talk about your thinking and what you're seeing maybe in the macro or in your business that prevented you right at the moment from raising the guidance for the full year for growth?

We had a great Q1, Brian. And we're always trying to be appropriately conservative when we provide the outlook to the market. The business is performing well. But I looked at that and balance that with macro uncertainty over the long term and the visibility that we have kind of moving into the future. If you take a look at that 6% to 8%. It would be normal seasonality as you go through the year. where we gave you the midpoint of the guide for the second quarter, which is up sequentially Q1 to Q2.

Normal seasonality is you're up -- you're either flat to slightly up Q3 and then you're going to be down due to the holidays in Q4. That's really what's built into the full year guide. We're 1 quarter in. We held it to where it is, but there is a certain amount of conservatism in there just based on the macro environment.

The next question is from Troy Jensen from Cantor Fitzgerald.

Congrats on really nice results here. Quick question for us, rasher. I guess I'd be curious to know your thoughts on how much of Proto Labs has production exposure. I've always thought of injection molding is primarily all production because you produce some out of parts, but I don't know if you've tried to figure out what percentage you have exposed to prototyping versus production and how that's changed over the past year or so.

Again, I think we said it in our strategic plan. We are early in our journey to build the capabilities needed for production. I don't know if you've given out in terms of percent what it is, but we are building it and more customers in our interactions with our bigger strategic accounts, they want us to get into production, and that's what we're building out as part of our strategic pillars is to be able to do more production for them.

Absolutely, we see more interest in injection molding and in 3D printing as well. And we continue to gain some of these orders that gives us longer runs. We are still further away from getting to give you guys an ARR kind of number because they're still early in this production journey.

How about just capacity levels right now in the factory? Any needs for investments given the accelerated growth here? .

Yes, Troy. We don't -- capacity, yes, from the perspective of mills. And DMLS, we're adding DMLS metal 3D printers. We have enough space. But as you know, in our digital manufacturing model we can scale very quickly. What we're running into capacity issues is just on the number of machines and certain services. Specifically, CNC machining, obviously, you can see because of the growth, and I also mentioned in the U.S., we have around 30% growth in metal 3D print. So we're adding DMLS printers as well. .

And then just 1 more for you, Dan. Can you just touch on gross margin thoughts going forward and can we keep them above 46% here?

Yes. So the guide has gross margin flat to slightly down quarter-over-quarter. With that being said, I expect full year gross margins to be slightly up. on the year just based on what we saw in the first quarter and what we're seeing -- what I'm projecting for the second quarter. Gross margin is highly dependent on what our mix is and what we're seeing from a pricing perspective, we're going to continue to monitor market dynamics around pricing, and we'll adjust pricing as necessary. But I'm really pleased with the execution we've had as it relates to that, and you can see that in our margins. .

The next question is from James Ricchiuti from Needham & Company.

First congrats on the quarter. Dan, maybe first question for you. You gave some context in terms of how to think about gross margins as we go through the year. It appears that you're also thinking more about adding some additional sales and marketing expense as you go through the year to pursue some of the growth initiatives that you're targeting. How do we think about maybe OpEx as we look out beyond the June quarter? .

Yes. I would expect OpEx to increase quarter-to-quarter. I described it on the call, we made some actions both in Europe -- and in the U.S., the Europe actions were part of the Europe reset, and the U.S. actions were to fund that strategic investments. And I expect us to invest as we go through the year. A lot of that investment is going to go into R&D. You're going to see some capital investment as well as it relates to software development as we go through the year.

And these are to fund those strategic pillars, which should provide us both innovation for top line growth over the long term as well as efficiencies as we reduce the friction both with our customers and with our employees internally. So yes, there's going to be further investment as we go through the year, but that's to build traction and a strong return on the long term by funding the strategic buyers.

I also wanted to ask a follow-up. Just on what you're seeing in Europe. I know it was nice sequential growth that you're you registered in Q1. Where are you seeing the most traction? Is this from the changes you're implementing? Is it -- are these perhaps coming from any one vertical or are they coming from new customers, different business lines. I wonder what -- if you can just elaborate on the early progress you're seeing there? .

Yes. Thank you. We -- as we said, we took deliberate actions to reset the business in Europe. We made targeted reductions in the first quarter. In terms of our go-to-market changes, we started to align our sales and marketing resources around core industries, aerospace and defense and medical. And we are increasing focus on targeted customer engagement. And that is working for us. It's, again, very early what we are doing in Europe. And we are seeing the benefits of that come through in the first quarter. But again, as I said, we are very early in this effort so far.

And lastly, if I could just slip 1 in, some very nice growth in revenue per customer for contact. Again, similar type question, are you getting more traction? You called out a couple of verticals, but I'm just wondering where are you seeing the most progress in terms of driving revenue per customer? .

Yes. We are definitely -- we are very pleased with the engagement we are getting from our largest customers, most strategic customers. We spend a lot of time talking to them. And we are seeing most response in aerospace and defense and drone companies our specialty, which is speed, reliability and quality resonates a lot with these industries right now. They are high innovation. They like our speed with innovation and our ability to take them all the way through the life cycle of the part all the way into production. And that's what is resonating and giving us more share of wallet.

What I would tell you as well is as we do customer surveys, one of the things they do like about us is as we have more human interaction with them, with our experience in manufacturing and our experience in actually making the part, helping them through the process so that they're -- we're delivering what they need, and that makes that customer stickier and order from us more often. As we do more of that, that leads to really that expansion and how many orders, how many parts those customers end up buying for us in a given period. .

Yes. And these industries, as you know, are early in the innovation cycle. These are long investments, early in the innovation cycle, and we will benefit a lot as these industries continue to scale, and we get in early in the innovation cycle.

This concludes the question-and-answer session as well as today's teleconference. You may all disconnect your lines at this time. Thank you for your participation.

Greetings, and welcome to Proto Labs Fourth Quarter and Full Year 2025 Earnings Call.

[Operator Instructions]

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ryan Johnsrud, Investor Relations. Thank you. Please go ahead.

Thank you, Donna. Good morning, everyone, and welcome to Proto Labs' Fourth Quarter and Full Year 2025 Earnings Conference Call. I am joined today by Suresh Krishna, President and Chief Executive Officer; and Dan Schumacher, Chief Financial Officer. This morning, Proto Labs issued a press release announcing its financial results for the fourth quarter and full year ended December 31, 2025.

The release is available on the company's website. In addition, a prepared slide presentation is available online at the web address provided in our press release. Our discussion today will include statements relating to future performance and expectations that are or may be considered forward-looking statements and subject to many risks and uncertainties that could cause actual results to differ materially from expectations.

Please refer to our earnings press release and recent SEC filings, including our annual report on Form 10-K for information on certain risks that could cause actual outcomes to differ materially and adversely from any forward-looking statements made today. The results and guidance we will discuss include non-GAAP financial measures consistent with our past practice. Please refer to our press release and the accompanying slide presentation at the Investor Relations section of our company website for a complete reconciliation of GAAP to non-GAAP results.

With that, I will now turn the call over to Suresh Krishna. Suresh?

Thanks, Ryan. Good morning, everyone, and thank you for joining our fourth quarter and full year earnings call. I am pleased to share our strong financial performance in 2025 and outline our strategic priorities as we move into 2026. 8 months into this role I've spent significant time with customers, engineers, operators and investors. What's become clear is that Proto Labs has exceptional assets and market relevance, but in recent years, we haven't fully translated that into consistent execution. The results this quarter are an early indication of what's possible when we align execution around the right priorities. We finished the year with clear momentum, delivering double-digit year-over-year growth and another record revenue quarter. In constant currencies, fourth quarter revenue increased 11% and full year revenue grew 6%, representing Proto Labs' strongest quarterly and annual organic growth rate since 2018. Revenues per customer grew 13% in 2025, demonstrating major success on a key priority.

In addition, we delivered year-over-year growth in earnings and generated another strong cash flow, reinforcing the strength of our business model. This was fueled by exceptional demand for CNC Machining and Sheet Metal, which both delivered double-digit growth in 2025. In fact, U.S. CNC revenue grew 25% in 2025. I'd like to thank Mark Dirsa, our Senior Director of CNC Operations, and his team for their exceptional execution in delivering on robust CNC demand.

Innovation-driven industries like drones, space exploration, satellites and robotics continue to rely on Proto Labs as a critical partner. We also see strong momentum in data centers, another high-growth market where Proto Labs enables faster execution for customers like Amphenol and CommScope, leaders in data center infrastructure solutions.

These are well-funded and long-cycle markets where our digital manufacturing model creates a durable competitive advantage and has us well positioned for 2026. Our financial results reflect Proto Labs progress in improving the customer experience, strengthening customer relationships and executing with speed, focus and discipline. As a result of our strong finish in 2025, we've entered 2026 from a position of strength with clear momentum and growing confidence in the opportunities ahead.

Now shifting to our long-term strategy. We have clarified our strategy to serve customers across the entire life cycle of a part from prototype through production. This strategic direction is not new. However, what is new is the rigor, focus and execution plan behind it. This approach reinforces our position as the world's fastest and most reliable provider of prototype parts while deliberately building the capabilities required to be a trusted production supplier.

Importantly, this strategy builds from our core strengths rather than shifting away from them. Excellence in prototyping and leadership in digital manufacturing are the foundations of our competitive advantage and they are the capabilities that enable us to expand credibly into production. Execution of this strategy is anchored by 4 strategic pillars: number one, elevate customer experience; number two, accelerate innovation; number three, expand production; and number four, drive operational efficiency.

First, we are elevating the customer experience by removing friction, making it easier for customers to do business with Proto Labs and more efficient for our teams to serve them. Our strategy centers on deepening customer relationships and driving higher conversion, retention and revenue per customer, ultimately improving unit economics and operating leverage. One tangible example is improvements to our e-commerce customer experience. Today, multiple factory and network storefronts create unnecessary friction. A more unified experience will simplify the customer journey and allow our teams to support customers more consistently and efficiently.

With our second strategic pillar, accelerate innovation, we intend to return Proto Labs to its legacy of rapid differentiated innovation, expanding offerings across our core manufacturing services to drive outsized growth. As one of the earliest and largest digital manufacturers, Proto Labs has unique assets that differentiate us, including over 60 patents and more than 60 trade secrets, a robust and growing CAD data set and deep experience applying automation and AI at scale.

We are now translating these assets into a faster, more consistent cadence of customer-facing product and service launches through 2026 and beyond. Innovation for us means expanding manufacturing capabilities, improving speed and precision, enhancing coating and manufacturability feedback and deploying smarter pricing and sourcing algorithms always grounded in customer needs and clear return on investment.

Next, expand production. We are current -- while we currently offer production, our capabilities and customer engagement have historically been weighted towards prototyping. We are now strengthening the capabilities and certifications needed for true production work, opening access to a much larger market opportunity as we scale. For Proto Labs, expanding production requires a more deliberate customer-led approach, prioritizing the right customers, applications and capabilities to unlock this opportunity. In January, we achieved ISO 13485 certification for our U.S. factory Injection Molding operation, a critical requirement for medical device production programs.

We already support prototyping work for all major medical device companies, and this certification opens a substantial opportunity to expand into production over the coming years. Moving forward, we will continue to add certifications and other capabilities required for production expansion.

Our fourth strategic pillar, drive operational efficiency enables profitable growth through improved productivity and cost discipline. This pillar is critical. It funds investments across the first three while acting as a force multiplier for profitability. This includes expanding factory and network gross margins leveraging SG&A more effectively, simplifying how we operate, utilizing AI and reallocating resources towards the highest priority initiatives. Each of our 4 strategic pillars reinforces the others and collectively, they drive a more customer-centric, innovative, efficient and scalable Proto Labs.

While this strategy defines our organic priorities, selective inorganic opportunities can further advance our progress. We will continue to evaluate acquisitions that strengthen our capabilities and align closely with our strategic framework. We will remain disciplined and focused on opportunities that create durable long-term shareholder value.

With our long-term strategy established, let's shift to 2026. We expect 2026 will be a year of transformation and growth focused on execution. We are making foundational, organizational, operational and capability building changes that position Proto Labs for faster growth and improved profitability. The first change is getting the right talent in place and properly structured. Marc Kermisch, our Chief Technology and AI Officer is leading a reorganization of our technology group into a domain-focused organization structure, which better aligns how we build technology with how Proto Labs creates value for customers. Our product management teams are now part of Marc's technology organization, helping remove silos and accelerate innovation.

The second change is focused on continuous improvement in quality. We are expanding our business operating system, which we call Proto Excellence beyond our factory manufacturing operations and deploying it across the organization to drive productivity. We are also adding talent with significant manufacturing expertise to our quality team as we continue to build production capabilities.

The third change for 2026 is the establishment of a global capability center, or GCC, in India. Proto Labs India will be a strategic extension of our global operating model designed to scale innovation, strengthen delivery and deepen our global engineering and digital capabilities. Proto Labs India will serve as an integrated hub that complements our U.S. and European teams tapping into India's deep technical talent. Ashish Sharma has been appointed to lead this effort. Ashish has built and scaled GCCs for several large industrial companies, and we are excited to have him on board.

Fourth, we are making important changes in Europe in 2026. Europe plays a critical role in Proto Labs future, but revenues have declined over the past 2 years amid macro uncertainty as well as internal complexity that created friction for customers and employees. As a result, we are taking deliberate action to reset the business. We are implementing new go-to-market strategies that -- and a renewed customer focus to reaccelerate revenue growth aligning our cost structure with current revenue levels and improving productivity.

We believe our addressable market size in Europe is similar to the U.S. Europe is not a growth drag structurally, it is an execution opportunity. Our strategic reset actions in 2026 are designed to stabilize margins and reset the cost base, positioning the region for growth and profitability.

While 2026 is a year of transformation, it is also a year of acceleration. Here are a few initiatives that we expect will drive growth in 2026. On elevating the customer experience in Q1, we plan to launch ProDesk, a customer-facing experience designed to improve customers engage with Proto Labs across ordering, collaboration and service. ProDesk is an important first step in improving the e-commerce experience through better user experience and functionality while we continue to work towards a more fully unified platform over time. This initial launch is focused on removing friction today and setting the foundation for broader e-commerce simplification in the future.

On accelerating innovation, we already released a few capability expansions late in 2025, advance CNC Machining and expanded metal 3D printing. The pace of releases will continue in 2026, including improvements to our coating experience and manufacturability software, expansions of our factory capabilities, additional secondary services and more. As for expanding production, we will focus our efforts in 2026 on our largest and most strategic customers in aerospace and defense and medical, applying what we learn and scaling best practices across our customer base over time.

We currently have 2 leading medical device customers in the pilot program leveraging our new Injection Molding certifications and capabilities, including traceability, process validation and automated inspection to support high precision production volumes. As you can see, we are making step changes in 2026 to achieve our 4 long-term strategic pillars. As a result of strong momentum exiting 2025 and the progress on key growth initiatives, we expect growth in 2026 to accelerate relative to 2025.

Importantly, while 2026 reflects a year of transformation and measured acceleration, the structural changes we are making are designed to position Proto Labs for a return to sustained double-digit revenue growth. Our path to double-digit growth is driven by 3 levers: first, improving conversion and retention through an improved customer experience and accelerated innovation; second, growing revenue per customer in part by expanding in production; and third, continue to accelerate penetration in high-growth verticals like aerospace, defense, medical, robotics and data centers. Taken together, our long-term strategy and transformational work underway in 2026 positions Proto Labs for sustained revenue growth and operating leverage over the long term, reinforcing our position as a leader in cash flow generation in our industry.

We believe our strategic framework will translate into measurable financial progress over the next several years beginning in 2026. As outlined above, Proto Labs has a credible path to $1 billion in annual revenue over time while delivering meaningful operating margin expansion. I'm proud of what the team accomplished in 2025 and encouraged by the momentum we enter into 2026 and confident in our ability to execute with speed, discipline and innovation as we deliver long-term value to our customers and shareholders.

With that, I'll turn it over to Dan to walk through the financials. Dan?

Thanks, Suresh, and good morning. I'll start with a brief overview of our fourth quarter and full year results, followed by our outlook for 2026. Fourth quarter revenue was a company record $136.5 million, up 11% year-over-year in constant currencies. This is also the first time since 2017 that we grew revenue sequentially in the fourth quarter. Fourth quarter revenue in the U.S. grew 15.9% year-over-year, while Europe declined 8.1% in constant currencies. CNC revenue in the U.S. grew 35% in the fourth quarter. Revenue fulfilled through Proto Labs network was $30.5 million, up 11.2% in constant currencies. Non-GAAP gross margin was 44.8%, up 140 basis points year-over-year as volume growth in the U.S. factories generated higher gross margins. Fourth quarter non-GAAP operating expenses were $48.7 million, up $5.2 million compared to the prior year, driven by higher incentive compensation, commissions and medical expenses.

On a percent of revenue basis, fourth quarter operating expenses were down 10 basis points year-over-year. Non-GAAP earnings per share were $0.44, above our guidance range and up $0.06 year-over-year due to increased volume and factory gross margin improvements, partially offset by a higher tax rate.

Now on to our full year 2025 financial highlights. Revenue was a record $533.1 million, up 5.7% in constant currencies. Factory revenue grew 3.7%, and Proto Labs network revenue grew 13.8%. 2025 revenue in the U.S. grew 9.1% year-over-year, while Europe revenue declined 7% in constant currencies. As Suresh discussed, we have focused efforts planned for 2026 to reset our European operation, generating efficiencies and returning the region to growth. In 2025, CNC Machining revenue grew 16.7% year-over-year in constant currencies. Strong demand in the U.S. for CNC parts and drones, satellites and rockets drove this outstanding performance. In the U.S., CNC grew 25% year-over-year. Injection Molding revenue declined 1.9%. The service was negatively impacted by weakness in medical device and lower prototyping demand. 3D printing declined 4.7% year-over-year due to weak prototype demand for 3D printed plastic parts and older technologies.

However, we are seeing strength in metal 3D printing. DMLS revenue in the U.S. grew double digits. Sheet Metal grew 12% year-over-year. This service also benefited from strong demand in U.S. aerospace and defense. Full year 2025 non-GAAP gross margin was 45.1% compared to 45.2% in 2024. Our gross margin is unmatched in digital manufacturing, a testament to the strength of our combined factory and network fulfillment model.

Factory non-GAAP gross margin was 49%, up 70 basis points year-over-year. I'd like to commend our factory operations and continuous improvement teams for their factory productivity improvements in 2025. Network non-GAAP gross margin was 31%, down 190 basis points year-over-year, largely due to inefficiencies related to tariffs. 2025 non-GAAP operating expenses were $193.3 million, or 36.3% of revenue, up slightly from 36% of revenue in 2024. As we said throughout 2025, the majority of the SG&A increase was in variable expenses tied to revenue growth, including incentive compensation and commissions. However, there is significant opportunity for leverage on our operating costs as we scale. Suresh already outlined a number of transformational initiatives in 2026 meant to drive efficiencies and productivity.

We expect efforts within our operational efficiency pillar to generate operating leverage in the long term. Non-GAAP earnings per share were $1.66, up $0.03 year-over-year. We generated $74.5 million in cash from operations in 2025 as Proto Labs continues to lead the digital manufacturing industry in cash generation. We returned $43 million to shareholders in the form of repurchases. On December 31, 2025, we had $142.4 million of cash and investments on our balance sheet and 0 debt.

Turning to our forward outlook. We have momentum in the business, and we are actively laying the foundation to invest in our strategic pillars and grow the business to $1 billion in revenue. Our focus on long-term margin expansion will be driven by revenue growth, factory utilization and productivity, network margin refinement and SG&A leverage. As these drivers scale, we believe Proto Labs has a path to expand operating margins while continuing to lead the industry in cash generation.

As Suresh mentioned, 2026 is a year of transformation and acceleration for Proto Labs. With that said, we anticipate full year 2026 GAAP revenue growth of 6% to 8%. As is our standard practice, we will provide both revenue and earnings guidance for the first quarter of 2026, outlined on Slide 19. We expect revenue between $130 million and $138 million. At the midpoint, this implies 6% revenue growth year-over-year. We expect foreign currency to have a $2.1 million favorable impact on revenue compared to the first quarter of 2025.

Our earnings guidance incorporates the following assumptions for the first quarter of 2026. Non-GAAP add-backs will include stock-based compensation expense of approximately $3.6 million, amortization expense of $900,000 and transformation and restructuring costs of $700,000, a non-GAAP effective tax rate between 24% and 25%.

In summary, we expect first quarter 2026 non-GAAP earnings per share between $0.36 and $0.44. That concludes our prepared remarks. Please open the line for questions.

[Operator Instructions]

Our first question today is coming from Greg Palm of Craig-Hallum.

I wanted to maybe start off with a little bit more color on Q4. And by the way, congrats on a great finish to the year and really improved year overall. But as you kind of mentioned first time in a long time where revenues actually grew sequentially from Q3 to Q4, and I guess I'll sort of ask the same question. I can't recall you ever sequentially declining from Q4 to Q1, but obviously, that's what the midpoint implies. So how much of that is conservatism. What exactly did you see in Q4? Was there some pull forward of revenues? And maybe just a little bit more color on what you've seen quarter to date.

Yes. Thanks, Greg, and thanks for the congratulations. You've followed us for some time. I've talked about this in the past. As you go into the fourth quarter, it ends up being quite unpredictable in terms of when customers will have projects and what we saw is like through November and December, continued good order volumes driven by our engagement with customers in those key industries. And so that resulted in the results that you see.

As we started in January, it was a more normalized start to the year where it's softer as people are coming back from the holidays, and we've seen order rates improve from that point. So it hasn't been since 2017 that we've seen that where in the fourth quarter, people continue to order right to the end of the year. But we do see some normalization now starting in January.

Okay. That's fair enough. And then just -- in terms of end markets, applications, I think you've talked about a few of them that you've been sort of seeing a lot of growth in recent history. But can you just maybe go in a little bit more detail whether A&D so the drones and satellites space, but I also think you mentioned data centers, and you haven't talked about that a lot in the past. But are you -- presumably, some of these end markets are accelerating, but just give us a little bit more color exactly what you're seeing.

Yes. Thanks, Greg. We are absolutely seeing innovation-led growth in these markets. And as you know, we are the default go-to place for prototyping for innovation. We are absolutely well positioned to leverage all of these growth markets that are well-funded long-cycle innovations starting now and we serve almost all of these industries. So we feel pretty good about where we are positioned to serve the innovation-led growth in the U.S. right now.

Okay. And lastly, I appreciate some of the commentary on the strategic pillars. I'm curious, how much -- or what can sort of be done near term versus midterm versus long term? And I mean, do you think you're starting to see some of the results from some of these strategic initiatives already? Or is this more of a sort of to come kind of thing?

Yes. Greg, we are just starting this now and we will see acceleration in the outer years. This is a year of transformation. We are putting things in place, and we are getting organized.

Our next question is coming from Troy Jensen of Cantor Fitzgerald.

Congrats on the great results. Maybe just a couple of questions -- just a couple of questions for me. Can you talk about just unique developers. It was down here, lowest we've seen in a bit. Is this a conscious decision to shed less profitable? Or can you just touch on the UDPs, please?

Yes. Troy, we are absolutely focused on increasing revenue per contact, and we saw acceleration in Q4 with revenue per contact up almost 23%. Having said that, we are also focused on driving more contacts. So we are aware that we have to grow both, but our focus has been to get more share of wallet from our existing customers, and that is borne by the facts of how Q4 performed. In fact, all of 2025 performed where we were up 13% year-over-year on revenue per contact.

So just a different question here. Can you talk -- there's been chatter or just I know the administration has really kind of been pushing U.S. supply chain for defense and I've just heard chatter that they're out even kind of talking to the machine shop builders of the world. But anything that you guys can talk about here that's kind of reshoring or the U.S.-based supply or defense? Is this something that you've had discussions with or talked to administration about?

And you can -- as you can see from our results, we have good exposure to aerospace and defense, good exposure to all the growth areas within aerospace and defense. That includes drone satellites, rockets, robotics, and we are seeing good growth from all of those end markets.

Okay. But not specifically just defense really pushing U.S. reshoring supply chains just more broad-based?

Yes. I think -- I don't know how much specifics we can give you, but it's -- we have good exposure to all of these companies, and we are a preferred supplier to them when it comes to driving innovation.

Okay. So keep up the good work.

Our next question is coming from Brian Drab of William Blair.

Since Troy was trying to get you talk about all your defense work, I thought maybe I'd ask you to reveal all 63 secrets that you mentioned on the call. Can we talk through those?

No. They're secret for a reason, Brian.

I haven't heard that stat before, 63 secrets. I thought that was interesting. The Injection Molding business has been pretty study here the last couple of quarters. But this is obviously still one of the keys to the growth going forward is to reaccelerate growth in Injection Molding. I know that you've done some work around automation and you're working with enterprise customers, different verticals. But like what -- as you think about that 6% to 8% growth which would be outstanding for 2026 for the overall company.

What kind of visibility do you have to the Injection Molding business contributing to that type of growth? And I'm wondering if you just -- if you have some better visibility related to production programs with some customers? Or any color around that visibility would be great.

Yes, Brian, thanks. We have acknowledged in the past that prototyping in Injection Molding is down and it remains down. So hence, our pivot towards production in Injection Molding in particular while we are going after production in all our service lines, getting the ISO 13485 certification for medical industry, which allows us to do traceability, process validation and [ automated ] inspection helps us pivot to more production in Injection Molding. We are in pilot with 2 medical device manufacturers right now for high precision, higher volume production parts for Injection Molding. And as that scales, we will be able to bring in more customers into that fold and thereby expand our Injection Molding revenues year-over-year.

Do you think that it's possible that Injection Molding grows at a comparable rate to CNC Machining in 2026?

I don't -- yes.

We're not giving guidance as it relates to the service at this point.

Fair. Okay. And then you launched these advanced CNC capabilities in October. And I'm just wondering, is that still very early in the ramp? Or did that affect, do you think, some of the CNC order activity in the fourth quarter?

Yes, while it's already, it's performing well for us. We are only a few months in, but we are seeing significant excitement and customers wanting to use that service. It's something they've been asking us for a long time and I talk about friction, it's these kinds of things where customers want something from us and we are not responding, and we are able to do that now and we are seeing a good lift for these services.

Okay. And then my last question for now is just on India. Should I be thinking about that as an opportunity to expand the network side of your business, which -- serving customers globally? Or -- and I think you mentioned, I may have just missed it. Or is it more focused on customers -- with serving customers within India and the surrounding region?

Yes. So we have been in India for some time with manufacturing partners that support our network business by putting in a center in India, we are looking to expand how we can leverage India's technical talent to help us advance our innovation agenda, our AI agenda and accelerate that with speed. So we are expanding India for supporting our global business.

So is it -- what type of people are in this facility then? Is it software engineers or CNC machinist or what -- can you just elaborate a little bit.

We will share more as we build it out. We just started this in the beginning of the year. And as I said, we already had a presence with supplier quality engineers, supplier development engineers, working with our manufacturing partners and making them capable to supply global customers in Europe and U.S. And by putting in a head who has helped build global capability centers, we can add more capability in our India office to support our entire business.

Our next question is coming from Jim Ricchiuti of Needham & Company.

I'm wondering is the -- is this decision to share full year growth targets with us today, is that a function of what you're seeing in terms of opportunity. I'm not going to call it predictable demand because I don't think that's something necessarily that characterizes your business. But I'm wondering, are you seeing this opportunity -- a better view of this opportunity in several of the key markets you've identified? Or is it -- or is it just -- is this accelerating growth due to just greater confidence in the changes you're making and the potential for that to provide more immediate benefits. I'm not sure if that question is confusing. I'm just trying to get a sense because normally, you guys have not talked about full year revenue growth.

So Jim, we just had a quarter in which we had 11% growth year-over-year. And Suresh just laid out some transformational changes that we're going through. So it's a year of quite a bit of change for us. I don't have better visibility to what the full year is, but I thought it would be helpful to share with you and the investors where we're thinking about for the full year in terms of growth.

And that's very helpful, and I think appreciate it. The other question I had is, given all the changes you're making, what are some of the puts and takes on the investments required? Do you anticipate additional investments as you go through the year to potentially lay the foundation for stronger growth? Or is this also going to be a reallocation of resources?

It's going to be -- one, it's a reallocation of resources. We are driving initiatives. You can see some of the -- we had a transformational charge in the fourth quarter. We've got one in the first quarter. So we are looking at eliminating costs in certain areas, but reinvesting them into others. So from a full year perspective, I would not expect us to be expanding margin. What we're going to be doing is we're going to be looking to lower cost but at the same time, reinvest that cost to drive some of the transformational change that Suresh talked about and start really moving growth.

Got it. And just one quick follow-up. I may have missed it. Could you provide the network gross margin in the quarter. I think they were lower for the year, but I wasn't quite sure you may have mentioned that, I missed it.

Network margin in the quarter was 30.3%.

And I'll add my congratulations. Real nice finish to the year.

Thank you. Ladies and gentlemen, this brings us to the end of our question-and-answer session and today's conference. We would like to thank you for your participation and interest in Proto Labs. You may disconnect your lines or log off the webcast at this time, and enjoy the rest of your day.

Greetings, and welcome to Proto Labs Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Ryan Johnsrud, Investor Relations Manager. Thank you. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to Proto Labs' Third Quarter 2025 Earnings Conference Call. I'm joined today by Suresh Krishna, President and Chief Executive Officer; and Dan Schumacher, Chief Financial Officer.

This morning, Proto Labs issued a press release announcing its financial results for the third quarter ended September 30, 2025. The press release is available on the company's website. In addition, the prepared slide presentation is available online at the web address provided in our press release.

Our discussion today will include statements relating to future performance and expectations that are or may be considered forward-looking statements and subject to many risks and uncertainties that could cause actual results to differ materially from expectations. Please refer to our earnings press release and recent SEC filings, including our annual report on Form 10-K for information on certain risks that could cause actual outcomes to differ materially and adversely from any forward-looking statements made today.

The results and guidance we will discuss include non-GAAP financial measures consistent with our past practice. Please refer to our press release and the accompanying slide presentation at the Investor Relations section of our company website for a complete reconciliation of GAAP to non-GAAP results.

Now I will turn the call over to Suresh Krishna. Suresh?

Thanks, Ryan. Good morning, everyone, and thank you for joining our third quarter earnings call. I'm pleased to be with you today to discuss our strong results. We delivered record quarterly revenues and exceeded earnings expectations, highlighting the strength of our model and the power of focused execution.

Before discussing our results in detail, I want to take a moment to share a few reflections from my first 5 months with Proto Labs. Spending time in our facilities and with our customers and our partners has left me energized and confident in the opportunities ahead. We are focused on removing friction, expanding our offerings and deepening customer relationships. While it's still early, my short time here has strengthened my confidence that our current strategy, delivering high-quality custom parts throughout the product life cycle from prototyping to production is the right one.

We are in the midst of a comprehensive strategic planning process to identify specific initiatives and projects to accelerate growth and improve our operations. We are refining the details on how to achieve full realization of our strategy, and I look forward to sharing more in 2026.

Meanwhile, we are committed to delivering value with speed, clarity and discipline, unlocking long-term growth. Together with our teams, I am focused on reaccelerating revenue growth and ultimately positioning Proto Labs for long-term shareholder value creation.

Now on to our third quarter results. Revenue grew 7.8% year-over-year to a quarterly record of $135.4 million, and we had strong quarter of earnings that exceeded expectations. Our teams continue to execute with speed and focus, driving strong financial results. I'd like to especially commend our U.S. go-to-market teams whose continued commitment to customers and execution fueled another quarter of double-digit revenue growth in the U.S.

Our record revenue was led by increased demand in our U.S. CNC machining and sheet metal offerings, supported by strength across several key end markets. First, in aerospace and defense, we experienced continued strong demand for mission-critical precision parts in innovative areas like drones, satellites and space exploration.

As you know by now, Proto Labs works with the most prominent, innovative and fastest-growing companies, Amazon being one of them. Our speed, precision, quality and reliability allow us to be a trusted partner to Amazon in several of its critical business units, notably drones and robotics. We have also supported Blue Origin with parts for their single-launch lunar cargo lander, among other projects. Blue Origin told us they continue to use Proto Labs' services due to our impeccable customer service and levels of detail and accountability.

The second area of note for us is industrial and commercial machinery. This segment also performed well with notable activity in robotics and semiconductors. In addition, overall Proto Labs CNC machining revenue was driven by very strong network fulfilled growth.

I want to acknowledge our Proto Labs Network teams for their excellent execution through periods of significant tariff uncertainty and implementation challenges. Our teams managed through uncertainty and increased demand while reducing customer friction and driving higher sequential network gross margins. These results demonstrate our ability to execute well and deliver strong performance across our target industries.

Now shifting to our two key performance indicators where we made significant improvements. Third quarter revenue per customer increased almost 15% year-over-year as we continue to drive increased share of wallet with our large and strategic customers. I am very encouraged by the traction we are seeing in deepening customer relationships, and I can tell you anecdotally that our large enterprise customers want to do even more with Proto Labs.

Adoption of our combined offer continued to expand in this quarter with customers utilizing both factory and network fulfillment in the last 12 months, up 35% versus the prior quarter. As we continue to serve more customers and remove customer friction, this is showing up in accelerated demand. In fact, due to strong demand, we are expanding CNC machining capacity in our factories, a significant signal of momentum and confidence. We expect this investment to generate meaningful return.

I know we can do more for our customers. Over the past several months, we have worked to significantly expand our factory CNC machining service. You might have seen a press release announcing the launch of advanced CNC machining capabilities a few weeks ago. If you haven't, I'd encourage you to check it out.

We listened to our customers and heard loud and clear that they require advanced manufacturing capabilities from Proto Labs. These capabilities include tighter tolerances for added precision, diverse finishes to strengthen and cosmetically improve parts and fast, comprehensive quality documentation. Further, these services are all now available via our protolabs.com e-commerce ordering platform. This is an example of our commitment to removing friction, and we will continue to invest in improvements like this to drive demand.

Moving to a broader commentary about our business. As I noted in our last earnings call, I believe we have great talent and a great culture. I want to build on that culture by continuing to bring in and retain top talent. We are proud to be named one of America's Best-in-State Employers in the 2025 by Forbes, recognizing our strong workplace culture and commitment to our employees.

In addition, in early October, we announced the appointment of Marc Kermisch as our Chief Technology and AI Officer. This move helps strengthen our leadership team. Marc will lead our technology teams through Proto Labs' next chapter. He brings a strong track record in digital transformation and AI strategy, and his addition underscores our commitment to these areas.

We've been using AI and machine language at Proto Labs for a long time now as part of digital manufacturing. Marc will lead our tech teams as we further embed AI and automation across our operations, driving both efficiency and better customer outcomes, both of which are central to our strategy. We will continue to strengthen organizational capabilities to support our growth initiatives.

Before passing the call over to Dan, I'd like to make some closing remarks. As I mentioned earlier, we will provide more details on strategic initiatives in 2026, but sharpening our execution and improving the customer and employee experiences are essential. Our focus is clear: accelerate profitable growth. I am very encouraged by the progress we've made over the last 2 quarters.

We have accelerated revenue growth and exceeded expectations on earnings. We have significant momentum into year-end. I can feel it in our manufacturing facilities and in conversations with our sales teams across all of our offices. I could not be more confident in Proto Labs' ability to execute with speed, discipline and innovation as we deliver long-term value to our customers and shareholders.

With that, I'll turn it over to Dan to walk through the financials. Dan?

Thanks, Suresh, and good morning. I'll start with a brief overview of our third quarter results, followed by our outlook for the fourth quarter. Third quarter revenue was a company record $135.4 million, up 7.8% year-over-year or 6.8% in constant currencies. Revenue fulfilled through Proto Labs Network was $30.1 million, up 16.2% in constant currencies. Third quarter CNC machining revenue grew 18.2% year-over-year or 17% in constant currencies. As Suresh stated, we are seeing very strong demand for our CNC machining services across several key end markets, most notably drones, satellites and space exploration. In the U.S., CNC machining revenue grew 24% year-over-year.

Injection molding grew 2% year-over-year or 1.2% in constant currencies as we saw strong demand for network fulfilled injection molding services, offset by weak prototyping demand. 3D printing revenue declined 6.3% year-over-year or 7.1% in constant currencies, driven by weak demand in Europe. Sheet metal grew 13.9% year-over-year or 13.3% in constant currencies, fueled by solid growth in most end markets. Revenue in the U.S. grew 10% year-over-year, while Europe revenue declined 5% in constant currencies. Like many manufacturers, we are seeing the effects of continued contraction in European manufacturing activity.

Shifting to margins. Third quarter consolidated non-GAAP gross margin was 45.9%, up 110 basis points sequentially. We delivered sequential gross margin improvements in both the factory and the network. Non-GAAP operating expenses were $48.6 million or 35.9% of revenue, down 30 basis points, from 36.2% of revenue in the second quarter as we generated sequential efficiencies on our SG&A costs. On a year-over-year basis, SG&A was up $4.2 million. The majority of that year-over-year increase was in variable expenses tied to revenue growth, including incentive compensation and commissions.

Third quarter adjusted EBITDA was $21.1 million or 15.6% of revenue. Non-GAAP earnings per share were $0.47, up $0.06 sequentially. The sequential improvement was primarily driven by gross margin expansion. Compared to the third quarter of 2024, EPS was flat as increased volume was offset by higher incentive compensation and commissions expenses.

We generated $29.1 million of cash from operations during the third quarter. Proto Labs continues to lead the digital manufacturing industry in cash generation, reflecting the strength of our business model. We returned $12.8 million to shareholders in the form of repurchases. On September 30, 2025, we had $138.4 million of cash and investments on our balance sheet and $0 debt.

Our outlook for the fourth quarter of 2025 is outlined on Slide 12. We expect revenue between $125 million and $133 million. At the midpoint, this implies 6% revenue growth year-over-year. We expect foreign currency to have a $1.5 million favorable impact on revenue compared to the fourth quarter of 2024.

Moving to earnings guidance. We anticipate non-GAAP add-backs in the fourth quarter to include stock-based compensation expense of approximately $3.9 million and amortization expense of $900,000. We currently estimate a non-GAAP effective tax rate between 23% and 24% in the fourth quarter. In summary, we expect fourth quarter non-GAAP earnings per share between $0.30 and $0.38.

That concludes our prepared remarks. Operator, please open the line for questions.

[Operator Instructions] Today's first question is coming from Greg Palm of Craig-Hallum.

Suresh, a lot of your prepared remarks revolved around this idea of accelerated growth. But I don't think a lot of investors think of Proto Labs as a growth company, just given the history over the last 7 to 8 years. So just help us understand what's the opportunity? What's the potential growth rate for the company longer term?

Yes. Thanks again for that question. We are very focused on driving growth. Our last two quarters would indicate that. We've been above 7% two quarters in a row. We are working on our new strategic plan. And we -- as I said in my prepared remarks, we'll come out and share that with all of you in 2026. In the meantime, we are focused on listening to our customers, understanding our friction points, removing those friction points and providing them what they need. And we are very focused on delivering products across the entire product life cycle. All of these are resonating with our customers. And as we focus on executing those, we will continue to evolve our strategy with our strategic plan that we will announce in 2026. The confidence we have in future growth is things we are doing right now are resonating very strongly with our customers.

And is it fair to assume -- I mean, are you seeing any of that right now? Or are you more or less riding the wave of growth of some of your end markets like A&D? I'm just trying to get a sense of like what company-specific initiatives can happen that can translate into a step-up in the growth rate?

Yes. We gave -- we shared one example of advanced machining capabilities, that came directly from listening to our customers. And we have a few others that we are working on that we will share more details when we come back to you in 2026. But to be clear, we are seeing growth across several industries. It's not just aerospace and defense. We are seeing -- we serve 50,000 customers a year. We are the supplier of choice for anything that has to do with innovation. And there's a lot of innovation happening across a wide variety of industries today. So while we are seeing good growth in aerospace and defense, we are seeing very good growth in different industries as well. And innovators, whether they're in their garage or they are big Fortune 500 companies, we are their destination because they want to go with speed and innovation, and we are the best partner for that. So we are very diverse in our customer base.

Okay. I understand. And then just last one on the CNC expansion. What is the CapEx requirement associated with that? Is that just more machines? Is that a facility? And sort of where are we in terms of that build-out right now?

Yes, Greg, thanks for the question. This is Dan. We're fine from a facility perspective. This is just continuing to add mills. I mean with our digital manufacturing model, we can expand very quickly just by adding mills to the facility. I know you've been out to our Brooklyn Park facility. We can simply add mills and be able to continue industry-leading fast lead times by doing that. So it's an equipment purchase.

The next question is coming from Troy Jensen of Cantor Fitzgerald.

Congrats on the nice results. So Suresh, for you, I know you called out record revenue per unique developer. But the unique developer number, it was down on a year-over-year basis. It's been -- it looks like it's at least a 3-year low. So can you just talk about like new developers and not just growing the services you're offering, but it just seems like this same market, you guys should be growing unique developers and not shrinking them. So any thoughts on that, please?

We are absolutely focused on growing our customer base. We are definitely seeing the efforts that we are putting right now is growing share of wallet, and that's what we are focused on, but we are definitely looking to increase our customer base overall. And when you serve 50,000 customers and our focus is right now on growing share of wallet, that's where we are seeing results, but we're absolutely focused on increasing our customer base as well.

All right. Understood. And then can you just talk about just cross-selling? I think Rob used to provide us data points on percentage of customers that are using both factory and network.

So I think we mentioned in the script, that's up 35% year-over-year. Of those customers, that are in the trailing 12 months, have ordered from both the network and the factory. The key here is what type of conversation are we having with the customer? The customer is going to upload their CAD file, and we can have a holistic discussion with them about what's important to them. Is it -- do they need fine details in terms of what their part is? Do they need it right away? Can they wait longer? What price point are they looking for? And that's really what that metric is all about, is our ability to have that broader conversation with the customer and win more business with Proto Labs.

The next question is coming from Brian Drab of William Blair.

I can hear the cold in my voice as I'm starting to talk this morning. With the advanced CNC machining capability, how automated is that going to be? Or how automated is it? I see that you're talking about the ability to evaluate 2D drawings. Is that type of evaluation automated? And just what were some of the challenges in bringing that additional level of service online?

Yes. This is -- as I indicated in my prepared remarks, it's tighter tolerances. It's different kind of finishes that our customers want and then improvements in quality documentation. And we've automated all that by putting everything on our website, so people can just order it on protolabs.com, as an e-commerce transaction. So we've made the entire thing a digital thread. In the past, it would have been more manual, and we made it a digital thread, removing the friction for our customers.

So I guess, specifically, if I give you a 2D drawing when it has 400 tolerances on it, is -- the system is taking into account all 400 of those tolerances automatically? Or do you have some level of manual evaluation of that by an engineer?

The website will walk you through with drop-down menus on all the things that you want to specify. So as a design engineer, you can go in and interact with the website, to be able to decide what is needed, what you need, all the way into quality documentation. So that way, it's all digital, and we don't need any manual intervention. Now we always have our application engineers available for a conversation and many other -- many of the customers do use that. And that way, if they have any clarifications, those are all sorted out. But that is available for everything, whether it's for advanced or for regular. That service is available for all our customers.

And then how is that -- how are you thinking about pricing of that level of service relative to, what I assume, the customers could have gotten historically anyways through the Proto Labs Network, maybe just having to wait a little bit longer? But I think you have partners probably available on that Network.

So Brian, a couple of things on it. It's very automated on the front end. But if there's -- if it's tripping into something that is very specific on the customer needs, we do have people that are responding to the customer and making sure that we have their parts and the parts that they need. It's a very competitive offer in the 5- to 10-day lead time space. So we can do complex CNC parts very competitively from a pricing perspective in that 5- to 10-day space.

Okay. Got it. And then just -- maybe just one more for now. Suresh, after you've been there for 5 months, and you see how the CNC business is just booming, but the injection molding business, which was the legacy -- obviously, the legacy, growth driver for many years. That business is still relatively flat lately. What do you think about the medium-term prospects for that business to get the growth going there again?

Yes. We -- there is reduced prototyping activity in that space, which is driving some of the softness and it has been for the past few years. But -- we are definitely focused on the three service lines and the sheet metal, which is only U.S.-based, in all -- in both our geographies. So as we come out and talk to you in 2026, we'll talk about more specific initiatives on what we are doing. It is, as you said, a legacy business for us, but it's a very, very good business, and we've been known for that, and we'll redouble our efforts for growth in all our service lines.

The next question is coming from Jim Ricchiuti of Needham & Company.

First, congrats on the results and the margin improvement. Just wondering what were some of the puts and takes in the gross margin performance in the quarter? Volume, I'm sure played a role. But I'm just -- did you see much improvement in the network gross margins? And I don't think I heard you talk at all about tariffs. So I don't -- I'm guessing that was not an issue. But just in general, did you break out the network gross margin?

We did not. But network gross margins were around 33% in the quarter. So Jim, you might recall from last quarter, we talked about the change in tariffs and how that negatively impacted our U.S. network margin. we give the customer a price when they order it, and we hold to that price. So we could have a 30-day worth of backlog that the cost goes up on it due to pricing and you would have a negative margin impact. We were successfully able to implement changes both to our pricing and our sourcing algorithms so that in the third quarter, even though tariff costs were still up, we were able to improve our margins quarter-over-quarter in the network. So there's about 80 basis points quarter-over-quarter that was just due to the improvement in the network margins.

Outside of that, we saw improvements in our factory margin as well. One main driver of that is revenue in Europe was up quarter-over-quarter. And with that increase in our Europe factory revenue quarter-over-quarter, we were able to operate those plants more efficiently in the third quarter.

So those two things combined, so both factory margins being up and network margins being up contributed to our 110 basis point improvement second quarter to third quarter in gross margins.

Got it. That's helpful. When you look at the progress that you're making in the revenue per customer, that growth that you're seeing, I wonder if you could help us understand where the biggest benefits are coming from? Are they coming from -- you highlighted a couple of key verticals. Obviously, there's a lot of activity in the drone space, in the robotics space. Are these -- are you seeing growth in this area? Just -- and the revenue per customer, is it coming from the well-established Proto Labs' customer that you've been working with for a long time? Or is this coming perhaps from more recent customers that have just been more receptive to your production capabilities? Just trying to understand what's driving that because it is noteworthy, I think.

Yes. That's a great question. We are seeing improvements from new and existing customers. And we are seeing this, what I would say, share of wallet increase across different industries. As I said even earlier, we are a very diverse customer base. And while we are seeing good strength in the sectors you mentioned within aerospace and defense, which is around drones, satellites, space, we're also seeing in industrial areas like robotics, semiconductors, consumer electronics. So we are seeing the benefits of focusing on customer voice and turning around and responding to that. And that's what is helping us improve our share of wallet.

Dan, do you want to add anything?

Yes. I also would like to say we reorganized from a go-to-market perspective. At the start of the year, we talked to you guys about that. The Americas sales team is performing extremely well. They're having in-depth conversations with customers about what their needs are and how we can better fulfill those needs. And that interaction as well is helping us to serve those customers more holistically, and that is showing in that metric where -- how much a customer is purchasing for us -- from us is increasing.

Thank you. Ladies and gentlemen, this concludes today's question-and-answer session and today's conference call. We would like to thank you all for your participation. You may disconnect your lines or log off the webcast at this time, and enjoy the rest of your day.

Ladies and gentlemen, good morning, and welcome to the Proto Labs Second Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Jason Frankman, VP and Corporate Controller. Please go ahead, sir.

Thank you, Ryan. Good morning, everyone, and welcome to Proto Labs Second Quarter 2025 Earnings Conference Call. I'm joined today by Suresh Krishna, President and Chief Executive Officer; and Dan Schumacher, Chief Financial Officer.

This morning, Proto Labs issued a press release announcing its financial results for the second quarter ended June 30, 2025. The release is available on the company's website. In addition, a prepared slide presentation is available online at the web address provided in our press release. Our discussion today will include statements relating to future performance and expectations that are or may be considered forward-looking statements and subject to many risks and uncertainties that could cause actual results to differ materially from expectations. Please refer to our earnings press release and recent SEC filings, including our annual report on Form 10-K for information on certain risks that could cause actual outcomes to differ materially and adversely from any forward-looking statements made today.

The results and guidance we will discuss include non-GAAP financial measures consistent with our past practice. Please refer to our press release and the accompanying slide presentation at the Investor Relations section of our company website for a complete reconciliation of GAAP to non-GAAP results.

Now I'll turn the call over to Suresh Krishna. Suresh?

Thanks, Jason. Good morning, everyone, and thank you for joining our second quarter earnings call. Before getting into the details of our record performance during the quarter, I'd like to quickly introduce myself. I am honored and excited to step into the role of President and CEO at Proto Labs. I'm an engineer by training, and have held many leadership positions in supply chain, operations and general management. I have overseen profitable growth and shareholder value creation at several manufacturing companies.

As a former Proto Labs customer, I have seen firsthand how the company reliably delivers high-quality custom parts and accelerates for some of the world's most pioneering companies. In fact, I used Proto Labs digital manufacturing capabilities to accelerate product development and beat the competition to market. I have long admired the company's leadership in digital manufacturing, its strong culture and its commitment to innovation and customer service. Proto Labs next chapter is going to be an extraordinary one, and I'm thrilled to be leading this talented team.

I also want to take a moment to thank Rob Bodor for his many contributions and leadership over the past several years. Rob played an important role in helping set the company's direction, and I'm grateful for the foundation he helped build. I have been in the road just over 2 months now, and I've spent much of that time listening to employees in our manufacturing facilities and offices, meeting with customers and taking a fresh look at our strategy and how we are executing it. These experiences have only reinforced my conviction in Proto Labs potential. We have a very innovative and resilient culture and a pervasive mindset for continuous improvement. I believe in this company. I have personally seen the value Proto Labs delivers to its customers, and I'm excited about the opportunity to lead this great organization.

This is a wonderful company with best-in-class profitability and cash flow generation and a history of rapid growth. But in recent years, our growth has not kept pace with expectations. That said, I see this as a significant opportunity and I'm energized by the work ahead to help reaccelerate the business towards sustainable strong growth. I'm confident in our strategy of delivering high-quality custom parts across the full product life cycle from prototyping to production. With a strong foundation already in place, I believe we can sharpen our execution, particularly when it comes to customer and employee experience. These may sound like simple concepts, but done right they can unlock meaningful long-term growth. There will be my top 2 focus areas.

I'm sure many of you are eager to hear about my long-term strategic vision. And that's an appropriate question. Let me reassure you that in the near term, there will be no radical shift in our current strategy. My immediate focus is to listen, learn, and engage closely with our teams, customers and partners to identify the highest impact opportunities. I look forward to sharing more in the coming quarters.

Now on to our second quarter results. We delivered a very strong quarter, exceeding expectations in both revenue and EPS. This included record revenue highlighting our ability to execute effectively in a dynamic and uncertain environment. Our best-in-class profitability also enable us to continue returning capital to shareholders through ongoing share repurchases, further demonstrating the strength and resilience of our business model. I want to thank our teams across the globe for their hard work and dedication. This performance wouldn't be possible without them.

In addition to our financial results, we were also honored to receive a 2025 Future of Manufacturing Project Award from the National Association of Manufacturers. This recognition validates the progress we've made as a technology-focused customer-centric manufacturer and underscores our leadership in driving innovation and agility across the industry. I'm also excited to announce that in June, our metal 3D Printing service in Raleigh, North Carolina, received ISO 13485 certification which is an internationally recognized quality standard for medical device manufacturers. This certification is an important to both current and prospective medical customers and demonstrates our commitment to quality and excellence in medical device manufacturing. The ISO 13485 certification will help accelerate our growth in medical, specifically metal 3D printed nonactive implants and other devices. Thanks to our production and quality teams for their hard work to achieve this certification.

Now shifting to our 2 key growth indicators in the quarter. Customers utilizing our combined offer grew 44% over the trailing 12 months. And revenue per customer in the second quarter increased 11% year-over-year. I encouraged by the continued traction we are seeing, particularly in expanding share of wallet with strategic customers. We also continue to make significant progress on our growth investments that we first shared with you on our Q4 2024 call in February. First, our marketing investments continue to drive engagement and reinforce our brand in both prototyping and production. We are seeing increased awareness and interest from customers across our target industries especially aerospace and defense, where our speed, complexity and domestic capabilities make us a preferred partner.

We help accelerate innovation for a wide variety of customers in aerospace and defense. We serve the leaders in space exploration and satellites like NASA, Blue Origin and Relativity Space as well as commercial aircraft manufacturers like Airbus and Boeing. Defense contractors, including Raytheon, Lockheed Martin, Northrop Grumman and [indiscernible], all trust Proto Labs to deliver quality parts quickly. In addition, we manufacture lots of parts for companies on the leading edge of drone development, including defense, electric client taxis, parcel delivery services and many more. In an industry with lots of funding and innovation, Proto Labs is a trusted manufacturing partner for many.

As our second key growth investment, we have continued to advance our sales enablement tools and processes, allowing our sales teams to better understand the strategic production needs of our customers and make it easier for these customers to interact with Proto Labs in this context. And third, we also continue to make progress to optimize our fulfillment channels. These efforts help us better align our manufacturing footprint and capabilities with customer demand and are central to our ability to deliver seamless customer experience across both factory and partner network. We are still early on the journey to improve our production fulfillment capabilities. Our global operations organization continues to refine how parts are manufactured with excellent quality in the right place at the right time for the right price, which vastly improves the customer experience.

Turning to tariffs and the evolving trade landscape. This is another area where Proto Labs is well positioned to succeed. As always, we are focused on what we can control. Speed and agility are central to our operations, and those trends are especially critical in today's environment. Our global manufacturing footprint gives us the flexibility to adapt quickly to shifting supply chain dynamics and serve customers effectively regardless of geography. While trade policies and tariffs continue to change rapidly, we believe tariffs and further investments in American manufacturing innovation are a tailwind for our business in the long term.

On the other hand, tariffs and frequently changing trade policies can create short-term margin pressures. For instance, if we quote a price for the customer, and subsequent trade policies alter our cost structure, we absorb that risk in the short term. While this may impact margins temporarily, our AI-driven pricing and fulfillment systems enable us to adapt in real time, delivering a smoother customer experience than many peers who simply pass tariff-related increases directly to the customer. This is a strong example of how we reduce friction for our customers, fostering greater loyalty and expanding share of wallet.

Finally, and perhaps most importantly, we continue to generate very healthy cash flows, which gives us the financial strength to invest in growth and innovation while maintaining resilience through market uncertainty. To close, I want to briefly revisit our 2025 priorities, which are still intact. We are both a prototyping and a production company, delivering through our digital factories and our partner network, and we execute with excellence across all these areas. Sharpening our strategy and execution are top priorities of mine and it's essential for driving our growth. As I mentioned earlier, that focus extends to both customer and employee experiences. In the near term, we will work to remove friction for both customers and employees, and we will increase our speed of execution.

I'm deeply committed to not just what we deliver to our customers, but how we deliver it by our employees with speed, clarity and discipline. Our priorities remain as follows: drive growth in our key performance indicators, expand our production capabilities and reinforce our core prototyping business. I am pleased with the progress our employees have made through the first half of the year, and I'm confident that we have the foundation, the team and the strategy in place to drive sustainable growth while maintaining our industry-leading profitability and cash flow generation. I'm excited about the path ahead. We'll continue to drive innovation, execute for our customers and deliver long-term value to our shareholders.

With that, I'll turn it over to Dan to walk through the financials. Dan?

Thanks, Suresh, and good morning, everyone. Second quarter revenue was a company record $135.1 million. This is above our guidance range, up 6.5% year-over-year in constant currencies and up 7% sequentially. Revenue fulfilled through our digital factories grew 4% year-over-year in constant currencies and revenue fulfilled through Proto Labs network was up 16%. Turning to revenue by service in constant currencies. Second quarter CNC Machining revenue was also a company record, growing 20% over the prior year. And in the U.S. alone, CNC Machining revenue grew 30%. We continue to see very strong demand from aerospace and defense customers, specifically in high requirement parts. The value we deliver via our factory and network CNC Machining offer is really resonating with our innovative customers.

Injection Molding declined 4% year-over-year. 3D Printing revenue was down 1% year-over-year amidst continued weakness in prototyping. And lastly, sheet metal grew 9%, bolstered by improved offerings and additional go-to-market efforts. Revenue in the U.S. grew 12% year-over-year, while Europe revenue declined 15% in constant currencies. Manufacturing activity in Europe continues to contract. We reorganized our European go-to-market teams at the start of the second quarter and remain focused on identifying and executing opportunities to drive demand across the region.

Shifting to margins. Second quarter consolidated non-GAAP gross margin was flat sequentially at 44.8%. On a year-over-year basis, gross margin was down 90 basis points, driven by higher growth in network revenue and a lower U.S. network margin due to changing tariffs. We responded to these changes by adjusting pricing. And in June, network margins were back to pre-tariff levels. Non-GAAP operating expenses increased $2.7 million compared to the prior year, an increase of 6%, consistent with revenue. The majority of the operating expense increase was in variable expenses tied to revenue, namely incentive compensation and commissions. Second quarter adjusted EBITDA was $19.7 million or 14.6% of revenue. Non-GAAP earnings per share were $0.41 in the quarter, above our guidance range and up $0.08 sequentially on higher-than-anticipated volume. EPS was up $0.03 on a year-over-year basis.

Proto Labs continues to lead the digital manufacturing industry in terms of cash generation, reflecting the strength of our business model. We generated $10.6 million in cash from operations during the second quarter and we returned $3.1 million to shareholders in the form of repurchases. On June 30, we had $123.2 million of cash and investments on our balance sheet and 0 debt. Our outlook for the third quarter of 2025 as outlined on Slide 13. We expect revenue between $130 million and $138 million. At the midpoint, this implies 6% growth year-over-year in constant currencies. We expect foreign currency to have an approximately $400,000 favorable impact on revenue compared to the third quarter of 2024.

Moving to earnings guidance. We anticipate non-GAAP add-backs in the third quarter to include stock-based compensation expense of approximately $3.9 million and amortization expense of $900,000. We currently estimate a non-GAAP effective tax rate between 24% and 25% in the third quarter. In summary, we expect third quarter non-GAAP earnings per share between $0.35 and $0.43. That concludes our prepared remarks. Operator, please open the line for questions.

[Operator Instructions] The first question comes from the line of Brian Drab from William Blair.

I just wanted to first start with the strength that you're seeing in CNC and I'm curious -- I know you mentioned aerospace and defense that makes sense. I'm just wondering, are you seeing more of that strength in one area or the other in terms of the factory of the network? Or is that driving growth across both of those business lines?

Yes. Thanks for the question, Brian. We are seeing similar growth, both in the factory and the network from a growth -- year-over-year growth percentage perspective. As I talked about on the call, it's 30% CNC growth in the U.S. that's really driving the overall 20% for the company.

Brian, this is Suresh. I'd like to just add, we grew revenues with our larger accounts, and that's based on the focus for our go-to-market reorganization that we've done. I'd like to give a huge shout out to our go-to-market team in the Americas for continuing to drive great customer service and great customer relationship. Also a huge shout out to our production teams based in Nashua, New Hampshire and Brooklyn Park, Minnesota, for being able to jump 30% more revenues year-over-year. That shows the agility that we have in the organization to be able to respond to customers' needs.

That's great. And are those -- I'm just wondering if you could give us an insight into those orders and CNC work, is that leaning more toward production? Or is it leaning more towards prototyping or all of the above? And what's the breakdown there?

Yes, I would say all the above. We don't give a split at that level, but it is a combination of both production and there is some prototyping that is in there as well. But yes, obviously, the performance there, as Suresh talked about, helped increase our revenue per contact year-over-year double digits.

Okay. And is that -- can you comment on whether you're seeing that strength continue into the third quarter and is still pretty robust in July?

Yes. The midpoint of our guide indicates that we're continuing to see the strength, and it's in the same areas, Brian. .

Yes. Okay. I'll just ask one more for now. Can you just add a little more color around the injection molding business? And I know you said prototyping is relatively but just how the injection molding business is -- what's putting it under pressure and what could turn that around and how it's performing across the network versus the factory?

Yes. So let me answer the last part of your question first. The network is a relatively small portion of our Injection Molding business, the majority of it is through the factory. A couple of things to comment on. Last year, we had some larger Injection Molding production orders, specifically in automotive that provided some headwind year-over-year. But in general, we're seeing weakness within Medical and that is impacting what we have around Injection Molding. That being said, we're continuing to innovate in that space. We see that as a real big driver for us in the future from a production perspective. So we're continuing to add capabilities to that to win more of that production business.

Congrats on the record revenue results.

The next question comes from the line of Greg Palm from Craig-Hallum Capital Group.

I'd also like to offer my congratulations on a good quarter. And Suresh, welcome aboard. Maybe Suresh, I'd like to just start with you in kind of a broader question on not necessarily why you joined, but maybe it's a little bit early, but you've been there a couple of months, so you've got a little bit of an opportunity to figure out maybe what excites you? What's going wrong in the past? What's been missing? I mean just -- I know we're still waiting for kind of a longer-term strategic vision, but can you just tease us a little bit and give a little bit of a bit more color on kind of what's exciting you going forward?

Thanks, Greg, for that question. As I said in my prepared remarks, I believe there is a large opportunity to reaccelerate the growth of this business. And that's what excites me about joining Proto Labs at this point in time. I'm spending all my time listening and talking to our employees, customers and our partners. And right now, I'm very focused on removing friction for our customers and our employees. And through these efforts, we'll be able to identify what our future opportunities are, and we'll be able to share those with you in the coming quarters.

Okay. Fair enough. We'll be looking forward to that. In terms of the quarter and the gross margin, I want to maybe dig into that a little bit more, presumably, maybe that's more related to some of the longer lead time offerings. But just can you give us a sense on the negative impact from the tariffs, and I don't know if you're able to kind of quantify that? And just to be clear, it sounds like that was maybe a temporary issue that's now been resolved. So what's kind of the implied outlook for gross margin here in Q3?

Yes, absolutely. So great. Yes. Part of our pressure in the quarter on margins was tariffs. So it was our U.S. network margins that were impacted by that. And that had happened midway through the quarter. We were able to, like I said on the call, just our pricing and adjust our fulfillment so that in June, our margins in network margins in the U.S. were back to normal. So that provided part of the headwind quarter-over-quarter from a gross margin perspective.

In addition, we had soft volume through the factory within Europe as well, which also challenge the margins quarter-over-quarter, and we had a higher mix of network revenue from Q1 to Q2, which also provided margin pressure. Now on the positive side, as we talked about, we grew 4% in the factory. So we had some strong factory margins in the United States that were able to offset those things, allowing gross margins to be flat quarter-over-quarter.

What exactly though, in terms of the tariffs was the impact because you're a quick-turn business? So I guess I'm a little bit confused on kind of what -- I mean what was happening in May, for instance, if you said it was midway through the quarter. What was the surprise that impacted the margin specifically knowing that -- I mean, a lot of it, I think the tariffs that were originally enacted were actually kind of early April, right?

So I mean, the specific impact was when we talked about in the quarter last time, if a tariff was put on a certain country from our network perspective, we can then source it from a different country to avoid those tariff impacts. But the tariff that took hold was the one that was on aluminum and steel. So it didn't matter what country it was coming from. You were going to get a tariff impact on that. And so as that happened in the network, which has longer lead times, you have more like 20 to 30 days of backlog that's through the network that is priced at a different price than what our assumption was on the cost on the tariff.

And so it was really at the time adjusting our pricing so that -- and looking at different ways in which our algorithm is working in terms of what we're charging MPs and so forth, working through those dynamics to offset the tariff impact, but then it takes 30 days for that backlog to come through and then you can get your margin right on the other side. So I know a bit of a funky answer, but it was the aluminum and the steel tariff impact. It was the fact that we have 30 days of backlog. And then once we've adjusted for that, then we don't have a margin impact, but you still have that backlog coming through at a lower margin.

No, that's more color. I would have assumed it would have been a pass-through, but the lag makes sense. What -- by the way, what was -- did you give a network...

Greg, just real quickly. We don't pass that through to the -- we honor the price we give a customer. And that's part of -- we think, is going to value us over the long term, right, in terms of maintaining that relationship.

Yes. Okay. And then just, I guess, 2 quick housekeepings. Did you give a gross margin for the network business as a whole in the quarter? And then in terms of A&D, what percent of your business is A&D in terms of mix today?

Yes. So network margin was just below 30%. It was 29% in the quarter. In terms of percent of A&D, it's north of 20% in the quarter.

The next question comes from the line of Troy Jensen from Cantor Fitzgerald.

Congrats on the nice results and Suresh, welcome. So Dan, just a follow-up on a comment you just said about 30 days of visibility. I always thought of you guys as having much less than that. I thought like lead times for like kind of 7 to 10 days. So can you explain that comment?

Yes. I have longer visibility for 15% of the business that goes through the network. For 85% of the business, I have a limited visibility.

Okay. So I get it. That's new business. All right. Perfect. And then I know like the last couple of quarters, you've had this new initiative to push into production. Is there any update you can give us? Any kind of stats that cabin successful?

Yes. Obviously, it's a stat that we talk about on the call, right? So we're seeing an 11% increase in revenue per customer contact, right? So we're really happy with that. And in addition, we find customers that are fulfilling their orders through both the factory and the network in general, are doing about twice the amount of business overall with us, right? So it's another indication of moving more into production or fulfilling that customer more holistically. And so that was up 44% year-over-year. So those are the 2 external metrics that we talk about that is driving a decent amount of growth and the growth that you saw within the quarter.

Yes, fair. Okay. And last question for me. Can you just talk about -- would you expect to get normal seasonality in Q4? Or are some of these initiatives going to help offset what we've typically seen as kind of a down slightly sequential quarter?

Yes. I would speak to the midpoint of our guidance, right? So from where we see things, obviously, coming off the earnings call last quarters were stronger than what we anticipated and that continued, and that's indicative of where we are in the guide. So for our Q3 seasonality, like we gave a midpoint of the guidance. I think that's where we think that, that's going to fall. In terms of the fourth quarter, I would expect typical seasonality Q3 to Q4 just because of the holiday periods. So that ends up being down slightly from the third quarter.

Ladies and gentlemen, with that, we conclude the question-and-answer session. On behalf of Proto Labs, that concludes the conference. Thank you for your participation. You may now disconnect your lines.