Proto Labs, Inc. Stock

Greetings. Welcome to the Proto Labs Q3 Fiscal Year 2026 Earnings Conference Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to Ryan Johnsrud, Investor Relations. Thank you, Ryan. You may begin.

Thank you. Good morning, everyone, and welcome to Proto Labs' Third 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, Proto Labs issued a press release announcing its financial results for the third quarter ended September 30, 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 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?

Thank you, Ryan. Good morning, everyone, and thank you for joining our earnings call. I am very pleased with our third quarter performance, which provides further evidence that the execution of our strategy is translating into strong and consistent financial results. Third quarter revenue grew 14%, resulting in another record revenue quarter. This is the fourth consecutive quarter of double-digit growth. We also delivered double-digit non-GAAP EPS growth for the fourth consecutive quarter with EPS growth outpacing revenue growth in each of these quarters.

In the first 9 months of 2026, year-over-year revenue grew 12%, adjusted operating margin expanded 300 basis points and adjusted EPS grew 46%, underscoring the consistency of our execution and the strength of our momentum. These results are driven by the tremendous work of our Proto Labs team and their continued commitment to serving our customers. I want to thank them all for everything they do every day. The trends that drove strong performance in the first half of the year continued in the third quarter.

Larger strategic customers continue to broaden their relationships with Proto Labs and turn to us for more of their manufacturing needs across the entire product life cycle. This is reflected in a 17% year-over-year increase in revenue per customer. In addition, we served almost 21,000 customers in the quarter, up sequentially for the third straight quarter. We continue to see strong demand in high-growth industries, including aerospace, defense, drones, robotics and data centers. We work with most innovative companies in these markets, including Blue Origin, Relativity Space, Raytheon, AeroVironment, Shield AI, Agility Robotics and many others. These customers need to rapidly move from ideas to prototypes and into production, making Proto Labs' speed, quality and reliability increasingly critical. We saw broad-based strength across our business in the third quarter with each of our 3 largest service lines growing double digits year-over-year.

Factory CNC Machining was particularly strong, growing 22% as our world-class speed continues to resonate with customers. Global 3D printing revenues grew 12%, led by strong demand from metals and HP's Multi Jet Fusion technology, or MJF. Year-to-date, MJF revenue in our U.S. factory operation is up more than 40%, and we are investing in additional capacity to support that growth. Proto Labs is at the center of a major shift taking place in manufacturing driven by 4 powerful macro trends.

First, reindustrialization. Companies are bringing manufacturing closer to their customers and building more resilient regional and sovereign supply chains. Second, a wave of hardware innovation moving at the speed of software. Investment is accelerating across critical and emerging industries like space, drones, robotics, data centers and other highly engineered hardware that ultimately needs to be designed, tested and manufactured from prototype to production at faster speeds than ever before.

Third, physical AI. AI is moving beyond software and into the physical world, driving a new generation of robotics, autonomous systems, intelligent machines and other advanced products that require manufacturing to leverage physical AI. And fourth, supply chain agility and scalability. As innovation accelerates, companies need manufacturing partners that can invest and scale with them without the manpower and capital constraints of traditional supply chains.

This is exactly the environment Proto Labs is built for. We help customers move quickly from idea to prototype to production while delivering the quality, reliability and scalable capacity they need. And we have an important structural advantage, our true digital thread. Proto Labs' software-native digital manufacturing model enables speed and automation today while creating a foundation to leverage AI and scale efficiently over time. And with millions of CAD files and decades of manufacturing data in our library, we have a powerful foundation to apply AI, advance our manufacturing capabilities and create more valuable solutions for our customers.

We are already seeing the benefits of these trends in our business, and we believe they create a significant opportunity for Proto Labs over the next several years. We continue to invest in capabilities to capture the opportunity ahead. We are advancing our 4 strategic pillars: elevating the customer experience, accelerating innovation, expanding into production and driving operational efficiency. I'd like to share several important business and product updates with you now.

On ProDesk, we launched new metal 3D printing heat treatments, FDM printing capabilities and additional CNC Machining surface finishes, giving customers more control over part performance, surface quality and finishing requirements. Next, we continue to enhance the Proto Labs Network with improvements designed to accelerate order acceptance, improve partner communication and strengthen quality. We are also developing AI-assisted order checks to identify specification discrepancies earlier and further automate the customer and partner experience.

With respect to improving efficiency across the organization, last week, we announced an enterprise implementation of Amazon Quick as part of our broader AI road map. Our initial focus is on go-to-market workflows where we believe AI can improve productivity, reduce response times and streamline order-to-quote processing. To accelerate implementation, we created forward deployed AI engineer roles to identify high-impact use cases and design AI-enabled workflows across the organization. Enterprise-wide implementation will continue into 2027, led by Marc Kermisch, our Chief Technology and AI Officer.

Technology is an important enabler of our strategy, and operational execution is the other. In August, Sam Ramahi was named Chief Operations Officer. Sam brings over 25 years of executive operational leadership across global companies like nVent, Eaton, Honeywell and more. Sam will help advance our strategic pillars while focusing on driving operational excellence across safety, quality, delivery and cost. We are also expanding the talent and capabilities needed to execute our strategy.

We have officially inaugurated our new global capability center in India. Engineers are on site and are working directly on our manufacturing and AI road map. The talent and capabilities we are building in India will help accelerate progress across all 4 strategic pillars. The strength (sic) [ capability ] center strengthens our investments in technologies that will meaningfully improve productivity, including AI, automation and advanced manufacturing capabilities that support our broader digital manufacturing strategy.

Turning to Europe. Revenue grew double digits in the third quarter, in part due to the go-to-market changes we initiated late last year. We are very pleased with this performance, and I want to thank our team in Europe, led by Pjotr Horowitz, for their continued execution and commitment. We continue to advance the initiatives needed to return Europe to profitability, addressing the drivers of underperformance while putting the right organizational structure, operating model, talent and capabilities in place to execute more effectively.

These efforts are designed to complement the go-to-market changes already underway and support further operational improvements. As I shared last quarter, the transformation in Europe remains a work in progress, and it's a longer-term effort. While we are encouraged by double-digit revenue growth, our objective remains unchanged, transform Europe into a contributor to both future growth and profitability.

Before I turn the call over to Dan, I want to highlight 2 recent recognitions of our commitment to manufacturing innovation. In August, we announced a partnership with MIT and a grant supporting U.S. manufacturing innovation research at MIT Industrial Performance Center. And in September, Proto Labs was one of the only 500 U.S. companies named to Business Insider's America's Most Innovative Businesses 2027 list. We are proud of both recognitions and believe they reinforce Proto Labs' position at the center of manufacturing innovation.

In closing, I am very pleased with our results through the first 9 months of the year and the progress we are making on our transformation. At the same time, I believe we are still in the early innings of what this business can achieve. We are executing our strategy at a time when some of the world's most innovative industries are moving faster, manufacturing supply chains are being reconfigured, and speed and digital manufacturing capabilities have never been more important. We believe Proto Labs is uniquely positioned for this environment and the opportunity ahead. We remain focused on building on recent momentum and delivering sustained profitable growth and long-term value for our customers and shareholders.

With that, I'll turn the call over to Dan to walk through the financials and outlook.

Thanks, Suresh, and good morning. I'll start with an overview of our third quarter results, followed by our outlook for the fourth quarter. Third quarter revenue was a company record $154.3 million, up 14.2% year-over-year in constant currencies. U.S. revenue grew 14.7%, while Europe grew 12.2% in constant currencies. Third quarter CNC Machining revenue grew 16.7% year-over-year in constant currencies. Our largest service continues to see very strong demand in aerospace and defense, most notably space exploration, satellites and drones, as well as in robotics.

Injection Molding grew 12.6% in constant currencies, driven by strength in electronics, aerospace and defense and telecommunications. 3D printing revenue increased 11.5% year-over-year in constant currencies. As we saw in the first half of 2026, demand in DMLS and MJF remained very strong in the U.S. We continue to invest capital to expand capacity in those areas. Sheet Metal revenue declined 4.6% year-over-year in constant currencies with broad weakness across end markets, partially offset by strength in aerospace and defense.

On to profitability. Non-GAAP gross margin was 44.5% in the third quarter, down 230 basis points sequentially and 140 basis points year-over-year. The lower gross margin was driven by our factory operations, primarily reflecting higher raw material costs, machine upgrades and targeted near-term investments in labor and contractor support. These were made to accommodate the significant increase in volume over the course of the year while maintaining our standards for speed, quality and reliability. Third quarter non-GAAP operating expenses were $50.3 million, up $1.7 million compared to the prior year, primarily reflecting increased investment in demand generation, along with higher contractor, professional services and software license costs as we continue to fund our strategic priorities.

Importantly, we continue to generate significant operating leverage. Adjusted operating expenses were 32.6% of revenue, down from 34.8% of revenue in the second quarter and 35.9% in the third quarter of 2025. This operating leverage reflects both strong revenue growth and the targeted actions we have taken to improve our cost structure and reallocate resources towards our highest priority growth initiatives. We continue to invest and add resources behind our strategic initiatives while identifying additional efficiencies that can help fund future growth.

Adjusted EBITDA was $26.2 million, or 17% of revenue, up from $21.1 million or 15.6% of revenue in the third quarter of 2025. Year-to-date, adjusted EBITDA is up 27.2% year-over-year. Third quarter non-GAAP earnings per share were $0.63, up 33.4% year-over-year, driven by revenue growth, mix shift and significant leverage on our SG&A expenses. $0.63 is the highest adjusted EPS figure we've reported since the third quarter of 2020. Adjusted EPS is up 45.5% year-over-year year-to-date. We generated $22.8 million in cash from operations during the third quarter, and we repurchased $5 million of common stock. On September 30, we had $175 million of cash and investments on our balance sheet and 0 debt.

Our outlook for the fourth quarter of 2026 is outlined on Slide 14. For the fourth quarter, we expect revenue between $143 million and $151 million. At the midpoint, this implies 8% revenue growth year-over-year. As a result, we are raising our full year 2026 revenue growth outlook from a prior range of 8% to 10% to a new range of 10% to 11%. We anticipate 2026 will be our first year of double-digit organic revenue growth since 2018. We expect foreign currency to have a negligible impact on revenue compared to the fourth quarter of 2025.

Our fourth quarter earnings guidance incorporates the following assumptions: Non-GAAP add-backs will include stock-based compensation expense of approximately $4.1 million and amortization expense of $900,000, a non-GAAP effective tax rate between 19% and 21%. In summary, we expect fourth quarter 2026 non-GAAP earnings per share between $0.46 and $0.54. That concludes our prepared remarks. Nicole, please open the line for questions.

[Operator Instructions] Our first question comes from Brian Drab with William Blair.

Congrats on a great quarter. Could you just start by talking about -- it looks like revenue per customer is up about 17%. And maybe add some granularity to that in terms of -- is it driven by volume? Or is it also the breadth of services now that you're increasingly offering that's allowing for that -- that's just a very impressive result and where are you seeing the most success?

Brian, this is Suresh. Thanks for your question. As we've talked before, we are absolutely focused on our 4 key strategic pillars, the first of them, which is elevating customer experience. And the second of them, which is accelerating innovation on behalf of the customers. And the third, which is expanding into production, are all contributing to this particular growth that we are seeing in wallet share with our core customer base. Some of the changes we've made to be able to do this well beyond the strategy, is the way we are executing.

We have an enterprise sales team. We are focused on a handful of industries that are high value for us. And those sales teams are building deep customer relationships and listening and turning it around to provide innovation that is specific to these customers. In the past, we may have innovated for the general customer base, which for us is tens of thousands of customers, to now being very focused on the customers where we see high value. So that is where we are able to drive wallet share and increase revenue per customer.

And then I mean I'm seeing the stock, I'm surprised a little bit to see that the stock is indicating slightly down before the open here. I guess it could be just the guidance for -- midpoint of guidance is $0.50 for the fourth quarter after you just put up $0.63. But is there -- what is there beyond just typical seasonality for the fourth quarter that you're looking at as you guide for that fourth quarter?

Yes. I mean, one, it is typical -- I assume the seasonality that we've seen for the prior 7 years for last quarter. So it is built in there that we expect to see some softness around the holiday time, which, as you know, impacts that EPS number. Second, gross margin, I'm assuming to be flat to slightly down quarter-over-quarter. We don't expect to see the same -- we talked about machine upgrade costs and so forth. We don't expect to see it at that high of a level.

But as we have lower revenue and we have some inefficiency in our factories around the holiday time as we bring in contractors and overtime as employees are taking time off. And then I would expect SG&A expenses as a percent of revenue to look more like the first and second quarter of the year rather than what we saw in the third quarter. So there is a pickup in SG&A expenses as well.

[Operator Instructions] Our next question comes from Austin Bohlig with Needham.

Congrats on the great results. I was just hoping to get a little bit more color on, kind of, the growth you're seeing in the factory versus the network. I didn't see what the revenue for the network was, if you could provide that.

Yes. So network revenue was up 3% year-over-year. So that meant that factory growth was up 17.5%. So again, we had higher growth in the factory than we had in the network. From a network side, we are seeing really strong momentum in the network in Europe, but things are a bit softer in the U.S. Our customers, as we come to them, they have a choice in this time in terms of do they need the speed that we're offering through the factory or do they need the breadth of services and maybe longer lead time of the network. And we are just seeing more of our customers in the U.S. take advantage of that speed, and you're seeing that in the tremendous growth.

Got it. And then just one follow-up. So with all the defense or A&D success more broadly, like, with your conversations with your customers, how are you guys feeling this with, like, some uncertainty around the fiscal '27 budget continuing resolution continuing through 2027? Do you guys think that, like, this momentum can continue even with some kind of lingering uncertainty around future budgets?

Yes. Austin, thanks for bringing that up. We are very, very broad-based in terms of the industry we serve, and A&D for us is very broad as well. While there might be some uncertainty around defense budget, we see tremendous opportunity in space exploration, in satellites, in drones, neoprimes, along with the primes. And then beyond that, we absolutely see non-A&D sectors like robotics and data centers also growing. So we are very confident that when you look out into the future that we would continue to be able to drive our goal of double-digit growth for the foreseeable future.

Our next question is from Brian Drab with William Blair.

I was just wondering if you could talk maybe for Dan, a little bit further out in terms of how you're thinking about the trajectory of gross margin and expense dollars as we think about 2027, maybe just directionally or at high level, like, different projects that -- and different expenses to think about as we're modeling?

Yes. So we're in the middle of establishing our 2027 budget and plans as we speak. But what I would tell you is we're going to continue to accelerate our investment in several areas. One is expanding our capacity. And the second is investing in our strategic pillars. So that's elevating our customer experience, accelerating innovation, expanding into production, and driving operational efficiency. So with the last one, our objective from a spending perspective is really to focus on how do we continue to increase our efficiencies as we invest.

I would expect next year from an operating expense perspective that the growth in operating expenses would be much closer to the revenue growth next year than what we saw this year as we start to make these investments. From a gross margin perspective, it really is going to depend on the mix that we're seeing and the different types of products that we have and how that plays out as we go through the year. But I would expect that we would be able to hold our gross margin percentage as we go into 2027.

Okay. I'll follow up more later on that, but that's really clear.

Our next question comes from Greg Palm with Craig-Hallum.

Sorry if this got, I guess, maybe explained or specified. I've been juggling a handful of calls this morning. But in terms of the -- maybe the sequential gross margin bridge from Q3 to Q2, a couple of hundred basis points, give or take. Dan, I know you listed a bunch of reasons, but just can you break that out between them? And then just in terms of sustainability or confidence in getting that gross margin level back up from here, maybe just a little bit more color on that, please.

Just to be clear, Greg, you're talking about Q2 to Q3 gross margin?

Correct.

All right.

Yes. So Greg, as we noted in our prepared remarks, demand has been exceptionally strong in our U.S. factory CNC. Revenues have grown over 20% for 6 quarters in a row. So while our automated model is designed to scale efficiently with this kind of volume increase, we, in this particular quarter, had to do some machine upgrades. We found opportunistically a window where we could do that. And some of our older machines were upgraded so that they could start to perform at the same rate as some of the newer machines that we have acquired more recently.

We've acquired over 40 new machines this past year. So that -- those expenses were incurred within the quarter and not capitalized. And then there were some some contract labor we had to bring in for our support services because we were chasing this growth and make sure that we could deliver everything we needed for our customers within the time frames that we provide them. Beyond that, there was raw material increases that we saw. So those are the pressures that we got in Q3 versus our Q2 performance.

Greg, just to provide more specifics, I would say there's about 100 basis points in those machine upgrades. There's probably about 90 basis points in that contract labor and the remaining in the material cost. I just want to reemphasize that the contract upgrades and obviously, the contract labor, those are all variable costs that we can choose to move over time. And it's really focused on making sure that we have the speed, the quality and the reliability for our customers.

Okay. So just to be clear, though, so does some of that -- I mean, you incur that completely in Q3 and then it goes away completely for, sort of, Q4 or go forward or...

Yes. Well, one thing I would say is we're always using contract labor, right, to vary depending on the volume that's coming in. But yes, there is some assumption in the guide that, that cost comes down as we're in fourth quarter. But what is, kind of, counteracting that, right, is the lower volume that is in the middle of the guide as well as seasonality. So we may have to use some of that contract labor and some of that overtime as our employees take off for the holidays.

[Operator Instructions] It looks like we have no more questions in the queue. This now concludes our question-and-answer session. Ladies and gentlemen, thank you for your participation. This concludes today's teleconference. Please disconnect your lines, and have a wonderful day.

Greetings, and welcome to the Proto Labs Q2 Fiscal Year 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' Second Quarter 2026 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 second quarter ended June 30, 2026. The release is available on the company's website as well as an accompanying slide presentation. 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.

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

Thank you, Ryan. Good morning, everyone, and thank you for joining our earnings call. We delivered another record quarter with record revenue and strong profitability. As we did in the first quarter, we achieved double-digit revenue growth, gross margin expansion and operating cost leverage. Importantly, our results show that our strategy is beginning to translate into broader business momentum with expanding relationships among larger customers, sustained strength in CNC Machining, meaningful acceleration in Injection Molding and early progress from the changes we are making in Europe.

Second quarter revenue per customer grew 17% year-over-year, reflecting continued momentum as we deepen engagement with enterprise accounts. More and more customers are innovating at the speed of software and Proto Labs is the perfect partner to help them rapidly iterate and move from design into production. Strong performance across our factory business reinforces our belief that the investments we are making are gaining traction in the areas where we have our strongest long-term competitive advantages.

Injection Molding was a standout performer in the second quarter, growing 13% year-over-year, with strength in telecommunications, driven by data center demand and aerospace and defense. This meaningful acceleration is important because it reflects the impact of the work we have been doing to improve quality, strengthen customer engagement and drive larger orders. Injection Molding remains one of Proto Labs' key differentiated capabilities and its accelerated growth is an encouraging proof point in our broader expansion strategy.

CNC Machining continued its strong performance with 20% year-over-year growth in our factory operation, driven by sustained strength in aerospace and defense, including drones, satellites and robotics. Our results this quarter also reinforce an important trend we are seeing across the business. Larger, more strategic customers are expanding both the breadth and the depth of their relationships with Proto Labs.

Let me provide you with some examples. AeroVironment, a customer for over 10 years relies on us for both prototyping and production. Lockheed Martin has expanded its use of our 3D printing capabilities as they build out a network of strategic partners in additive production, a critical capability per space flight. And with companies such as Anduril, Meta, Medtronic, Edwards Life Sciences, Boston Dynamics and many others, we continue to build credibility as a partner that can support rapid innovation and increasingly complex production needs.

The common thread is that our customers are asking Proto Labs to support more of their product life cycle. This is exactly the strategy we laid out earlier this year and it is why our teams remain focused on our 4 strategic pillars: number one, elevating the customer experience; number two, reigniting innovation; number three, expanding into production; and number four, driving operational efficiency. As it relates to elevating the customer experience, we made significant progress in the quarter with the rollout of our new European commercial structure on July 1, an important milestone in the broader transformation we have discussed over the past few quarters.

Previously, customers often worked with multiple regional entities to access our services while we operated across several ERP systems. By aligning our European operations into a single existing ERP platform and legal entity, our European customers with operations across multiple countries can now access our full manufacturing footprint through a single point of engagement. This simplifies how customers do business with Proto Labs reduces friction and makes it easier to leverage the full breadth of our capabilities. At the same time, it reduces internal complexity and supports greater operational efficiency in Europe going forward.

While we are making progress on our 4 strategic pillars, we also continue to drive organizational and operational changes to position Proto Labs for faster growth and improved profitability. To strengthen our commercial organization and better support our next phase of growth, we hired Bernardo Parlange as our Chief Commercial Officer in May. Bernardo brings a wealth of enterprise B2B commercial experience. He now leads sales, marketing and customer success, bringing these functions together under a unified strategy to improve commercial execution and build a more scalable model.

Manufacturing excellence also remains a key focus. To that end, in May, we hired Micah Roberts as Senior Director of Global Quality to help strengthen quality outcomes, production consistency and customer satisfaction. This work is especially important as we support larger production programs where repeatability, inspection, documentation and quality systems become increasingly critical to earning more share with customers. Separately, we announced the planned retirement of Mike Kenison, former Chief Operations Officer, effective July 1st. Mike was with Proto Labs for nearly 20 years, and he played a significant role in building and scaling our world-class global operations and positioning the company for continued success. We are grateful for his exceptional leadership and dedication. We have initiated a search for a new Chief Operations Officer and expect to name a successor in the coming months.

Returning to Europe and the transformation we outlined in February, we are pleased with the early progress we've made as revenue in the region grew 9% year-over-year, building on the momentum we saw in the first quarter. This reflects early results from go-to-market changes we began implementing late last year, including alignment to core industries and increased yet simplified customer engagement. I want to recognize Peter Horowitz, our VP of Sales and Customer Success in Europe and the go-to-market team for their strong leadership and execution as they drive the changes.

At the same time, Europe remains a transformation story. While the commercial initiatives we implemented are beginning to gain traction and recent demand trends are encouraging, profitability is still a work in process. Overall, Europe remains a mid- to long-term effort. Our objective is to turn what has been an earnings headwind into a contributor to future growth and profitability, and the second quarter was an encouraging step in that direction. In closing, we are pleased with our execution across the business, which led to another record revenue quarter and another important proof point in our transformation.

We delivered double-digit top line growth, a 340 basis point operating margin improvement and further expansion with larger strategic customers. The investments we are making are driving solid momentum. Injection Molding accelerated, CNC Machining remained strong, Europe grew nicely, and our teams are continuing to improve the way we serve the customers and operate the business. We continue to invest in AI to improve how we serve customers and operate internally. Proto Labs is at the forefront of what is called physical AI, the application of AI to the physical world, in our case, manufacturing.

While much of today's AI discussion focuses on software. Physical AI in manufacturing requires a deep understanding of processes, materials, machines and quality, combined with sophisticated software and data sets. It is a materially harder problem requiring deep expertise in both software and manufacturing. We invented digital manufacturing in 1999 and with nearly 3 decades of experience building digital manufacturing systems, our richest manufacturing data sets and the ability to translate designs into physical parts via true digital thread, we believe we are uniquely positioned to lead in this emerging category. The market recognizes the value that we deliver and the type of company we are becoming.

In July, Proto Labs was recognized by Time Magazine as one of America's best companies of 2026. This recognition is a testament to the dedication of our teams as we work to build a stronger, more innovative and more resilient company. At the start of this year, we began a significant transformation designed to position our business for faster growth and stronger long-term profitability. We are in the early stages of that work. But through the first half of 2026, we have demonstrated that Proto Labs can produce strong financial outcomes and transform the business for the future. This is the foundation for profitable growth and long-term value creation for 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 second quarter results, followed by our outlook for the rest of 2026. Second quarter revenue was a company record $149.3 million, up 10.2% year-over-year in constant currencies. By region, revenue in the U.S. grew 10.9%, while Europe grew 7.3% in constant currencies. Second quarter CNC Machining revenue grew 13.1% year-over-year in constant currencies. Our largest service continues to see strong growth, driven by both volume and pricing.

Demand remains exceptionally strong in aerospace and defense, most notably space exploration, satellites and drones. Injection Molding grew 12.9% in constant currencies. As Suresh stated, this is a meaningful acceleration and reflects the work we have been doing to drive growth in Injection Molding. We saw notable strength across end markets as well as in larger orders. 3D printing revenue declined 2.7% year-over-year in constant currencies, mainly due to a 6.7% decline in Europe. We continue to see strength in DMLS and MJF technologies in the U.S., driven by aerospace and defense and electronics, and we are investing to add capacity in those areas. Sheet metal grew 3.5% year-over-year in constant currencies.

On to profitability. Non-GAAP GAAP gross margin was 46.8% in the second quarter, 60 basis points higher than the first quarter and up 200 basis points year-over-year. These increases were driven by higher margins in both factory and network fulfillment as well as a mix shift. Second quarter non-GAAP operating expenses were $52 million, up $3.1 million compared to the prior year, primarily reflecting increased investment in demand generation, and higher contractor and professional services costs as we continue to invest in our strategic pillars.

On a percent of revenue basis, adjusted operating expenses were 34.8% of revenue, approximately flat sequentially and down 140 basis points year-over-year. This lower level of operating expenses is primarily due to targeted cost reductions we made earlier in the year in Europe as a part of our strategic reset, along with reductions in the U.S. as we reallocated resources to fund our strategic projects. We continue to ramp hiring for strategic project work. In addition, as a part of our drive operational efficiency pillar, we are in the early innings of finding savings and efficiencies that will allow us to invest more in growth areas.

Adjusted EBITDA was $25.1 million or 16.8% of revenue, up from $19.7 million or 14.6% of revenue in the second quarter of 2025. Second quarter non-GAAP earnings per share were $0.60, up $0.19 or 45% year-over-year, driven by revenue growth, gross margin improvements and significant leverage on our SG&A expenses. $0.60 is the highest adjusted EPS figure we've reported since the third quarter of 2020. We generated $15.4 million in cash from operations during the second quarter, and we repurchased $5 million of common stock. On June 30, we had $162.9 million of cash and investments on our balance sheet and 0 debt.

Our outlook for the third quarter and full year 2026 is outlined on Slide 13. For the third quarter, we expect revenue between $145 million and $153 million. At the midpoint, this implies 10% revenue growth year-over-year. Revenue grew 10% year-over-year in the first half of 2026. Supported by our first half performance, our third quarter revenue guidance and our typical sequential revenue decline from the third to fourth quarter, we are raising our full year 2026 revenue growth outlook to 8% to 10% year-over-year. We expect foreign currency to have a $400,000 unfavorable impact on revenue compared to the third quarter of 2025.

Our third quarter earnings guidance incorporates the following assumptions: non-GAAP add-backs will include stock-based compensation expense of approximately $4.2 million and amortization expense of $900,000, a non-GAAP effective tax rate between 23% and 24%. In summary, we expect third quarter 2026 non-GAAP earnings per share between $0.56 and $0.64. That concludes our prepared remarks.

Please open the line for questions.

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

Congrats on the results. Maybe just start with a sort of a differentiation between factory and network. I did not hear what factory network revenue actually was. It sounded based on your commentary, that factory was well led, but can you give us that? And then do you have the network margin as well?

Greg, thanks for the question. We are really excited with the 10% growth that we are driving, and we've driven this now 3 quarters in a row. The choice between factory and network is really a customer's choice. We fulfill the demand the way they want it to be fulfilled. We saw flat network revenues in Q2 A.s we continue to execute our strategic pillars and drive growth, we would be looking to drive growth in both the factory and the network. Overall goal is to continue to drive double-digit growth in the long term in any macro cycle. And we've done that for the past 3 quarters, and we're really thrilled with how we are performing right now on our strategic pillars.

Greg, the gross margin in the quarter for the network was 33.6%. That's both up sequentially and year-over-year.

Okay. I appreciate that. And then I think there was a couple of things that stood out across the revenue line. CNC remains strong. Injection Molding was really good to stand out, as you talked about. But even your new contacts, your new customers jumped up pretty nicely sequentially, and that's been kind of in a sequential decline for, I don't know, how many years. So I guess the question is, are you doing anything differently? Where are these customers coming from? What services are they using? And I know we're focusing a lot on revenue per customer and wallet share. But underneath the surface, is there also an increasing focus on going after new customers as well?

Yes. Greg, great question. As you think about our 4 strategic pillars, the first one is elevating customer experience, which is resulting in us removing friction for our customers that allows us to cater to our customers in a better way than we've done before. So that is really the focus that allows us to grow customers while retaining the customers and growing our wallet share with our customers.

And one example, Greg, of that in the quarter, we talked about it is we simplified the experience for the customers within Europe by moving to one legal entity as well as consolidating to our one ERP system, which means in Europe, customers have just one entity that they're interacting with, which simplifies a lot of things for them. We did that with our normal run rate of R&D expenses, and we will continue to make investments to make the experience for customers easier.

The next question is from Troy Jensen from Cantor Fitzgerald.

I also want to say congrats on the great results here. Suresh, if you could just maybe go through your counts about AI and how you're adopting it in the manufacturing organization. Can you just kind of help us -- I guess I assume you guys were using more AI to kind of reduce costs at the organization. But can you just help us with some of the applications that AI is benefiting on the manufacturing side?

Yes. Great question. We have been in the forefront of digital manufacturing. We invented it back in 1999 and have been improving it ever since. So what we have is a unique library of over 15 million CAD growing that allows us to actually use AI to make our offerings better. And our offerings are better in instant coating, our design for manufacturability, our sourcing and all of the aspects of how we run the business. So from a front-end side for the customer, we are making improvements in pricing. We are making improvements in instant coating, design for manufacturability and how we are sourcing and matching them with the right offering within our platforms.

And to take it further, when we talked about physical AI, that requires deep knowledge of all manufacturing processes. As you know, our manufacturing execution software, MES, is not off-the-shelf software like what other companies have. It's homegrown. We have patents on it. It's part of our trade secret. And that is what is allowing us to continue to innovate and build on and drive the connectivity between quality systems and sensors that we have in our factories all the way to how we can drive speed for our customers and speed is how we are winning in this marketplace. And AI applied to the physical world is allowing us to win with our customers with speed and accelerating their innovation.

We'll congrats to [ Mark and Mitch ] for all the work there. Have a quick question for Dan. Just G&A at the expense in the quarter gapped up a lot, can you -- is that a onetime event? Is that going to go back down here in Q3? Or is that going to be more sustained at this level?

Yes, I would say it's more sustained at this level. I think we talked about in the first quarter, we made a number of reductions, both in Europe and in the Americas to fund our strategic investment. And so what I would look at -- what I think you should model is our SG&A expense will be down slightly Q2 to Q3 to get into that earnings guidance range. Also, gross margin will be down slightly Q2 to Q3, and that kind of gets you in that earnings range. But Troy, we're focused on making the right investment with strong ROI moving forward. And so over the long term, I wouldn't necessarily peg where we are Q1 and Q2 as a percent of revenue from a dollar perspective is where we're going to be over the long term. We're making investments there.

Great. Well clearly, the investments are paying off. So keep it up. Maybe just one last question. I think I asked this a lot, but is there any way you guys can kind of help us with production as a percentage of sales? And I guess we'd love to see if it's growing for you guys. I'm sure it is, but is there any way you guys can kind of help parse that out for us?

Yes. We don't -- I'm not going to help you. We don't specifically measure as it relates to that. We're focused very specifically on winning a larger wallet share of our customers. As that happens, what comes with that is more frequent and larger orders over the longer term. And that really needs to get into sustainable results. Now that being said, I think there is a big opportunity for us, both organically and inorganically, to expand our capabilities in terms of what we do for production. And so over the longer term, we're going to continue to move into that area.

The next question is from Brian Drab from William Blair.

Sure feels different at Proto Labs the last few quarters. So congratulations on the very strong organic revenue growth that you guys are sustaining. I was wondering, Dan, you just mentioned inorganic. Can you elaborate on that? What you guys have in your minds in terms of what you would do inorganically to augment what you're doing for production?

Yes. It's all centers around the customer. So we want to make sure that we're meeting more and more of our customer needs, especially our larger customers, especially in areas in which we're seeing higher growth. And I think there's an opportunity -- we feel there's an opportunity to expand our capability of what we do. Troy just mentioned production. So there is a capability there that I think other companies may have that are attractive to us and attractive to some of our larger customers. So yes, we have a healthy pipeline of M&A opportunities, and the focus needs to be the return that we would get from those. And the highest return is going to come from serving our customers' needs, and that's our focus.

Okay. What I'm hearing is that you don't really want to tell me, which I get. But is it more -- you know what I mean, like do you not want to -- like is it another service? Or is it an automation of current services? Or just curious if it's like a completely different manufacturing process that you're thinking of adding?

No, it's not going to be outside any of the services that we do. But it's going to be -- I mean the opportunities we're looking at is to be able to do more production type applications for our customers in our key industries.

So do certifications and quality steps and metrology and...

All of those things, Brian.

Yes. Okay.

Just to be clear, Brian, we have certifications as well. We have AS9100. We got ITAR. We are working on [ CMMC ]. We've got ISO 13485 for medical. We have those certifications as well. As we think about expanding through acquisitions, it is going to be helping us to reinforce our strategic pillars. Moving into production is important for us and having companies that are actually doing that versus just doing prototyping and production will help us get focused and drive deeper share of wallet with the customers that we already serve.

Okay. Great. And then just specifically on Injection Molding and CNC, both saw this really strong step up sequentially from -- I mean, they've been doing great for the last 6 quarters generally. CNC 6 quarters ago was at $52 million, now you're doing $70 million. So on CNC, then you have the $7 million step-up sequentially. Is this kind of sequential growth, do you think, sustainable in either CNC or Injection Molding? Was there anything specific big orders from a big customer that resulted in such a strong sequential step up in the second quarter?

Yes. What I would tell you is the long-term growth is sustainable, and I think we're going to have larger pickups in certain quarters than we have in other quarters, right? But I think the long-term growth -- the long-term growth in these areas is sustainable. Maybe Suresh, if you want to talk about.

Yes. Let me give you Injection Molding as an example. It's a significant differentiator of what we have versus anybody else in the marketplace. And we've been methodically working on getting certifications. You mentioned that, Brian. So ISO 13485, traceability, process validation, first article inspection, PPAPs, all those capabilities we've built, so it allows us to serve our customer into the entire life cycle from prototyping all the way to production. We've got a handful of customers who are really pulling for us to be able to offer them more services, it's resonating.

Our strategy, which is to say we want to be from prototype all the way to production is resonating in med devices. It's resonating in drones. It's resonating in satellites. There are a lot of customers who want us to go down this path. And we see that the growth we saw in this quarter is very sustainable in the future. We are early cycle in these industries to get into production and provide a full life cycle of parts.

Okay. And then the last thing I just want to ask is that stands out to me is that the network revenue was flat, as you said. But the factory revenue was up 14%, if my model is correct here. So that tells me -- and you said people want speed. Are we getting back to an environment given the ISM Index is showing and other signs are showing that the manufacturing environment is more healthy. The people are not choosing the standard lead time but are more paying up for speed like the good old days at Proto Labs. That's what those data points are telling me.

And we're seeing that, Brian. So we are seeing that people are paying more for speed, whether that be in expedites or in our standard lead times, which, as you know, are faster than anything that's in the industry. So we are seeing strength in those areas.

Just think of us -- I mean, we are absolutely in the front end of innovation, and there is more innovation activity, and we're in the early cycle of a lot of industries which are early in innovation. You think about drones, robotics, data centers, satellites, rockets, all of those are early cycle and with a long tail ahead of us. So what we offer is a unique proposition. And we are, again, early in this cycle of the next several years of a lot of innovation that is waiting to happen in these sectors.

Yes. It feels like you're right at that intersection of all those end markets that are moving fast. And a manufacturing environment that is getting healthier and will generally probably move faster as they have more money and more competition picks up and the activity picks up. That all sounds very good.

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

I was hoping to get a little bit more color, if we can, on the strength you're seeing in some of the key verticals. I mean it sounds like you had a strong quarter in A&D. But I wonder if you could talk a little bit about the various growth vectors as it relates to the increase in the full year growth rate.

Jim, thanks for your question. We absolutely see a lot of strength in aerospace and defense. That sector grew almost 20% for us in Q2 and that is pretty broad for us. We don't break it out, but it includes satellites. It includes drones. It includes rockets, space exploration, satellites and a few other high-growth industries in there. As we indicated in the last question, we are in the early innings of a multiyear innovation cycle in all of these areas. And the focus there is from this present administration on increasing speed in defense innovation, in particular, absolutely plays to our advantage. So a lot of the defense majors and also the newer primes, they are very, very interested in what we are able to offer and partner with us to take not just into prototyping, but all the way into production.

Particularly, if you think about drones, many of them as if they work in sending their products into theater, they get feedback from the market right away. And the next iteration, in fact, next batch of production is an innovation or something changes, and it really suits us because we innovate at the speed of software as do these companies. We are able to partner with them to get it all the way from prototype to production.

And then Jim, some of the numbers. Aerospace and defense is about 25% of our total revenue right now. And I would also say that the other innovative areas outside of aerospace and defense, we're seeing growth in supporting data centers and the build-out of data centers as well as the innovation that's happening in robotics. So it's not necessarily just one player. There are multiple companies that we're working with in each of those industries and helping them innovate.

Got it. Nice acceleration in Europe and wondering if you feel like you have perhaps turned the corner there. It sounds like this is more operational or maybe the market -- the overall market demand has picked up. So I was hoping you could elaborate on that and maybe shed more light, Suresh, on what you highlighted, the drag on profitability in Europe and how much of that -- what that represents and how we should be thinking about improvements in this area over the medium term?

Yes. I think Dan and I will tag team on this. We made some changes in our go-to-market approaches in Europe end of last year, and we are seeing the fruits of that. So we have focused our sales and marketing efforts into industries that are meaningful for us, both A&D and medical, like in the U.S. are strong for Europe. And our sales teams are able to focus on a handful of customers and drive deeper relationships, and that is allowing us to start to accelerate our revenues. As we've said in the past, it's a multifold transformation. We need revenue growth, but we also need to be able to optimize costs, both our operating costs and our factory costs. So it is a medium-term effort for us to be able to get Europe back to profitability.

And we continue to make progress in terms of improving the customer experience in Europe. I talked about it earlier, but we're going to make improvements in that customer experience. In Europe, we -- customers now can order through one legal entity. It makes it simpler for them to do transactions across our entire suite of businesses, and that will help us grow with greater operational efficiency into the future.

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

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.