Proto Labs - Earnings Call - Q4 2019
February 6, 2020
Transcript
Speaker 0
Greetings. Welcome to Proto Labs Fourth Quarter and Full Year twenty nineteen Earnings Call. At this time, all participants are in listen only mode. A brief question and answer session will follow the formal presentation. Please note this conference is being recorded.
At this time, I'll turn the conference over to Dan Schumacher, Director of Investor Relations. Mr. Schumacher, you may begin.
Speaker 1
Thank you, Rob, and good morning, everyone. With me today is Vicki Holt, our President and Chief Executive Officer John Way, our Chief Financial Officer and Rich Baker, our Chief Technology Officer. This morning, before the market opened, Proto Labs issued a press release announcing its financial results for the fourth quarter and full year ended December 3139. The release is available on the company's website at prolabs.com. In addition, a prepared slide presentation is available online at the web address provided in our press release.
Before we begin, I would like to remind everyone that our discussion will include statements relating to future performance and expectations that are or may be considered forward looking statements and subject to many risks and uncertainties that could cause actual results to differ materially from expectations. Please refer to our earnings press release and recent SEC filings, including our annual report on Form 10 ks 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 within the Investor Relations section of our website for a complete reconciliation of non GAAP to GAAP results. Now I'd like to turn the call over to Vicki Holt, President and Chief Executive Officer of Proto Labs.
Vicki?
Speaker 2
Thanks, Dan. Good morning, everyone. Thank you for joining us on our fourth quarter conference call. I will begin with an overview of our overall business performance in the quarter. Then John will provide a detailed look at our fourth quarter and full year financial performance.
Rich Baker and I will then provide an overview of a major initiative for 2020. And finally, John will conclude with our financial outlook. This morning, we reported 2019 annual revenue of $459,000,000 or growth of 4% in constant currencies despite a challenging global economic environment. The fourth quarter played out as we expected with quarterly revenue of $112,000,000 and earnings per share of $0.63 at the midpoint of the guidance ranges we provided in our Q3 call. Macroeconomic headwinds across various industries and all the geographies we operate in have resulted in less activity from our customers in 2019.
As we expected with the softer year, we did not see a push from customers to complete projects by the end of the year, resulting in a relatively weak demand through the fourth quarter. Providing further color on the quarter, revenue was down 1% year over year in constant currencies. Slide five in our investor presentation highlights fourth quarter revenue by geography. Revenue in our largest market, The Americas, declined 1% versus the prior Q4. Demand was especially sluggish in our aerospace and manufacturing end markets, while automotive grew in the mid teens off relatively easy comparables in 2018.
Our European region produced Q4 year over year revenue growth of 4% in constant currency. Revenue in our medical end market showed strong growth, while automotive and consumer electronics declined. Our Japan region quarterly revenue declined 12% in constant currency. In Japan business environment, exports have weakened with the trade war between The U. S.
And China having an impact. Softer business spending is evident both in the latest purchasing managers' indices and industrial production has declined in recent months. Transitioning to revenue by service on Slide six. As stated earlier, we experienced relatively weak demand in the last quarter of the year. That rang true across all our services except three d printing.
Three d printing revenue in the 2019 increased 13% over the prior year. It is clear that our customers are utilizing three d printing more in their product development and understanding the specific use cases where three d printing can be utilized for production parts. Our leadership position in producing high quality parts is ringing through even in this tougher economic environment and positions us to capitalize on the future growth in this market as the technologies continue to advance. Injection molding revenue declined 4.5% compared to the fourth quarter of twenty eighteen. A portion of this year over year change is driven by a relatively strong Q4 in 2018, with the remainder driven by year over year declines in Consumer and Aerospace industry segments.
CNC machining revenues were up 1% year over year in Q4. Lastly, sheet metal contributed $5,200,000 of revenue in the quarter, representing a decline of 13% year over year. We've talked about our challenges with our sheet metal service in previous calls. While our sheet metal revenue is down year over year, the revenue was flat with Q3, showing signs that we have stabilized this service. Moving to our full year performance.
In 2019, Proto Labs
Speaker 0
continued to evolve to better serve the needs of our customers in a challenging macroeconomic environment.
Speaker 2
Full Our full year 2019 revenue was $459,000,000 representing 4% growth over 2018 in constant currency, as shown on Slide nine. Our full year non GAAP EPS was $2.79 down 8% versus 2018. In 2019, we expanded how we serve customers by launching production capabilities for three d printing, introducing precision color matching for injection molded parts and expanding our three d technologies through the addition of Carbon's digital light synthesis three d printing technology. These are in addition to other envelope expansions that we have developed in recent history, such as on demand manufacturing for injection molding and secondary operations such as pad printing, laser engraving and threaded inserts. Our challenge is that we have not been able to fully realize the returns on these service expansions.
Our ability to provide the customer experience our customers have grown to expect from us on expansions of our core service offerings has been impaired due to the limitations of our systems. The system limitations have also impacted our ability to realize the full benefits of our acquisition of Rapid Manufacturing. In addition, we've had to add manual processes to support the expanded offers. The net result is that we are not fully able to capture the market demand for these services while also increasing our cost structure to support manual process, impacting both the top and the bottom line. Later in the call, we'll be discussing what we're doing to address these challenges.
Although 2019 was a difficult year, we are confident in our future, and we will continue to expand our position as a recognized leader in the rapidly evolving digital manufacturing space. John will now provide an in-depth look at our Q4 and full year 2019 financials.
Speaker 3
John? Thank you, Vicki. I'll start with our Q4 financial results and then transition to the full year results for 2019. Revenue in the fourth quarter was $111,900,000 a decrease of $900,000 or 0.8% compared to the fourth quarter of twenty eighteen. Foreign currency represented a $250,000 headwind in the quarter due to the relative strength of the U.
S. Dollar. Our fourth quarter unique product developers served increased to $20,600 or growth of 1% compared to the prior year. As we look at the expense portion of the income statement, it is best to look at the sequential performance as we go from quarter to quarter as presented on Slide 14. Certain costs we attempt to flex with volume such as cost of goods sold, while others are more of a long term investment like sales and R and D.
Our non GAAP gross profit for the quarter was $57,500,000 resulting in adjusted gross margin of 51.4%, down slightly sequentially from 51.5% in the 2019 as we managed our cost of goods sold to correspond with the revenue. Adjusted operating expenses totaled $36,000,000 or 32.2% of total revenue for the fourth quarter of twenty nineteen. This compares to $35,100,000 or 29.9% of revenue in the third quarter. Adjusted sales and marketing expense was $16,800,000 or 15% of revenue in the quarter. The expense was flat with the third quarter, but increased as a percent of revenue due to the lower revenue base.
Adjusted R and D expense was consistent with third quarter at $7,800,000 We continue to invest in research and development at this level to expand our capabilities in all services and improve our customer experience and internal systems in order to support the future growth of the business. Adjusted general and administrative expense was 10.2% of revenue in the fourth quarter, up from 8.9% in the third quarter, largely driven by timing of certain expenses such as legal, consulting and audit expenses. On a GAAP basis, we realized the benefit in 2019 of $2,300,000 related to the reduction in the valuation of performance shares. The net result was adjusted EBITDA in the quarter of $28,300,000 or 25.3% of revenue compared to 27.5% of revenue in the third quarter. Our non GAAP effective tax rate was 20.9% in the 2019 compared to 18.3% in the prior year.
After adjustments, our non GAAP diluted earnings per share in the fourth quarter was at the midpoint of our guidance range at $0.63 representing a $0.13 per share sequential decline. The main factor in this decline was volume with revenue declining $5,600,000 from the third quarter. We were able to flex our cost of goods sold and hold the gross margin percentage relatively flat. However, the lower volume resulted in an zero one one dollars per share impact. Non GAAP EPS was down $0.11 per share compared to the fourth quarter of twenty eighteen.
The lower effective tax rate in 2018 represented a $02 per share benefit last year. The remaining $09 per share year over year decrease in EPS was driven by the following factors. First, we made investments to expand our manufacturing capacity, including the addition of our new CNC facility in late twenty eighteen, increasing our cost structure while revenue declined year over year, resulting in a $06 per share impact from gross margin compression. We also increased our investment in R and D to expand our product envelope and improve our e commerce experience, resulting in a $02 per share impact. Now turning to cash flow and balance sheet items on Slide 15.
Our business continues to produce strong cash flows, generating $32,300,000 in cash from operations during the quarter. Capital expenditures totaled $16,100,000 in the fourth quarter, consisting of investments to drive and support future growth, including IT systems and infrastructure, facilities investments and production equipment. We ended the fourth quarter with a cash and marketable securities balance of $174,000,000 Shifting now to our full year results on Slide 18. Revenue for the full year was $458,700,000 a 3% increase over 2018 or 4% growth in constant currencies. We served 47,800 unique product developers during 2019, an increase of 1,800 or 4% over 2018.
Non GAAP gross margin in 2019 was 50 to 53.9% of revenue in 2018. The year over year adjusted gross margin compression was driven by the following factors. Rapid Manufacturing had a 50 basis point impact on our consolidated year over year gross margin driven by lower volume in those services. The addition of our CNC facility in Minnesota had a negative 40 basis point impact on our gross margins in 2019. As we grow our CNC service over time, we'll be able to leverage this fixed cost.
Labor increases contributed a 65 basis point impact. Our labor as a percent of revenue increased due to wage inflation and manual processes we had to put in place to support our new services. Mix of business also had an impact on our gross margins. As we have stated in the past, our three d printing business operates at a lower gross margin than our injection molding and CNC services. The strong growth in three d printing has created a headwind on our gross margin.
We were able to mitigate this headwind through operational improvements. However, the net result was a 25 basis point negative impact to our overall gross margins. The remaining 10 basis point compression came from other investments in our operations. Non GAAP adjusted operating expenses totaled $144,500,000 or 31.5% of total revenue in 2019. This compares to $137,200,000 or 30.8% of revenue in 2018.
Adjusted sales and marketing expense was $70,300,000 or 15.3% of revenue in 2019 compared to $66,600,000 or 14.9% of revenue in 2018. We continue to invest in sales and marketing to attract new customers and retain our existing customers. As the industrial sector softened in 2019, our customers had fewer projects during the year. As a result, we increased our sales and marketing investment to attract more new customers. While in the short term, this increased our sales and marketing costs, we believe many of these customers will continue to do business with us in the future years.
As the industrial sector improves and these engineers have more projects, we will reap the benefits of a larger customer base in the years to come. Adjusted R and D expense was $30,800,000 or 6.7% of revenue compared to $27,200,000 or 6.1% of revenue in 2018. As we have stated in the past, our R and D investments consist of activities to expand their envelope by adding new services and materials, investments to improve our existing services and software development supporting our e commerce platform, manufacturing software and internal systems. Vicki and Rich will provide additional details on our system investments in a few minutes. Adjusted general and administrative expenses was flat at $43,300,000 representing 9.4% of revenue in 2019 and nine point seven percent of revenue in 2018.
During 2019, all of our operating costs, including G and A, included a benefit related to the reduction of incentive compensation compared to 2018. The net result was adjusted EBITDA in 2019 of $121,400,000 or 26.5% of revenue compared to 28.4% of revenue in 2018. Our non GAAP effective tax rate was 21.6% in 2019 compared to 20.9% in the prior year. Taking all this into account, our non GAAP EPS was $2.79 in 2019, down $0.25 per share compared to the prior year. The year over year decline was driven by the gross margin compression we discussed earlier and continued investments in sales and marketing and research and development.
Despite the economic environment, we generated $116,100,000 in cash from operations during the year. Capital spending was $62,200,000 We also returned capital to shareholders by repurchasing $33,500,000 of common stock during the year under our $100,000,000 stock buyback program and have $50,000,000 remaining under this program. Our cash and marketable securities balance of $174,000,000 is up from $155,000,000 at the end of twenty eighteen. Now I'd like to turn the call back over to Vicki for an overview of our top priority in 2020.
Speaker 2
Thanks, John. As we enter 2020, the long term future for Proto Labs is more exciting than ever. Our ability to fulfill our customers' prototyping and low volume manufacturing needs through our unique e commerce and digital manufacturing solution puts us at the forefront of the Manufacturing four point zero revolution. However, our customers have been telling us they want more. They want more in terms of services and capabilities, and they want more in terms of the e commerce experience we offer.
Proto Labs was founded twenty years ago with the mission of providing custom injection molded parts to entrepreneurs who found it difficult to obtain prototypes to advance their inventions. As we have progressively added more services and capabilities, our customer base has evolved and broadened. In addition to servicing individual product developers making individual parts, we now also serve companies that are working on projects consisting of multiple parts in different services. In order to continue to provide an excellent experience for the broad use cases of our customers, we need to evolve the way we engage and serve our customers. With our digital e commerce model, our customer interface and supporting systems are essential to the customer experience.
As we look forward to the new decade and beyond, we have realized that we need to evolve our systems to capitalize on the market opportunity and properly serve the long term needs of our customers. With that, I'm going to turn the call over to Rich Baker, Chief Technology Officer, to speak about an exciting development for Proto Labs that will impact 2020 and beyond. Rich?
Speaker 4
Thank you, Vicki, and good morning to everyone on the call. I'm here to discuss a project which is a step change in our digital thread we call Proto Labs two point zero. As Vicki mentioned, Proto Labs two point zero is a project that we've undertaken to enhance and evolve our systems and processes to support our customers and our strategy for the next decade and beyond. We've been having been responsible for re architecting systems in the past, I have seen that the right systems and architecture are critical to customer experience, sales effectiveness, organizational efficiency, and financial success. Labs two point zero builds off the digital manufacturing model that is at the core of the company and updates the customer interface and supporting systems that will allow us to expand our offerings efficiently.
I joined Proto Labs in 2016 because I saw so much potential to expand the business to better serve customers. I've been a Proto Labs customer since 02/2007. I was well aware of the capabilities as well as the limitations of Proto Labs' offerings. After I joined Proto Labs, I did an assessment of the state of our systems. I was struck by the amount of energy and resources required to make even relatively small changes to our offering.
I pretty quickly came to realize that the systems, largely homegrown, had evolved over the past twenty years, closely tied to a narrow concept of Proto Labs' initial manufacturing process. The system was incrementally refactored and expanded to that functionality as the company's capabilities evolved, but this created technical debt. Continuing down this path would have been painfully slow or maybe even impossible. We needed a different approach so that our systems could support and evolve evolving customer needs in a scalable fashion. So now let me share some of the exciting details of this project, which we plan to launch in the second half of this year.
There are two main parts to Proto Labs two point zero. The first is e commerce, our interface with customers. And the second is our back end systems, which support the operations. We are moving to a modern software architecture and advanced development practices. Our approach is to focus our software development on building pieces of our digital thread which are unique to Proto Labs.
Then we will integrate these with commercial packages for standard functionality. We started with e commerce because this is the most impactful to the customers and will provide the greatest benefit to the business. As we were architecting this change, we realized the improvements we're making and presenting our capabilities we're going to require an advancement in our back end support systems as well. To do this, we brought in resources to help with this approach, both in thought leadership as well as staff augmentation. This approach allows us to gain expertise leveraging state of the art software architecture and techniques, expanding our capabilities, accelerating the development, and then transferring knowledge to our staff.
To help contextualize what we're talking about and why we need to change, let me give three examples. Our current system was built to support an individual ordering one unique prototype part in one service. Our growing production business has additional requirements, which are not currently digitally enabled. ProLabs two point zero will support customers managing multiple parts and different services, supporting projects from prototype through to production. Our current system has limited ability to manage information associated with manufacturing quality, which is less important for prototype parts, but is required for production orders.
The future interface will offer an intuitive approach to capture this information from customers and allow it to flow through our front end and to our manufacturing execution system. The legacy architecture that our current e commerce platform is built on is dated. The front end systems share data structures and resources with the back end, making even small changes on the front end potentially impactful to the back. The new e commerce is a hybrid cloud platform, us to make improvements much more rapidly. Our new architecture will enable us to continuously integrate and deploy in a high availability environment.
These are just a few examples of the advancements we are making. Our existing e commerce architecture cannot sustain the progressing needs of our broad customer base. Utilizing a hybrid cloud microservices architecture will allow us to benefit from all the modern software capabilities you experience in your favorite e commerce websites. We'll be able to continuously test and evolve ideas. We can utilize enhancements from outside Proto Labs for standard functionality, allowing us to focus our resources on new capabilities specific to our digital manufacturing model.
All of this will smooth the path for advancements of our existing services as well as new offers moving from R and D into e commerce. It will also allow us to integrate our existing acquisitions into the platform that was not possible in the existing environment. Ultimately, ProLabs two point zero enables us to provide additional services for our customers, which they want much faster, which in turn enhances the value that we deliver to our customers. These improvements will support the growth of the business well into the future. Now Vicki will discuss the long term benefits of Proto Labs two point zero.
Speaker 2
Thanks, Rich. I am very excited to share with you some of the benefits of Proto Labs two point zero as outlined on Slide 22 of our earnings presentation. As Rich described, this project was initiated by our desire to better serve our customers and was expanded when it presented the opportunities to better serve our employees. We are building out a customer facing and back end systems to support our strategy now and into the future. The long term benefits of this important project include tremendous improvements in the customer experience, our internal productivity, the speed and scalability of the business, and expanded internal business insights.
The first benefit Proto Labs two point zero will offer is a much improved customer experience. Proto Labs' go to market strategy continues to evolve to be more customer focused, and this project is an example of that. The new e commerce platform will be more intuitive than the legacy platform with fewer clicks required to place an order and an overall better buying experience. We're also adding enhancements, which will make Proto Labs more valuable to our customers when managing and executing their projects to take their ideas from concept to production. These improvements are examples of how we're listening to our customers and evolving our business to support their needs.
The rewards for these improvements will be higher customer satisfaction and improved customer retention. Proto Labs two point zero will also enable improved internal efficiencies over time. In addition to improving the customer experience, Proto Labs two point zero will equip our employees to more efficiently do their jobs. One area in which we see these improvements is in our sales and customer support functions, with a reduction in manual work associated with service expansions. Additionally, the systems enhancements will allow us to eliminate some of the manual processes we've had in place on recent envelope expansions.
Our software resource productivity will also improve with the new environment, requiring less time and resources spent on system maintenance, allowing our teams to focus more on innovation and future growth. And finally, the updated architecture will also make it easier to integrate acquisitions, including rapid manufacturing, providing leverage of our cost structure. Another benefit of Proto Labs two point zero will be the ability to improve the speed and scalability of our business. With the new architecture, we will be able to expand our existing envelope and launch new service offerings to customers more efficiently. After our system is live, we'll be able to launch new offerings and additional services online at a fraction of the time and complexity allowed by our existing systems.
Not only will the speed at which we publish the offering improve, the user interface will be more intuitive and the back end support system to support the delivery of the service to the customer will be more efficient. Lastly, Proto Labs two point zero will enable improved business insights. This project will provide easier access to data across the enterprise driving value added analysis. Vertolabs two point zero will provide the integration of our marketing platforms and our CRM system, providing additional customer focused business insights. The improvement in the workflows across services, including expansion of services, will allow for improved operational reporting.
We'll also be able to continually evaluate and improve our offering in the marketplace and delight our customers. In summary, Proto Labs two point zero represents an exciting future for Proto Labs. When Proto Labs was founded in 1999, it was absolutely a revolutionary and novel business model. And Proto Labs continues to be regarded as the leader and innovator in the industry. To remain the leading e commerce digitally enabled supplier of custom manufacturing parts and services, we knew we had to change and evolve.
As Rich stated, Proto Labs two point zero will build out our system to better support our customers and further our strategy. I am very excited about the future of Proto Labs and the opportunity to serve our customers in a much broader manner. I'd like to thank our teams for their extremely hard and diligent work on Proto Labs two point zero to date and for their continued efforts as we approach our planned go live in the second half of the year. Now John will provide our financial outlook for the first quarter of twenty twenty. John?
Speaker 3
Thank you, Vicki. Our guidance for the 2020 is summarized on Slide 24. We currently expect first quarter revenue to be in the range of 111,000,000 to $117,000,000 This revenue guidance reflects the current global economy, specifically the muted manufacturing and industrial production data. We've also estimated that foreign currency will not have a significant impact on our first quarter revenues compared to the prior year. Moving to earnings guidance.
Our compensation expense will increase sequentially driven by accruing incentive compensation closer to target as we begin the new year, the seasonality of payroll taxes in the first quarter, and a partial quarter of our annual merit increase. The impact of these items is currently estimated at $08 to $0.10 per share. Our non GAAP add backs for the quarter will include stock compensation costs of approximately $3,500,000 and amortization of approximately $750,000 We currently estimate our non GAAP tax rate to be approximately 21% to 22% in the first quarter. Taking into consideration all the above, we expect our quarterly non GAAP EPS to be between $0.50 and $0.58 per share in the first quarter. In addition to the first quarter guidance, we also want to provide some guidance on the financial impacts of Proto Labs two point zero as we prepare to launch in the second half of the year.
We estimate that the project will result in increased expenses of approximately $10,000,000 during the course of 2020. These expenses consist of costs we will incur related to system preparedness, such as training and change management activities, including overtime, travel, and contractor support. They also include consultant support leading up to the system launch for a period of time after we go live. These costs will largely be capitalized until we go live and expensed during the support period. We will have a software asset on our balance sheet that we estimate will be approximately $40,000,000 that we will begin amortizing when the system is placed in service.
The recurring quarterly amortization is estimated at 1,300,000.0 to $1,500,000 Earlier in the call, Vicki discussed the benefits associated with this project. These benefits are longer term in nature with the amount realized in 2020 expected to be minimal due to the second half timing of the system launch. We are managing the business for the long term. We have embarked on the Proto Labs two point zero project to provide the foundation that will allow us to serve our customers more holistically and capitalize on the current and expanding market opportunities. Proto Labs two point zero will impact our financial performance in 2020.
However, the project is necessary for us to realize our full potential as a business. That concludes our formal remarks. Now we'd be happy to take your questions. Rob, can you please open up the line?
Speaker 0
Thank you. We'll now be conducting a question and answer session. Our first question is from the line of Brian Drab with William Blair. Please proceed with your question.
Speaker 5
Hi, good morning. Thanks for taking my questions.
Speaker 3
Morning Brian. Morning.
Speaker 5
Hi. So John, first question, just related to one of your last comments there. You said that Proto Labs two point zero would affect financial performance in 2020. You gave the $10,000,000 in expense, but how does this affect financial performance more broadly, gross margin? Mean, it going to
Speaker 3
take some
Speaker 5
of the focus off of revenue growth? And just can you talk a little bit how it affects financial performance more broadly?
Speaker 3
Yes. So I think, you know, I've quantified the direct impact of the project. And, you know, that'll be spread out kind of throughout the year as we approach, the go live date. It is a significant project for the company. And with that, we've got resources on it, and have had resources on it in 2019 as well.
So it does have an impact to the business. You know, we are continuing to manage around it. We still are delivering parts and serving the customers and making sure we keep our focus there.
Speaker 2
I'll add a little color to that, Brian. This is a transformational project for the company that's going to set us up for the next decade. And it's one that we have prioritized because we know that it is necessary for us to be able to continue to service our customers the way they want to be serviced and also be able to expand our service offering for the growth that our investors expect from this company. So we prioritize that over, frankly, other priorities in 2019, and we'll be doing the same in 2020. Now that's not to say that we have continued to add service expansions as we've outlined, but the ability to fully realize the benefits of those service offerings have been impacted by the fact that our systems have not allowed us to create the kind of seamless customer experience that our customers expect from Proto Labs.
So this new system will allow us to do that, allow us to capitalize more on the market opportunity that our service offerings have created. And then on the margin side, as we've added these things, we've had to put manual processes in place to supplement some of the deficiencies in the system. With Proto Labs two point zero, we'll be able to automate a lot of those manual processes, in sales service as well as some that are in the fulfillment back end side, that's going to give us the productivity improvements to begin to really drive some of that margin. So, we've prioritized this and it's for very, very good reasons to set us up for the next decade.
Speaker 5
And can you just say again what the timing is? When does this project get completed and it's fully implemented?
Speaker 2
Yes. So we expect it to go live in the second half. And as we proceed throughout the year and meet milestones, we'll be able to be more clear and you'll hear more about that.
Speaker 5
Okay. But this isn't something that you would expect to the work on this project to be continuing into 2021, 2022? This is something you're going to get done this year?
Speaker 2
The go live will be this year. Now there's always work once we go live. So for example, the rapid manufacturing acquisition is not in scope on go live. That will come after. We've talked about the fact that this system will allow us to integrate acquisitions much more efficiently.
So it made sense to get this in place before we did that integration. In addition, we've been working on some of the software enhancements and quoting enhancements in the sheet metal business that will be able to be rolled into that when we bring that business into the fold after the go live.
Speaker 5
Okay. And then just one follow-up related to that. One of the benefits as you're saying here is going to be easier integration of acquisitions. Obviously, there's been some challenges with the last two acquisitions. Can you just tell us a little bit about what types of acquisitions you'd be looking at, at this point?
And also as you answer that, I'm just thinking about what services you can add at this point given you're operating off a much bigger base now. And I'd imagine any new service that you would go out and look to acquire would just be, you know, by definition would have a lower, you know, smaller addressable market than things that than the ones that you've added in the past.
Speaker 3
So I'll take that, Brian. You know, so I think right now our focus is on getting this project done. We are continuing to look at our strategy and ultimately how we serve our customers better over the long term in helping them get their products to market. There's a lot of things that could go into that. As we look at those strategies, we'll continue to evolve that.
But right now, I wouldn't expect acquisitions to be our primary focus. The primary focus is going be on getting this project done.
Speaker 5
Okay. All right. I'll follow-up later. Thank you. Thanks.
Speaker 0
Our next question is from the line of Andrew Dascari with Berenberg. Please proceed with your question.
Speaker 3
Yes. Can you hear me? Yes.
Speaker 6
Hi, good morning. I just wanted to quickly ask one follow-up on Proto Labs two point zero. Will that help you potentially accelerate your on demand business longer term? And then secondly, I'm not sure if someone addressed this already. I was on another call.
Are you seeing any impact in terms of demand from the coronavirus outbreak even though you're not in China?
Speaker 2
Yes, okay. I'll take a stab at that. Rich, you might want to add some additions as we talk about the production business. Clearly, one of the things we're addressing in the ProLex two point zero e commerce experience is the fact that we service more than just a product developer. We service a number of personas, particularly as you launch into the production business.
So we service supply chain managers and procurement. And by the way, we need to serve up our production offer in a way that's understood by those buyers. So we knew that coming in, and we've designed those kinds of enhancements in the new e commerce experience to make it easier for our customers to understand the offer, to buy the offer, and to take advantage of it. Rich, I don't know if you want to add anything to that on on demand manufacturing or production.
Speaker 4
Thanks, Vicki. Couple things. One, there are a lot of requirements for production that are not directly related to the part that we produce. So the quality of part we produce is quite good. But once you go into production, there are a lot of things related to quality and certifications that need to be managed.
And if you can't demonstrate that you've kept your process under control and you have all the documentation to back that up, that represents risk for someone in their supply chain. And so we need to be able to show all of those other things that supply chain type people need, and we need to also be able to deliver those on our back end in a digitally enabled way. And so that's what we're building out here. So that should help us across all services adding production capabilities.
Speaker 2
Good. And then I'll just address coronavirus. So let me just answer that by saying, as you know, one of the advantages that the Proto Labs rapid turn model provides our customers is its ability to respond to supply chain disruptions. So that's clearly a value proposition that we deliver customers. That being said, as of this date, we have not seen a major impact as a result of the coronavirus.
But we do want to make sure that our customers understand that this is something we can do to help them should they have a supply chain disruption that presents challenges because our injection mold tooling, our injection mold parts, CNC parts are all made in country and we can respond pretty rapidly.
Speaker 3
Great, thank you.
Speaker 0
Our next question is from the line of Greg Palm with Craig Hallum. Please proceed with your question.
Speaker 7
Yes, thanks and good morning everyone.
Speaker 2
Good morning, Greg. Good morning.
Speaker 7
So thanks for all the details on Proto Labs two point zero. So I mean, I think you've given us enough where the why behind It's not entirely clear of the why now. So was there a specific trigger that really influenced the timing of this announcement? Or maybe a little bit more color on the why now would be helpful.
Speaker 2
Why the announcement? The why, we've been working on this for a while. Recognized really back in 2017, we needed to evolve our e commerce experience, and so this has been a project we've been working on for some time. The why now is we're about to go we're going to be going live this year. We really wanted you to be aware of how this event will impact our 2020 financial performance.
But also, we're so excited to talk about how it's going to set us up for the next decade as well. So why now is we're pretty firm on where the timeline is for go live and it's going to impact our performance. John, I don't know if you want to add anything No, I
Speaker 4
think that covers it.
Speaker 7
Well, yes, sorry, I guess I'll not necessarily just the announcement. I'm just more curious, it sounds like you've been making some investments in over the past few quarters, but you're certainly accelerating things here with a pretty big investment spend. So the question is, why now in terms of really accelerating those investments? Or was this sort of the plan all along?
Speaker 3
Yes. I think as Vicki mentioned, we were looking at the system. As we were trying to make changes, and Rich addressed this on the call as well, as we were trying to make changes, it was just cumbersome and not efficient, and we weren't building on a stable foundation. So I think maybe Rich, I'll turn it over to you and let you add some further color.
Speaker 4
So everyone on this call is either an investor or thinking about being an investor. And so we all appreciate what a good business it is. So how do we get more of that business? This is the thing that will help us get more of that core business that has nice margins and that we can expand and that customers are asking for. So sooner would have been better.
But there's only so fast you can produce and test and validate these types of business systems. And so now we're at a point where we have some confidence and we have dates and we can estimate what the impact is on the full year. And so it's time to talk about it. And, you know, we've been going, I would say about as fast as is prudent. As I mentioned, we've done a lot of things to accelerate that with staff augmentation, with other people we've brought in.
So we've gone about as fast as possible. It would have been even better to have it done two years ago or five years ago, but I can't I don't have a time machine.
Speaker 2
The other thing I'll just add is this transformation that we're going to is not atypical of startup e commerce digital businesses. You often start a business, and we started back in 1999, and it was basically a homegrown architecture and software base. There's been technology has evolved over the last twenty years, and there's modern technology, state of the art technology that we can deploy that's really going to speed up our ability to respond and build this robust e commerce experience that customers, they definitely expected in a B2C world. And more and more, we're going to be leading that in a B2B world. And we are really excited to be able to be in a position to do that.
Speaker 7
Okay, makes sense. Thanks for the color there. And John, to be clear, I mean, in terms of financial performance implications, are we expecting any top line hit from this or is it really too early to make that estimate?
Speaker 3
Yes, I think it's tough to assess that right now. And we provide our quarterly guidance. I think as we go through the year and assess how the market's performing, we'll keep you updated on what that guidance will be. But as of right now, we're looking at it as a benefit for customers. I think they will like the changes in the experience, but we'll continue to assess that.
Speaker 7
Okay. And so the Q1 twenty twenty guidance for revenue, there's no inherent impact either positive or negative on No. This,
Speaker 3
It won't impact Q1 at all.
Speaker 2
No. Q1 forecast is based upon our best available information at this point in time based on where we are in the quarter. And as you know, we're an on demand manufacturer with only a six to seven day backlog. So we look at the projections activity, in the regions in which we operate and a number of other indicators to come up with what we believe is the best quarterly revenue forecast based on where we sit today.
Speaker 7
Okay. And just last one as a follow-up on that. I mean, any change in sort of the broader macro or at least order environment relative to kind of what you saw in Q4?
Speaker 2
Yes. The only thing I'll say is that as you typically in our seasonality, January starts pretty soft. This week, where the holidays fell, the January was incredibly soft. So we haven't really in total seen a big pickup from where we were in the fourth quarter. John, I don't know if you
Speaker 3
have anything to add to I think the only thing I'd add is that's not atypical from any other year. January always starts a little slow for us, and it ramps as we go through the quarter. The difficult part for us is what's the slope of of that ramp through the quarter. We don't have great visibility to March. So, yes, we've given you the best information we have right now.
Speaker 7
Yes. All right. Understood. Thanks for the time.
Speaker 2
Thanks, Greg.
Speaker 0
Our next question is from the line of Jim Ricchiuti with Needham and Company. Please proceed with your question.
Speaker 8
Hi, thanks. Good morning. So it sounds like you're being purposely vague on when this goes live. I think I can understand why. Would you anticipate some benefit from this two point zero in Q4 or is this the benefit that you're anticipating is really looking out to 2021?
Speaker 3
Yeah, I think again, I think as we view it, we think it'll be a positive change for our customers. But it will be a change, right? And in general, people don't always like change at the beginning, they do over the long term. I think for modeling purposes, as we're looking at it, and as I said in our prepared remarks, I'm not anticipating a big benefit in 2020. I think the benefits will come in 2021 and beyond.
Speaker 8
And is this going to be phased in? I think if I heard you correctly earlier, the rapid piece of this will be implemented in 2021. Do you anticipate having this phased in for the three d printing portion of the business or is this really focused mainly on the core legacy business?
Speaker 2
Yes, three d printing is in scope for go live. That'll be you'll the benefits of that in our integrated system with customers right from the beginning. It's just the sheet metal and expanded CNC offering from the rapid manufacturing, which will be integrated post go live.
Speaker 8
Okay. John, I heard you earlier, I thought I heard you say that the expense associated with this which I guess you called out in 2020 is about $10,000,000 spread out over the course of the year. Can you give us some sense as to some of that expense that is being incurred as it relates to your guidance for Q1?
Speaker 3
Yes, there's a little bit of expense in Q1. It actually starts to pick up more in Q2 as we're doing testing and training and getting ready for go live in the back half. So and then, during the period, right after go live, you've got a support period planned in there and the amortization. So I think we'll be able to provide more color as we go through the year and more visibility as we get into the guidance for Q2.
Speaker 8
And is this being implemented outside of The U. S. In Europe?
Speaker 2
Yes, it'll be implemented in Europe and in North America. Japan will follow in a second phase. So it will just be Europe and North America.
Speaker 3
And the timeline for Europe is the same as North America? We'll provide those details as we go further and progress towards our go live date. Thank you.
Speaker 0
Thank you. At this time, I'll turn for closing remarks.
Speaker 2
Great. Thank you for joining us today. We are confident in the long term prospects and the strength of our business model. Our differentiated technology enabled digital manufacturing platform has demonstrated the ability to help companies and entrepreneurs get their products to market faster than their competition. With Proto Labs two point zero, we continue to innovate with our technology interface and service offering to enhance our customers' experience.
I want to thank the Proto Labs employees for their continued efforts as well as our customers for their support. We look forward to updating you on our progress during our next call. Thank you.
Speaker 0
Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.