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Proto Labs Inc (NYSE:PRLB)
Q3 2019 Earnings Call
Oct 24, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings. Welcome to Proto Labs Third Quarter 2019 Earnings Call. [Operator Instructions] Please note this conference is being recorded.

At this time, I will turn the conference over to Daniel Schumacher, Director of Investor Relations. Mr. Schumacher. You may begin.

Daniel Schumacher -- Director of Investor Relations

Thank you, Rob, and good morning, everyone. With me today is Vicki Holt, our President and Chief Executive Officer; and John Way, our Chief Financial Officer.

This morning, before the market opened, Proto Labs issued a press release announcing its financial results for the third quarter ended September 30th, 2019. The release is available on the company's website at protolabs.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-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 within the Investor Relations section of our company website for a complete reconciliation of non-GAAP to GAAP results.

Now I'd like to turn the call over to Vicki Holt, President and Chief Executive Officer of Proto Labs. Vicki?

Victoria M. Holt -- President and Chief Executive Officer

Thanks, Dan. Good morning, everyone. Thank you for joining us on our third 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 third quarter financial performance as well as our outlook for the fourth quarter.

This morning we reported record quarterly revenue of $117.5 million, representing growth of 1.8% over the third quarter of 2018 or 2.5% in constant currencies. Our adjusted earnings per share were $0.76, representing a $0.05 per share improvement over the second quarter of 2019.

Our business grew year-over-year in the third quarter despite an industrial environment that has continued to soften. As you are all aware in September, the ISM US manufacturing purchasing managers index registered its lowest monthly measure since 2009. Both US manufacturing production and capacity utilization for the industrial sector decreased in the quarter consistent with what we've said in the past our business is negatively impacted by a decline in manufacturing activity and industrial production.

Our customers are taking a more cautious approach in general including R&D projects and that's reflected in our year-to-date financial results. 2018 was a very strong year for Proto Labs for our customers and for manufacturing and industrial activity. If you recall tax reform had just gone into effect and business confidence and investment were both higher than current levels.

To demonstrate the impact of the economy to our business our top 100 customers grew nearly 20% in the first nine months of 2018. In the first nine months of this year revenue generated from those same 100 customers was essentially flat. All these customers remain key Proto Labs customers, but their investment levels have varied due to the economic environment. Dissecting our revenue a little further.

The year-over-year revenue growth in our legacy services in the quarter was approximately 4% in constant currencies. Our rapid manufacturing business in New Hampshire declined 14.3% compared to the prior year as we look at third quarter revenue by geography.

The Americas, our largest market produced revenue growth of 2.4% over the prior year excluding the acquired services our legacy services in the Americas grew 5% year-over-year. In the Americas, Medical, our largest customer industry continues to grow nicely, while the biggest year-over-year decline was in automotive. Aerospace also declined slightly compared to the third quarter of 2018. Our European region produced year-over-year revenue growth of 2.1% in constant currencies.

However, due to currency headwinds, we reported a decline of 2.6% in dollars for the region. As it relates to customer industries, we saw strong performance in medical and aerospace and year-over-year declines in automotive manufacturing and computer electronics. Our Japan region grew 7.4% in constant currencies.

Transitioning to revenue by service, injection molding revenue increased 2.8% compared to the third quarter of 2018. CNC machining declined 1.5% year-over-year impacted by foreign currency exchange rates and a decline in our acquired CNC Services. Third quarter 2018 CNC organic revenue growth was 29% and produced a record quarterly Proto Labs record creating a difficult comparison for the most recent quarter.

3D printing revenue in the third quarter of 2019 was a Proto Labs record and increased 14.8% over the prior year. The 3D printing market continues to expand and we continue to rapidly produce 3D printed parts with outstanding quality and repeatability.

Since our acquisition of Fine Line in 2014, we continue to add new 3D printing technologies and capabilities to meet our customers' needs for both prototypes and production parts. Two particular 3D printing technologies that have been extremely successful for us recently are our metal 3D printing offer and Multi Jet Fusion technologies.

These technologies expand our ability to deliver production solutions. Our offerings continue to provide exceptional value to customers as industry demand for metal 3D printing and Multi Jet Fusion parts grows. We will continue to aggressively pursue new and differentiated 3D printing technologies to serve our customers as the 3D printing market continues to evolve and expand.

Lastly, sheet metal contributed $5.3 million of revenue in the quarter, representing a decline of 18.2% year-over-year. As we stated previously, our rapid acquisition has not met our expectations. Following the acquisition in December of 2017, we spent 2018 adjusting the offer and manufacturing operations to one which is aligned with an e-commerce scalable digital manufacturing model.

Consequently, in 2019, we moved away from some complex business, which was not scalable and did not fit into the envelope of our new offer. The intended result was to increase there was an increase in volume through our cross-selling efforts and a lower average order value.

We are experiencing some success in our cross-selling efforts with greater than 20% increase in the number of product developers using the acquired services. However, the drop in average order value was greater than anticipated.

Even with the increase in product developers utilizing the acquired services, the penetration into our existing account base is in the single-digits, which creates a significant opportunity in the future. While the opportunity remains strong, we are finding the unseating existing sheet metal vendors in this difficult macroeconomic environment has proven to be a challenge.

The difficult environment will not last forever. And as we create a differentiated service in the market by integrating sheet metal into our customers buying experience, while achieving market leading on-time delivery results with stated lead times, we will ultimately drive the necessary volume through these operations.

We are very confident we have the right actions in place to improve the performance of these acquired services. I've been personally responsible for several major business turnarounds in my career and the key to success are a keen focus on the earnings drivers of the business.

In Proto Labs case this reside in driving the cross-selling across our vast customer base and developing innovative ways to flex costs with the variability of demand, which is inherent in an on-demand manufacturing business. There are actions under way in both these areas, which I am confident will yield results. Feedback from our customers confirms these services are valuable to them and they value the accelerated innovation and reliable on-demand manufacturing services at unprecedented speeds. We will remain focused on improving this business over the long-term and delivering to our customers, the outstanding Proto Labs experience they expect from us.

In summary, due to a weakening macroeconomic environment and difficult comparisons, after a tremendous 2018 for Proto Labs, our 2019 year-over-year growth rates have been lower than historical levels. Although, we continue to invest in the business to allow for future growth, we are taking a disciplined approach and managing expenses during this time of macroeconomic uncertainty.

When business optimism and capital investment in our geographic markets increase, we believe Proto Labs will demonstrate tremendous growth because of our scalable model and the value we bring to our customers. We have built a leadership position in the digital manufacturing space by focusing on the needs of our customers and we remain steadfast in our mission and I'm very confident and excited about the long-term prospects for Proto Labs.

Now I'd like to turn the call over to John for more information on our financial results. John?

John A. Way -- Chief Financial Officer

Thank you, Vicki. Revenue in the third quarter was $117.5 million, an increase of $2 million or 1.8% over the same quarter in 2018. Foreign currency represented at $900,000 headwind in the quarter due to the relative strength of the US dollar.

Our third quarter unique product developer served increased to 21,471 or growth of 3.3% compared to the prior year with strong growth in 3D printing continuing to allow us to engage with our customers earlier in the product development cycle.

Our non-GAAP gross profit for the quarter was $60.5 million resulting in a adjusted gross margin of 51.5% in the third quarter down sequentially from 52.6% in the second quarter of 2019. Sequential gross margin compression of 110 basis points in the third quarter was due to the following factors.

The acquired rapid operations represented a 70 basis point headwind to our consolidated gross margin compared to the second quarter of 2019 due to lower volumes. As we have stated in the past it is difficult to adjust our cost structure in the short-term when volumes are lower than anticipated. The remaining 40 basis point decline was primarily due to increased repair and maintenance and higher production supply spend in our CNC and injection molding operations in the Americas during the quarter.

Adjusted operating expenses totaled $35.1 million or 29.9% of total revenue for the third quarter of 2019. This compares to $37.1 million or 32% of revenue in the second quarter, a reduction of $2 million. Adjusted sales and marketing expense was 14.3% of revenue in the quarter down sequentially from 16.1% of revenue. The largest component of the sequential decline relates to the second quarter seasonality of marketing spend, including expenditures associated with several trade shows.

Adjusted R&D was 6.6% of revenue consistent with the second quarter of 2019. 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 8.9% of revenue in the third quarter down slightly from 9.3% in the second quarter largely driven by lower incentive compensation expense and favorability in our self-insured medical expenses compared to last quarter. The net result was adjusted EBITDA in the quarter of $32.3 million or 27.5% of revenue, an improvement of 80 basis points over the second quarter.

Our non-GAAP effective tax rate was 21.5% in the third quarter of 2019 compared to 19.6% in the prior year. Our third quarter 2018 effective tax rate was lower due to favorable results of an IRS tax audit. After adjustments our non-GAAP diluted earnings per share in the third quarter was $0.76 resulting in a $0.05 per share sequential improvement in EPS principally driven by lower SG&A.

Non-GAAP EPS was down $0.10 per share compared to the third quarter of 2018. The lower effective tax rate in the third quarter of 2018 represented a $0.03 per share benefit last year. The remaining $0.07 year-over-year decrease in EPS was driven by investments in our R&D activities and gross margin compression, including lower volumes in our acquired operations, the investment in our CNC facility in the Americas and wage inflation.

Now turning to cash flow. Our business continues to produce strong cash flows, generating $28.9 million in cash from operations during the quarter. Capital expenditures totaled $12 million in the third quarter consisting of our investments to drive future growth including IT systems and infrastructure, expansion of our facilities in Europe and production equipment.

We also returned capital to shareholders by repurchasing $12.1 million or 128,000 shares of common stock during the quarter. Today, we have repurchased $50 million under our stock repurchase program resulting in $50 million remaining available under the program.

We ended the quarter with a cash and marketable securities balance of $155 million on September 30th. Now I'd like to provide our expectations for the fourth quarter of 2019. We currently expect fourth quarter revenue to be in the range of $109 million to $115 million.

This revenue guidance reflects the current global economy specifically the muted manufacturing and industrial production data. As we have stated in the past, the fourth quarter, particularly the impact of the holiday season on the end of the quarter is difficult for us to forecast. That is especially true this year in this environment. We estimate foreign currency will not have a significant impact on our fourth quarter revenues compared to the prior year.

Moving to earnings guidance. In the fourth quarter each year we incur holiday pay during the Thanksgiving and Christmas holiday seasons that results in increased labor costs. Our non-GAAP add backs for the quarter will include stock compensation costs of approximately $2 million and amortization of $900,000. We currently estimate our non-GAAP tax rate to be approximately 21% to 22% in the fourth quarter.

Taking into consideration all the above, we expect our quarterly non-GAAP EPS to be between $0.59 per share and $0.67 per share in the fourth quarter.

That concludes our formal remarks. Now Vicki and I will be happy to take your questions.

Questions and Answers:

Operator

Thank you. We'll now be conducting a question-and-answer session. [Operator Instruction] Thank you. The first question is from the line of Brian Drab with William Blair. Please proceed with your question.

Brian Drab -- William Blair -- Analyst

Hi, good morning. Thanks for taking my questions.

Victoria M. Holt -- President and Chief Executive Officer

Good morning, Brian.

John A. Way -- Chief Financial Officer

Good morning, Brian.

Brian Drab -- William Blair -- Analyst

So, I guess, the difficult macro environment is well understood and well publicized. So, maybe just getting into some of the details of the business first. So, with rapid that business was up significantly sequentially in the second quarter. And I'm wondering if you could, I didn't hear a number for rapid overall sequential, if you could give that number and then talk a little bit about why that business would kind of decline or -- now sequentially when it should be ramping?

Victoria M. Holt -- President and Chief Executive Officer

Yeah. So, well, John kind of sequentially it was down slightly and so just I pulled that number for me, I don't have them on top of my head, but let me just talk a little bit. As I mentioned in the call, we are going through some major changes in that business with moving forward with a defined offer and frankly industry leading -- lead times and stated lead times. So, big changes that are happening in that business. And therefore some of the existing customers that or with that business had very complex plus really outside of our envelope today.

So, we're continuing to see that piece of the business frankly not reoccur. We're seeing some success in bringing in new product developers from Proto Labs very large set of product developers that we serve. As I mentioned that grew over 20% year-over-year, but with the lower order value that we have on that revenue growth in total is still below our expectations.

So, what we're really focused on is making sure that we can continue to improve that customer experience in a way that allows us to cross-sell. And in addition as you know when we bring new customers they're off in the first order, they're kicking their tires to try to see what our capabilities are, and it's the second and third orders where they begin to increase that order value. So, we're impacted by that as well.

So it's a -- I'm confident getting customer feedback. They're very pleased with the service. There is nobody out there that offers three-day lead times on sheet metal parts, but it's a matter of turning those customers and taking share in a macro environment that frankly the machine shops and the local mom and pops around the quarter. They now have capacity and they can service that business. So, we've got to take that share from those in what is a more difficult macro environment.

John A. Way -- Chief Financial Officer

And Brian for the numbers on that, it's down 9% or about $1 million.

Victoria M. Holt -- President and Chief Executive Officer

Sequentially.

John A. Way -- Chief Financial Officer

Sequentially.

Brian Drab -- William Blair -- Analyst

About $1 million, 9%. Okay. And then you talked about the pressures on gross margin. Can you talk about the outlook for gross margin? What do you expect gross margin to be in the fourth quarter and trending into 2020? Is there gross margin expansion potential from here and how much?

John A. Way -- Chief Financial Officer

Yeah. So, I think, as we look at the fourth quarter and consistent with what we've discussed in the past and looking at our revenue guide. With the revenue coming down a little bit, we will be able to manage the labor cost and the materials, but we will have some challenges really managing the cost structure down with revenue being sequentially down. So, as we're looking at gross margin, it probably will be a little bit lighter than where we are currently in the fourth quarter. We are focused on gross margin across each of our services. We're going through our budgeting process right now and looking at the actions and building up the plans for 2020. We will be looking to drive improvement in the gross margins, but we're going through the work right now to fully flesh out those plans.

Brian Drab -- William Blair -- Analyst

Okay. And then I'll just ask one more for now. But what have you seen in October in terms of demand relative to the third quarter and in October last year?

Victoria M. Holt -- President and Chief Executive Officer

Yeah, I think, what we've seen in demand is that it's pretty, it's consistent with the guidance that we put out. So, we feel comfortable with, at this point, with the revenue guidance we just gave you.

Brian Drab -- William Blair -- Analyst

All right. Okay, thanks very much. I'll follow up later.

Operator

Thank you. Our next question is from the line of Andrew DeGasperi with Berenberg. Please proceed with your question.

Andrew DeGasperi -- Berenberg -- Analyst

Good morning. I just want to ask sort of a follow-up on one area you mentioned in terms of the aerospace business slowing down. Do you think that's a temporary blip, I know, [Indecipherable] this morning also mentioned something of a push-out on their end or is there anything specific that you can highlight?

Victoria M. Holt -- President and Chief Executive Officer

Yeah, I think, it is a temporary blip. We see strong activity, we have a very strong value proposition in aerospace. And remember where we play in aerospace it's not so much commercial aircraft. It's in space, it's in satellite communications, it's in drones, and lots of lots of activity there. So, year-to-date our revenue growth in that aerospace is still 7.2%, so really strong. It's just in that particular quarter, it was basically flat or down very slightly. So, we're still confident that's got long-term legs and lots of R&D activity and low volume production in that space for us.

Andrew DeGasperi -- Berenberg -- Analyst

Got it. And in terms of the rapid business, I know, we're focusing on that a bit, but just sort of a question in terms of how do you see this progressing. I guess in Q4 you're dealing with the issues in the macro side and also the sheet metal business overall, but do you see this business returning to growth starting Q4 year-over-year, I know, last year it started declining or is it really just a 2020 event?

Victoria M. Holt -- President and Chief Executive Officer

Let me step back for a minute. So, one of the things that we've done has significantly changed the offer and then focusing on the cross-selling efforts with Proto Labs customers and teaching them really how our offer with sheet metal and the expanded CNC offer will work for them. So, that takes time. We also are in a macroeconomic environment where the competitors which really are the mom and pops have significant excess capacity. So unseating those current vendors and gaining that share in this environment is more difficult.

We are turning those customers, I mentioned the 20% increase in product developers, but it will be somewhat muted. So, we're being cautious on the forecast there recognizing we've got to be able to, in addition, create a much more integrated customer experience and that will take us a little time.

Andrew DeGasperi -- Berenberg -- Analyst

Got it. Last question. The low volume business versus prototyping. Have you seen sort of a bigger pulled back from there at this point?

Victoria M. Holt -- President and Chief Executive Officer

So, we've seen across -- are you talking particularly about the injection molding service?

Andrew DeGasperi -- Berenberg -- Analyst

Yes, correct.

Victoria M. Holt -- President and Chief Executive Officer

Where we have the -- there we have a stated offer for on-demand manufacturing and we continue to see that growth and injection molding witnessed by the larger orders that we're starting to see come through in that space. So, we feel comfortable with that. But our prototyping business in injection molding is growing as well. So it's, I would say, that between the two they're growing at comparable rates.

Andrew DeGasperi -- Berenberg -- Analyst

Got it. Thank you.

Operator

The next question is from the line of Troy Jensen with Piper. Please proceed with your question.

Troy Jensen -- Piper Jaffray -- Analyst

Hey, good morning, John. Good morning, Vicki.

Victoria M. Holt -- President and Chief Executive Officer

Good morning.

John A. Way -- Chief Financial Officer

Good morning.

Troy Jensen -- Piper Jaffray -- Analyst

Hey, John, just for you. Sorry if I missed it, but can we touch a little bit more on gross margins. I mean if I look at Q2 you guys grew revenues slightly sequential and kind of kept margins flat, but in this quarter it grew slightly, but we're down about 110 bps so?

John A. Way -- Chief Financial Officer

Yeah, yeah. So, rapid, is the biggest driver of that. So, the volume shortfall in that business is 70 bps of that 110. The remaining 40 was due to some of the product supplies and repair and maintenance. So, we had in some of our facilities in the US, but the acquired operations was the biggest component.

Troy Jensen -- Piper Jaffray -- Analyst

Okay. So, sheet metal even though it's only down 200,000 sequentially, it had a 70 bps sequential impact?

John A. Way -- Chief Financial Officer

It was the sheet metal and the CNC component, the operations that we required to do.

Troy Jensen -- Piper Jaffray -- Analyst

Yeah, that makes more sense.

John A. Way -- Chief Financial Officer

Combination of the two.

Troy Jensen -- Piper Jaffray -- Analyst

All right. And then, I guess, we saw some good leverage in sales and marketing in this quarter. It sounds like it may have been seasonal with some trade events, but else that Vicki made some comments, it was a bit more intentional. So, just be curious ultimately maybe not fourth quarter, but is there any leverage in the operating lines here that you guys can do to maybe offset the sluggishness in the topline?

John A. Way -- Chief Financial Officer

Yeah, I think, we're continuing to look at all the cost and the cost structure. I think ultimately as we're looking at it, we're building a business for the long-term and we're staying focused on what we need to do to continue to expand the envelope.

So and I think from an R&D perspective we'll continue kind of at the same levels that we're at. I don't think we'll pull back there. Sales and marketing, I think, we'll be prudent with some of the marketing spend. But I think we are continuing to look to drive that volume growth. The G&A area is an area we'll continue to look at continue to scrub and we'll manage that right now.

Victoria M. Holt -- President and Chief Executive Officer

We continue to work on driving the productivity of our sales team. I mentioned before, we're using data and analytics in order to have our sales team focusing on the opportunities that have the greatest lifetime value for us. So, that's industry segments and types of customer companies. We've taken more productively drive long-term sales growth. So, I think, that focus and that use of data is also going to give us some opportunity over the long-term to drive the productivity of the sales team.

Troy Jensen -- Piper Jaffray -- Analyst

Okay, great. I understand that. So, Vicki how about for you. I'd love to hear just kind of qualitatively your thoughts on 2020. And I know we're not going to get numbers from you, right, specific guidance, but it doesn't seem like we're going to see a rapid recovery and ISM data or we're coming into election year. So, I mean, Initial thoughts on 2020 would be awesome.

Victoria M. Holt -- President and Chief Executive Officer

Yeah, so you read the same things I do I wish I could predict. I think what I'm hearing out there in the marketplace is that the first quarter maybe in the second we probably still going to see quite a bit of some headwinds we're looking at toward the second half of the year, people are expecting things to recover a little bit.

Now the other thing that we'll have in 2020 of course this will be coming off comparable that aren't so challenging. I mean, you look at the third quarter of 2018, we had a phenomenal third quarter of 2018. So, the comparables are pretty tough there as well. So, I think, you'll see that coming through next year.

Troy Jensen -- Piper Jaffray -- Analyst

Great. Well, good luck.

Victoria M. Holt -- President and Chief Executive Officer

Thank you.

John A. Way -- Chief Financial Officer

Thanks, Troy.

Operator

[Operator Instruction] The next question comes from the line of Jim Ricchiuti with Needham & Company. Please proceed with your question.

James Ricchiuti -- Needham & Company -- Analyst

Hi, good morning. I wanted to follow-up on the comments that you made about some cautiousness that you're seeing on some of the R&D projects. And normally I don't -- I wouldn't expect you would see that in slowing macro environment particularly something that's fairly modest slowing. So, I wonder if you could elaborate on that or maybe talk a little bit about perhaps which verticals you're seeing that in?

John A. Way -- Chief Financial Officer

Yeah, I think, as we're looking at it, Jim, and I think that's why we gave the data point of our top 100 customers. Last year we saw strong growth in those top 100 customers and this year they're essentially flat and what that creates is we delivered strong growth in 2018. Those customers haven't increased their spending level from where that was in 2018. It's flattened out more that's kind of creating some of that challenge and putting pressure on that topline percentage growth number. Is that help?

James Ricchiuti -- Needham & Company -- Analyst

It helps. I mean I would expect that R&D projects continue to get funded in this kind of environment. So I was just struck by that. I can see other parts of the business slowing. So, but maybe we could just switch gears for a second. And I'm also trying to reconcile the continued strength you're seeing in 3D printing and I mean you called out a couple of areas metals, the multi jet and clearly those seem like good growth areas. But I'm wondering, are you -- do you feel you're just taking share or is this part of the business the market just continuing to grow beyond the core business beyond what you're seeing in the core markets that you address?

Victoria M. Holt -- President and Chief Executive Officer

I think we've got a little bit of both going on. We do have a differentiated offer with respect to quality and the consistency and reliability of our offer. So, when customers are looking for high quality industrial 3D printed parts for their programs, we're the place to go.

So, I think, we're seeing some of that, but I do think customers are learning more and more how to use 3D printing both in their product development cycle as well as how to design for 3D printing for production, and I think that's what you see with the growth in our metal 3D printing and multi-jet fusion which are both technologies that are particularly valuable for production type programs. So, I think, it's a little bit of both that's happening with that business.

James Ricchiuti -- Needham & Company -- Analyst

Vicki last question can you say which market verticals you seem to be getting the most traction in metals and multi-jet.

Victoria M. Holt -- President and Chief Executive Officer

We're seeing it in aerospace in med device and also somewhat in computer electronics in the multi-jet fusion plastic area. So, those would probably be the three industry verticals.

James Ricchiuti -- Needham & Company -- Analyst

Okay, thank you.

Operator

The next question is a follow-up from the line of Brian Drab with William Blair.

Brian Drab -- William Blair -- Analyst

Hi. So, I'm just looking at the notes from the last call and the expectation for gross margin and just want to spend another second trying to understand more what has changed in terms of the trajectory because you're really cautious. I think as you look to the second half of the year in terms of revenue growth, but you were expecting gross margin to step up sequentially. So, is the biggest factor there that's changed in the rapid business or is it, I guess, a combination of that with increased caution on the overall topline trajectory?

John A. Way -- Chief Financial Officer

Yeah, I think, it's the -- it's easier to leverage cost when revenue is increasing right as revenue is lighter than we anticipated you've got to pull cost back and that's just a bigger challenge. So, I think, it is the volume there and what we just experienced in rapid that's creating that cost.

Brian Drab -- William Blair -- Analyst

Okay. And then, John, can you just give us an update, just the numbers on where alpha gross margin is and where rapid gross margin is and what the overall headwind those are having not year-over-year, but just the overall headwind those have on the gross margins?

John A. Way -- Chief Financial Officer

Yeah, so the rapid gross margin 260 basis point headwind on the overall and your 3D is about 130 basis points overall.

Brian Drab -- William Blair -- Analyst

And where does that put, I guess, last quarter alpha was at a little over 20% gross margin?

John A. Way -- Chief Financial Officer

Yeah, so we dipped down into the mid-teens in 3D printing in Europe and then in New Hampshire we're in the 25% range.

Brian Drab -- William Blair -- Analyst

Okay, got it. Thanks very much.

Operator

Thank you. At this time, I will turn the floor back to management for closing remarks.

Victoria M. Holt -- President and Chief Executive Officer

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. We continue to innovate with our service offerings and technology interface and features 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.

Operator

[Operator Closing Remarks]

Duration: 37 minutes

Call participants:

Daniel Schumacher -- Director of Investor Relations

Victoria M. Holt -- President and Chief Executive Officer

John A. Way -- Chief Financial Officer

Brian Drab -- William Blair -- Analyst

Andrew DeGasperi -- Berenberg -- Analyst

Troy Jensen -- Piper Jaffray -- Analyst

James Ricchiuti -- Needham & Company -- Analyst

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