PRLB - NYSE

Greetings and welcome to Proto Labs Third Quarter Fiscal Year 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to Jason Frankman, Vice President and Corporate Controller. Thank you, you may begin.

Thank you, Jerry [ph] and welcome everyone, to Proto Labs’ third quarter 2023 earnings conference call. I’m joined today by Rob Bodor, Proto Lab’s 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, 2023. 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 Rob Bodor. Rob?

Thanks, Jason. Good morning, everyone, and thank you for joining our third quarter earnings call. Proto Labs had an excellent third quarter. From a financial perspective, I am very pleased with our results, which surpassed our expectations on the top and bottom line. In the third quarter, we generated record revenue, improved profitability, generated substantial cash flow and returned capital to shareholders. We reported revenue of $131 million, the highest quarterly revenue figure in Proto Labs' 24-year history. Revenue was up broadly both year-over-year and sequentially across injection molding, CNC machining and 3D printing. Along with record total revenue, network revenue in the third quarter was a record $23 million, growing over 80% year-over-year in constant currencies. Our digital network powered by Hubs continues to take share in the market at an outstanding pace. Our digital factory business fulfilled through our internal factories, rebounded nicely from the second quarter with sequential growth. We continue to accelerate innovation for customers with the fastest and most reliable lead times in the industry. Our strategy is working. Record revenue in an uncertain macro climate demonstrates this. Proto Labs is becoming a one-stop-shop for custom prototypes and low volume production parts. As we integrate the factory and network offers, we continue to realize significant value from the Hubs acquisition. Our comprehensive offer through the Digital Factory and the Digital Network continues to resonate with customers who are increasingly adopting it. This is clear to us as a significant portion of third quarter network growth was driven by Proto Labs customers. We serve the largest customer base in our industry. In the third quarter alone, over 23,000 unique design engineers and production buyers ordered parts from Proto Labs. While we have the scale, infrastructure and automation to serve all of these customers, a notable portion of our third quarter revenue growth was from larger strategic customers. These customers are taking advantage of our comprehensive offer fulfilled through the combined Digital Factory and Digital Network. This unique hybrid offer unlocks our ability to go deeper with customers and serve them more strategically, expanding our share of wallet. From prototype to production, from delivery overnight to overtime and from quantity 1 to quantity 1 million we can serve customers' needs better than any other company in our industry. In addition to reporting record revenue, we also further improved our industry leading profitability. Third quarter earnings per share increased both year-over-year and quarter-over-quarter. We generated our highest quarterly non-GAAP EPS in three years. Earnings outperformance was largely driven by higher volume and improved gross margins in both the Digital Factory and the Digital Network, which resulted in Proto Labs' highest quarterly consolidated gross profit dollars since 2019. Third quarter network gross margin was also a record and we have now expanded consolidated gross margin and operating margin for three consecutive quarters. We are not just talking about profitable growth, but we've been executing on it. Expanding profits allows us to drive investments in innovation and improvements to our customer offer. During the third quarter, we received external recognition for one such innovation, our instant design for additive manufacturability analysis tool. This proprietary software provides customers with rich design for manufacturability feedback to help them design the best 3D printed parts, and it does so instantly. For this innovation, Proto Labs won a 2023 IDEA Award. This is an award presented by several industry publications that recognizes the best new product innovations of 2023. This is another example of how our commitment to innovation helps us maintain our position as industry leader. While our offer continues to delight customers, the broader economic environment is still uncertain. Manufacturing conditions in the U.S. and Europe remained soft and have not consistently improved throughout 2023. Yet we grew in the quarter, especially our digital manufacturing network business with year-over-year growth of over 80%. Proto Labs offers the most comprehensive digital manufacturing service in the world in terms of pricing, lead time options and part envelope. Our combined factory and network model is effective as you can see in our financial results and it resonates with our customers, which I'd like to highlight with a few tangible examples of how customers are driving value out of sourcing prototype and low volume production parts from Proto Labs through the factory and the network. In my first example, a Fortune 500 medical company's production vendor had a line down situation and could not deliver time sensitive components, leaving a large gap in delivery of end use equipment for surgical rooms. Because this medical company is a regular customer of Proto Labs and injection molding and is familiar with our speed and reliability, they turned to Proto Labs to help solve this issue. The customer initially leveraged our Digital Factory and its world class lead times for CNC machine parts. Proto Labs has always been a great candidate for lying down situations due to the industry best lead times and on demand production that our Digital Factory affords. However, prior to the establishment of the digital network, production in these types of situations would often shift away from Proto Labs as volumes increased. That is no longer the case because of the Digital Network. Through the network, we were able to support production for the medical customer and delivered over $500,000 in production grade and use components over the course of a few months. The combination of the factory and network capabilities provided immense value, enabling this Fortune 500 medical customer to avoid an extended production shutdown, saving them significant time and money. In addition to increasing number of customers using the combination of the factory and the network p Proto Labs also continues to accelerate innovation through our Digital Factory. As the industry leader, we are called upon by the most innovative companies in the world to help develop next generation products. Recently, a luxury high end automotive manufacturer selected Proto Labs to assist with its first foray into the electric vehicle market. Proto Labs worked with Hutchinson, a multinational design firm and manufacturer, to prototype the battery pack cooling system for the luxury automaker's first electric vehicle. We rapidly manufactured injection molded parts which meant stringent project timelines and quality standards. Utilizing our speed, reliability and quality, we delivered parts to specification for testing and to be mounted on the electric supercar prototype reducing validation and testing times and accelerating their innovation. This is the power of Proto Labs and illustrates why we are often the partner of choice wherever innovation is happening. Now for a brief update on our 2023 priority areas as we approach the end of the year. As a reminder, our 2023 priorities are first to drive revenue growth, particularly in our largest services injection molding and CNC machining and second to increase shareholder value through expanding profitability in the factory and the network. We are successfully delivering on both priorities, revenue growth and profitability. Starting with revenue, at the beginning of this year, we stated that our goal for injection molding was to grow 2023 revenue year-over-year. Year-to-date IM revenue is up organically and we believe we will achieve our goal for the full year. We continue to win more injection molding orders that leverage both factory and network fulfillment. Additionally, we are winning larger orders, demonstrating our expansion into more production use cases. CNC machining is also up year-to-date and like injection molding, we expect our CNC machining service to achieve revenue growth for the full year over 2022. Third quarter revenue through our Digital Factory grew sequentially as more customers took advantage of our world class reliability and the fastest lead times in our industry. Meanwhile, third quarter CNC machining revenue via the Digital Network grew over 85% year-over-year, highlighting the effectiveness of the combined model and the value that Proto Labs customers get from the broad offerings fulfilled through the network. We have also delivered on our profitability priority. In the third quarter we exhibited the robust earnings power of our business model. Even in an uncertain macro climate, we expanded profitability. Margin expansion in both the Digital Factory and the Digital Network were the result of sound execution by controlling our cost structure and gaining efficiencies and leverage while fulfilling increasing demand. In addition, we continue to invest in our executive leadership team. I am excited to have Agnes Semington join our team as our new Chief Human Resources Officer. Agnes has extensive experience in human resources leadership across manufacturing and digital companies and will guide our HR team and strategy as we continue to make Proto Labs a great place to work. I'd like to thank all Proto Labs employees for their contribution thus far in 2023. The efforts and commitment of our employees enable us to continue to succeed and grow profitably. In summary, Proto Labs' combination of factory and network offers has enabled us to outperform peers in the current environment and we believe we will outgrow the market over the long-term. Third quarter revenue growth was broad based including sequential and year-over-year growth in our three largest services from many different customers. We are well positioned to weather economic volatility due to our best-in-class profitability and strong cash flow generation. We will continue to reinvest profits into the business as we seek to further expand our offer and capture additional share of wallet. In the third quarter, we generated record revenue, improved profitability, generated substantial cash flow and returned capital to investors. We are a great long-term strategic partner for our customers and believe we will deliver value for shareholders over the long-term. Dan will now provide additional financial detail on our third quarter results as well as our outlook for the fourth quarter of 2023. Dan?

Thanks Rob and good morning everyone. Before I begin, I'd like to remind you all that we made a strategic decision to exit our Japanese operations last year and September 2022 was the last month in which we generated revenue in Japan. As such, this will be the last quarter of year-over-year comparisons including Japan. Our financial results begin on Page 11 of the slide presentation. Third quarter total revenue came in at $130.7 million, up 7.1% year-over-year in constant currencies and excluding Japan. Revenue exceeded our guidance range to a due to a pickup in order trends after the first few weeks of July that continued through the end of the quarter. Revenue fulfilled through our Digital Network of manufacturing partners was $22.6 million in the third quarter, a record for the network business and up 81.2% in constant currencies. Our network offer with this broad range of manufacturing capabilities and lead times continues to gain share even in uncertain macroeconomic conditions. Changes in foreign currencies represented a $1.7 million favorable impact to revenue in the third quarter, in line with our expectations. Revenue by region is summarized on Slide 12. In the Americas revenue grew 5% year-over-year. In Europe, third quarter revenue grew 16.9% year-over-year in constant currencies. Looking at revenue by service, CNC machining grew 11% year-over-year in constant currencies and excluding Japan, driven by continued growth through our integrated CNC offer. Injection molding revenue grew approximately 6% year-over-year in constant currencies and excluding Japan. The increase was largely due to higher orders for follow on parts. Expedites on part orders increased as customers still take advantage of our best-in-class lead times and reliability in uncertain economic conditions. Third quarter 3D printing revenue grew 7% year-over-year in constant currency. Sheet metal revenue declined 18% year-over-year in constant currencies in the third quarter. As you'll recall, our sheet metal service experienced revenue headwinds earlier in the year. In response, we furloughed 25% of our sheet metal workforce in the second quarter. We saw signs of improvement in the third quarter as revenue increased 9% sequentially. We served 23,080 unique product developers in the third quarter, a decrease of 3.1% year over year. As Rob mentioned, our unique hybrid offer allows us to go deeper with customers and serve them more strategically, expand share of wallet and grow our overall revenue. Turning to Slide 18 and our detailed income statement, overall third quarter non-GAAP gross margin increased 190 basis points sequentially to 46%. This is the third consecutive quarter of sequential gross margin expansion. Both factory and network gross margins expanded over the second quarter. On the Digital Factory side, sequential gross margin improvement was driven mainly by higher volume, labor efficiencies and continued investments in increased automation. Our manufacturing facility teams managed costs to volume levels well in the third quarter including flexing overtime and contractors as needed while maintaining our industry best lead times. On the network side, third quarter gross margin increased to a record 33.7% from 31.2% in the second quarter of 2023. Throughout 2023 we have continued to refine our network sourcing and pricing algorithms. Our long-term target for network gross margin is still between 25% and 30%. Turning to operating expenses, total non-GAAP selling, general and administrative expenses were $43.7 million in the quarter or 33.5% of revenue compared to $43.1 million or 35.2% of revenue in the second quarter of 2023. Improved operating expense leverage sequentially was driven by efficiencies on higher volume as well as continued focused cost containment efforts, partially offset by higher incentive compensation. Moving to taxes. Our non-GAAP effective tax rate in the third quarter was 20.5% compared to 25.2% in the second quarter. The sequential decrease in the non-GAAP effective tax rate was primarily due to an improvement in earnings in our tax jurisdictions that are fully reserved for net operating losses. Third quarter non GAAP dilutive net income per share was $0.51 compared to $0.33 in the second quarter of 2023. The sequential earnings per share consisted of a few items. First, higher volume as revenue was up $8.4 million quarter-over-quarter. With our profit model, we get significant leverage on increased volume, especially in the Digital Factory. The remaining increase was driven by a number of items, including a lower effective tax rate and higher interest income. Moving to cash flow and balance sheet highlights on Slide 19. We generated $24.2 million in cash from operations in the quarter, up from $9.3 million in the prior quarter. Our business exhibits very strong cash flow generation in any economic climate, allowing us to invest in future growth and return capital to shareholders through share repurchases. In the third quarter, we repurchased 9 million of common shares and will continue to purchase opportunistically going forward. Our balance sheet is still very strong. On September 30, 2023, we had $114.9 million of cash and investments on our balance sheet and zero debt. Turning now to our forward-looking guidance, which is outlined on Slide 21. We expect to generate fourth quarter revenue of between $118 million and $126 million. At the midpoint this implies 5% revenue growth year-over-year in constant currencies. The fourth quarter of any calendar year is difficult to forecast because of the impact of the holiday season. This revenue guidance takes into account quarter-to-date order trends as well as our best estimate of the impact of seasonality in the fourth quarter. We expect foreign currency to have between a $0.5 and $1 million favorable impact on revenue compared to the fourth quarter of 2022. Moving to earnings guidance, we anticipate non-GAAP add backs in the fourth quarter to include stock based compensation of approximately $4.5 million and amortization expense of $1.5 million. We currently estimate our fourth quarter non-GAAP effective tax rate will be between 19% and 20%. Considering this, we expect fourth quarter non-GAAP earnings per share between $0.26 and $0.34. Now back to Rob for closing comments.

Thanks Dan. Our third quarter growth, including record total revenue and record network revenue is evidence that our unique combined offer is gaining significant traction in the market. In addition, gross and operating margins improved sequentially for the third consecutive quarter. Proto Labs is the most profitable and cash flow positive company in digital manufacturing. We are focused on executing successfully on our 2023 priorities and driving toward our long-term strategy which creates shareholder value. Thank you.

Are we ready for questions?

Yes we are.

Great.

[Operator Instructions] Our first question is from James Ricchiuti with Needham and Company. Please proceed.

Hi, good morning. Congratulations by the way on the quarter. First question is just regarding the guidance and this may just simply be a function of the Q3 being stronger, but if we look at the seasonality and I'm talking sequentially, the decline, it appears is at the midpoint of your Q4 guidance. It's a little bit more of a sequential decline than we've seen in in prior years and I wonder if you could speak to that? And then I've got a follow up question. Thank you.

Yes. On that, I think what we're seeing at least from the order trends early in October that CNC did not start the quarter as strong as it did as the rates we were seeing in last quarter and that's why we adjusted the guide to where it was, which is, I agree with you Jim, it's a little bit softer than our normal seasonality did third quarter to the fourth quarter.

Got it. And you talked a little bit about inverts that you've been making with larger strategic customers and I'm wondering if you might expand on that. And these are existing customers, presumably, that you're going deeper into. Can you talk about the types of customers and why you think you've been a little bit more successful than perhaps in the past?

Yes, sure. Happy to do that. Thank you for the question. So we have kind of top five segments, or industries, right, where we serve customers medical, computer, electronics, automotive, aerospace, and industrial equipment. In those industries, we serve many of the most innovative companies right in those industries, and we serve 85% of the Fortune 500 companies in those industries, so and some of them we've served for two decades. Right. So large strategic customers have always been part of the mix for Proto Labs. But over that period of time, we've often heard from customers that while they're happy with our services, they want to use us more comprehensively in different use cases, not just in prototyping, but in production opportunities and so forth. And so that's been really core to our strategy over the last several years, is to expand our capabilities in order to be able to serve them in those different settings and to serve them more holistically and therefore more as a strategic partner. And I think this quarter we've seen some good traction in that. Over the last several quarters, you've heard use cases that we've shared on the earnings calls of customers as they're using us in those ways. And this quarter, we saw our average order values increase across both the network and the factory. So investments that we've been making in the factory to expand our capabilities, as well as progress we've made in getting our customers to adopt and see the value of our offerings in the network have all been gaining traction for us. So we saw an increase in larger production orders from those customers and larger orders really across the board in multiple services, so very pleased with this kind of evidence that the strategy is gaining traction this quarter.

Got it. And just one quick follow-up and you may have given this in the presentation. Did you say what the Hubs gross margin was?

Yes, we did. It is 33.7%.

Sorry. Thank you.

Our next question is from Greg Palm with Craig Hallum Capital Group. Please proceed.

Yes. Good morning, everyone. Thanks for taking the questions and congrats on the progress here. I guess just maybe following up on that recent question. Why the success now with some of these bigger customers and wallet share expansion opportunities? Are you doing anything different internally that's allowing you to win more share? I'm just sort of curious to kind of hear your thoughts on the evolution of some of those wins.

Sure. Well, we've continued to drive expansion and we've continued to invest in our sales force as well. In the Americas, we've invested in a new sales leader. And I think all of those things, as we've been rolling out more and more of these capabilities and engaging our customers with our broader offerings, we saw a particularly nice uptick in the take rate in the quarter as a result of that.

Okay. And is it across sort of all offerings, injection molding, CNC, 3D printing? Is it more concentrated with a specific service?

So I think we saw growth pretty broadly across multiple services. And I would say that it was more in kind of larger production orders and longer lead time offerings where we saw the most growth.

Okay, and then just wanted to follow up once on the guidance because it is a significantly, but it is quite a bit more of a seasonal decline in Q4, as Jim had stated. But are you able to maybe quantify order rates in October versus what you're seeing in what you saw in Q3? And is there any sort of added level of conservative basis on what you're seeing in October? Just wanted to clear that up.

Yes, no, I mean, we're using a similar model that we're looking at. I mean, the challenge, Greg, right now is the macro backdrop and what is going to happen during the holiday season, which is pretty uncertain. But as I said earlier, I think the only thing that has changed from an order rate perspective, maybe Q3 and Q4, is that CNC was a touch softer to start October, which is why I put the guide where it was using kind of our order trend and our seasonality model.

Okay, fair enough. I will leave it there, thanks.

Our next question is from Brian Drab with William Blair. Please proceed.

Hi, good morning. Thanks for taking my questions and shockingly good result in a tough environment. So congratulations.

Thanks. Brian.

Can you comment a little bit further on the gross margin trajectory. Hubs had such a strong quarter in terms of gross margin. Does that moderate? It sounds like you did reiterate the longer term guidance for that to be lower than what you did in the third quarter. So how does that look into the fourth quarter and beyond? And then also, I guess with things slowing down a little bit, there's some deleveraging in the fourth quarter. Just some comments on gross margin, please.

Yes. So from the Hubs gross margin perspective, we really kind of made the changes coming out of Q1, which is where we saw a higher gross margin than the range in Q2 and Q3. And to be honest, we want to see how we can continually evolve that model in different macro markets before we change that range as of now. Right. So it is – we are very pleased with the results from what we've had adjusted there. And I would think we should see something similar in the fourth quarter for that margin. But like I said, I think we want to see in different macro conditions and so forth that we can continue to maintain that margin before we would adjust the range. You're right. On the factory side, there's a lot of inefficiency that happens within the factory around the holiday period. Right. So we've got people taking holiday and vacations. We have to augment that more with contractors and overtime. And so we should see the factory margin come down a twitch [ph] in the fourth quarter as it normally does.

Okay. So overall, company gross margin down somewhat in the fourth quarter sequentially. Okay?

Yes.

Okay. And then I'll just ask one more question for now, I guess the developer count is down a little bit and the revenue is up a lot. And I'm just wondering if you could comment on are we maybe entering a phase for Proto Labs where we're going to see sustained higher revenue per developer? And this is obviously a metric that a lot of people use to build their models around to some extent and that stepped up significantly. Revenue per developer, do you expect that to be sustainable?

Yes. Thank you. I think you're right about that. I think that the metric of number of developers is probably going to be less relevant for us longer term as we go forward because consistent with our strategy, we are showing signs that we're able to penetrate our customers and increase our average order values with them and so forth. Right. And in this quarter, even with a modest decrease in that count, we were able to grow revenue overall. In the past, we were very driven by the product developer count, solely given that we were primarily a prototyping company. And so those were really our primary customers. As our strategy of expanding our capabilities, serving our customers more holistically, serving them in production use cases and so forth continues to rollout, I think we're able to expand revenue somewhat independent of that metric. So I think it'll become less and less relevant over time.

Okay. All right, thank you very much.

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

Yes, good morning, guys. A few questions. I know that last quarter you called out some weakness in medical devices and consumer electronics, and it sounds like those couple of verticals did rebound this quarter. Is there any commentary you can give as to perhaps why that was the case, if in fact that was the case and how sustainable you think that is moving into next year?

So, Ben, on the medical side, we were up quarter-over-quarter in medical, really with some of the strength and injection molding around medical, however, it was still down 4% year-over-year, so it performed well, but it was still slightly declining year-over-year. And computer electronics did not improve for us quarter-over-quarter. But injection molding medical is important to us, as you can imagine, with our quick turn business. For those in medical that are developing new devices, we help them succeed at what they're doing and bringing those devices to regulatory approval and into production.

Okay. And so just from an end market standpoint, was there relative strength, therefore in areas like auto and aerospace and defense?

Yes. So the strong industries for us in the quarter were aerospace, automotive and industrial.

Okay. And Europe was particularly strong in this quarter in contrast to a number of the other manufacturing automation companies that we follow. Is there any specific commentary you can give as to the strength there?

Yes, Europe's growth is mainly being driven by our expanded network offer within the region. So that really drove the growth that we saw in Europe.

Okay. And then with regard to the unique developer number in the quarter, I was curious to know, can you cite the number of production buyers that you had in this quarter, perhaps versus last year and perhaps how that number is evolving?

Yes, no, we don't have a number on production, but I would say the indicator ends up being, as was discussed earlier, your revenue per developers as Brian talked about. As that increases, it will be a sign that we are getting more of that production business and you can see that in the quarter.

Okay, thank you very much.

Thanks, Ben.

And our next question is a follow-up from James Ricchiuti with Needham and Company. Please proceed.

Hi, Jim. Jim, are you there?

Apologies, I was on mute. Yes, you may have touched on this, but what I'm struck by is the with stronger growth rate in Europe over the last several quarters versus North America. That's not to say you didn't show progress in North America this past quarter, but I'm wondering, as you think the next year, and I'm not looking for guidance, but only – is that going to be one of the priorities, potentially a more uniform growth rate between the two major regions. And to the extent you want to, but is there any preview you can give us about possibly what some of the priorities might be looking out to 2024?

Yes, so let me answer as it relates to kind of the difference in growth rates. And Rob can talk about a bit in terms of priorities. As you know, before we acquired Hubs, the U.S. business from a manufacturing side is much larger in the U.S. than in Europe. And so the higher growth rates, the disparity between the growth rates between the U.S. and Europe is driven by a higher percent of our Europe business is through the network. And that is growing, as we talked about, over 80% year-over-year. And so Rob, I'll pass on.

Yes, sure. Thanks. So we see both Europe and the Americas as very good long term markets for us with strong industrial bases. And as Dan points out, the mix is somewhat different in terms of our business in those two regions. And of course, Europe is smaller relative to the Americas. Our objectives are to grow in both regions. And we believe that from a long term standpoint, there's similar opportunity there. Now, in the short term, there is somewhat difference in kind of the macro environments in the two regions. And so we kind of have to kind of manage through that as well in the near term.

And then again, to the extent you're willing to, we're a couple of months away from the end of the year. Anything you want, to possibly lay out there in terms of how you're thinking about some of the priorities looking at for 2024?

We are going through our budget cycle right now.

Jim, so we're meeting with the businesses on the budget and we're putting those plans together and we'll talk more about our goals for 2024 at the next earnings release.

No, I understand. Thank you. Congrats again.

Thank you, Jim.

Our next question is a follow up from Greg Palm with Craig Hallum Capital Group. Please proceed.

Yes, thanks. Hopefully a quick one. I'm not sure if I missed this, but did you comment on the mix of kind of the lower price, longer lead time versus quick turn? I know that was kind of a trend you were seeing year-to-date, and I'm just curious if anything changed here in Q3?

Yes, I don't think we addressed it specifically in the prepared remarks. We saw increase, I would say that our longer lead time, lower priced offerings grew faster than the average right for us in the mix in the quarter. Right. And you can see that because the network offerings, which are mostly in that category, grew 80% or better.

Okay. I mean in terms on the -- because the gross margin was up quite a bit on the factory side of things. So if it wasn't mix, was it just utilization and higher revenue? Any other reason why gross margin was quite a bit stronger than recent quarters?

Yes. So, Greg, the primary driver really, was the pickup quarter-over-quarter in revenue. And the leverage that we saw off of that, I mean, we were able to do a good job of holding our costs on that revenue pickup in the factory while still meeting our industry best lead times. So that was the main driver. I would say. We did see more customers in the third quarter asking for things quickly than we have in the past, and those were mainly as Rob talked about some of those strategic customers that use us more holistically throughout the portfolio.

Understood. Okay, thanks for clarifying that.

Yes.