Daniel Schumacher; Chief Financial Officer, Chief Accounting Officer; Proto Labs Inc
Greetings. Welcome to Proto Labs third quarter, 2024 earnings call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad as a reminder, this conference is being recorded. It is now my pleasure to introduce Jason Frankman corporate controller. Thank you. You may begin.
Thank you, Sherry and welcome everyone to Proto Labs. Third quarter, 2024 earnings conference call. I’m joined today by Robert Bodor, President and Chief Executive Officer and Daniel Schumacher, Chief Financial Officer.
This morning, Proto Labs issued a press release announcing its financial results for the third quarter ended September 30, 2024. The release is available on the company’s website. In addition, a prepared slide presentation is available online at the web address provided in our press release.
Our discussion today will include statements relating to future performance and expectations that are or may be considered forward-looking statements and subject to many risks and uncertainties that could cause actual results to differ materially from expectations. Please refer to our earnings press release and recent sec filings including our annual report on form 10-K for information on certain risks that could cause actual outcomes to differ materially and adversely from any forward-looking statements made. Today.
The results and guidance we will discuss include non-GAAP financial measures consistent with our past practice. Please refer to our press release and the accompanying slide presentation at the investor relations section of our company website for a complete reconciliation of GAAP to non-GAAP results.
Now I’ll turn the call over to Robert Bodor.
Thanks Jason, good morning everyone. And thank you for joining our third quarter, 2024 earnings call.
We had solid execution in the quarter with results coming in above expectations.
Despite continued dynamic challenges in the manufacturing sector, our disciplined approach and resilient business model drove solid financial and operational results year-to-date. We’ve grown non-GAAP earnings per share over 10%.
Additionally, in the third quarter, Pro labs generated its highest quarterly operating cash flow since 2020 before the acquisition of 3D hubs. This was driven in part by continued gross margin improvements in the factory and the network and is a testament to the profitability of our business model against any macro fact drop driven by our unique comprehensive fulfillment model.
However, our revenue growth is flat year-to-date and I believe we can accelerate our growth by continuing to invest in our priorities and execute our strategy under the realigned organizational structure.
As a reminder, last quarter, we announced a realignment, separating regional go to market teams from a new global fulfillment organization in order to focus our regional teams on our customers to drive growth and to enable global efficiency and fulfillment.
Before expanding on the progress made across our realigned structure. I’d like to first cover our strategic priorities.
We have made substantial progress on our 2024 priorities today. As previously mentioned, increasing the number of customers using our comprehensive services across factory and network is critical to our growth strategy.
In the last 12 months, the number of customers using the combined offer grew 35% year over year.
We are still in the early stages of exposing the full combined offer to customers and there is a huge growth opportunity for prolapse.
Our other main priority for the year is to increase revenue per customer contact.
We’ve made great strides here as well. Year-to-date revenue per customer contact is up 5%. Demonstrating progress on our shift toward higher value production orders.
Let me now bring this progress to light through the following recent examples of how customers in leading industries with high requirement needs are using proto labs for production.
The first example comes from a world class clean energy customer that went to market earlier this year with a fully integrated solar and battery system for labs manufactured and assembled multiple parts in the factory to assist the customer’s production.
Our world class manufacturing lead times and complete assembly help the customer ramp more efficiently than ever. That’s just one way that we win in production.
In another recent case, a high profile medical instrumentation customer relied on pro labs to solve a key need in their supply chain, low to mid volume injection molding production parts.
In this customer’s case, we have had a strong relationship for many years supporting early prototypes through 3D printing.
Our recent expanded focus on quality and increased inspection capabilities allowed us to win production business with this customer and they were able to benefit from our quality and speed to keep their new product launch time line intact.
These examples illustrate how our established brand and position in prototyping enable us to grow in production with our existing customers.
I also want to highlight our recent collaboration with Harley Davidson factory racing which we detailed in a press release at the end of September.
Harley’s engineering team utilizes proto labs, digital manufacturing services to manufacture critical components for their racing motorcycles. In a few days after a Sunday race, the team has a week to prototype test, learn iterate manufacture and replace critical parts using specialty materials all before the next race. The following weekend, this continuous improvement enabled by protolabs. Rapid manufacturing has resulted in significant year over year improvements in race times and podium damages.
Harley Davidson factory racing has not only leveraged PROTO labs for quick turn parts but also our global network of manufacturing partners for larger and more complex parts.
These examples demonstrate the power of proto labs to enable our customers to drive innovation, accelerate time to market and improve performance throughout the prototype to production cycle.
Now, I’d like to provide an update on the realigned organizational structure with regional go to market teams now solely focused on revenue generation.
The newly created global operations organization is tasked with fulfilling customer part orders by a factory and network in the most efficient manner.
We continue to refine our portfolio fulfillment options to optimize consolidated gross margin at times. This means leveraging our own unique manufacturing capabilities through the factory and at others, it involves network partners.
Since our announcement last quarter, the global organization has already begun to find ways to improve fulfillment of customer orders.
Specifically, we will leverage our global operations to better fulfill customer orders for metal additive parts and some injection molded parts in Europe accordingly. In October, we announced portfolio reshaping decisions to streamline our operational efficiency.
We will close our prototype injection molding facility in Germany, and we will discontinue direct metal laser centering or DMLS manufacturing services through our factory operation in Europe.
We remain fully committed to continue offering all our manufacturing services to customers across Europe including injection molding and metal 3D printing through other existing factory and network fulfillment options.
The only change is in how these services are fulfilled. Consistent with the realignment to a new global fulfillment strategy.
This decision was not taken lightly. And I want to take a moment to thank all impacted employees for their commitment to proto labs and to serving our customers.
The closure, the closure and discontinuation are in no way, a reflection of their efforts.
We will provide transition services to those impacted.
We truly wish them all the best looking ahead. We believe these decisions will improve operational and fulfillment efficiency while bringing the full capabilities of our global operations footprint to our customers.
We are acting with urgency to capitalize on our unique ability to meet customer needs, accelerate our growth and continue to drive industry leading profitability and cash flows.
In summary, we posted solid third quarter results while continuing to manage through ongoing manufacturing sector challenges, we remain committed to accelerating our growth as highlighted by the actions we initiated at the end of the second quarter to reorganize our internal structure.
We continue to win in production as I illustrate a few examples of customers using pro labs for high requirement and use parts that continued shift will better position the company for growth and value creation. Over the long term, we are the clear profit and cash flow leader in the industry and are committed to executing on our priorities and increasing value for shareholders.
I want to thank our entire pro labs team for the tireless efforts to best serve our customers and execute accordingly. I’ll now hand it over to Daniel to cover our financials in detail. As well as our outlook for the fourth quarter.
Yes.
Daniel Schumacher
Thanks, Rob.
Our financial results begin on page 8 of the slide presentation.
Third quarter revenue was $125.6 million representing a 4% decline from the record revenue we achieved in the third quarter of last year.
Revenue was flat sequentially and slightly above our guidance range as order rates picked up more than anticipated through August and September turning to revenue by service on slide 12rd quarter, injection molding revenue declined 10% year over year in constant currencies. As we saw weakness in the industrial and consumer electronics verticals to drive growth and molding. We continue to invest in production capabilities and our new regional go to market teams are making production business a priority.
CNC machining was flat year over year in constant currencies. We saw strong growth in our network C&C business.
Third quarter, 3d printing revenue declined 1% year over year in constant currencies and sheet metal revenue declined 13% year over year, we served 22,511 customer contacts in the third quarter.
Revenue per customer contact declined 1% year over year. Largely due to due to the decline in injection molding revenue. Our highest value per order service as rob discussed growing revenue per customer is a long term priority of ours. Yet there may be bumpiness from quarter to quarter as we shift to more production work in that respect, year-to-date revenue per customer is up 5% over 2023 third quarter, consolidated non-GAAP gross margin increased 50 basis points. Sequentially to 46.2% with improvements in both the factory and the network factory gross margin was 49% in the third quarter. Up sequentially from 48.8% driven by continued automation improvements and excellent work by our plant management teams to align staffing with volumes portal labs. Network gross margin was 35% up from 32.8% in the second quarter. Driven by our AI powered pricing and sourcing algorithms year-to-date non-GAAP. Gross margin is 45.8% up 130 basis points compared to the first three quarters of 2023.
We are very pleased with our gross margin improvement. A testament to both our hard working employees and our resilient profitable business model. No other company in the digital manufacturing services space can match the margin profile of our combined factory and network model.
Third quarter non-GAAP operating expenses declined $1.8 million compared to the second quarter of 2024.
As a percent of revenue, non-GAAP operating expenses decreased to 35.3% from 36.8% in the prior quarter. Driven primarily by lower incentive compensation.
In summary, third quarter, non-GAAP earnings per share were $0.47 up $0.9 sequentially on flat revenue growth.
As Rob mentioned earlier, year-to-date adjusted EPS is up over 10% year over year on flat revenue, we will continue to invest our profits to drive future growth through our priority areas. Further enabled by the previously addressed realignment, transitioning to cash flow and balance sheet highlights on slide 11 cash flow from operations was $24.8 million. Our highest quarterly figure since 2020 prior to the acquisition of 3D hubs, as I say on every earnings call, our business model generates industry leading cash flows allowing us to invest in organic growth and return capital to shareholders. To that end. We repurchased $19 million of common shares in the third quarter.
On September 30th, 2024, we had $117.6 million of cash and investments on the balance sheet and zero debt.
Our outlook for the fourth quarter of 2024 is outlined on slide 13, we expect to generate revenue between $115 and $123 million.
This guidance incorporates order and revenue trends through the first four weeks of the fourth quarter.
Further, a sequential revenue decline in the fourth quarter is normal seasonality in our business due to fewer working days and lower orders during the holiday season.
We expect foreign currency to have an approximately $1 million favorable impact on revenue compared to the fourth quarter of 2023.
Moving to earnings guidance, we anticipate non-GAAP add backs in the fourth quarter to include stock based compensation expense of approximately $4.4 million. Germany closure expenses of $4 million and amortization expense of $900,000.
We currently estimate a non-GAAP effective tax rate of 20% plus or minus 50 basis points. In summary, we expect fourth quarter non-GAAP earnings per share between 28 and $0.36.
That includes our prepared remarks.
Sherry. Please open the line for questions.
Operator
Thank you. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two. If you would like to remove your question from the queue for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Brian Drab William Blair & Company. Please proceed.
Brian Drab
Hi, good morning, good morning.
Hey Dan. Hey rep. I just wanted to start a gross margin. So yeah, the gross margin pretty solid and, and you know, higher than it’s been in a while. You know, where, where do you expect to be able to sustain that? And, and how do you like? How do you see the fourth quarter in terms of gross margin? And, and then I’m, I’m also in asking this question looking at the network, you know, which is of course, you know, somewhat lower gross margin. And it looks like growth, there’re decelerated some. So I’m just wondering if you, if you’re seeing maybe, you know, a convergence in the growth rates of eventually here in, in the overall business between the network and the factory and maybe you don’t have this, this headwind in terms of gross margin from the faster growth in the, in the on the network side.
Daniel Schumacher
Yeah, let me, Brian, I think there’s two questions in there. I think one is related to gross margin and what’s about the growth from the network? I’ll take the gross margin first. Yeah, what I would tell you is the gross margin percent improved, as I said, both in the factory and the network. And so, you know, in terms of the network, gross margins as we’ve talked about before, you know, we’re experiencing gross margins that, that are above, you know, the range that we’ve given and, you know, we’re really happy with our sourcing algorithms and, and, and how we’re able to use that model to drive more profitability through that area. Now, you know, we’ve been in, you know, a state in which manufacturing continues to contract. You know, we’re keeping our range at that 25 to 30%. Even though it’s, it’s, it’s at 35% but I don’t expect conditions to change much, you know, quarter over quarter and would expect that we’re going to be above the range on network gross margins in the fourth quarter as it relates to the factory improvements. You know, we’re, you know, we continue to add automation to, to a factory side of our business. And you know, we’re doing a better job in terms of magic managing labor costs as that goes through. So, you know, there’s improvement there as well. So I I know you kind of alluded to, is it, is there a mix in which the, you know, the network may be not growing as high as it was last year? You know, there, there may be some aspect to that, but if you look at the core, both the network gross margins and the factory gross margins are.
Robert Bodor
Proving.
Daniel Schumacher
Now, Rob, did you want to take the question on network growth?
Robert Bodor
Yeah, certainly. Thank you, Ryan, for the question. So, yeah, yeah, I think, you know, look. So, in Q3 of last year, we saw absolutely stupendous growth in the network, right? North of 80% on, you know, on the year over year comparison, you know, we grew network 11% in, in the third quarter this year building upon that. And we did that in the context of a difficult macro. I think I read the report, we’re now at 22 consecutive months of contraction in manufacturing. And so, I’m, you know, I’m pleased with it. I’m very confident that we can grow the network even higher. You know, in the future and fully expect that and that work is going to continue to be a strong growth engine for our business and we’re seeing customers adopting it, right. I mean, we had 35% growth year over year in customers adopting our comprehensive offer, buying more of the network. So, I’m pleased with that and do expect it will continue to be a strong growth engine for us.
Daniel Schumacher
But one more thing, Brian, that was in your question that did not cover on growth margin. We do, we do expect gross margin to come down quarter over quarter as we go into the holiday season, we’re a little more inefficient with our labor as we’re using contractors and such and the volume ends up being a little more uneven as you go through that holiday period. So we would expect the gross margin to come down just Q3 to Q4.
Brian Drab
Right? Okay. And that’s what I figured. I mean, obviously that’s typical in the fourth quarter free. Yeah.
Daniel Schumacher
It’s typical.
Brian Drab
Right? Rob on the blend of, you know, the idea that you’re getting more people using the blend of the services. You know, what, where, what can you tell me about where that stands now in terms of like is still very early in that opportunity, right? Is it a low single digit percentage of the customer contacts that are using both.
Daniel Schumacher
Services?
Robert Bodor
Yeah, we’re still in early innings with this. Absolutely. So I see it as a, as a really big continued growth opportunity for our business, but I’m quite pleased to see the rate of adoption that we’re getting, in terms of customers buying a comprehensive offer and also more and more customers using us for production and bringing value. You know, to them, like in the examples that I shared in the prepared remarks. But, but yeah, overall we’re still in the early innings, I would consider, you know, less than 5% of customers.
So there’s a lot of opportunity for us to penetrate and that’s what our go to market teams are focused on.
Brian Drab
Okay, great. And then maybe I’ll just ask one more and then pass it on. You touched on it in the prepared remarks. You know, I think that the increased inspection capabilities that, you know, I’ve talked to you guys a lot about, and, and see the capabilities in the, in the facility and it’s impressive. You know, that seems like that’s a key strategic, initiative that you have and, and it’s making a difference. Can you just talk a little bit more about the traction that you’re getting from the high volume work? Because, I mean, you know, obviously the, you know, you’ve got, you know, a challenging environment that you’re operating in revenue is down. And but still the revenue per customer is up and, and you know, so this is like a key lever that you’re pulling, and can you just talk about the traction you’re getting in, in the higher volume orders through that.
Robert Bodor
Yeah, so, you know, we’ve been going through this transformation right to really drive production and to serve our customers end to end across their entire product life cycle. And of course, given that we started with prototyping that that means doing more and more production work for them. And so adding capabilities around comprehensive offerings, the ability to produce a much broader range of their part needs and also being able to do the inspection and other documentation, process control documentation and the like that they expect in production have been important additions and as we’ve brought that forward, our customers have been adopting it and, and we’re seeing, you know, nice growth there that drives our average revenue per customer to be I think the highest in our industry. And and we’re seeing continued growth in that number as more and more customers are adopting production and, and we’re seeing that that grow, you know, kind of 35%. You know, in terms of the customers buying the comprehensive offer year over year last quarter. So I’m pleased with it. I think it’s, it’s again, we’re in the early stages we’re really driving to, to grow it and we’re seeing strong and positive customer response. So I think we’re on the right track and we’re going to keep focused, right?
Brian Drab
Alright, great. Thank you very much.
Robert Bodor
Thank you.
Operator
Our next question is from James Ricchiuti with Needham and Company. Please proceed.
James Ricchiuti
Hi, good morning. Thanks. Congrats on the on the quarter by the way and if we go back to August, you talked about slowing activity and it sounds like the pace picked up a little bit relative to your expectations. Any sense as to what drove that better showing in August, September? Was it, you know, just the overall market, some of the things that you’ve done. And I’m just wondering, if you’ve seen some of that traditional pick up in the daily rates. How has that been trending, you know, thus far in October?
Daniel Schumacher
Yeah, Jim, the market that we’re playing in is, is very uneven is, is what I would tell you as I talked about in the prepared remarks, we saw it in, in really June and into July. A lower order rate. And what we did see to your point is we did see a higher pick up than normal seasonality in our order rate perspective in August and September. But that was starting from a data point of July that was really lower than historical, obviously, because we, you know, we reported that that revenue was down. So we were, it was nice to see the, you know, the pick up in August to September. I would say there wasn’t anything in particular that I would point out. I would just say that the general business, responded better than, than what seasonality would say from a really low June and July. And as, as I’m creating the guide again, I’m looking at, you know, four weeks of data that I have around, shipments and orders and the guide is, is showing kind of a normal decline quarter over quarter Q3 to Q4 that, that we normally see, you know.
Robert Bodor
I would just say I’m pleased that the go to market teams were able to get better than expected traction, right? As we kind of ended the quarter.
James Ricchiuti
And a nice sequential step up in operating margins in the quarter. And, yeah, I’m wondering if there’s a way for you to help us with the Global Operations Organization alignment. You know, how much of that would you attribute to it or is it, is it just mainly a function? Yeah, the revenues came in at the upper end of the range. We, we saw some nice solid improvement and growth margins as well.
Daniel Schumacher
Yeah, what I would say is, again, kind to repeat the 22 aspects of that, that gross margin. One being our network growth margin, which is really about, you know how we continue to improve our, our sourcing algorithms and, and improve the pricing within that model. And the second is really on a, on a plant by plant perspective in terms of the automation that we’re putting in and the tools that we’re using to manage our costs in those areas in, in, in an environment in which, in which the volume can be volatile, we, we just continue to improve in those respects and, and that’s what, what drove it in terms of the new organization. I’ll let Rob talk to that.
Robert Bodor
Yeah. So, I think as we look at that longer term, again, the strategy, there was a few things, one we want to be able to bring our global full capabilities, right? So, wherever we’ve got manufacturing capabilities around the world, we want to be able to bring those full capabilities to every customer, regardless of what region that they’re in to be able to serve them fully and to the best of our ability. Secondly, that structure now allows us to also reduce areas of redundancy or parts of the parts of the operation where maybe we’re not operating at healthy margins, right? We can, we can, we can we have some more degrees of freedom to, to really optimize that. And so you’re seeing, you know, these recent announcements is, is one example of that. And I think over time, you’ll see more and more opportunity for us to kind of optimize our operations from that standpoint to both drives, you know, healthy profitability for the business, but also make sure that we’re serving our customers as fully as possible.
Thank you.
Operator
Our next question is from Troy Jensen with Cantor Fitzgerald. Please proceed.
Troy Jensen
Hey, gentlemen, congrats on the great margins and cost controls.
Robert Bodor
Here.
Thanks for, thanks for calling.
Troy Jensen
Hey, so maybe I’ll first start off with the German facility update. Was this the old, was it the alpha cam acquisition mainly additive out in Germany?
Robert Bodor
Yeah, that’s right. So these were a couple of the components of the business that we acquired from alpha four years ago.
Troy Jensen
Alpha form. Okay. Alright. Did you do much of the Mrs in Europe or is it all is all mostly polymers? And you did metals in your in in Raleigh?
Robert Bodor
Yeah. So we have we have both polymers and the metal additive manufacturing in Europe and in Ptsb Burne. And this announcement was specific to the metal with the MLS. And so we’ll be phasing that out of fulfillment from, from Germany and fulfilling it instead through a combination of, of our capabilities in in North Carolina and our network partners. But.
Daniel Schumacher
What I would tell you, Troy is similar to our Raleigh operation, you know DMLS is, is a good chunk of the business.
Robert Bodor
But it’s, it’s.
Daniel Schumacher
Not the majority of the business in either.
Robert Bodor
Location.
Okay.
Troy Jensen
All Right. I guess. Well, two questions come with that then. Can you help me out with the Opex savings? I know we probably won’t see it in Q4. But you know, how much will this reduce Opex in, like either March or June quarters of next year?
Daniel Schumacher
This is choice. So, this is more of a savings from a gross margin perspective than it, than it is from an Opex perspective. For instance, in puts, we’re still maintaining the facility. We, we are just fulfilling the DMLS differently, both through our manufacturing partners and also through Raleigh.
Troy Jensen
Yeah, understood. I thought it was shuttering the facility, but it’s just kind of rely on it. So.
Daniel Schumacher
I Get it. So, the lower facility.
So, we do have another facility that is the precision injection molding facility. And so that one, we, we are closing.
Troy Jensen
Okay, cool. And I get it, you’re doing this because you can get better margins. You know, running through the network, curious if there’s other products kind of in your, in your portfolio. That makes sense. I guess I’m wondering primarily about sheet metal. I think that to me that’s like a lower gross margin product segment that hasn’t grown for you guys. And would it make sense to kind of run that through the network business also?
Robert Bodor
Yeah. So, yeah, last quarter, I think we definitely saw headwinds and sheet metal. You know, I’ll remind you that’s our smallest service and it got a lot of exposure to kind of the computer electronics segment, which which did see slowing last quarter and actually have seen headwinds for several quarters. Now, You know, I’ll remind you that we, you know, we’ve taken action there, we’ve, we right size that business, we’re monitoring it and operating it very closely. So I would say that the new global structure enables us to, I think have some degrees of freedom around this that we haven’t had before. And you know, we’re, we’re, we’re considering all these things as we go forward.
Got you. Okay. So we’ll keep up the good work.
Sure. Thank you.
Operator
Our next question is from Greg Palm with Craig Hallum Capital Group. Please proceed.
Greg Palm
Hey, thanks for taking the questions here. I may maybe just kind of starting with the, the out performance. I’m I’m curious if you, you know, can attribute any of the outperformance to the sort of the real realignment. It’s Rob, it sounded like maybe a hint of that, maybe that was a little bit of that. And then just to be clear as it relates to the order trends, you said, you know, pick up August September, have those picked up in October and they stayed at similar rates. I’m just trying to gauge kind of the guide of where order rates are for the first four weeks versus kind of what normal seasonality is in the quarter.
Robert Bodor
Sure. Thanks for the question, Greg. Yeah, you know, I’m pleased with how we were able to end the quarter and beat our expectations. The work that our go to market teams did in terms of, you know, driving demand in the second half of the quarter was great to see. I, I do believe that as we, we focused our teams through this reorganization, focusing our go to market teams on the the customers within their region allowing them to, to specialize and focus on that. I do believe help and you know, expect to see that continue to, to help provide benefits for growth as we, as we continue to go forward with this model.
Daniel Schumacher
On the order rate question. No, they, they have not picked up. I would say it more that, you know, June and July were soft and then we got to a more normal kind of seasonality in, in August and September. So there, there hasn’t been a pickup in, in October and that’s reflected in the guide.
Greg Palm
Okay.
And you know, the the margin, you know, performance was, was impressive. I’m curious on the network side, have you changed? You know, and you know, the algorithm at all the way you’re sourcing stuff or, you know, do you attribute some of the, the out performance, not just this quarter, but you know, year-to-date is that more of a byproduct of the environment we’re in, you know the fact that a lot of suppliers just have more open capacity right now.
Robert Bodor
Yeah, I, I think you’re right. So II I predict the two things. One is we launched this our pricing algorithm about a year and a half ago, which was a significant improvement and then we continue to make incremental improvements in it over that period. And I think you’re seeing that play out in terms of the margin. You know, as we look at it externally, we, we believe that we are very competitive in terms of our pricing, but we are able to get, and, and we’ve got very strong close rates, right. So we’re, we’re seeing that be very competitive yet, we’re able to continue to increase the, the gross margin because of the way the algorithm is working. So I’m quite pleased with that at the same time. II, I would agree with you that we’re clearly seeing excess capacity in manufacturing and that is factoring in right to the, to the margins that we’re able to get right now in this macro.
Greg Palm
Yeah. Okay. Makes sense. And I guess just, just lastly is it relate? I just want to make sure I’m, I’m clear on the P&L impact of sort of the recent news around the, the, the European facility.
It, what, what is the expected P&L impact, I guess? You know, so it doesn’t sound like much of an Opex, but it sounds like potentially some, you know, COGS savings are you able to, you know, quantify anything at all?
Daniel Schumacher
Yeah. No, nothing that we’re going to specifically come out with in terms of specific numbers. But there, there’s a, there’s a precision molding part of the business, that, you know, some of that business will be able to be fulfilled through the network. And so some of it will not, so that there is, you know, some of that business that we looked at as wasn’t strategic for our put to production strategy. And so, you know, there is some revenue that, that won’t be there, but we should see some gross margin improvement overall. I would say it’s, it’s not a huge amount be because of the relative size of, of of what those businesses.
Robert Bodor
Are.
Greg Palm
And I assume the revenue impact, I mean, it’s more like in the hundreds of thousands of maybe business that gets lost versus millions or.
Daniel Schumacher
Yeah, I yes, it’s, it’s not a, it’s not a huge amount. And what I would say is you know, what that business was doing was doing much more complex molds, but it was very difficult the way they were doing that to take it to production. And so what we’re shifting is doing more of those complex molds through the network using steel tools and, and, and other types so that we can then take that customer from prototype to production as a part of our strategy. So what we feel is a although although there might be a short term impact from that from the longer term is much better aligns with our strategy to move more to production over the long term.
Greg Palm
Yeah. Okay. That makes sense. All right, I will leave it there. Thanks.
Robert Bodor
All right. Thank you.
Operator
With no further questions. This will conclude today’s conference. You may disconnect your lines at this time and thank you for your participation.
