Proto Labs, Inc. (NYSE:PRLB) Q1 2024 Earnings Call Transcript

Proto Labs, Inc. (NYSE:PRLB) Q1 2024 Earnings Call Transcript May 3, 2024

Proto Labs, Inc. misses on earnings expectations. Reported EPS is $0.2043 EPS, expectations were $0.3. Proto Labs, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings. Welcome to Proto Labs First Quarter 2024 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.

Jason Frankman: Thank you, Sherry and welcome, everyone, to Proto Labs' first quarter 2024 earnings conference call. I'm joined today by Rob Bodor, 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 first quarter ended March 31, 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 Rob Bodor. Rob?

Rob Bodor: Thanks, Jason. Good morning, everyone and thank you for joining our first quarter 2024 earnings call. We demonstrated strong operational and financial execution in the quarter, delivering first quarter revenue at the top end of our guidance range and earnings above expectations. These results were driven by the continued execution of our 2 strategic priorities: Increasing the number of customers using our comprehensive offer and driving higher revenue per customer through larger orders and all services. We delivered strong gross margins, earnings and cash flow. I'll now expand on the progress being made across our 2 priorities and then Dan will take us through the results momentarily. First, we continue to increase the number of customers using our comprehensive offer fulfilled through both the factory and the network.

The combined offer brings immense value to customers, enabling them to use Proto Labs as a single-source manufacturer throughout the product life cycle, from prototype to production to end of life. We have seen that those customers that use Proto Labs across both the factory and the network, spend approximately double what all other customers spend, demonstrating the significant synergy and value that our customers derive from the combined offer. Over the past few years, we've significantly expanded our offering and now serve more production needs than ever before, yet we are in the early innings of customers fully utilizing our combined offer. In fact, last year, less than 5% of the 53,000 total Proto Labs customer contacts purchased parts to fill through both the factory and the network.

This clearly presents a huge growth opportunity for Proto Labs and I am very excited about this potential. We have been and continue to be very focused on accelerating the continued adoption of our combined offer in order to capitalize on the attractive growth opportunities to add new clients and increase share of wallet. We also made progress on our second strategic priority which is to drive higher revenue per customer through larger orders and all services. Of note, revenue per customer contact increased 5% year-over-year in the first quarter. We are benefiting from recent technological advancements to our offering which allow us to win more in production. In the factory, we're beginning to see early returns on investments in production, including robotics, our patented automated mold polishing process and machine perception in our quality verification process.

We have also greatly supplemented our production offer with expanded capabilities and AI-enabled pricing options through the network. We believe that Proto Labs has the strongest brand in the industry known for our reliability and quality for the last 25 years. Let me now bring these remarks to life with several examples of how we're helping our customers positively impact the world. These customer examples begin on Page 6 of our slide presentation. The first 2 examples highlight our role in enabling the profound advancements taking place in medical devices, specifically advanced prosthetic equipment. BioDapt has used Proto Labs as their custom parts supplier since its founding in 2010. As we showcased on our website and a recent press release, BioDapt creates custom prosthetic equipment for elite, adaptive athletes via our world-class factory CNC Machining service.

Our ability to iterate and rapidly manufacture high-performance custom prosthetic equipment allows us to serve BioDapt and provide bespoke, highly engineered solutions for elite athletes, such as Mike Schultz, Founder of BioDapt and former X Games and Paralympic Games Gold Medalist, as well as Noelle Lambert, former Division 1 Lacrosse Athlete, who is training to compete the 2024 Paralympic Games. Circleg, another manufacturer of advanced prosthetic equipment that enables amputees in East Africa to live active lives, needed a way to mass produce a design that can be adjusted to each individual while being highly affordable. Our Proto Labs network provided a design input and affordably manufactured high-strength stainless steel CNC Machine components for Circleg's prosthetic system in the high volumes that they required.

I'm deeply proud of the fact that we can play a role in helping society through our work with pioneering medical device companies, like BioDapt and Circleg. Whether they need rapid prototyping for custom high requirement products or affordable manufacturing of critical components and high production volumes, we can bring unique value to our customers throughout the life cycle of their products through our combined offer. The next example that I'd like to share comes from our work with NASA, where we delivered custom metal components within 48 hours of their design. Our unique, highly automated digital factory enables us to serve NASA's needs faster than anyone else in the world. Over the years, our digital manufacturing offer has propelled NASA's design evolution and accelerated their innovations.

A technician using a 3D printer to produce a metal component for a customer.

In February, NASA partnered with Proto Labs at the Power Source Global Summit, where they crowd-sourced requirements and design constraints for a tool to capture gases on the moon surface. Conference attendees used generative design software to design metal components for lightweighting that could be manufactured using Proto Labs' 3D Printing and CNC Machining capabilities. Once ordered, Proto Labs manufactured the parts in less than 24 hours. Less than 48 hours after they were designed, the physical parts were delivered to NASA at the conference, enabling these experts to innovate and move science forward. Proto Labs is uniquely positioned to achieve this feat for NASA as the only digital manufacturer in the world that combines the digital thread with speed, reliability and quality.

This is a great example of the positive impact we can have for our customers by utilizing our unique capabilities to empower the world's most innovative organizations to bring new ideas and products to market. As I stated at the beginning of the call, we continue to execute well on our priorities during the first quarter which drove strong financial and operational results. We are pleased with our progress to date and remain focused on executing on our strategic initiatives and generating strong financial results. I want to thank our entire team for their continued dedication to excellence and positioning Proto Labs for success and value creation. Dan will now provide additional financial detail on our first quarter results as well as our outlook for the second quarter of 2024.

Dan?

Dan Schumacher: Thanks, Rob and good morning, everyone. Our financial results begin on Page 10 of the slide presentation. As Rob mentioned, we delivered first quarter revenue at the top end of our guidance range and earnings above expectations, driven by an uptick in order growth relative to the beginning of the year as well as strong performance in higher-margin services. First quarter revenue of $127.9 million was in our guidance range and grew 1% year-over-year in constant currencies. Proto Labs Network revenue was $23.9 million, a quarterly record, up 38% in constant currencies. First quarter U.S. revenue grew 4% year-over-year, while Europe revenue was softer than expected, declining 9% year-over-year in constant currencies, primarily due to large orders in the first quarter of 2023 that did not recur this quarter.

In addition, the Eurozone and U.K. manufacturing sectors continued to contract in the first quarter on the basis of weak demand. Turning to Slide 12 and revenue by service. First quarter Injection Molding revenue grew approximately 1% year-over-year in constant currencies. Injection Molding parts growth was particularly strong due to continued larger orders. CNC Machining grew 3% year-over-year in constant currencies, driven by continued growth through Proto Labs network. First quarter 3D Printing revenue was flat year-over-year. Sheet Metal revenue declined 16% year-over-year in constant currencies. As previously mentioned, our Sheet Metal service is more exposed to the computer electronics vertical which experienced continued industry-wide softness.

We have rightsized the business and are monitoring it carefully. First quarter non-GAAP gross margin increased 30 basis points sequentially to 45.6%, driven by improvements in factory gross margins. Proto Labs network non-GAAP gross margin was 31.7%. First quarter non-GAAP diluted net income per share was $0.40, above the midpoint of our guidance range of $0.30. This outperformance was driven by revenue coming in near the top end of our guidance range and better-than-expected gross margins. Gross margin exceeded our expectations due largely to stronger-than-anticipated factory revenues in Injection Molding in the Americas, one of our higher-margin services. We are pleased with the improvements we've seen in factory gross margins as we drive continued innovation in automation and efficiency as the world's most advanced digital manufacturer.

Non-GAAP EPS of $0.40 was down $0.06 sequentially primarily due to higher operating expenses including higher incentive compensation and other seasonal costs that increased sequentially in the first quarter. The increased SG&A costs were partially offset by higher volume and an improvement in factory gross margins. Turning to cash flow and balance sheet highlights on Slide 13. Our industry-leading cash flow generation model produced $21.3 million in first quarter cash from operations. We repurchased $16 million of common stock in the quarter, equivalent to 85% of our free cash flow. On March 31, 2024, we had $112.9 million of cash and investments on our balance sheet and zero debt. Turning now to forward-looking guidance. Our guidance for the second quarter of 2024 is outlined on Slide 15.

We expect to generate second quarter revenue between $122 million and $130 million. After strong orders from the end of January through the beginning of March, we saw some softening of larger orders as we approach the week of Easter. That carried through the month of April. We do expect year-over-year revenue growth in the second quarter. We expect foreign currency to have a negligible impact on revenue compared to the second quarter of 2023. Moving to earnings guidance. We anticipate non-GAAP addbacks in the second quarter to include stock-based compensation expense of approximately $4.5 million and amortization expense of $1 million. We currently estimate a non-GAAP effective tax rate of 24%, plus or minus 50 basis points in the second quarter.

In summary, we expect second quarter non-GAAP earnings per share between $0.30 and $0.38. That concludes our prepared remarks. Operator, please open the line for questions.

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