Earnings call transcript Q1 2023

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Operator

Greetings. Welcome to the Proto Labs' Q1 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.

the and to Corporate turn Frankman, host, now President Vice Controller. will conference your over Jason I

You may begin.

Jason Frankman

release joined XX, Bodor, Thank its release you, Executive This XXXX first I'm morning, quarter the Proto Officer; financial Labs' by XXXX. Shamolin, and the Chief ended company's is issued quarter welcome, results earnings everyone, and Dan Proto available conference for Financial and Labs Lab's on announcing President Proto to The Schumacher, first today March Chief Rob Officer. call. press a website.

presentation In prepared available a web addition, the address in slide release. is press online our at provided

to including uncertainties filings, from today information will cause results to recent could materially and differ discussion earnings our considered XX-K performance press may certain cause materially annual from to actual risks future refer differ release for and be made today. Form could expectations. and and forward-looking expectations forward-looking statements statements Our to that that to statements on are on subject or include SEC our actual that outcomes and any Please relating report risks adversely many

to press slide results. past section include The consistent and our measures will non-GAAP to company website practice. our release of reconciliation presentation accompanying our GAAP results Please complete discuss non-GAAP the at of with the refer Relations and we guidance financial Investor a for

Now, to turn Bodor. will I the over call Rob? Rob

Rob Bodor

guidance morning, for reported ranges. our thank conditions, to everyone, you morning, first pleased and share Good Jason. expectations. performed Thanks, revenue above macroeconomic uncertain earnings first am we our call. this we quarter and joining Amidst earnings quarter that above I

customer new expand also innovation accelerate we our share customers. and pipeline to our with additional launches multiple During capture wallet new of the gain first quarter, to offerings, continued

execute employees our how year. first of in with the our on pleased am few months goals the I

continued strength was in our manufacturing January Strong year line, Hubs our our in top greater-than-anticipated and digital we customers. outperformed quarter in by of demand the demand main key partner driven expectations Europe orders by from in performance strong European driven A two part in start through large operations the February, in network. On areas. and first

Revenue nicely XX% growth the over constant currencies. quarter first grew at very in through network manufacturing our in digital

As value our the digital and offering we that unique continue digital to realize from network. combines factory the

and are We only customers, scratching strategy our demand significant surface our with we of the proving getting combined offering. traction out and of the are

envelope become The factory growth a number aware we As network strong of teams factor. as of purchase high power source services. they strong services parts the the customers our from the seeing quality facing more manufactured are sell, one growth customer combined and in network is have single network customers both utilizing are customers wider looking of and that custom more to go-to-market to now of to also capabilities, our of testament

economic our lead increased offerings range offer expanded printing, launched including continue in CNC well network to Several resonate breadth market, of with XD and of prices certain current stronger even has times lower are to we cycle, our attractive longer more subset than the priced and In expected. a areas been lead and lead base time recently in as our its wider machining options. these in customer and as the time, growth longer of offers

XXXX. Now update our priorities for brief for a key on

second, two growth Labs areas. increased investments expanding Proto growth, in network. the On offer. profitability growth to shareholder revenue factory the value primary narrowed its through and comprehensive in our focus molding in and CNC priority drive new drive Injection First, focus two our and areas; integrated has and revenue

driven and year-over-year fourth excluding over constant double-digit quarter. in largely molding to currencies year start growth follow-on in the Injection injection the Strength parts. sequential was Molding has had and a Japan, good with growth by

go-to-market out and roll molds. strategies to We offer will growth improvements under to in drive continue

it to the our by orders combination early to in performance internal very of injection the fulfilled molding encouraged I'm partners. the As relates factories offer, combined and manufacturing

We our molding injection are due the winning combined to offer. breadth orders of more

example, a Domestic for division molded injection on Philips high relied Proto Labs parts for decade. has quality Appliances For over

Our prototype and parts. required project requirement complex more recent high both molded quick-turn parts

limitless network. parts internal would Labs value the speed offer customers the and anyone of Our for other offer, Philips complexity we Hubs factory and molded Due additional and our This to for is similar combined delivers Proto have offer. in these parts. elsewhere faster the the the almost to deliver can and market, than we capacity, combined complexity now of to digital many combination gone with Prior in Philips situations.

the for day recently standard we cutting lead lead industry-leading launched molding, pipeline seven innovation times molds, for As in an accelerated time half. within our injection

to offering in molding, continue digital in improve growth production We part service. will which our follow-on additional injection quality our enable

teams factory our automated through continue to our polishing. mold addition, In in manufacturing like innovations improve efficiency operations

strong area, by with in growth the the quarter, between and is performing cross-selling factory also priority growth digital very machining, network. the CNC Our next driven well additional first

breadth pricing custom lead to through As through challenging be macro Proto growth with past, allow Customer time I've for drive cycles the in Labs both single-source options network the to preferences CNC us CMC parts. discussed shift will all factory in a and supplier our and enables extended and machine macroeconomic the unmatched conditions.

in XXXX surpassed the in is expanding through factory quarter. first for for the and to network. expectations increase our The profitability earnings shareholder the value and revenue priority We next

for year expected, different our of business offerings business expected and profitability. quick-turn caused impacting Macro lower time, is anticipated. However, priced to our mix demand lower in than conditions lead grow than faster our longer than was early the

quick-turn volume mix environment. has current a profitability business, which in dependent difficult and the higher increased proven of on our higher Improving is priced

on margin As a expect efficiencies. result, we and on we XXXX, operating operating pressure continued vigilant improvement will remain throughout

metal our workforce in costs the we direct lower reduce in metal demand are service, sheet Due second with while XX% continued in to quarter. demand, our invest of areas. We high taking the in areas continuing actions to furloughed growth to softness sheet

in as reductions thoughtful the of volumes. business made have to areas other with well align sales We

growth. areas to reprioritize investments evaluate continue support our We business the in and to focus

program, quarter, our increased deploying million share repurchase repurchase our share we first through the During program. $XX

Going be will forward, dependent will and and market price other our opportunistic on market be to repurchase continue we conditions. rate

Our perform employees innovation to this expectations in to is commitment challenging our financial business customers' climate talented well needs. the have enabled achieve and ability our who our due to meet to efforts accelerate and and adapt of us

to revenue advantage are to incented early programs All incentive invest more employees and directly redesigned maintain now their and and has talented allowed compensation retaining performance development we earnings leadership programs. targets on In business grow the us our continued competitive XXXX, initiatives based and Attracting profitably. our employees and specific have of both in units.

and I to will to Labs in of thank and employees throughout our We the member invest teams for Hubs want Proto XXXX, every their continue efforts.

indicating slightly, softer quarter start March, months several second Managers' straight the note. companies remains. what to As rest has May macroeconomic after registered XXXX below In contraction. level Manufacturing we tapered to a ended and on Purchasing very and we ahead rates macro Consistent data XXXX, have the look a the ISM, Index declined six and quarter of strong order uncertainty with the U.S. and to slightly its XX, industrial XXXX, reported, lowest since have

quarter In of as to customers wallet on capture even earlier, margins near-term, expedited volatility. and stated beyond. breadth additional I weighs us and growing time nature we new business enables the as share price macroeconomic through the and throughout to of global manufacturing, offer our shift lower second weakness expect continue lead of However, offers business. This macroeconomic the our faster longer influence mixed our to than continue quick-turn will our

We will rates closely and monitor expenses continue to accordingly. adjust order variable

have mix for the guidance shift We earnings reflected our impact this quarter. second in

that will customers our and and the deliver great I’m I first shareholders long-term. confident results am our we our value the pleased with over quarter in for

the lead Our longer priced we leader macro as market and lower rapidly that very are manufacturing. performs still during cycle, digital growing are industry offerings this in expedited of well time, quick-turn the part

volatility us innovation great customer profitability for we long-term generation. cash We invest our of and weather best-in-class and and economic customers. a continue also wallet. strategic models to in economic partner positioned business to customer are our share offer any our additional conditions, due expand to enables Through strong well capture flow are This to

will cover provide first XXXX. our our for financials of quarter depth second now and the in With quarter outlook that, Dan? Dan

Dan Schumacher

Thanks, Rob, and good morning, everyone.

Our financial results presentation. X begin the of slide on Page

million first a million of $XXX.X to and or of excluding continue record Hubs to generating revenue range a macroeconomic and $X.X The unfavorable representing revenue XX.X% foreign growth XX.X% growth X.X% revenue, increase network revenue with in to grew above of quarter quarter quarter. Changes our the and impact global negatively in had resonate a constant represents impact year-over-year offer $XX.X constant in represent was currencies in revenue current X.X%. Hubs First currencies. continues backdrop. guidance million Japan. currencies year-over-year the customers Sequentially,

on our orders revenue XX.X% In XXXX key strong XX. First quarter first the quarter several start year-over-year. first year-over-year is quarter revenue summarized by Slide from constant a Americas, Europe, to very largest in increased driven grew revenue In X.X% by currencies and region larger region customers.

by service. revenue to Transitioning

injection constant molding in Japan. First quarter grew revenue currencies year-over-year and excluding approximately X%

options length, This XXXX and revenue driving through machining in sell at constant network to shift initiatives XX% in priorities factory growth As customers cost grow grew and driven the excluding is we lower injection of longer was in the options. our lead top time to lead Japan. CNC have molding time, currencies one revenue. discussed our year-over-year cross to as longer demand

in quarter with constant metal on XD Sheet network declined grew printing growth in of saw some orders. revenue XX% grew larger through strength printing metal all revenue year-over-year declined strongest currencies service, the growth sheet X% our constant Within quarter. also – – we and in geographies First Europe currencies. in the revenue XD the the in year-over-year

service vertical demand the product the been unique slowing current developers and by XX,XXX metal to product in served exposed We developers in electronics quarter, more excluding sheet unique Our natively Japan industry the and X.X%. served first computer impacted environment. increased is has

non-GAAP basis increased points Overall, XX.X%. Slide to XX gross in XX quarter sequentially income to Turning detailed margin statement. our first

first lower other to fulfillment fourth network compared gross closures. manufacturing New network Our in Year margin Chinese XXXX. quarter manufacturing partners gross due XX.X% the by XX.X% of in to The and shifting quarter was factory margin the was driven to regions

margin targeted quarter gross be second of range expect in to network XX% XX%. We to our

margin compared non-GAAP increased of growth especially with revenue slightly fourth were operating higher revenue Sequential The growth marketing XX.X% increase expanded was expenses or of the sequentially. margins expense XX.X% XXXX. commissions offset higher metal $XX.X demand. driven $XX.X injection quarter, and set basis of points gross lower quarter sequential million compensations amounts. volume, as of gross in million Factory to was or sheet by in overall in lower revenue revenue molding by operating partially XXX than Total the

taxes. to Moving

in at the rate tax first quarter effective quarter XXXX. normalized of Our to fourth X.X% was compared in non-GAAP the more XX.X%

As fourth an a reminder, decline a accrual to driven the earnings by uncertain of sequentially. in The a resolved. position lower rate share was was tax of the increase quarter $X.XX per non-GAAP normalized that drove rate our more an release tax

income to benefits rate. quarter as was share as earnings First tax revenue as per $X.XX shift to improvement effective factory These well The net higher XXXX. quarter by lower continues margin revenue internal and per non-GAAP higher driven compared offset outgrow sequential by the network the of primarily in income. fourth were was partially mixed diluted $X.XX volume other share

a the us up invest balance from growth. business Turning to from of our to XX. highlights drive Even uncertainty future $XX.X on flow weather to quarter cash and while million in operations strong quarter, in in enabling offer Slide We cash cash generated generations, the in of $XX.X XXXX. million macro flow first to periods very fourth and improvements exhibits sheet continuing tough environment,

worth increase repurchase We XXXX. during million a fourth $XX.X quarter, of the quarter first over the shares common of significant

going a mentioned, and of forward. and in we March to very strong On cash sheet. zero have had Rob we will balance As opportunistically our $XXX.X debt. million investments purchase XX, still XXXX, continue sheet We balance

the outlined XX. outlook on second XXXX our of as Slide for provide we’ll quarter Now

flat at the closure growth. patterns, We typical incorporates between million Japan expect to quarter This this negative $XXX more implies the $X.X generate year-over-year a revenue have been expected excluding is impact the which on and revenue million seasonality currencies midpoint Japan. The revenue forecast somewhat year-over-year difficult our in revenue performance environment. million and constant to and to macro $XXX April given second operations of dynamic have range

impact XXXX. unfavorable have foreign of expect $X.X compared the second to We to currency approximately million a on quarter revenue

order second $X.X quarter weakness, which second to to points. and million. trends XX% to non-GAAP currently our we quarter, second compensation a We and of second on mix will margins in the of time, guidance. be Moving We earnings estimate macro non-GAAP add longer anticipate continued and backs lower the on approximately early quarter pressure towards include plus anticipate will quarter earnings. expense stock-based lead rate amortization $X.X effective expense XX million, tax shift continued price continue offers, Based basis or to minus put in

proactively best-in-class in As softer of quality speed, are Rob that we our are area reducing the costs factories. described, seeing sacrificing our demand without and business reliability in

expect model business enable will profitable a out development custom comprehensive to we in parts in second quarter strong most build and $X.XX. non-GAAP to Our between and the flow the generation market. expense research $X.XX manufacturing offer to EPS the reductions, approach to cash take continuing measured future and while this, us through invest Considering digital

comments. closing for Rob to back Now

Rob Bodor

Dan. Thanks,

offering. the in revenue future. to CNC quarter manufacturing us withstand company injection is molding focused in our Labs We we and strong in Proto and in our challenging successfully are of pleased and investing most profitable earnings visual our to grew expectations industry, while our XXXX. the most two We generate enabling comprehensive first for surpassed the the areas macroeconomic with start and environments, cash

is unique best-in-class market. traction Our offer the gaining significant in combined

will enable to focused progress our on XXXX will which make value profitable shareholder continue and growth We priorities, creation. long-term

prepared concludes remarks. our That

take to your happy We’re questions.

Operator

comes line Jensen of Instructions] Our question the Markets. Street with first Please your with from proceed Lake [Operator Capital question. Troy

Troy Jensen

off, first here. the gentlemen, on Hey, results nice congrats

Rob Bodor

Troy. Thanks,

Dan Schumacher

Thanks, Troy. Good morning.

Troy Jensen

less your guess curious you quick-turn you Maybe get cuts imply kind extended I that? does to could on and could margins. either give guidance, some a sequential Daniel downtick your business OpEx I’m color times if about of of lead it with a on coupled the morning. guys or implies then guess us more that for comments And midpoint to one Good basis? in gross But answer. here I of

Dan Schumacher

Yes.

is the gross expect Chinese gross a margins do margins our to behind expect quarter. seasonal challenge that we quarter-over-quarter. The first a percent network better said, Year perspective, with XX quarter-over-quarter margin one, margin points. basis basis from to So the that basis we in points do impacts improve XXX I Like gross we have New

Rob mentioned, in making cuts as gross and in there the cost areas the certain factory are Second, margin we well. reductions as improve to

Troy Jensen

All margins you right, with the on share us business? perfect. Dan, could are what network the

Dan Schumacher

script. the Yes, I said it in

XX% to the I in into that in would range we’re is So quarter. they’re to our and the which XX%, quarter, then the second long-term XX.X% back expect going get range of

Troy Jensen

Okay, perfect. for one And last Rob.

Just been do what verticals were think in any Europe but you thoughts? automotive, strong? have This other might

Rob Bodor

in and automotive Yes. particularly in strength within industrial. We EV saw in and also that

Troy Jensen

Awesome. All right, work. guys, keep up the good

Rob Bodor

Yes. Thank you.

Dan Schumacher

Troy. Thanks,

Operator

comes with question. line Needham. of Ricchiuti Jim Please with next the your Our question proceed from

Jim Ricchiuti

a could if the growth I be two looking of Is Americas it the the or Hi. you’re versus in Thanks. size in just the quick-turn so the bit and clearly slower why I’m mix function the But morning. Europe these growth in markets? major Yes, that greater it you more at and regions, turn the shed function a little of showing regions. the growth Good rates being of in showing of in stronger of growth well kind to I’ll to wonder end very business Americas? Americas Europe So over just you’re you. in business may and color the a impacted a as

Rob Bodor

Yes.

had orders. due quarter business talked factory bit We about Europe my our really the a bit I on little some a to – commentary. in very So that little large side, tremendous a first talked

that So helped.

in the the business side that On the the because and metal in sheet didn’t of quick-turn quarter. developmental business the grow of the U.S. quarter business business

Jim Ricchiuti

you pronounced markets at changes which the you went where look through areas in the demand, more you in the that business Americas, see end quarter was did as as of And in?

Rob Bodor

markets end Which were strongest in…

Jim Ricchiuti

trends curious, the end Americas, different the markets were just the in where I’m seeing business? you in

Rob Bodor

business. strong saw was electronics, us. weakness sheet for We in aerospace us. strong computer So metal was for Automotive some the in particularly

Jim Ricchiuti

talk in you’d about I seeing pricing what Americas, you’re a competitive general And the trends. finally, in if little wonder there the bit landscape

Rob Bodor

Sure.

there of can – business transactional space. – that that more very part space time into if you In is Though see, the longer with in the direct competitors side. take did factory, the competitive about not pricing. our still of we there So, And you the we’re that digital time exceptionally a are quarter of the part differentiated think a not feel business our And the lot lead we at in XX%. on lead as grew that we running digital we the quick space. network were well factory in

in to quarter. were we on strategies our the normal so able And execute pricing

Jim Ricchiuti

Got it. very much. Thanks

Rob Bodor

Thank you.

Operator

line the from with comes your Brian with Blair. William question question. proceed of next Our Please Drab

Brian Drab

taking for Thanks my questions. Hi.

an it First, can the expectation I’m business mean, for thought grow But the in there last increased still is versus whole year? just the year-over-year uncertainty call. since there’s macro, I updated the if in injection XXXX world clearly industrial curious given the macro XXXX the is that molding

Rob Bodor

Yes.

– business result molding. So that not but had molding. in we with I’m injection pleased I think the I’m nice in driving to grow injection I quarter still result, we satisfied. am a are the

We’re to drive continuing to the the up grow injection. business

Dan Schumacher

the quick have we into I nature say, business. would of visibility, better Brian, our don’t any right, turn

could Sure, business that and in half by the trends? impacted of be more both the So negatively. macro in we year positively second

of we So guiding making not But had in – the service a year. full at we’re individual point, happy about any with terms that or the declaration results anything QX. this I’m I in

Brian Drab

Okay.

type it gathered April? slowed. there in into were and what Okay. of we I activity well orders. large because you that And guess that correct? parts And quarter, ended guess, that the in really Is did then some I terms did I business part March then in of see as the

Dan Schumacher

molding on in correct, later yes, we momentum really right? Yes, you in quarter injection saw quarter. parts than side. that the quarter that in in the was so more of The And are the earlier strength the

from large we’ve very a we’re this year from coming and last year install seeing base, I right, IM off strange what perspective of parts. and but – So come chain think yes a got was supply that – comes back order customers them

Rob Bodor

call this use say we're side more side I business in the And more the digital customers of business, both regarding from would and but of the I to that as shared the on network also true the is Philips. the factory demand example seeing

Brian Drab

to question is the back to step last but the then then other to just user just And and of and of and what the completed? business can Hubs' Labs site. would together terms all integration – side Yes. the to Hubs link regarding legacy independently to timing? us be to, you the And and go use I I to I Labs going I comes Proto remind to kind website, integration Proto the and interface and future? and are Labs, of Hubs how like when of people I the in the network business – where just to still still the the we don't get get Proto and is know, still that have a maybe like be finding that go go Is Are in of – it curious kind largely. I'm X.X,

Rob Bodor

Yes, absolutely.

can at are access Hubs' website. capabilities the Hubs. just Within before, of be the this as Hubs time. seeing to we're Hubs' full through to stated – But to you capabilities, and good as We coming the still up flow XD you shortly network right, website really said, do we right, will the from customers protolabs.com. now started we have with CNC CNC, So and printing we

a job. teams Our think, cross-selling great are, doing I

XX% business. driving Our revenue teams in see can a from as are growth nice our the growth network really doing you of go-to-market job

most we're the our customers, So capabilities integration exposing of with I well. is think And combined progressing it's the resonating broad our importantly, and to offer them.

Brian Drab

my thanks for question. Okay, taking very much

Rob Bodor

Thank you.

Operator

your Our Craig-Hallum. of Palm the question. line proceed next from question with Greg Please with comes

Greg Palm

questions Thanks here. morning. taking the for good Yes,

that grow molding part the ability business on I injection business you to strong, does get some of to the understand to up does XXXX? year, this the curious, growth, the accelerate? maybe Or on hinge achieve business the and grow that I'm do can those Following was commentary, later parts but just it the molded get in need more on year to if you what's sort growth? assumption this molding behind

Rob Bodor

the increased we business, drive working Yes, to businesses. as parts are molding as absolutely, well

more As Dan to broad a to and our we've order And That's production business. are and we base continuing who in got objective molds customer with continuing growth. are mold do us from said, the great us. drive more

As with them side. on cross-selling network being we're as opportunities mentioned as customers capabilities we expand offering have well, the our us in molding end-to-end and interested seeing I working the to for more to

So we'll continue drive that. to

Greg Palm

gross bit And shifting over to Hubs. then Okay. little just margin It's for a unclear.

of a basis think, was points. it So couple down, I XXX

presumably You year. last with revenue ran and New headwinds Chinese into lot a Year the higher this same year

the impacted So at it was year-over-year structure in that something there basis? else or quarter one-time on a least

Dan Schumacher

going Yes. walking What into there's bit to manufacturing fourth from the with of amongst doing Year. a quarter, as within we we supply tightening partners, know we're be the quarter the chain New Chinese the up first our end

price last were felt meant there so, this is, were pricing, as were we some optimizing won we're learned from opportunities we may we bit we as the we year, we much. margin go that a what each not year. gross And – into a we higher aggressive the Last constantly year than increasing we What a higher year, by we on learn more have that. which as price like price little little actually

quarter, And that New we for pricing so aggressive change with this time. weren't Year the Chinese as

range for growth not to million. was Yes, back to we in million quarter, high, our but So next $XX XX%. as was our rate expect $XX and higher be the at margin

Greg Palm

Yes.

just Okay. last one. then And

the I due mentioned increased to of some for had sort quarter-over-quarter the margin, core, gross you furloughs. On think

but across or mentioned something alluding metal, you think furloughs else and you to sheet not? I business other parts were the of

Dan Schumacher

that over areas, it's as in sacrificing which aligning time. measured without day. our volume reductions includes the within are slower factories demand costs temps, our as as turn we're It's of reducing so a the the to managing those also reducing well, apart quick ability that cost We're making seeing

Greg Palm

Yes, okay. Understood. All right, thanks.

Dan Schumacher

Greg. Thanks

Operator

Ben question Research. comes Rose proceed Battle the of next from line with question. with Our Road your Please

Ben Rose

to Thank taking that businesses. question. factory a for Proto are what strategic my is which that's product business progress larger those out the volume using those regard Hubs in accounts might officers have driving reach to standpoint to whether accounts you accounts, the Labs core whether Rob, that's orders beyond making get Curious your designers – point? and for your from your within procurement thoughts with to higher in that a question this driving accounts at to factor A primarily network on in you're

Rob Bodor

some Yes. business to we're network the the you to starting network is. question. and with cross-selling Thank that absolutely and driving we've capabilities. factory think success you have see by it combined that And mentioned the orders for that the can the larger I and of and

see part we've engineers certainly, So designers it's those, both procurement thousands a and parts you in of production which to that as well And professionals. to we're our in tens product is serve that. as got attributed can customers. fortunate growth across of business, And strong

Ben Rose

much. very you thank Okay,

Rob Bodor

Thanks Ben.

Operator

this of And we Thank lines today's conference. for disconnect session. you the This have time. reached your your concludes question-and-answer participation. may the you And end at

Proto Labs (PRLB) 5 May 232023 Q1 Earnings call transcript