Q1 2021 Proto Labs Inc Earnings Call
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Welcome to the Proto Labs Q1, 2021 earnings conference call. At this time, all participants are in a listen only mode of <unk>.
On answer session will follow the formal presentation, if anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded I will now turn the conference over to your host Dan Schumacher. Mr. Schumacher you may begin.
Thank you Alan and good morning, everyone.
With me today of Rob of the door Proto Labs, President and Chief Executive Officer, and John Way, our Chief Financial Officer.
This morning, Proto labs issued a press release announcing its financial results for the first quarter ended March 31.
<unk> 2021.
Okay.
Now I'd like to turn the call over to Rob the door withheld the road of Proto Labs, President and Chief Executive Officer since March 1st of this year.
Thanks, Dan and good morning, everyone. Thank you for joining us today for our first quarter of 2021 earnings call.
I am excited to take you through our operating and financial results as well as our top priorities and my first year of CEO.
We have a few very important topics for today, including an update on our for the last two point on system launch and performance our first quarter together with the three D homes and an invitation to our virtual Investor Day later this month.
John will provide details on our first quarter financial results and our outlook for the second quarter later in the call.
Turning the first quarter of financial performance on.
Pleased to report the strong start to 2021 with revenue on earnings within our expectations first quarter revenue of of $116 million was near the top end of our guidance range representing of year over year increase of 1% and the sequential increase of 10% of.
<unk> hubs contributed five $8 million of revenue between clothes on January 22nd at the end of the first quarter.
And delivered strong growth of 35% over there prior to the results.
<unk> are normal seasonality patterns.
Revenue started relatively soft in January and picked up as we progressed through the quarter.
This was particularly true on our injection molding business, we saw increased demand as global manufacturing activity continued its recovery from the low point in the second quarter of 2020, and we benefited from global supply chain challenges is our customers pursued alternatives to their traditional suppliers.
This was the strong order volume of injection molded production parts, not only benefiting the first quarter, but creating a backlog into the second quarter as well.
As a result of first quarter of injection molding revenue from 3% year over year and 8% sequentially.
We breakdown revenue by service on slide six.
Or three deeper into the red.
The revenue increased 8% of over the prior year quarter and 8% over the fourth quarter of 2021.
I'm excited to work with my colleagues to execute on our strategic objectives delight, our customers and capture more of our market opportunity.
As we continued to emerge from the headwinds of the global pandemic Proto labs is well positioned.
Even on our market leadership and the bold strategic moves we have made to better serve our customers by improving our e-commerce experience and expanding our offer.
Our three priorities for 2021 are first to create a world class customer experience for digital manufacturing.
Second to expand our portfolio of customer offerings to meet the broadest set of customer needs and third to further invest in our employees.
In the first four months of 2021, we made substantial progress on all three.
First and most importantly for labs to point out of is now live in Europe and the Americas.
We've processed over 54000 orders through the new system.
With this new E Commerce platform, our customers now have access to an improved order management more secondary operations enhanced quality documentation streamline production features and the ability to manage multiple services in a single project.
As with any system launch of this magnitude we have had our challenges.
The the best and R&D to provide the the best customer experience and.
In the near term both organizations will continue to operate semi independently while collaborating to develop a robust plan that will allow us to the best serve our customers and generate significant shareholder value.
Our third priority of 2021 of.
The long term focus for total labs.
Is the continued to invest in our employees.
Our employee drive the success of this company.
We are delighted that the treaty hubs employees joined our team in the first quarter.
And our relationships on productivity will only increase as our interactions and collaborations continue.
Throughout 2020 on into 2021, we've demonstrated our commitment to the development of our employees and offer many opportunities for additional training.
In 2020, we implemented a customized learning management system and now offer hundreds of on line courses across the range of jobs specific disciplines that provide our employees with greater access to development resources.
Employees are assigned forces to help them expand their expertise and the current position and can also register per course to help them advance their positions in the organization.
We have also launched customize leadership development programs for the managers that focus on how to effectively coach and develop their employees.
Furthermore, the safety mental health and physical wellness of our employees has always been a top priority for this company.
To help them overcome the unique physical and mental challenges brought on by the pandemic, we develop and deploy specialized health and wellness training throughout the year.
Aside from our primary of 2021 priorities in recent years, we've also prioritized our sustainability and societal impact.
We are working to continuously improve on environment, and social and governance for Es team practices.
And I would like to take a moment to highlight some of the work we're doing today.
Prolepsis recently recognized from the U S with the 2021 Sustainability award from the National Association of manufacturers for a continued effort to reduce on environmental footprint.
These efforts include implementing solar power of that are Plymouth, Minnesota of injection molding facilities.
Reducing material of weight through recycling programs.
Establishing an internal green team and making other energy efficient changes across all of our facilities.
We're also tracking on utility NRG and natural gas consumption. So that we can better understand our impact and identify areas for further improvement.
There are also several social initiatives in the works that on quite proud of.
Our detailed first quarter financial results begin on page 16 of our presentation.
First quarter revenue of $116 1 million represents a 10, 4% sequential increase of 5% organic sequential growth in constant currencies.
<unk> was acquired at the end of January and contributed $5 $8 million of revenue between the acquisition date and the end of the quarter.
Additionally, changes in foreign currency had a $1 $6 million favorable impact on first quarter revenue.
We served 22600 unique product developers in the first quarter up 8% year over year and 24% sequentially.
The first part of growth was largely driven by the acquisition of <unk> hubs, adding just over 3000 product developers served.
We will continue to increase the number of product developers reserve and increase the share of wallet with our existing customers as we execute on our 2021 priorities and longer term of strategic objectives.
Turning to slide 17, and our detailed income statement, our non-GAAP gross margin in the quarter of 48, 5% was in line with our guidance and compares to 51% in the fourth quarter of 2020.
The <unk> hubs represented the ninth 190 basis point headwind on overall gross margin due to the lower margin nature of the outsourced manufacturing model.
The <unk> gross margin was lower than our target for this business driven by increased shipping and customs costs as well as higher sourcing costs during the quarter.
The <unk> team is actively working on available levers to improve this gross margin performance.
The remaining sequential decrease was due to higher staffing costs in the form of overtime and content contractor spend and our manufacturing facilities driven by the progression of orders during the quarter and efficiencies inefficiencies as our operations teams adapted to the new prototypes to point of those systems.
As we go forward business mix will play a role in our gross margin and is likely to introduce additional volatility in this metric.
Sure.
Our total non-GAAP operating expenses were $42 4 million in the quarter compared to $37 4 million in the fourth quarter of 2020.
The <unk> hubs added $2 4 million of non-GAAP operating expenses on the quarter.
The remaining sequential increase consists of the following factors.
We had a full quarter of Proto labs, two non depreciation resulting in an additional $600000 of expense.
We incurred incremental overtime and contractor spend associated with going line on the Proto labs, two <unk> system, resulting in $600000 of expense.
And the remaining increase was primarily related to an increase in accrued bonuses payroll taxes and medical expenses compared to the fourth quarter.
Our GAAP operating expenses included nonrecurring transaction costs of $2 5 million associated with the <unk> acquisition and an increase in equity compensation associated with our CEO transition and the acquisition of <unk> hubs.
Moving taxes, our non-GAAP effective tax rate in the first quarter was 22, 7% up from 18, 2% in the prior quarter.
The sequential increase was driven by of provision to return benefit in the fourth quarter that did not recur the lower research and development tax credit.
The net operating losses of three hubs.
Yes.
The net result was non-GAAP diluted earnings per share in the quarter of 40 <unk>.
Representing a 21 per share decrease from the prior year kind of sequential decrease of <unk> 10 per share.
Our non-GAAP adjustments are consistent with our prior practices and are detailed in the appendix of our presentation.
The sequential change in non-GAAP earnings per share consisted of the following components.
First the addition of <unk> business represented a negative sequential impact of <unk> <unk> per share, including lower investment income and the impact to weighted average shares outstanding.
Increased volume in our legacy business and the incremental cost to support that volume represented a sequential increase of <unk> <unk> per share.
This volume was offset by increased expenses related to the Proto labs, two of <unk> launch, including depreciation of the system and additional labor during the launch representing of <unk> per share reduction.
And finally, the increasingly effective tax rate had a <unk> <unk> per share unfavorable impact on the quarter.
Transitioning now to the cash flow statement and balance sheet summarized on slide 19.
We generated $6 $4 million from cash from operations in the first quarter compared to $22 4 million in the first quarter of 2020.
Our operating cash flow this quarter was impacted by the transaction costs associated with the <unk> hubs acquisition and an increase in our receivables balance as a result of relatively higher sales at the end of the quarter.
And due to processing efficiencies of customers and employees adapted to.
The new Proto labs, two <unk> systems.
The increase in receivables is a timing matter and we are increasing our focus.
In order to improve cash flow in future quarters.
The net cash portion of the purchase price in the <unk> hubs acquisition was $127 7 million.
On March 31, we had $93 $1 million of cash on cash equivalents on the balance sheet and we continue to have no debt.
Our proven digital manufacturing model will continue to provide strong cash flows and has enabled us to maintain flexibility and invest in future growth incurred of including Proto labs, two point of view and the acquisition of <unk> hubs.
Turning now to our outlook for the second quarter of 2021.
Consistent with past practice, we will provide a formal revenue range and the qualitative summary of our cost expectations in the quarter as outlined on slide 21.
We expect second quarter revenue to be in the range of $117 million to $127 million.
Representing sequential growth of up to 9%.
We expect foreign currency have on approximately $2 million favorable impact on revenue compared to the prior year.
Assuming currency rates remain at current levels.
Our revenue guidance reflects the continued recovery in the macro environment.
April revenue maintained the strength, we saw in March and the early May trends have remained fairly consistent with April.
Now turning to expenses.
We expect our non-GAAP second quarter gross margin to be approximately 48% plus or minus 50 basis points.
The <unk> continues to be of factor in our second quarter gross margin estimate.
As a reminder, we will have a full quarter of <unk> hubs included in our second quarter results and the <unk> hubs gross margins are lower than the legacy Proto labs business, resulting in additional pressure on overall gross margin.
We are also experiencing wage and raw material inflation costs.
Which we are actively working to mitigate through pricing and other operating efficiencies.
Turning to operating expense, we expect total non-GAAP selling general and administrative expenses to be between 43 and $45 million. These.
Of these projected second quarter expenses include the following components that are incremental to the first quarter.
<unk> expenses will be included for the full quarter, adding approximately $1 million of additional expense.
We will continue to invest in marketing sales to drive revenue growth.
We will also continue to invest in R&D at a rate of approximately eight 5% of revenue to drive our long term revenue growth.
Here are a few other components to consider for the second quarter.
We currently estimate our non-GAAP tax rate to be approximately 23%.
We anticipate a reduction in the interest income of approximately $250000 as a result of a lower average cash balance following the acquisition of <unk> hubs.
And finally, we estimate our second quarter fully diluted shares outstanding at approximately $28 million.
I'll now turn the call over to Rob for final comments.
Thank you John.
The first quarter of 2021 marked the beginning of the new chapter for Proto labs. The launch of Proto labs, two pointed out on the acquisition of <unk> hubs together will greatly expand our ability to delight customers across a very broad range of their needs and use cases.
Once integrated the.
As new capabilities will make proto labs, not only the fastest and most reliable digital contract manufacturer in the industry, but also one of the most comprehensive and our services.
In addition, we are well positioned to capture demand of the vaccine rollout continues lockdowns and on our customers return for work and accelerate their product development.
We will continue to focus on execution and prudently manage business performance in the short term, while also investing to expand our position as the digital manufacturing leader.
We will continue working with reading clubs to plan and execute an integration that will enable us to offer the best in class digital manufacturing customer experience and the broadest digital manufacturing offer for custom parts.
That concludes our formal remarks, now John and I will gladly take your questions.
Operator can you please open the line.
Thank you at this time, we'll be conducting a question and answer the question if you'd like to ask a question. Please press star one on your telephone keypad.
For making the tone will indicate your line is on the question queue. You May Press Star two if you would like to remove your question from the queue for participants using speaker equipment for maybe necessary quicker to the home for pets.
The stock.
Our first question is from Brian Drab with William Blair. Please proceed with your question.
Hi, good morning, Thanks for taking my questions.
Hey, Brian Brian.
Yes.
The first I'm, just curious of the developer count was up meaningfully.
That includes developers on the three of the hubs platform is that right and if so can you give some granularity there in terms of how much screening hubs contributed to that metric.
Yes.
Does that include the <unk> developers and that was approximately 3000.
Developers on the quarters.
Okay and the number in the filing for first quarter 'twenty.
When it didn't change so it's not adjusted for what.
The correct pro forma for what it would have been right. Okay correct.
Thank you okay.
And then.
The <unk> hubs.
No kind of sprinkled across the different segments and can you give that.
Debt breakdown.
Across the E&C <unk>.
For molding et cetera.
So in the footnote, you'll see we've broken out by region.
For the schedules in the press release, so you can see that.
As it relates but service.
About 60% of that revenue is the CMC above 30% is three D printing.
On the remainder is.
Large largely items.
Okay.
Okay and then.
John I think you said that.
The gross margin for the three hubs.
Below expectations my.
The memories that the guidance was for three of the hubs to be above the 200 basis point headwind in the quarter and.
For me that was translating to.
5% gross margin for three hubs in the quarter.
Can you can you add some detail around what you mean by it is below expectations and help me understand what the gross margin.
Might be going forward for that.
Yes, so the <unk>.
Gross margin in the quarter was just over 10.
And I think of it.
As you do your math Youll Youll see that.
And our expectations of long term for that business is 20% to 25% so.
It will be below where we expect it to be long term.
And we're working to.
Improve those gross margins.
Okay, Yes, I think my 5% calculations on a lower revenue number.
That makes sense so the.
Is there anything else they can in terms of purchase accounting or something that put pressure on it to result from that 10% or one time temporary in nature or was it just the.
I guess, the logistics and other sourcing costs you mentioned.
Yes, it did.
The purely of the logistics and sourcing costs associated with it.
Okay. Thanks, a lot of I think maybe what youre referencing is in the prior conversations we were working through the mapping of the accounts.
Just to make sure that as we're reporting gross margin, we have the costs and consistent places.
So I think that was creating maybe.
Maybe a little bit of uncertainty as we were talking at the time of the acquisition.
But we've worked through all of that.
Since the acquisition.
For the last couple of got it yeah, that's what I was referring to okay.
Thanks.
Thank you. Our next question is from Greg Palm with Craig Hallum Capital. Please proceed with your question.
Yeah. Thanks, Good morning, everyone I guess, maybe just starting with <unk>.
Kind of a look back on the quarter I mean, as you look back what surprised you versus the original guidance that you laid out back in February.
It sounds like you maybe got some benefit from all of the supply chain related impacts that were all seen but you know if I, if I back out a little bit of incremental FX benefit the <unk>.
<unk> was still basically in line and so I'm just curious if there was another part of the business that may be disappointed here versus the guidance because I'm, assuming you didn't you didn't have guidance.
For all of the supply chain benefit in there and I'm not even sure. If you can quantify what the impact was.
I think.
On the quarter progressed and was pretty much in line with where we expected I would say the the biggest difference probably was the uptick that we saw in March.
With our typical seasonality pattern, we start the year relatively slow in January and have a pickup in margin and net pickup is always creates a little bit of uncertainty for us.
And it was it was strong and brought net revenue in closer to the top end of the range on the other factors I think Blake from being surprised I think everything else was relatively in line with or was in line with with where we guided.
So I don't know that there were a lot of other big surprises in the quarter, Yes, I would agree that was well in line I think.
The thing we're always deal with the Q1 of the timing of when we see the pickup and the magnitude of that.
So that's what we're referring to.
Okay. It makes sense.
Availability concerns as it relates to raw materials or labor.
What's your current view on on both of those.
Yeah, as we mentioned in the on the remarks.
Third volume, we're in the midst of a global of resin shortage.
Which is impacting us as well as well.
Well, we'll know on electronics shortage, which is impacting some capital equipment. So we're working closely with our suppliers and managing that as best we can right now.
Okay.
Just last one is I am thinking about it from an industry standpoint, it certainly seems debt the digital manufacturing market.
Lots more baas lots more activity.
Im not im not sure if you can give any evidence of.
New customers I guess it doesn't really showed in the account, but there's also a lot of companies that are kind of scaling up new competitors. One recently announced the transaction to go public. So just kind of curious how youre thinking about the landscape overall.
Yeah. The 3000, New partners you acquired through the three D Labs, just wondering if you have any sense of the forecast of the year.
What's the the potential out I guess, you know mid to late next year.
For the end of this year.
Yeah, I think as we look at it we give our revenue of guidance for the quarter.
And.
The mixed does play into it I think we're we're anticipating significant growth in.
And the three D hubs business and I don't know that we're we're in a position are going to be giving.
Product developer guidance for that specific components of the business, but we do expect it to continue to grow and continue to add to our overall the product of overcome.
Yes, we announced around.
We're on the acquisition, we feel our customer overlap as low so there's a lot of opportunities.
Okay.
And just to kind of I guess you go back to your guidance you issue pretty strong guidance of I'm wondering if you could talk a little bit about.
I guess, the sort of the upper end of that guidance, what demand trends that you see that could maybe drive.
Revenue towards that other and.
So ask for.
We're looking at it.
We have had a strong march that continued through April.
We are seeing strength in our injection molding per.
Production parts of.
Those orders can continue to come in.
So continuing to watch that.
As we're working with both of our suppliers end of customers as Rob mentioned on the the residence.
Having that supply and an ability to fulfill.
Those within the the quarter I think we'll be one component I think the <unk> hubs actually is another one that.
Yeah.
Could produce and help us drive towards the the top end of that range.
And I guess all of our services. We are we are seeing traction and momentum so.
It just depends how the the rest of the quarter place on it.
Yeah.
We're excited about what this platform will bring us as we've talked about.
Great. Yes. Thank you that does lots of my questions. Congrats on the quarter I appreciate it.
Thank you.
Thank you. Our next question is from Ben Rose with Battle Road Research. Please proceed with your question.
Yes, hi, good morning, Robin Good morning, John.
Good morning, good morning.
Yeah.
So.
Great to see the progress of the company's making.
<unk> had some specific questions starting first on the medical device side I think.
You were hopeful that.
Excuse me with the end of COVID-19 that there might be some return to elective procedures and just curious on the medical devices are you seeing.
The increased demand for things like implantable prototypes in prosthetics and so forth.
Yeah.
As we look at the medical continues to be one of.
Our our stronger industry verticals.
Actually it is the top.
As far as the specific activity I think we are seeing the company's underneath there.
Continuing with their research and development activity.
We also are experiencing a little more in the production part component.
That I think is maybe indirectly linked to some of the COVID-19 work that we did and the ability to attract customers there.
So medical continues to perform well for us and I think we're seeing a broadening range.
Of the applications.
People are returning.
Okay.
On the on the automotive side, you know there's been a lot of buzz around what's happening in terms of.
EV development I know that your business traditionally has not been with the larger Oems, but I know you do work with.
Some of the design firms that they outsource work to is there any kind of meaningful.
Improvement.
From a prototype standpoint for automotive.
Actually year over year.
Losses, but we've been happy with it so far.
And then when the other question as it pertains to three hops I know at the time of the acquisition.
One of your thoughts on it was that for customers that have a longer lead time, you know of requirements that some of the suppliers could help out in that regard are you seeing.
That part of the business as of meaningful contributor to what they're doing.
Yeah. So.
Right now I would say it's.
Too early range I think both both components of the business or are almost operating independently as where.
Developing the integration plants, I think you're spot on for the long term progression and as we start to bring really the organizations together, but I think in in this quarter.
Largely operating independently in the results for almost stand on.
Okay, and if I may just just one more question for Rob with the demand environment, improving it would seem that.
You know timing would be right to increase the outbound selling of marketing efforts and just curious to know your thoughts on on how you're approaching.
You had mentioned some increased investment in sales and marketing was just curious to know how your how you're approaching that those kinds of activities.
Sure. It's a combination of you know of.
Our digital marketing investments as.
As well as our our sales team.
Okay price.
We're continuing you know we've been working on this continued strategy to focus on the industry mhm more specialized there. So we're continuing on that path as well that.
Okay.
Okay. Thanks very much.
Thank you.
Thank you all of our final question of from David Mizrahi with Bang Bang. Please proceed with your question.
Hi that sorry, just a follow up on all for anything expensive. So I understand the horror all printing expenses for the school said that can you just speak about how you're thinking about some of that leverage moving into the back on for this year and into 22 and do you have any goals, you'll talking to you with respect and is operating expenses as well.
Yeah.
So I think.
Provided the guidance for this quarter of that is really looking sequentially.
Okay.
Commented on the R&D and with R&D, we're excited the move.
From the work on to the point now and.
Start executing on the backlog of projects that we have.
Really the.
Drive the customer demand in customer growth.
As Rob mentioned sales and marketing.
Kind of continue to invest there I think the levels were were asked coming out of Q2 will probably trying to hold their.
Through the remainder of the year and then reevaluate as as we go into the <unk>.
22.
And I would say the same wouldn't G&A.
Just kind of continue to try to hold at those levels.
So.
Yes, I think we've.
We've progressed through the year of that.
That's what we're looking at.
Great helpful. Thanks, and then just also sorry, if I missed necessarily of that can you just walk through again will come from activities look like as in the through the Montana and just wait on seem that continuous improvement and that's it for me.
I'm sorry could you could you repeat the question on from active because of the you're talking about kind of demand, yes, sorry.
Yeah, sorry.
Sure. So generally Q1, we see seasonal lift as we go through the quarter start slow coming out of the holidays and in January and February is usually when we see kind of the the inflection and the pickup and and marches seasonally on.
Strongest month in the quarter. So we saw similar trends this year as the.
In the past the actually.
Stronger than normal seasonal pick up between February and March.
The answer the questions David.
Yes, that's great. Thank you just wanted to.
That.
Thank you ladies and gentlemen, we have been standard of the question answer the question I will now turn the call on the can Rob the until after the closing remarks.
Thank you. Thank you all for your time this morning.
I am pleased with our performance on the first quarter of 2021, and I am confident in our long term strategic objectives.
One of the banks of prolapse and three of the house employees for their continued efforts as we drive our of 2021 priorities forward.
Also want to think of our shareholders for their continued support prolapse.
We look forward to providing you additional information on a long term strategy and financial objectives era of virtual Investor day on May 20th.
Thank you and have a great day.
This concludes today's conference and you might disconnect your lines at the time. Thank you for your participation and have a great day.
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