Q2 2021 Proto Labs Inc Earnings Call
[music].
Greetings and welcome to the Proto Labs second quarter 2021 earnings call. At this time all participants are in a listen only mode a question and.
Cash and 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 call over to Dan Schumacher you may begin.
Thank you Stacey and good morning, everyone with me.
The today of off the door for the last of 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 second quarter ended June 30 of 2021.
The release is available on the company's website.
In addition of prepared slide presentation is available online at the web address provided in our press release.
Before we begin I would like to remind everyone that our discussion will include statements relating to future performance and expectations.
<unk> or may be considered forward looking statements subject.
The 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.
Really 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 the company.
Company website for a complete reconciliation of non-GAAP to GAAP results now.
Now I'd like to turn the call over to Rob the door for a summary of our second quarter performance Rob.
Thanks, Dan.
And good morning, everyone. Thank you for joining us today for our second quarter of 2021 earnings.
Skol Alban.
I will begin with commentary on recent industry developments and an overview of second quarter of business performance.
John will then provide details on our second quarter financial results and our outlook for the third quarter.
During the first half of 2021.
Several of emerging companies that offer online access.
The comp manufacturing of entered or announced plans to enter the public markets.
This is not unexpected given the trends towards manufacturing for the <unk> in recent years.
These recent developments further highlight the very attractive digital contract manufacturing space.
And the industry that <unk> created in 1999.
Proto labs remains unique is the only company to digitally manufacturer parts across a range of services, both additive and traditional.
We remain the only company to transform these manufacturing processes, enabling us to be the fastest and most reliable manufacturer of custom parts of the world.
Yeah.
We began to revolutionize manufacturing in 1999 and have over 20 years of experience in manufacturing data to drive continuous improvement in our systems and processes.
With the acquisition of hubs earlier, this year, our ability to offer market, leading speed and consistency.
For the premium network of manufacture.
On the factory partners will allow us to serve nearly all customer use cases by combining our unique digital thread with the hubs digital network.
We believe the combination of per labs, internal manufacturing capabilities and hubs network of premium manufacturing partners is superior to competing offerings provides the broadest set of.
1 of these kind of lead times in the world.
We're.
<unk> on serving our customers and the sustainable manner that will in turn deliver long term shareholder value for.
For the labs has the best in class financial profile, driven by our software enabled manufacturing and superior customer offerings.
Through the continued.
The capable integration of hubs and further expansion of our internal capabilities. We will also have the broadest digital manufacturing offered in the market to serve our existing customers and to attract new customers.
We invented the digital manufacturing space 2 decades ago our.
Our combination of the digital thread for manufacturing.
And our premium digital network is the winning model.
And we will outperform other companies in the space long term.
We are very excited about the future.
Turning now to our second quarter performance.
The strong order growth resulted in record quarterly revenues of $123 million.
And then our guidance range and representing a year over year growth of 15, 5%.
As a reminder, in the second quarter of 2020, we generated $12 million of revenue from parts.
COVID-19 related applications, including testing supplies personal protective equipment and life saving medical devices.
Excluding that.
Year over year growth was 30%.
Our results include a full quarter of revenue from our recent acquisition of hubs.
Hubs for the strong growth of 45% over the prior year and contributed $8.9 million on revenue in the second quarter.
Consistent with many businesses that have been surging demand.
We are also experiencing tight supply in markets for labor in certain materials.
Labor shortages, especially in the U S are well documented and of led to wage inflation and difficulties on adding staff to service the healthy order volumes. Despite the challenges we generated record quarterly revenue in large part due to our software enabled.
That revenue channel manufacturing processes that are far less labor intensive than our peers.
Continuing with our second quarter revenue performance by surface outlined on slides 6 and 7.
Injection molding revenue was a record $58.2 million in the second quarter, excluding the COVID-19 related injection.
And moving revenue in the second quarter of 2020.
This service grew 27%.
We continue to experience very high demand in our injection molding business.
During this period of tight supply our value proposition of best in class lead times has resonated with customers the.
Of the impacts of labor and material shortages have been most pronounced.
The protection molding business.
The substantial backlog of orders because of the carry into the next quarter.
CNC machining revenue was a record $41.6 million in the second quarter.
CNC machining revenue in the quarter was up 45% over the second quarter of 2020 <unk>.
Excluding clubs, our legacy CNC machining business.
<unk> grew 23% through the strong order volume as market demand continues to improve from the historic lows of 2020.
Additionally, during the second quarter, we launched the new flexible lead time manufacturing option in our total net CNC service.
And we still offer the fastest lead times in the market through our standard and expedite options and we now expect.
Spanned at our CNC offerings within economy offer that provides customers with a broader range of lead time on price point options.
<unk>.
The decision that best suits and allows them to make the decision of the best suits their specific use case.
Furthermore, this offering expansion benefited from our new prototypes to <unk> platform.
For the last 2 point on a list of the launch this new offer to the market faster than would have been possible in our prior environment.
3 D printing revenue was a record high of $18.2 million in the second quarter.
<unk> printing revenue increased 28% year over year.
Or 12% excluding hubs, indicating.
Continued strong demand for our <unk> printing services.
Lastly sheet metal increased 1% year over year.
During the second quarter, we consolidated our sheet metal operations in New Hampshire into 1 facility to help create operational efficiencies.
This improved this move impacted sheet metal revenues and lead times.
Briefly during the second quarter, but will provide benefits for our business going forward.
Moving to earnings we reported second quarter non-GAAP diluted earnings per share of <unk> 39.
Labor in certain of the resin availability issues have constrained product shipments as we continued to emerge from the economic impacts of the global pandemic.
Impacting.
Both of our reported revenue and earnings this quarter.
Due to higher than anticipated labor costs and medical expenses, our second quarter non-GAAP gross margin was lower than the guidance range. We provided in may.
As we move forward, we will continue to deploy innovative strategies to fill openings in our manufacturing operations and deliver quality.
To our customers. In addition, we will continue working to actively mitigate labor and material cost impacts through pricing and other operating efficiencies.
Transitioning now the hubs the business we acquired in January.
Hubs recently rebranded and dropped the <unk> from its name.
Of the part founding in 2013 as of peer to peer 3 D. Printing service hubs has evolved to offer Proto labs full range of manufacturing services by a network of premium manufacturing partners the <unk>.
<unk> brand better reflects the full range of manufacturing services and capabilities currently offered.
The rebrand occurred in early May.
Since it had been planned since before the acquisition in January.
We're very excited with how the rebranding wind and I want to thank the hubs team for their great work on this.
In addition to the rebrand our priority is the integration of hubs capabilities into a broader customer offerings.
After launching per labs to point out in.
Quarter of 2021, the integration is now our top priority for the remainder of the year.
While both organizations continue to operate semi independently and execute on their respective business plans. We continue to work together to incorporate hubs of capabilities to provide 1 unified seamless customer experience with the broadest digital manufacturing offer.
The first question parts of the World.
At our May 20th virtual Investor Day, we provided further insight into our long term strategy and our plan for execution over the next 5 years the.
The presentation include the prepared remarks with supporting slides as well as of 45 minutes slide Q&A session.
For several members of our executive leadership team.
This was our first investor day of events since late 2017, and we included a great amount of detail on our strategy, including forward looking financial targets.
You have not already seen it I welcome you to watch the recording of this presentation, which you can access via the Investor Relations section of our website.
<unk>.
Now John will provide a detailed summary of our second quarter financial performance as well as our outlook for the third quarter.
John.
Thanks, Rob.
Our detailed second quarter financial results begin on page 11 of our presentation.
With the hubs acquisition occurring during the first quarter. This was our <unk>.
First full quarter, reflecting the impact of the hubs financials.
Second quarter revenue of $123 million represents a 15, 5% year over year increase or 553% organic growth in constant currencies.
Ups produced strong results contributing $8.9 million.
The revenue in the second quarter, representing growth of 45% in this business.
Changes in foreign currency had a $1.9 million favorable impact on the second quarter revenue in line with our expectations.
Right.
We serve 23250 unique product developers from the second quarter.
1200, or 36% year over year, and 650 or 3% sequentially.
Year over year product developed for growth was driven by approximately 4000 developers served on the hubs platform and with the remainder of representing growth in our legacy business.
Turning.
Up 612, and our detailed income statement, our non-GAAP gross margin on the quarter of 46, 8% compares to 48, 5% in the first quarter of 2021, and our guidance range of $47.5 to 48, 5%.
Our second quarter gross margin was impacted by higher personnel.
The slides cost in the form of medical costs.
And overtime and contractor spend in our manufacturing facilities due to the tight labor markets as Rob referenced earlier in the call.
In addition of second quarter gross margin was slightly lower than our projection for this business is global logistics costs, including freight.
And customs costs remained at elevated levels.
Overall hubs represent of the 260 basis point headwind on second quarter gross margins due to the lower margin nature of the outsourced manufacturing model.
Yeah.
Our total non-GAAP operating expenses were $42.8 million.
Slightly below our expectations and consistent with $42.4 million from the first quarter of 2021.
Our non-GAAP operating expenses increased from $34.6 million from the second quarter of 2020.
The hubs acquisition added $3.2 million of operating expense in the quarter.
Other year over year increases included Proto labs, 2 point on depreciation of $1.4 million investment in R&D of $1.3 million and investing in sales of marketing of $1.4 million.
Our GAAP operating expenses in the second quarter, including the impact of of revaluation.
Asian of contingent consideration associated with the hubs acquisition.
GAAP accounting argument regulations require that we revalued the contingent consideration on a quarterly basis until the contingent consideration period concludes at the end of 2022, which may introduce some volatility on our GAAP financials.
<unk> adjusted the impact of the revaluation in our non-GAAP reporting as this is a noncash financial benefit and does not relate to the ongoing operations of the business.
Moving to taxes, our non-GAAP effective tax rate in the second quarter was $26.7.
We are of scent above our expectations and up from 22, 7% in the prior quarter and 18, 1% in the second quarter of 2020.
The sequential increase in our effective tax rate was primarily due to the tax law changes in the U K, increasing the tax rate from 19% to 25% in 2023.
This tax law change requires us to revalue of our deferred tax assets and liabilities and the resulted in a onetime expense of $300000.
Yes.
The net result was non-GAAP diluted earnings per share in the quarter of 39.
Representing a 21 cents per share decrease from the prior year and our.
The sequential decrease of <unk> <unk> per share.
Our non-GAAP adjustments are consistent with our prior practices with the addition of the contingent consideration adjustments described earlier and are detailed in the appendix of our presentation.
The year over year change in non-GAAP earnings per share consistent of the following components.
The first volume in our legacy business, representing a year over year increase of <unk> <unk> per share, partially offset by gross margin compression of <unk> <unk> per share.
The addition of the hubs business represented the <unk> per share decrease as we continue to invest in and scale of that business.
The.
It's on Proto labs, 2 point on depreciation represented of <unk> per share impact.
Our increased investment in R&D resulted in of <unk> per share decrease and finally, the increase of the effective tax rate had a <unk> per share unfavorable impact on the quarter.
True.
The increase meaning now for the cash flow statement and balance sheet summarized on slide 13.
We generated $14.3 million from cash from operations from the second quarter.
Our operating cash flow this quarter was impacted by investments to continue to build out and scale, our manufacturing partner model and our product offer.
As well as the timing of cash receipts and payments, resulting in an increase in our working capital, including an increase in our accounts receivable balance.
We also repurchased $1.2 million under our stock repurchase program in the quarter.
On June 30 of our cash and investment balance was $89 million.
And our balance sheet remains free of debt.
Turning now to our outlook for the third quarter of 2021.
Consistent with past practice, we will provide the formal revenue range and a qualitative summary of our cost expectations for the quarter as outlined on slide 15.
Yeah.
We.
To produce record quarterly revenue in the third quarter in the range of $123 million to $133 million, representing year over year growth of 14% to 24% and sequential growth of up to 8%.
We expect foreign currency to have on approximately $1.5 million favorable impact on revenue.
<unk> compared to the prior year, assuming foreign currency rates remain at current levels.
Now turning to expenses.
We expect our third quarter non-GAAP gross margin to be approximately 47% plus or -50 basis points.
Our gross margin projection remains in line with our second quarter results as we anticipate.
We expect the continued wage and raw material inflation costs, which we are actively working to mitigate through pricing and the other operating efficiencies.
As a reminder, business mix as the larger variable and gross margin performance with the addition of hubs as the outsourced manufacturing model carries a lower gross margin than our internal manufacturing.
The operations.
Turning to operating expense, we expect total non-GAAP selling general and administrative expenses to be between 44 and $46 million.
And we currently estimate our non-GAAP effective tax rate to be approximately 24%.
That concludes our.
Now, Rob and I will gladly take your questions can.
Can you. Please open up the line for Q&A.
Thank you we will now be conducting a question and answer session.
You asked a question. Please press star 1 on your telephone keypad. The confirmation tone will indicate your line is on the question queue. You May Press Star 2 if you would like to remove your quest.
<unk> 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 comes from Greg Palm with Craig Hallum Capital Group. Please go ahead.
Yes. Thanks. This is Danny <unk> on for on for Greg today.
Hi, guys.
Just digging into gross margin a little bit more I appreciate the color on I guess, the labor shortage wage inflation that kind of stuff.
Obviously compressed in Q2 looks to be more of the same in Q3.
I guess, just looking out beyond that if it's not going to be necessarily of revenue growth.
I mean, what's going to be the drivers behind.
That's starting to expand again towards that towards the 50%.
Yes, Jamie I think Ed.
As stated before mix is going to play out.
<unk> role in our gross margin as we go forward.
The hubs business for now.
The outsourced manufacturing model curious of lower gross margin profile than our internal operations. So as you look at mix in that business is growing nicely and we expect that to continue so that growth in that business. As you look at just pure percentages. It is going to put pressure on.
Of that gross margin number.
I think as we look at the internal operations.
As we stated we are experiencing some inflationary costs.
On both labor and and some of the materials.
And we're actively working with with customers.
On the pricing as well as our internal efficiencies and expect to continue to do so.
As we manage through this.
Okay.
Helpful. I guess, just jumping into hubs now.
And that integration, how should we think about that progressing.
The initial synergies you're realizing any.
Initial feedback from the customer base.
Yes, sure I can take that.
So the hubs integration has gone well 2 teams are working together on the integration plan as you think about this.
So we're going.
On our customer facing capabilities incrementally.
And our primary objective is to make sure that it's a really seamless.
And great customer experience and so those of the things that we're working.
Right now together.
At the same time we're.
Be rolling of the companies pretty independently hubs has their own set of growth targets.
Working towards that just for 45% in the last quarter.
We're happy with that so we're working the the 2 in parallel.
As we worked through the system.
And back.
And to be able to present these capabilities to our customers on the front end and we will be doing that incrementally by service.
Yes, any any change in the way youre thinking about that hubs contribution for 2021.
No I think that the.
Gross.
We're still room that we.
You talked about 45% growth this quarter is kind of in line with our expectations.
And it's trending I think the gross margins a little bit softer than we had originally anticipated and we are working through solving solving that challenge.
Alright, I appreciate the color I'll hop back in the queue.
Sure.
Once again, if you would like to ask a question. Please press star 1 on your telephone keypad.
Next question comes from Ben Rose Battle Road Research. Please go ahead.
Hi, This is jonathan growth filling in for Bob.
Just wondering if you could.
Highlight any trends in average order size Proto labs during Q2.
I'm, sorry could you repeat that we had some trouble hearing you.
Yes can you hear me now yeah.
Yes, yes.
Alright, so I am wondering if you could highlight any trends in average order size during Q2.
Trends in average order size.
Yeah, Yeah, Yeah. So I think the way I would look at it like the average order size on our individual services remain pretty much in line with with what they have been historically.
I would say that.
In our.
Sure and molding service.
We are experiencing strong orders.
And those orders tend to be.
Yes, Matt.
A little bit larger in quantities and size.
Given that Eddie.
Of course.
We've kind of built up the backlog and I said, a little bit of a shift in the mix during this quarter, but as you look at the individual services on the underlying data. The average order sizes are remaining relatively consistent.
Okay, great. Thank you.
And then I'm just wondering if theres been any recent trends towards customers being willing to pay.
The premium for faster turnaround on different parts of the prototypes.
Well I mean, our our historical model right is to.
Is to offer the fastest lead times on the world and.
Our standard pricing does have premiums as you.
As you increase increase the speed of that delivery so.
Whether that's in injection molding, our CMC or <unk> printing.
For our sheet metal right.
There is a premium for example on CMT as you move from 3 day 2 day to 1 day the same day.
They are a.
Premiums at every level there and.
So that's very standard for us.
Okay, great. Thank you so much.
Thank you.
Your next question comes from Brian Drab with William Blair. Please go ahead.
Okay.
The backend some technical.
Difficulties here.
For taking my questions on on hubs.
It seems you Havent mentioned that what the gross margin.
Have you or can you tell us for gross margin was in the second quarter.
Gross margin was in the low teens.
Nicole in the 12% to 13% range, Brian from this quarter, Okay and can you of the Lora.
And why is that again.
What are the main issues.
The main issues or the.
Freight costs and customs.
And do these things for sure we're incurring.
Okay.
That doesn't.
Include at this point of any of the.
Have you sorted out the.
The movement of some of the costs between Cogs and SG&A I mean is that sorted out but these are the.
Okay.
Yes.
Consistent with how we.
But our gross margin.
Got it okay.
<unk>.
The $8.9 million of harvest season.
The solid revenue number can.
Can you just.
Remind me like for like explain how the company how hubs is or is not benefiting from being part of the.
Proto labs platform at this point is it still.
When I go look for quotes of it still looks like an independent company sales of Proto Labs company, but I mean I need to go to their website. The order something right. So are they benefiting from being part of Proto.
Total lab do you think at all.
In the quarter.
Yes, so Brian as we've talked about.
The reports still running the 2 independently as we're working through the platform to integrate them.
So the plan is that we will we'll bring them on.
Brian expose those capabilities for the Proto labs customers through the Proto labs website.
We have not done that yet.
Not the stage that we're at so.
So there are operating independently of this 1.
Are they able to offer any additional services.
And the capabilities being part of the Proto labs family now.
At this stage, we're still working through.
The integration.
And how does the plug those in effectively.
There is a few orders that are being passed back and forth, but for the most part I think the both businesses are relatively organic in Q2.
Okay got it and then.
On <unk>.
Just quickly on the sheet.
Metal.
I missed what the reasons worldwide that was down sequentially, but also.
Wondering if you could.
Maybe elaborate on that and then.
Also.
Remind us when when that should be tied in total.
<unk> 2 point of all.
Yeah.
Yes, so on the first.
We consolidated our operations in sheet metal over the.
The last quarter.
We're operating out of 2 facilities.
We consolidated into 1.
Which.
The relief.
Right long term move for us so that we can.
Improve opera.
Additional efficiencies and also.
We'll be able to improve our lead times as a result of that.
But that did cause some disruption in the quarter of which.
Impacted revenue and lead times for a period, we're now fully back.
Oh in NII other questions too.
Yes, yes.
So we're evaluating that the.
The the plan is that we will integrate sheet metal into into 2 point of consolidated offer across include.
Including sheet metal and integrating hubs right now with the integration.
Gration planning.
Working through the prioritization of that and so on.
We're not announcing that that timing is as of right now.
Alright, and what's the biggest challenge in.
Incorporating sheet metal and the parent.
Sue pointed out.
Well, it's simply a matter of.
The prioritization right. We've got a set of resources that are working on building out the front end.
We want to add hubs into it we want to add the legacy business into it remember that when we launched 2 point, though that was scoped to not include sheet metal at.
At the time right. So we've launched with our first.
Of our 3 services sheet metal is always going to follow on.
And it's that's still in the plan.
Got it and then just the last question you gave the guidance for the third quarter for gross margin.
I mean, how do you Hum.
Can you look a little bit farther out in the fourth quarter do you expect gross margin the kind of continue.
Continue to improve or.
Should we think about the hubs growth on the lower gross margin there is weighing on gross margin.
On what through the balance of the year.
Yeah Yeah.
Thanks.
Brian I think it is going to be mix dependent.
And yes, I think it will come.
Continue to introduce variability into that gross margin as we look at projections, so depending on growth rates and things like that will impact of those percentages.
I think what I would say overall is.
We would we would anticipate gross margins to be relatively stable through share.
The remainder of the year as we work to mitigate some of.
The.
Labor and inflationary costs that were.
And in our internal businesses and then there will be some headwinds from the strong growth.
We're seeing in the office business.
Okay. Thanks for taking my question.
I will now turn the floor over to you Rob the door for closing remarks.
Yes.
Thank you for your time this morning, I am pleased with our performance in the second quarter of 2021 and remain confident in our long term strategic objectives. We're focused on creating long term shareholder value through continued integration of pumps and improvements to our customer offer.
I'd like to thank our employees around the globe for their continued efforts as.
Increment to the second half of 2021.
A very important year for our business I also want to thank our shareholders for their continued support of Proto labs, we look forward to updating you on our performance next quarter. Thank you very much have a great day.
This concludes today's conference you may disconnect. Your lines at this time of thank you for your participation.
[music].
[music].
Greetings and welcome to the Proto labs second quarter 'twenty 'twenty 1.
The next call.
At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
He wants you to 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 call over to Dan Schumacher you.
On earnings.
Thank you Stacey and good morning, everyone with me today are Rob 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 second quarter.
And at June 32021, the.
The release is available on the company's website. In addition of prepared slide presentation is available online at the web address provided in our press release.
Before we begin I would like to remind everyone that our discussion will include statements relating to future performance and.
Maybe get patients that are for 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.
The expect accompanying slide presentation at the Investor Relations section of the company website for a complete reconciliation of non-GAAP to GAAP results.
Now I'd like to turn the call over to Rob the door for a summary of our second quarter performance Rob.
Thanks, Dan.
And good morning, everyone.
You for joining us today for our second quarter of 2021 earnings Conference call.
I will begin with commentary on recent industry developments and an overview of second quarter business performance.
John will then provide details on our second quarter financial results on our outlook for the third quarter.
And then free the first half of 2021.
Several of emerging companies that offer online access to manufacturing of entered or announced plans to enter the public markets.
This is not unexpected given the transfer of manufacturing for <unk> in recent years.
These recent developments further highlight the very attractive digital contract.
The <unk> space.
And the industry that <unk> created in 1999.
Proto labs remains unique is the only company to digitally manufactured parts across a range of services both of additive and traditional.
We remain the only company to of transform these manufacturing processes, enabling.
Manufacture to be the fastest and most reliable manufacturer of custom parts of the world.
We began to revolutionize manufacturing in 1999 and have over 20 years of experience in manufacturing data to drive continuous improvement in our systems and processes.
With the acquisition of hubs earlier this.
This year, our ability to offer market, leading speed and consistency for.
For the premium network of manufacturing partners will allow us to serve nearly all customer use cases by combining our unique digital thread with the hubs digital network.
We believe the combination of per labs internal manufacturing capabilities and.
<unk> network of premium manufacturing partners is superior to compete offerings provides the broadest set of capabilities on lead times of the world.
We're focused on serving our customers in a sustainable manner that will in turn deliver long term shareholder value.
For the labs has the best in class financial profile.
Driven by our software enabled manufacturing and superior customer offerings.
Through the continued integration of hubs and further expansion of our internal capabilities. We will also have the broadest digital manufacturing offered in the market to serve our existing customers and to attract new customers.
We invented the.
The digital manufacturing space 2 decades ago.
Our combination of the digital thread for manufacturing and our premium digital network is the winning model.
And we will outperform other companies in the space long term.
We are very excited about the future.
Turning now to our second quarter performance.
Strong order growth resulted in record quarterly revenues of $123 million.
Within our guidance range and representing a year over year growth of 15, 5%.
As a reminder, in the second quarter of 2020, we generated $12 million of revenue from parts with COVID-19 related applications, including.
Supplies personal protective equipment and life saving medical devices.
Excluding that revenue year over year growth was 30%.
Our results include a full quarter of revenue from our recent acquisition of hubs hubs to the strong growth of 45% over the prior year and contributed $8.9 million on revenue.
The new in the second quarter.
Consistent with many businesses that surge in demand.
We are also experiencing tight supply in markets for labor in certain materials.
Labor shortages, especially in the U S are well documented and of led to wage inflation and difficulties on adding staff to service the healthy order volumes.
Despite the challenges we generated record quarterly revenue in large part due to our software enabled digital manufacturing processes that are far less labor intensive than our peers.
Continuing with our second quarter revenue performance by services outlined on slides 6 and 7.
Injection molding revenue.
With a record of $58.2 million in the second quarter.
Excluding the COVID-19 related injection molding revenue in the second quarter of 2020 of.
This service grew 27%.
We continued to experience very high demand in our injection molding business <unk>.
During this period of tight supply our value proposition of best in class lead.
<unk> has resonated with customers on.
The impacts of labor and material shortages have been most pronounced in our injection molding business, creating a substantial backlog of orders for carrying into the next quarter.
CNC machining revenue was a record $41.6 million in the second quarter.
CNC machining revenue in the quarter was up.
Time, 5% over the second quarter of 2020.
Excluding clubs, our legacy CNC machining business grew 23% through the strong order volume as market demand continues to improve from the historic lows of 2020.
Finally during the second quarter, we launched the new flexible lead time manufacturing option in our Proto labs CNC service.
Force still offer the fastest lead times in the market through our standard and expedite options and we've now expanded our CNC offerings within the economy offer that provides customers with a broader range of lead time at price point options and make the.
For the decision that best suits and allows them to make the decision of the best suits their specific use case.
Furthermore, this offering expansion benefited from our new Proto labs to point out platform.
For the labs to point on 8 plus the launch this new offer to the market faster than would have been possible in our prior environment.
<unk> printing revenue was a record high of $18.2 million in the second quarter.
The <unk>.
When revenue increased 28% year over year for 12%, excluding hubs, indicating continued strong demand for our <unk> III <unk> printing services.
Lastly sheet metal increased 1% year over year.
During the second quarter, we consolidated our sheet metal operations in New Hampshire into 1 facility to help create operational efficiencies.
This improved this move impacted sheet metal revenues and lead times briefly during the second quarter, but will provide benefits for our business going forward.
Moving to earnings we reported second quarter non-GAAP diluted earnings per share of <unk> 39.
Labor in certain of the resin availability issues have constraints.
Grain product shipments as we continued to emerge from the economic impacts of the global pandemic impacting <unk>.
Both of our reported revenue and earnings this quarter.
Due to higher than anticipated the labor costs and medical expenses, our second quarter non-GAAP gross margin was lower than the guidance range. We provided in may.
As we move forward, we will continue to deploy.
Innovative strategies to fill openings in our manufacturing operations and deliver quality parts to our customers. In addition, we will continue working to actively mitigate labor and material cost impacts through pricing and other operating efficiencies.
Transitioning now to hubs the business we acquired in January.
Hubs recently rebranded and dropped the <unk> from its name.
Since its founding in 2013 as the peer to peer 3 D. Printing service hubs has evolved to offer Proto labs full range of manufacturing services by a network of premium manufacturing partners the.
<unk> brand better reflects the full range of manufacturing.
Current capabilities currently offered.
The rebrand occurred in early May and had been planned since before the acquisition in January.
We're very excited with how the rebranding wind and I want to thank the hubs team for their great work on this.
In addition to the rebrand our priority is the integration of hubs.
Service of these into a broader customer offer.
After launching per labs to point out in the first quarter of 2021. The integration is now our top priority for the remainder of the year.
While both organizations continue to operate semi independently and execute on their respective business plans. We continue to work together to incorporate hubs capabilities to provide.
Capable of unified seamless customer experience with the broadest digital manufacturing offer for custom parts of the world.
At our May 20th virtual Investor Day, we provided further insight into our long term strategy and our plan for execution over the next 5 years.
The presentation included.
The prepared remarks with supporting slides as well as of 45 minute flight Q&A session with several members of our executive leadership team.
This was our first Investor day events since late 2017, and we included a great amount of detail on our strategy, including forward looking financial targets.
If you've not already seen it I welcome you to watch the record.
1 of the presentation, which you can access via the Investor Relations section of our website.
Now John will provide a detailed summary of our second quarter financial performance as well as our outlook for the third quarter.
John.
Thanks, Rob our.
Our detailed second credit financial results begin on page.
Recording of our presentation.
But the hubs acquisition occurring during the first quarter. This was our first full quarter, reflecting the impact of the hubs financials.
Second quarter revenue of $123 million represents a 15, 5% year over year increase or 553% organic growth in constant.
<unk> hundred 6.
Ups produced strong results contributing $8.9 million of revenue in the second quarter representing growth of 45% in this business.
Changes in foreign currency had a $1.9 million favorable impact on the second quarter revenue in line with our expectations.
Sure.
We served 23250 unique product developers from the second quarter up 6200, or 36% year over year, and 650 or 3% sequentially.
Year over year product developed for growth was driven by approximately 4000 developers served on the ups platform and.
And with the remainder of representing growth in our legacy business.
Turning to slide 12, and our detailed income statement, our non-GAAP gross margin on the quarter of 46, 8% compares to 48, 5% in the first quarter of 2021, and our guidance range of 47.5 to 48.
<unk> 5 per cent.
Our second quarter gross margin was impacted by higher personnel costs in the form of medical costs and.
And overtime and contractor spend in our manufacturing facilities due to the tight labor markets as Rob referenced earlier in the call.
In addition hub second quarter gross margin.
$8 slightly lower than our projection for this business as global logistics costs, including freight and customer costs remained at elevated levels.
Overall hubs represented the 260 basis point headwind on second quarter gross margins due to the lower margin nature of the outsourced manufacturing model.
Yeah.
<unk> with our total non-GAAP operating expenses were $42.8 million.
Slightly below our expectations and consistent with $42.4 million from the first quarter of 2021.
Our non-GAAP operating expenses increased from $34.6 million from the second quarter of 2020.
The hubs acquisition added $3.2 million of operating expense from the quarter.
Other year over year increases included Proto labs, 2 point on depreciation of $1.4 million investment in R&D of $1.3 million in investment in sales of marketing of $1 per million.
Our GAAP.
Operating expenses in the second quarter, including the impact of a revaluation of contingent consideration associated with the hubs acquisition.
GAAP accounting argument regulations require that we revalued the contingent consideration on a quarterly basis until the contingent consideration period concludes at the end of.
'twenty, 2 which may introduce some volatility in our GAAP financials.
We have adjusted the impact of the revaluation in our non-GAAP reporting is this is a noncash financial benefit and does not relate to the ongoing operations of the business.
Moving to taxes.
<unk> 2002 of our non-GAAP effective tax rate in the second quarter was 26, 7% above our expectations and up from 22, 7% from the prior quarter and 18, 1% in the second quarter of 2020.
The sequential increase in our effective tax rate was primarily due to the tax law changes in the U K.
K, increasing the tax rate from 19% to 25% in 2023.
This tax law change requires us to revalue of our deferred tax assets and liabilities and the resulted in a onetime expense of $300000.
The net result was non-GAAP diluted earnings per share in the quarter of 30.
The 9 reps.
The representing a 21 per share decrease from the prior year and a sequential decrease of 1.7 per share.
Our non-GAAP adjustments are consistent with our prior practices with the addition of the contingent consideration adjustments described earlier and are detailed in the appendix of our presentation.
The year over year change in non-GAAP earnings per share consistent of the following components.
<unk> volume in our legacy business represent on a year over year increase of <unk> <unk> per share, partially offset by gross margin compression of <unk> <unk> per share.
The addition of the hubs business represented the 9 cents.
The decrease as we continue to invest in and scale of that business.
The increase from Proto labs, 2 point on depreciation.
<unk> represented of <unk> per share impact.
Our increased investments in R&D resulted in of <unk> per share decrease and finally, the increase of the effective tax.
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 13.
We generated $14.3 million from cash from operations from the second quarter.
Our operating cash flow of this quarter was impacted by investment.
Per share continued to build out and scale, our manufacturing partner model and our product offering.
As well as timing of cash receipts and payments, resulting in an increase in our working capital, including an increase in our accounts receivable balance.
We also repurchased $1.2 million under our stock repurchase program.
<unk> from the quarter.
On June 30 of our cash flow investment balance was $89 million and our balance sheet remains free of debt.
Turning now to our outlook for the third quarter of 2021.
Consistent with past practice, we will provide formal revenue range and a qualitative summary of.
Graham its expectations for the quarter as outlined on slide 15.
We expect to produce record quarterly revenue in the third quarter in the range of $123 million to $133 million.
Representing year over year growth of 14% to 24% and sequential growth of up to 8%.
We expect foreign currency to have an approximately $1.5 million favorable impact on revenue compared to the prior year, assuming foreign currency rates remain at current levels.
Now turning to expenses.
We expect our third quarter non-GAAP gross margin to be approximately 47% plus or minus.
50 basis points.
Our gross margin projection remains in line with our second quarter results as we anticipate continued wage and raw material inflation costs, which we are actively working to mitigate through pricing and the other operating efficiencies.
As a reminder, business mix as the larger variable on gross margin performance with the addition.
<unk> of hubs as they outsourced manufacturing model carries a lower gross margin than our internal manufacturing operations.
Turning to operating expense, we expect total non-GAAP selling general and administrative expenses to be between 44 and $46 million.
And we currently estimate.
Our non-GAAP effective tax rate to be approximately 24%.
That concludes our prepared remarks, now Rob and I will gladly take your questions.
Can you. Please open up the line for Q&A.
Thank you we will now be conducting a question and answer session.
You asked a question. Please press star 1 on your telephone.
From keypad.
Information for everyone.
The Kate your line is on the question queue. You May Press Star 2 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 comes from Greg Palm with Craig Hallum Capital Group. Please go ahead.
Yeah. Thanks. This is danny acreage on for on for Greg today.
I guess, just digging into gross margin a little bit more I. Appreciate the color on on I guess, the labor shortage wage inflation of that kind of stuff, obviously compressed in Q2 looks to be more of the same in Q3.
I guess, just looking out beyond that if if it's not going to be necessarily of revenue growth. What's I mean, what's gonna be the drivers behind.
That's starting to expand again towards that towards that 50%.
Yeah, Jamie I think of as I.
As stated before mix is going to play a bigger role.
And our gross margin as we go forward.
On the hubs business and the outsourced manufacturing model curious of lower gross margin profile than our internal operations. So as you look at mix in that business is growing nicely and we expect that to continue so that growth.
And that business as you look at just pure percentages is going to put pressure on on that gross margin number.
I think as we look at the internal operations.
As we stated we are experiencing some inflationary costs in both labor and.
And some of the materials.
And we're actively working with with customers on the.
The pricing as well as our internal efficiencies and expect to continue to do so as.
As we manage through this.
Okay. That's helpful. I guess just jumping in.
And 2 hubs now.
And that integration, how should we think about that progressing against the initial synergies you're realizing any.
Initial feedback from the customer base.
Yes, sure I can take that.
So the hubs integration has gone well 2 teams are.
Our working together on the integration plan as you think about this.
To be rolling out customer facing capabilities incrementally.
<unk>.
And our primary objective is to make sure that it's a really seamless.
And great customer experience and so those of the things.
Things that we're working.
Right now together.
At the same time, we're still running of the company's pretty independently hubs has their own set of growth targets.
They are working towards that just for 45% in the last quarter.
<unk>.
We're happy with that so we're working the the 2 in parallel.
As we worked through the systems.
<unk>.
And back end to be able to present these capabilities to our customers on the front end and we will be doing that incrementally by service.
Yes, any any change in the way youre thinking about that hubs contribution for 2021.
No I mean, I think the the growth.
Gross.
We talked about 45% growth this quarter is kind of in line with our expectations.
And it's trending I think the gross margins on a little bit softer than we had originally anticipated and.
We're working through solving solving that channel.
Alright, I appreciate the color I'll hop back in the queue.
Once again, if you would like to ask a question. Please press star 1 on your telephone Keypad. Your next question comes from Ben Rose Battle Road Research. Please go ahead.
Hi, This is jonathan growth filling in for Bob.
I'm just wondering if you could highlight any trends in average order size Proto labs during Q2.
I'm, sorry could you repeat that we had some trouble hearing you.
Yes, Yes can you hear me now.
Yes, yes.
So I'm wondering if you could highlight any trends in average order size during Q2.
Trends in average order size.
Yes, yes, yes, so I think the way I would look at it like the average order size on our individual services remain pretty much.
And with with what they have been historically.
Would say that in.
In our injection molding service.
We are experiencing strong orders.
And those orders tend to be.
A little bit larger in quantities and.
And on size.
Given that.
Sure.
We've kind of built up the backlog and I said, a little bit of a shift in the mix during this quarter, but as you look at the individual services in the underlying data. The average order sizes are remaining relatively consistent.
Okay great. Thank.
And then I am just wondering if theres been any recent trends towards customers being willing to pay a premium for faster turnaround on different parts of the prototypes.
Well I mean, our our historical model right is to.
Is to offer the fastest lead times of the world.
And.
Our standard pricing does have premiums as you.
As you increase increase the speed of that delivery so.
Whether that's in injection molding or CMC or 3 D printing.
For our sheet metal right.
There is a premium for example on CMT as you move from 3 day 2 day to 1 day of the same day.
Are there of premiums at every level there.
<unk>.
So that's that's very standard for us.
Okay, great. Thank you so much thank you.
Your next question comes from <unk>.
Brian Drab with William Blair. Please go ahead.
Okay. The dial back in some technical difficulties here.
Thanks for taking my questions on on.
Hubs.
It seems you Havent mentioned that what the gross margin.
Can you tell us for gross margin wise on the second quarter.
Gross margin within the division.
Low teens.
So the in that 12% to 13% range, Brian for this quarter, Okay and can you at the lower end.
And why is that again what are the main issues.
The main issues or the.
The freight car.
And customs.
And do these things for Stewart, where.
We're incurring.
Okay.
And then that doesn't.
Include at this point any of the.
Have you sorted out the.
The movement of some of the costs between Cogs and SG&A I.
Is that sorted out.
Okay, Yes.
Yes.
Consistent with how we report our gross margin.
Got it okay.
<unk>.
The $8.9 million at harvest is it.
Solid revenue number can.
Can you just.
Remind me like for like explain how the company how hubs is or is not benefiting from being part of the.
Proto labs platform at this point is it still.
When I go look for quotes of its still the it looks like an independent company. It says the Proto labs company, but I mean I need to go to their website. The order something right. So are they benefiting from being <unk>.
Proto labs do you think at all.
And the in the quarter.
Yes, so Brian as we've talked about it were still running the 2 independently as we're working through the platform to integrate them right.
Alright. So the plan is that we will we'll bring them on Brian.
Brian and expose those capabilities to the Proto labs.
Part of the Proto labs website.
Have not done that yet that's not the stage that we're at so.
So there are operating independently at this point.
Are they able to offer any additional services.
Being an capabilities being part of the Proto labs family now.
At this stage, we're still working through.
The integration.
How does the plug those in effectively.
There is a few orders that are being passed.
And for us, but for the most part I think the both businesses are relatively.
Customers in the kidney in Q2.
Okay got it and then.
Just quickly on the sheet metal.
I missed what the reasons were that was down sequentially, but also I'm just wondering if you could.
Maybe elaborate on that and then.
So.
Remind us when.
And that should be tied in to Proto labs, 2 point of all.
Yeah. So on the first question, we consolidated our operations in sheet metal over the.
On the last quarter.
We're operating out of 2 facilities.
We consolidated into 1.
Which.
I think it's the relief for right.
<unk> long term move for us so that we can.
Improve operational efficiencies and also believe.
We'll be able to improve our lead times as a result of that.
But that did cause some disruption in the quarter, which.
Impacted revenue and lead times for.
We're now fully back.
And the Guy had a question on to point out 1.
Oh, yes.
So we're evaluating that the.
The the.
On the plan is that we will integrate sheet metal into into 2 point of <unk> and have the consolidated offer.
Across include.
Including sheet metal and integrating hubs right now with the integration planning.
We're working through the prioritization of that and so on.
We're not announcing that that timing of the roadmap.
Alright.
Rob what's the biggest challenge in.
Sure.
Incorporating sheet metal and the permanent of Sue pointed out.
Well, it's simply a matter of.
The prioritization right. We've got a set of resources that are working on building out the front end.
Sure.
We want to add hubs into it we want to add the.
The legacy business into it remember that when we launched 2 point now that were scoped to not include.
The metal at the time right. So we've launched with our first.
Our free services. She metals is always going to follow on.
And it's that's still in the plan.
Yes.
Got it and then just the last question you gave the guidance for the third quarter for gross margin I mean, how do you.
Can you look a little bit farther out in the fourth quarter do you expect gross margin of kind of continue.
Continue to improve or.
Should we think about the hubs growth and the lower gross margin there.
There is weighing on gross margin.
Somewhat through the balance of the year.
Yeah I think.
Brian I think it is going to be mix dependent.
And yes, I think it will.
Continue to introduce variability into that gross margin as we.
Projections, so depending on growth rates and things like that will impact those percentages.
I think what I would say overall as well.
We would we would anticipate gross margins to be relatively stable.
Sure.
The remainder of the year as we work to mitigate.
Some of.
Yes.
Labor and inflationary costs that we're incurring in and our internal businesses and then there will be some headwinds from the strong growth that.
We're seeing in the ups business.
Okay. Thanks for taking the question.
I will now turn the floor over to you Rob the door for closing remarks.
Sure.
Thank you for your time this morning on <unk>.
Pleased with our performance in the second quarter of 2021 and remain confident in our long term strategic objectives.
We're focused on creating long term shareholder value through continued integration of pumps and improvements.
Customer offer.
I'd like to thank our employees around the globe for their continued efforts as we move into the second half of 2021 of.
Very important year for our business.
Also want to thank our shareholders for their continued support of Proto labs, we look forward to updating you on our performance next quarter. Thank you very much have a great day.
This concludes today's conference you may disconnect your lines at this time on thank you for your participation.