Q4 2021 Proto Labs Inc Earnings Call

Speaker 1: Greetings. Welcome to ProtoLabs' fourth quarter 2021 earnings call. At this time, all participants will be in a listen-only mode. Question and answer session will begin shortly.

Greetings welcome to photo labs fourth quarter, 2021 earnings call.

All participants will be in a listen only mode.

A question and answer session will follow the formal presentation.

Speaker 1: If anyone should require operator assistance during the conference, please press star zero from your telephone keypad. Please note this conference is being recorded.

If anyone should require operator assistance during the conference. Please press star zero from your telephone keypad.

Please note this conference is being recorded.

Speaker 1: At this time, I'll turn the conference over to Jason Frankman, Vice President and Corporate Controller.

At this time I'll turn the conference over to Jason and Franklin, Vice President and corporate controller.

Jason you May now begin.

Speaker 2: Thank you, Rob, and welcome everyone to ProtoLabs' fourth quarter and full year 2021 earnings conference call. I'm joined today by Rob Bedore, ProtoLabs President and Chief Executive Officer, and Dan Schumacher, Interim Chief Financial Officer.

Thank you, Rob and welcome everyone to Proto labs fourth quarter and full year 2021 earnings conference call.

And today by Rob Manure, Proto Labs, President and Chief Executive Officer, and Dan Schumacher interim Chief Financial Officer.

Speaker 2: This morning, ProtoLabs issued a press release announcing its financial results for the fourth quarter and full year ended December 31, 2021. The release is available on the company's website. In addition, a prepared slide presentation is available online at the web address provided in our press release.

This morning, <unk> issued a press release announcing its financial results for the fourth quarter and full year ended December 31, 2021. The release is available on the company's website. In addition, a prepared slide presentation is available online at the web address provided in our press release, our discussion today will include statements.

Speaker 2: Our discussion today will include statements relating to future performance and expectations that are, or may be considered, forward-looking statements and subject to many risks and uncertainties that could cause actual results to differ materially from expectations. Please refer to our earnings press release and recent SEC filings, including our annual report on Form 10-K , for information on certain risks that could cause actual outcomes to differ materially and adversely from any forward-looking statements made today.

Relating to future performance and expectations that are or may be considered forward looking statements and subject to many risks and uncertainties that could cause actual results to differ materially from expectations. Please refer to our earnings press release, and recent SEC filings, including our annual report on Form 10-K for inform.

<unk> on certain risks that could cause actual outcomes to differ materially and adversely from any forward looking statements made today.

Speaker 2: The results and guidance we will discuss include non-GAAP financial measures consistent with our past practice. Please refer to our press release and the accompanying slide presentation at the Investor Relations section of our company website for a complete reconciliation of non-GAAP to GAAP results. Now, I'd like to turn the call over to Rob Bedore. Rob?

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

Now I'd like to turn the call over to Rob the door Rob.

Thanks, Jason and good morning, everyone.

Speaker 2: During 2021, like many companies, ProtoLabs faced our fair share of disruptions, external and internal.

During 2021 like many companies Proto labs faced our fair share of disruptions external and internal.

Speaker 2: Throughout the year, we overcame these disruptions and continued to invest in strategic areas that will drive further and future profitable growth, including our employees, hubs, ProtoLabs 2.0, and new customer offerings.

Throughout the year, we overcame these disruptions and continued to invest in strategic areas to drive further.

<unk> profitable growth, including our employees hubs for labs to point out and new customer offerings. Despite.

Speaker 2: Despite the challenging operating environment and external shocks over the past two years, our business fundamentals and market opportunity remain very strong.

Despite the challenging operating environment and external shocks over the past two years, our business fundamentals and market opportunity remain very strong.

Speaker 2: As we enter 2022, ProtoLabs is a profitable, growing, technology-enabled digital manufacturer with strong cash flow. The combination of ProtoLabs' best-in-class rapid manufacturing services and Hub's outsourced manufacturing partner network is truly a unique model in this market, a market that is growing rapidly with the continued digitalization of manufacturing.

As we enter 2020 to Proto labs is a profitable growing technology enabled digital manufacturer with strong cash flow the.

The combination of <unk> best in class rapid manufacturing services and hubs outsourced manufacturing partner network is truly a unique model in this market a market that is growing rapidly with the continued digitalization of manufacturing.

Speaker 2: The external disruptions to our business in 2021 are well known. The global pandemic and new variants continue to add uncertainty and complexity to all business.

The external disruptions to our business in 2021 are well known.

The global pandemic at new variants continue to add uncertainty and complexity to all businesses.

Speaker 2: Supply chains have been massively disrupted due to labor and material shortages.

Apply changes have been massively disrupted due to labor and material shortages.

Speaker 2: Brexit added additional logistics and import-export complications for companies that operate in the region, particularly ProtoLabs, given the quick-turn nature of our manufacturing service.

Brexit added additional logistics and import export complications for companies that operate in the region, particularly Proto labs, given the quick turn nature of our manufacturing services and.

Speaker 2: And last, but certainly not least, the United States recently experienced its fastest rate of inflation in four decades.

And last but certainly not least the United States recently experienced its fastest rate inflation and for decades.

Speaker 2: However, despite the challenging operating environment, 2021 was one of the most transformative years in our company's 22-year history.

However.

Spite the challenging operating environment 2021 was one of the most transformative years in our company's 22 year history.

Speaker 2: We executed on our top priorities to create an industry-leading digital manufacturing platform, to expand our portfolio of customer offerings, and to invest in our employees.

We executed on our top priorities to create an industry, leading digital manufacturing platform to expand our portfolio of customer offerings and to invest in our employees.

Speaker 2: the year was highlighted by two game-changing transformations for us.

The year was highlighted by two game changing transformation for us.

Speaker 2: First, we completed the largest acquisition in our history and joined forces with hubs to expand our offerings and serve more customer use cases.

First we completed the largest acquisition in our history and joined forces with hubs to expand our offerings and serve more customer use cases.

Speaker 2: We are very excited about providing an integrated offer to customers through one seamless digital quoting and ordering platform, fulfilling orders through our internal manufacturing facilities or our network of premiums.

We are very excited about providing an integrated offer to customers through one seamless digital quoting and ordering platform.

Filling orders through our internal manufacturing facilities.

Or our network of premium manufacturing partners.

Speaker 2: I want to reiterate that this hybrid model combining ProtoLabs industry-leading in-house manufacturing capabilities and an outsourced network is unique in our market.

I want to reiterate that this hybrid model, combining <unk> industry, leading in house manufacturing capabilities and outsourced network is unique in our market.

Speaker 2: It allows us not only to offer our customers virtually any type of part size or geometry, quantity and lead time.

It allows us not only to offer our customers virtually any type of parts sizer geometry quantity at lead time, but.

Speaker 2: but also to effectively manage through economic cycles with supply shortages or excess capacity.

But also to effectively manage through economic cycles with supply shortages or excess capacity.

Speaker 2: Our second game-changer was the launch of ProtoLabs 2.0, a revamped, customer-facing digital quoting platform and upgraded internal operating system.

Our second game changer was the launch of prototypes to point out a revamped customer facing digital quoting platform and upgraded internal operating systems.

Speaker 2: The launch of ProtoLabs 2.0 in the Americas and Europe was made possible by the efforts of hundreds of ProtoLabs employees.

The launch of Proto labs, two <unk> in the Americas, and Europe was made possible by the efforts of hundreds of Proto labs employees.

Speaker 2: This is an incredible example of what the power of team can do.

This is an incredible example of what the power of team can do.

Speaker 2: Customer response has been very positive and we continue to gain traction.

Customer response has been very positive and we continue to gain traction.

Speaker 2: In order to transform our company in 2021 and set ourselves up for success in 2022 and beyond, we adapted and overcame challenges while continuing to delight our customers and delivering record revenue.

In order to transform our company in 2021 and set ourselves up for success in 2022 and beyond.

We adapted and overcame challenges, while continuing to delight, our customers and delivering record revenue.

Speaker 2: We also launched two major new offerings to our customers.

We also launched two major new offerings to our customers.

Speaker 2: first, flexible lead times in our CNC machining, and the second, an enhanced digital quality offering in injection mold.

The first flexible lead times in our CNC machining and the second and enhanced digital quality offering and injection molding.

Speaker 2: During the year, we received significant external recognition of our industry leadership and best-in-class digital manufacturing capabilities.

During the year, we received significant external recognition of our industry leadership and best in class digital manufacturing capabilities.

Speaker 2: First, the World Economic Forum announced our induction into the Global Lighthouse Network, recognizing our leadership in implementing Industry 4.0 technology.

The World Economic Forum announced our induction into the global Lighthouse network, recognizing our leadership and implemented industry four <unk> technologies.

Speaker 2: We joined this network as one of only 10 lighthouse manufacturing facilities in the United States, and we share the honor with Fortune 500 companies like BMW, HP, Siemens, Micron, and Foxconn.

We joined this network is one of only 10 lighthouse manufacturing facilities in the United States and we share the honor with Fortune 500 companies like BMW, HP, Siemens Micron and Fox Com.

Speaker 2: ProtoApps was also recognized with awards in the software and digital manufacturing categories of Design World's Leadership in Engineering Award.

Proto Labs was also recognized with awards in our software and digital manufacturing categories of design Worlds leadership and Engineering Awards.

Speaker 2: And most recently, we were recognized as one of five finalists for Plastics News Annual Processor of the Year Award for 2021.

And most recently we were recognized as one of five finalists for plastics news annual processor of the year Award for 2021.

Speaker 2: As a customer-centric organization, external recognition is not the primary goal. However, it is very rewarding to have these widely respected global organizations validate our innovation, transformation, and market leadership.

As a customer centric organization external recognition is not the primary goal.

However, it is very rewarding to have these widely respected global organizations validate our innovation transformation and market leadership.

Speaker 2: I am energized by what this company can do and the number one reason for this is our deep and talented team of employees.

I am energized by what this company can do and the number one reason for this is our deep and talented team of employees I want to recognize and thank Proto labs helps employees for their tireless efforts in 2021.

Speaker 2: I want to recognize and thank ProtoLabs and Hubs employees for their tireless efforts in 2021.

Speaker 2: Our team is our most important asset, which is why we continue to invest in our employees and their health and safety.

Our team is our most important asset which is why we continue to invest in our employees and their health and safety.

Speaker 2: We're furthering our diversity, equity, and inclusion efforts, prioritizing our safety program, supporting new work environments, and providing development opportunities with personal and professional educational.

Furthering our diversity equity and inclusion efforts prioritizing our safety program supporting the work environments and providing development.

Opportunities with personal and professional education offerings.

Speaker 2: The global contract manufacturing market is a multi-trillion dollar industry and we are still in the process.

The global contract manufacturing market is a multi trillion dollar industry.

And we are still in the early days of digitalization.

Speaker 2: which is bringing manufacturing online and driving growth for all players in the scene.

Which is bringing manufacturing online and driving growth for all players in the space.

Speaker 2: Within the $100 billion digital manufacturing industry, we've identified we're the largest, the most technologically advanced, and we have strong cash flow.

Within the $100 billion digital manufacturing industry, and we've identified where the largest the most technologically advanced.

And we have strong cash flows and profitability.

Speaker 2: In addition, ProLabs is the only manufacturer with a truly hybrid fulfillment capability that combines the fastest in-house capabilities in the world with a global curated network of manufacturing partners.

In addition, fertilizers the only manufacturer with a truly hybrid fulfillment capability that combines the fastest in house capabilities in the world with a global curated network of manufacturing partners.

Our hybrid model is.

Speaker 2: built to withstand economic cycles and continue to grow profit.

Built to withstand economic cycles and continue to grow profit.

Speaker 2: Our internal rapid manufacturing offer outperforms the market during periods of high demand for innovation and growth.

Our internal rapid manufacturing offer outperforms the market during periods of high demand for innovation and growth.

Speaker 2: while the HUBZ model with longer lead times and lower prices performs well during periods of dampened innovation or supply chain disruption.

While the hubs model with longer lead times, and lower prices performed well during periods of dampened innovation or supply chain disruptions.

Speaker 2: As we begin to unite the two offers in a single e-commerce experience in 2022, we will become a one-stop shop, enabling us to serve all customer needs and capture the large opportunity ahead.

As we begin to unite the two offers in a single E. Commerce experience in 2022, we will become a one stop shop, enabling us to serve all customer needs and capture the large opportunity ahead of us.

Speaker 2: In summary, 2021 was a transformational year for ProtoLabs and set the foundation for profitable growth for years to come.

In summary.

<unk> 2021 was a transformational year for Proto labs and set the foundation for profitable growth for years to come.

Speaker 2: With that, I'll turn the call over to Dan Schumacher to take you through our financial results in detail.

With that I'll turn the call over to Dan Schumacher to take you through our financial results in detail.

Speaker 3: Thanks Rob. Good morning everyone. I'll take you through three areas of financial details.

Yeah.

Thanks, Rob and good morning, everyone.

I will take you through three areas of financial detail.

Speaker 3: I will start with the fourth quarter, then go to full year highlights. And I will conclude with our outlook for the first quarter of 2020.

I will start with the fourth quarter.

Then go to full year highlights and I will conclude with our outlook for the first quarter of 2022.

Speaker 3: Throughout my remarks, I will reference slides from our quarterly deck.

Throughout my remarks, I will reference slides from our quarterly deck.

Speaker 3: Our fourth quarter financial results begin on page seven of the presentation.

Our fourth quarter financial results begin on page seven of the presentation.

Speaker 3: fourth quarter revenue of $123.6 million, was slightly above our guidance range, and represents a 17.5% year-over-year increase.

Fourth quarter revenue of $123 6 million was slightly above our guidance range and represents a 17, 5% year over year increase.

Speaker 3: or 8.6% organic growth in constant current.

Or eight 6% organic growth in constant currencies.

Speaker 3: Revenue came in ahead of our expectations, due in part to strong production orders and execution on delivering these orders at the end of the quarter.

Revenue came in ahead of our expectations due in part to strong production orders and execution on delivering these orders at the end of the quarter.

Speaker 3: Hubs generated $9.9 million of revenue in the fourth quarter, representing growth of approximately 40% year over year.

Hubs generated $9 9 million of revenue in the fourth quarter, representing growth of approximately 40% year over year.

Speaker 3: Changes in foreign currency have a $600,000 unfavorable revenue impact in the...

Changes in foreign currency had a $600000 unfavorable revenue impact in the quarter.

Speaker 3: During the fourth quarter, supply chain constraints and electronic shortages impacted demand for our quick-term proto-lab services.

During the fourth quarter supply chain constraints and electronics shortages impacted demand for our quick turn product term Proto lab services as our customers endured near record lead times for production materials and components.

Speaker 3: As our customers endure near record lead times for production materials and components, they are willing to wait longer for custom

They are willing to wait longer for custom metal and plastic parts, we offer the fastest lead times in the industry, but there are occasions when customers value price over speed. Meanwhile, the broader range of lead times and pricing options options offered by hubs.

Speaker 3: We offer the fastest lead times in the industry, but there are occasions when customers value price over time.

Speaker 3: Meanwhile, the broader range of lead times and pricing options offered by hubs really resonates with customers in today's climate, as evidenced by hub's 40% growth.

Resonates with customers in today's climate.

Evidenced by hubs, 40% growth.

Speaker 3: As Rob highlighted a few minutes ago, this is how our hybrid model is more resilient to economic cycles than many of our peers.

As Rob highlighted a few minutes ago. This is how our hybrid model is more resilient to economic cycles and many of our peers.

Speaker 3: In Europe , fourth quarter revenue of $22.1 million amounted to growth of 20.4% year-over-year.

In Europe fourth quarter revenue of $22 1 million.

Amounted to growth of 24% year over year.

Speaker 3: excluding club's revenue in Europe and the impact of foreign currency.

Excluding hubs revenue in Europe , and the impact of foreign currencies.

Speaker 3: Our Europe revenue declined 4% year-over-year in the fourth quarter, reflecting continued supply chain challenges in the overall European manufacturing environment, especially heightened in automotive.

Our Europe revenue declined 4% year over year in the fourth quarter, reflecting continued supply chain challenges in the overall European manufacturing environment, especially.

Especially heightened in automotive.

Speaker 3: We served 23,376 unique product developers in the fourth quarter, up 28.7% year-over-year.

We served 23376 unique product developers in the fourth quarter up 28, 7% year over year.

Speaker 3: Strong growth in product developers was driven primarily by the January 2021 acquisition of hubs, while product developer growth in our legacy business was commensurate with our revenue growth. Turning to slide 15.

Strong growth in product developers was driven primarily by the January 2021 acquisition of hubs, while product developer growth in our legacy business with commensurate with our revenue growth.

Turning to slide 15, and our detailed income statement, our non-GAAP gross margin in the quarter was 45, 6% within our guidance range and up slightly sequentially from 44, 9%.

Speaker 3: Our non-GAAP gross margin in the quarter was 45.6% within our guidance range and up slightly sequentially from 44.9%.

Speaker 3: Lower sequential contractor, overtime, and recruiting costs were offset by labor inefficiencies around the holidays.

Lower sequential contractor overtime and recruiting cost were offset by labor inefficiencies around the holidays.

Speaker 3: Hobbs gross margin in the fourth quarter improved 30 basis points sequentially to 17.5%. For the quarter, Hobbs represented a 240 basis point drag on our overall gross margin due to the lower margin nature of the outsourced manufacturing model.

Hubs gross margin in the fourth quarter improved 30 basis points sequentially to 17, 5% for the quarter Humps represented a 240 basis point drag on our overall gross margin due to the lower margin nature of the outsourced manufacturing model or.

Speaker 3: Our total non-GAAP operating expenses were $42.9 million in the fourth quarter, down slightly sequentially from the third quarter, and slightly below our guidance range of $43 to $44 million. Fourth quarter non-GAAP operating expenses increased $5.5 million from the fourth quarter of 2020. Most of this increase was driven by bringing on the operations of HUBS, which added $3.8 million of operating expenses in the most recent quarter.

Our total non-GAAP operating expenses were $42 9 million in the fourth quarter down slightly sequentially from the third quarter and slightly below our guidance range of $43 million to $44 million.

First quarter non-GAAP operating expenses increased $5 5 million for the fourth quarter of 2020.

Most of this increase was driven by bringing on the operations of hub, which added $3 8 million of operating expenses in the most recent quarter.

Speaker 3: Moving to taxes, our non-GAAP effective tax rate in the fourth quarter was 16% compared to 25.3% in the prior quarter and 18.2% in the fourth quarter of 2020. Our non-GAAP rate was lower this quarter primarily to the release of uncertain tax position reserves as a statute of limitations expired on them during the fourth quarter.

Moving to taxes, our non-GAAP effective tax rate in the fourth quarter was 16% compared to 25, 3% in the prior quarter and 18, 2% in the fourth quarter of 2020 are.

Our non-GAAP rate was lower this quarter, primarily to the release of uncertain tax position reserves as the statute of limitations expired on them during the fourth quarter.

Speaker 3: The net result was non-GAAP diluted earnings per share in the quarter of $0.41, representing a sequential increase of $0.06 per share and a $0.09 per share decrease from the prior year. The year-over-year decrease in earnings per share consisted of anticipated operating losses at hubs, lower gross margins in our legacy business partially offset by higher revenue, and the absence of ProtoLabs 2.0 launch expenses incurred in the fourth quarter of 2020.

That result was non-GAAP diluted earnings per share in the quarter of 41 Rep.

Representing a sequential increase of <unk> <unk> per share and a <unk> <unk> per share decrease from the prior year.

Year over year decrease in earnings per share consistent with the anticipated operating losses at hubs lower gross margins than our legacy business, partially offset by higher revenue and the absence of Proto labs, two <unk> launch expenses incurred in the fourth quarter of 2020.

Speaker 3: Our cash flow performance is summarized on slide 17.

Our cash flow performance as summarized on slide 17.

Speaker 3: We generated $23 million in cash from operations in the fourth quarter, up from $11.5 million in the third quarter. We also repurchased shares worth $10.2 million under our stock repurchase program in the quarter to offset dilution.

We generated $23 billion in cash from operations in the fourth quarter.

From $11 5 million in the third quarter, we also repurchased shares worth $10 2 million under our stock repurchase program in the quarter to offset dilution.

Speaker 3: I will now move to our full year 2021 results, which begin on page.

I will now move to our full year 2021 results, which begin on page 18.

Speaker 3: As Rob mentioned, we generated record annual revenue, recognizing $488 million for growth of 12.4% over 2020.

As Rob mentioned, we generated record annual revenue recognizing $488 million.

Our growth of 12, 4% over 2020.

Speaker 3: Organic growth in constant currencies was 4%. HUBZ contributed $33.3 million in revenue between the January 21st acquisition date and the end of the year.

Organic growth in constant currencies was 4% hubs.

<unk> contributed $33 3 million in revenue between the January 21 acquisition date, and the end of the year.

Speaker 3: In Europe , our 2021 revenue declined 5% in constant currencies and excluding hubs, reflecting lower demand for quick-turn parts due to the supply chain issues as well as difficulties caused by Brexit.

In Europe , our 2021 revenue declined 5% in constant currencies and excluding hubs.

<unk> lower demand for quick turn parts due to the supply chain issues as well as difficulties caused by Brexit.

Speaker 3: The added logistics complexity and increased shipping times caused by Brexit negatively impacted our lead times and on-time delivery rates from our UK-based injection molding and CNC machining facilities.

We added logistics complexity and increased and increased shipping times caused by Brexit negatively impacted our lead times and on time delivery rates from our UK based injection molding and CNC machining facility.

Speaker 3: These lead times are now back to pre-Brexit levels and we are excited about the growth potential in Europe in 2021.

These lead times are not back to pre Brexit levels, and we are excited about the growth potential in Europe in 2021.

Speaker 3: We served 55,330 unique product developers in 2021, up 26.3% year over year.

We served 55 330 unique product developers in 2021 up 26, 3% year over year.

Speaker 3: Now on to our detailed full-year income statement on slide 24. Our non-GAAP gross margin in 2021 was 46.4% compared to 51% in 2020. HUB's gross margin in 2021 was 15.2%, representing a 220 basis point negative impact to our overall gross margin.

Now onto our detailed full year income statement on slide 24, our.

Our non-GAAP gross margin in 2021 was 46, 4% compared to 51% in 2020 hubs.

<unk> gross margin in 2021 was 15, 2%, representing a 220 basis point negative impact to our overall gross margin.

Speaker 3: We will continue to drive sequential improvements in gross margin. That helps.

We will continue to drive sequential improvements in gross margin that helps.

Speaker 3: In 2021, total non-GAAP operating expenses were $171.6 million, up $27.9 million from 2020.

2021, total non-GAAP operating expenses were $171 6 million up $27 9 million from 2020.

Speaker 3: HUB's 2021 non-GAAP operating expenses represented $13.2 million of this year-over-year increase.

Hubs 2021, non-GAAP operating expenses represented $13 2 million of this year over year increase.

Speaker 3: Moving to taxes, our 2021 non-GAAP effective tax rate was 22.7% compared to 20.2% in 2020.

Moving to taxes.

Our 2021 non-GAAP effective tax rate was 22, 7% compared to 22% in 2020.

Speaker 3: non-GAAP diluted earnings per share in 2021 was $1.55 compared to $2.36 in 2020.

non-GAAP diluted earnings per share in 2021 was $1 55 compared to $2 36 in 2020.

Speaker 3: The $0.82 year-over-year change in our non-GAAP earnings per share was driven by several headwinds throughout the year combined with investments we made in future growth opportunities. Specifically, HUBS represented a $0.32 per share anticipated decrease year-over-year as we continue to incur operating losses while we scale that business.

The 82 year over year change in our non-GAAP earnings per share was driven by several headwinds throughout the year combined with investments we made in future growth opportunities specifically <unk>.

<unk> represented a 32 per share anticipated decrease year over year as we continue to incur operating losses, while we scale that business.

Speaker 3: In our legacy operations, wage and material cost inflation, as well as inefficiencies with the launch of ProLabs 2.0, partially offset by revenue growth, resulted in a $0.21 reduction in our earnings per share.

In our legacy operations wage and material cost inflation as well as inefficiencies with the launch of <unk> two point out partially offset by revenue growth resulted in a 21 reduction in our earnings per share.

Speaker 3: The depreciation of the ProtoLabs 2.0 software asset represented a $0.15 per share decrease. One-time ProtoLabs 2.0 cost to support the Americas launch and hypercare phase resulted in a $0.06 per share decrease. Continued investment in R&D resources that expand our customer offerings represented a $0.03 per share decrease. Lastly, a year-over-year increase in our effective tax rate resulted in a $0.05 per share unfavorable impact.

The depreciation of the Proto labs to point out a software asset reserve represented a <unk> 15 per share decrease one time Proto labs, two point out cost to support the Americas launch and hyper care fees resulted in a <unk> <unk> per share decrease continued investment in R&D resources that expand our customer offerings represented.

<unk> per share decrease lastly, our year over year increase in our effective tax rate resulted in a <unk> <unk> per share unfavorable impact.

Speaker 3: Transitioning to the cash flow statement and balance sheet on slide 25. We generated $55.2 million in cash from operations in 2021. We repurchased $23.3 million worth of shares under our stock repurchase program during 2021, primarily to offset the impact of dilution, and currently have $61.9 million remaining under our existing stock repurchase plan, which goes through 2023.

Transitioning to the cash flow statement and balance sheet sheet on slide 25.

We generated $55 2 million in cash from operations in 2021, we repurchased $23 3 million worth of shares under our stock repurchase program during 2021, primarily to offset the impact of dilution.

We currently have $61 $9 million remaining.

Under our existing stock repurchase plan, which goes through 2023.

Speaker 3: On December 31st, our cash and investments balance was $91.8 million and our balance sheet remained strong and debt free.

On December 31, our cash and investments balance was $91 8 million and our balance sheet remains strong and debt free.

Speaker 3: Finally, I'd like to detail our outlook for the first quarter of 2022 as outlined on slide 27.

Finally, I would like to detail our outlook for the first quarter of 2022 as outlined on slide 27.

Speaker 3: We expect to generate revenue between $116 million and $126 million in the first quarter, representing year-over-year growth of about $1.5 billion.

We expect to generate revenue between 116 at $126 million in the first quarter.

Representing year over year growth of up to 8% we.

Speaker 3: We saw a slow start to the first quarter in our legacy businesses as the Omicron variant slowed demand in manufacturing, reflected by U.S. manufacturing activity falling to a 14-month low in January . However, as the quarter has progressed and the Omicron wave began to recede, our orders have begun to accelerate, creating optimism for the back half of the quarter and the rest of 2020.

We saw a slow start to the first quarter in our legacy businesses as the omicron variant slow demand in manufacturing reflected by U S manufacturing activity falling to a 14 month low in January however, as the quarter has progressed in the omicron waves began to recede our orders have begun to accelerate creating optimism.

For the back half of the quarter and the rest of 2022.

Speaker 3: We expect foreign currency to have an approximate $500,000 unfavorable impact on revenue compared to the first quarter of 2021, assuming foreign currency rates remain at current levels.

We expect foreign currency to have an approximate $500000 unfavorable impact on revenue compared to the first quarter of 2021, assuming foreign currency rates remain at current levels.

Speaker 3: Turning to gross margin, we expect first quarter non-GAAP gross margin of approximately 44% plus or minus 100 basis points. While we're beginning to see the positive impact of pricing changes in the quarter, the soft start to the year created low margins in January that will not be offset by the end of the quarter. In addition, there was $1 million of favorable gross profit items in the fourth quarter that we are not projecting to repeat in the first quarter.

Turning to gross margin, we expect first quarter non-GAAP gross margin of approximately 44% plus or minus 100 basis points, while we're beginning to see the positive impact of pricing changes in the quarter. The soft start to the year created low margins in January that will not be offset by the end of the quarter.

In addition, there was $1 million of favorable gross profit items in the fourth quarter that we are not projecting to repeat in the first quarter we.

Speaker 3: We expect total non-GAAP operating expenses to be between $42 and $43 million in the first quarter, consistent with recent quarters.

We expect total non-GAAP operating expenses to be between 42 and $43 million in the first quarter consistent with recent quarters.

Speaker 3: We estimate our first quarter non-GAAP effective tax rate to be approximately 25% compared to 16% in the fourth quarter and 22.7% in the first quarter of 2021.

We estimate our first quarter non-GAAP effective tax rate to be approximately 25% compared to 16% in the fourth quarter and 22, 7% in the first quarter of 2021.

Speaker 3: Now, I'd like to turn the call back over to Rob as he closes with the introduction of our 2022 strategic priorities. Rob.

Now I'd like to turn the call back over to Rob as he closes with the introduction of our 2022 strategic priorities Rob. Thank.

Thank you Dan.

Speaker 2: In 2022, we are well positioned for success, due to the work that we've done in the past few years.

In 2022, we are well positioned for success due to the work that we've done in the past few years.

Speaker 2: We are taking several measures to address the near-term challenges facing our business.

We are taking several measures to address the near term challenges facing our business, including thoughtful pricing changes to offset cost inflation.

Speaker 2: including thoughtful pricing changes to offset cost inflation.

Speaker 2: improving internal operating efficiency, and investing further in automation.

Improving internal operating efficiency and investing further in automation.

Speaker 2: We have pricing actions in place in every service in every region.

We have pricing actions in place and every service and every region.

Speaker 2: Some actions were initiated in late 2021, and others went into effect in early 2022. It will take some time to realize the full benefit of these changes.

Some actions were initiated in late 2021, and others went into effect in early 2022, and it will take some time to realize the full benefit of these changes.

Speaker 2: Within the ProtoLabs 2.0 environment, our internal operating efficiency continues to improve during the efforts of our software teams and our employees as they adapt to the updated process.

Within the Proto labs, two <unk> environment.

Our internal operating efficiency continues to improve given the efforts of our software teams and our employees as they adapt to the updated processes.

Speaker 2: Additionally, our 2022 plan includes continued investment and productivity through workflow automation and robotics to enable us to scale our revenues faster than the need for additional labor.

Additionally, our 2022 plan includes continued investment in productivity through workflow automation and robotics to enable us to scale, our revenues faster than the need for additional labor.

Speaker 2: All three of these measures will continue to be areas of emphasis for us as part of our 2022 strategic priority.

All three of these measures will continue to be areas of emphasis for us as part of our 2022 strategic priorities.

Speaker 2: At our Investor Day in May 2021, we outlined our three-phase plan to double revenue by 2026. First, to establish the platform, second, to accelerate our growth, and third, to expand profitability.

At our Investor Day in May 2021, we outlined our three phased plan to double revenue by 2026 first to establish the platform second to accelerate our growth and third to expand profitability.

Speaker 2: We are on track. We made great progress on positioning the company to achieve our plan during 2021 by developing and strengthening our platform with hubs and the ProtoLabs 2.0 system.

We are on track, we made great progress on positioning the company to achieve our plan during 2021.

By developing and strengthening our platform with hubs and the Proto labs, two <unk> systems.

Speaker 2: and by accelerating our growth throughout the year, culminating in strong double-digit growth in the fourth quarter.

And by accelerating our growth throughout the year, culminating in strong double digit growth in the fourth quarter.

Speaker 2: For 2022, we have four strategic priorities to keep us moving forward. First is.

For 2022, we have four strategic priorities to keep us moving forward.

First is accelerating our revenue growth.

Speaker 2: Resources will be focused on expanding the capabilities of our services, integrating hubs offering, improving pricing, and continue to expand our production use cases to drive revenue growth.

Sources will be focused on expanding the capabilities of our services integrated hubs offerings, improving pricing and continuing to expand our production use cases to drive revenue growth.

Speaker 2: We will expand our portfolio of services both through our legacy operations and through an integrated offer with hubs, starting with CNC machines.

We will expand our portfolio of services, both through our legacy operations and through an integrated offer with hopes starting with CNC machining.

Speaker 2: Pricing will improve, both at ProLabs and at Hubs, through continuous testing of our algorithms and adjustments to pricing based on various market factors.

Pricing will improve both at <unk> and at hubs through continuous testing of our algorithms and adjustments to pricing based on various market factors.

Speaker 2: New product launches and improved pricing will enable the final component of our revenue growth strategy, expansion of our production offer.

New product launches and improved pricing will enable the final component of our revenue growth strategy expansion of our production offerings. We.

Speaker 2: We originally built this business to offer prototypes and remain the best in the world at prototyping as a result of our digital model's ability to deliver custom parts in as little as one day with industry-leading reliability and quality.

We originally built this business to offer prototypes and remain the best in the world at prototyping as a result of our digital models ability to deliver custom parts little as one day with industry, leading reliability and quality.

Speaker 2: We now stand poised to accelerate the transformation of on-demand production in 2022 through the combination of our expanded pricing and lead time options, expanded capabilities including the integration of hubs offerings, as well as our new digital quality offerings that provide part quality and process assurance at all volumes.

We now stand poised to accelerate the transformation of on demand production in 2022 through the combination of our expanded pricing and lead time options.

<unk> capabilities, including the integration of hubs offerings as well as our new digital quality offerings that provide part quality and process assurance at all volumes.

Speaker 2: I am confident these actions will drive double-digit revenue growth by the end of 2022.

I am confident these actions will drive double digit revenue growth by the end of 2022.

Our second strategy is to delight our customers.

Speaker 2: We've established an enhanced cross-functional customer experience.

We've established an enhanced cross functional customer experience team to drive continuous improvements to our customer offer during 2022.

Speaker 2: to drive continuous improvements to our customer offer during 2020.

Speaker 2: Our customers value reliability and speed, and we offer the fastest lead times and most reliable on-time delivery rates in the custom parts manufacturing industry.

Our customers value reliability and speed and we offer the fastest lead times and most reliable on time delivery rates in the custom parts manufacturing industry.

Speaker 2: Although these metrics were challenged at times in the past two years due to the operating environment and internal disruptions caused by the launch of ProtoLabs 2.0, we are back at it again.

Although these metrics were challenged at times in the past two years due to the operating environment and internal disruptions caused by the launch of Proto labs two point al.

We are back to our industry leading standards.

Speaker 2: Our third strategy for 2022 is to be the digital leader at scale through continuous improvement.

Our third strategy for 2022 is to be the digital leader at scale through continuous improvement.

Speaker 2: As it relates to ProtoLabs internal manufacturing facilities, we will continue to prioritize process improvements and automation, including introducing robotics and workload automation in our factories and back office processes.

As it relates to Proto labs internal manufacturing facilities, we will continue to prioritize process improvements and automation, including introducing robotics and workflow automation in our factories and back office processes. This strategy will drive improved operating margins in 2022.

Speaker 2: This strategy will drive improved operating margins in 2022.

Speaker 2: Our fourth strategy for the year is to continue to be a great place to work in these changing times.

Our fourth strategy for the year is to continue to be a great place to work in these changing times.

Speaker 2: We will continue to develop and empower employees as well as attract and retain top talent to continue to drive forward on our five-year plan.

We will continue to develop and empower employees as well as attract and retain top talent to continue to drive forward on our five year plan.

Speaker 2: We will expand our role-specific training and resources to support our flexible workforce and further our efforts in areas such as diversity, equity, and inclusion.

We will expand our role specific training and resources to support our flexible workforce and further our efforts in areas such as diversity equity and inclusion.

Speaker 2: By investing in these areas that matter to all of our employees, we will maintain a great place to work and a winning culture.

By investing in these areas that matter to all of our employees, we will maintain a great place to work and a winning culture.

Speaker 2: We also believe that being part of a great company is being a great corporate.

We also believe that being part of a great company as being a great corporate steward.

Speaker 2: As a corporation, Protolabs has many stakeholders and we're focused on ESG initiatives that are impactful.

As a corporation prototypes as many stakeholders and we are focused on ESG initiatives that are impactful to them.

Speaker 2: Our Board of Directors and leadership teams are aligned on our top priorities within ESG. In the past few months, our organization has reviewed our policies, programs, and initiatives, identifying opportunities for expansion.

Our board of directors and leadership teams are aligned on our top priorities within ESG in the past few months, our organization has repeated our policies programs and initiatives identifying opportunities for expansion.

Speaker 2: We plan to address those areas and ultimately improve our impact on the environment and the communities in which we operate.

We plan to address those areas and ultimately improve our impact on the environment and the communities in which we operate.

Speaker 2: As we enter 2022, I'm confident that we have the right strategic priorities in place. The transformative moves we made in 2021 set us up for success in 2022 and beyond.

As we enter 2022 I am confident that we have the right strategic priorities in place.

The transformative moves we made in 2021 set us up for success in 2022 and beyond.

Speaker 2: Our scale, speed, brand, and manufacturing experience position us optimally to grow profit.

Our scale speed brand and manufacturing experience position us optimally to grow profitable.

Speaker 4: ProtoLabs is resilient and our employees are talented, driven, and adaptable.

Proto labs is resilient and our employees are talented driven and adaptable.

Speaker 2: We pioneered the digital manufacturing market in 1999. We're the fastest digital manufacturer in the world, and we're just getting started with hubs, where together, we're creating the world's broadest manufacturing offer.

We pioneered the digital manufacturing market and $19 99, where.

We are the fastest digital manufacturer in the world and we're just getting started with hubs, where together we are creating the world's broadest manufacturing offering.

Speaker 2: as we enter 2022 after a challenging year of transformation.

As we enter 2022 after a challenging year of transformation.

Speaker 2: We are positioned very well and I am excited to continue our journey towards doubling our revenue by 2026.

We are positioned very well and I am excited to continue our journey towards doubling our revenue by 2026.

Okay.

Speaker 2: This concludes our prepared remarks. Dan and I will now gladly take your questions.

This concludes our prepared remarks, Dan and I will now gladly take your questions.

Speaker 2: Rob, can you open the line for Q&A? Yes. Thank you.

Rob can you open the line for Q&A.

Yes. Thank you.

Speaker 1: We will now be conducting a question and answer session. If you would like to ask a question today, please press star 1 on your telephone keypad and a confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue.

We will now be conducting a question and answer session. If you'd like to ask a question today. Please press star one on your telephone keypad and a confirmation tone will indicate your line is in the question queue.

You May press Star two if you would like to remove your question from the queue.

Speaker 1: Participants are using speaker equipment. It may be necessary to pick up your handset before pressing the star keys. One moment please.

All participants are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

Please while we pull for questions.

Speaker 1: Thank you. Our first question is from the line of Brian Drabb with William Blair. Please receive your.

Thank you and our first question is from the line of Brian Drab with William Blair. Please proceed with your questions.

Speaker 3: Morning. Thanks for taking my questions. First, just wanted to ask about gross margin. Thanks for the guidance through the first quarter. Is there any sense you can give us for how gross margin might progress as we move through the quarters in 22?

Good morning, Thanks for taking my questions.

First just wanted to ask about gross margin. Thanks.

Thanks for the guidance for the first quarter or is there any sense you can give us for how gross margin might progress as we move through the quarters in 2002.

Speaker 3: Yeah, so Brian , we would expect it to improve sequentially through the year and that we would have improved gross margin percent year over year as volume is increasing quarter by quarter.

Yes, we would.

So Brian we would expect it to improve sequentially.

Through the year.

We would have improved gross margin percent year over year.

As value is increasing quarter by quarter.

Is there any aspirational.

Speaker 3: range or something by the end of the year? I know Rob just mentioned, you know, for revenue, hoping to reach a double-digit revenue growth rate by the end of the year, but and any idea where we should exit maybe? Exit 22?

Range or something but by the end of the year I know, Rob just mentioned.

For revenue, hoping to reach a double digit revenue growth rate by the end of the year, but.

Any idea of where we should exit maybe.

'twenty two.

Yeah. So.

Speaker 3: We're not really giving a guide, but I would just say that we expect to be, our gross margin percent to be above what it is, non-GAAP gross margin percent to be above what it was in 2021.

We're not really giving a guide, but I would just say that we expect to be our gross margin percent to be above.

What it is non-GAAP gross margin percent to be above what it was in 2021.

Okay.

Speaker 3: Okay. And then I wanted to make sure I understood that comment about double-digit revenue growth by the end of 2022. Does that imply – I don't want to put words in your mouth, obviously, but does that imply single-digit revenue growth until we get to the end of 2022? Is that the goal, to get the company back to double-digit by then?

Okay, and then I wanted to make sure I understood that comment about <unk>.

Double digit revenue growth by the end of 2022.

Does that imply.

I don't want to I don't want to put words in your mouth, obviously does that imply single digit revenue growth until we get to the end of 2022 is that the goal to get to get the company back to double digits by then.

Yes, so what we're saying is look we ended Q4, well right we were grow with a strong trajectory.

Speaker 2: What we're saying is, look, we ended Q4 well, right? We were growing, you know, with a strong trajectory.

Speaker 2: The organic business was 9% and Hubs was growing 40%. We saw a slowdown in orders at the end of December and the first week or so of January given what happened with Omicron, but since then orders have been on a good trajectory and so we're feeling confident that we'll be able to get to that double digit growth later in the year.

The organic business was 9%.

It helps us growing 40%.

We saw a slowdown in orders at the end of December and the.

Week or so of January .

Given what happened with omicron.

But since then our orders have been on a good trajectory and so we're feeling confident that we will be able to get to that double digit growth later in the year.

Speaker 1: Okay. Okay. Thanks. And then...

Okay. Okay. Thanks, and then.

Speaker 3: other topic I wanted to touch on was the, you mentioned the digital and seamless ordering platform.

Yes.

The other topic I wanted to touch on.

You mentioned, the digital and seamless ordering platform.

Speaker 3: I, you know, the user experience now on the website is still, you know, you still kind of get directed to.

Hi.

User experience now on the website.

It's still.

You're still kind of get directed to.

Speaker 3: a few different areas right you get there's proto labs legacy and then then

On a few different areas, there's proto labs legacy and then then.

Speaker 3: You can use MyRapid and then Hub still seems very separate. I'm just wondering if you could explain where we are today and where we're headed and the timing of when all of those are really, I feel like it could be more seamless. And I was wondering if you could just comment on that.

You can use my rapid and then hubs still seems very separate and I'm just wondering if you could.

Explain where we are today and where we're headed.

Timing of when all of those are really I feel like it could be more seamless and I was wondering if you just comment on that.

Speaker 2: Yeah, we agree that that's exactly what we're we're working for hubs right now is separate hubs. You're absolutely right. Hubs is separate right now. And, you know, we learned from the integration with rapid how critical a really seamless customer experience is. And that's what we're building.

Yes, we agree that that's exactly what we're working for.

Hubs right now as separate hub Youre, absolutely right hubs is separate right now and we learned from the integration with rapid how critical really seamless.

Or experiences and that's what we're building.

Speaker 3: I'm just wondering, too, is Hubs in the state of things today? Does Hubs benefit, really, from being part of ProtoLabs, or are you just kind of running them? How do they benefit today, since you don't go to the ProtoLabs website and then find Hubs very easily? Are they kind of on a stand-alone basis and going for their earn-outs, and then...

And then I'm just wondering as hubs.

In the state of things today.

Hubs benefit really from being part of Proto labs.

Just kind of running them how do they benefit.

Since they are not you don't go to the Proto labs website, and then find hubs very easily.

Are they kind of on a standalone basis and going through their earn outs and then.

Speaker 3: you know, sort of in the approving stage still. Like, how are you thinking about that? So today, Hubs has been operating.

Sort of in a proving stage still how are you thinking about that.

So today's hubs has been operating.

Speaker 2: Largely independently, we've been making continued investments in hubs and we've seen good growth from them. We're also continuing to invest in.

Largely independently we have been making continued investments in hubs.

And.

We've seen good growth from them. We're also continued to invest in.

Speaker 2: In innovations within hubs, you've seen pricing improvements, right, which have driven gross margin improvements there, and there have been investments in the manufacturing partner platform to improve the experience for our MPs and make sure we're continually optimizing the opportunities that we send to the MPs that are really tailored to them.

Innovations within hubs, you've seen pricing increase or pricing improvements right, which have driven gross margin improvements there and there have been investments in the.

The manufacturing partner platform to improve the experience for our MPS and make sure. We are continually optimizing the opportunities that we send to the MPS that are really tailored to them.

Speaker 5: That's the work that we've been doing, and alongside that, working on the front-end integration to make that seamless.

And that's the work that we've been doing and alongside that working on the front end integration to make that seamless.

Speaker 6: Okay, great. Good luck with everything. I'll talk to you more later this morning. Thank you.

Okay, great. Good luck with everything I'll talk to you more later this morning. Thank you.

Thanks, Brian .

Speaker 1: Our next question comes from the line of Greg Palm with Craig Hallam. Please proceed with your question.

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

Speaker 7: Yeah, good morning. And thanks for taking the questions here. I guess when you when you look back at the quarter, was there anything that surprised you revenue came in nicely above expectations. So just kind of curious whether that was certain end market strength or whether it was just better execution overall.

Yeah good morning.

And thanks for taking the questions here I guess when you when you look back at the quarter.

Was there anything that surprised you revenue came in nicely above expectation. So just kind of curious whether that was certain end market strength or whether it was just better execution overall.

Speaker 8: Yeah, so I, so, um, you know, we had really good execution, especially in our injection molding production area. You know, we, in that business, we got the lead times back to where they were, we entered the quarter with quite a big backlog in that business, and our lead times probably were not where we wanted them to be. And so, you know, I gotta give credit to, you know, our, our production.

Yes so.

We had really good execution, especially in our injection molding production area.

In that business.

Got the lead times back to where they were we entered the quarter with quite a big backlog in that business and our lead times, probably were not where we wanted them to be.

And so.

Got to give credit to.

Our our production.

Speaker 8: Group with an injection molding for really performing well within the quarter And you know that was one place in which you know We ended up having you know higher revenue getting back to those lead times That's I put us over there over the guys

Group within injection molding for really performing well within the quarter.

And that was one place in which.

We ended up having higher revenue getting back to those lead times.

That put us over there over the guidance.

Speaker 7: Okay, that makes sense. And specifically on the Q1 guide, can you give us any more color specifically for, you know, what you're seeing in January ? I mean, it's been a, frankly, a long time, I think, since you've seen any sort of sequential decline in revenue from Q4 to Q1. And I think if my math is right, it basically implies, you know, flattish organic growth on a year-over-year basis.

Okay.

Thanks.

And specifically on the Q1 guide can you give us any more color specifically for what Youre seeing in January I mean, it's been frankly, a long time I think since you've seen any sort of sequential decline in revenue from Q4 to Q1 and I think if my math is right. It basically implies flattish.

Organic growth on a year over year basis.

Speaker 8: Yeah, so, um, you know, Greg, we...

Yes so.

Greg.

Speaker 9: We're a quick turn business, and we're projecting things like we always have. So we're taking a look at how the orders came in through January , and then based on seasonality trends that we've seen, based on uploading activity, we're projecting out what happened in the quarter. You know, we talked a bit about this, but, you know...

We're a quick quick turn business.

Projecting things.

Like we always have so we're taking a look at how the orders came in through January .

And then based on seasonality trends that we've seen based on uploading activity.

We're projecting out what happened in the quarter.

<unk>.

We talked a bit about this but.

Speaker 9: I know us as a company and our customers, you know, as Omicron came through, there was a much higher rate.

I know us as a company and our customers.

As omicron came through there was much higher rate of infection that occurred and there were a lot more people that were out of the office and so as we came out of the holidays into January .

Speaker 9: of infection that occurred and there were a lot more people that were out of the office.

Speaker 9: And so as we came out of the holidays into January , our thinking is that that kind of delayed starting everything up again, in terms of when we come out of the holidays, when do orders start picking up? So that was a week or two later for us than normal. And we believe that some of that, the Omicron variant had something to do with that. I hope.

Our thinking is that that kind of delayed starting everything up again in.

In terms of.

When we come out of the holidays window orders start picking up so that was a week or two later for us than normal.

And we believe that some of that beyond the crime variant.

That's something to do with that.

I hope that helps.

Speaker 7: Well, and I guess what I'm trying to get a sense for it is that does the guidance assume that it's maybe a slower ramp through the quarter than what is normal? Or are you are you still expecting a pretty steady ramp? Because I think, you know, March is typically the most important month anyways. So I'm just trying to get a sense for what the guidance assumes for maybe March specifically. Yeah. Um,

Well I guess, what im trying to get a sense for does that does the guidance assume that it's maybe a slower ramp through the quarter than what is normal or are you are you still expecting a pretty steady ramp because I think March is typically the most important month denny's anyway. So I'm just trying to get a sense for what the guidance assume.

For maybe more specifically yes.

Yes.

Speaker 8: I think it assumes that we get back up to where we would project or assume that we would be, so probably a steeper ramp up February and March because of the slow start in January . The ramp is happening a little bit later, and we can't make up for the revenue shortfall that we're seeing.

I think I think it assumes that we get back up to our two where we would project or assume that we would be so probably a steeper.

Ramp up.

February and March because of the slow start in January it's just the ramp is happening.

A little bit later, and we can't make up for the revenue shortfall that we're seeing.

Speaker 7: Yep. Okay, got it. And then last one, just a clarification. I think you mentioned something about a $1 million positive impact to gross margin in Q4. I didn't catch what that was.

In January .

Okay got it and then last one just a clarification I think you mentioned something about a $1 million positive impact to gross margin in Q4, I didn't catch what that was.

Speaker 10: Yeah, I mean, it was it was various items that had occurred in the fourth quarter and I'm, you know, we're going to have margin fluctuations quarter quarter and and I'm just not projecting to see those coming in in the first quarter. Okay. All right.

Yes.

It was various items that had occurred in the fourth quarter.

We're going to have margin fluctuations quarter to quarter, and and I'm, just not projecting to see those coming in.

In the first quarter.

Okay, alright, thanks, so much good luck.

Thank you.

Speaker 11: Our next question comes from the line of Jim Raschutte with Needham and Company. Please proceed.

Our next question comes from the line of Jim Ricchiuti with Needham <unk> Company. Please proceed with your question Hi.

Speaker 12: Hi, thank you. Good morning. Yeah, I'm just wondering, as you look at the activity that you're seeing in the quarter, early in the quarter, you cited Omicron.

Alright. Thank you good morning, I'm, just wondering as you look at the.

The activity that youre seeing in the quarter early in the quarter you cited.

Speaker 13: Are you seeing, since it appeared to hit Europe earlier, and...

Brian .

Are you seeing since it appeared to hit.

Hit Europe earlier.

Speaker 14: that has improved a bit, perhaps quicker than it has in the U.S. Have you seen more of a pickup there that gives you the confidence that, you know, that gets behind us and we start seeing that pickup in activity midway to late in Q1?

That has improved a bit perhaps quicker than it has in the US Are you have you seen more of a pick up there that gives you the confidence that.

That gets behind us and we start seeing that pick up in activity midway to late in Q1.

Here in the west.

Speaker 8: So the trend in Europe is a bit different, and I think one of the things that at least we're seeing is on the hub side, we're seeing things fairly strong within Europe .

So the trend in Europe is a bit different and I think one of the things that at least we're seeing.

Is on the Hep side, we're seeing things fairly strong within Europe .

Speaker 15: on our quick turn business, the legacy business that's within Europe .

<unk>.

On our quick turn business the legacy business that's within Europe .

Speaker 9: We went out and surveyed customers and what they're dealing with is a bottleneck in their supply chain around microchips and electronics.

<unk>.

We went out and surveyed customers.

And what they are dealing with is a bottleneck in their supply chain around micro chips and electronics.

And as that occurs.

Speaker 9: they can wait a little bit longer for some custom part.

They can wait a little bit longer for some custom parts and.

Speaker 9: And, you know, they have alternatives, great alternatives like HUB.

They have alternatives greatest alternatives like hubs, who they can wait a little bit longer for those parts.

Speaker 9: who they can wait a little bit longer for those parts and get them at a different price point. So we do feel like within Europe , at least with the trending that we're seeing within Europe , that that bottleneck within the supply chain...

And get them at a different price point.

So we do feel like within Europe at least with the trending that we're seeing within Europe that that bottleneck within the supply chain.

Speaker 8: is impacting our quick turn business, but businesses like Hubs are benefiting from that. But we do feel like that's why this hybrid model is so important to us, so that we can offer the quick turn when the customer needs it, but we can also offer a little bit longer lead times at a different price point.

It is impacting our quick turn business, but businesses like hubs are benefiting from that but we do feel like that's why this hybrid model is so important to us. So that we can we can offer the quick turn when the customer needs. It but we can also offer.

A little bit longer lead times at a different price point.

Yes.

Speaker 16: Got it. Thanks for that. Just you alluded to pricing actions, which we're hearing from a lot of companies. I'm wondering if you could shed a little bit of more light on that in terms of how we should be thinking about the implementation and the impact of those pricing actions over the next one to two quarters.

Got it thanks for that just you alluded to pricing actions, which were we're hearing from a lot of companies I'm wondering if you could shed a little bit.

More light on that.

Terms of of how we should be thinking about.

The implementation and the.

Intact as pricing actions over the next one to two quarters quarters sure.

Speaker 2: Sure, Jim, I can start and Dan, please chime in. So, you know, we looked at our pricing.

Sure Jim I can start and then please chime in.

So we looked at our pricing.

Speaker 2: Across the board right by the by service and our objective is really to offset inflation both you know from from supply materials and then of course labor right and and We have several dimensions that we manage this on right There's kind of the base part has a certain price because there's certain cost You know to make a part at let's say quantity one and then of course with with volume

Across the board by by service and our objective is really to offset inflation both from from supply materials.

And then of course labor right.

We have several dimensions that we manage this on right. There is kind of the base part has a certain price because theres certain costs to make a part of let's say quantity one and then of course.

With volume.

That will change because we've got volume price curves and.

And then.

As you have different complexities youll also have different prices for that for that base part and then of course the.

The lead times so.

We looked at all of those and we've made adjustments in pricing and kind of in some of the base parts and some of the material.

Costs and those components, we've made adjustments to cover those and then the shape of those curves looking at.

How pricing falls with volume or how pricing changes with lead time.

Speaker 2: Those were all adjustments that we made across the board in a really thoughtful way to make sure that we're covering our inflationary costs.

Those were all adjustments that we made across the board in a really thoughtful way to make sure that we're covering our inflationary costs.

So.

But in terms of.

Seeing the impact as we go forward.

Is that going to be.

Youre going to expect to see the full benefit in Q2.

Speaker 8: We're going to we're going to see continued improvement throughout the quarters as it relates to that. I said this in my prepared remarks. We are seeing an improvement.

We're going to we're going to see continued improvement throughout the quarters as it relates to that.

I said this in my prepared remarks, we are seeing an improvement.

And basically revenue per unit pricing improvement in the first quarter. It's just January was was very soft from us from a revenue perspective.

Otherwise you would see that improvement in the Q1 margin as well, but it will be a driver to show sequential improvement in our gross margin percent throughout 2022.

Speaker 1: One final question, if I may, just on Hubs. Robin, if I heard you correctly, I think you said you anticipate improvement in Hubs gross margins in the current quarter and I assume going forward. I wonder if you could talk to that. And you had alluded in recent quarters just about some of the branding challenges around Hubs in Europe . Are you guys past that, do you think?

One final question, if I may just on hubs.

Rob if I heard you correctly.

You said you anticipate.

The improvement in <unk>.

Gross margins in.

In the current quarter.

I assume going forward I wonder if you could talk to that and <unk>.

Ed.

In recent quarters, just about some of the branding challenges around hubs in Europe is that are.

Have you guys passed that evening.

Speaker 17: Yeah, we're past that, and the point about gross margin is that, you know, we're continuing to invest in pricing optimization, and we've seen gross margins improve in hubs, in part because of that work, and over time we expect to continue to see gross margin improvement.

Yes, we're past that.

<unk>.

And the point about gross margin is that we're in.

Continuing to invest in <unk>.

Pricing optimization and.

And we've seen gross margins improve and hubs in part because of that work and over time, we expect to continue to see gross margin improvement.

One thing I'll just.

Speaker 18: Jim, to clarify, quarter over quarter, gross margins are slightly lower, there's some seasonality with HUBZ margins. They're slightly lower in the first quarter, basically due to Chinese New Year, but yeah, for sure on the full year, we expect to see an improvement in the HUBZ gross margin.

Jim did clarify quarter over quarter gross margins are slightly lower for there is some seasonality with hubs margins were slightly lower in the first quarter.

Basically be due to Chinese new year, but.

But yes for sure on the full year, we expect to see an improvement in the hubs gross margin.

Got it thank you.

Thank you Jim.

Speaker 1: The next question comes from the line of Jared Maiman with Barenburg Capital. Please proceed with your question.

The next question comes from the line of Jared mainland with <unk> capital. Please proceed with your question.

Speaker 19: Hey, good morning, guys. So first question for me, so it sounds like the hubs business and then the base business in Europe kind of moved from a little bit of kind of sequential stagnation in Q2 to Q3, back to growth from in Q3 to Q4. So I guess it kind of sounds like what you're saying is maybe some of these automotive customers

Hey, good morning, guys.

So first question for me so.

Sounds like.

The hubs business and then the base business in Europe .

I'm from.

A little bit of kind of sequential stagnation in Q2 Q3.

Back to growth from in Q3 Q4.

So I guess kind of sounds like.

What youre seeing maybe some of these automotive customers.

Speaker 19: in Europe are kind of willing to accept the longer lead times because of some of these

In Europe are kind of willing to accept the longer lead times.

Because of some of these semi backups.

Speaker 19: And that's kind of providing a little bit of a boost to the hub business. So is that kind of the, is that kind of correct in what you're saying? And if that's correct, is that kind of a temporary tailwind? Or do you think that's kind of sustainable in this?

And thats providing.

Providing a little bit of a boost.

The hub.

<unk>.

Is that kind of the is that trying to correct and what you are saying.

That's correct is that kind of a temporary tailwind or do you think thats kind.

Kind of a sustainable in this.

Speaker 19: return to kind of strong sequential growth in Europe could stick around through 2022.

A return to kind of strong sequential growth in Europe .

Should stick around through 'twenty two.

Speaker 2: Yeah, so we are we are seeing that as.

Yes. So we are we are seeing that as <unk>.

Speaker 2: You know, supply chain disruptions are happening, and, you know, in this kind of economic cycle where, therefore, there's less need for the quick turn in that part of the business, we're – by contrast, we're seeing our longer lead time business pick up nicely. And you know, as evidenced by hubs continuing to grow, you know, we did 40 percent last quarter and we had, you know, strong double-digit year-over-year growth in hubs throughout the year last year.

Supply chain disruptions are happening and and in this kind of economic cycle, where therefore, there's less need for the quick turn in that part of the business.

By contrast, we're seeing our longer lead time business pick up nicely.

And as evidenced by hubs continues to grow we did 40%.

Last quarter, and we had strong double digit year over year growth.

Hubs throughout the year last year.

Speaker 19: got it okay okay uh and then another question on hubs i know you guys have owned this for uh about a year now so i'm just curious if do you have any kind of information on what percentage

Got it okay, Okay and then.

Another question on the hubs.

I know you gave on the spur.

About a year now so I'm just curious.

Any kind of information on what percentage.

Speaker 19: of the customers of the base kind of Fertilabs business or Fertilabs 2.0 business are using hubs at this point? And then is there any difference between kind of the percentage of top 100 or top 1,000 customers that are using this in comparison to the other 20,000 some-odd customers you guys have quarterly?

Of the customers of the piece.

Kind of fertilizer business with <unk> two point of our business are using hubs at this point and then is there any.

Difference between kind of the percentage of top 100 or top.

Thousands of customers that are using this in comparison to the other 20, some odd customers you guys have quarterly.

Speaker 20: So, the overlapping percentage between the customer bases is still relatively small today, and that's part of, you know, the opportunity that we see as we do the integration and we bring the Hubs capabilities to our ProtoLabs customers.

So the overlapping percentage between the customer basis is still relatively small today and thats part of the opportunity that we see as we do the integration and we bring the hubs capabilities to our Proto labs customer base.

Speaker 19: Okay, got it. And then last one for me, and sorry if you already mentioned this and I missed it, but it seems like there was a slight drop sequentially in GNA this quarter, and I'm just wondering if that's kind of typical seasonality or if there was something else there that is more sustainable? Are you looking from a gap or non-gap perspective?

Okay got it and then last one for me and sorry, if you already mentioned this and I missed it but it seems like there is a slight drop sequentially.

Sequentially in G&A.

This quarter and I'm just wondering if that's kind of typical seasonality or is there something else there that is more sustainable.

Are you looking from a GAAP or non-GAAP perspective.

Looking at GAAP specifically.

Speaker 8: Yeah, so there was, um, there was some change in stock-based compensation, quarter over quarter, that, that, that impacted.

So there was.

There was some change in stock based compensation quarter over quarter that impacted G&A.

Go ahead.

Speaker 9: And we also recognize the benefit of a reduction in the contingent consideration related to the HUD's acquisition that appears in GNA. That was 4.7 million in the quarter. Both of those are non-GAAP .

And we also.

Recognize the benefit of a reduction in the contingent consideration related to the <unk> acquisition that appears in G&A.

Those $4 7 million in the quarter.

Both of those are non-GAAP items.

Okay got it thanks guys.

Thank you.

Speaker 1: Our next question is from the line of Ben Rose with Battleroad Research. Please receive your questions.

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

Yes, good morning, gentlemen.

Speaker 21: Some questions on the on-demand manufacturing service that you offer. I'm wondering, in this environment, how much of a competitive advantage is it for protolabs?

So some questions on me.

On the on demand manufacturing.

Service that you offer I am wondering in this environment, how much of a competitive advantage is it for Proto labs.

Speaker 21: having its own facilities, and not having the customer's design shopped around to multiple sources. So the question is really, is it an advantage that you have being able to maintain the security and the privacy of your customer's product designs?

Having its own facilities.

Not having the customers design shopped around two multiple.

Sources.

So the question is really is.

Is it an advantage that you have being able to maintain the security and the privacy of your customers' product designs.

Speaker 22: Yeah, Ben, we definitely hear that from our from our customers because.

Yes, then we definitely hear that from our from our customers.

Yeah.

Speaker 23: You know, oftentimes, when they're looking for a production vendor, you know, they want to be able to audit, they want to be able to, you know, see the whole trail, they want to understand our security practices. I mean, we have customers for whom, you know, we have to guarantee understanding of, you know, what the security is for the building, right, what the entry and exit, you know, kind of controls are.

Oftentimes when when Theyre looking for.

Production vendor they want to be able to audit they want to be able to see the whole trails, they want to understand our security practices.

We have customers for whom we have to we have to guarantee.

Understanding of what the what the security is for the building right with the entry and exit.

Kind of controls or.

Speaker 24: and the IT security and a number of things, right? Those audits can become very, very comprehensive. And so we definitely do see that as a benefit for our production customers who are looking for that kind of security that we can provide that end-to-end and our digital thread that runs throughout our.

In the IP security and a number of things right. Those audits can become very very comprehensive and so we definitely do see that as a benefit for our production customers were looking for that kind of security that we can provide that end to end and our digital thread that runs throughout our.

Speaker 2: our production from, you know, quote, all the way through the plant floor to shipping and that full traceability that we're able to provide them that's quite unique. And, in fact, we get that comment from auditors all the time that they, you know, that provides them a great deal of comfort and that's a system that they've really never seen before.

Our production from.

All the way through the plant floor to shipping and that full traceability that we're able to provide them that is quite unique.

And in fact, we get the comment from auditors all the time.

That provides them a great deal of comfort and that's a system that really never seen before.

Speaker 21: Okay, you made a question also, Rob, with respect to design complexity. I can definitely understand the use cases for, you know, the hub service where it might be, you know, a very large quantity of parts, perhaps.

Okay.

Okay.

You made a question.

So Rob with respect to designed to flex.

<unk> I can definitely understand the use cases for.

The hub service, where it might be.

A large quantity of parts perhaps.

Speaker 21: not with a great deal of design complexity, where the lead time isn't that critical, but with respect to your core services, I can definitely see that being preferred by customers. Is that the right way to think about part of the distinction between your core services versus...

Not with a great deal of design complexity.

The lead time isn't that critical.

But with respect to your core services I can definitely see that being preferred by customers is is that the right way to think about.

Part of the distinction between.

Your core services versus versus hubs.

Speaker 2: Well, so I think hubs brings two dimensions of, you know, additional capability. One is.

Well, so I think hubs brings two dimensions.

Additional capability one is.

Speaker 25: the higher quantities and, you know, longer lead times, lower pricing. So extends in that context very much our production capabilities, right, into a broader range of needs for our customers. But the second is added part complexity or specialization, right, because

The higher quantities and la.

Longer lead times, lower lower pricing so extend in that context, very much our production capabilities into a broader range of needs for our customers.

But the second is.

Added.

Added part complexity or specialization rent because.

Speaker 2: And through the network, we've got these premium manufacturing partners who have specializations and capabilities that might be beyond our capabilities.

Through the network. We've got these premium manufacturing partners, who have specializations and capabilities that might be beyond.

Speaker 26: know our core offering and and so can therefore complement right so that might be you know very tight tolerances or it might be some kind of specialty machining for example or you know certain you know certain secondary operations or those kinds of capabilities that we don't currently have in-house the network can help complement and we can provide to our customers.

Our core offering.

And so can therefore complement right so that might be very tight tolerances or it might be some kind of specialty machining for example.

Or certain.

Certain secondary operations or those kinds of capabilities that we don't currently have in house. The network can help complement and we can provide to our customers.

Speaker 27: Okay, great. And then finally, I know that there's been some recent

Okay, Great and then and then finally.

I know that there's been some recent.

Speaker 21: initiatives within the company to, you know, target some of the growing EV manufacturers.

The initiatives within the company too.

Target.

Some of the growing EV manufacturers.

Speaker 21: uh... prototyping needs uh... has that been a sector that's uh...

Prototyping needs.

Ben.

Sector that's.

Speaker 21: been contributing to the performance in the last couple quarters?

Banking contributing to the performance in the last couple of quarters.

What I would say Ben is.

Speaker 9: In multiple industries, in which innovation is at the forefront, people are using us. And EV and automotive is just...

And in multiple industries in which innovation is at the forefront.

People are using us and even automotive is just one.

Speaker 9: But we see that in many different.

But we see that in many different.

Speaker 28: industries and spaces that, you know, as they're innovating, you know, they're coming to us because of how fast we are.

Industries in spaces that.

As they are innovating.

They're coming to us because of how fast we are.

Okay.

Okay. Thanks, that's very helpful.

Thank you.

Speaker 29: Thank you. At this time, we've reached the end of the question and answer session. And now I'll turn the call over to Rob Berdorff for closing remarks.

At this time, we've reached the end of the question and answer session I'll now turn the call over to Rob.

<unk> for closing remarks.

Speaker 30: Thank you for joining us on our fourth quarter and full year 2021 conference call. I want to thank the 2,700 ProLabs and Hubs employees across the world for their continued efforts and enthusiasm as we enter 2020.

Thank you for joining us on our fourth quarter and full year 2021 conference call.

I want to thank the 2700, Proto labs and hubs employees across the world for their continued efforts and enthusiasm as we enter 2022.

Speaker 2: Lastly, thanks to our customers and shareholders for their continued support. We look forward to updating you on our performance next quarter. Have a great day.

Lastly, thanks to our customers and shareholders for their continued support.

We look forward to updating you on our performance next quarter have a great day.

Speaker 31: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

This concludes today's conference you may disconnect your lines at this time and thank you for your participation.