Q2 2019 Earnings Call
We'll be with you momentarily.
I'm looking for the Proto labs earnings call.
Okay can I get your name.
Yeah, sorry, Brian Healy.
H E AG a leeway.
That's right.
Okay, Okay right right.
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Thank you.
Capability to develop.
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Of how we can serve our customers better.
Weve added dedicated business development resources focused on growing two of our top customer industries medical and aerospace.
These industries are leading the growth so far in 2019.
Proto labs is recognized as a leader in digital manufacturing, but we still have opportunities to improve our brand awareness.
We continue to find new and innovative ways to create buzz about Proto labs and promote our leadership as the emerging digital manufacturing smart market leader.
During the quarter, we collaborated with renowned fashion designer Zac Posen, and GE additive on fashion pieces for the 2019 met gala.
Our threed printing team in North Carolina did a wonderful job producing the dresses in the event generated significant media attention displaying our thought leadership and Threed printing.
In addition, Proto labs has once again sponsoring stock as a participant in the discovery channels Battle Bots program.
Proto labs provides threed printed CNC machined and sheet metal parts to bring this battle bought to life. This program is a direct match to Proto labs target customers and provides energy to our employees watching does compete compete.
As it relates to enhancing our customer experience, we continue to invest in and to improve our e-commerce platform and provide a best in class customer experience.
As we continue to add to our capabilities. We also need to ensure that our customer experience remains intuitive and engaging.
Our next priority for this year is improving overall efficiency.
We continue to invest in making our processes and systems more efficient in order to scale, our operations and support future growth.
Our organization is also focused on software functionality and Interconnectivity of our internal systems to include additional capabilities.
And drive improvements in our overall business efficiency.
Our teams have really embraced the Proto excellence continuous improvement program, which has helped us ensure proto labs remain innovative and efficient as we serve our customers.
Lastly, we continue to focus on improving the performance of the acquired rapid services.
On our first quarter earnings call. We described four primary areas of focus relating to the acquired sheet metal and expanded CNC machining services.
We've made meaningful progress in each of these areas and we'll continue to execute on our plans.
First we continued to advance sales training across all sales teams in the second quarter.
We have also integrated our CRM instances, enabling better collaboration and customer insights across all sales teams and unlocking new sales enablement tools for sellers.
Second as it relates to marketing, we increased our investment in search engine optimization and pay per click driving increased impression share and customer conversions.
We continue to market, our new offerings through our multiple channels.
Third on our last call. We indicated that we were working to reduce the standard lead times for sheet metal parts.
I'm very proud to report that in May we launched three day lead time and now offers the fastest sheet metal parts service in the world.
Our teams have been working for months to ensure that our operations can uphold the proto labs brand promise of unprecedented speed.
And reliability that our customers value at all or services initial feedback on our three day sheet metal offer has been very positive.
And finally, we continue to test value based pricing in our core sheet metal offering.
We are confident that the execution of these focus areas will lead to continued sequential performance improvement in the rapid services.
In summary, Proto labs is not immune to softening macroeconomic environment.
We have continued to generate revenue growth through the first half of 2019, despite weakening macro conditions.
Aside from the economic environment, we continue to drive forward and take advantage of our position as a leader in the industry 4.0 digital manufacturing Revolution.
There are three mega trends associated with industry 4.0 that are disrupting product growth models and Proto labs stands to benefit from these mega trends.
First shorter product lifecycle have increased the importance of being first to market with new products.
Second increasing adoption of the Internet of things requires product design changes as more products become connected resulting in rapid innovative product development.
And finally personalization and customization results in a shorter product production runs and just in time manufacturing.
These three trends offer significant opportunities for continued long term growth for our business and Proto labs is extremely well positioned through our mission of helping companies accelerate product development reduce risk and optimize their supply chains.
We created the digital manufacturing space at 1999 and have been the leader ever since our ability to serve customers from individuals to fortune 500 enterprises with quality parts at unprecedented speed is unmatched in our industry.
We continue to invest in our business to serve our customers and drive future growth.
We are confident and excited about the long term prospects for this company focusing on the needs of our customers will drive growth for the business and result in value creation for our shareholders.
Now I'd like to turn the call over to John for more information on our financial results.
Thank you Vicki.
Revenue in the second quarter was $115.9 million, an increase of $6.3 million or 5.7% over the same quarter in 2018.
Foreign currency had a slightly larger negative impact than we expected representing a $1.4 million headwind in the quarter, resulting in revenue growth of 7% in constant currencies.
Turning to product developers, our second quarter unique product developers served increased to 20840 or 4.7% growth compared to the prior year.
Gross profit for the quarter was $60.2 million, an increase of $1 million over the comparable quarter of the prior year.
Gross margin was 52% in the second quarter up slightly from 51.9% in the first quarter of 2019.
This compares with 54% in the second quarter of 2018.
Year over year gross margin compression in the second quarter was due to the following factors.
Our rapid manufacturing operations, representing a 100 basis point headwind to our consolidated gross margins this quarter compared to the second quarter of 2018.
The investment in earning new CMC facility in Minnesota to support future growth increased our fixed costs that we will leverage overtime and resulted in a 50 basis point decrease in gross margin.
The remaining 50 basis point decrease was driven by a number of factors, including wage inflation investments to support expanded offerings and business mix, partially offset by price.
Operating expenses totaled $40.7 million or 35.1% of total revenue in the second quarter of 2019.
This compares to $39.4 million or 34.7% of revenue in the first quarter of 2019.
Sales and marketing was 16.6% of revenue in the quarter up slightly from Q1 and consistent with our guidance.
Our sales and marketing costs include investments in developing our voice of customer capabilities and trade show activity that is seasonally higher in the second quarter.
Research and development was 7% of revenue consistent with the first quarter.
We will continue to invest in R&D at these levels in 2019 to expand our capabilities in each of our services and improve our customer experience and internal systems to support the future growth of the business.
On a GAAP basis, our tax rate was 21.9% up from 19.6% in the second quarter of 2018.
On a GAAP reporting basis net income totaled $16.2 million, resulting in diluted earnings per share of 60 cents.
Earnings per share improved two cents sequentially, principally driven by increased volume.
Now turning to cash flow our business continues to produce strong cash flows generating $36.9 million from cash from operations during the quarter.
Capital spend in the second quarter was $21.4 million and consisted of investments in equipment.
Infrastructure and systems and initial facility investments in Europe to ensure capacity for future growth.
We also returned capital to shareholders by repurchasing $4.1 million or 41000 shares of common stock.
In May our board of directors approved a 50 million dollar increase to our authorized stock repurchase program and extended the expiration date to December 31 2023.
This authorization increase increases the stock repurchase program to $100 million.
Today, we have repurchased an aggregate dollar value of $38 million, resulting in $62 million remaining available to purchase common stock under our stock repurchase program.
We ended the second quarter with a cash and marketable securities balance of $151 million up from $139 million at the end of the first quarter.
Now I'd like to provide our expectations for the third quarter of 2019.
We currently expect third quarter revenue to be in the range of $116 million to $122 million our growth in the range of 1% to 6%.
This revenue guidance reflects the following factors revenue in the third quarter of 2018 was very strong aided by the strong economy.
The current economic growth has moderated and with limited visibility in our business, we are taking a cautious approach.
We have analyzed our current year to date performance and are placing more weight on the sequential trends in the business.
We estimate foreign currency will have approximately $1 million negative impact on our third quarter revenues compared to the prior year.
Moving to earnings guidance.
Our non-GAAP GAAP add backs for the quarter will include stock compensation costs of approximately $3.9 million and amortization of $900000.
We currently estimate our non-GAAP tax rate to be approximately 22% to 23% in the third quarter.
As a reminder, our Q3 2018 EPS included a favorable outcome of a tax audit, resulting in a 19.6% effective tax rate.
Taking into consideration all the above we expect our quarterly non-GAAP EPS to be between 69, and 77 cents per share in the third quarter.
Thank you the floor is now open for questions. If you would like to ask a question you May press star one on your telephone keypad at this time a confirmation Tom would indicate your line is in the question queue. You May Press Star two 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. Once again that is star one to register questions at this time.
Our first question is coming from Brian Drab hopefully in Blair. Please go ahead with your question.
Good morning, Thanks for taking my questions.
Hi, Brian Good morning, Brian .
Hi.
First question just on the developer count or are you concerned at all I guess and I assume that just has to do with the end market weakness and have the headwinds but.
Are you concerned at all about the 5% growth and developer count thing that stood out to me in the numbers today.
Yes, so the development developer count growth is pretty consistent with where we are in the revenue growth. So as I said I do think the macroeconomic climates, having an impact on that but pretty consistent with where we are with revenue growth.
And.
Yes, so there is nothing else.
Going on there I guess what are you.
Expecting further revenue per developer going forward and.
What ways can you increase that.
Yes, I think as we progress over time.
And continue to drive growth in the rapid services actually revenue might outpace our product developer growth as as we do some of that cross selling and.
Sell more services to to those existing developers.
Growth is strong.
And just because it has the order sizes of the relative services.
I think we continue to focus on.
Our customers what their needs are and try to offer them. The best service to meet their needs and will build on that a little bit on as on demand manufacturing grows in injection molding you.
Not only get the follow on parts from that with each polyps develop our but you also.
The more complex molds and and structure. So that also helps us with the other levers that can be pulled in terms of driving revenue growth per product developer.
Okay, great. Thanks, and then just on the guidance the midpoint of the.
Year over year.
Revenue growth guidance is 3% to 4% for the third quarter. So can you make any comments.
Where you think the different.
Segments and or regions will be.
Directionally relative to that kind of mid point later.
Hello.
The mid point.
The Americas will probably be pretty close to the midpoint I mean, given the fact that it drives.
Region, and generally drives a lot of the growth.
Europe may be a tad higher than that and of course, Japan will likely be higher as well on but the Americas being such a big percentage tends to drive it.
Theres also some foreign currency headwinds that we're dealing with as well that's going to impact that temper, what we've got there in Europe .
Prior year comparable that.
We're comparing with coupled with what we're seeing with some of the macroeconomic slowdown in some of our end markets.
We felt this is the.
The best visibility Weve got right now and guidance.
Okay, and then just one one last one on the sheet metal. So it sounds like you feel quite a bit better about the sheet metal business now relative to.
Hi, you sounded on the first quarter call.
How much demand are you seeing for that three day offering.
And what percentage just roughly.
Of your.
Business and sheet metal can can you actually do with with a three day offering.
I will say that the.
But the sequential growth that we're seeing in our express service is good and we're pleased with the feedback we are getting on three day.
So it it is a new offer and so it's something that the customers are learning about and learning to take advantage of but when they do they.
They have been very pleased with that.
Okay and is it is it.
Just a fraction of the business that you can do three day or is this kind of pretty broad this roll out or I don't know, it's pretty driver. It's very broad, yes, it's very broad it captures a good percentage of the geometries on that we can do and three days absolutely in our service.
Okay. Thank you very much.
Thank you. Our next question is coming from Troy Jensen of Piper Jaffray. Please go ahead with your question.
All right Hi, Vicky had John Thanks for taking my questions here.
Hi, Thanks, I think I want to dive in with you Vicki on just the injection molding business I mean, it's hovering around 7% growth and I do not kind of focus on this question a lot with you guys for them.
Just your thoughts on why it's not growing better organically. It seems like you guys have added a lot of new services and now its color matching.
Revenue is on them is on demand manufacturing the key to really get this injection molding business growing again or.
Yes, I agree I agree well first let me say on a on an adjusted for currency basis, our injection molding business grew 9% in the quarter. So.
Approaching that double digit and and yes. The on demand manufacturing offer is one of the key drivers to two.
Move that and keep that injection molding business.
Yet in that upper single to low double digit number. So we that's absolutely critical and we are continuing to add things to that offering as we learn from our customers what more they need now on some of the offers that we've added and we pointed out have been really focused on.
Really strategic and focus accounts not broadly offered because we're still working to understand how best to scale those offers and how best to serve those offers up to our customers in the E. Commerce experience. So theres still basically we're learning as we as we begin to get experience with this more expanded offer.
And we are very excited about the custom color offer we're starting to see some very early interest in that particularly in the on demand manufactured space, where there might be multiple parts that they now can bring forward in a customer color approach. So we're pleased with that and as we've mentioned before when you look at our injection molding prototype business.
Theres been an impact there with the the growth in the last three to five years of desktop printers, where maybe one of the first iterations of apart might take place with a printer down the hall. So the number of prototype into it aeration with.
Injection molded mould is probably somewhat reduced so that again underscores the need to really move into the on demand manufacturer space and Thats whats driving the growth today.
Okay understood good luck.
Just a quick one for John too.
Yes, we should assume Q4 is seasonally a down sequential quarter right. Historically it is for you guys at the acquisition years.
Yes, I think it will it's as we look at.
The seasonal seasonality patterns and how we're returning for the year I think it will be slightly down.
Okay, perfect and maybe just one more for either one of you guys. Just I guess quarters ago, we thought China trade that terrorists could be a positive score for Proto labs.
It doesn't seem like we're kind of seeing it yet, but vicki any conversations or in any updated thoughts on that topic.
Yes, so I see it.
We had several conversations with companies that are looking at their supply chains, but remember the investment that took place over the last several decades for more extended supply chains into Asia.
Errors.
It's a big investment in big change and so those don't happen quickly.
All right understood. Good luck in the second half.
Thanks.
Thank you. Our next question is coming from Andrew Degasperi affair in Burke. Please go ahead.
Good morning.
I guess my first question on.
Japan, and Europe , I mean, growing really well considering everything that was just discussed I mean anything that you can comment in terms of why your counter cyclical even though some of that's going to European auto business is cutting R&D budgets and everything.
Yes, so in Europe , our our auto business was down so I think what you see there is the continued penetration that we're getting.
On across many of the other industry segments, that's helping drive that it's a lower base. So remember yeah, we entered in the Europe and even the Japan market for later than the U.S. markets, So and you've got a lower base from which to grow. So we continue to drive new product developers and penetration in in our key markets medical was a real strong market for us in a in the quarter medical as one of our.
We target as a high potential industry segment, we tend to get.
Better close rates in the medical segment and longer lifetime value. So as we continue to enhance our go to market model in the across the.
Globally to focus on high potential industry segments, Thats, helping us in Europe , Japan is also a very low base, you're so you're growing from a.
And for a lot of penetration there because were younger in that market, but what you are seeing I think is that the benefits that we're getting from our relationship with missing me coupled with our our benefits off of growth outside of semi as more and more customers in that market.
Get used to doing business in a b to b environment in each in E Commerce, which is Japan's a little bit behind the rest of the world there, but there.
They are recognizing they've got to get on the industry 4.0, bandwagon in and take advantage of digit model. So we're starting to see some improvement there.
Great and then on the through the metal on demand.
I mean, maybe help us understand like what kind of opportunity do you see in that business and.
I mean, how many part rugs can you do on a month for with what those kind of machines.
Yeah. So first let me comment a little bit about the the that space in total so it's still very very early in the use of threed printing for production parts across both metals and plastics, we feel that as a leader in threed printing with our knowledge of the technologies and capabilities that we are in the best position to help companies learn how to use that technology for production parts. So.
A close cycles for those are long because you've got to not only develop the part itself and its geometry, and how it's going to be made but you also have to develop all of the secondary operations easily go with that coupled with the quality control plans that would allow a product to move into production applications. So longer cycles, but we've got a lot of interest from our key industry verticals like med device and aerospace.
To be the ones to help them navigate this change. So it is a great offer for us I Wouldnt expect for cocky Ceight hockey stick changes in revenue that yen and Andrew I think the other thing to think about there is as we talked about in kind of all of our service as it is in the low volume space. So it's not like.
Well.
Start up these machines and having run for a year producing these parts and in a lot of them.
At least today that are somewhat smaller parts.
As companies are continuing to learn how to use this technology effectively.
We think it will pick up over time, but.
We want to be the leader as as it does pick up.
Great. Thank you.
Thank you. Our next question is coming from Greg Palm of Craig Hallum. Please go ahead.
Hi, guys. This is actually Danny acreage on for Greg today, Thanks for taking my questions.
Hi, Dan.
I know you don't specifically guide by segment, but just looking at results here for Q2 were there any segments that significantly outperformed or or underperformed versus against like your prior expectations.
Oh in terms of services or.
And Mark.
And Mark Girl in terms of services actually services services.
Not really I would say that.
CNC machining a little bit.
Hi, Danny I think that.
Foreign currency headwinds were a little greater than we thought they were.
Adjusting for that we're kind of in the middle of our guide CMC. Once it was a little lighter, but coming off really strong growth from a year over year perspective.
As we looked at it through.
The quarter June was a little bit softer than than we would have anticipated.
So we ended the quarter of a little softer than than.
We had started it so I think those three factors are really.
What's kind of driving probably more so the guide for Q3.
And where our results came in Q2.
Okay, Great I guess, you just mentioned that June was a little bit softer there.
Is there anything that you're seeing so far in July and any commentary that you can give there.
I think it's reflected in our guidance.
Okay.
And then just lastly, given the departure of the CR. All this past quarter is there is there any plans to replace that position and can you kind of remind us of what someone has major initiatives work.
So on.
First let me say that one of the things that wasn't major initiative was to build the team in each of the regions with really strong sales leadership in the Americas in Europe , and in Japan, and we have that in place right now.
So that really takes off any pressure to immediately jump into any kind of a resale.
A backfill of that rule on the the real initiatives of continuing to evolve the go to market model and one of the things that we've we've been doing here in in 2019 in addition to.
Significant amount of training for our sales team both on the technologies, but also on on and on.
Selling skills strategic selling skills and and.
Strategic partnering with customers we've also been.
Focusing on high potential customer segments.
That we've identified based on analysis of our data and that's allowing our sales and marketing teams frankly to really focus where we can get to the greatest return for our sales and marketing investments and Thats. The major area, where we continue to to enhance and grow our voice of customer investments that we've gotten from our chief marketing officer that that joined US recently as well.
That will get a full year with us going to allow us to continue to enhance that so we're not rushing to fill that role at this point in time and where we can can you continuing to evaluate what we need going forward.
Alright, great I appreciate the color.
Thank you once again, ladies and gentlemen that is star one if youd like to register a question at this time.
Our next question is coming from Brian Drab of William Blair. Please go ahead.
Hi, I just wanted to.
Just some further color on the outlook, if you would be willing to give it in terms of gross margin.
First of all on the second half of the year.
We expect gross margin to tick up sequentially.
Yes, I think thats as we're looking at it.
We look to drive.
Sequential improvement, but modest sequential improvement really it's as we're looking at it.
Gross margin is going to be impacted by revenue. So the better the revenue growth said better ability we have to to drive the gross margin improvement so flat to up a little bit is the way I would look at it.
And I think you gave the headwinds related to alpha and rapid.
But what was the absolute gross margin level at least roughly at each of those operations.
Rapid actually improved.
And as close to 30%.
And.
And in our Threed printing business in Europe is in the low twentys.
Okay.
And can you just.
Make any statement about where you think those kind of level off when they reach steady state and I don't know if thats 12 months or two years from now but.
Well I think what we're driving to and what we've got plans in place.
Initially is to get the.
Sheet metal gross margins up to the 40% range.
And get the Threed printing in Europe up to the 30% range. Once we accomplish that will will set up the the next set of initiatives to continue to drive up from there, but I think the current plans are to get those those two to those levels.
And is that you think John within the next couple of years or.
Any rough time frame around that.
Yes, I am.
Yes, I think thats, the right timeframe I think again.
Revenue growth is going to be a big factor in that.
And the ability to continue to to pull in the revenue will help us leverage some of the fixed cost and drive those gross margins.
Okay, and you talked a little bit about I may have missed as I was taking notes here, but what specifically are you doing to further penetrate aerospace and medical markets. You mentioned those is obviously key initiative areas right.
So we put dedicated.
Business development resources that frankly have some experience in those end markets that are helping us to build relationships, but also helping our sales and marketing teams Taylor, what we're doing to those segments. So both from a marketing engagement, but also with sales and marketing.
Also on the sales team and also this teams helping us inform our roadmap going forward. So that we can continue to meet the needs of that segment and those are our two of the industries that are looking at how to utilize metal threed printing production.
So we're working with them closely.
To help develop that and.
Yes get their their parts and services and the Med device segment is also very excited about custom color injection molding. So thats a segment that tends to use the direct injection molding tooling and to be able to do that with custom color is a welcome addition.
Got it okay. Thank you very much.
Thank you.
Thank you at this time I'd like to turn the floor back over to Ms. Holt for closing comments.
Thanks, Donna Thank you for joining us today, we remain excited about the outlook for Proto labs. As we look ahead. We are confident that the current long term industry 4.0, Mega trends are favorable to our strength and our business model. Our differentiated technology enabled digital manufacturing platform has demonstrated the ability to help companies and entrepreneurs get their products to market faster than the competition.
We continue to innovate with our service offerings and technology interface and features to enhance our customer experience.
I want to thank the Proto labs employees for their continued efforts as well as our customers for their support we are committed to driving great shareholder value in 2019 and over the long term and look forward to reporting to you on our progress during the next quarter. Thank you.
Ladies and gentlemen, thank you for your participation. This concludes today's conference you may disconnect. Your lines at this time and have a wonderful day.
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