Proto Labs, Inc.

Greetings. Welcome to Proto Lab third quarter fiscal year 2023 earnings call. At this time, all participants are in the listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Jason Frankman, Vice President and Corporate Controller. Thank you. You may begin.

Thank you, Sherry, and welcome everyone to ProtoLabs' third quarter 2023 earnings conference call. I'm joined today by Rob Bedore, ProtoLabs President and Chief Executive Officer, and Dan Schumacher, Chief Financial Officer. This morning, ProtoLabs issued a press release announcing its financial results for the third quarter ended September 30, 2023. 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 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. 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 GAAP to non-GAAP results. Now I will turn the call over to Rob Bedore. Rob? Thanks, Jason.

Good morning, everyone, and thank you for joining our third quarter earnings call. ProtoLabs had an excellent third quarter. From a financial perspective, I am very pleased with our results, which surpassed our expectations on the top and bottom line. In the third quarter, we generated record revenue, improved profitability, generated substantial cash flow, and returned capital to shareholders. We reported revenue of $131 million, the highest quarterly revenue figure in Protolab's 24-year history. Revenue was up broadly, both year over year and sequentially, across injection molding, CNC machining, and 3D printing. Along with record total revenue, network revenue in the third quarter was a record $23 million, growing over 80% year over year in constant currencies. Our digital network, powered by hubs, continues to take share in the market at an outstanding pace. Our digital factory business, fulfilled through our internal factories, rebounded nicely from the second quarter with sequential growth. We continue to accelerate innovation for customers with the fastest and most reliable lead times in the industry. Our strategy is working. Record revenue in an uncertain macro climate demonstrates this. Protolabs is becoming a one-stop shop for custom prototypes and low volume production parts. As we integrate the factory and network offers, we continue to realize significant value from the hubs acquisition. Our comprehensive offer through the digital factory and the digital network continues to resonate with customers who are increasingly adopting it. This is clear to us as a significant portion of third quarter network growth was driven by Protolabs customers. We serve the largest customer base in our industry. In the third quarter alone, over 23,000 unique design engineers and production buyers ordered parts from Protolabs. While we have the scale, infrastructure, and automation to serve all of these customers, a notable portion of our third quarter revenue growth was from larger strategic customers. These customers are taking advantage of our comprehensive offer fulfilled through the combined digital factory and digital network. This unique hybrid offer unlocks our ability to go deeper with customers and serve them more strategically, expanding our share of wallet. From prototype to production, from delivery overnight to over time, and from quantity one to quantity one million, we can serve customers' needs better than any other company in our industry. In addition to reporting record revenue, we also further improved our industry-leading profitability. Third quarter earnings per share increased both year over year and quarter over quarter. We generated our highest quarterly non-GAAP EPS in three years. Earnings outperformance was largely driven by higher volume and improved gross margins in both the digital factory and the digital network, which resulted in ProLab's highest quarterly consolidated gross profit dollars since 2019. Third quarter network gross margin was also a record, and we have now expanded consolidated gross margin, and operating margin for three consecutive quarters. We are not just talking about profitable growth, but we've been executing on it. Expanding profits allows us to drive investments in innovation and improvements to our customer offer. During the third quarter, we received external recognition for one such innovation, our instant design for additive manufacturability analysis tools. This proprietary software provides customers with rich design for manufacturability feedback to help them design the best 3D printed parts, and it does so instantly. For this innovation, ProLabs won a 2023 IDEA Award. This is an award presented by several industry publications that recognizes the best new product innovations of 2023. This is another example of how our commitment to innovation helps us maintain our position as industry leaders. While our offer continues to delight customers, the broader economic environment is still uncertain. Manufacturing conditions in the U.S. and Europe remain soft and have not consistently improved throughout 2023. Yet, we grew in the quarter, especially our digital manufacturing network business, with year-over-year growth of over 80%. Protolabs offers the most comprehensive digital manufacturing service in the world in terms of pricing, lead time options, and part envelope. Our combined factory and network model is effective, as you can see in our financial results. And it resonates with our customers, which I'd like to highlight with a few tangible examples of how customers are driving value out of sourcing prototype and low-volume production parts from Protolabs through the factory and the network. In my first example, a Fortune 500 medical company's production vendor had a lying down situation and could not deliver time-sensitive components, leaving a large gap in delivery of end-use equipment for surgical rooms. Because this medical company is a regular customer of Protolabs and injection molding and is familiar with our speed and reliability, they turned to Protolabs to help solve this issue. The customer initially leveraged our digital factory and its world class lead times for CNC machine parts. Protolabs has always been a great candidate for lying down situations due to the industry best lead times and on demand production that our digital factory affords. However, prior to the establishment of the digital network, production in these types of situations would often shift away from Protolabs as volumes increased. That is no longer the case because of the digital network. Through the network, we were able to support production for the medical customer and delivered over $500,000 in production grade and use components over the course of a few months. The combination of the factory and network capabilities provided immense value, enabling this Fortune 500 medical customer to avoid an extended production shutdown, saving them significant time and money. In addition to increasing number of customers using the combination of the factory and the network, Protolabs also continues to accelerate innovation through our digital factory. As the industry leader, we are called upon by the most innovative companies in the world to help develop next-generation products. Recently, a luxury high-end automotive manufacturer selected Protolabs to assist with its first foray into the electric vehicle market. Protolabs worked with Hutchinson, a multinational design firm and manufacturer, to prototype the battery-packed cooling system for the luxury automaker's first electric vehicle. We rapidly manufactured injection molded parts, which meant stringent project timelines and quality standards. Utilizing our speed, reliability, and quality, we delivered parts to specification for testing and to be mounted on the electric supercar prototype. reducing validation and testing times and accelerating their innovation. This is the power of ProtoLabs and illustrates why we are often the partner of choice wherever innovation is happening. Now for a brief update on our 2023 priority areas as we approach the end of the year. As a reminder, our 2023 priorities are, first, to drive revenue growth, particularly in our largest services, injection molding and CNC machining, and second, to increase shareholder value through expanding profitability in the factory and the network. We are successfully delivering on both priorities, revenue growth and profitability, starting with revenue. At the beginning of this year, we stated that our goal for injection molding was to grow 2023 revenue year over year. Year to date, IM revenue is up organically, and we believe we will achieve our goal for the full year. We continue to win more injection molding orders that leverage both factory and network fulfillment. Additionally, we are winning larger orders, demonstrating our expansion into more production use cases. CNC machining is also up year to date. And like injection molding, we expect our CNC machining service to achieve revenue growth for the full year over 2022. Third quarter revenue through our digital factory grew sequentially, as more customers took advantage of our world-class reliability and the fastest lead times in our industry. Meanwhile, third quarter CNC machining revenue via the digital network grew over 85% year-over-year, highlighting the effectiveness of the combined model and the value that Protolabs customers get from the broad offerings fulfilled through the network. We have also delivered on our profitability priority. In the third quarter, we exhibited the robust earnings power of our business model. Even in an uncertain macro climate, we expanded profitability. Margin expansion in both the digital factory and the digital network were the result of sound execution by controlling our cost structure and gaining efficiencies and leverage while fulfilling increasing demand. In addition, we continue to invest in our executive leadership team. I am excited to have Agnes Semington join our team as our new Chief Human Resources Officer. Agnes has extensive experience in human resources leadership across manufacturing and digital companies and will guide our HR team and strategy as we continue to make Protolabs a great place to work. I'd like to thank all Protolabs employees for their contribution thus far in 2023. The efforts and commitment of our employees enable us to continue to succeed and grow profitably. In summary, Protolab's combination of factory and network offers has enabled us to outperform peers in the current environment, and we believe we will outgrow the market over the long term. Third quarter revenue growth was broad-based, including sequential and year-over-year growth in our three largest services from many different customers. We are well-positioned to weather economic volatility due to our best-in-class profitability and strong cash flow generation. We will continue to reinvest profits into the business as we seek to further expand our offer and capture additional share of wallet. In the third quarter, we generated record revenue, improved profitability, generated substantial cash flow, and returned capital to investors. We are a great long-term strategic partner for our customers and believe we will deliver value for shareholders over the long term. Dan will now provide additional financial detail on our third quarter results as well as our outlook for the fourth quarter of 2023. Dan?