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spk00: Greetings. Welcome to Protolab's first quarter 2024 earnings call. At this time, all participants are in a 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.
spk04: Thank you, Sherry, and welcome, everyone, to ProtoLabs' first quarter 2024 earnings conference call. I'm joined today by Rob Bedore, President and Chief Executive Officer, and Dan Schumacher, Chief Financial Officer. This morning, ProtoLabs issued a press release announcing its financial results for the first quarter ended March 31, 2024. 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'll turn the call over to Rob Bedore. Rob?
spk05: Thanks, Jason. Good morning, everyone, and thank you for joining our first quarter 2024 earnings call. We demonstrated strong operational and financial execution in the quarter, delivering first quarter revenue at the top end of our guidance range and earnings above expectations. These results were driven by the continued execution of our two strategic priorities, increasing the number of customers using our comprehensive offer and driving higher revenue per customer through larger orders in all services. We delivered strong gross margins, earnings, and cash flow. I'll now expand on the progress being made across our two priorities, and then Dan will take us through the results momentarily. First, we continue to increase the number of customers using our comprehensive offer fulfilled through both the factory and the network. The combined offer brings immense value to customers enabling them to use ProtoLabs as a single source manufacturer throughout the product life cycle, from prototype to production to end of life. We have seen that those customers that use ProtoLabs across both the factory and the network spend approximately double what all other customers spend, demonstrating the significant synergy and value that our customers derive from the combined offer. Over the past few years, we've significantly expanded our offering and now serve more production needs than ever before, yet we are in the early innings of customers fully utilizing our combined offer. In fact, last year, less than 5% of the 53,000 total Protolabs customer contacts purchased parts fulfilled through both the factory and the network. This clearly presents a huge growth opportunity for Protolabs, and I am very excited about this potential. We have been and continue to be very focused on accelerating the continued adoption of our combined offer in order to capitalize on the attractive growth opportunities to add new clients and increase share of wallet. We also made progress on our second strategic priority, which is to drive higher revenue per customer through larger orders in all services. Of note, revenue per customer contact increased 5% year over year in the first quarter. We are benefiting from recent technological advancements to our offering, which allow us to win more in production. In the factory, we're beginning to see early returns on investments in production, including robotics, our patented automated mold polishing process, and machine perception in our quality verification process. We have also greatly supplemented our production offer with expanded capabilities and AI-enabled pricing options through the network. We believe that Protolabs has the strongest brand in the industry, known for our reliability and quality for the last 25 years. Let me now bring these remarks to life with several examples of how we're helping our customers positively impact the world. These customer examples begin on page six of our slide presentation. The first two examples highlight our role in enabling the profound advancements taking place in medical devices, specifically advanced prosthetic equipment. BioDapt has used ProtoLabs as their custom parts supplier since its founding in 2010. As we showcased on our website and a recent press release, BioDapt creates custom prosthetic equipment for elite adaptive athletes via our world-class factory CNC machining service. Our ability to iterate and rapidly manufacture high-performance custom prosthetic equipment allows us to serve Biodapt and provide bespoke, highly engineered solutions for elite athletes such as Mike Schultz, founder of Biodapt and former X Games and Paralympic Games gold medalist, as well as Noelle Lambert, former Division I lacrosse athlete who is training to compete at the 2024 Paralympic Games. CERCLEG, another manufacturer of advanced prosthetic equipment that enables amputees in East Africa to live active lives, needed a way to mass produce a design that can be adjusted to each individual while being highly affordable. Our Protolabs network provided design input and affordably manufactured high-strength stainless steel CNC machine components for CERCLEG's prosthetic system in the high volumes that they required. I'm deeply proud of the fact that we can play a role in helping society through our work with pioneering medical device companies like BioDapt and Circlic. Whether they need rapid prototyping for custom high requirement products or affordable manufacturing of critical components at high production volumes, we can bring unique value to our customers throughout the life cycle of their products through our combined offer. The next example that I'd like to share comes from our work with NASA. where we delivered custom metal components within 48 hours of their design. Our unique, highly automated digital factory enables us to serve NASA's needs faster than anyone else in the world. Over the years, our digital manufacturing offer has propelled NASA's design evolution and accelerated their innovations. In February, NASA partnered with Protolabs at the Power Source Global Summit where they crowdsourced requirements and design constraints for a tool to capture gases on the moon's surface. Conference attendees used generative design software to design metal components for lightweighting that could be manufactured using Protolabs 3D printing and CNC machining capabilities. Once ordered, Protolabs manufactured the parts in less than 24 hours. Less than 48 hours after they were designed, the physical parts were delivered to NASA at the conference. enabling these experts to innovate and move science forward. Protolabs is uniquely positioned to achieve this feat for NASA as the only digital manufacturer in the world that combines the digital thread with speed, reliability, and quality. This is a great example of the positive impact we can have for our customers by utilizing our unique capabilities to empower the world's most innovative organizations to bring new ideas and products to market. As I stated at the beginning of the call, we continue to execute well on our priorities during the first quarter, which drove strong financial and operational results. We are pleased with our progress to date and remain focused on executing on our strategic initiatives and generating strong financial results. I want to thank our entire team for their continued dedication to excellence and positioning Protolabs for success and value creation. Dan will now provide additional financial detail on our first quarter results as well as our outlook for the second quarter of 2024. Dan?
spk06: Thanks, Rob. And good morning, everyone. Our financial results begin on page 10 of the slide presentation. As Rob mentioned, we delivered first quarter revenue at the top end of our guidance range and earnings above expectations, driven by an uptick in order growth relative to the beginning of the year, as well as strong performance in higher margin services. First quarter revenue of $127.9 million was in our guidance range and grew 1% year-over-year in constant currencies. ProLabs network revenue was $23.9 million, a quarterly record, up 38% in constant currencies. First quarter U.S. revenue grew 4% year-over-year, while Europe revenue was softer than expected, declining 9% year-over-year in constant currencies. primarily due to large orders in the first quarter of 2023 that did not recur this quarter. In addition, the Eurozone and UK manufacturing sectors continued to contract in the first quarter on the basis of weak demand. Turning to slide 12 in Revenue by Service. First quarter injection molding revenue grew approximately 1% year-over-year in constant currencies. Injection molding parts growth was particularly strong due to continued larger orders. CNC machining grew 3% year-over-year in constant currencies, driven by continued growth through Protolab's network. First quarter 3D printing revenue was flat year-over-year. Sheet metal revenue declined 16% year-over-year in constant currencies. As previously mentioned, our sheet metal service is more exposed to the computer electronics verticals, which experience continued industry-wide softness. We have right-sized the business and are monitoring it carefully. First quarter non-gap gross margin increased 30 basis points sequentially to 45.6%, driven by improvements in factory gross margins. Protolab's network non-gap gross margin was 31.7%. First quarter non-GAAP diluted net income per share was $0.40, above the midpoint of our guidance range of $0.30. This outperformance was driven by revenue coming in near the top end of our guidance range and better than expected gross margins. Gross margin exceeded our expectations due largely to stronger than anticipated factory revenues and injection molding in the Americas, one of our higher margin services. We are pleased with the improvements we've seen in factory gross margins as we drive continued innovation in automation and efficiency as the world's most advanced digital manufacturer. Non-GAAP EPS of $0.40 was down $0.06 sequentially, primarily due to higher operating expenses, including higher incentive compensation and other seasonal costs that increased sequentially in the first quarter. were partially offset by higher volume and an improvement in factory gross margins. Turning to cash flow and balance sheet highlights on slide 13. Our industry-leading cash flow generation model produced 21.3 million in first quarter cash from operations. We repurchased 16 million of common stock in the quarter, equivalent to 85% of our free cash flow. On March 31st, 2024, We had $112.9 million of cash in investments on our balance sheet and zero debt. Turning now to forward-looking guidance. Our guidance for the second quarter of 2024 is outlined on slide 15. We expect to generate second quarter revenue between $122 and $130 million. After strong orders from the end of January through the beginning of March, we saw some softening of larger orders as we approached the week of Easter. That carried through the month of April. We do expect year-over-year revenue growth in the second quarter. We expect foreign currency to have a negligible impact on revenue compared to the second quarter of 2023. Moving to earnings guidance. We anticipate non-GAAP add-backs in the second quarter to include stock-based compensation expense of approximately 4.5 million and amortization expense of 1 million. We currently estimate a non-GAAP effective tax rate of 24%, plus or minus 50 basis points in the second quarter. In summary, we expect second quarter non-GAAP earnings per share between 30 and 38 cents. That concludes our prepared remarks. Operator, please open the line for questions.
spk00: Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. 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. And for a participant choosing speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Brian Drab with William Blair. Please proceed.
spk03: Good morning. Thanks for taking my questions. Morning, Brian. Morning. I'd like to just start on the orders. I think I have the picture, but can you just maybe put a finer point on it? When we talked to you on February 9th, the year had been getting off to a pretty slow start, and it sounds like it picked up significantly. I guess in terms of the whole business or just large orders that seem to pick up in the later part of February and March, but then slowed in April. Can you just elaborate on that?
spk06: Yeah. So we saw, you know, at the beginning of the year, end of last year and beginning of this year, really a softer order period for us than we've had historically. And we saw an order pick up in January and that continued to be strong for through February and the beginning of March. But as we started approaching the Easter period, it was a bit softer, and that continued through April. You know, our guidance is based on, as we always do, we've looked at the order trends, and the guidance is indicative of that. In terms of you ask about specific areas or geographies, I mean, we talked about it in the script. We had really strong, larger injection molding orders through that timeframe. And those were primarily in the Americas, which you can see in our results in terms of our strength by region.
spk03: Got it. Thanks. And then can I ask about gross margin? Because gross margin, you know, again, above 45%, you know, it's been moving in the right direction. Is that, you know, sustainable? And can you remind me, I don't know if you said, but within the Within the network, where are we with gross margin in the first quarter?
spk06: Yeah, so I would say a couple of things, Brian. First, we saw improvements last year in gross margin in two areas. One is in the network, and that has to do with continuing to improve our algorithm for both pricing and sourcing through the network. as well as expanding our MPs into different geographies so that as we go into the first quarter of this year, we historically had a stronger impact from Chinese New Year, which causes the capacity in our MP network to be a bit lighter and for us to be more challenged from a gross margin perspective. Our algorithms and expanding our sourcing helped us to maintain margins over 31% in the network in the first quarter. The second thing, and Rob talked about it and I talked about it as well, we've increased automation in our facilities around both robotics, our patented automated mold polishing, our quality labs, and those things add efficiency, especially when we get larger orders. And we started seeing that last year and an improvement in our margins last year, and that continued into the first quarter. I would say absolutely, as we continue to maintain larger orders, we should be able to continue that type of margin in the factory. From the network side, we've been in this very uneven environment from a macro perspective. And, you know, we're very pleased with where our network gross margins are, which are at the high end of our range. I wouldn't want to extend the range right now until we maybe get into a different macro time. And if we're able to still maintain that high margin, you know, through that period.
spk03: Yeah, definitely within the network, the gross margin's been at the high end of expectations. And, you know, I've seen, obviously, the automation in the factory is very impressive today. Last question for me, can I just push a little harder? Do you think that consolidated gross margin can stay above 45 throughout 2024?
spk06: Yeah, I mean, with the limited visibility that we have, you know, I'm not going to say for Q3 and Q4 because, you know, I'm not going to try to right now forecast what that volume will be. But I would say the guidance, our earnings guidance for the next quarter is assumes flat to slightly down gross margin percent just based on the midpoint being a lower volume number than in the first quarter, but that's maintaining kind of healthy efficiency and healthy margins.
spk03: Yeah, thanks very much.
spk00: Our next question is from Greg Palm with Craig Hallam Capital Group. Please proceed.
spk01: Yeah, good morning, everybody, experts. Taking the questions. I wanted to dig into guidance just a little bit and kind of what you said about April specifically. Can you just maybe give us some sense on how you approach the guidance? Is it essentially based on what you have seen in April and the assumption that maybe it improves from there? Or is it based on things stabilizing at these levels, just a little bit more color? Because I think normally Q2 is seasonally stronger than Q1s. Just wanted to get some sense on how you're approaching the guide.
spk06: Yeah, it's interesting in this environment, Greg, if you take a look at us last year, Q2 was not seasonally stronger than Q1. And so we are looking at the order input, as you just said. We're looking at what our businesses are seeing from a quotation trend And based on that, we are, you know, developing a range that, you know, that we think is where the revenue is going to end up being. It's a challenging environment, right, to forecast, because as I talked about in the last call, we had soft orders to come into the quarter as well. We went through a period where the orders were fairly strong, and now they're softening again. And so we used our same information that we have going in in terms of What are our orders at? Where did April come in to help project the quarter? I will say something else, though, on top of that. You know, we've shown last year in this uneven type of macro environment that we can grow, and that's what we're focused on right now. And the middle of the guide and our first quarter both indicate us growing, and that's what we're focused on.
spk01: Yep, makes sense. Okay, I appreciate that. And then thanks for providing a little bit more color on, you know, sort of the customers and the cross-sale opportunity. And I think you mentioned that 5% of customers are currently using both services. Did I hear that right?
spk05: Yeah, less than five, yeah.
spk01: Less than five. Where was that number a year ago? You know, where do you want it to be, whether it's a year from now or a couple years from now? And I guess more importantly, what are you doing internally to increase that number?
spk05: Yeah, I appreciate the question. Thank you. So if you're asking what's driving the cross-selling that we're seeing, the answer is we are. This is very fundamental to our strategy. This is what our sales and marketing teams are focused on. We've, over the last several years, expanded our offering dramatically, both through the network and through the factory, in terms of being able to take larger quantity orders and do production more efficiently. And we're starting to see that traction, right? We've got over 53,000 customers that we serve who are used to relying on us for prototyping and have been asking us for more opportunities to work together in different use cases and needs that they have. And we're now able to bring that to them and able to support them through the lifecycle of their products. And so we are working very aggressively to, you know, to bring that to our customers, right? At the beginning of the year, we changed the brand United Around ProtoLabs with the network, and we've been communicating this to our customers, and our salespeople have been approaching our customers with these broader offerings to capture some of these opportunities. And so we're seeing that have traction, right? And as you point out, we're absolutely in the early innings with this, right? We are just scratching the surface. I'm pleased with how quickly, you know, the number grew from zero to what it is today. And I'm just really excited about attacking the remaining 95% of our customers, right, and bringing this opportunity to them. Because I think that this is clearly a huge growth potential for our business.
spk01: Yeah, it makes sense. Okay, I will leave it there. Thanks. Thanks, Britt.
spk00: As a reminder to star one on your telephone keypad if you would like to ask a question. Our next question is from Jim Rashudi with Needham & Company. Please proceed.
spk02: Hi. Good morning. Just given the variability that you're seeing in the business, the softening you've seen more recently, is that in any – is there much of a difference in Europe versus – the U.S., or are you seeing any change in any particular vertical?
spk06: Yeah, I would say that, Jim, the softness is more just to do with larger orders, and I think more of that softness is in the U.S. than it is in Europe from a quarter-over-quarter perspective.
spk02: Got it. And remind me, You were impacted, at least by the comparison in Europe, by some larger orders that you had in the year-ago period of Q1. What did that look like in Q2 of last year? I'm just trying to think about how we might see that portion of the business bounce back in Q2.
spk06: Yeah, so when we're talking specifically about Europe, our factory side of the business is And Q1 of last year in Europe had some really large orders that didn't repeat into Q2. So last year's Q2 Europe number for the factory was lower than what its Q1 number was. And so that's part of the reason why you saw the decline that you did in Europe was really tough comps with Q1 of last year. from the timing of larger orders within Europe.
spk02: Got it. How should we be thinking about OPEX as we think there's a reasonable step up in OPEX from Q4 to Q1? As you look out over the balance of the year, any thoughts on how we should be modeling OPEX?
spk06: Yeah, I think OpEx will be slightly higher in Q2 versus Q1. We have some additional investments we're making in the business. There's some more expense from a trade show perspective. And so we expect a slight uptick in OpEx from Q1 to Q2.
spk02: Okay, thank you. Thanks, Jim.
spk00: There are no further questions at this time. We will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.
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