Proto Labs, Inc.

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jason Frankman, Vice President and Corporate Controller. Thank you. You may begin.

Thank you, Shamali. Good morning, everyone, and welcome to ProtoLab's first quarter 2025 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 31st, 2025. 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?

Thanks, Jason. Good morning, everyone, and thank you for joining our first quarter earnings call. We started the year strong, delivering revenue of $126 million near the upper end of our guidance range. Profitability was solid as well, with earnings per share of 33 cents, also near the top end of our expectations. We also delivered sequential gross margin expansion and strong free cash flow. While first quarter revenue was down slightly versus the prior year amidst macroeconomic headwinds and manufacturing contraction, we remained confident in our strategy and our commitment to driving growth for the full year. Our first quarter performance sets a solid foundation for growth in 2025 and demonstrates our ability to deliver on expectations in a volatile environment, reinforcing the resilience of our model. In addition, free cash flow during the quarter represented 14% of revenue, reflecting continued industry-leading profitability. Because we believe in the strength of our model, we have continued to return capital to our shareholders by repurchasing our common stock, as Dan will discuss shortly. Shifting to an update on our strategic priorities, our hybrid model continues to yield positive outcomes and was successful once again. Customers utilizing our combined offer grew more than 45% over the trailing 12 months, and revenue per customer in Q1 increased by 3% year over year. We also continue to make significant progress in our initiatives to drive growth as outlined last quarter. First, our marketing investments to further establish Protolabs as a production manufacturer are gaining traction. Our new messaging is resonating within production buyer channels, reinforcing our brand positioning, and expanding awareness. At the start of this year, we made an incremental investment in marketing to inform and educate potential customers about our expanded capabilities across the product lifecycle. We have seen our share of voice in the market increase as a result of this new marketing, with over 2 million views of our prototype to production campaign to date. This has led to an increase in searches for protolabs as potential customers look to source their custom on-demand manufacturing. Online searches for protolabs are up double-digit percentage points versus last year, and this progressively increased each month during the first quarter, so we are seeing accelerated momentum for our production offerings. We will continue to invest in this campaign as we progress through 2025, tailoring to our target industries. Production revenue continued to grow nicely and exceeded our expectations in the first quarter. We are very pleased with customer engagement of our expanded production capabilities. To illustrate our success in production applications, I'd like to highlight some customer examples in aerospace and defense, one of our target industries. Our speed, extensive domestic manufacturing capabilities, and ability to produce complex high requirements parts make us an excellent partner to these innovative organizations. We offer ITAR certified parts through both the factory and through the manufacturing partners in the Protolabs network, enabling aerospace and defense customers full access to our combined offer. Revenue from these customers has increased very nicely in recent years, in part due to increased end user production orders. We manufacture flight-ready production parts through AS9100 certified facilities, and our metal 3D printing service is especially valuable as customers seek to design and procure durable, lightweight parts. We serve the largest and most advanced companies in this space, including 100% of aerospace and defense companies in the Fortune 500. Organizations like Blue Origin, NASA, and Lockheed Martin have all leveraged production in Protolabs. In one example, Protolabs is part of a team supporting Blue Origin's Blue Moon Mark I. The single-launch lunar cargo lander will remain on the moon's surface, providing safe, reliable, and affordable access to the lunar environment. NASA has said that the Mark I cargo lander could deliver a scientific payload to the moon's south polar region as soon as this summer. We've also had several Aero and Defense customers qualify our production solution after auditing our manufacturing facilities. These customers, some of which have used our prototyping services for many years, have already placed orders for production parts and injection molding, CNC machining, and 3D printing. This is a great example of continued growth driven by existing Protolabs customers leveraging both prototyping and production. Now transitioning to our second initiative to drive growth, our go-to-market reorganization. I am pleased to say that this is yielding positive results. Enhanced sales enablement tools and processes are improving our understanding of customer production needs, enabling us to deliver tailored solutions via team-based selling, better serving our customers, and driving growth. And third, the optimization of our fulfillment channels to meet customer needs is advancing very well. The closure of our German molding facility has streamlined our global operations as we continue to improve overall efficiency by aligning our manufacturing footprint with our global fulfillment strategy. This decision, which is part of the broader multi-year reshaping of our portfolio and began with the closure of our Japan operations in 2022, allows us to better leverage both factory and network capabilities. We are pleased with the results to date and remain focused on continuing to optimize our manufacturing footprint to better serve our customers globally. Turning to tariffs and strategic positioning. We are closely monitoring the evolving tariff policies and their potential impact on our customers and the broader manufacturing landscape. As we've demonstrated most recently during the COVID-19 pandemic, We can adapt faster than anyone to support our customers in times of supply and demand volatility. Speed and agility are central to our operations. While there is still uncertainty in regard to tariffs, we believe the current situation unfolding is a strong opportunity to drive growth for several reasons. First, our diverse and strategically located global manufacturing footprint provides resilience and flexibility. allowing us to adapt to shifting supply chain dynamics and serve our customers effectively regardless of geographical shifts. In fact, 90% of our revenue from American customers is already fulfilled by factories in the US through both our digital factories and our network. Our international operations are also highly adaptable with manufacturing capabilities spanning multiple countries we are not overly reliant on any single region and can and do shift capacity in response to changing demand. This positions us favorably as companies reevaluate sourcing strategies in response to tariff risks. Next, our pricing models are fulfilled and routing platforms are highly adaptable and driven by artificial intelligence. And finally, we consistently generate strong free cash flow. underscoring the fundamental strength of our business model. This financial stability, which is uncommon in our industry, enables us to invest in growth initiatives and navigate periods of uncertainty. We are actively reviewing pricing strategies to help offset impacts from tariffs where appropriate, ensuring that we stay competitive while preserving value for customers. The current economic uncertainty is causing customers to be more cautious about demand forecasting which may extend the timeline for shifting supply chains. But again, we believe this environment favors agile players like us. We pioneered on-demand manufacturing over 25 years ago, and we remain the fastest in the world. This is a vital solution for customers whose demand may be volatile or unclear, allowing them to only order what they need and receive delivery in days, not months. Before I hand the call over to Dan, I'd like to close with our 2025 priorities. Our primary focus for 2025 remains driving growth in our key indicators, which are increasing the number of customers utilizing our combined offer and increasing revenue per customer. To achieve this, we are, one, leveraging our newly streamlined organizational structure to enhance efficiency and accelerate growth across all areas of our business. Our teams are in place and they are properly incentivized. Two, we are expanding our production use cases by investing in advanced manufacturing capabilities and refining our go-to-market strategies to better meet customers where they are, positioning ourselves to capture a larger share of this growing market. And three, we're reinforcing our core prototyping business by investing in cutting-edge technologies and optimizing lead times, ensuring we maintain our industry-leading position. Protolab's unique combination of factory and network enables us to serve customers across product life cycles, from prototyping through production and into end of life. So in closing, we are confident in our position to navigate evolving market dynamics and deliver sustainable growth while maintaining industry-leading profitability and cash flow. Our strategic investments and operational efficiencies position us well to capitalize on emerging opportunities and create long-term value for our shareholders. Now I'll hand it over to Dan to cover the financials.

Dan? Thanks, Rob, and good morning, everyone. I'll start with a brief overview of our first quarter results, then provide our outlook for the second quarter of 2025. First quarter revenue came in at $126.2 million toward the upper end of our guidance range and down 1% year-over-year in constant currencies. The first quarter last year included one extra ordering day due to leap year. Our revenue result reflects a 4% sequential increase. Revenue fulfilled through Protolab's network was $26.3 million, up 11.5% in constant currencies. U.S. revenue was down 1.2% compared to the prior year. In Europe, revenue was flat compared to the prior year in constant currencies. Turning to revenue by service on a constant currency basis, CNC machining revenue grew 6% year over year, driven by strong performance in production and high requirement CNC parts. Injection molding revenue declined 7% versus the prior year, mainly due to non-recurring larger part orders in the first quarter of 2024. Injection molding revenue increased 7 percent as compared to the fourth quarter. 3D printing revenue was down 6 percent year over year as order trends lagged our expectations in late 2024 and early 2025. And lastly, sheet metal revenue increased 19 percent over last year, driven by improved offerings and go-to-market efforts. Moving to margins. first quarter consolidated non-GAAP gross margin increased 140 basis points sequentially to 44.8%, mainly due to higher volume and margin improvements on the factory side. On a year-over-year basis, gross margin was down 80 basis points, driven by lower volume and a higher mix of network-fulfilled revenue. Non-GAAP operating expenses increased $3.6 million sequentially in the most recent quarter, driven primarily by higher incentive compensation, as well as additional investments in demand generation. We discussed these gross investments last quarter, and Rob elaborated on the progress we've made. We will continue to monitor returns on these investments and adjust as necessary throughout the year. Higher incentive comp and demand gen spend was partially offset by lower headcount in the first quarter as we restructured teams as part of the new organizational structure. Non-GAAP earnings per share were 33 cents within our guidance range and down 5 cents sequentially. This sequential decline was primarily driven by increased operating expenses and a higher tax rate. As Rob mentioned, we continue to lead the digital manufacturing industry in terms of cash generation. We generated $18.4 million in cash from operations during the first quarter, and we returned $20.9 million to shareholders in the form of repurchases, or 122 percent of free cash flow. On March 31st, 2025, we had $116.3 million of cash and investments on our balance sheet and zero debt. Our outlook for the second quarter of 2025 is outlined on slide 15. We expect revenue between $124 and $132 million. This guidance represents growth of 2% year-over-year at the midpoint and incorporates order and revenue trends to date. We expect foreign currency to have a $300,000 favorable impact on revenue compared to the second quarter of 2024. 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 $900,000. We currently estimate a non-GAAP effective tax rate between 25 and 27 percent 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, open up for questions.

Thank you. We will now be conducting a question and answer session. 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 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment, please, while we pull for questions. Our first question comes from the line of Brian Drab with William Blair. Please proceed with your question.

Hi. Good morning. Thanks for taking my questions. Thanks, Brian. I will point out, you know, it seems like maybe the start of a good trend here is seeing the unique customer contacts. up sequentially the revenue per customer up sequentially. This is just a couple of things that, you know, I mean, the customer count up just modestly sequentially with the, you know, moving, moving in the right direction in a tough environment, um, stood out to me. Um, but I, I wanted to ask first, you know, on the, on the gross margin, you know, is a nice, um, you know, improvement sequentially in gross margin. Obviously the fourth quarter can be a little soft, but you know, how, Can you just drill into that a little bit more, how sustainable this level of gross margin is? And can you get back to some of these 45s and 46s that we saw in 2024 as we move through 2025?

Yeah, thanks for the question, Brian. You know, it's primarily volume, quarter over quarter. And, you know, we had a good pickup in volume in our factory, which caused our factory margins to increase quarter over quarter. Our network margins actually were slightly down quarter over quarter. I think we've got some challenges usually in the first quarter from a network perspective as it relates to sourcing and Chinese New Year and so forth. So the main driver quarter over quarter is that increase in factory volume and factory margins. As we look at the rest of the year, my guide implies that margins from Q1 to Q2 will be flat to slightly down. That's really the amount of revenue that we have flowing through network fulfilled versus factory fulfilled. So we expect higher network revenue quarter over quarter. And so that's going to create a headwind. That being said, we are driving improvements in margin in both the factory and both the network I think getting to, you know, 45 or, you know, some of those higher margins that we saw before, it will be impacted by how much of that volume does go through the network versus what goes through the factory as we look at the rest of the year.

Okay.

Thank you.

Go ahead, Rob.

Yeah. Sorry. Thank you for your comments on the business and the sequential performances. I'm quite pleased with that 4% sequential performance, and as our guide indicates, we're seeing continued growth and expect that growth to continue into Q2. We made major changes and a pretty substantial pivot last year in support of customer focus and in support of our production strategy, and I'm very pleased with that. the growth that we're seeing in our production business as a result of this, you know, at that time we came forward with a number of, uh, of critical metrics that we're going to use to measure this. And frankly, they're all up, right? We're seeing average, uh, order values increase. We're seeing revenue per customer increase. Uh, we're seeing our, the number of customers who are buying our combined offer, uh, up substantially and our production revenues are growing. So, um, you know, I want to just recognize the work of our, of our go-to-market teams who are out there educating our customers on this. Uh, this is our focus. We're investing behind it. Uh, we've got a successful brand campaign that will continue to drive. And, um, I'm very encouraged, uh, with the, how we're starting this year.

Okay. Got it. Maybe, uh, I'll just ask one more for, for now, since you guys just give me a lot of detail on my first question, but, um, Is there anything to be concerned about related to the hubs network? And I know that it's a global network, obviously, but I think there are quite a few manufacturing partners in China. Is the tariff situation, which I know could be a positive driving on shoring and get positive for you in a lot of ways, but is this trade war causing challenges for hubs?

Yeah, thank you for the question. You know, no, we really haven't seen that. We've got a network that is extremely adaptable, right? And so we routinely are able to, and on a real-time basis, you know, move work around across the network and redirect orders based on the customer needs, pricing, and so forth. And so that flexibility really allows us to adapt very quickly. And in fact, even in a normal year, we see substantial shifts across the network in terms of where we're sourcing components. And that's what we've been able to do here to adapt to the tariffs. So the network continues to grow, and we've been able to be quite flexible and adaptive to mitigate any impact both to our MPs and to our customers during this period. In fact, this is one of the strengths of our model.

Okay, thanks. I'm sorry to slip back to old terminology. I'll go write down Protolabs Network 10 times on a piece of paper. That's the right name. All right, thank you.

Thanks, Brian.

Thanks. Thank you. Our next question comes from the line of Greg Palm with Craig Hallam Capital Group. Please proceed with your question.

Yeah, good morning. Thanks for taking the questions and congrats on the quarterly results. Can you maybe, yeah, can you maybe talk a little bit more about what you're seeing in April specifically, just, you know, in terms of kind of order growth and customer behavior and, you know, specifically the guide implies a lower gross margin. I think, Dan, you mentioned it's based on a mix of networks. So you're seeing a higher proportion of revenue going to the network so far this month or previous month, April?

Yeah. You know, from a trend perspective, you know, we've seen orders consistently improve month to month as we've gone through the year. I think, you know, on the network side, it was – to start the year softer and had to do more with kind of bigger network orders through Europe. But we're seeing that, you know, begin to overall network fulfilled orders to continue to trend up. And so our guide reflects that. So we just continue to see as we're going through the year, improvement in demand.

And you talked about you know, the benefits of your offering, you know, comprehensive offering in times like this. I'm curious, do you have any evidence, you know, that this current environment is actually providing some kind of tailwind, whether that's, you know, onboarding of new customers? I mean, I don't know what kind of metrics you'd look for specifically, but what are you seeing out there?

Yeah, sure. Yeah. So as I'm talking to customers and I talked to, several very recently, even this week, what we're hearing from them is several things. First of all, excitement around our production offerings and more adoption of those production offerings. So this is independent of the macro environment. Remember that they've been asking us for these capabilities for years, and now we're really bringing them to them and we're promoting it very aggressively. And so we've got these customers who, you know, we're engaging with, they're used to, you know, relying on us for their prototyping. And now we've got these production solutions so they can stay with us through their product lifecycle, reducing their risk whenever they have to, you know, change a supplier. So, you know, that makes this more streamlined and more cost effective for them. So they're very pleased with that. And I think that I attribute a lot of our sequential growth and what we're seeing today to that. That said, in terms of supply chain disruption and tariffs in this environment, we're definitely hearing them talk about looking at alternatives for their supply chain and diversification around supply chain and including reshoring to the U.S. as part of that solution. And and so we're having those those dialogues and we're seeing some of them begin that. And I see that, again, as a strong growth opportunity for us. I mean, we stand ready to to serve their needs in that way. Right. We're super adaptive. We're highly automated. We're very flexible and we've got tons of scale and the super majority. Right. Ninety percent of our America's revenue is already fulfilled in the Americas. Right. So we have very little tariff exposure from that standpoint.

Yep, understood. And I guess just kind of going forward, thinking about the network, are you, you know, just given some of the initial tariffs, you know, are you thinking about building a greater, you know, base, let's say, here in the US? I mean, do you feel like you've got, you know, the right amount of, you know, sort of production partners here? What do you think?

Yeah, I'm pleased with our network and the strong manufacturing partners that we have in all parts of the world. And we've got plenty of excess capacity right now in our U.S. manufacturing partners. Of course, as we grow and scale, we can onboard and do routinely onboard more. So I feel very ready right now. I think we've got the right the right network, the right set of partners, and we are ready to grow.

Okay. All right. Well, best of luck. I'll leave it there. Thanks.

Thanks, Greg.

Thank you. Our next question comes from the line of Troy Jensen with Cancer Fitzgerald. Please proceed with your question.

Hey, gentlemen. Congrats on the March quarter results. Thanks, Greg. Rob, maybe to start with you. You're welcome. Rob, to start with you, just... On the push into production, if you guys are successful, will you see it more in factory or network? And the reason I'm asking, I guess I always thought it would be more on the factory side because I think customers are going to want to qualify the partner that they're working with. And you guys can control the quality better in the factory versus the network. But it seems like you're talking about network as the benefit of tariffs or production.

Yeah, thanks for the question, Troy. So the answer is definitely both. Right, we serve customers with production and use parts out of both our factories and our networks. Actually quite pleased with the quality that comes out of the network partners. This is an area of strength in our model. And we aggressively audit and control quality with our network partners, just as we do within our own factories, right? We have the same quality. standards that we apply across our whole organization. Remember now we've got a global operations organization that includes both factory and network. So we view that in the same way and hold it to those same standards. The answer varies a little bit more as we think about it by service, where some services we're going to do more likely more production out of the factory. and in others, you know, more in the network. But we definitely see it across the board.

You know, Troy, I think one other thing to remind you, you know, we think our network is set up as well positioned to do more production type work. We, you know, have, you know, a more discrete defined base of manufacturing partners that we work with. We're making sure that, you know, We are in contact with our cross-docs and the MPs to make sure that the quality of the parts that are coming through is high and that there's more interaction that a customer can have through some of our digital tools in order to do those production-type orders through the network. But I'm going to reinforce what Rob said. It is both production through the factory and production through the network.

Perfect. And as we're seeing production grow, that's how it's playing out. Okay, perfect. And then, Dan, just to follow up for you, I mean, it's been a while since we've had a normal year. Can you remind us, like, normal seasonality? I always think of Q3 traditionally up sequentially and then Q4 down. Is that the case? And are tariffs going to maybe offset that, provide growth throughout the year?

Yeah. Troy, I have to laugh when you say what a normal year is because, yeah, it's been a while. Yeah, I mean, you know. You know, normally what we end up seeing is, you know, Q1, although being up from Q4 is a little bit softer because of coming out of the holidays, you know, that January would be softer from a revenue perspective. So we see kind of that pickup quarter of a quarter, which is mainly due to having kind of three months rather than – then we see maybe flattish as you go Q2 to Q3, if not slightly up, and then it would be down in the fourth quarter really due to the holidays again. So that's usually what we see. So Q1 up versus fourth quarter, slightly down versus Q2. Q2 sees a pickup. Q3 flat to slightly up, and then slightly down for the Q4 due to the holidays. Gotcha. Do you think Tarasov said it this year? Oh, my God, Troy. As you said, we haven't had normal in a long time. You know, I feel good about, you know, what our guide is for the second quarter. But it's a changing landscape. But as Rob said, I mean, we really feel like we're well positioned, both from the number of different fulfillment options we can offer customers, as well as our financial strength. Yeah, and the actions that we're taking are gaining direction.

Perfect. Thanks, guys, and good luck going forward.

Thank you. Our next question comes from the line of James Rashidi with Needham & Company. Please proceed with your question.

Hi. Good morning. You know, I may have missed it. It may be in your material or you may have said it. What were the network margins in the quarter? I think you said they were down quarter on quarter, but did you say what they were?

Yeah, we didn't specifically say what the margins were, but they were a little over 31% for the network.

Perfect. Thank you. So on tariffs, I think I'm trying to get a sense. Are you seeing headwinds at all from the materials you use? And I mean, it sounds like you're already evaluating pricing actions. I'm just curious if that's an issue for you at all.

Yeah, thanks for the question, Jim. I think the strength of our model really helps us here. We've got a very robust supply chain for raw materials. And so we've been able to mitigate a lot of that and have not seen substantial increases in our costs from raw materials as a result of the tariff landscape.

Got it. You've had a couple of quarters of declines, I think, year over year in 3D printing. I'm wondering how that business aligns with the overall strategy of driving the production parts business. I mean, you alluded to the space market, which just seems like a natural for production and metals out there. But I'm just wondering, is there anything we need to be thinking about as you look at that 3D printing portion of the business?

Yeah, thanks, Jim. You know, I I think you're thinking about it right. 3D printing is certainly, we do a bunch of production in 3D printing, but still the majority of that service is really a prototyping service, right? And in the macro economy that we've been experiencing for the last two years now with manufacturing contraction, what we're hearing from customers is that they're not launching as many new products in this environment. They're slower manufacturing. to do that. And so we are seeing headwinds to prototyping overall. And that was the reason why we drove the big pivot that we did in order to focus on production. And we're seeing very nice growth in production pretty well across the board, including in the 3D printing segments that tie to production. But But right now, in this economy, there's definitely a headwind for prototyping, and I think that's affecting our 3D printing business.

Last question. If we think about the production parts opportunity, there's some more mature manufacturing markets that you guys obviously are going after. I'm wondering, there's probably some in-green culture using traditional methods. Are you satisfied with

with how the strategy is playing out in those markets obviously some of the more nimble markets like commercial space you know this clue i would think there's good momentum there yeah thanks um so what we're seeing is that uh we've got a very differentiated offering that competes really well in the higher margin portions of the production landscape that we target those are the the low to mid volume production kinds of parts of the space. Because of our high levels of automation, digitalization, scalability, flexibility, we're pretty uniquely positioned in production in those categories. And again, those are kind of the higher margin categories, so we like that. Certainly by industry, where we tend to penetrate fastest is in those industries where they're launching more new products. because that's where we get to be at the table, right? When they're launching the new product and they're developing the supply chain to produce that product, that's where we have great opportunities. And so I think that's why you're seeing that. But over time, I fully expect us to be penetrating through production well in all the industries because we've really got a differentiated production offering we're targeting.

Thanks, guys. Congrats. Thank you. Thanks, Jim.

Thank you. And ladies and gentlemen, we have reached the end of the question and answer session. And this does conclude today's conference. You may disconnect your lines at this time. We thank you for your participation.