Proto Labs, Inc. (NYSE:PRLB) Q4 2023 Earnings Call Transcript February 9, 2024
Proto Labs, Inc. misses on earnings expectations. Reported EPS is $0.00027 EPS, expectations were $0.3. Proto Labs, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings. Welcome to Proto Labs Fourth Quarter Fiscal Year 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. At this time, I will now turn the conference over to Jason Frankman, Vice President and Corporate Controller. Mr. Frankman, you may begin.
Jason Frankman: Thank you, Rob and welcome everyone, to Proto Labs’ fourth quarter and full year 2023 earnings conference call. I’m joined today by Rob Bodor, Proto Lab’s President and Chief Executive Officer; and Dan Schumacher, Chief Financial Officer. This morning, Proto Labs issued a press release announcing its financial results for the fourth quarter and full year ended December 31, 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 Bodor. Rob?
Rob Bodor: Thanks, Jason. Good morning, everyone, and thank you for joining our fourth quarter and full year 2023 earnings call. We continue to execute well on our priorities through the fourth quarter, resulting in a record year and strong financial and operational results. For the full year 2023, we generated revenue above $500 million for the first time in ProtoLabs’ 25-year history, while delivering improved earnings, robust cash flow, and returning substantial capital to shareholders. Every day at ProtoLabs, we’re guided by our mission, which is to empower the world’s most innovative companies to bring their new ideas to market by offering the fastest and most comprehensive digital manufacturing service. We manufacture high-quality, custom, complex parts for the next generation of innovative solutions to the world’s challenges.
I’ll now share a few examples of how we enable customers to accelerate innovation across pioneering industries. First, I want to share two examples from the electric vehicle industry, which is a growing sector of our business. ProtoLabs has been heavily involved in creating a more sustainable future through the electrification of vehicles with various customers. One prominent EV manufacturer has been a ProtoLabs factory customer for years as our reliable and rapid lead times help them move fast and bridge supply chain challenges as they introduce new vehicles and options. This customer recently received their first order fulfilled through our manufacturing partner network, which we rebranded from Hubs to ProtoLabs Network in January. ProtoLabs Network manufactured quality injection molded prototype parts, which were beyond our factory’s capabilities due to their size and complexity.
As EV manufacturers have very different development and supply chain requirements than traditional auto manufacturers, the flexibility of our combined offerings provides the agility and adaptability that EV manufacturers need. We are incredibly excited to continue our work with this customer and help create a more sustainable future through emissions-free vehicles. In addition to electric cars, our advanced digital manufacturing capabilities also support innovation in the electric aerospace industry. Kinetics [ph], a company that has developed an electric motor for commercial regional jets and narrow body aircraft, leveraged our manufacturing precision and speed to have a new complex metal component manufactured. This part was 3D printed in our digital factory due to its complex design that maximizes surface area and improves the power to weight ratio.
Our services allow Kinetics [ph] to accelerate innovation in aircraft motors. ProtoLabs is also involved in rapid innovation in the commercial space exploration sector where speed to market is critical. Our ability to quickly provide high quality precision parts through comprehensive manufacturing services allows companies like Space Inventor to develop satellite systems and advance aerospace technology. Space Inventor turned to ProtoLabs in order to meet stringent project timelines. We manufactured several CNC machined components for structural elements and complex brackets and a variety of specialized materials for their satellites. Crucially, with our industry-leading turnaround times, we rapidly manufactured and delivered quality components while significantly expediting Space Inventor’s design process.
One final example to highlight today comes from the agricultural machinery industry. ProtoLabs recently worked with a leading equipment manufacturer that drives sustainable progress in agriculture. This customer had an unexpected delay arise at an existing supplier. When supply chain disruptions arise, ProtoLabs always has capacity available to ensure customers can continue to innovate. We provided quality, cost-efficient CNC machined components through both the factory and the network. ProtoLabs’ speed and comprehensive offering allow this customer to meet scheduled phase gates and keep a critical program on track. These are just four short examples of the innovations we get to accelerate every day in exciting industries which positively impact the world.
We served over 53,000 customers in 2023 and empowered customer innovations in many different applications. I’m proud to say that in 2023, we contributed to the greater good while successfully executing against our business priorities. 2023 was a success for ProtoLabs. We confirmed that our strategy to combine the factory and network offers is the right one, demonstrated by 70% growth in ProtoLabs’ network and continued customer adoption of the combined offer. In the presence of a challenging global manufacturing demand environment that experienced contraction throughout the year, our comprehensive offering enabled ProtoLabs to take share in our market. Our leadership team executed on our strategic objectives and I’m proud of what we accomplished.
As you’ll recall, we entered 2023 with two priority areas. First, to narrow our focus to drive revenue growth in our two largest services, injection molding and CNC machining. And second, to improve shareholder value through increased profitability. I am pleased to report that we successfully delivered on both of those priorities. On our fourth quarter earnings call one year ago, we stated that we expected year-over-year growth in injection molding for the full year. We met our goal of achieving injection molding growth in 2023, driven by the value we provide as a single source injection molded parts supplier, winning larger orders with strategic customers. Investments in digital quality, competitive pricing, and consultative design services have contributed to success with larger production-oriented orders.
Collectively, these investments have been key to transforming our injection molding business, allowing ProtoLabs to serve as a true strategic partner for our customers. In addition, we continue to win more injection molding orders where our customers benefit from combined factory and network performance. In our other priority growth area, CNC machining, we successfully unlocked greater growth potential through the most complete and comprehensive offer in the industry. CNC machining revenue fulfilled by the ProtoLabs network grew 80% in 2023. Customers took advantage of the combined offer, leveraging lower part prices at longer lead times, improved tolerances, broader finishing options, and larger and more complex part designs through the ProtoLabs network.
We also invested to expand our CNC offer in the digital factory, launching scaled plating and anodizing at our best-in-class lead times. Finally, in 2023, we drove shareholder value through improved profitability and returning capital to shareholders. ProtoLabs’ differentiated business model generated significant profitability and cash flow throughout the year. Both factory and network gross margins improved year-over-year, and 2023 non-GAAP earnings per share grew 6% over 2022. We generated $73 million in cash from operations, the highest in our industry, and we paid back 97% of our free cash flow to shareholders through $44 million in share repurchases. Our strong execution on the strategic priorities set out at the beginning of 2023 provides a robust foundation for continued success in 2024.
This year, we expect to grow revenue. To do so, our 2024 priority areas are as follows. First, we will strive to increase revenue per customer by growing the number of customers using the combined factory and network offer, and second, we will drive larger orders in all services. Success in these priority areas will lead to improved financial performance and continued shareholder value creation. Specifically, we’re focused on driving growth in users of the combined offer, which will drive revenue through both the factory and the network. This number increased substantially in 2023, and I expect significant growth in 2024. Our go-to-market teams are aligned and well-equipped to promote and sell the combined offer to existing and new customers.
Next, our emphasis on driving larger orders through both the factory and the network includes a shift from prototyping to production, which is a larger overall market. Specifically for injection molding, which has the highest revenue per customer of our four services, we will focus on satisfying the needs of the production customer. With its lower price, longer lead time offer, the ProtoLabs network generates higher average order value than the factory, and we will expand on these larger orders through the network in 2024. These areas of emphasis highlight the importance of increasing customer share of wallet. Since our initial public offering in 2012, our primary focus was to add new customers while continuing to serve our existing customers in their times of need.
While this is still important, our focus with the combined offer is to go deeper with larger strategic customers and serve more of their custom parts needs as a true prototype to production single source supplier. In 2024, we will also continue to invest in our most important internal resource, our people. ProtoLabs employees enable us to continue revolutionizing manufacturing and accelerating innovation. ProtoLabs is a great place to work and we will improve the employee experience through continued investments in areas like talent acquisition, training and development, and total rewards. Just a few weeks ago at our annual kickoff meetings, we introduced a fully refreshed set of company values for the first time in over 10 years to help guide us into the future.
We look forward to doing more for and investing in our amazing talent at ProtoLabs this year and beyond. We are encouraged by our strong finish to 2023 and believe we have the right strategy and priorities in place for continued success. Resilient execution in 2023 enabled us to meet our commitments and take share in the market despite headwinds from manufacturing contraction. We remain focused on becoming the strategic partner to the world’s innovators, maintaining our industry-leading financial model, and increasing value for our shareholders. I want to thank our more than 2,400 employees for delivering excellent 2023 results and positioning the company for success and value creation in 2024 and beyond. Thank you for your continued commitment to ProtoLabs.
Dan will now provide fourth quarter and full year financial information as well as our outlook for the first quarter of 2024. Dan?
Dan Schumacher: Thanks Rob and good morning everyone. Our financial results begin on slide 13 of the slide presentation. Looking first at fourth quarter performance, revenue of $125 million grew 7.2% year-over-year in constant currencies. ProtoLabs network revenue was $22.5 million in the quarter, up 49% in constant currencies. Looking at revenue by service on slide 15, fourth quarter injection molding revenue grew approximately 14% year-over-year in constant currencies as we saw an increase in larger parts orders. CNC machining grew 4% year-over-year in constant currencies driven by continued growth through ProtoLabs network. Fourth quarter 3D printing revenue grew 3% year-over-year in constant currencies. Sheet metal revenue declined 8% year-over-year in constant currencies.
Fourth quarter non-GAAP gross margin decreased 70 basis points sequentially to 45.3% primarily due to lower factory volume. Fourth quarter ProtoLabs network non-GAAP gross margin was 33.6% compared to 33.7% in the third quarter. Fourth quarter non-GAAP diluted net income per share was $0.46, adjusted EPS came in higher than our guidance midpoint of $0.30 for several reasons. First, higher than expected volume. Revenue came in at the top end of our guidance range. Next, gross margin exceeded our expectations in the fourth quarter due to do largely to stronger than anticipated revenues and injection molding, one of our higher margin services. Lastly, our fourth quarter selling, general and administrative expenses were below forecast driven partially by lower incentive compensation.
Turning to cash flow and balance sheet highlights on slide 16. Cash flow from operations was $17.2 million and we repurchased 4.9 million of common shares in the fourth quarter. On December 31st, 2023 we had $110.8 million of cash and investments on our balance sheet and zero debt. Now let’s look at some of these results for the full year which begin on slide 18. Total revenue increased 5% over 2022 in constant currencies and excluding Japan. At $504 million, total revenue surpassed $500 million for the first time in our history. Both factory and network gross margins increased year-over-year. However, total company GAAP gross margins were flat at 44.1% due to a higher mix of network revenue. 2023 Protolab’s network revenue of $82.6 million grew 69% year-over-year in constant currencies and network gross margin for the full year was 30.6% compared to 25.8% in 2022.
We served 53,464 customer contacts in 2023 and revenue per contact increased 9% over 2022. 2023 non-GAAP earnings per share increased 6% to $1.59 and we generated $83.2 million in adjusted EBITDA. Cash generated from operations in 2023 was $73.3 million up from $62.1 million in 2022. Our business model generates industry-leading cash flows allowing us to invest in organic growth and return capital to shareholders. During 2023 we paid 97% of our free cash flows to shareholders through share repurchases. Turning now to forward-looking guidance. We will continue to guide on a quarterly basis due to the quick-turn nature of our business and continued macroeconomic uncertainty. Our guidance for the first quarter of 2024 is outlined on slide 23. We expect to generate first quarter 2024 revenue between $120 million and $128 million.
This guidance reflects a softer start to 2024 due to December and early January order levels being lower than historical periods. However, recent performance has been more in line with historical trends, and our guidance assumes that will continue through the end of March. We expect foreign currency to have between a $500,000 and $1 million favorable impact on revenue compared to the first quarter of 2023. Moving to earnings guidance, we anticipate non-GAAP add-backs in the first 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 21% plus or minus 50 basis points in the first quarter. In summary, we expect first quarter non-GAAP earnings per share between $0.26 and $0.34.
That concludes our prepared remarks. Operator?
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