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Proto Labs Inc (PRLB) Q1 2019 Earnings Call Transcript

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Update time : 2019-09-02 00:03:36

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Proto Labs Inc  (NYSE: PRLB)
Q1 2019 earnings Call
April 25, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and greet ought the Proto Labs First region 2019 earnings Call. at this time, full participants are at a listen-only mode. A brief question-and-answer meeting will hunt the formal presentation. (Operator Instructions) though a reminder, this meeting is being recorded.

It is now my rapture ought introduce your host, Mr. Daniel Schumacher, Director of FP&A and Investor Relations. Thank you. You can begin.

Daniel Schumacher -- Director of Investor Relations

Thank you, operator and good morning everyone. With me today is Vicki Holt, our headmaster and leading Executive officer and John way, our leading economical Officer. This morning ago the just opened, Proto Labs issued a publication release announcing its economical results though the first region ended March 31, 2019. The release is available above the Company's website at protolabs.com. at addition, a prepared slide presentation is available online at the web report provided at our publication release.

Before we used to be we begin, I used to alike ought recolect everyone that our discussion will include statements relating ought future deed and expectations that are or can be considered forward-looking statements and apt ought many risks and uncertainties that could cause true results ought differ materially from expectations. amuse refer ought our earnings publication release and trend SEC filings, including our Annual clarify above forge 10-K though news above certain risks that could cause true outcomes ought differ materially and adversely from any forward-looking statements made today. The results and guidance we will controversy include non-GAAP economical measures compatible with our past practice. amuse refer ought our publication release and accompanying slide presentation within the Investor Relations district of our company website though a finish reconciliation of GAAP ought non-GAAP results.

Now, I'd alike ought become the summon above ought Vicki Holt, headmaster and leading Executive officer of Proto Labs. Vicki?

Victoria M. Holt -- President and leading Executive Officer

Thanks, Dan. Good morning, everyone. Thank you though joining us above our first region meeting call. This morning we reported first region revenue of $113.5 million, representing growth of 5% above 2018 or 6.9% at continual currency. Our adjusted earnings per part were $0.69, representing a $0.02 per part refuse compared ought the first region of 2018. though we analyzed our deed at the first region of 2019, the revenue growth at our legacy services was nearly 11% at continual currency. The challenges, we experienced at the first region related largely ought the services acquired at the fast Manufacturing acquisition.

The revenue and the earnings growth from our acquisition of fast Manufacturing did no confront our expectations this quarter. though we discussed at our earnings summon above February 7, we did no undergo the exaggerate at request though the acquired sheet metal and expanded CNC services, while we began selling these services ought the legacy Proto Labs customers above January 1. at fact, the revenue from the services produced at the acquired tool declined $2.5 million or 21% compared ought the first region of 2018. though we discussed at the fourth region earnings call, while we integrated the two sales teams, we distributed accounts and disrupted the entire sales organization by realigning accounts ought permit our customers ought be managed by one clarify manager fairly than two. One other factor that -- is that we standardized our offer ought improve the reliability and throughput of our operations.

Rapid historically operated though a traditional machinery preserve without a standardized offer, usually accepting non-standard trade that is no scalable. The acceptance of these orders often resulted at late deliveries, extended direct mature above criterion orders and dissatisfied customers. Our customers consume told us they impose Proto Labs' reliability, assets and speed. at that order, we standardized the manufacture offer ought insure we could consistently and reliably confront our delivery commitments at scale, anticipating stronger request while we opened up the services ought full of the legacy Proto Labs customers. This alter resulted at some turnover at the visitor foundation that was greater than anticipated. We trust this is the precise fashion above the expectation language though we concentrate above reliably servicing our customers with assets products and on-time delivery. I will controversy actions we are taking ought motivate request at the fast services afterward at the call.

As we confront at our first region revenue by geography, the Americas, our largest market, produced revenue growth of 4.3% above the foregoing year. fast services was the headmaster driver of the lower growth evaluate compared ought the foregoing periods. revenue growth at our Americas' legacy services was 9.3%.

Europe produced year-over-year revenue growth of 6.6% or 14.8% at continual currency. Europe's growth rebounded nicely after a slow December though visitor purchasing picked up level with the suspect of Brexit.

Our Japan piece grew 20.8% or 23.2% at continual currency. Our distribution partnership with Misumi at Japan continues ought quicken request at the region. at total, our commerce grew 6.9% at continual currency.

Moving ought revenue by service. Injection molding produced record revenue and increased 7.7% compared ought the first region of 2018. CNC machining year-over-year growth was 3.1%. Our CNC service includes an expanded offer acquired at the fast transaction. The revenue produced out of the acquired operations was down $1.3 million compared ought the foregoing year. Our legacy CNC operations grew 8% at the first region of 2019 after experiencing vast growth of above 40% at the first region of 2018 creating a difficult year-over-year comparable. First region 3D printing revenue was also a record and increased 17.5% from the foregoing year with both the Americas and Europe growing at similar rates.

Our growth is deputy of our ever-expanding concept leadership at this space. at the quarter, we teamed up with Wohlers and Associates ought broadcast a new immersive classify of compose though additive manufacturing. The two like-minded organizations are bringing decades of combined additive manufacturing undergo ought assist engineers and designers mature methods and strategies ought acquire the most from various 3D printing technology. This follows announcements at previous quarters of joining GE Additive companion network, and becoming a founding member of MIT's middle though Additive and Digital Advanced produce Technology. Finally, our newest service sheet metal contributed $5 million of revenue at the quarter, representing a refuse of 19.5% year-over-year.

Turning ought earnings, we reported first region non-GAAP EPS of $0.69 per share, representing a year-over-year refuse of $0.02 per share. Our contemporary era earnings were impacted by the lower-than-anticipated volumes of our fast services and investments we're making at our sales and marketing and inquiry and development areas ought facilitate growth.

Our investments are focused above continuing ought be the world's largest and fastest digital manufacturing source though fast prototyping and on-demand production. Our achievements at this universe last ought be recognized and first region was no exception. at the quarter, The National club of Manufacturers recognized Proto Labs though a Manufacturing Leadership Awards winner though its famous achievement at Engineering and produce Technology. Our manufacturing engineers developed toolpath generation software that achieved extremely level surface finishes though injection mold without increasing milling time. We last ought pattern advancements at our services ought shorten our direct mature and enlarge our divide envelope at a digital manner.

Now though an update above our 2019 priorities. though we discussed at our persist earning calls, we consume four priorities though this year; last ought evolve our go-to just model, intensify our visitor experience, improve our overall efficiency though a company, and improve the deed of the acquired fast operation. Our efforts related ought the first and persist priorities are focused above improving the deed of the fast services. though a management team, we were same excited ought enlarge the breadth of our capabilities and last ought offer differentiated services ought our existing visitor base. The launch of these services did no generate the volume we had planned, and it has the entire concentrate of my management team ought cause the entire latent of and guarantee of these new offerings.

Based above our experiences at the first quarter, there are four headmaster actions we are taking ought improve performance. First, at the first region we restructured the fast sales organization, including changes at sales leadership. Our New Hampshire sellers are getting comfortable with the new books of commerce and selling full of Proto Labs' services. at Q2, we will last ought coach and part best practices ought improve our go-to-market success. Second, we will last ought invest at marketing ought highlight the availability of our expanded service offerings ought motivate increased demand. Third, we will decrease the published direct time of the sheet metal business. We are able ought conduct this based above automation and genius investments we've made at the business. This guarantee of unprecedented haste is something our customers consume learned ought expectation from us and allows us ought admit part from the market. And finally, we last ought analyze our news and growl on opportunities ought tool value-based pricing and improve leverage our quoting machinery ought improve shut rates.

In the region we will admit favour of these opportunities and win more business. The investment article has no changed. 70% of our customers last ought utilize sheet metal services. Our excitement though these new services has no diminished. We will last ought motivate improvements at our go-to-market strategy, operations and offerings ought delight our customers and spend this business.

Our other priorities, ought last ought intensify our visitor undergo and improve our overall efficiency, include projects that are being worked by our R&D and software teams. We will supply farther updates above these priorities though the year progresses. silent the growth at the first region was no though well though we used to consume liked, our future opportunities remainder well and we will last ought concentrate above execution of our priorities ought motivate commerce performance.

With that, I used to alike ought become the summon above ought John.

John A. Way -- Chief economical Officer

Thank you, Vicki. revenue at the first region was $113.5 million, an exaggerate of $5.7 million or 5.3% above the same region at 2018. Foreign coin had a slightly larger negative shock than we expected, representing a $1.7 million headwind at the quarter.

Turning ought manufacture development growth. Our first region maiden manufacture developers served increased ought 20,573 or 9% growth compared ought the foregoing year. entire favour though the region was $58.9 million, an exaggerate of $1 million above the similar region of the foregoing year. entire margin was 51.9%, a sequential diminish from the 52.5% we reported at the fourth region of 2018. This compares with 53.7% at the first region persist year.

Year-over-year entire margin compression at the first region was owing ought the following factors; first, the investment we made at expanding the genius of the fast operations combined with lower-than-anticipated volume drove an 80 basis point headwind ought our consolidated entire margins at the first region of 2019 compared ought the first region of 2018. Next, higher facility costs associated with our new CNC facility, it created a 50 basis point diminish at entire margin. Finally, the remaining 50 basis point refuse was driven by a amount of factors, including commerce combine and annual allowance inflation.

Operating expenses totaled $39.4 million or 34.7% of complete revenue though the first region of 2019, up $400,000 from Q4. Sales and marketing was 16.4% of revenue at the region compared ought 15.4% at the foregoing year. The increased investment related ought an exaggerate at headcount ought motivate long-term growth, expenses associated with integrating the fast sales force, and investments at developing noise of visitor capability.

Research and development cost increased ought 7.1% of revenue compared ought 6.2% of revenue at the foregoing year. These investments related ought continuing ought add engineering genius ought enlarge their divide envelope at each of our services and investments ought estimate new technologies at 3D printing.

GAAP operating earnings was $19.4 million or 17.1% of revenue at the first quarter. Adjusted non-GAAP operating earnings was $23.4 million or 20.6% of revenue. above a GAAP basis, our impose evaluate was 21.1%, up from 17.6% at the first region of 2018. The GAAP impose evaluate is influenced by a amount of factors each region with the timing of training of stock up -- stock-based compensation being a significant variable.

On a non-GAAP basis, the impose evaluate was 21.3% at the first region compared ought 23.5% at the foregoing year. above a GAAP reporting basis, net earnings totaled $15.5 million, resulting at diluted earnings per part of $0.57. Adjusting though the after-tax revenue of stock compensation, amortization of intangibles and unrealized foreign coin losses, our non-GAAP diluted earnings per part at the region was $0.69, representing a $0.02 per part diminish from the foregoing year and a sequential diminish of $0.05 per share.

In summary, our economical deed this region was impacted by habitation genius and staffing though anticipated volumes at our acquired sheet metal and expanded CNC services that did no materialize, the inclusion of expenses though a entire region above our new CNC facility that was placed at service at the goal of the fourth region ought help future growth, and investments at sales and marketing and inquiry and development.

Now turning ought money flow, we generated $18 million at money from operations during the quarter. Our money from operations were lower than trend quarters, largely driven by timing of payments of certain liabilities, including annual incentive compensation. leading cost at the first region was $12.7 million, chiefly owing ought investments at instrument systems and IT infrastructure.

We also returned leading ought shareholders by repurchasing $17.3 million or 157,700 shares of joint stock. We ended the first region with a money and marketable securities rest of $139 million, down from $155 million at the goal of 2018.

Now I'd alike ought supply our expectations though the second region of 2019. We currently expectation Q2 revenue ought be at the hill of $114 million ought $120 million, or growth at the hill of 4% ought 9%. This revenue guidance reflects the following factors; the services of the fast Manufacturing commerce will improve sequentially, besides will apt be down year-over-year. We impose foreign coin will consume nearly $1 million negative shock above our Q2 revenue though compared ought the foregoing year.

Moving ought earnings guidance. We impose our operating costs, including sales and marketing cost will be higher than Q1 owing ought natural seasonality of commerce shows. Our non-GAAP add-backs though the region will include stock compensation costs of nearly $3.5 million and amortization of $900,000. We currently impose our non-GAAP impose evaluate ought be nearly 21% ought 22% at Q2. Taking into consideration full the above, we expectation our quarterly non-GAAP EPS ought be among $0.66 and $0.74 per part at the second quarter.

That concludes our formal remarks. Now Vicki and I'd be merry ought admit your questions. Operator, can you amuse empty the summon though Q&A?

Questions and Answers:

Operator

Thank you. We will now be conducting a question-and-answer session. at the favour of time, we ask that you amuse frontier yourself ought one question and one follow-up. (Operator instructions) Our first question comes from the row of Brian Drab with William Blair & Company. amuse advance with your question.

Brian Drab -- William Blair & company -- Analyst

Hey, good morning. Thanks though taking my questions.

Victoria M. Holt -- President and leading Executive Officer

Good morning, Brian.

John A. Way -- Chief economical Officer

Good morning.

Brian Drab -- William Blair & company -- Analyst

I guess, of course, let's neutral initiate with Rapid, please. so a unite of questions here. I'll roll into one, though I've maiden got allocated two questions. so the sheet metal commerce deed perhaps at April versus what you saw persist year and sequentially, can you grant us an update above the persist 25 days? And then, perhaps can you comment above the turnover at more detail at the visitor foundation there? And was that more above the sheet metal aspect or above the CNC side? And I will neutral rent it there though now.

Victoria M. Holt -- President and leading Executive Officer

Yes. so we last ought growl on a gradual improvement at our -- full of our metrics at both sheet metal and at CNC, besides it is gradual improvement. And so we conduct expectation ought growl on sequential improvement at sales, revenue above both sheet metal and the new CNC offer out of fast Manufacturing at Q2, though though we mentioned, it will possibly cabin be slightly negative year-over-year, besides improve than what we've experienced during the first region though we last ought assassinate above the actions that we recognize and better both the offer, the pricing and the fashion that the sales team is implementing the strategies with the customers. so we expectation ought growl on that ought continue. at condition of the second divide of your question, which was...

Brian Drab -- William Blair & company -- Analyst

About the turnover, was it more at (multiple speakers).

Victoria M. Holt -- President and leading Executive Officer

Turnover, yes. no it was lovely (inaudible). study nearly this at this way, Brian. They were a traditional machinery preserve and a traditional machinery preserve did no consume a criterion offer at full and often a sales team used to become at with something that is really out of the scope of a scalable, able deed ought last ought scale. And they used to drop at those orders and disrupt the entire flow. We've now gone ought a criterion offering and really optimized the flow, so that we consume reliable on-time deliveries. though you know, our customers expectation 98% on-time delivery routinely level though we scale. And so that's a various philosophy, a various fashion ought managing a machining deed or a sheet metal deed than a traditional manufacturing. That's what allows us ought dispatch the class of visitor satisfaction that we deliver, and our customers will talk us that is divide of the impose that's there. so we felt same -- it was very, same significant though us ought put that offer at lay and at advance of moving deliver with turning above the machinery ought the Proto Labs sales organisation and the Proto Labs customers so that we can insure those experiences that they consume with this new offer ought confront the expectations of the Proto Labs' brand promise. so I am confident above the expectation term, this is the precise commerce ought do. besides we did growl on visitor turnover at both of those businesses and the revenue growth also did no elect up though we had expected it ought conduct though rapidly. We expected that ought happen.

Brian Drab -- William Blair & company -- Analyst

So what has been the bigger factor though at the year-over-year refuse at that business? Is it the disruption at the sales compel or is it you making the aware decision that you wanted ought influence away from non-standard business? And what percent of the fast commerce was non-standard that you're neutral no doing anymore? Which of those issues is bigger?

Victoria M. Holt -- President and leading Executive Officer

I study they're both a factor. And while you really (ph) study nearly it, it's a various fashion of selling. The sales team at New Hampshire is selling now a criterion offer though opposed ought neutral taking any things perhaps out there and trying ought accommodate it into a box and pattern it work. Now they consume ought sell a criterion offer. so it's a various fashion ought advance ought market. so that is a alter and that is causing some of our sales team at New Hampshire ought really fight with how ought advance ought just that fashion doing a fate of training, had a small sheet of turnover at that sales team, which is no unexpected though well.

So it's really difficult ought tease those two apart. besides there is -- it is event across both services and there's some business, which really is no scalable, which we -- which doesn't accommodate into the criterion offer and is now exterior of the range.

Brian Drab -- William Blair & company -- Analyst

Okay, thanks. I'll consume ought pass it across though now. Thank you.

Operator

Thank you. Our next question comes from the row of Andrew DeGasperi with Berenberg Capital. amuse advance with your question.

Andrew DeGasperi -- Berenberg leading Markets -- Analyst

Good morning. I guess, the first question above the expanded CNC efforts, it seems obviously that commerce you flagged though being weaker. Are they the same issues you consume with sheet metal or is that neutral really isolated ought the clarify consolidation? And then secondly, could you perhaps neutral report nearly Europe? I mean, it was surprising growth given that the piece is a sheet weak generally. neutral some additional comments above that used to be appreciated.

Victoria M. Holt -- President and leading Executive Officer

So the shock of the -- everything. I mean, so we consume the criterion offer that was initiated, which is a various fashion of going ought market, and by that I mean, you've got a criterion offer, criterion direct time, an fashion that is taken ought assist the commerce that we take. That is a large divide of the disruption at the go-to just model. besides the other sheet is the changes at sales operations. And though I mentioned ought Brian, it's really difficult ought tease the two apart and it did happen across both offers. so we now consume a standardized offer with the expanded CNC offering and we consume a standardized offer at sheet metal with criterion direct mature and a criterion fashion ought the market. That's what -- that's divide of why Proto Labs can scale the fashion we scale and service our customers with the level of reliability that we do, is standardizing non-standard trade and that's a change. at condition of Europe, Europe is executing -- European team is focused above executing above our go-to-market model, with an fashion of really identifying targeted customers and strategically engaging with those customers at some various levels. so there's good things event there. The teams consume been focused above the persist year and revised some of the growth rates that we consume above 3D printing. though you know, we added a amount of services at 3D printing at the second half of 2018. We are now beginning ought growl on some of the benefits of those ads though we advance into 2019. so yes, I consent there's good well growth and a good initiate of the year at Europe.

Andrew DeGasperi -- Berenberg leading Markets -- Analyst

Right and one persist question. at condition of timing of this effort ought turnaround Rapid, conduct you study this is cabin a 2019 accident that you can at least acquire ought even versus persist year?

Victoria M. Holt -- President and leading Executive Officer

Oh, yes. I study we will be -- though you confront at the second half of the year, I study we'll be starting ought growl on some growth versus foregoing year, especially by the fourth region definitely. It's improving at the second quarter. It's neutral at this point, I study it can be slightly negative.

Andrew DeGasperi -- Berenberg leading Markets -- Analyst

Got it. Thank you.

Operator

Thank you. Our next question comes from the row of Troy Jensen with Piper Jaffray. amuse advance with your question.

Troy Jensen -- Piper Jaffray -- Analyst

Hi, good morning. Thanks though taking my questions.

Victoria M. Holt -- President and leading Executive Officer

Good morning, Troy.

Troy Jensen -- Piper Jaffray -- Analyst

Hey Vicki. perhaps I will initiate with you Vicki. I used to alike ought concentrate neutral friendly of above the organic business. I study I heard you talk maybe, you know, 8% ought 10% organic growth though CNC and injection molding, and perhaps it was mean double-digits with continual currency, besides can you neutral report nearly -- conduct you study that divide of the commerce is hitting plans? What conduct you study alike a sustainable growth evaluate is? Is it high-single digits or is it friendly of mid-teens though the friendly of the core?

Victoria M. Holt -- President and leading Executive Officer

Yes. I study what we said is, above low-to-mid teens though the center is what we study is sustainable above the expectation term. You're going ought growl on fluctuations. I was really actually pleased with some of the growth that we saw at our legacy business. Yet, CNC growing the legacy divide