The Most Important Takeaways From Proto Labs Inc.'s Q2 Earnings Call

Adding context to Proto Labs' earnings.

Jul 25, 2014 at 10:54AM

Whatever "weather-related issues" Proto Labs (NYSE:PRLB) experienced this winter became a thing of the past when the quick-turn manufacturing service reported record second-quarter earnings. For the quarter, Proto Labs reported 19% year-over-year growth in the number of unique product developers served, which collectively increased their spending by 7%, on average. After listening to Proto Labs' conference call, it's increasingly clear that the company is well run, focused, and dynamic, with little real competition.

Continued expansion
Proto Labs' business model is simple to understand: it offers real manufactured parts as quickly as possible for product developers, in as little as one day in many cases. The more manufacturing services that Proto Labs can integrate into its ecosystem, the more product developers it can serve, and the greater its market opportunity becomes. In April, Proto Labs introduced liquid silicone rubber, or LSR, and metal injection molding, or MIM, services as part of its Protomold injecting molding service. Thus far, LSR and MIM continue to gain traction and has been exceeding internal growth expectations. Proto Labs' management expects that while revenue from LSR and MIM will be modest in 2014, it's setting the stage for LSR and MIM to represent a more significant percentage of the company's overall revenue.

What's more, Proto Labs has entered a soft launch phase for CNC-turned parts, which can be produced in as little as one day. During the call, CEO Vicki Holt highlighted how CNC-turned parts will significantly improve part complexity, surface finish, manufacturing efficiency, and overall quality, compared to its current CNC milling offering. The biggest difference between CNC milling and CNC turning is that the finished part is stationary during the CNC milling process, whereas the finished part rotates at an extremely high speed during the CNC turning process. Ultimately, the benefits that CNC turning offers should attract new product developers and expand the company's addressable market significantly when the service is launched in 2015.

Improving the customer experience
Proto Labs has found that most product developers' designs need some sort of modification before the part can be manufactured. To address this need, Proto Labs has introduced Proto Labs Proposed Revision, or PPR, which provides a cost-free automated solution for the most common manufacturability issues that customers encounter. Beyond its uniqueness and speed, PPR allows customers to reduce design effort, gain valuable manufacturing insights, save money developing products, and promises to improve customer satisfaction. Because PPR is an automated process, it's highly scalable across Proto Labs' ecosystem and is expected to address up to 85% of manufacturing issues from product designers.

In the next 12 months, Proto Labs has plans to continue investing in automation technology to make the customer experience even more consultative in nature. If successful, it would allow Proto Labs to differentiate itself further from the competition.

An ace in the hole
As Proto Labs began testing out CNC-turned parts for customers, it came to light that customers are willing to pay a premium for quicker turnaround. Because Proto Labs has built a manufacturing service that's uniquely positioned for quick and consistent turnaround in the small to mid-volume manufacturing space, the company likely has a lot of untapped pricing power for customers that are willing to pay a premium for speed. The ability to raise prices and not lose customers could be a huge trump card for Proto Labs, which served an impressive 8,222 unique product developers last quarter.

A potential game-changer
Although CEO Vicki Holt was talking up the prospects of its upcoming CNC turning service during the call, Proto Labs' research and development division has also been working on a potential game-changing manufacturing service that could significantly expand its addressable market. Details are currently sparse, but investors should reasonably expect to learn more about this future service offering in the quarters ahead.

All in all, Proto Labs is continuing to build out the breadth of its manufacturing services and customer experience, which is making life increasingly difficult for the competition to replicate in the small to mid-volume manufacturing space. This laser-focused attitude and positioning is helping Proto Labs consistently deliver compelling earnings results. Perhaps it's time to consider Proto Labs for your portfolio.

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Steve Heller owns shares of Proto Labs. The Motley Fool recommends Proto Labs. The Motley Fool owns shares of Proto Labs. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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