The second quarter marked the twelfth consecutive quarter Proto Labs (PRLB -0.35%) reported record revenue, which grew by 21% year over year to $64 million, translating to $0.44 per share in earnings on a GAAP basis.
The big-picture takeaway from the results was that Proto Labs served a record number of product developers, its international business experienced strong growth in spite of a sluggish Europe and Asia, and its Fineline 3D printing service is growing revenue like gangbusters -- up 86% year over year -- thanks to effective cross-selling between its suite of rapid manufacturing services.
Beyond the headlines, Proto Labs' earnings conference call provided additional insights about the underlying health of the business. In total, there were five key takeaways from management.
1. Expanding the envelope
One of Proto Labs' core growth strategies is to expand the number of manufacturing services it offers worldwide, which in turn increases the number of potential product developers it can serve. In the second quarter, all three of Proto Labs' services -- Firstcut CNC machining, Protomold injection molding, and Fineline 3D printing -- were expanded.
On the call, Holt shared the highlights:
Within Firstcut CNC machining service, we launched lathe-turn parts in North America in the first quarter and in Europe in the second quarter. We are on track to launch lathe-turn parts in Japan by the end of Q3. We've also added brass as a material now available in the lathe process...
...we are on track to launch additive manufacturing in Europe during the third quarter beginning with our stereolithography process. We anticipate rolling out selective laser sintering and direct metal laser sintering processes in Europe in 2016. We expect to launch additive manufacturing in Japan in 2016 as well...
..within the Protomold injection molding service, we've expanded our capability and can now manufacture significantly larger parts in liquid silicon rubber. And finally, we've moved magnesium injection molding also referred to as thixomolding molding out of our Proto works R&D into our Americas Protomold operation as a readily available service.
2. Update on Europe
In Europe, Proto Labs' second-quarter revenue increased by 12% year over year to $10.1 million. Had currencies remained constant, the region's revenue would've increased by an impressive 33.5% compared to the year prior.
According to John Tumelty, vice president and general manager of Proto Labs Europe, several factors played into the company's strength in Europe. The most notable was the sales and leadership initiatives Proto Labs initiated in the fourth quarter of last year:
Our revenue strength in the quarter was driven by the actions initiated in Q4 2014 and continued throughout this year to strengthen our leadership in marketing and sales and augment our sales staff. We have added 21 marketing, sales, and support staff since the end of Q3 2014 for a total of 66 customer-facing professionals in Europe. Our enhanced and regionally focused marketing team has made progress in improving our messaging to European customers.
The other factors included the introduction of lathe-turned parts, 3D printing, and software enhancements, which are expected to drive continued growth out of the region for the remainder of the year.
3. Cross-selling opportunities abound
When Proto Labs acquired Fineline Prototyping, a 3D printing as a service company, last year, it was delighted that less than 2% of Fineline customers were existing Proto Labs customers. This meant that there would be tremendous cross-selling opportunities for Proto Labs to sell its 3D printing customers rapid manufacturing services, and sell its manufacturing customers earlier stage 3D printing prototyping services.
Aside from measuring the number of unique product developers Proto Labs serves in a given quarter, it's difficult to measure the impact of cross-selling on Proto Labs' business. During the call, Holt offered up an anecdotal account of how its early on cross-selling efforts have been faring:
So we feel really good about the cross-selling. It's happening every day. Anecdotally, every single day we are hearing more and more opportunities to do that cross-selling and we are developing the tactics to do that.
4. Improving Fineline margins
In the second quarter, Proto Labs' gross margin declined by 310 basis points year over year to 58.7%, and declined by 150 basis points sequentially. In the earnings release, Fineline was cited for 90 basis points of the annual decline, as 3D printing tends to carry a lower margin than Proto Labs' other services.
It came to light during the call that there could be an opportunity for Fineline's margins to improve, but only if it doesn't dampen demand. CFO John Way weighed in:
We are continuing to analyze and making sure we are very careful with our approaches so we don't dampen demand related to [Fineline]. So, I think, we will improve those margins, not certain we will get them all the way to all the -- to where the legacy [existing services] margins were, but we are confident we will improve them over time and we will start to see that in 2016.
5. Keeping its promise
Proto Labs is working to establish itself as the world's fastest manufacturer of reliable parts for low-to-mid-volume manufacturing runs. To ensure it has the necessary manufacturing capacity to meet this objective, Proto Labs must invest ahead of expected growth.
In the first half of 2015, Proto Labs has spent approximately $15.7 million on property and equipment, and expects to spend a total of $40 million this year on capital expenditures to support its future growth prospects.
When responding to an analyst's question about the company's slight reduction in its operating margin target, Holt explained that Proto Labs has a brand promise to keep first:
We've had to make a lot of investment in this quarter with capacity that we needed to put in place to make sure that our brand promise remains where it needs to be and that is we are a reliable supplier of on-demand parts with very short lead time. And so, I think, [this is the] right thing for us to be doing to make sure that we continue the [revenue] growth rate we've got and I do believe there is levers that we can pull to move us back toward that 29% [operating margin range in the future].
All about the customer
At the end of the day, Proto Labs' entire business is built on providing a great customer experience, which Holt recognizes as "a cornerstone of the company." If Proto Labs fails to deliver on this front, its future prospects would likely weaken.
Fortunately, all signs appear to suggest that Proto Labs continues to remain uniquely positioned to capitalize on the rise of low-cost rapid manufacturing in a way that keeps the customer experience and the company's long-term success in balance.
