Proto Labs (PRLB) Q4 2021 Earnings Call Transcript

Proto Labs (PRLB -0.35%)
Q4 2021 Earnings Call
Feb 11, 2022, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings. Welcome to Proto Labs fourth quarter 2021 earnings call. [Operator instructions] Please note this conference is being recorded. At this time, I'll turn the conference over to Jason Frankman, vice president and corporate controller.

Jason, you may now begin.

Jason Frankman -- Vice President and Corporate Controller

Thank you, Rob, and welcome everyone to Proto Labs fourth quarter and full year 2021 earnings conference call. I'm joined today by Rob Bodor, Proto Labs president and chief executive officer; and Dan Schumacher, interim 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, 2021. 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 non-GAAP to GAAP results. Now I'd like to turn the call over to Rob Bodor. Rob.

Rob Bodor -- President and Chief Executive Officer

Thanks, Jason, and good morning, everyone. During 2021, like many companies, Proto Labs faced our fair share of disruptions, external and internal. Throughout the year, we overcame these disruptions and continued to invest in strategic areas that drive further and future profitable growth, including our employees, hubs, Protolabs 2.0, and new customer offerings. Despite the challenging operating environment, and external shocks over the past two years, our business fundamentals and market opportunity remain very strong.

As we enter 2022, Proto Labs is a profitable, growing, technology-enabled digital manufacturer with strong cash flow. The combination of Proto Labs, best in class rapid manufacturing services, and hubs outsourced manufacturing partner network is truly a unique model in this market, a market that is growing rapidly with the continued digitalization of manufacturing. The external disruptions to our business in 2021 are well known. The global pandemic and new variants continue to add uncertainty and complexity to all businesses.

Supply chains have been massively disrupted due to the labor and material shortages. Brexit added additional logistics and import-export complications for companies that operate in the region, particularly Proto Labs, given the quick-turn nature of our manufacturing services. And last but certainly not least, the United States recently experienced its fastest rate inflation in four decades. However, despite the challenging operating environment, 2021 was one of the most transformative years in our company's 22 year history.

We executed on our top priorities to create an industry-leading digital manufacturing platform to expand our portfolio of customer offerings, and to invest in our employees. The year was highlighted by two game-changing transformations for us. First, we completed the largest acquisition in our history and joined forces with Hubs to expand our offerings, and serve more customer used cases. We are very excited about providing an integrated offer to customers through one seamless digital calling, and ordering platform.

Fulfilling orders through our internal manufacturing facilities or our network of premium manufacturing partners. I want to reiterate that this hybrid model combining Proto Labs leading in-house manufacturing capabilities, and an outsource network is unique in our market. It allows us not only to offer our customers virtually any type of part size or geometry, quantity, and lead times, but also to effectively manage through economic cycles with supply shortages or excess capacity. Our second game-changer was the launch of Protolabs 2.0, a revamped customer-facing digital coaching platform and upgraded internal operating systems.

The launch of Protolabs 2.0 in the Americas, and Europe was made possible by the efforts of hundreds of Protolabs employees. This is an incredible example of what the power of team can do. Customer response has been very positive and we continue to gain traction. In order to transform our company in 2021, and set ourselves up for success in 2022 and beyond.

We adapted and overcame challenges while continuing to delight our customers, and delivering record revenue. We also launched two major new offerings to our customers; the first flexible lead times in our CNC machining; And the second, an enhanced digital quality offering and injection moulding. During the year, we received significant external recognition of our industry leadership and best-in-class digital manufacturing capabilities. First, the World Economic Forum announced our induction into the global lighthouse network, recognizing our leadership in implementing Industry 4.0 technologies.

We joined this network as one of only 10 lighthouse manufacturing facilities in the United States, and we share the honor with Fortune 500 companies like BMW, HP, Siemens, Micron, and Foxconn. Proto Labs was also recognized with awards in the software, and digital manufacturing categories of design world's leadership and engineering awards. And most recently, were recognized as one of five finalists for Plastics News Annual Processor of the year award for 2021. As a customer-centric organization.

External recognition is not the primary goal. However, it is very rewarding to have these widely respected global organizations validate our innovation, transformation, and market leadership. I am energized by what this company can do, and the number one reason for this is our deep and talented team of employees. I want to recognize and thank Proto labs and Hubs employees for their tireless efforts in 2021.

Our team is our most important asset, which is why we continue to invest in our employees and their health and safety. We're furthering our diversity, equity, and inclusion efforts, prioritizing our safety programs, supporting new work environments, and providing development opportunities with personal and professional educational offerings. The global contract manufacturing market is a multitrillion-dollar industry, and we are still in the early days of digitalization. Which is bringing manufacturing online and driving growth for all players in the space.

Within the $100 billion digital manufacturing industry we've identified, we are the largest, the most technologically advanced, and we have strong cash flows and profitability. In addition, Proto Labs is the only manufacturer with a truly hybrid fulfillment capability that combines the fastest in-house capabilities in the world with a global curated network of manufacturing partners. Our hybrid model is built to withstand economic cycles and continue to grow profitably. Our internal rapid manufacturing outperforms the market during periods of high demand for innovation and growth, while the Hub's model with longer lead times and lower prices performs well during periods of dampened innovation or supply chain disruptions.

As we begin to unite the two offers in a single e-commerce experience in 2022, we will become a one-stop shop, enabling us to serve all customer needs and captured the large opportunity ahead of us. In summary, 2021 was a transformational year for Proto Labs, and set the foundation for profitable growth for years to come. With that, I'll turn the call over to Dan Schumacher to take you through our financial results in detail. Dan.

Dan Schumacher -- Interim Chief Financial Officer

Thanks, Rob. Good morning, everyone. I'll take you through three areas of financial details. I will start with the fourth quarter, then go to full year highlights, and I will conclude with our outlook for the first quarter of 2022.

Throughout my remarks, I will reference slides from our quarterly deck. Our fourth quarter financial results begin on Page 7 of the presentation. Fourth quarter revenue of $123.6 million was slightly above our guidance range and represents a 17.5% year-over-year increase, or 8.6% organic growth in constant currencies. Revenue came in ahead of our expectations due in part to strong production orders and execution on delivering these orders at the end of the quarter.

Hubs generated $9.9 million of revenue in the fourth quarter, representing growth of approximately 40% year-over-year. Changes in foreign currency at a $600,000 unfavorable revenue impact in the quarter. During the fourth quarter, supply chain constraints and electronics shortages impacted demand for a quick-turn Proto Labs services as our customers endured near-record lead times for production materials and components, they are willing to wait longer for custom metal and plastic parts. We offer the fastest lead times in the industry, but there are occasions when customers value price over speed.

Meanwhile, the broader range of lead times and pricing option offered by Hubs really resonates with customers in today's climates, as evidenced by Hubs 40% growth. As Rob highlighted a few minutes ago, this is how our hybrid model is more resilient to economic cycles than many of our peers. In Europe, fourth quarter revenue of $22.1 million amounted to growth of 20.4% year-over-year Excluding hubs revenue in Europe, and the impact of foreign currencies, our Europe revenue declined 4% year over year in the fourth quarter, reflecting continued supply chain challenges in the overall European manufacturing environment, especially heightened in automotive. We serve 23,376 unique product developers in the fourth quarter of 28.7% year-over-year.

Strong growth in product developers was driven primarily by the January 2021 acquisition of hubs. While product developer growth in our legacy business was commensurate with our revenue growth. Turning to Slide 15, in our detailed income statement. Our non-GAAP gross margin in the quarter was 45.6% within our guidance range, and up slightly sequentially from 44.9%.

Lower sequential contractor over time in recruiting costs were offset by labor and efficiencies around the holidays. Hubs gross margin in the fourth quarter improved 30 basis points sequentially to 17.5%. For the quarter, Hubs represented a 240 basis point drag on our overall gross margin due to the lower margin nature of the outsourced manufacturing model. Our total non-GAAP operating expenses were $42.9 million in the fourth quarter, down slightly sequentially from the third quarter and slightly below our guidance range of $43 million to $44 million.

Fourth quarter non-GAAP operating expenses increased $5.5 million from the fourth quarter of 2020. Most of this increase was driven by bringing on the operations of Hubs, which added $3.8 million of operating expenses in the most recent quarter. Moving to taxes, our non-GAAP effective tax rate in the fourth quarter was 16%, compared to 25.3% in the prior quarter, and 18.2% in the fourth quarter of 2020. Our non-GAAP rate was lower this quarter primarily to the release of uncertain tax position reserves as a statute of limitations expired on them during the fourth quarter.

The net result was non-GAAP diluted earnings per share in the quarter of $0.41, representing a sequential increase of $0.06 per share, and $0.09 per share decrease from the prior year. The year-over-year decrease in earnings per share consisted of anticipated operating losses that Hubs lower gross margins, and our legacy business, partially offset by higher revenue and the absence of Protolabs 2.0 launch expenses incurred in the fourth quarter of 2020. Our cash flow performance is summarized on Slide 17. We generated $23 million in cash from operations in the fourth quarter, up from $11.5 million in the third quarter.

We also repurchased shares worth $10.2 million under our stock repurchase program in the quarter to offset dilution. I will now move to our full year 2021 results, which begin on Page 18. As Rob mentioned, we generated record annual revenue recognizing $488 million or growth of 12.4% over 2020. Organic growth in constant currencies with 4%.

Hubs contributed $33.3 million in revenue between the January 21st acquisition date and the end of the year. In Europe. our 2021 revenue declined 5% in constant currencies and excluding Hubs, reflecting lower demand for quick-turn part due to the supply chain issues as well as difficulties caused by Brexit. The added logistics complexity and increased shipping times caused by Brexit negatively impacted our lead times and on-time delivery rates from our UK-based injection moulding and CNC machine facilities.

These lead times are now back to pre-Brexit levels, and we are excited about the growth potential in Europe in 2021. We served 55,330 unique product developers in 2021, up 26.3% year-over-year. Now onto our detailed full year income statement on Slide 24. Our non-GAAP gross margin in 2021 was 46.4%, compared to 51% in 2020.

Hubs gross margin in 2021 was 15.2%, representing a 220 basis point negative impact to our overall gross margin. We will continue to drive sequential improvements in gross margin at Hubs. In 2021, total non-GAAP operating expenses were $171.6 million, up $27.9 million from 2020. Hubs 2021 non-GAAP operating expenses represented $13.2 million of this year-over-year increase.

Moving to taxes, our 2021 non-GAAP effective tax rate was 22.7%, compared to 20.2% in 2020. Non-GAAP diluted earnings per share in 2021 was $1.55, compared to $2.36 in 2020. The $0.82 year-over-year change are non-GAAP earnings per share was driven by several headwinds throughout the year combined with investments we made in future growth opportunities, specifically, Hubs represented a $0.32 per share anticipated decrease year-over-year, as we continue to incur operating losses while we scale that business. In our legacy operations, wage and material cost inflation, as well as inefficiencies with the launch of Protolabs 2.0 partially offset by revenue growth, resulted in a $0.21 reduction in our earnings per share.

The depreciation of the Protolabs 2.0 software assets represented a $0.015 per share decrease. One time Protolabs 2.0 cost to support the Americas launch and hyper care phase resulted in a $0.06 per share decrease. Continued investment in R&D resources that expand our customer offerings represented the $0.03 per share decrease. Lastly, a year-over-year increase in our effective tax rate resulted in a $0.05 per share unfavorable impact.

Transitioning to the cash flow statement and balance sheet on Slide 25, we generated $55.2 million in cash from operations in 2021. We repurchased $23.3 million worth of shares under our stock repurchase program during 2021, primarily to offset the impact of dilution, and currently have $61.9 million remaining under our existing stock repurchase plan, which goes through 2023. On December 31st, our cash and investments balance was $91.8 million, and our balance sheet remained strong and debt-free. Finally, I'd like to detail our outlook for the first quarter of 2022, as outlined on Slide 27.

We expect to generate revenue between $116 million and $126 million in the first quarter, representing year-over-year growth of up to 8%. We saw a slow start to the first quarter of our legacy businesses as the omicron variant slowed demand in manufacturing reflected by U.S. manufacturing activity falling to a 14-month low in January. However, as the quarter has progressed on the omicron wave began to recede, our orders have began to accelerate, creating optimism for the back half of the quarter and the rest of 2022.

We expect foreign currency to have an approximate $500,000 unfavorable impact on revenue compared to the first quarter of 2021, assuming foreign currency rates remain the same at current levels. Turning to gross margin, we expect first quarter non-GAAP gross margin of approximately 44% plus or minus 100 basis points. What we're beginning to see the positive impact of pricing changes in the quarter, the soft start to the year created low margins in January that will not be offset by the end of the quarter. In addition, there was $1 million of favorable gross profit items in the fourth quarter that we are not projecting to repeat in the first quarter.

We expect total non-GAAP operating expenses to be between $42 million and $43 million in the first quarter, consistent with recent quarters. We estimate our first quarter non-GAAP effective tax rate to be approximately 25%, compared to 16% in the fourth quarter, and 22.7% in the first quarter of 2021. Now, I'd like to turn the call back over to Rob as he closes with the introduction of our 2022 strategic priorities. Rob.

Rob Bodor -- President and Chief Executive Officer

Thank you, Dan. In 2022, we are well-positioned for success doing the work that we've done in the past few years. We are taking several measures to address the near-term challenges facing our business, including thoughtful pricing changes to offset cost inflation, improving internal operating efficiency, and investing further in automation. We have pricing actions in place in every service of every region.

Some actions were initiated in late 2021, and others went into effect in early 2022. It will take some time to realize the full benefits of these changes. Within the Protolabs 2.0 environment, our internal operating efficiency continues to improve due to the efforts of our software teams, and our employees as they adapt to the updated processes. Additionally, our 2022 plan includes continued investment in productivity through workflow automation and robotics to enable us to scale our revenues faster than the need for additional labor.

All three of these measures will continue to be areas of emphasis for us as part of our 2022 strategic priorities. At our Investor day in May 2021, We outlined our three-phase plan to double revenue by 2026; first, to establish the platform; second, to accelerate our growth; and third to expand profitability. We are on track. We made great progress on positioning the company to achieve our plan during 2021 by developing, and strengthening our platform with Hubs and the Protolabs 2.0 systems, and by accelerating our growth throughout the year, culminating in strong double-digit growth in the fourth quarter.

For 2022, we have four strategic priorities to keep us moving forward; first, is accelerating our revenue growth. Resources will be focused on expanding the capabilities of our services, integrating Hubs offering, improving pricing, and continue to expand our production use cases to drive revenue growth. We will expand our portfolio of services both through our legacy operations and through an integrated offer with Hubs starting with CNC machining. Pricing will improve both at Proto Labs and at Hubs through continuous testing of our algorithms and adjustments to pricing based on various market factors.

New product launches, and improved pricing will enable the final component of our revenue growth strategy, expansion of our production offerings. We originally built this business to offer prototypes and remain the best in the world at prototyping as a result of our digital models ability to deliver custom parts and little as one day with industry-leading, reliability, and quality. We now stand poised to accelerate the transformation of on demand production in 2022. Through the combination of our expanded pricing and lead time options, expanded capabilities including the integration of Hubs offerings, as well as our new digital quality offerings that provide part quality and process assurance at all volumes.

I am confident these actions will drive double-digit revenue growth by the end of 2022; Our second strategy is to delight our customers. We've established an enhanced cross-functional customer experience team to drive continuous improvements to our customer offer during 2022. Our customers value, reliability, and speed, and we offer the fastest lead times and most reliable on-time delivery rates in the custom parts manufacturing industry. Although these metrics were challenged at times in the past two years to the operating environment and internal disruptions caused by the launch of Protolabs 2.0, we are back to our industry-leading standards; Our third strategy for 2022, is to be the digital leader at scale through continuous improvement, as it relates to Proto Labs as internal manufacturing facilities, we will continue to prioritize process improvements and automation, including introducing robotics and workflow automation in our factories, and back-office processes.

This strategy will drive improved operating margins in 2022; Our fourth strategy for the year is to continue to be a great place to work in these challenging times. We will continue to develop and empower employees, as well as attract and retain top talent to continue to drive forward on our five-year plan. We will expand our role-specific training and resources to support our flexible workforce and further our efforts in areas such as diversity, equity, and inclusion. By investing in these areas that matter to all of our employees, we will maintain a great place to work and a winning culture.

We also believe that being part of a great company is being a great corporate steward. As a corporation, Proto Labs has many stakeholders, and we're focused on ESG initiatives that are impactful to them. Our board of directors and leadership teams are aligned on our top priorities within ESG. In the past few months, our organization has reviewed our policies, programs, and initiatives identifying opportunities for expansion.

We plan to address those areas and ultimately improve our impact on the environment, and the communities in which we operate. As we enter 2022, I'm confident that we have the right strategic priorities in place. The transformative moves we made in 2021 set us up for success in 2022 and beyond. Our scale, speed, brand, and manufacturing experience position as optimally to grow profitably.

Proto Labs is resilient, and our employees are talented, driven, and adaptable. We pioneered the digital manufacturing market in 1999. We are the fastest digital manufacturer in the world, and we're just getting started with Hubs, we're together, we're creating the world's broadest manufacturing offer. As we enter 2022, after a challenging year of transformation, we are positioned very well and I am excited to continue our journey toward doubling our revenue by 2026.

This concludes our prepared remarks. Dan and I will not glad take your questions. Rob, can you open the line for Q&A?

Questions & Answers:

Operator

Yes, thank you. [Operator instructions] Our first question is from the line of Brian Drab with William Blair. Please proceed with your questions.

Brian Drab -- William Blair -- Analyst

Morning. Thanks for taking my questions. First, just wanted to ask about gross margin. Thanks for the guidance through the first quarter.

Is there any sense you can give us for how gross margin might progress as we move through the quarters in '22?

Dan Schumacher -- Interim Chief Financial Officer

Yeah. So, Brian, we would expect it to improve sequentially through the year, and that we would have improved gross margin percent year-over-year, and volume is increasing quarter by quarter.

Brian Drab -- William Blair -- Analyst

Is there any aspirational range or something by the end of the year? I know, Rob just mentioned for revenue hoping to reach a double-digit revenue growth rate by the end of the year. But then, any idea where we should exit maybe [Inaudible] '22?

Dan Schumacher -- Interim Chief Financial Officer

Yeah. So we're not really giving a guide, but I would just say that we expect to be our gross margin percent to be above what it is non-GAAP gross margin percent to be above what it was in 2021.

Brian Drab -- William Blair -- Analyst

OK. And then I wanted to make sure I understood the comment about double-digit revenue growth by the end of 2022. Does that imply, I don't want to put words in your mouth obviously, but does that imply single-digit revenue growth until we get to the end of 2022? Is that the goal to get the company back to double-digit by then? 

Dan Schumacher -- Interim Chief Financial Officer

Yeah. So what we're saying is, look, we ended Q4, right? With a strong trajectory, the organic business was 9% and that Hubs was growing 40%. We saw a slowdown in orders at the end of December, and the first week or so January, given what happened with omicron. But since then, orders have been on a good trajectory.

And so we're feeling confident that we'll be able to get to that double-digit growth later in the year. 

Brian Drab -- William Blair -- Analyst

OK. Thanks. And then the other topic I wanted to touch on was, you mentioned the digital and seamless ordering platform. The user experience now on the website is still get directed to a few different areas, right? You get there's Proto Labs, legacy, and then you can use My rapid, and then Hubs still seems very separate.

I'm just wondering if you could explain where we are today, and where we're headed, and the timing of when all of those are? Really, I feel like it could be more seamless and sooner if you just comment on that. 

Dan Schumacher -- Interim Chief Financial Officer

Yeah. We agree that's exactly what we're working for. Hubs right now is separate. You're absolutely right, Hubs is separate right now.

And we learned from the integration with rapid how critical a really seamless customer experience is, and that's what we're building. guess.

Brian Drab -- William Blair -- Analyst

And then I'm just wondering, too, is Hubs in the state of things today? Does Hubs benefit really from being part of Proto Labs? Or you just running them. How do they benefit today since you don't go to the Pro Labs website and then find Hubs very easily? Or are they on a stand-alone basis and going for their earnout? And then, sort of an improving stage. So how are you thinking about that?

Dan Schumacher -- Interim Chief Financial Officer

So today, Hubs has been operating, largely independently. We've been making continued investments in Hubs and we've seen good growth from them. We also continue to invest in innovations within Hubs. You've seen pricing improvements, right? which have driven gross margin.

Improvements there and there have been investments in the manufacturing partner platform to improve the experience for RMPs and make sure we're continually optimizing the opportunities that we send to the MPs that are really tailored to them. That's the work that we've been doing. And alongside that, working on the front-end integration to make that seamless.

Brian Drab -- William Blair -- Analyst

OK. Great. Good luck with everything. I'll talk to you more later this morning.

Thank you. 

Dan Schumacher -- Interim Chief Financial Officer

Thanks, Brian.

Operator

The next question comes from the line of Greg Palm with Craig-Hallum. Please proceed with your questions.

Greg Palm -- Craig-Hallum Capital Group -- Analyst

Yeah. Good morning, and thanks for taking the questions here. I guess when you when you look back at the quarter, was there anything that surprised you? Revenue came in nicely above expectations to just curious whether that was non-market strength? Or whether it was just better execution, overall. 

Dan Schumacher -- Interim Chief Financial Officer

Yeah. So we had really good execution, especially in our injection moulding production area. We in that business, we got the lead times back to where they were. We entered the quarter with quite a big backlog in that business.

And our lead times probably were not where we wanted them to be. And so, I've got to give credit to our production group with an injection moulding for really performing well within the quarter. And that was one place in which we ended up having higher revenue, getting back to those lean times that put us over the guide.

Greg Palm -- Craig-Hallum Capital Group -- Analyst

OK. Makes sense. And specifically, on the Q1 guide, can you give us any more color specifically for what you're seeing in January? It's been frankly, a long time I think since you've seen any sequential decline in revenue from Q4 to Q1. And I think if my math is right, it basically implies, flattish organic growth on a year-over-year basis.

Dan Schumacher -- Interim Chief Financial Officer

Yeah. So, Greg, we were a pretty quick-turn business, and we're projecting things like we always have. So we're we're taking a look at how the orders came in through January. And then based on seasonality trends that we've seen based on uploading activity, we're projecting out what happened in the quarter.

We talked a bit about this, but  I know us as a company and our customers, as omicron came through, there was a much higher rate of infection that occurred, and there were a lot more people that were out of the office. And so as we came out of the holidays into January, our thinking is that, that kind of delayed starting everything up again in terms of when we come out of the holidays, when the orders start picking up. So that was a week or two later for us than normal. And we believe that, that some of that the omicron variant had something to do with that.

I hope that helps. 

Greg Palm -- Craig-Hallum Capital Group -- Analyst

Well, I guess what I'm trying to get a sense for, does the guidance assume that it's maybe a slower ramp through the quarter than what is normal? Or are you are you still expecting a pretty steady ramp? Because I think, March is typically the most important month, anyways. So I'm just trying to get a sense for what the guidance assumes for maybe March, specifically.

Dan Schumacher -- Interim Chief Financial Officer

Yeah. I think it assumes that we get back up to where we would project or assume that we would be. So probably a steeper ramp up February and March because of the slow start in January. It's just the ramp is happening a little bit later, and we can't make up for the revenue shortfall that we're seeing in January. 

Greg Palm -- Craig-Hallum Capital Group -- Analyst

Yep. OK. Got it. And then last one, just a clarification.

I think you mentioned something about a one million dollar positive impact to gross margin in Q4. I didn't catch what that was? 

Dan Schumacher -- Interim Chief Financial Officer

Yeah. It was various items that had occurred in the fourth quarter and we're going to have margin fluctuations quarter-to-quarter. And I'm just not projecting to see those coming in the first quarter. Thank you.

Our next

Greg Palm -- Craig-Hallum Capital Group -- Analyst

OK. All right. Thanks so much. Good luck.

Operator

Our next question comes from the line of Jim Ricchiuti with Needham Company. Please proceed with your questions. 

Jim Ricchiuti -- Needham and Company -- Analyst

All right. Thank you. Good morning. I'm just wondering as you look at the activity that you're seeing early in the quarter, you cited omicron.

Since it appeared to hit Europe earlier, and that has improved a bit, perhaps quicker than it has in the U.S. Have you seen more of a pickup there that gives you the confidence that gets behind us, and we start seeing that pick up in activity midway to late in Q1 here in the U.S.?

Dan Schumacher -- Interim Chief Financial Officer

So, the trend in Europe is a bit different. And I think one of the things that at least we're we're seeing is on the Hubs side, we're seeing things fairly strong within Europe. On our quick-turn business, the legacy business that's within Europe. We went out and surveyed customers and what they're dealing with is a bottleneck in their supply chain around microchips and electronics.

And as that occurs, they can wait a little bit longer for some custom parts. And they have great alternatives like Hubs, who they can wait a little bit longer for those parts, and get them at a different price point. So we do feel like within Europe, at least with the trending that we're seeing within Europe, that that bottleneck within the supply chain is impacting our quick-turn business, but businesses like Hubs are benefiting from that. But we do feel like that's why this hybrid model is so important to us so that we can offer the quick-turn when the customer needs it, but we can also offer a little bit longer lead times at a different price point.

Jim Ricchiuti -- Needham and Company -- Analyst

Got it. Thanks for that. You alluded to pricing actions which we're hearing from a lot of companies, I'm wondering if you could shed a little bit of more light on that in terms of how we should be thinking about the implementation and the impact of this pricing actions over the next one to two quarters?

Dan Schumacher -- Interim Chief Financial Officer

Sure, Jim.

Rob Bodor -- President and Chief Executive Officer

I can start and Dan, please chime in. So we looked at our pricing across the board right by service, and our objective is really to offset inflation both from supply, materials, and then of course, labor, right? And we have several dimensions that we manage this on, right? There's the base part has a certain price because there's certain costs to make a part at, let's say, quantity one. And then, of course, with volume, that will change because we've got volume price curves. And then, as you have different complexities, you'll also have different prices for that base part.

And then, of course, the lead times. So we looked at all of those and we've made adjustments in pricing and in some of the base parts, in some of the material costs and those components, we've made adjustments to cover those and then the shape of those curves looking at how pricing falls with volume or how pricing changes with lead time. Those were all adjustments that we made across the board in a really thoughtful way to make sure that we're covering the our inflationary costs.

Jim Ricchiuti -- Needham and Company -- Analyst

But in terms of seeing the impact as we go forward, is that going to be this effect to see the full benefit in Q2?

Rob Bodor -- President and Chief Executive Officer

We're going to see continued improvement throughout the quarters as it relates to that. I said this in my prepared remarks. We are seeing an improvement in basically revenue per unit, pricing improvement in the first quarter. It's just January was very soft from us from a revenue perspective.

Otherwise, you would see that improvement in the Q1 margin as well. But it will be a driver to show sequential improvement in our gross margin percent throughout 2022. 

Jim Ricchiuti -- Needham and Company -- Analyst

One final question, if I may just on hubs. Rob, if I heard you correctly, I think you said you anticipate improvement in Hubs gross margins in the current quarter and I assume going forward. I wondered if you could talk to that, and you had in recent quarters just about some of the branding challenges around Hubs in Europe is that are you guys past that [Inaudible]?

Rob Bodor -- President and Chief Executive Officer

Yeah. We're past that and the point about gross margin is that, we're continuing to invest in pricing optimization, and we've seen gross margins improve in Hubs in part because of that work. And over time, we expect to continue to see gross margin improvement.

Dan Schumacher -- Interim Chief Financial Officer

One thing just Jim to clarify quarter-over-quarter gross margins are slightly lower for there's some seasonality with Hubs margins. They're slightly lower in the first quarter, but basically due to Chinese New Year. But, yeah, for sure on the full year, we expect to see an improvement in the Hubs gross margin. 

Jim Ricchiuti -- Needham and Company -- Analyst

Got it. Thank you.

Rob Bodor -- President and Chief Executive Officer

Thank you, Jim.

Operator

The next question comes from the line of Jared Maymon with Berenberg Capital. Please proceed with your questions. 

Jared Maymon -- Berenberg Capital Markets -- Analyst

Hey, good morning, guys. So first question for me. So it sounds like the Hubs business and the base business in Europe moved from a little bit of a sequential stagnation in Q2, Q3, back to growth from in Q3 to Q4. So I guess it sounds like what you're saying is maybe some of these automotive customers in Europe are willing to accept the longer lead times because of some of these semi backups? And that's providing a little bit of a boost to the Hubs business, is that correct? And what you're saying, if that's correct, is that kind of a temporary tailwind? Or do you think that's kind of sustainable in this return to kind of strong sequential growth in Europe? It could stick around '22?

Dan Schumacher -- Interim Chief Financial Officer

Yeah. So we are seeing that supply chain disruptions are happening, and in this kind of economic cycle where, therefore, there's less need for the quick-turn in that part of the business world. By contrast, we're seeing our longer lead time business pick up nicely. And as evidenced by Hubs continue to grow, we did 40% last quarter and we had strong double-digit, year-over-year growth in Hubs throughout the year last year. 

Jared Maymon -- Berenberg Capital Markets -- Analyst

OK. And then another question on Hubs. I know you guys done this for about a year now. So I'm just curious if do you have any information on what percentage of the customers of the Proto Labs or Protolabs 2.0 business are using Hubs at this point? And then is there any difference between the percentage of top 100 or top thousand customers that are using this in comparison to the other 20,000 [Inaudible] customers you guys up quarterly?

Dan Schumacher -- Interim Chief Financial Officer

So the overlapping percentage between the customer bases is still relatively small today, and that's part of the opportunity that we see as we do the integration, and we bring the Hubs capabilities to our Protolabs customer base.

Jared Maymon -- Berenberg Capital Markets -- Analyst

OK. I got it. And then last one for me, and sorry, if you already mentioned this and I missed it, but it seems like there is a slight drop sequentially in G&A of this quarter, and I'm just wondering if that's typical seasonality? Or if there is something else there that is more sustainable?

Dan Schumacher -- Interim Chief Financial Officer

Are you looking from a GAAP or non-GAAP perspective?

Jared Maymon -- Berenberg Capital Markets -- Analyst

I'm looking at GAAP, specifically.

Dan Schumacher -- Interim Chief Financial Officer

Yeah. So there was some change in stock-based compensation quarter-over-quarter that impacted G&A. And we also recognize the benefit of a reduction in the contingent consideration related to the Hubs acquisition that appears in G&A. That was $4.7 million in the quarter. 

Rob Bodor -- President and Chief Executive Officer

Both of those are our non-GAAP items. 

Jared Maymon -- Berenberg Capital Markets -- Analyst

Okay. Got it. Thanks, guys.

Dan Schumacher -- Interim Chief Financial Officer

Thank you. 

Operator

The next question is from the line of Ben Rose with Battle Road research. Please proceed with your questions.

Ben Rose -- Battle Road Research -- Analyst

Yes. Good morning, gentlemen. And some questions on the demand manufacturing service that you offer. I'm wondering in this environment how much of a competitive advantage is it for proto labs having its own facilities, and not having the customers design shopped around to multiple sources? So the question is really, is it an advantage that you have being able to maintain the security and the privacy of your customers product designs? 

Rob Bodor -- President and Chief Executive Officer

Yeah. Ben, we definitely hear that from our customers because oftentimes when they're looking for a production vendor, they want to be able to audit. They want to be able to see the whole trail, they want to understand our security practices. We have customers for whom we have to guarantee understanding of what the what the security is for the building, right? What the entry and exit, controls are, the IP security, and a number of things, right? Those audits can become very, very comprehensive.

And so we definitely do see that as a benefit for our production customers who are looking for that kind of security that we can provide that end-to-end. And our digital thread that runs throughout our production from quote all the way through the plant floor to shipping, and that full traceability that we're able to provide them, that's quite unique. And in fact, we get that comment from auditors all the time that provides them a great deal of comfort, and that's a system that they've really never seen before. 

Ben Rose -- Battle Road Research -- Analyst

OK. And then a question also Rob, with respect to design complexity, I can definitely understand the use cases for the Hubs service where it might be a very large quantity of parts, perhaps not with a great deal of design complexity where the lead time isn't that critical. But with respect to your core services, I can definitely see that, being preferred by customers. Is that the right way to think about part of the distinction between your core services versus Hubs?

Rob Bodor -- President and Chief Executive Officer

Well, so I think Hubs brings two dimensions of additional capability; One, is the higher quantities and you no longer lead times lower pricing. So extend in that context very much our production capabilities, right? Into a broader range of needs for our customers; But the second is added part complexity or specialization, right? Because through the network, we've got these premium manufacturing partners who have specializations and capabilities that might be beyond our core offering. And so can therefore compliment, right? So that might be very tight tolerances or it might be some kind of specialty machining, for example, or certain secondary operations or those kinds of capabilities that we don't currently have in-house. The network can help complement and we can provide to our customers.

Ben Rose -- Battle Road Research -- Analyst

OK. Great. And then finally, I know that there's been some recent initiatives within the company to target some of the growing EV manufacturers, prototyping needs. Has that been a sector that's been contributing to the performance in the last couple of quarters?

Rob Bodor -- President and Chief Executive Officer

What I would say, Ben, is in multiple industries in which innovation is at the forefront, people are using us, and EV and automotive is just one. But we see that in many different industries and spaces that, as they're innovating, they're coming to us because of how fast we are. 

Ben Rose -- Battle Road Research -- Analyst

OK. Thanks very helpful. 

Dan Schumacher -- Interim Chief Financial Officer

Thank you.

Operator

At this time, we've reached the end of the question-and-answer session. I'll now turn the call over to Rob Bodor for closing remarks.

Rob Bodor -- President and Chief Executive Officer

Thank you for joining us on our fourth quarter and full year 2021 conference call. I want to thank the 2,700 Proto Labs and Hubs employees across the world for their continued efforts and enthusiasm as we enter 2022. Lastly, thanks to our customers, and shareholders for their continued support. We look forward to updating you on our performance next quarter.

Have a great day. 

Operator

[Operator signoff]

Duration: 52 minutes

Call participants:

Jason Frankman -- Vice President and Corporate Controller

Rob Bodor -- President and Chief Executive Officer

Dan Schumacher -- Interim Chief Financial Officer

Brian Drab -- William Blair -- Analyst

Greg Palm -- Craig-Hallum Capital Group -- Analyst

Jim Ricchiuti -- Needham and Company -- Analyst

Jared Maymon -- Berenberg Capital Markets -- Analyst

Ben Rose -- Battle Road Research -- Analyst

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