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Proto Labs Inc.'s Q2 Earnings Beat the Street

By Steve Heller – Jul 23, 2015 at 11:45AM

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Proto Labs continued to experience an increase in the number of product developers it served, and revenue growth out of its European region remained healthy, but the company's gross margins compressed further.

Make that 12 quarters in a row -- three years -- since Proto Labs (PRLB 1.32%) hasn't reported record revenue along with its earnings.

In the second quarter, reported this morning, the quick-turn manufacturer generated $64 million in revenue, an increase of 21% year over year, translating to $0.44 per share in earnings, or $0.50 per share on an adjusted basis. These results compare favorably to Wall Street expectations calling for Proto Labs to generate $62.6 million in revenue and earn $0.48 per share, after adjustments.

Digging into the details, Proto Labs continued to experience an increase in the number of product developers it served, and revenue growth out of its European region remained healthy, but the company's gross margins compressed further.

Product developers served
Arguably, one of the most important metrics to judge Proto Labs' quarterly results by is the number of product developers and engineers it serves. Ideally, investors want to see this figure growing because it suggests that Proto Labs' rapid manufacturing services are becoming more respected and well known across the industry. The other benefit of a growing product developer base is that it'll likely lead to greater revenue-generating opportunities for the company down the road.

During the second quarter, Proto Labs served a record 11,822 product developers, representing an increase of 28% year over year and a 7% increase from the first quarter. Based on $64 million in revenue, the average product developer spent a hair over $5,400 during the quarter, an increase of about $100 per product developer from the first quarter.

The international picture
Proto Labs grew its international revenues by nearly 14% year over year in the second quarter, and accounted for about 23% of the company's total quarterly revenue.

In Europe, revenue increased by 12% year over year to $10.1 million. Had currencies remained constant, Europe would've experienced revenue growth of a blistering 33.5% compared to the year ago quarter.

Japan experienced similar revenue trends to Europe, increasing by 11.6% year over year to $1.6 million after factoring currency headwinds. On a constant currency basis, Japan's second-quarter revenue increased by 33% from the year prior.

Compressing margins
Proto Labs' second-quarter gross-profit margin declined by 310 basis points year over year to 58.7%, and declined by 150 basis points sequentially.

Compared to a year ago, the decline was caused by a 90 basis point impact from its recent Fineline 3D printing acquisition, which carries lower margins than the rest of its business, and an 80 basis point impact from currency headwinds. The remaining 140 basis points were driven by a combination of increased costs associated with adding manufacturing capacity and shift to lower margin manufacturing services from customers.

Now what
Proto Labs CEO Vicki Holt attributed the revenue growth it experienced across all of its businesses and geographies to focusing on strengthening leadership and driving more focused marketing and sales efforts.

Looking ahead, Holt said that the company will "continue to focus on our priorities -- to enhance our targeted sales and marketing efforts worldwide, expand the envelope of manufacturing services, and continually improve customer service." Having ended the quarter with $142 million in cash and zero debt, it appears that Proto Labs has the resources to accomplish its goals.

Steve Heller owns shares of Proto Labs. The Motley Fool recommends Proto Labs. The Motley Fool owns shares of Proto Labs. 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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