Proto Labs, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with the three months ended March 31, 2016 unless noted. Proto Labs makes custom injection-molded, CNC-machined and 3D-printed parts through an e-commerce-driven manufacturing model. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $80.2 million | $72.6 million | +10.5% |
| Gross profit / gross margin | $45.3 million / 56.5% | $39.7 million / 54.6% | Margin +1.9 percentage points |
| Operating expenses | $27.6 million | $24.5 million | +12.6% |
| Operating income / margin | $17.7 million / 22.1% | $15.1 million / 20.8% | +16.8% income |
| Net income / diluted EPS | $12.2 million / $0.46 | $10.7 million / $0.40 | Net income +14.4% |
| Operating cash flow | $18.8 million | $18.3 million | +$0.5 million |
Revenue grew across all three reported geographies: United States $60.2 million (+10.5%), Europe $17.0 million (+8.8%) and Japan $3.0 million (+21.2%). By product line, Injection Molding rose 11.0%, CNC Machining 16.4% and 3D Printing 10.7%. Other revenue fell $1.2 million, primarily reflecting the company’s decision to exit its non-core resin resale business.
Cash and cash equivalents were $71.9 million at March 31, 2017. Short- and long-term marketable securities totaled $129.4 million at amortized cost, bringing cash and securities to approximately $201.3 million. Current assets were $171.8 million and current liabilities $28.1 million. The balance sheet presents no debt line item; the filing does not provide a separate debt total. Capital expenditures were $7.8 million. Investing activities used $13.6 million and financing activities used $2.5 million, including $2.7 million of share repurchases.
Material changes and management commentary
- Revenue growth reflected more customers using the web-based interface: 14,801 unique product developers and engineers, up 11.7%; average revenue per such customer increased 2.3%. These counts exclude certain Alphaform customers not using the interface.
- Gross margin improved as revenue growth outpaced cost-of-revenue growth, with management citing manufacturing productivity improvements. Cost of revenue rose 6.0%, versus revenue growth of 10.5%.
- Operating expenses increased 12.6%, mainly due to higher headcount. Management expects continued investment in personnel, technology, sales and marketing, and product offerings; it expects cost of revenue to rise in dollars but remain relatively constant as a percentage of revenue.
- Foreign currency movements reduced international revenue by $1.0 million year over year, primarily because of U.S. dollar strength against the British pound. The company reported a $0.1 million foreign-currency loss, versus a $0.4 million gain a year earlier.
Outlook, risks and notable items
- The filing provides no quantitative revenue or earnings guidance. Management expects operating expenses to increase and the effective tax rate to remain relatively constant.
- Foreign exchange is a key disclosed exposure. The company does not hedge with forward contracts or currency borrowings; it states a hypothetical 10% adverse currency move could materially affect operating results, though it would generally not materially affect financial position.
- Management reported no material change to the risk factors in its 2016 Form 10-K. It did not believe pending legal proceedings were reasonably expected to have a material adverse effect.
- The board authorized up to $50 million of share repurchases through December 31, 2021. The company repurchased 49,700 shares for $2.7 million in the quarter; the program does not obligate further purchases.
- The company adopted the share-based-payment accounting update in Q1. It expects the forthcoming revenue-recognition standard to have no material impact, while evaluation of that and other issued standards continued.
Important facts for investors to verify
- Whether customer growth, revenue per customer and manufacturing productivity continue to support growth and margin improvement.
- How foreign exchange rates affect international revenue and operating results, given the unhedged exposure.
- Capital spending needs and the use of the company’s cash and marketable securities, including future repurchases under the authorization.
- The eventual effects, if any, of new accounting standards and the outcome of the company’s unrecognized tax-benefit reserves, which totaled $4.1 million.