Proto Labs, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless stated otherwise. Proto Labs provides on-demand custom parts through injection molding, CNC machining and 3D printing. Financial amounts below are in millions of dollars unless noted.
Financial performance
- Revenue: $72.6 million, up 24.0% from $58.5 million. Injection molding revenue rose 14.8% to $43.2 million; CNC machining rose 15.3% to $18.9 million; 3D printing more than doubled to $9.1 million. The 3D-printing and international comparisons include revenue from the 2015 Alphaform acquisition.
- Profit and margins: Gross profit was $39.7 million, up 12.5%, while gross margin fell to 54.6% from 60.2%. Operating income declined 4.4% to $15.1 million; operating margin was 20.8% versus 27.1%. Net income increased 2.0% to $10.7 million. Diluted EPS was $0.40, unchanged year over year.
- Cash flow: Operating cash flow was $16.9 million versus $15.4 million. Investing used $16.6 million, including $8.3 million of property and equipment purchases. Financing provided $2.5 million. Cash increased $3.0 million during the quarter.
- Liquidity and debt: At March 31, cash and cash equivalents were $50.6 million and marketable securities totaled $106.5 million ($38.8 million current and $67.7 million long-term). Current assets were $144.1 million and current liabilities $23.9 million. The balance sheet lists no debt balance; the company made no debt payments in Q1 2016.
- Other metrics: The effective tax rate was 32.4% versus 32.1%. Stock-based compensation was $1.7 million. Total assets were $374.8 million and shareholders’ equity was $343.7 million at quarter-end.
Material changes and management commentary
- Revenue growth reflected Alphaform and a larger customer base. Excluding developers and engineers gained through Alphaform, the company served 13,249 unique product developers and engineers, up 20%; average revenue per such customer decreased 4%.
- International revenue increased 60.7% to $22.0 million, including $4.9 million from Alphaform; U.S. revenue rose 12.8% to $50.6 million. A stronger U.S. dollar reduced international revenue by $0.4 million.
- Cost of revenue grew 41.4%, faster than revenue. Management attributed the increase to higher production and raw-material costs, direct-labor costs, and equipment and facility costs. Margin pressure also reflected lower Alphaform margins, investment in manufacturing capacity and foreign-exchange movements.
- Marketing and sales, R&D, and general and administrative expenses rose 23.6%, 23.3% and 32.1%, respectively, primarily from increased staffing and related costs. Management expects operating expenses to continue increasing with investment in personnel, marketing and technology.
- Other income was $0.6 million, compared with a $0.5 million expense in Q1 2015, primarily reflecting the change in currency results: a $0.4 million foreign-exchange gain versus a $0.6 million loss.
Outlook, risks and contingencies
- No numerical revenue or earnings guidance is provided. Management expects cost of revenue to rise in dollars but remain relatively constant as a percentage of revenue; it also expects continued investment and higher operating expenses.
- Foreign-currency exposure is unhedged. Management says a hypothetical 10% adverse currency move could materially affect operating results, though it would generally not materially affect financial position.
- The company reported $2.9 million of liabilities for unrecognized tax benefits. Management did not expect any pending litigation to have a material adverse effect; no material changes to previously reported risk factors were disclosed.
- Management stated that adoption of the new revenue-recognition standard was not expected to have a material impact; the impact of the new lease and share-based-payment standards was still under evaluation.
Important facts for investors to verify
- How much of reported growth, particularly international and 3D-printing growth, was acquired through Alphaform versus organic, and whether the customer revenue-per-developer decline persists.
- Whether manufacturing capacity investments and Alphaform’s lower margins continue to weigh on gross margin.
- Whether operating cash generation remains adequate as capital spending and operating expenses increase.
- The sensitivity of earnings to foreign exchange and the status or potential resolution of unrecognized tax benefits.