Proto Labs Inc (PRLB) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2012 Proto Labs, Inc. earnings conference call. My name is Sab. and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Bill Dietrick. Please proceed.

Thank you, Operator, and good morning, everyone. This morning, before the market opened, Proto Labs issued a press release announcing its second-quarter and first six months financial results for the period ended June 2012. The release is available on the Company's website at protolabs.com.

Before we get started, during the course of this conference call, the Company will make projections and may make other statements about its business that are forward-looking and are subject to many risks and uncertainties that could cause actual results to differ materially from expectations. A detailed discussions of the risks and uncertainties that affect the business is contained in the Company's SEC filings, particularly under the heading Risk Factors.

Copies of these filings are available online from the SEC, or on the Proto Labs website. The Company's projections and forward- looking statements are based on factors that are subject to change; and, therefore, these statements speak only as of the date they are given. The Company does not undertake to update any projection or forward-looking statements.

In addition, to supplement the GAAP numbers, we have provided non-GAAP adjusted net income and basic and diluted net income per share information, that includes the after-tax costs of stock compensation. We believe that this non-GAAP number provides meaningful supplemental information and is helpful in assessing our historical and future performance. A table reconciling the GAAP information to the non-GAAP information is included in our financial release.

Now I would like to turn the call over to Brad Cleveland, President and CEO of Proto Labs. Brad?

Thanks, Bill. Good morning, everyone. Thank you for joining us today on our second-quarter 2012 conference call. With me today is Jack Judd, our Chief Financial Officer. I'll begin with a brief overview of our second-quarter and first six months of 2012 financial results, as well as some related commentary. Then Jack will provide a more detailed look at our financial results, and offer our views on the outlook for the third quarter. At the end of our remarks, we will be happy to take your questions.

In the second quarter of 2012, our first full quarter as a public company, Proto Labs generated revenue of $30 million, an increase of 25% over the second quarter of 2011. Our first half of 2012 revenue grew 29% over the first half of 2011. Our consolidated gross margin in the second quarter was 59.1%, and our net income totaled $5.1 million, or $0.20 per share.

So far in 2012, we've served 1507 new customers that have provided us with $7.4 million in revenue. Jack will walk through these results in greater detail. But, as I noted, we just completed our first full quarter as a public company, and I wanted to provide a sense of what it has been like.

First of all, from the standpoint of Proto Labs' worldwide employees, there's been a real sense of excitement and support for being a public company. This is evidenced by the fact that about three-fourths of our US employees are participating in our employee stock purchase plan, which is a strong indication that they believe in the future of the business. In addition, for the second time in a row, and based on interviews of our employees, the Minneapolis Star Tribune has named Proto Labs as one of the top workplaces in the state of Minnesota.

I can confidently say that our employees are fully engaged, and aligned with the interest of shareholders. And in my opinion, this is a key reason why our business continues to prosper. During the past quarter, we enjoyed the process of becoming better acquainted with our public shareholders. Jack and I participated in a number of investor conferences put on by three of our underwriters, including Jefferies, Craig-Hallum and William Blair, where we were in front of dozens of investors.

In each case, we were able to interact directly with many of you that are listening on the call today. We appreciated those opportunities to tell our story, get your perspective as an investor; and, most importantly, answer your questions. With that in mind, I would like to provide some thoughts on a few of the most common questions we have been receiving from investors over the past few months.

The first and most common question has been, is Proto Labs seeing any effects from macroeconomic issues, particularly in Europe? Despite the well-publicized economic headwinds in Europe, we grew revenue 19% as measured in local currency, and 16% as measured in dollars over the same quarter last year. And on a year-to-date basis, our revenue growth rate in local currency is 32%. So, despite the softness in the European economy, we believe the strength of our European revenue demonstrates the robustness of our business model. To maintain this momentum, we are continuing our planned investments in marketing and sales initiatives to rapidly grow our customer base. Once economic conditions improve, we expect to benefit from these investments in the form of an accelerated revenue ramp up, much as we experienced in 2009. As such, we remain confident in our long-term 25% growth model.

The next most common question has been, how are your Protoworks R&D initiatives coming along? Well, everything is going according to plan. We are making solid progress on all fronts, and believe that we will begin to see a meaningful impact on revenue from these initiatives by the end of 2014.

We've also been commonly asked, when will we see your gross margins return to your long-term model of 60% to 62%? We remain confident in our long-term gross margin model, and we are not encountering any significant pricing pressure from competitors. Margins over the past two quarters have been impacted by the capacity expansions we've undertaken in the US and Japan. We're in the process of balancing this additional manufacturing capacity with the demand for our current services, complicated by significant orders volatility in recent months.

As a quick-turn custom manufacturer that sells time, we have no buffer from the creation of finished goods inventory. So our factories must be set to accommodate peak demands, thereby introducing excess capacity during periods of lesser demand. This results in a negative gross margin impact in between those peak periods.

In addition to balancing capacity and demand, the best way to increase gross margin is to grow the top line. To achieve this, we continue to work to expand the breadth of our services and invest globally in our marketing and sales initiatives. For example, to accelerate the use of our services by our customers, we have initiated a global sales account program to coordinate our international teams on key accounts.

Pricing optimization has been another key focus in the past quarter. We have modified our automated pricing algorithms to ensure we fully capture all costs associated with our manufacturing processes. We have also worked to optimize pricing via our recent implementation of quick-turn premiums for our Firstcut service.

We continuously strive to improve the efficiency of our manufacturing operations on a global basis, with an emphasis on minimizing waste and reducing rework. We've always been a highly efficient organization, but the ability of our engineering teams to come up with better ways to do things continues to amaze me. All together, we believe that these efforts are starting to have a positive impact on our gross margin, and we will be working hard to continue this progress.

The final commonly asked question we have received is, how is Proto Labs progressing in Japan? Japan, our newest international subsidiary, represented approximately 3% of our consolidated revenue this past quarter, and grew 42% over the second quarter of 2011. Revenue grew 129% in the first half of 2012 compared to the first half of 2011. While we expect to see ongoing choppiness in our quarterly revenue growth rates, we remain very enthusiastic about our opportunity in Japan.

Our target is to be profitable in Japan by the end of 2014. And we are committing the expertise and financial resources required to achieve this. That concludes my efforts to address the recent questions we've had from investors.

From a general business standpoint, the demand for Proto Labs' quick-turn custom manufacturing services is healthy. We see strong interest from new customers worldwide, and we continue to gain additional business from our existing customers.

Our team is executing well, offering excellent customer service and support; enhancing operational efficiencies; and expanding our services. I'd like to thank my worldwide colleagues for their dedication and hard work over the past quarter.

So to summarize, despite macroeconomic headwinds, our consolidated second-quarter results for 2012 were strong. We made good progress on improving our margins. And the combination of these produced solid quarterly net income. We have a number of promising initiatives underway to ensure our business continues to profitably grow through the remainder of 2012.

With that, I'd like to turn the call over to Jack for a more in-depth review of our second-quarter financial results, and our outlook for the third quarter of 2012. Jack?

Thank you, Brad, and good morning, everyone. Revenue in the second quarter of 2012 was $30 million, an increase of $5.9 million, or 25% over second-quarter 2011 revenue. Protomold revenue during the just-completed quarter was $21.5 million. And Firstcut revenue was $8.5 million. During the quarter, Firstcut revenue represented 28% of total revenue compared to 24% during the second quarter of 2011.

Our international revenue was $7 million, or 24% of total revenue during the second quarter of 2012, compared to $6.2 million or 26% of revenue during the same period in 2011. On a year-to-date basis, revenue was $59.9 million, an increase of $13.5 million, or 29% over 2011 revenue. Year-to-date, international revenue was $14.8 million compared to $11.1 million in 2011.

Our increases in revenue were driven by new customer acquisitions. Measured on a year-to-date basis, we now have done business with 1507 new customers, providing $7.4 million in revenue; and 3858 existing customers, doing $52.5 million in revenue. This compares to 1188 new, and 2887 existing customers doing $5.9 million and $40.5 million in revenue in the first six months of 2011, respectively. New customer growth is up 27% over 2011.

Our gross margin in the second quarter of 2012 was 59.1% compared to 60.4% in the same quarter in 2011, and 59.1% in the first quarter of 2012. During the quarter we incurred costs to bring on board our new factory in Rosemount, Minnesota. All of our new factory capacity has been completed, and all costs related to the factory moves has been expensed.

Our operating income was $7.5 million, or 24.9% of revenue in the second quarter. Year-to-date, our operating income is $15.1 million, or 25.2% of revenue. Operating expenses were $2.3 million higher in the quarter than the previous year. This increase was mostly driven by the addition of 30 new employees in marketing and sales, and $1.2 million of additional spending in R&D that includes the Protoworks initiatives we described last quarter.

Company-wide, at the end of June, we had 602 total employees. This compares to 432 and 511 at the end of June and December 2011, respectively. Our earnings per share in the second quarter of 2012 was $0.20 per share. Adding back the after-tax cost of stock compensation, our non-GAAP earnings per share in the quarter was $0.23. A reconciliation of net income and EPS to non-GAAP net income and EPS was included in our earnings release this morning.

At the end of June, our cash and investments totaled nearly $79 million. Our capital spending so far in 2012 totals $12.7 million, almost all of which was spent on factory expansion and additional CNC mills and injection molding presses.

I would now like to provide some guidance into our projected results for 2012. Taking into account the international macroeconomic conditions, we currently expect revenue in the third quarter to be between $30 million and $33 million. Stock compensation costs in our quarter will approximate $750,000. Our tax rate will be similar to the just-completed quarter. Taking all of the above factors in consideration, our quarterly non-GAAP EPS, adding back the after-tax cost of stock compensation, is expected to be between $0.21 and $0.25 per share. Our CapEx in 2012 is expected to be between $14 million and $18 million.

I would like to reiterate Brad's comments from before, that we remain confident in our long-term 25% growth model. That concludes our prepared remarks. Operator, we will now open up the call for questions.

(Operator Instructions). Troy Jensen, Piper Jaffray.

Good morning, gentlemen. Brad, just a clarification here -- did you say that Europe would have grown 32% year-over-year on a constant currency basis?

Yes.

And then, maybe Jack, do you know what the dollar impact would be on account of the exchange?

I know the dollar amount for the second quarter was $120,000.

Okay. So not the material for --

No, and the currency impact in Japan is really immaterial.

Got you. All right, that's fair. All right then, Brad, you mentioned about seeing this growth in Europe and starting to invest in the sales and marketing. Is there any step function which we should think about on the sales and marketing line? Or is this kind of a gradual spend in (technical difficulty) account adds?

Troy, it's very much a gradual spend. We have a plan in place for this entire year, and we are pursuing that quarter by quarter. So it's been the plan all along to gradually ramp up our investments in marketing and sales worldwide.

All right, perfect. Jack, I want you to go through the -- you kind of rattled through the guidance there kind of quickly. So, $30 million to $33 million in revenues; EPS of $0.21 to $0.25. Was that a pro forma number? Because you also mentioned staff-based comp of 750 (multiple speakers).

The EPS numbers are adding back the after-tax costs of stock compensation. Then we said stock compensation would be around $750,000 in the quarter.

Okay, then can you just kind of help me, directionally, with gross margins? Now that the capacity add is kind of behind you guys, I'm assuming all that was done in Q2. If revenues ramp, would you start to expect to see the gross margins go up from here? And if you could, address the operating line, too.

I would expect that if we can be in the middle to the higher range of our revenue guidance, then our gross margins will be higher in the quarter. And I would expect that our operating margin will follow along with that. If we are at the lower end of our guidance, we probably will have similar gross margins to what we had this past quarter.

Okay. All right, guys. Well, good luck in Q3, and I'm sure we'll talk soon.

Thanks, Troy.

Steve Dyer, Craig-Hallum.

Thank you. Good morning, guys. Are you guys seeing anything new on the competitive landscape out there? There's been a lot of -- and, again, not exactly you guys -- but a lot of 3-D printing noise around similar type industries lately. Are you seeing anything new, in terms of pricing and bidding and so forth?

Steve, this is Brad. The short answer is no. Our position, with respect to 3-D printing, is that we are a very complementary business. We tend to be the next step in the vast majority of applications, where somebody might print a part and then they need the true functional parts in the material of choice. And they are in a hurry to get them; that's when we come into play. And to date, in the work that we do, we still have no significant organized competitors anywhere in the world that we run into every day. Hopefully that answers your question.

Yes, thank you. Jack, G&A was down quite a bit, relative to at least what I had modeled. Was there any anomaly in there? Or is that the real number? It's not the run rate, clearly. But how should we think about that number going forward?

First quarter is a little bit seasonally stronger -- maybe stronger might not be the right word -- but more expensive quarter. So that would be one of the reasons why we would be down in the second quarter. And then there's -- just as financial statements come together, G&A is mostly people costs, and legal and accounting, and stuff like that. So nothing strange going on in there.

Okay. And then just, generally, from a geographic standpoint, is Europe the area -- if you were to pick one that's problematic, is that clearly the area? Or is there anything else? Domestically, things appear to be holding up pretty well.

We certainly wouldn't use the word problematic. But our growth in Europe in the first quarter was much stronger than it was in the second quarter. And we attribute none of that to our business; the demand for our business is very, very strong. We generate a lot of new customers; very strong customer growth, as you see in the numbers that Jack gave. The slowness in Europe, compared to the first quarter, is clear. But business remains very, very strong there. And, historically, as I mentioned in the call remarks, when things pick up again, it has a very good impact on our business.

Yes, understood. Okay, thanks, guys.

Tim Mulrooney, William Blair.

Tim, your line is open. Please proceed with your question.

Operator, let's go on to the next question, then.

Peter Misek, Jefferies.

Good morning, gentlemen. Just some questions on your forecast -- so you've obviously taken the macroeconomic environment into consideration. I'd love to hear how you built this forecast up; not necessarily detailed, but more broad strokes by industry. What do you think the puts and takes are for your various big industries -- Medical devices, et cetera? And where do you think you're being overly conservative? You're being overly conservative on the macro side, and just shaving what you think you guys could do? Just some puts and takes would be great.

Peter, that's a big question. So I'll see if I can answer all of those parts. And if I don't, give me another shot at it. We don't build any of our forecasts by looking at our verticals. We market all verticals relatively equally. We actually don't do any vertical marketing, I should say. Business comes into us from product developers. And certain industries have more product developers, but that doesn't mean that we concentrate on those industries. So I can't tell you that we're looking for the medical device industry to be bigger or smaller in the next six months than it was in the past.

There is no doubt -- and I think you said it right -- that there is a part of Europe, right now, that I think we would like to see some strengthening of our growth rates back to what they were a couple quarters ago. And if that would happen, that would give us some more optimism toward sales projections and forecasts. But I think, right now, with everything that we've seen and everything that we've just encountered, and everything that we hear in the news, we think that the revenue guidance we just gave is reasonable and appropriate.

And does it include any new process, material, or any other item that's not currently on the factory floor right now?

This is Brad. There are some things that we are working on that may make an impact next year. But for the rest of this year, there is no significant increases in the types of materials we're offering, or geometries or processes that will make a material impact this year.

Okay. And in terms of how you guys saw June progressing, there is some industry stats that show that June was a particularly cruel month to Europe; that it started okay and decelerated through the month. Could you talk about that? Did you guys see anything like that? Any kind of color on how June progressed, and how you came into July, would be great.

I think the comment that I would like to make first on that is, being a quick-turn manufacturer, we see business go up and down quickly within a quarter, because we only have 15 days worth of business at any one given time. So we might be a little bit different than some other manufacturers. I would say that, the comment that I would like to make on the second quarter that was unusual for us, it would be the order volatility in our markets that we experienced, and that we would have strong weeks followed by less strong weeks. And it was somewhat confusing to us, that that would have been what we saw more than anything else. And in Europe especially, I think we did have macroeconomic headwinds. And I do think they affected our orders in the quarter.

Great. And one last one, if I could sneak it in, is on the cost side, Brad or Jack, do you guys feel that you've got the levers you can pull one way or another on the cost side, whether things deteriorate a little bit further or accelerate back, that you can manage that? Just some understanding on the variable cost levers that maybe you can tweak a little bit. Not a lot, obviously, but tweak a little bit here to give us a little bit more comfort on those bottom-line numbers. That would be great. Thanks a lot, guys.

I think the number-one area of our costs that we try to tweak has to do with the -- our manufacturing costs, and our ability to adjust labor for the amount of business we have coming in. And what makes that, maybe, more difficult than normal manufacturer is, again, that we don't have any finished goods to sell from. And so, we really have to staff for higher order levels than what we have on average. But I can tell you that we worked very hard at that in the second quarter so that we could have better results. And we continue to work on that. And it's a big initiative of ours to balance that as much as we can.

Great, thank you.

Brian Drab, William Blair.

Good morning. First, a clarification -- I may have written down a number wrong here. But I thought we talked about, earlier in the call, a 19% growth rate with respect to Europe, organically. Did I hear that number correctly? (Multiple speakers) about a 32% number.

Yes, we grew 19% for the quarter, measured in local currency. But again, 16% in dollars, so we had some negative currency going on in the UK for the quarter.

For sure, but I heard a 32% number, then, in constant currency with respect to Europe. What period is that for?

For the first six months.

Got it, thanks. One of the previous analysts on the call here talked about June, and tried to get some insight into that. And I understand the orders were volatile throughout the quarter. But can you give us a better sense of month-by-month, the trend in Europe? Because, clearly, I understand the currency was a significant headwind for your European sales, but down significantly in the second quarter from the first quarter in Europe. And I'm just wondering if you could give us a sense how that progressed -- April, May, June. I know you are not going to want to talk specifics, maybe in terms of growth rates for each month; but maybe rank those months within the quarter, if you could, in terms of strength.

That's a tough question for us, because you could almost go back and rank weeks versus months. Overall, I would say that Europe was against the previous year. And, again, it's tough to even comment on that because you get spring holidays into Europe in April of 2011 that we didn't have in April of 2012. But I would say that Europe was slightly stronger in the first half of the quarter than it was in the second half of the quarter. But, again, I want to emphasize this volatility, because weeks are probably more important than months.

Okay, thank you.

Greg McKinley, Dougherty & Company.

Yes, thank you. Could you talk a little bit about, perhaps, any volatility that you experienced in your US business, as opposed to Europe? Did that behave consistently with what you've seen in the business previously? Or were there some greater signs of short-term volatility this quarter than what you've seen in the past?

I would say that the business in the United States was consistent with what we thought that it would be going into the quarter, in terms of how it came to us and the orders and everything.

If you look at -- this is Brad -- if you look at the US numbers, our growth quarter-over-quarter was very comparable to the first quarter. It was very, very strong. So the softness was really focused -- and the volatility was really focused in Europe.

Yes. As you look to the rest of the year, can you give us a sense for -- I think you are at roughly 600 headcount today, or at the end of the quarter. Given your plans for the second half, where do you think that shakes up, so we can get a sense for how aggressively you plan to keep investing in the second half of the year?

We will continue to invest in sales and marketing, according to our plans that we had earlier in the year. In fact, we have added people in the month of July to our sales. And I would expect that we will selectively continue to hire and grow that area. I expect the manufacturing side will be very much based upon how revenue comes in. We don't have any big initiatives to hire or staff anything above normal levels in manufacturing. And elsewhere in the Company, software engineers; if a couple software engineers show up, and they meet our specs, we're going to hire them.

Thank you.

Steve Dyer, Craig-Hallum.

Thank you. I think I just missed it; did you give, Jack, revenue from existing and new?

Yes, I did.

Would you mind repeating that?

So, this is what the numbers are -- 1507 -- these are measured year-to-date, now -- 1507 new customers, $7.4 million in revenue; 3858 existing customers, $52.5 million in revenue.

Perfect. That's all I need, thank you.

And there are no further questions in the queue. I would now like to turn the call back over to Brad Cleveland for closing comments.

Thank you. Well, thank you all for joining us today. I hope we've conveyed a sense of our confidence in the continuing strength of the Proto Labs business model, and our excitement about the growth opportunities ahead of us. We look forward to updating you on our progress during our third-quarter conference call. Thank you very much.

Thank you all for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.