Proto Labs' Stock Falls on Earnings Concerns

By Markets Fool.com

What: On Thursday morning, rapid manufacturing service provider Proto Labs (NYSE: PRLB) reported its second-quarter earnings, which then caused its stock to fall over 17% near the market's opening before recovering a little.

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PRLB Price data by YCharts.

So what: In the second quarter, Proto Labs' revenue increased 17% year over year to a record $75 million. This growth translated to earning $10.7 million or $0.40 per diluted share -- unchanged from last year. Without Alphaform AG, a German-based 3D printing service provider that Proto Labs acquired in October, the company's legacy revenue grew by 10% year over year to $70.2 million.

Including Alphaform, management expected Proto Labs to generate between $75 million and $80 million in second-quarter revenue. Although Proto Labs' sales results fell within management's previous expectations and it reported encouraging customer growth, rising expenses caused its profitability to flatline.

Specifically, Proto Labs' second-quarter GAAP operating margin fell from 27.1% last year to 19.8% this year, as total operating expenses grew by a blistering 35.6% year over year -- more than double its revenue growth rate.

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Operating Expense

Amount (Thousands)

YOY Change

Marketing and sales

$11,453

20.5%

Research and development

$5,816

32.3%

General and administrative

$10,126

60.6%

YOY = year over year. Data source: Proto Labs.

Now what: Considering Proto Labs' operating expenses resulted in the company reporting flat profits, it's possible that investors are concerned that Proto Labs' stepped-up investments in its operations won't pay off in the form of improved profitability. Ultimately, if the company cannot rein in its expenses or increase its revenue faster than its expenses, future earnings potential comes into question.

Looking ahead, CEO Vicki Holt said that Proto Labs "will be focused on driving actions to improve our sales performance and efficiency through our operations, and we expect to see improvement in sales growth, especially in theAmericas, over time." To me, this sounds a lot like Proto Labs is starting to focus on controlling its operating expenses and improving its sales performance.

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Steve Heller owns shares of Proto Labs. The Motley Fool owns shares of and recommends Proto Labs. Try any of our Foolish newsletter services free for 30 days. 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.