Proto Labs Manufactures Another Good Quarter; Stock Pops

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Proto Labs (NYSE: PRLB) released solid third-quarter 2017 earnings before the market opened on Thursday. The quick-turn, contract manufacturer of prototypes and low-volume production parts posted revenue growth of 12.7% year over year, while adjusted earnings per share rose nearly 10%.

The market rallied on the results, sending Proto Labs shares to a closing gain of 8.2% on Thursday. We can attribute the pop to results beating the company's guidance and Wall Street's expectations, as well as a rosier-than-expected fourth-quarter outlook. The stock has gained 72.8% for the year through Thursday, crushing the S&P 500's 16.6% return. It's also breezed by the returns of the two largest pure-play 3D printing stocks, 3D Systems and Stratasys, which are down 11% and up 37%, respectively, for the same period.

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Proto Labs stock is up nearly 52% -- more than 6 times the market's return -- since I called it the best stock to buy in the 3D-printing space earlier this year.

Proto Labs' key quarterly numbers 

Adjusting for discontinued services and the impact of foreign currency, revenue growth was 13.8% over the third quarter of 2016.

Proto Labs had forecast adjusted EPS in the range of $0.48 to $0.54 on revenue of $83 million to $88 million, so it beat the upper end of its guidance range for earnings and came in at the upper end of its outlook for revenue.

For additional context -- though long-term investors shouldn't give too much importance to Wall Street's near-term estimates -- analysts' consensus expectation was that Proto Labs would deliver adjusted EPS of $0.52 on revenue of $84.45 million. So the company comfortably beat both expectations.

Proto Labs continues to generate strong cash flow and possess a pristine balance sheet. The company generated $19.6 million in cash from operations during the quarter, up from $16.9 million in the year-ago period. It ended the quarter with cash and cash equivalents of $227.8 million, up 5% from the year-ago period, and continues to carry no long-term debt.

Revenue results by service provided

Proto Lab's CNC (computer numerical control) metal machining business continues to drive growth, as it did in the first and second quarters of this year, when this segment posted year-over-year revenue growth of 16.4% and 21.8%, respectively. Growth also accelerated in the company's largest business, plastic injection molding, which grew 4.5% year over year last quarter.

The 3D-printing business turned in solid revenue growth and accounted for 12.6% of the company's total revenue. The result didn't match the second quarter's robust 19.5% year-over-year revenue jump, but investors should expect lumpy results in this segment. It's a smaller business and one that's still working to incorporate the company's European 3D-printing acquisition of two years ago.

What happened with Proto Labs in the quarter?

  • Year-over-year revenue grew 13.3% in the United States, 15.9% as reported in Europe and 11.7% on a common-currency basis, and declined 8.6% in constant currency in Japan. Japan is a small market, so results will be particularly lumpy, but management believes cultural differences are a main reason for the subpar results. Namely, management says developing long-term business relationships is particularly important in Japan, and the company will be tailoring its approach to this market going forward.
  • The number of unique product developers and engineers served increased 18.5% year over year to 16,909.
  • Average revenue per product developer increased about 2.5% sequentially.
  • Gross margin declined to 56% from 57.2% in the year-ago period. The relatively new 3D printing business in Europe continues to have a negative impact on gross margin -- an area the company has been working to improve. The introduction of new products was also a factor in the decline.
  • Operating margin ticked up to 22% from 21.7% in the year-ago quarter.

What management had to say

Here's what CEO Vicki Holt had to say in the press release:

Looking ahead

Proto Labs posted another solid quarter. The company is working to address its weaker links -- namely, the European 3D-printing business and the Japanese business in general.

CFO John Way outlined the company's fourth-quarter outlook on the conference call as follows:

Going into earnings, Wall Street was projecting that Proto Labs would turn in adjusted EPS of $0.54 on revenue of $86.3 million in the fourth quarter. So the company's outlook, at the midpoint, on both the top and bottom lines came in higher than Wall Street was expecting.

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Beth McKenna has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Proto Labs. The Motley Fool recommends 3D Systems and Stratasys. The Motley Fool has a disclosure policy.