Protolabs Reports Record Revenue Growth and Net Income for Second Quarter 2018

Record Quarterly Revenue of $109.7 million, an increase of 34% over 2017

Record Quarterly Net Income of $18.3 million, an increase of 52% over 2017

MAPLE PLAIN, Minn.--(BUSINESS WIRE)--Proto Labs, Inc. (NYSE: PRLB), a leading online and technology-enabled, quick-turn, on-demand manufacturer, today announced financial results for the second quarter ended June 30, 2018.

Second Quarter 2018 highlights include:

• Revenue for the second quarter of 2018 was a record $109.7 million, representing a 33.7 percent increase over revenue of $82.0 million in the second quarter of 2017.
• The number of unique product developers and engineers served through our web-based customer interface totaled 19,198 in the second quarter of 2018, an increase of 18.7 percent over the second quarter of 2017. This metric does not include unique product developers served in our recently acquired RAPID Manufacturing business.
• Net income for the second quarter of 2018 was a record $18.3 million, or $0.67 per diluted share.
• Non-GAAP net income was $19.9 million, or $0.73 per diluted share. See “Non-GAAP Financial Measures” below.

“For the second straight quarter, Protolabs delivered 34% revenue growth over 2017,” said Vicki Holt, President and Chief Executive Officer. “Through the first half of the year, our CNC Machining business has experienced explosive growth in excess of 60%. Our ability to serve our customers with this level of growth demonstrates the tremendous value and scalability of our digital business model.”

Additional Second Quarter 2018 highlights include:

• Gross margin was 54.0 percent of revenue for the second quarter of 2018, compared with 56.5 percent for the second quarter of 2017 with the change in gross margin largely driven by the RAPID Manufacturing acquisition.
• GAAP operating margin was 20.0 percent of revenue during the second quarter of 2018, compared to 20.0 percent for the second quarter of 2017.
• Non-GAAP operating margin was 23.3 percent of revenue during the second quarter of 2018, compared to 22.9 percent for the second quarter of 2017. See “Non-GAAP Financial Measures” below.
• The company generated $33.2 million in cash from operations during the second quarter of 2018.
• Cash and investments balance was $144.9 million at June 30, 2018.

“Protolabs continues to produce strong financial results,” said John Way, Chief Financial Officer. “Our revenue growth of 34% converted to a 34% growth in income from operations and net income growth of 52%. This business performance resulted in cash generated from operations of $33 million and provided the opportunity to reinvest in the business to drive future growth.”

Non-GAAP Financial Measures

The company has included non-GAAP revenue growth that excludes the impact of changes in foreign currency exchange rates. Management believes these metrics are useful in evaluating the underlying business trends and ongoing operating performance of the company.

The company has included non-GAAP operating margin, adjusted for stock-based compensation expense and amortization expense (collectively, “non-GAAP operating margin”), in this press release to provide investors with additional information regarding the company’s financial results.

The company has included non-GAAP net income, adjusted for stock-based compensation expense, amortization expense, disposal of businesses, legal settlements and unrealized foreign currency activity (collectively, “non-GAAP net income”), in this press release to provide investors with additional information regarding the company’s financial results.

The company has provided below reconciliations of GAAP to non-GAAP net income, operating margin and revenues, the most directly comparable measures calculated and presented in accordance with GAAP. These non-GAAP measures are used by the company’s management and board of directors to understand and evaluate operating performance and trends and provide useful measures for period-to-period comparisons of the company’s business. Accordingly, the company believes that these non-GAAP measures provide useful information to investors and others in understanding and evaluating operating results in the same manner as our management and board of directors.

Conference Call

The company has scheduled a conference call to discuss its second quarter 2018 financial results today, July 26, 2018 at 8:30 a.m. ET. To access the call in the U.S. please dial 877-709-8150 or outside the U.S. dial 201-689-8354 at least five minutes prior to the 8:30 a.m. start time. No participant code is required. A simultaneous webcast of the call will be available via the investor relations section of the Protolabs website and the following link: https://edge.media-server.com/m6/p/3a8giomf. A replay will be available for 14 days following the call on the investor relations section of the Protolabs website.

About Protolabs

Protolabs is the world's fastest digital manufacturing source for rapid prototyping and on-demand production. The technology-enabled company produces custom parts and assemblies in as fast as one day with automated 3D printing, CNC machining, sheet metal fabrication, and injection molding processes. Its digital approach to manufacturing enables accelerated time to market, reduces development and production costs, and minimizes risk throughout the product life cycle. Visit protolabs.com for more information.

Forward-Looking Statements

Statements contained in this press release regarding matters that are not historical or current facts are “forward-looking statements” within the meaning of The Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other factors which may cause the results of Protolabs to be materially different than those expressed or implied in such statements. Certain of these risk factors and others are described in the “Risk Factors” section within reports filed with the SEC. Other unknown or unpredictable factors also could have material adverse effects on Protolabs’ future results. The forward-looking statements included in this press release are made only as of the date hereof. Protolabs cannot guarantee future results, levels of activity, performance or achievements. Accordingly, you should not place undue reliance on these forward-looking statements. Finally, Protolabs expressly disclaims any intent or obligation to update any forward-looking statements to reflect subsequent events or circumstances.

Proto Labs, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
				June 30,		December 31,
				2018		2017
				(Unaudited)
	Assets
	Current assets
		Cash and cash equivalents		$	62,605	$	36,707
		Short-term marketable securities			57,619		57,424
		Accounts receivable, net			55,928		51,503
		Inventory			9,590		11,271
		Income taxes receivable			-		1,832
		Other current assets			7,678		6,267
			Total current assets		193,420		165,004
	Property and equipment, net				197,339		166,440
	Long-term marketable securities				24,636		37,034
	Goodwill				128,752		128,504
	Other intangible assets, net				18,521		19,084
	Other long-term assets				3,519		2,672
			Total assets	$	566,187	$	518,738
	Liabilities and shareholders' equity
	Current liabilities
		Accounts payable		$	20,038	$	15,876
		Accrued compensation			13,822		12,100
		Accrued liabilities and other			9,885		8,408
		Short-term debt obligations			-		5,000
		Income taxes payable			637		2,371
			Total current liabilities		44,382		43,755
	Long-term income taxes payable				2,181		2,181
	Long-term deferred tax liabilities				8,583		6,966
	Other long-term liabilities				4,788		4,621
	Shareholders' equity				506,253		461,215
	Total liabilities and shareholders' equity			$	566,187	$	518,738

Proto Labs, Inc.
Condensed Consolidated Statements of Operations
(In thousands, except share and per share amounts)
(Unaudited)
			Three Months Ended				Six Months Ended
			June 30,				June 30,
			2018		2017		2018		2017
	Revenue
		Injection Molding	$	51,586	$	46,792	$	102,929	$	94,708
		CNC Machining		37,788		24,180		74,519		46,152
		3D Printing		13,248		10,873		25,573		20,958
		Sheet Metal		6,309		-		12,550		-
		Other		721		195		1,826		389
		Total revenue		109,652		82,040		217,397		162,207
	Cost of revenue			50,439		35,671		100,276		70,565
	Gross profit			59,213		46,369		117,121		91,642
	Operating expenses
		Marketing and sales		17,557		14,630		34,129		27,617
		Research and development		7,032		6,084		13,697		11,907
		General and administrative		12,640		9,253		25,583		18,034
		Total operating expenses		37,229		29,967		73,409		57,558
	Income from operations			21,984		16,402		43,712		34,084
	Other income, net			808		1,173		986		1,488
	Income before income taxes			22,792		17,575		44,698		35,572
	Provision for income taxes			4,478		5,489		8,333		11,286
	Net income		$	18,314	$	12,086	$	36,365	$	24,286
	Net income per share:
		Basic	$	0.68	$	0.46	$	1.35	$	0.91
		Diluted	$	0.67	$	0.45	$	1.34	$	0.91
	Shares used to compute net income per share:
		Basic		26,972,990		26,541,978		26,925,673		26,554,262
		Diluted		27,274,882		26,649,152		27,232,215		26,710,217

Proto Labs, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
				Six Months Ended
				June 30,
				2018			2017
	Operating activities
		Net income		$	36,365		$	24,286
		Adjustments to reconcile net income to net cash provided by operating activities:
			Depreciation and amortization		12,749			8,700
			Stock-based compensation expense		5,034			3,958
			Deferred taxes		1,620			1,608
			Gain on sale of businesses		(671	)		-
			Amortization of held-to-maturity securities		276			592
			Other		7			77
			Changes in operating assets and liabilities		3,937			206
		Net cash provided by operating activities			59,317			39,427
	Investing activities
		Purchases of property and equipment			(43,194	)		(13,301	)
		Cash used for acquisitions, net of cash acquired			(90	)		-
		Proceeds from sale of businesses			284			-
		Purchases of marketable securities			(17,129	)		(20,037	)
		Proceeds from maturities of marketable securities			29,056			25,194
		Purchases of other assets and investments			-			(514	)
		Net cash used in investing activities			(31,073	)		(8,658	)
	Financing activities
		Payments on debt			(5,000	)		-
		Proceeds from exercises of stock options and other			3,306			3,791
		Repurchases of common stock			-			(4,410	)
		Net cash used in financing activities			(1,694	)		(619	)
	Effect of exchange rate changes on cash and cash equivalents				(652	)		251
	Net increase in cash and cash equivalents				25,898			30,401
	Cash and cash equivalents, beginning of period				36,707			68,795
	Cash and cash equivalents, end of period			$	62,605		$	99,196

Proto Labs, Inc.
Reconciliation of GAAP to Non-GAAP Net Income per Share
(In thousands, except share and per share amounts)
(Unaudited)
			Three Months Ended						Six Months Ended
			June 30,						June 30,
			2018			2017			2018			2017
	Non-GAAP net income, adjusted for stock-based compensation expense, amortization expense, unrealized loss (gain) on foreign currency, disposal of businesses, and legal settlement
		GAAP net income	$	18,314		$	12,086		$	36,365		$	24,286
		Add back:
		Stock-based compensation expense		2,726			2,242			5,034			3,958
		Amortization expense		799			125			1,563			288
		Unrealized loss (gain) on foreign currency		93			(412	)		248			(349	)
		Disposal of businesses		(671	)		-			(671	)		-
		Legal settlement		-			(417	)		-			(417	)
		Total adjustments ^1		2,947			1,538			6,174			3,480
		Income tax benefits on adjustments ^2		(1,318	)		(501	)		(3,361	)		(1,079	)
		Non-GAAP net income	$	19,943		$	13,123		$	39,178		$	26,687
	Non-GAAP net income per share:
		Basic	$	0.74		$	0.49		$	1.46		$	1.01
		Diluted	$	0.73		$	0.49		$	1.44		$	1.00
	Shares used to compute non-GAAP net income per share:
		Basic		26,972,990			26,541,978			26,925,673			26,554,262
		Diluted		27,274,882			26,649,152			27,232,215			26,710,217
	^1Stock-based compensation expense, amortization expense, unrealized loss (gain) on foreign currency, disposal of businesses, and legal settlement were included in the following GAAP consolidated statement of operations categories:
			Three Months Ended						Six Months Ended
			June 30,						June 30,
			2018			2017			2018			2017
		Cost of revenue	$	363		$	237		$	650		$	434
		Marketing and sales		443			339			820			607
		Research and development		376			279			690			501
		General and administrative		2,343			1,512			4,437			2,704
		Total operating expenses		3,162			2,130			5,947			3,812
		Other income, net		(578	)		(829	)		(423	)		(766	)
		Total adjustments	$	2,947		$	1,538		$	6,174		$	3,480
	^2For the three- and six-months ended June 30, 2018 and 2017, income tax effects were calculated using the effective tax rate for the relevant jurisdictions. Our non-GAAP tax rates differ from our GAAP tax rates due primarily to the mix of activity incurred in domestic and foreign tax jurisdictions and removing effective tax rate benefits from stock-based compensation activity in the quarter.

Proto Labs, Inc.
Reconciliation of GAAP to Non-GAAP Operating Margin
(In thousands)
(Unaudited)
			Three Months Ended						Six Months Ended
			June 30,						June 30,
			2018			2017			2018			2017
	Revenue		$	109,652		$	82,040		$	217,397		$	162,207
	Income from operations			21,984			16,402			43,712			34,084
		GAAP operating margin		20.0	%		20.0	%		20.1	%		21.0	%
		Add back:
		Stock-based compensation expense		2,726			2,242			5,034			3,958
		Amortization expense		799			125			1,563			288
		Total adjustments		3,525			2,367			6,597			4,246
		Non-GAAP income from operations adjusted for stock-based
		compensation expense and amortization expense	$	25,509		$	18,769		$	50,309		$	38,330
		Non-GAAP operating margin		23.3	%		22.9	%		23.1	%		23.6	%

Proto Labs, Inc.
Comparison of GAAP to Non-GAAP Revenue Growth
(In thousands)
(Unaudited)
		Three Months Ended June 30, 2018							Three Months Ended June 30, 2017		%		% Change Constant
		GAAP		Adjustments^1			Non-GAAP		GAAP		Change^2		Currencies^3
	Revenues
	United States	$	86,354	$	-		$	86,354	$	63,353	36.3	%	36.3	%
	Europe		20,213		(1,453	)		18,760		16,131	25.3	%	16.3	%
	Japan		3,085		(51	)		3,034		2,556	20.7	%	18.7	%
	Total Revenue	$	109,652	$	(1,504	)	$	108,148	$	82,040	33.7	%	31.8	%
		Six Months Ended June 30, 2018							Six Months Ended June 30, 2017		%		% Change Constant
		GAAP		Adjustments^1			Non-GAAP		GAAP		Change^2		Currencies^3
	Revenues
	United States	$	170,521	$	-		$	170,521	$	123,529	38.0	%	38.0	%
	Europe		40,158		(3,987	)		36,171		33,130	21.2	%	9.2	%
	Japan		6,718		(227	)		6,491		5,548	21.1	%	17.0	%
	Total Revenue	$	217,397	$	(4,214	)	$	213,183	$	162,207	34.0	%	31.4	%
^1 Revenue growth for the three- and six-month periods ended June 30, 2018 has been recalculated using 2017 foreign currency exchange rates in effect during comparable periods to provide information useful in evaluating the underlying business trends excluding the impact of changes in foreign currency exchange rates.
^2This column presents the percentage change from GAAP revenue growth for the three- and six-month periods ended June 30, 2017 to GAAP revenue growth for the three- and six-month periods ended June 30, 2018.
^3 This column presents the percentage change from GAAP revenue growth for the three- and six-month periods ended June 30, 2017 (calculated using the foreign currency exchange rates in effect during that period) to non-GAAP revenue growth for the three- and six-month periods ended June 30, 2018 (as recalculated using 2017 foreign currency exchange rates) in order to provide a constant currency comparison.

Proto Labs, Inc.
Product Developer Information
(Unaudited)
		Three Months Ended		Six Months Ended
		June 30,		June 30,
		2018	2017	2018	2017
	Unique product developers and engineers served	19,198	16,174	28,598	24,255
Note: the information above does not include customers who do not utilize our web-based customer interface; these customers are principally related to our recent acquisitions.