Proto Labs - Earnings Call - Q1 2021
May 6, 2021
Transcript
Speaker 0
note this conference is being recorded.
I will now turn the conference over to your host, Dan Schumacher. Mr. Schumacher, you may begin.
Speaker 1
Thank you, Alex, and good morning, everyone. With me today are Rob Bedore, Proto Labs' President and Chief Executive Officer and John Wei, our Chief Financial Officer. This morning, Proto Labs issued a press release announcing its financial results for the first quarter ended 03/31/2021. The release is available on the company's website. In addition, a prepared slide presentation is available online at the web address provided in our press release.
Before we begin, I would like to remind everyone that our discussion will include statements relating to future performance and expectations that are or may be considered forward looking statements and subject to many risks and uncertainties that could cause actual results to differ materially from expectations. Please refer to our earnings press release and recent SEC filings, including our annual report on Form 10 ks for information on certain risks that could cause actual outcomes to differ materially and adversely from any forward looking statements made today. The results and guidance we will discuss include non GAAP financial measures consistent with our past practice. Please refer to our press release and the accompanying slide presentation at the Investors section of our company website for a complete reconciliation of non GAAP to GAAP results. Now I'd like to turn the call over to Rob Vador, who has held the role of Proto Labs' President and Chief Executive Officer since March 1.
Rob?
Speaker 2
Thanks, Dan, and good morning, everyone. Thank you for joining us today for our first quarter twenty twenty one earnings call. I'm excited to take you through our operating and financial results as well as our top priorities in my first year as CEO. We have a few very important topics for you today, including an update on our Proto Labs two point o system launch and performance, our first quarter together with three d Hubs and an invitation to our virtual Investor Day later this month. John will provide details on our first quarter financial results and our outlook for the second quarter later in the call.
Turning to first quarter financial performance. I'm pleased to report a strong start to 2021, with revenue and earnings within our expectations. First quarter revenue of $116,000,000 was near the top end of our guidance range, representing a year over year increase of 1% and a sequential increase of 10%. Three d Hubs contributed $5,800,000 of revenue between close on January 22 and the end of the first quarter, and delivered strong growth of 35% over their prior year results. As with our normal seasonality patterns, revenue started relatively soft in January and picked up as we progressed through the quarter.
This was particularly true in our injection molding business. We saw increased demand as global manufacturing activity continued its recovery from the low point in the second quarter of twenty twenty, and we benefited from global supply chain challenges as our customers pursued alternatives to their traditional suppliers. This led to strong order volume of injection molded production parts, only benefiting the first quarter, but creating a backlog into the second quarter as well. As a result, our first quarter injection molding revenue grew 3% year over year and 8% sequentially. We break down revenue by service on Slide six.
Our three d printing revenue increased 8% over the prior year quarter and 8% over the fourth quarter of twenty twenty. Our CNC machining and sheet metal services were both down mid single digits year over year, but were up over 15% sequentially, reflecting continued increase in global demand. As we look at revenue by region, The Americas produced organic sequential revenue growth of 6.5%, while converting to our new ProLabs two point zero platform mid quarter. Our European region was impacted by disruptions from logistics changes associated with Brexit and continued COVID nineteen restrictions, resulting in organic sequential revenue growth of 3%. Japan revenue decreased 17% year over year in constant currencies and was relatively flat sequentially.
Moving to earnings. We reported first quarter non GAAP diluted earnings per share of $0.40 also in line with our expectations for the quarter provided in February. Our earnings in the first quarter included the operations of three d Hubs and costs associated with our Portalabs two point zero systems launch, including a full quarter of depreciation and increased research and development spend. As a reminder, three d Hubs is a very strategic long term investment for our business. We're currently investing to build up the platform and infrastructure to support the significant future growth that we will drive through the platform.
Overall, I'm very pleased with our financial performance in the quarter in which we launched our redesigned systems to support our customers and future growth and completed a transformative acquisition. I've been with Proto Labs for over eight years in a variety of capacities. And after two months in my new role, I am more confident than ever in the future prospects of this company. The launch of Proto Labs two point o and the acquisition of three d Hubs position Proto Labs for strong growth, financial performance, and shareholder value long into the future. I'm excited to work with my colleagues to execute on our strategic objectives, delight our customers and capture more of our market opportunity.
As we continue to emerge from the headwinds of the global pandemic, Proto Labs is well positioned given our market leadership and the bold strategic moves we have made to better serve our customers by improving our ecommerce experience and expanding our offer. Our three priorities for 2021 are, first, to create a world class customer experience for digital manufacturing. Second, to expand our portfolio of customer offerings to meet the broadest set of customer needs. And third, to further invest in our employees. In the first four months of twenty twenty one, we made substantial progress on all three.
First and most importantly, Proto Labs two point o is now live in Europe and The Americas. We've processed over 54,000 orders through the new systems. With this new e commerce platform, our customers now have access to improved order management, more secondary operations, enhanced quality documentation, streamlined production features, and the ability to manage multiple services in a single project. As with any system launch of this magnitude, we have had our challenges. Our incredible employees have answered the call to solve these challenges for customers as they arose and deployed software updates with system improvements to resolve them permanently.
In March, amid global shortages of resins and capital equipment, driven in part by electronics supply shortages, we saw a significant sequential increase in orders. As orders ramped, our facilities were operating below their full run rate efficiency as they adapted to the new systems, leading to some on time delivery challenges near the end of the first quarter. Due to the outstanding efforts of our teams, on time delivery has improved dramatically in most services and is back to the market leading Proto Labs standard that customers have come to expect. In injection molding, the significant increase in production parts orders I mentioned earlier has created a backlog at our US injection molding facility. With respect to our second priority, continuing to expand our offer to meet the broadest set of customer needs, our transformative acquisition of three d Hubs in January is a significant step toward achieving that objective.
This acquisition provides two great benefits to ProLab's customers. First, a complementary network of manufacturing partners to fulfill a breadth of capability outside of our current envelope. And second, a broader selection of pricing and lead time options. We are currently working with the talented three d Hubs team on assessing near term revenue synergies and planning long term integration. As we work to unify the customer experience and incorporate three d Hubs capabilities with Proto Labs in one seamless customer facing platform, we will continue to invest in r and d to provide the best customer experience.
In the near term, both organizations will continue to operate semi independently while collaborating to develop a robust plan that will allow us to best serve our customers and generate significant shareholder value. Our third priority in 2021, a long term focus for Proto Labs, is to continue to invest in our employees. Our employees drive the success of this company. We're delighted that the three d Hubs employees joined our team in the first quarter, and our relationships and productivity will only increase as our interactions and collaborations continue. Throughout 2020 and into 2021, we've demonstrated our commitment to the development of our employees and offer many opportunities for additional training.
In 2020, we implemented a customized learning management system and now offer hundreds of online courses across a range of job specific disciplines that provide our employees with greater access to development resources. Employees are assigned courses to help them expand their expertise in their current position and can also register for courses to help them advance their positions in the organization. We have also launched customized leadership development programs for new managers that focus on how to effectively coach and develop their employees. Furthermore, the safety, mental health, and physical wellness of our employees has always been a top priority for this company. To help them overcome the unique physical and mental challenges brought on by the pandemic, we developed and deployed specialized health and wellness training throughout the year.
Aside from our primary 2021 priorities, in recent years, we've also prioritized our sustainability and societal impact. We are working to continuously improve our environment, social, and governance, or ESG, practices. And I'd like to take a moment to highlight some of the work we're doing today. ProLabs was recently recognized in The US with the 2021 Sustainability Award from the National Association of Manufacturers for our continued effort to reduce our environmental footprint. These efforts include implementing solar power at our Plymouth, Minnesota injection molding facility, reducing material waste through recycling programs, establishing an internal green team, and making other energy efficient changes across all of our facilities.
We are also tracking our utility, energy, and natural gas consumption so that we can better understand our impact and identify areas for further improvement. There are also several social initiatives in the works that I'm quite proud of. First, we've implemented a diversity, equity, and inclusion leadership council to oversee diversity inclusion efforts at Proto Labs. We've also conducted anti bias training for our employees and are creating employee resource groups as we continue to engage employees on matters that are important to them. In addition, Proto Givers, an employee led philanthropic organized a fundraiser in the first quarter to raise money for the Minnesota Assistance Council for Veterans to help veterans and their families who are homeless or at risk of becoming homeless by providing housing, employment, and legal services.
This is just one example of the great work all of our global locations are doing in their communities. We're in the early stages of our EST journey, and we'll continue to look for ways to build on our strong foundational practices throughout 2021 and beyond. On Thursday, 05/20/2021 at 10AM eastern time, we will host a virtual investor day. During this session, we'll go into greater depth and provide further insight into our long term strategy and our execution plan to achieve that strategy. I will be joined by several members of our executive leadership team to offer further information on our strategic initiatives for the next five years.
We last held an Investor Day event in 2017, and I'm truly looking forward to hosting you again later this month. There will also be a chance for current and prospective investor participation in the form of a live question and answer session after our prepared remarks. Please register today at the link provided in the press release we issued this morning. Now John will provide a detailed summary of our first quarter financial performance as well as our outlook for the second quarter. John?
Speaker 3
Thank you, Rob. Our detailed first quarter financial results begin on Page 16 of our presentation. First quarter revenue of $116,100,000 represents a 10.4% sequential increase or 5% organic sequential growth in constant currencies. Three d Hubs was acquired at the January and contributed $5,800,000 of revenue between the acquisition date and the end of the quarter. Additionally, changes in foreign currency had a $1,600,000 favorable impact on first quarter revenue.
We served 22,600 unique product developers in the first quarter, up 8% year over year and 24% sequentially. The first quarter growth was largely driven by the acquisition of three d Hubs, adding just over 3,000 product developers served. We will continue to increase the number of product developers we serve and increase the share of wallet with our existing customers as we execute on our 2021 priorities and longer term strategic objectives. Turning to Slide 17 and our detailed income statement. Our non GAAP gross margin in the quarter of 48.5% was in line with our guidance and compares to 51% in the fourth quarter of twenty twenty.
Three d Hubs represented a 190 basis point headwind on overall gross margin due to the lower margin nature of the outsourced manufacturing model. The three d Hubs gross margin was lower than our target target for this business driven by increased shipping and customs costs as well as higher sourcing costs during the quarter. The three d Hub's team is actively working on available levers to improve this gross margin performance. The remaining sequential The decrease was due to higher staffing costs in the form of overtime and contractor spend in our manufacturing facilities driven by the progression of orders during the quarter and efficiencies inefficiencies as our operations teams adapted to the new Proto Labs two point zero systems. As we go forward, business mix will play a role in our gross margin and is likely to introduce additional volatility in this metric.
Our total non GAAP operating expenses were $42,400,000 in the quarter compared to $37,400,000 in the fourth quarter of twenty twenty. Three d Hubs added 2,400,000.0 in the quarter. The remaining sequential increase consisted of the following factors. We had a full quarter of Broadalabs two point zero depreciation resulting in an additional $600,000 of expense. We incurred incremental overtime and contractor spend associated with going live on the ProtoLabs two point o system resulting in $600,000 of expense.
And the remaining increase was primarily related to an increase in accrued bonuses, payroll taxes and medical expenses compared to the fourth quarter. Our GAAP operating expenses included non recurring transaction costs of $2,500,000 associated with the three d Hubs acquisition and an increase in equity compensation associated with our CEO transition and the acquisition of three d Hubs. Moving to taxes. Our non GAAP effective tax rate in the first quarter was 22.7%, up from 18.2% in the prior quarter. The sequential increase was driven by a provision to return benefit in the fourth quarter that did not recur, a lower research and development tax credit and net operating losses at Treaty Hubs.
The net result was non GAAP diluted earnings per share in the quarter of $0.40 representing a $0.21 per share decrease from the prior year and a sequential decrease of $0.10 per share. Our non GAAP adjustments are consistent with our prior practices and are detailed in the appendix of our presentation. The sequential change in non GAAP earnings per share consisted of the following components. First, the addition of three d Hub's business represented a negative sequential impact of $08 per share, including lower investment income and the impact to weighted average shares outstanding. Increased volume in our legacy business and the incremental cost to support that volume represented a sequential increase of $04 per share.
This volume was offset by increased expenses related to Proto Labs two point zero launch, including depreciation of the system and additional labor during the launch, representing a $03 per share reduction. And finally, the increase in the effective tax rate had a $02 per share unfavorable impact on the quarter. Transitioning now to the cash flow statement and balance sheet summarized on Slide 19. We generated $6,400,000 in cash from operations in the first quarter compared to $22,400,000 in the first quarter of twenty twenty. Our operating cash flow this quarter was impacted by transaction costs associated with the three d Hubs acquisition and an increase in our receivables balance as a result of relatively higher sales at the end of the quarter and due to process inefficiencies as customers and employees adapted to the new Proto Labs two point zero systems.
The increase in receivables is a timing matter, and we are increasing our focus in order to improve cash flow in future quarters. Additionally, the net cash portion of the purchase price in the three d Hubs acquisition was $127,700,000 On March 31, we had $93,100,000 of cash and cash equivalents on the balance sheet and we continue to have no debt. Our proven digital manufacturing model will continue to provide strong cash flows and has enabled us to maintain flexibility and invest in future growth, including Proto Labs two point zero and the acquisition of three d Hubs. Turning now to our outlook for the second quarter of twenty twenty one. Consistent with past practice, we will provide a formal revenue range and a qualitative summary of our cost expectations in the quarter as outlined on Slide 21.
We expect second quarter revenue to be in the range of $117,000,000 to $127,000,000 representing sequential growth of up to 9%. We expect foreign currency to have an approximately $2,000,000 favorable impact on revenue compared to the prior year, assuming foreign currency rates remain at current levels. Our revenue guidance reflects the continued recovery in the macro environment. April revenue maintained the strength we saw in March and early May trends have remained fairly consistent with April. Now turning to expenses.
We expect our non GAAP second quarter gross margin to be approximately 48% plus or minus 50 basis points. Mix continues to be a factor in our second quarter gross margin estimate. As a reminder, we will have a full quarter of three d Hubs included in our second quarter results and the three d Hubs gross margins are lower than the legacy Proto Labs business, resulting in additional pressure on overall gross margin. We are also experiencing wage and raw material inflation costs, which we are actively working to mitigate through pricing and other operating efficiencies. Turning to operating expense.
We expect total non GAAP selling, general and administrative expenses to be between 43,000,000 and $45,000,000 These projected second quarter expenses include the following components that are incremental to the first quarter. Three d Hub's expenses will be included for the full quarter, adding approximately $1,000,000 of additional expense. We will continue to invest in marketing and sales to drive revenue growth. We will also continue to invest in R and D at a rate of approximately 8.5% of revenue to drive our long term revenue growth. Here are a few other components to consider for the second quarter.
We currently estimate our non GAAP tax rate to be approximately 23%. We anticipate a reduction in interest income of approximately $250,000 as a result of a lower average cash balance following the acquisition of three d Hubs. And finally, we estimate our second quarter fully diluted shares outstanding at approximately $28,000,000 I'll now turn the call over to Rob for final comments.
Speaker 2
Thank you, John. The 2021 marked the beginning of a new chapter for ProBolabs. The launch of ProBolabs two point o and the acquisition of three d Hubs together will greatly expand our ability to delight customers across a very broad range of their needs and use cases. Once integrated, these new capabilities will make Proto Labs not only the fastest and most reliable digital contract manufacturer in the industry, but also one of the most comprehensive in our services. In addition, we're well positioned to capture demand as the vaccine rollout continues, lockdowns end, and our customers return to work and accelerate their product development.
We will continue to focus on execution and prudently manage business performance in the short term, while also investing to expand our position as the digital manufacturing leader. We will continue working with three d hubs to plan and execute an integration that will enable us to offer the best in class digital manufacturing customer experience and the broadest digital manufacturing offer for custom parts. That concludes our formal remarks. Now John and I will gladly take your questions. Operator, can you please open the line?
Speaker 0
Thank you. At this time, we will be conducting a question and answer session. Our first question is from Brian Drab with William Blair. Please proceed with your question.
Speaker 4
Hi, good morning. Thanks for taking my questions.
Speaker 3
Hey, Brian. Hey, Brian.
Speaker 4
Hey. So first, I'm just curious, the developer count was up meaningfully. That includes developers on the three d Hubs platform. Is that right? And can you if so, can you give some granularity there in terms of how much three d Hubs contributed to that metric?
Speaker 3
Yeah. It, does include the three d Hubs developers, and that was approximately 3,000, developers in a quarter.
Speaker 4
Okay. And the number in the filing for first quarter twenty wouldn't be in a it it didn't change, so it's not adjusted for what, you know Correct. Pro form a for what it would have been. Right? Okay.
Speaker 3
Correct. That is
Speaker 4
correct. Thank you. Okay. And then, you know, three d Hubs is now kinda sprinkled across the different segments. And and can you give that breakdown, across CNC and injection molding and etcetera?
Speaker 3
Yeah. So in the footnote, you'll see we've we've broke it out by region. So you our the schedules in in the press release, so you can see that. As it relates by service, you know, about 60% of that revenue is CNC. About 30% is is three d printing, and the remainder is large largely I'm
Speaker 4
Okay. Okay. And then, you know, John, I think you said that the gross margin for three d hubs was below expectations. My memory is that the guidance was for three d hubs to be about a 200 basis point headwind in the quarter. And for me, that was translating to like 5% gross margin for three d hubs in the quarter.
Can you add some detail around what you mean by it was below expectations and help me understand what the gross margin might be going forward for that business?
Speaker 3
Yeah. So the the gross margin in the quarter was just over 10. And I think Okay. As you as you do your math, you'll you'll see that. And our expectations, long term for that business is 20 to 25%.
So it's a a little below where we expect it to be long term, and we're we're working to improve those gross margins.
Speaker 4
Okay. Yeah. Think I my five percent calculation is on a a lower revenue number, but, so that makes sense. So the was there anything else, like, in terms of purchase accounting or something that put pressure on it to result in that 10% or, you know, onetime temporary in nature? Or was it just the, I guess, the logistics and other sourcing costs you mentioned?
Speaker 3
Yes. The it purely is the logistics and and sourcing costs associated with it.
Speaker 5
Okay. Thanks a lot. I think
Speaker 3
I think maybe what you're referencing is in the the prior conversations, we were working through the mapping of the accounts, just to make sure that as we're reporting gross margin, we have the cost in consistent places. So, you know, I think that was creating, maybe a little bit of uncertainty as as we were talking at the time of the acquisition. But we worked through all of that, you know, since the acquisition
Speaker 6
in the last couple of years.
Speaker 4
Got it. Yes. That's what I was referring to. Okay. Thanks.
Speaker 0
Thank you. Our next question is from Greg Palm with Craig Hallum Capital Group. Please proceed with your question.
Speaker 7
Yes, thanks. Good morning, everyone. I guess maybe just starting with kind of a look back on the quarter. I mean, you look back, what surprised you versus the original guidance that you laid out back in February? It sounds like you maybe got some benefit from all the supply chain related impacts that we're all seeing.
But if I back out a little bit of incremental FX benefit, the quarter was still basically in line. And so I'm just curious if there was another part of the business that may be disappointed you versus the guidance because I'm assuming you have guidance for all the supply chain benefit in there, and I'm not even sure if you can quantify what the impact was.
Speaker 3
You know, I think, the quarter progressed and was pretty much in line with with where we expected. I'd say the the biggest difference probably was the uptick that we we saw in March. You know, with our typical seasonality pattern, we we start the year relatively slow in January and have a pickup in March, and and that pickup is always creates a little bit of uncertainty for us. And it was it was strong and brought that revenue in closer to the the top end of the range. On the other factors, I think, like, from being surprised, I think everything else was relatively in line with or was in line with with where we guided.
So I I don't know that there were a lot of other big surprises in in the quarter.
Speaker 2
Yeah. I would agree. It was well in line. I think the the thing we're always dealing with in q one is the timing of when we see the pickup and and the magnitude of that. So that's what we're referring to.
Speaker 7
Okay. Makes sense. Any availability concerns as it relates to raw materials or labor? What's your current view on both of those?
Speaker 2
Yeah. As we mentioned in the remarks, we're in the midst of a global resin shortage, which is impacting us as well as the well known electronics shortage, which is impacting some capital equipment. So we're working closely with our suppliers and managing that as best we can right now.
Speaker 7
Okay. And I guess just last one, as I'm thinking about it from an industry standpoint, it it certainly seems that, you know, the digital manufacturing market, you know, lots more buzz, lots more activity, you know, I'm not sure if you can give any evidence of new customers. I guess it doesn't really show it in the count, but there's also a lot of companies that are kind of scaling up, new competitors. One recently announced a transaction to go public. So just kinda curious how you're thinking about the landscape overall.
Speaker 3
Yeah. I think, you know, as we're thinking about new customers, I I think the count actually is up quite nicely. And I think the addition of hubs or three jobs brings, you know, a a different set of customers to us and and broadens that. And, you know, I I think all along, our our goal is to continue to increase the number of customers as well as increase share of wallet with with our existing customers and and and serve them better. And, you know, I think as we progress through the quarter, we're we were seeing some of that traction.
Speaker 2
Yeah. I you know, we we feel we're really well positioned in digital manufacturing to be able to capture this, and, you know, that's our strategy as we go forward.
Speaker 7
Okay. Great. Looking forward to hearing a little bit more on all this in a couple of weeks. So thanks for the color.
Speaker 2
Thanks, Greg. Thanks, Greg.
Speaker 0
Thank you. Our next question is from Jim Ricchiuti with Needham. Please proceed with your question.
Speaker 5
Hi. This is Tyler Bailey filling in for Jim. Thanks for taking my questions. So firstly, you mentioned 3,000 new partners that you acquired through three d Labs. Just wondering if you have any sense of a forecast through the year.
What's the potential add, I guess, you know, mid to late next year or the end of this year?
Speaker 3
You know, I think as we look at it, we we give our revenue guidance for the quarter. And, you know, the mix does play into it. You know, I think we're we're anticipating significant growth, in the three d Hubs business. I don't know that we're we're in a position or or gonna be giving, you know, product developer guidance for that specific component of the business. But we do expect it to continue to grow and continue to add to our overall product developer account.
Speaker 5
Yeah.
Speaker 2
And as we announced, you know, around the acquisition, we feel our customer overlap is is low, so there's a lot of opportunity there.
Speaker 4
Okay.
Speaker 5
Great. And and just to kinda, I guess, go back to your guidance you issued, pretty strong guidance. I wonder if you could talk a little bit about, I guess, the sort of the upper end of that guidance. What demand trends, you know, that you see that could maybe drive, you know, revenue towards that upper end?
Speaker 3
So, you know, as we're we're looking at it, you know, we had a had a strong March that continued through April. We are seeing strength in our injection molding production parts, And those orders can continue to come in, so continuing to watch that. You know, as we're working with both our suppliers and and customers as as Rob mentioned on the the resins, having that supply and and ability to fulfill, those within the quarter, I think, will be one component. I think three d hubs actually is is another one that, you know, could produce and and help us drive towards the the top end of that range. And I guess all of our services, are we are seeing traction and and momentum.
So, just depends how the the rest of the quarter plays out.
Speaker 2
Yeah. I mean, we're happy with the sequential growth, particularly that we're seeing across the board.
Speaker 5
And just a quick follow-up. Any particular strength in any,
Speaker 1
in any regions, North
Speaker 5
America, EMEA?
Speaker 3
Q one or as we're looking forward?
Speaker 5
As you're as you're looking forward, yes, through the rest of the year.
Speaker 3
Yeah. I think, The Americas is is a big component of that. Europe, we're still seeing challenges in both the economy as well as the the Brexit component of it and the logistics related to, some of the changes as a result of Brexit. So, you know, the growth in in Europe is is a little bit challenged. And then Japan, we also have just the normal seasonality with with the year ends.
Q one tends to be a little bit stronger than than q two in our historical patterns. So I'd say Americas is the the big driver there.
Speaker 8
I would just
Speaker 2
add in in Japan, you know, the the the COVID situation is, more extreme and it's causing lockdown. So we we see more uncertainty in in that economic recovery.
Speaker 4
Okay.
Speaker 5
That's helpful. Thank you. And and just one last question, and I'll jump back in line. Just wanted to get your, I guess, early observations, reactions from the launch of Proto Labs. I think you had mentioned you were in like a hypercare monitoring maybe last quarter, just wanted to see if you're you're moving on to the next phase now.
Speaker 2
Yeah. Good question. We definitely are moving on to the next phase. You know, as I as I mentioned in the remarks, we've we turned it on and, and it it worked across the board, which was, you know, great. And we've processed 54,000 orders, customer orders, you know, in that time.
So, we're we're you know, we continue to be in in this kind of, hypercare mode, but, we're we're moving out of that now. And and, you know, we're we're excited about what this platform will bring us as we've talked about.
Speaker 5
Great. Yes, thank you. That was most of my questions. Congrats on the quarter. Appreciate it.
Speaker 2
Thank you.
Speaker 0
You. Our next question is from Ben Rose with Battle Road Research. Please proceed with your question.
Speaker 8
Yes, hi, good morning Rob and good morning John. Good morning, Rob. Good morning. Great to see the progress the company's making. Had some specific questions, starting first on the medical device side.
I think you were hopeful that, excuse me, with the end of COVID that there might be some return to elective procedures. And just curious on the medical devices, are you seeing increased demand for things like implantable prototypes and prosthetics and so forth?
Speaker 3
You know, as as we look at it, you know, medical continues to be one of, our our stronger industry verticals. And actually, it's it's the top. You know, as far as the specific activity, I think we we are seeing the companies underneath there, continuing with their research and development activity. We also are experiencing a little more in the production part component, that I think is maybe indirectly linked to to some of the COVID work that we did and the ability to to attract customers there. So, you know, medical continues to perform well for us.
Speaker 2
And I think we're seeing a broadening, right, of, applications as as as people are returning.
Speaker 8
Okay. On the on the automotive side, you know, there's been a lot of buzz around, what's happening in terms of, EV development. I know that your business traditionally has not been with the larger OEMs, but I know you do work with, some of the design firms that they outsource work to. Is there any kind of meaningful, improvement from a prototype standpoint for, automotive?
Speaker 3
You know, actually, year over year, our automotive is is actually down a little bit. But I think that was more related to a a strong q one, and, you know, saw the dip in, you know, starting in the second quarter of of last year and then have been progressively improving as as we continue through that. So I I'd say there's not a meaningful change related to automotive. Okay.
Speaker 8
And with regard to Proto Labs two point o, I realize it's very early going, but I think, one of the goals was to, increase the number of services that developers might order from you. Do you have any, from your earlier experience, is there is there any movement on that front, such that there are more services being ordered?
Speaker 2
Yeah. Well, so first of all, two point o brought our three d printing capabilities onto, right, that shared platform, which I think was an important aspect. And it also helped us unlock, you know, more secondary operations and, and more capabilities, that support our production, offerings. And we are seeing an uptick in in those production offerings. Now some of that, you know, can be tied to seasonality as well as, you know, what we're seeing with the macro economy.
So I think, you know, we're we're still watching that so that we can really parse out all the root causes, but, we've been happy with it so far.
Speaker 8
Okay. And then, one other question. As it pertains to three d hubs, I know at the time of the acquisition, one of your, thoughts on it was that for customers that have, longer lead time requirements that some of the suppliers could help out in that regard. Are you seeing that part of the business as a meaningful contributor to what they're doing?
Speaker 3
Yeah. So I I think right now, both both components of the business are are almost on integration plans. I think you're you're spot on for the long term, really, the organizations together. But I think in this quarter, we're largely operating independently and the results are almost stand alone.
Speaker 8
Okay. And if I may, just one more question for Rob. With the demand environment improving, it would seem that timing would be right to increase the outbound selling and marketing efforts. And just curious to know your thoughts on how you're approaching You you had you had mentioned some, increased investment in sales and marketing. Was just curious to know how you're how you're approaching that, those kinds of activities.
Speaker 2
Sure. That's a combination of, you know, our our digital marketing, investments, as well as, our our sales team.
Speaker 8
Okay. Thanks very much.
Speaker 2
We're continuing you know, we've been working on this continued strategy to focus by industry more and more and specialize there. So we're continuing on that path as well, Ben.
Speaker 8
Okay. Okay. Thanks very much.
Speaker 2
Thank you.
Speaker 0
Thank you. Our final question is from David Mizrahi with Berenberg. Please proceed with your question.
Speaker 6
Hi, there. Sorry. Just a follow-up on operating expenses. So I understand the higher operating expenses for this quarter, but can you just speak about how you're thinking about some of that leverage moving into the back half of this year and into 2022? And do you have any goals you're talking to with respect to those operating expenses as well?
Speaker 3
Yeah. So I think, you know, provided the guidance for this quarter that is is really looking sequentially, commented on the r and d. And with r and d, you know, we're excited to move, from the work on two point o and, start executing on the the backlog of projects that we have, really to to help drive that customer demand and and customer growth. As Rob mentioned, you know, sales and marketing, we're gonna kinda continue to invest there. I think the levels at where we're at coming out of q two, we'll probably try to hold there, through the remainder of the year and then reevaluate as as we go into to '22.
And I'd say that the same with g and a, just kinda continue to try to to hold it at those levels. So, yeah, I I think as we progress through the year, that's that's what we're looking at.
Speaker 6
Great. Helpful. Thanks. And then just also sorry if I missed this earlier, but can you just walk through again what customer activities look like as we move through the months here and just where you're seeing that that continuous improvement? And that's it for me.
Thanks.
Speaker 3
I'm sorry. Could you could you repeat the question?
Speaker 2
Customer activities. Are you talking about kind of demand
Speaker 6
over time?
Speaker 2
What we've been seeing?
Speaker 6
Yeah. Sorry.
Speaker 2
Sure. So, generally, in q one, we see a seasonal lift as we go through the quarter. Start slow coming out of the holidays and in January, and then February is usually when we see kind of the the inflection and the pickup. And and March is, you know, seasonally our strongest month in the quarter. So we saw a similar trend this year, as in the past.
We actually,
Speaker 7
you know,
Speaker 2
had a, a stronger than normal, seasonal pickup between February and March. Does that answer the question, David?
Speaker 6
Yeah. That's great. Thank you. Just wanted to confirm that.
Speaker 0
Thank you. Ladies and gentlemen, we have reached the end of the question and answer session. I will now turn the call over to Rob Vador for
Speaker 2
Thank you. Thank you all for your time this morning. I'm pleased with our performance in the first quarter of twenty twenty one, and I'm confident in our long term strategic objectives. I want to thank the ProLabs and 3DHUBZ employees for their continued efforts as we drive our 2021 priorities forward. I also want to thank our shareholders for their continued support of ProLabs.
We look forward to providing you additional information on our long term strategy and financial objectives our virtual Investor Day on May 20. Thank you, and have a great day.
Speaker 0
This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation, and have a great day.