Proto Labs - Earnings Call - Q2 2025

Executive Summary

• Record revenue of $135.1M (+7.5% YoY) and non-GAAP EPS $0.41; both exceeded Wall Street consensus for Q2 2025 (Revenue $128.1M*, EPS $0.34*). Strength was led by CNC machining and U.S. demand, while injection molding and Europe were headwinds.
• Gross margin held flat sequentially on a non-GAAP basis (44.8%), though down ~90 bps YoY, driven by mix shift to Network and mid-quarter tariff changes on aluminum/steel that temporarily compressed U.S. Network margins; pricing adjustments restored Network margins by June.
• Q3 2025 guidance: revenue $130–$138M and non-GAAP diluted EPS $0.35–$0.43, with expected non-GAAP add-backs of ~$3.9M SBC and ~$0.9M amortization, and a non-GAAP tax rate of 24–25%.
• Stock reaction catalyst: multi-faceted beat (headline revenue and EPS) with clear narrative on tariff mitigation and durable CNC demand in aerospace/defense; trajectory signals continued YoY growth at the Q3 guide midpoint and confidence in production-led strategy.

What Went Well and What Went Wrong

What Went Well

• Record quarterly revenue ($135.1M) with U.S. growth +12% YoY; CNC machining set a company record (+20% YoY; +30% in U.S.), underscoring production traction in aerospace/defense.
• Non-GAAP EPS $0.41 rose both sequentially and YoY, supported by higher-than-anticipated volume; adjusted EBITDA margin expanded to 14.6%.
• CEO framing of strategic priorities and execution clarity: “Our priorities remain as follows: drive growth in our key performance indicators, expand production capabilities, and reinforce our core prototyping offer”.

What Went Wrong

• Injection molding revenue declined 3–4% YoY; management cited prior-year large auto orders and ongoing medical sector weakness.
• Non-GAAP gross margin down ~90 bps YoY due to higher Network mix and mid-quarter tariff impact on U.S. Network margins; Network margin landed at 29% in Q2.
• Europe remained soft (-15% YoY in constant currency) amid contracting manufacturing activity despite reorganization of go-to-market teams.

Transcript

Operator (participant)

Ladies and gentlemen, good morning and welcome to the Proto Labs' Second Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please signal the operator by pressing star and zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jason Frankman, VP and Corporate Controller. Please go ahead, sir.

Jason Frankman (VP and Corporate Controller)

Thank you, Ryan. Good morning, everyone, and welcome to Proto Labs' Second Quarter 2025 Earnings Conference Call. I am joined today by Suresh Krishna, President and Chief Executive Officer, and Dan Schumacher, Chief Financial Officer. This morning, Proto Labs issued a press release announcing its financial results for the second quarter ended June 30, 2025. 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. Our discussion today 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-K, 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 Investor Relations section of our company website for a complete reconciliation of GAAP to non-GAAP results. Now I'll turn the call over to Suresh Krishna. Suresh?

Suresh Krishna (President and CEO)

Thanks, Jason. Good morning, everyone, and thank you for joining our second quarter earnings call. Before getting into the details of our record performance during the quarter, I'd like to quickly introduce myself. I am honored and excited to step into the role of President and CEO at Proto Labs. I'm an engineer by training and have held many leadership positions in supply chain, operations, and general management. I have overseen profitable growth and shareholder value creation at several manufacturing companies. As a former Proto Labs customer, I have seen firsthand how the company reliably delivers high-quality custom parts and accelerates innovation for some of the world's most pioneering companies. In fact, I used Proto Labs' digital manufacturing capabilities to accelerate product development and beat the competition to market. I have long admired the company's leadership in digital manufacturing, its strong culture, and its commitment to innovation and customer service.

Proto Labs' next chapter is going to be an extraordinary one, and I'm thrilled to be leading this talented team. I also want to take a moment to thank Rob Bodor for his many contributions and leadership over the past several years. Rob played an important role in helping set the company's direction, and I'm grateful for the foundation he helped build. I have been in the role just over two months now, and I've spent much of that time listening to employees in our manufacturing facilities and offices, meeting with customers, and taking a fresh look at our strategy and how we are executing it. These experiences have only reinforced my conviction in Proto Labs' potential. We have a very innovative and resilient culture and a pervasive mindset for continuous improvement. I believe in this company.

I have personally seen the value Proto Labs delivers to its customers, and I'm excited about the opportunity to lead this great organization. This is a wonderful company with best-in-class profitability and cash flow generation and a history of rapid growth. In recent years, our growth has not kept pace with expectations. That said, I see this as a significant opportunity, and I'm energized by the work ahead to help re-accelerate the business towards sustainable, strong growth. I'm confident in our strategy of delivering high-quality custom parts across the full product lifecycle, from prototyping to production. With a strong foundation already in place, I believe we can sharpen our execution, particularly when it comes to customer and employee experience. These may sound like simple concepts, but done right, they can unlock meaningful long-term growth. They will be my top two focus areas.

I'm sure many of you are eager to hear about my long-term strategic vision, and that's an appropriate question. Let me reassure you that in the near term, there will be no radical shift in our current strategy. My immediate focus is to listen, learn, and engage closely with our teams, customers, and partners to identify the highest impact opportunities. I look forward to sharing more in the coming quarters. Now, on to our second quarter results. We delivered a very strong quarter, exceeding expectations in both revenue and EPS. This included record revenue, highlighting our ability to execute effectively in a dynamic and uncertain environment. Our best-in-class profitability also enabled us to continue returning capital to shareholders through ongoing share repurchases, further demonstrating the strength and resilience of our business model. I want to thank our teams across the globe for their hard work and dedication.

This performance wouldn't be possible without them. In addition to our financial results, we were also honored to receive a 2025 Future of Manufacturing Project Award from the National Association of Manufacturers. This recognition validates the progress we've made as a technology-focused, customer-centric manufacturer and underscores our leadership in driving innovation and agility across the industry. I'm also excited to announce that in June, our metal 3D printing service in Raleigh, North Carolina, received ISO 13485 certification, which is an internationally recognized quality standard for medical device manufacturers. This certification is important to both current and prospective medical customers and demonstrates our commitment to quality and excellence in medical device manufacturing. The ISO 13485 certification will help accelerate our growth in medical, specifically metal 3D printed non-active implants and other devices. Thanks to our production and quality teams for their hard work to achieve this certification.

Now, shifting to our two key growth indicators in the quarter. Customers utilizing our combined offer grew 44% over the trailing 12 months, and revenue per customer in the second quarter increased 11% year-over-year. I'm very encouraged by the continued traction we are seeing, particularly in expanding Share-a-Wallet with strategic customers. We also continue to make significant progress on our growth investments that we first shared with you on our Q4 2024 call in February. First, our marketing investments continue to drive engagement and reinforce our brand in both prototyping and production. We are seeing increased awareness and interest from customers across our target industries, especially aerospace and defense, where our speed, complexity, and domestic capabilities make us a preferred partner. We help accelerate innovation for a wide variety of customers in aerospace and defense.

We serve the leaders in space exploration and satellites like NASA, Blue Origin, and Relativity Space, as well as commercial aircraft manufacturers like Airbus and Boeing. Defense contractors, including Raytheon, Lockheed Martin, Northrop Grumman, and Anduril, all trust Proto Labs to deliver quality parts quickly. In addition, we manufacture lots of parts for companies on the leading edge of drone development, including defense, electric flying taxis, parcel delivery services, and many more. In an industry with lots of funding and innovation, Proto Labs is a trusted manufacturing partner for many. As our second key growth investment, we have continued to advance our sales enablement tools and processes, allowing our sales teams to better understand the strategic production needs of our customers and make it easier for these customers to interact with Proto Labs in this context. Third, we also continue to make progress to optimize our fulfillment channels.

These efforts help us better align our manufacturing footprint and capabilities with customer demand and are central to our ability to deliver a seamless customer experience across both factory and partner network. We are still early on the journey to improve our production fulfillment capabilities. Our global operations organization continues to refine how parts are manufactured with excellent quality in the right place at the right time for the right price, which vastly improves the customer experience. Turning to tariffs and the evolving trade landscape, this is another area where Proto Labs is well positioned to succeed. As always, we are focused on what we can control. Speed and agility are central to our operations, and those strengths are especially critical in today's environment. Our global manufacturing footprint gives us the flexibility to adapt quickly to shifting supply chain dynamics and serve customers effectively, regardless of geography.

While trade policies and tariffs continue to change rapidly, we believe tariffs and further investments in American manufacturing innovation are a tailwind for our business in the long term. On the other hand, tariffs and frequently changing trade policies can create short-term margin pressures. For instance, if we quote a price for the customer and subsequent trade policies alter our cost structure, we absorb that risk in the short term. While this may impact margins temporarily, our AI-driven pricing and fulfillment systems enable us to adapt in real time, delivering a smoother customer experience than many peers who simply pass tariff-related increases directly to the customer. This is a strong example of how we reduce friction for our customers, fostering greater loyalty and expanding Share-a-Wallet.

Finally, and perhaps most importantly, we continue to generate very healthy cash flows, which gives us the financial strength to invest in growth and innovation while maintaining resilience through market uncertainty. To close, I want to briefly revisit our 2025 priorities, which are still intact. We are both a prototyping and a production company, delivering through our digital factories and our partner network, and we execute with excellence across all these areas. Sharpening our strategy and execution are top priorities of mine, and it's essential for driving our growth. As I mentioned earlier, that focus extends to both customer and employee experiences. In the near term, we will work to remove friction for both customers and employees, and we will increase our speed of execution. I'm deeply committed to not just what we deliver to our customers, but how we deliver it by our employees with speed, clarity, and discipline.

Our priorities remain as follows: drive growth in our key performance indicators, expand our production capabilities, and reinforce our core prototyping business. I am pleased with the progress our employees have made through the first half of the year, and I'm confident that we have the foundation, the team, and the strategy in place to drive sustainable growth while maintaining our industry-leading profitability and cash flow generation. I'm excited about the path ahead. We'll continue to drive innovation, execute for our customers, and deliver long-term value to our shareholders. With that, I'll turn it over to Dan to walk through the financials. Dan.

Dan Schumacher (CFO)

Thanks, Suresh, and good morning, everyone. Second quarter revenue was a company record: $135.1 million. This is above our guidance range, up 6.5% year-over-year in constant currencies, and up 7% sequentially. Revenue fulfilled through our digital factories grew 4% year-over-year in constant currencies, and revenue fulfilled through Protolabs Network was up 16%. Turning to revenue by service in constant currencies, second quarter CNC machining revenue was also a company record, growing 20% over the prior year. In the U.S. alone, CNC machining revenue grew 30%. We continue to see very strong demand from aerospace and defense customers, specifically in high requirement parts. The value we deliver via our factory and network CNC machining offer is really resonating with our innovative customers. Injection molding declined 4% year-over-year. 3D printing revenue was down 1% year-over-year amidst continued weakness in prototyping.

Lastly, sheet metal grew 9%, bolstered by improved offerings and additional go-to-market efforts. Revenue in the U.S. grew 12% year-over-year, while Europe revenue declined 15% in constant currencies. Manufacturing activity in Europe continues to contract. We reorganized our European go-to-market teams at the start of the second quarter and remain focused on identifying and executing opportunities to drive demand across the region. Shifting to margins, second quarter consolidated non-GAAP gross margin was flat sequentially at 44.8%. On a year-over-year basis, gross margin was down 90 basis points, driven by higher growth in network revenue and a lower U.S. network margin due to changing tariffs. We responded to these changes by adjusting pricing, and in June, network margins were back to pre-tariff levels. Non-GAAP operating expenses increased $2.7 million compared to the prior year, an increase of 6%, consistent with revenue.

The majority of the operating expense increase was in variable expenses tied to revenue, namely incentive compensation and commissions. Second quarter adjusted EBITDA was $19.7 million, or 14.6% of revenue. Non-GAAP earnings per share were $0.41 in the quarter, above our guidance range, and up $0.08 sequentially on higher than anticipated volume. EPS was up $0.03 on a year-over-year basis. Proto Labs continues to lead the digital manufacturing industry in terms of cash generation, reflecting the strength of our business model. We generated $10.6 million in cash from operations during the second quarter, and we returned $3.1 million to shareholders in the form of repurchases. On June 30, we had $123.2 million of cash and investments on our balance sheet and zero debt. Our outlook for the third quarter of 2025 is outlined on slide 13. We expect revenue between $130 million and $138 million.

At the midpoint, this implies 6% growth year-over-year in constant currencies. We expect foreign currency to have an approximately $400,000 favorable impact on revenue compared to the third quarter of 2024. Moving to earnings guidance, we anticipate non-GAAP add-backs in the third quarter to include stock-based compensation expense of approximately $3.9 million and amortization expense of $900,000. We currently estimate a non-GAAP effective tax rate between 24% and 25% in the third quarter. In summary, we expect third quarter non-GAAP earnings per share between $0.35 and $0.43. That concludes our prepared remarks. Operator, please open the line for questions.

Operator (participant)

Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you would like to ask a question, please press star and one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Ladies and gentlemen, we will wait for a moment while we poll for questions. The first question comes from the line of Brian Drab from William Blair. Please go ahead.

Brian Drab (Equity Research Analyst)

Hi, good morning. Thanks for taking my questions.

Dan Schumacher (CFO)

Thanks, Brian.

Brian Drab (Equity Research Analyst)

Can you hear me okay?

Dan Schumacher (CFO)

Yeah, good morning.

Brian Drab (Equity Research Analyst)

I just wanted to first start with the strength that you're seeing in CNC. I'm curious, I know you mentioned aerospace and defense, that makes sense. I'm just wondering, are you seeing more of that strength in one area or the other in terms of the factory or the network, or is that driving growth across both of those business lines?

Dan Schumacher (CFO)

Yeah, thanks for the question, Brian. You know, we are seeing similar growth both in the factory and the network from a year-over-year growth percentage perspective. As I talked about on the call, it's 30% CNC machining growth in the U.S. that's really driving the overall 20% for the company.

Suresh Krishna (President and CEO)

Brian, no, it's just I'd like to just add, you know, we grew revenues with our larger accounts. That's based on the focus for our go-to-market reorganization that we've done. I'd like to give a huge shout out to our go-to-market team in the Americas for continuing to drive great customer service and great customer relationship. Also, a huge shout out to our production teams based in Nashua, New Hampshire, and Brooklyn Park, Minnesota, for being able to jump 30% more revenues year-over-year. That shows the agility that we have in the organization to be able to respond to customers' needs.

Brian Drab (Equity Research Analyst)

That's great. Are those, I'm just wondering if you could give us any insight into those orders and CNC work. Is that leaning more toward production, or is it leaning more toward prototyping, or all of the above? What's the breakdown there?

Dan Schumacher (CFO)

Yeah, I would say all of the above. We don't give a split at that level, but it is a combination of both production, and there is some prototyping that is in there as well. Obviously, the performance there, as Suresh talked about, helped increase our revenue for contact year-over-year, double digits.

Brian Drab (Equity Research Analyst)

Can you comment on whether you're seeing that strength continue into the third quarter, and is it still pretty robust in July?

Dan Schumacher (CFO)

Yeah, you know, the midpoint of our guide indicates that we're continuing to see the strength, and it's in the same areas, Brian.

Brian Drab (Equity Research Analyst)

Yeah, yeah. Okay. I'll just ask one more for now. Can you just add a little more color around the injection molding business? I know you said prototyping is relatively soft, but just how the injection molding business is, what's putting it under pressure, what could turn that around, and how it's performing across the network versus the factory?

Dan Schumacher (CFO)

Yeah, let me answer the last part of your question first. The network is a relatively small portion of our injection molding business. The majority of it is through the factory. A couple of things to comment on. Last year, we had some larger injection molding production orders, specifically in automotive, that provided some headwind year-over-year. In general, we're seeing weakness within medical, and that is impacting what we have around injection molding. That being said, we're continuing to innovate in that space. We see that as a real big driver for us in the future from a production perspective. We're continuing to add capabilities to that to win more of that production business.

Brian Drab (Equity Research Analyst)

Got it. Okay, I'll follow up more later. Congrats on the record revenue result.

Dan Schumacher (CFO)

Thanks, Brian.

Operator (participant)

Thank you. The next question comes from the line of Greg Palm from Craig-Hallum Capital Group. Please go ahead.

Greg Palm (Senior Research Analyst)

Hey, good morning. I'd also like to offer my congratulations on a good quarter, and Suresh, welcome aboard.

Dan Schumacher (CFO)

Thanks, Greg.

Suresh Krishna (President and CEO)

Thank you.

Greg Palm (Senior Research Analyst)

Maybe, Suresh, I'd like to just start with you in kind of a broader question on not necessarily why you joined, but you know, maybe it's a little bit early, but you've been there a couple of months, so you've got a little bit of an opportunity to figure out maybe, you know, what excites you, what's gone wrong in the past, what's been missing. I mean, just I know we're still waiting for kind of a longer-term strategic vision, but can you just tease us a little bit and give a little bit of a bit more color on kind of what's exciting you going forward?

Suresh Krishna (President and CEO)

Thanks, Greg, for that question. As I said in my prepared remarks, I believe there is a large opportunity to re-accelerate the growth of this business, and that's what excites me about joining Proto Labs at this point in time. I'm spending all my time listening and talking to our employees, customers, and our partners. Right now, I'm very focused on removing friction for our customers and our employees. Through these efforts, we'll be able to identify what our future opportunities are, and we'll be able to share those with you in the coming quarters.

Greg Palm (Senior Research Analyst)

Okay, fair enough. We'll be looking forward to that. In terms of the quarter and the gross margin, I want to maybe dig into that a little bit more. Presumably, maybe that's more related to some of the longer lead time offerings, but can you give us a sense on the negative impact from the tariffs? I don't know if you're able to kind of quantify that. Just to be clear, it sounds like that was maybe a temporary issue that's now been resolved. What's kind of the implied outlook for gross margin here in Q3?

Dan Schumacher (CFO)

Yeah, absolutely. Greg, yes, part of our pressure in the quarter on margins was tariffs. It was our, you know, our U.S. network margins that were impacted by that, and that had happened midway through the quarter. We were able to, like I said on the call, adjust our pricing and adjust our fulfillment so that in June, our margins and network margins in the U.S. were back to normal. That provided part of the headwind quarter-over-quarter from a gross margin perspective. In addition, we had soft volume through the factory within Europe as well, which also challenged the margins quarter-over-quarter. We had a higher mix of network revenue from Q1 to Q2, which also provided margin pressure. On the positive side, as we talked about, we grew 4% in the factory.

We had some strong factory margins in the United States that were able to offset those things, allowing gross margins to be flat quarter-over-quarter.

Greg Palm (Senior Research Analyst)

What exactly, though, in terms of the tariffs was the impact? I mean, you're a quick-turn business. I guess I'm a little bit confused on kind of what, I mean, what was happening in May, for instance, if you said it was midway through the quarter. What was the surprise that impacted the margin specifically, knowing that, I mean, a lot of it, I think the tariffs that were originally enacted were actually kind of early April, right?

Dan Schumacher (CFO)

The specific impact was, you know, when we talked about in the quarter last time, if a tariff was put on a certain country, from our network perspective, we can then source it from a different country to, you know, avoid those tariff impacts. The tariff that took hold was the one that was on aluminum and steel. It didn't matter what country it was coming from, you were going to get a tariff impact from that. As that happened in the network, which has longer lead times, you have more like 20 to 30 days of backlog that's through the network that is priced at a different price than what our assumption was on the cost on the tariff.

It was really, you know, at the time, adjusting our pricing so that, and looking at different ways in which our algorithm is working in terms of what we're charging MPs and so forth, working through those dynamics to offset the tariff impact. It takes 30 days for that backlog to come through, and then you get your margin right on the other side. I know a bit of a clunky answer, but it was the aluminum and the steel tariff impact. It was the fact that we have 30 days of backlog. Once we've adjusted for that, then we don't have a margin impact, but you still have that backlog coming through at a lower margin.

Greg Palm (Senior Research Analyst)

No, that's more color. I would have assumed it would have been a pass-through, but the lag makes sense. By the way, did you give a network?

Dan Schumacher (CFO)

Greg, just real quickly, we don't pass that through to the, we honor the price we give a customer. That's part of, you know, we think is going to value us over the long term, right, in terms of maintaining that relationship.

Greg Palm (Senior Research Analyst)

Okay. I guess two quick housekeepings. Did you give a gross margin for the Network business as a whole in the quarter? In terms of A&D, what percent of your business is A&D in terms of mix today?

Dan Schumacher (CFO)

Yeah, so Network margin was just below 30%. It was 29% in the quarter. In terms of percent of A&D, it's north of 20% in the quarter.

Greg Palm (Senior Research Analyst)

North of 20% in the quarter. Okay, I will leave it there. Thanks.

Dan Schumacher (CFO)

Yep.

Operator (participant)

Thank you. The next question comes from the line of Troy Jensen from Cantor Fitzgerald. Please go ahead.

Troy Jensen (Managing Director)

Hey gentlemen, congrats on the nice results, and Suresh, welcome.

Suresh Krishna (President and CEO)

Thank you.

Troy Jensen (Managing Director)

Hey, just a follow-up on a comment you just said about 30 days of visibility. I always thought of you guys as having much less than that. I thought lead times were like kind of seven to 10 days. Can you explain that comment?

Dan Schumacher (CFO)

Yeah, I have longer visibility for 15% of the business that goes through the network. For 85% of the business, I have limited visibility.

Troy Jensen (Managing Director)

Okay, I get it. That's network business. All right, perfect. I know like the last couple of quarters you've had this new initiative to push into production. Is there any update you can give us? Any kind of stats that I can see if you're being successful?

Dan Schumacher (CFO)

Yeah, obviously it's the stats that we talk about on the call, right? We're seeing an 11% increase in revenue per customer contact, right? We're really happy with that. In addition, we find customers that are fulfilling their orders through both the factory and the network in general are doing about twice the amount of business overall with us, right? It's another indication of moving more into production or fulfilling that customer more holistically. That was up 44% year-over-year. Those are the two external metrics that we talk about. That is driving a decent amount of our growth and the growth that you saw within the quarter.

Troy Jensen (Managing Director)

Okay. The last question from me, can you just talk about, would you expect to get normal seasonality in Q4, or is some of these initiatives going to help offset what we've typically seen as kind of a down slightly sequential quarter?

Dan Schumacher (CFO)

I would speak to the midpoint of our guidance, right? From where we see things, obviously coming off the earnings call last quarter, orders were stronger than what we anticipated, and that continued, and that's indicative of where we are in the guide. For our Q3 seasonality, we gave a midpoint of the guidance. I think that's where we think that that's going to fall. In terms of the fourth quarter, I would expect typical seasonality Q3 to Q4, just because of the holiday periods. That ends up being down slightly from the third quarter.

Troy Jensen (Managing Director)

Awesome. All right, guys, keep up the good work.

Dan Schumacher (CFO)

All right, thanks, Troy.

Suresh Krishna (President and CEO)

Thank you.

Operator (participant)

Thank you. Ladies and gentlemen, with that, we conclude the question and answer session. On behalf of Proto Labs, that concludes the conference. Thank you for your participation. You may now disconnect your lines.