Market Overview

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

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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

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
                       
 

1 Stock-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  
 

2 For 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

Adjustments1

Non-GAAP GAAP

Change2

Currencies3

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 Adjustments1 Non-GAAP GAAP

Change2

Currencies3
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.
 
2 This 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.

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