Protolabs Reports Strong 1Q24 Results With Revenues and Profits Exceeding Expectations - BUY
Protolabs PRLB 0.00%↑ reported strong 1Q24 results with revenues, gross margin and EPS all coming above consensus expectations. We suspected this in our positive 1Q24 pricing analysis. While Q2 guidance came in a little lighter than expected, Protolabs expects to grow in the June quarter. Shares traded up ~4% on these results.
We continue to remain bullish on Protolabs and believe they continue to show strong execution in a challenging macro environment. We believe the combination of Protolabs Factory and Network business positions the company as a clear leader in the digital manufacturing space. We expect the combination will allow Protolabs to acquire new customers, and more importantly grow wallet share per customer given the company’s internal manufacturing capabilities.
Key Results vs Consensus Expectations
1Q24 Results
Revenue $127.9M BEAT consensus $125.5M
Adjusted EBITDA $20.2M BEAT consensus $17.6M
Non-GAAP EPS $0.40 BEAT consensus $0.32
2Q24 Guidance
Revenue $122 - 130M vs consensus $128.7M
Non-GAAP EPS $0.30 - 0.38 vs consensus $0.39
Key 1Q24 Earnings Takeaways
Protolabs saw 1Q24 revenues grow 1.6% Y/Y $127.9M, which came in at the high-end of Management guidance ($120 - 128M) and consensus expectations ($125.5M). Revenues in the quarter were driven by strong order growth across Injection Molding (up 1.4% Y/Y), CNC (up 3.8% Y/Y) and 3D Printing (up 1.2% Y/Y) service offerings. While the company’s Network business saw revenues grow 39% Y/Y to $23.9M, the company’s Factory business was down 4.3% Y/Y as challenging macro continues to hamper growth. From a geographic perspective, growth was led by sales in the United States, which were up 3.8% Y/Y. Meanwhile Europe sales were down 6.1% as this region remains challenging due to contracting manufacturing activity. Customer Contracts in the quarter were up sequentially, but down 3.5% Y/Y to 22,466. However, we were pleased with revenue per customer contracts growing 5.3% Y/Y. We expect the combination of Protolabs Network and Factory business will allow them to acquire new customers and grow wallet share per customer overtime.
We were specifically impressed with Protolabs strong gross margin performance, with Non-GAAP gross margins expanding 220 basis points Y/Y to 45.6%. The strong performance was driven by improvements in Factory gross margins driven by operational efficiency initiatives focused on automation technologies. However, the strong gross margin performance was met with higher opex as Protolabs continues to invest in additional operational efficiency initiatives and annual compensation expenses. Higher opex pressured adjusted EBITDA margins down sequentially to 15.8%, but $20.2M in adjusted EBITDA was still able to beat analyst expectations ($17.6M). Cash flow from operations was $21.3M and free cash flow was $18.8M in the quarter.
Protolabs guided Q2 revenues in the range of $122 - 130M, which implies 3.1% Y/Y growth at the midpoint, but did come in a bit lighter than expected. Management highlighted that they saw order softness throughout April in the US, but have started to see improvements. We are not surprised to hear this commentary given ISM Manufacturing Index returned to contraction territory in April (49.2). Given their guidance likely implies softness continuing throughout the quarter, we believe an improvement in US manufacturing activity in May and June could allow Protolabs to outperform these estimates. While Protolabs does not give formal gross margin guidance, they expect to sustain gross margins around the ~45% mark in Q2. However, the company expects opex to be up sequentially as they continue to invest in the business. This resulted in Non-GAAP EPS guidance in the range of $0.30 - 0.38, which was lower than consensus expectations of $0.39.
5-Year Financial Outlook
We expect Protolabs to continue to navigate a more challenging manufacturing environment and grow revenues 4.7% to $527.6M in 2024. We expect the company’s three biggest service offerings, injection modeling, CNC and 3D printing, to all drive growth in 2024. Looking beyond 2024, we expect the company can sustain ~7% annual revenue growth through 2028, which is in-line with the on-demand manufacturing industry. However, we believe Protolabs Factory and Network offering puts them in position to take market share. Coupled with the expectation the overall manufacturing environment should improve, we believe these estimates could end up being conservative.
We expect Protolabs Network business to continue to grow 20%+ over the next several years. Given this business has gross margins below the company average (~30%), we expect Protolabs to see limited gross margin expansion as the Network business accounts for a higher percentage of overall sales. However, we expect strong revenue growth and prudent cost management, will drive operating and adjust EBITDA margin expansion. Our current forecast expects the company to generate $86.2M in adjusted EBITDA in 2024. By 2028, we expect the company will be generating $128M in adjusted EBITDA. We expect strong adjusted EBITDA will translate into robust free cash flow (FCF) generation, reaching $80M by 2028. However, as we stated before, our estimates imply ~7% annual growth, which could be conservative and see the potential for upward revisions to our adjusted EBITDA and FCF estimates.
Below is an overview of our 5 year outlook with a full financial model here.
Source: Industrial Tech Analyst
Investment Thesis
We believe the combination of Protolabs Factory and Network business positions the company as a clear leader in the digital manufacturing space. We expect the combination will allow Protolabs to acquire new customers, and more importantly grow wallet share per customer given the company’s internal manufacturing capabilities. While we believe gross margins could be lumpy as the Network business ramps, we believe Protolabs will continue to grow and produce strong free cash flow. Protolabs is currently trading at ~8x EV/EBITDA based on 2025 estimates, which is well below the company’s 5-year average of ~20x. We believe as the manufacturing environment improves, stronger growth coupled with improving margins will drive multiple expansion back towards historical levels. These all support our bullish stance.
As shown in our table below we use a 5 year DCF model to value Protolabs shares. Based on our current forecast we value Protolabs at $55.82, which equates to ~75%+ upside at current levels.
Source: Industrial Tech Analyst
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