Protolabs Reports Financial Results for the Third Quarter of 2023

MAPLE PLAIN, Minn.--(BUSINESS WIRE)--Proto Labs, Inc. ("Protolabs" or the "Company") (NYSE: PRLB), the world's leading provider of digital manufacturing services, today announced financial results for the third quarter ended September 30, 2023.

Third Quarter 2023 Highlights:

• Revenue for the third quarter of 2023 was a record $130.7 million, representing a 7.4% increase over the third quarter of 2022.
• Revenue generated from the digital network, powered by Hubs, was $22.6 million in the third quarter, representing growth of 86.9% over the third quarter of the prior year.
• Net income for the third quarter of 2023 was $8.0 million, or $0.31 per diluted share.
• Non-GAAP net income was $13.2 million, or $0.51 per diluted share. See "Non-GAAP Financial Measures" below.

"Protolabs produced third quarter financial results that surpassed our expectations on the top and bottom line. We generated record revenue, improved profitability, generated substantial cash flow, and returned capital to shareholders." said Rob Bodor, President and Chief Executive Officer. "This excellent financial performance demonstrates the success of our strategy; Protolabs' unique hybrid model combining the digital factory and the digital network is the best way to grow profitably in our industry. We experienced increased demand for our comprehensive digitally-enabled manufacturing capabilities in the quarter. The model is winning and customers are delighted."

Additional Third Quarter 2023 Highlights:

• Protolabs served 23,080 unique product developers during the quarter.
• Gross margin was 45.4% in the third quarter of 2023, up sequentially from 43.4% in the second quarter of 2023.
• Non-GAAP gross margin was 46.0% in the third quarter of 2023, representing a sequential increase of 190 basis points. See "Non-GAAP Financial Measures" below.
• EBITDA was $19.5 million, or 14.9% of revenue, in the third quarter of 2023, compared to $11.4 million, or 9.3% of revenue, in the second quarter of 2023. See "Non-GAAP Financial Measures" below.
• Adjusted EBITDA was $23.9 million, or 18.3% of revenue, in the third quarter of 2023, compared to $19.2 million, or 15.7% of revenue, in the second quarter of 2023. See "Non-GAAP Financial Measures" below.
• Cash flow from operations was $24.2 million in the third quarter of 2023, compared to $9.3 million in the second quarter of 2023.
• The Company repurchased $9.0 million of shares during the quarter.
• Cash and investments balance was $114.9 million as of September 30, 2023.

"Along with record revenue in the third quarter, we made substantial progress on our priority to improve profitability in both the digital factory and the digital network," said Dan Schumacher, Chief Financial Officer. "Through a challenging macro environment, Protolabs has demonstrated the industry-leading earnings power and cash flow generation of our business model, enabling us to continue to invest in future growth and return capital to shareholders."

Non-GAAP Financial Measures

The Company has included non-GAAP revenue growth by region and by service line that excludes the impact of changes in foreign currency exchange rates (collectively, "non-GAAP revenue growth"). Management believes these metrics, when viewed in conjunction with the comparable GAAP metrics, are useful in evaluating the underlying business trends and ongoing operating performance of the Company.

The Company has included earnings before interest, taxes, depreciation and amortization ("EBITDA") and EBITDA, adjusted for stock-based compensation expense, unrealized (gain) loss on foreign currency and costs related to the Japan closure activities (collectively, "Adjusted EBITDA"), in this press release to provide investors with additional information regarding the Company's financial results. The Company has also included earnings before interest, taxes, depreciation and amortization margin ("EBITDA margin") and EBITDA margin, adjusted for stock-based compensation expense, unrealized (gain) loss on foreign currency and costs related to the Japan closure activities (collectively, "Adjusted EBITDA margin"), in this press release to provide investors with additional information regarding the Company's financial results.

The Company has included non-GAAP gross margin, adjusted for stock-based compensation expense and amortization expense in this press release to provide investors with additional information regarding the Company's financial results.

The Company has included non-GAAP operating margin, adjusted for stock-based compensation expense, amortization expense and costs related to the closure of Japan (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 gross margin excluding Japan, adjusted for stock-based compensation expense and amortization expense in this press release to provide investors with additional information regarding the Company's financial results. The Company has included non-GAAP operating margin excluding Japan, adjusted for stock-based compensation expense, amortization expense, and costs related to the Japan closure activities (collectively, "non-GAAP operating margin excluding Japan"), 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, unrealized (gain) loss on foreign currency and costs related to the closure of Japan (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, non-GAAP gross margin, non-GAAP gross margin excluding Japan, non-GAAP operating margin, non-GAAP operating margin excluding Japan, non-GAAP revenue growth by region and by service, and Adjusted EBITDA and Adjusted EBITDA margin, 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 third quarter 2023 financial results and fourth quarter 2023 outlook today, November 3, 2023 at 8:30 a.m. EDT. 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. EDT start time. No participant code is required. A simultaneous webcast of the call and accompanying presentation will be available via the investor relations section of the Protolabs website and the following link: https://edge.media-server.com/mmc/p/ic4eziw6. 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 fastest and most comprehensive digital manufacturing service in the world. Our digital factories produce low-volume parts in days while our digital network of manufacturing partners powered by Hubs unlocks advanced capabilities and volume pricing at higher quantities. The result? One manufacturing source-from prototyping to production-for product developers, engineers, and supply chain teams across the globe. See what's next at protolabs.com.

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)
	September 30, 2023			December 31, 2022
	(Unaudited)
Assets
Current assets
Cash and cash equivalents	$	83,496		$	56,558
Short-term marketable securities		19,204			23,568
Accounts receivable, net		78,395			76,225
Inventory		13,803			13,578
Income taxes receivable		891			4,042
Prepaid expenses and other current assets		8,722			12,597
Total current assets		204,511			186,568
Property and equipment, net		243,022			257,785
Goodwill		273,991			273,991
Other intangible assets, net		26,668			31,250
Long-term marketable securities		12,212			26,419
Operating lease assets		2,737			3,844
Finance lease assets		16,763			17,532
Other long-term assets		4,341			4,779
Total assets	$	784,245		$	802,168
Liabilities and shareholders' equity
Current liabilities
Accounts payable	$	17,922		$	17,356
Accrued compensation		16,337			12,743
Accrued liabilities and other		21,027			22,384
Current operating lease liabilities		1,568			1,561
Current finance lease liabilities		16,630			17,537
Income taxes payable		1,144			-
Total current liabilities		74,628			71,581
Long-term operating lease liabilities		1,545			2,255
Long-term finance lease liabilities		671			-
Long-term deferred tax liabilities		17,138			26,322
Other long-term liabilities		5,341			4,362
Shareholders' equity		684,922			697,648
Total liabilities and shareholders' equity	$	784,245		$	802,168

Proto Labs, Inc. Condensed Consolidated Statements of Operations (In thousands, except share and per share amounts) (Unaudited)
	Three Months Ended September 30,							Nine Months Ended September 30,
		2023			2022				2023				2022
Revenue
Injection Molding	$	51,688		$	48,940			$	152,455			$	155,693
CNC Machining		52,916			47,489				149,317				141,809
3D Printing		21,622			19,823				63,952				59,458
Sheet Metal		4,291			5,219				12,478				15,066
Other Revenue		188			250				627				765
Total Revenue		130,705			121,721				378,829				372,791
Cost of revenue		71,423			68,089				212,648				205,933
Gross profit		59,282			53,632				166,181				166,858
Operating expenses
Marketing and sales		21,682			20,594				65,863				62,235
Research and development		10,105			9,309				30,647				29,316
General and administrative		17,058			16,477				49,713				49,770
Closure of Japan business		22			1,194				186				6,388
Total operating expenses		48,867			47,574				146,409				147,709
Income from operations		10,415			6,058				19,772				19,149
Other income (loss), net		320			(24	)			(1,758	)			(323	)
Income before income taxes		10,735			6,034				18,014				18,826
Provision for income taxes		2,781			2,083				7,784				7,223
Net income	$	7,954		$	3,951			$	10,230			$	11,603
Net income per share:
Basic	$	0.31		$	0.14			$	0.39			$	0.42
Diluted	$	0.31		$	0.14			$	0.39			$	0.42
Shares used to compute net income per share:
Basic		26,023,830			27,505,097				26,296,304				27,512,057
Diluted		26,028,456			27,508,217				26,327,606				27,522,734

Proto Labs, Inc. Condensed Consolidated Statements of Cash Flows (In thousands) (Unaudited)
	Nine Months Ended September 30,
		2023				2022
Operating activities
Net income	$	10,230			$	11,603
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		28,213				29,981
Stock-based compensation expense		11,811				13,335
Deferred taxes		(9,197	)			(8,920	)
Interest on finance lease obligations		859				-
Loss on foreign currency translation		3,906				-
Impairments related to closure of Japan business		-				2,842
Gain on disposal of property and equipment		(498	)			(1,174	)
Other		122				11
Changes in operating assets and liabilities:		10,600				3,886
Net cash provided by operating activities		56,046				51,564
Investing activities
Purchases of property, equipment and other capital assets		(9,935	)			(16,414	)
Proceeds from sales of property, equipment and other capital assets		693				3,227
Purchases of marketable securities		-				(45,872	)
Proceeds from sales of marketable securities		-				1,998
Proceeds from call redemptions and maturities of marketable securities		19,115				13,696
Net cash provided by (used in) investing activities		9,873				(43,365	)
Financing activities
Proceeds from exercises of stock options		1,986				2,311
Purchases of shares withheld for tax obligations		(1,436	)			(1,615	)
Repurchases of common stock		(39,053	)			(13,074	)
Principal repayments of finance lease obligations		(234	)			(417	)
Net cash used in financing activities		(38,737	)			(12,795	)
Effect of exchange rate changes on cash and cash equivalents		(244	)			(1,972	)
Net increase (decrease) in cash and cash equivalents		26,938				(6,568	)
Cash and cash equivalents, beginning of period		56,558				65,929
Cash and cash equivalents, end of period	$	83,496			$	59,361

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 September 30,								Nine Months Ended September 30,
		2023				2022				2023				2022
Non-GAAP net income, adjusted for stock-based compensation expense, amortization expense, unrealized (gain) loss on foreign currency and costs related to Japan closure activities
GAAP net income	$	7,954			$	3,951			$	10,230			$	11,603
Add back:
Stock-based compensation expense		4,441				4,907				11,811				13,335
Amortization expense		1,461				1,510				4,471				4,582
Unrealized (gain) loss on foreign currency		(29	)			382				86				742
Costs related to Japan closure activities		22				1,194				4,093				6,388
Total adjustments 1		5,895				7,993				20,461				25,047
Income tax benefits on adjustments 2		(633	)			(1,060	)			(931	)			(2,518	)
Non-GAAP net income	$	13,216			$	10,884			$	29,760			$	34,132
Non-GAAP net income per share:
Basic	$	0.51			$	0.40			$	1.13			$	1.24
Diluted	$	0.51			$	0.40			$	1.13			$	1.24
Shares used to compute non-GAAP net income per share:
Basic		26,023,830				27,505,097				26,296,304				27,512,057
Diluted		26,028,456				27,508,217				26,327,606				27,522,734

1	Stock-based compensation expense, amortization expense, unrealized (gain) loss on foreign currency and costs related to Japan closure activities were included in the following GAAP consolidated statement of operations categories:

	Three Months Ended September 30,							Nine Months Ended September 30,
		2023				2022			2023			2022
Cost of revenue	$	805			$	902		$	2,416		$	2,701
Marketing and sales		961				929			2,508			2,479
Research and development		675				602			1,888			1,702
General and administrative		3,461				3,984			9,471			11,035
Closure of Japan business		22				1,194			186			6,388
Total operating expenses		5,119				6,709			14,053			21,604
Other income (loss), net		(29	)			382			3,992			742
Total adjustments	$	5,895			$	7,993		$	20,461		$	25,047

2

For the three and nine months ended September 30, 2023 and 2022, income tax effects were calculated using the effective tax rate for the relevant jurisdictions. The Company's non-GAAP tax rates differ from its 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 Gross Margin (In thousands) (Unaudited)
	Three Months Ended September 30,								Nine Months Ended September 30,
		2023				2022				2023				2022
Revenue	$	130,705			$	121,721			$	378,829			$	372,791
Gross profit		59,282				53,632				166,181				166,858
GAAP gross margin		45.4	%			44.1	%			43.9	%			44.8	%
Add back:
Stock-based compensation expense		462				560				1,388				1,674
Amortization expense		343				342				1,028				1,027
Total adjustments		805				902				2,416				2,701
Non-GAAP gross profit	$	60,087			$	54,534			$	168,597			$	169,559
Non-GAAP gross margin		46.0	%			44.8	%			44.5	%			45.5	%

Proto Labs, Inc. Reconciliation of GAAP to Non-GAAP Gross Margin Excluding Japan (In thousands) (Unaudited)
	Three Months Ended September 30,								Nine Months Ended September 30,
		2023				2022				2023				2022
Revenue	$	130,705			$	121,721			$	378,829			$	372,791
Revenue excluding Japan	$	130,705			$	120,434			$	378,829			$	364,562
Gross profit		59,282				53,632				166,181				166,858
GAAP gross margin		45.4	%			44.1	%			43.9	%			44.8	%
Less: Japan gross profit		-				47				-				3,150
Gross Profit excluding Japan		59,282				53,585				166,181				163,708
GAAP gross margin excluding Japan		45.4	%			44.5	%			43.9	%			44.9	%
Add back:
Stock-based compensation expense		462				560				1,388				1,674
Amortization expense		343				342				1,028				1,027
Less:
Japan stock-based compensation expense		-				13				-				61
Japan amortization expense		-				-				-				-
Total adjustments		805				889				2,416				2,640
Non-GAAP gross profit excluding Japan	$	60,087			$	54,474			$	168,597			$	166,348
Non-GAAP gross margin excluding Japan		46.0	%			45.2	%			44.5	%			45.6	%

Proto Labs, Inc. Reconciliation of GAAP to Non-GAAP Operating Margin (In thousands) (Unaudited)
	Three Months Ended September 30,								Nine Months Ended September 30,
		2023				2022				2023				2022
Revenue	$	130,705			$	121,721			$	378,829			$	372,791
Income from operations		10,415				6,058				19,772				19,149
GAAP operating margin		8.0	%			5.0	%			5.2	%			5.1	%
Add back:
Stock-based compensation expense		4,441				4,907				11,811				13,335
Amortization expense		1,461				1,510				4,471				4,582
Costs related to Japan closure activities		22				1,194				186				6,388
Total adjustments		5,924				7,611				16,468				24,305
Non-GAAP income from operations	$	16,339			$	13,669			$	36,240			$	43,454
Non-GAAP operating margin		12.5	%			11.2	%			9.6	%			11.7	%

Proto Labs, Inc. Reconciliation of GAAP to Non-GAAP Operating Margin Excluding Japan (In thousands) (Unaudited)
	Three Months Ended September 30,								Nine Months Ended September 30,
		2023				2022				2023				2022
Revenue	$	130,705			$	121,721			$	378,829			$	372,791
Revenue excluding Japan	$	130,705			$	120,434			$	378,829			$	364,562
Income from operations		10,415				6,058				19,772				19,149
GAAP operating margin		8.0	%			5.0	%			5.2	%			5.1	%
Less: Japan (loss) income from operations		(7	)			(724	)			(481	)			(720	)
Income from operations excluding Japan		10,422				6,782				20,253				19,869
GAAP operating margin excluding Japan		8.0	%			5.6	%			5.3	%			5.5	%
Add back:
Stock-based compensation expense		4,441				4,907				11,811				13,335
Amortization expense		1,461				1,510				4,471				4,582
Costs related to Japan closure activities		22				1,194				186				6,388
Less:
Japan stock-based compensation expense		-				89				17				386
Japan amortization expense		-				-				-				-
Total adjustments		5,924				7,522				16,451				23,919
Non-GAAP income from operations excluding Japan	$	16,346			$	14,304			$	36,704			$	43,788
Non-GAAP operating margin excluding Japan		12.5	%			11.9	%			9.7	%			12.0	%

Proto Labs, Inc. Reconciliation of GAAP Net Income to EBITDA and Adjusted EBITDA (In thousands) (Unaudited)
	Three Months Ended September 30,								Nine Months Ended September 30,
		2023				2022				2023				2022
Revenue	$	130,705			$	121,721			$	378,829			$	372,791
GAAP net income		7,954				3,951				10,230				11,603
GAAP net income margin		6.1	%			3.2	%			2.7	%			3.1	%
Add back:
Amortization expense	$	1,461			$	1,510			$	4,471			$	4,582
Depreciation expense		7,869				8,197				23,742				25,399
Interest income, net		(561	)			(265	)			(1,283	)			(459	)
Provision for income taxes		2,781				2,083				7,784				7,223
EBITDA		19,504				15,476				44,944				48,348
EBITDA Margin		14.9	%			12.7	%			11.9	%			13.0	%
Add back:
Stock-based compensation expense		4,441				4,907				11,811				13,335
Unrealized (gain) loss on foreign currency		(29	)			382				86				742
Costs related to Japan closure activities		22				1,194				4,093				6,388
Total adjustments		4,434				6,483				15,990				20,465
Adjusted EBITDA	$	23,938			$	21,959			$	60,934			$	68,813
Adjusted EBITDA Margin		18.3	%			18.0	%			16.1	%			18.5	%

Proto Labs, Inc. Comparison of GAAP to Non-GAAP Revenue Growth by Region (In thousands) (Unaudited)
	Three Months Ended September 30, 2023										Three Months Ended September 30, 2022			% Change2			% Change Organic3
	GAAP			Foreign Currency1				Non-GAAP			GAAP
Revenues
United States	$	103,940		$	-			$	103,940		$	98,970		5.0	%		5.0	%
Europe		26,765			(1,666	)			25,099			21,464		24.7	%		16.9	%
Japan		-			-				-			1,287		(100.0	%)		(100.0	%)
Total revenue	$	130,705		$	(1,666	)		$	129,039		$	121,721		7.4	%		6.0	%

	Nine Months Ended September 30, 2023									Nine Months Ended September 30, 2022			% Change2			% Change Organic3
	GAAP			Foreign Currency1			Non-GAAP			GAAP
Revenues
United States	$	298,007		$	-		$	298,007		$	295,121		1.0	%		1.0	%
Europe		80,822			1,311			82,133			69,441		16.4	%		18.3	%
Japan		-			-			-			8,229		(100.0	%)		(100.0	%)
Total revenue	$	378,829		$	1,311		$	380,140		$	372,791		1.6	%		2.0	%

1	Revenue for the three and nine months ended September 30, 2023 has been recalculated using 2022 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 for the three and nine months ended September 30, 2022 to GAAP revenue for the three and nine months ended September 30, 2023.
3	This column presents the percentage change from GAAP revenue for the three and nine months ended September 30, 2022 to non-GAAP revenue for the three and nine months ended September 30, 2023 (as recalculated using the foreign currency exchange rates in effect during the three and nine months ended September 30, 2022) in order to provide a constant-currency comparison.

Proto Labs, Inc. Comparison of GAAP to Non-GAAP Revenue Growth by Service Line (In thousands) (Unaudited)
	Three Months Ended September 30, 2023										Three Months Ended September 30, 2022			% Change2			% Change Organic3
	GAAP			Foreign Currency1				Non-GAAP			GAAP
Revenues
Injection Molding	$	51,688		$	(655	)		$	51,033		$	48,940		5.6	%		4.3	%
CNC Machining		52,916			(708	)			52,208			47,489		11.4			9.9
3D Printing		21,622			(390	)			21,232			19,823		9.1			7.1
Sheet Metal		4,291			(20	)			4,271			5,219		(17.8	)		(18.2	)
Other Revenue		188			107				295			250		(24.8	)		18.0
Total Revenue	$	130,705		$	(1,666	)		$	129,039		$	121,721		7.4	%		6.0	%

	Nine Months Ended September 30, 2023										Nine Months Ended September 30, 2022			% Change2			% Change Organic3
	GAAP			Foreign Currency1				Non-GAAP			GAAP
Revenues
Injection Molding	$	152,455		$	781			$	153,236		$	155,693		(2.1	)%		(1.6	)%
CNC Machining		149,317			152				149,469			141,809		5.3			5.4
3D Printing		63,952			277				64,229			59,458		7.6			8.0
Sheet Metal		12,478			(9	)			12,469			15,066		(17.2	)		(17.2	)
Other Revenue		627			110				737			765		(18.0	)		(3.7	)
Total Revenue	$	378,829		$	1,311			$	380,140		$	372,791		1.6	%		2.0	%

1		Revenue for the three and nine months ended September 30, 2023 has been recalculated using 2022 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 for the three and nine months ended September 30, 2022 to GAAP revenue for the three and nine months ended September 30, 2023.
3		This column presents the percentage change from GAAP revenue for the three and nine months ended September 30, 2022 to non-GAAP revenue for the three and nine months ended September 30, 2023 (as recalculated using the foreign currency exchange rates in effect during the three and nine months ended September 30, 2022) in order to provide a constant-currency comparison.

Proto Labs, Inc. Product Developer Information (Unaudited)
	Three months ended September 30,				Nine months ended September 30,
	2023		2022		2023		2022
Unique product developers and engineers served	23,080		23,816		45,668		47,793

Contacts

Investor Relations Contact
Protolabs
Ryan Johnsrud, 612-225-4873
Manager - Investor Relations and FP&A
[e-mail]

Media Contact
Protolabs
Brent Renneke, 763-479-7704
PR & Media Strategist
[e-mail]