Rob Bodor, the President and CEO of digital manufacturing provider Protolabs (PRLB), has said that he’s “disappointed with its third quarter earnings,” despite the fact it reported a 17% revenue rise in its Q3 2021 financials.
During the third quarter, Protolabs generated $125 million worth of income, a figure that represents a 17% increase on the $108 million it reported in Q3 2020, and is well in-line with its guidance for the period. However, the firm also reported a low quarterly gross margin of 44%, citing COVID-induced labor, material and equipment shortages, as well as the impact of Brexit, for its worse than expected showing.
Similarly, due to disruption within its core European markets, Protolabs’ Hubs 3D printing subsidiary reported flat quarter-on-quarter revenue growth in Q3 2021, thus its parent firm has now unveiled pricing, efficiency and automation changes, which are designed to convert the companies’ promising client numbers into profitability.
In spite of this, since the publication of its results, Protolabs’ shares have fallen 18%, suggesting that its investors have seen beyond the firm’s wider revenue recovery, and taken issue with the low gross margin figures behind its top-line gains.
“Although our third quarter revenue was within our guidance range, earnings were below our expectations,” said Bodor. “To address our near-term challenges, we are taking several measures [but] these actions may not all have an immediate impact on our financial results, and the benefits may be muted in the fourth quarter due to lower seasonal revenues, and continued macro-weakness in Europe.”
Protolabs’ Q3 2021 financials
Protolabs reports its revenue across four segments: Injection Molding, CNC Machining, 3D Printing and Sheet Metal. As usual, Injection Molding was the firm’s highest-earner, bringing in $58 million over the course of Q3 2021, but CNC Machining was by far its fastest-growing division, as it generated $44 million, 33% more than the $33 million reported in Q3 2020.
The company’s 3D Printing revenue also grew from $16 million to $19 million between Q3 2020 and 2021, albeit at a slower rate than it managed to achieve in Q2 2021, when its revenue jumped by 29%. In terms of Protolabs’ Hubs subsidiary, its growth was even more sluggish during Q3 2021, as despite achieving a 35% year-on-year revenue rise, its sales were entirely flat against Q2 2021 at $9 million.
Bodor told analysts on the firm’s earnings call, that changing the name of its subsidiary to ‘Hubs’ had “caused a temporary decline in customer acquisition,” impacting on its Q3 income. As a knock-on effect, the purchase also cost Protolabs $3.8 million in expenses, but Bodor maintains that the rebrand is the “right move for the long-term,” and the deal will “broaden its pricing and lead time options.”
More broadly, to drive greater profitability across its business, the company has committed to making pricing changes to offset cost inflation, while investing further R&D funding in improving its operating efficiency and harnessing the potential of automation, with the aim of reducing its reliance on the turbulent labor market.
| Protolabs Revenue ($) | Q3 2020 | Q3 2021 | Difference (%) | Q3 2019 | Q3 2021 | Difference (%) |
| Injection Molding | 53m | 58m | +12 | 55m | 58m | +5 |
| CNC Machining | 33m | 44m | +33 | 40m | 44m | +10 |
| 3D Printing | 16m | 19m | +19 | 16m | 19m | +19 |
| Sheet Metal | 4m | 5m | +25 | 5m | 5m | N/A |
| Total Revenue | 108m | 125m | +16 | 118m | 125m | +6 |
Continuing to drive user growth
Despite achieving a lower than expected gross profit margin, Protolabs still managed to increase its number of unique product developers by 25% year-on-year to 23,450. During Q3, the company also unveiled two key initiatives which suggest that it has ambitions to expand this customer base even further, particularly within the electronics, oil and gas sectors.
Working with electronic part supplier RS Components, Protolabs launched its ‘Design and Manufacturing Solution’ in September 2021, which allows its partner’s clientele to 3D print models directly from DesignSpark CAD software, providing them with a complete design to-manufacture workflow, while potentially attracting new users to its services.
During the quarter, the company also published the results of its ‘Decision Time’ survey, which found that 83% of oil and gas firms are considering adopting 3D printing within spare part production. With many respondents agreeing on the need to drive greater material efficiency, as well as a better cost-per-part in the sector, the poll uncovered a potential opportunity for Protolabs’ services there.
In the shorter-term, the firm aims to invest in improving the experience of its existing customers, and it launched ‘Protolabs 2.0’ earlier this year. Although the company concedes that the upgrade to its online platform has caused “internal operational efficiency” issues that have hampered the software’s outright performance, it says its “customers’ response to the new platform continues to be positive.”
Elsewhere, Protolabs has made progress with its integration of Hubs, and according to Bodor, this has enabled it to “serve more customer needs,” while the launch of its upgraded CNC Machining and Injection Molding services, are thought to have contributed greatly to its revenue gains during Q3, thus it has committed to continue investing in these areas moving forwards.
Stagnant gross margins ahead?
Looking ahead to Q4, Bodor said on the earnings call that he “anticipates continued wage and raw material cost inflation,” thus he’s projecting a relatively unchanged non-GAAP gross margin of around 45%. However, he expects the benefits of Protolabs’ price changes and operational efficiency measures to positively impact the firm’s profitability from 2022, after Q4 holiday expenses have been cleared.
The company also remains in a strong financial position, as it had liquid capital of $84 million and a debt-free balance sheet, as of September 30, 2021. While this figure is much lower than the $200 million it had at the same point in 2020, Bodor maintains that it has the funding needed to invest where necessary, and identified 3D printing as a particularly promising area of potential growth for the firm.
“The 3D Printing market has been growing nicely since 2014, and we continue to see a lot of opportunities in the 3D Printing space,” concluded Bodor. “With that demand, and as the technology transitions from prototyping into more production applications, we see a tremendous opportunity, so we are investing in order to realize that.”
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Featured image shows Protolabs’ Minnesota headquarters. Photo via Protolabs.
