Shares in Protolabs (NYSE: PRLB) dropped by 12.4% today on news of weak fourth-quarter demand. Sales met analysts’ expectations, but profits fell sharply compared with the fourth quarter of 2018.
The Maple Plain, Minn.-based rapid manufacturing company reported profits of $15.19 million or $0.63 per share, on sales of $111.89 million for the three months ended Dec. 31, 2019, for a bottom-line drop of -21.3% on a sales shrinkage of -0.07% compared with Q4 2018.
Adjusted to exclude one-time items, earnings per share were $0.64, 1¢ ahead of The Street, where analysts were looking for sales of $111.95 million.
CEO Vicki Holt blamed the results on global macroeconomic conditions that grew weaker as the quarter progressed. Sales to medical device companies showed strong growth, but automotive and consumer electronics declined, Holt said in an earnings call transcribed by Seeking Alpha. Demand was weak across all of the company’s services except 3D printing, where sales grew by 13% over the same quarter of 2018.
Since its founding in 1999, Protolabs’ fast manufacturing processes have helped created medical-related products ranging from fitness trackers to a blood-clot-detecting ultrasound system to ear-cleaning headphones. The company expanded its offerings in 2019, adding precision color-matching for injection-molded parts and Carbon’s digital light synthesis 3D-printing technology. It began offering metal 3D printing capabilities in June, and previously added on-demand manufacturing for injection molding, and secondary operations such as pad printing, laser engraving and threaded inserts.
“Our challenge is that we have not been able to fully realize the returns on these service expansions,” Holt said. “Our ability to provide the customer experience our customers have grown to expect from us on expansions of our core service offerings has been impaired due to the limitations of our systems.”
Those system limitations hampered the company’s ability to fully realize the benefits of its 2017 acquisition of Rapid Manufacturing, she added. Protolabs has also had to add manual processes to support its expanded offerings.
“The net result is that we are not fully able to capture the market demand for these services, while also increasing our cost structure to support manual process, impacting both the top and the bottom line,” Holt said.
Protolabs executives also announced a $10 million update of the business beginning in the second half of 2020, a plan that Holt said had been under consideration since 2017. Dubbed Protolabs 2.0, the update will include improvements to the company’s e-commerce business and back-end systems, according to chief technology officer Rich Baker.
“Our current system has limited ability to manage information associated with manufacturing quality, which is less important for prototype parts but is required for production orders,” Baker said. “The future interface will offer an intuitive approach to capture this information from customers and allow to flow through our front-end platform.”
“The long-term benefits of this important project include tremendous improvements in the customer experience, our internal productivity, the speed and scalability of the business and expanded internal business insights,” Holt added. “After our system is live, we’ll be able to launch new offerings and additional services online at a fraction of a time and complexity allowed by our existing systems.”
The company also announced Q1 2020 revenue guidance of $111 million to $117 million, and earnings per share guidance of $0.50 to $0.58.
“We have embarked on the Protolabs 2.0 project to provide the foundation that will allow us to serve our customers more holistically and capitalize on the current and expanding market opportunities,” said chief financial officer Richard Way. “Protolabs 2.0 will impact our financial performance in 2020. However, the project is necessary for us to realize our full potential as a business.”
Shares in PRLB were trading at $99.02 at market close on Thursday.
