Proto Labs' Q3 2025 Earnings Call: Contradictions in CNC Growth, Margin Drivers, Sales Efficiency, and 3D Printing Strategy

Date of Call: October 31, 2025

Financials Results

• Revenue: $135.4M, up 7.8% YOY (6.8% in constant currencies); network revenue $30.1M, up 16.2% in constant currencies; U.S. revenue up 10% YOY
• EPS: $0.47 non-GAAP per share, up $0.06 sequentially; flat YOY
• Gross Margin: 45.9% non-GAAP gross margin, up 110 basis points sequentially; network gross margin ~33% in the quarter
• Operating Margin: Adjusted EBITDA margin 15.6% of revenue; non-GAAP operating expenses $48.6M or 35.9% of revenue, down 30 basis points sequentially

Guidance:

• Revenue for Q4 2025 expected between $125M and $133M (midpoint implies ~6% YOY growth).
• Foreign currency expected to favorably impact Q4 revenue by ~$1.5M vs Q4 2024.
• Estimated non-GAAP add-backs: stock-based comp ~$3.9M and amortization ~$0.9M.
• Estimated non-GAAP effective tax rate 23%–24% in Q4.
• Q4 non-GAAP EPS expected between $0.30 and $0.38.

Business Commentary:

* Record Revenue and Growth: - Proto Labs reported record revenue of $135.4 million for Q3, up 7.8% year-over-year. - Growth was driven by increased demand in U.S. CNC machining and sheet metal offerings, particularly in aerospace and defense sectors like drones and satellites.

• Improved Gross Margins:
• Consolidated non-GAAP gross margin improved to 45.9%, up 110 basis points sequentially.

• The improvement was due to better factory and network gross margins, as well as increased European factory revenue.

• Increased Revenue per Customer:

• Third-quarter revenue per customer increased almost 15% year-over-year.

• This was due to deeper customer relationships and increased share of wallet with large and strategic customers.

• CNC Machining Capacity Expansion:

• CNC machining revenue grew 18.2% year-over-year, with U.S. growth at 24%.

• The expansion in capacity is in response to strong demand, particularly in aerospace and defense sectors.

• Adoption of Combined Offer:

• Customers utilizing both factory and network fulfillment increased by 35% year-over-year.
• This growth is attributed to the company's focus on removing customer friction and providing integrated solutions.

Sentiment Analysis:

Overall Tone: Positive

• Management highlighted "record quarterly revenues" and that results "exceeded earnings expectations," noting "accelerated revenue growth" and "significant momentum into year-end." CFO reported $29.1M cash from operations and sequential gross margin improvement of 110 bps, and provided constructive Q4 revenue and EPS guidance.

Q&A:

• Question from Greg Palm (Craig-Hallum Capital Group LLC): What's the opportunity and potential long-term growth rate for the company?
  Response: Management is focused on reaccelerating growth via a strategic plan to be disclosed in 2026; current initiatives (removing friction, lifecycle offerings) are driving >7% growth in the last two quarters.

• Question from Greg Palm (Craig-Hallum Capital Group LLC): Is current growth company-specific or driven by end-market strength; what company initiatives could step up growth?
  Response: Growth is both company-specific and end-market-driven; advanced machining is a concrete company initiative and management sees demand across multiple industries, with more initiatives to be detailed in 2026.

• Question from Greg Palm (Craig-Hallum Capital Group LLC): What is the CapEx requirement for CNC expansion — machines or facilities, and where are you in the build-out?
  Response: Expansion is equipment-only (adding mills); no facility expansion required and capacity can be added quickly by purchasing machines.

• Question from Troy Jensen (Cantor Fitzgerald & Co.): Unique developer count is down YOY — why isn't the customer base growing?
  Response: Current focus is on growing share of wallet (revenue per customer) while also working to expand the overall customer base; serving ~50,000 customers annually.

• Question from Troy Jensen (Cantor Fitzgerald & Co.): Can you discuss cross-selling (customers using both factory and network)?
  Response: Trailing 12-month customers ordering from both factory and network increased ~35% YOY; this enables broader conversations and holistic solutions that drive more business.

• Question from Brian Drab (William Blair & Co.): How automated is the advanced CNC capability and is the evaluation of 2D drawings automated?
  Response: The advanced CNC workflow is largely automated via the e-commerce site (digital thread) with optional application engineer support for clarifications.

• Question from Brian Drab (William Blair & Co.): If a 2D drawing has many tolerances, does the system account for them automatically or is manual engineering needed?
  Response: The website guides users through specifications via dropdowns so engineers can specify needs digitally; manual engineering support is available when customers require clarification.

• Question from Brian Drab (William Blair & Co.): How is pricing positioned versus network partners for the advanced service?
  Response: Offer is competitive in the 5–10 day lead-time segment; front-end is automated but specialist support is provided for specific customer requirements.

• Question from Brian Drab (William Blair & Co.): What are medium-term prospects for injection molding, which has been relatively flat?
  Response: Injection molding softness is driven by reduced prototyping activity; the business remains important and management will outline initiatives to grow it in 2026.

• Question from James Ricchiuti (Needham & Company, LLC): What drove the gross margin improvement; network margins and any tariff impact?
  Response: Network gross margin ~33%; quarter-over-quarter network improvements (~80 bps) plus better factory utilization (notably higher Europe factory revenue) drove the 110 bps sequential gross margin gain; tariff impacts were mitigated via pricing and sourcing adjustments.

• Question from James Ricchiuti (Needham & Company, LLC): What's driving revenue per customer — new vs existing customers and which verticals?
  Response: Revenue-per-customer gains came from both new and existing customers across multiple verticals (aerospace/defense, drones, satellites, robotics, semiconductors, consumer electronics) and were aided by a reorganized Americas sales team enabling deeper customer conversations.

Contradiction Point 1

CNC Machining Opportunity and Growth Rate

It involves differing views on the growth potential and customer demand for CNC machining services, which could impact strategic planning and investor expectations.

Could you clarify Proto Labs' long-term growth opportunities and potential rate? - Greg Palm (Craig-Hallum Capital Group LLC)

2025Q3: Our last two quarters showed growth above 7%, indicating a trend. We are working on a new strategic plan to be shared in 2026. Confidence in future growth comes from current initiatives resonating strongly with customers, such as advanced machining capabilities. - Suresh Krishna(CEO)

Are the CNC orders focused on production, prototyping, or both? - Brian Paul Drab (William Blair & Company L.L.C., Research Division)

2025Q2: It is a combination of both production and some prototyping. We don't give a split at that level. - Daniel Schumacher(CFO)

Contradiction Point 2

Gross Margin Improvement Contributors

It highlights differing explanations for the improvement in gross margins, which are critical financial indicators for investors and stakeholders.

What factors contributed to the quarter's gross margin improvement? - James Ricchiuti (Needham & Company, LLC)

2025Q3: Network margins benefited from tariff-related pricing and sourcing adjustments, and factory margins improved due to increased revenue in Europe supporting more efficient operations. - Dan Schumacher(CFO)

Are the CNC work orders focused on production, prototyping, or both? - Brian Paul Drab (William Blair & Company L.L.C., Research Division)

2025Q2: On the network side, we did have some benefits from our tariff-related price adjustments and sourcing changes. - Daniel Schumacher(CFO)

Contradiction Point 3

Sales Team Efficiency and Revenue Growth

It delves into the effectiveness of the sales team and their contribution to revenue growth, which is crucial for strategic planning and performance evaluation.

What is driving revenue per customer growth? - James Ricchiuti (Needham & Company, LLC)

2025Q3: The Americas sales team's in-depth customer conversations are enabling more holistic service provision, driving share of wallet increase. - Suresh Krishna(CEO) and Dan Schumacher(CFO)

Are the CNC work orders oriented toward production, prototyping, or both? - Brian Paul Drab (William Blair & Company L.L.C., Research Division)

2025Q2: We're looking at our opportunities to further grow our sales force in those areas and build out some new capabilities that may be beneficial to our customer base. - Daniel Schumacher(CFO)

Contradiction Point 4

3D Printing Business Strategy

It involves differing statements about the strategy and alignment of the 3D Printing business, which can impact investor understanding of the company's priorities and growth areas.

How did you achieve record revenue per developer despite a decline in the number of developers? - Troy Jensen (Cantor Fitzgerald & Co.)

2025Q3: We are absolutely focused on growing our customer base, although currently focusing on growing share of wallet. More initiatives are planned for further expansion in 2026. - Suresh Krishna

How does the 3D Printing business align with the overall strategy? - James Ricchiuti (Needham & Company)

2025Q1: 3D Printing is mostly prototyping, facing headwinds due to the macroeconomic environment. We pivoted to focus on production, seeing growth in production-related 3D Printing. The 3D Printing segment aligns with our strategy as production increases. - Rob Bodor

Contradiction Point 5

Growth Strategy and Customer Base Expansion

It involves the company's strategy for growth and its focus on expanding its customer base, which are critical elements for revenue and market positioning.

Why did revenue per developer hit a record high even though the number of unique developers decreased? - Troy Jensen (Cantor Fitzgerald)

2025Q3: We are absolutely focused on growing our customer base, although currently focusing on growing share of wallet. More initiatives are planned for further expansion in 2026. - Suresh Krishna(CEO)

Which customers and verticals are seeing traction in production initiatives? - James Ricchiuti (Needham & Company)

2024Q4: We expect strong growth from the production business as well as the combined offerings in 2025. - Robert Bodor(CEO)