Speed is of the essence in taking a new product or part design
into production. But the process of converting electronic designs
into functioning real-world hardware can be frustratingly
EnterProto Labs (
), a 2012 IPO out of Minnesota, which claims to turn around part
designs more rapidly than its many rivals in the fragmented
market for prototyping and low-volume production.
"Companies want to get their products to market as quickly as
possible," noted John Bichelmeyer, a co-manager of the Buffalo
Small Cap mutual fund, which owned Proto Lab shares in its latest
Turning a design into a functional product or part can
normally take four to 12 weeks, he said, but Proto Labs reduces
turnaround time to an average 15 days.
For a premium price, it claims to turn a 3D
) part into a functioning product "in as little as one business
day," according to company filings.
With potential competition lurking in all corners of the
globe, designers have been flocking to Proto Labs. The company
was founded in 1999 and had just over $44 million in revenue in
2008. By 2012, it nearly tripled revenue to $126 million.
Template For Growth
Thomas Hayes, an analyst with Thompson Research Group, expects
28% to 29% revenue growth this year. He says revenue should climb
another 25% or 26% in 2014.
In the second quarter Proto Labs generated revenue of nearly
$39.75 million, shy of the $40.25 million that analysts polled by
Thomson Reuters expected. But with an operating profit margin of
nearly 32% (up 7 percentage points from a year earlier), Proto
Labs logged net income of $9.3 million, ex stock compensation
expense. That worked out to 36 cents a share , a penny better
than analysts polled by Thomson Reuters foresaw.
Some of Proto Labs' most intriguing metrics involve its
ongoing efforts to expand its base of designer clients. Through
the first six months of 2013, Proto Labs did business with 4,644
existing customer companies, CFO John Judd told analysts in early
August. The company also added 1,435 customers during the first
half of the year.
The focus is shifting from finding new customer companies to
finding new designer teams within existing customer companies.
During the second quarter, Proto Labs did business with nearly
6,900 product developers, 22% more than the year before.
Growing its base of designers within existing corporate
customer accounts makes good sense, according to Hayes. "It's
always cheaper and more profitable to grow business within
existing accounts," he noted.
How It All Works
Proto Labs' key to marketplace success is software that
automates the process of taking a 3D CAD design, quoting a price
on it and turning it over to manufacturing.
"Software is the distinguishing characteristic," Hayes
Conversion of a design into a functional product often gets
bogged down in the ordering process. Traditionally, it can take
days or even weeks just to generate a quote.
With Proto Labs, product developers submit their designs via a
Web interface. A Proto Labs algorithm quickly generates a price.
Even as it does, Proto Labs' software has begun to analyze the
manufacturability of the design -- and might suggest design
changes or enhancements. Proto Labs then has the capability to
fashion parts either through injection molding or computer
numerical control (
Hayes contends that the combination of rapid order-taking with
injection molding and CNC capabilities makes Proto Labs
"There's no one else that ties the front-end ordering and
creating of the part together. There's no one company with the
combination of software to take the order and make a quote and
then actually make the part."
3D Printing Industry Rises
It is unclear how long Proto Labs can maintain its speed
advantage in low-volume production. "Over time, someone will
write code that's similar," Hayes said.
However, he doesn't think Proto Labs is currently threatened
by one growing alternative: 3D printing. The company often gets
compared with firms in that category such as3D Systems (
) andExOne (XONE). And a new 3D printing IPO is expected to start
trading this week,Voxeljet (VJET).
Hayes sees Proto Labs and 3D printers serving two different
markets. The 3D printing technology, he says, is typically used
to produce a single prototype. That prototype may not be
completely functional. Proto Labs, by contrast, makes fully
functional parts and products. And it typically produces anywhere
from dozens to several hundred.
Customers will use Proto Labs for the initial low-volume
production stage that precedes full-scale production. Production
of several hundred parts is the "sweet spot" of the market for
Proto Labs, Hayes says.
In addition to co-managing the Buffalo Small Cap fund,
Bichelmeyer is also lead manager of the much smaller Buffalo
Emerging Opportunities fund. Together, the two funds owned more
than 200,000 shares of Proto Labs in the latest filing
He says the Buffalo funds look to invest in companies that are
aligned with major business trends. One of those trends, he says,
is "deploying capital through automation to eliminate labor."
Proto Labs fills the bill as its software takes human labor out
of the order-taking and quotation generation.
Bichelmeyer also notes that Proto Labs has been quick to build
a global presence. Though U.S. designers still make up the bulk
of Proto Labs' customer base, it does have a presence in both
Europe and Japan.
"They clearly do have a sizable international component,"
Proto Labs Chief Technology Officer Robert Bodor told analysts
in August that the company had sponsored a study by the
Industrial Designers Society of America and ORC International, a
market research firm. Proto Labs wanted an estimate of the total
"market for the prototyping and short-run production of parts
manufactured by either injection molding or CNC machining
processes," he said.
The study concluded that the addressable global market for the
types of services Proto Labs provides is roughly $6 billion. That
includes a $2.6 billion market in just the U.S.
It would seem that Proto Labs -- with just $126 million in
revenue last year -- has plenty of runway to speed ahead.