Greetings. Welcome to Proto Labs Fourth Quarter 2021 Earnings Call. At this time, all participants will be in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded.

At this time, I’ll turn the conference over to Jason Frankman, Vice President and Corporate Controller. Jason, you may now begin..

Thank you, Rob, and welcome everyone to Proto Labs’ fourth quarter and full year 2021 earnings conference call. I’m joined today by Rob Bodor, Proto Labs’ President and Chief Executive Officer, and Dan Schumacher, interim Chief Financial Officer.

This morning, Proto Labs issued a press release announcing its financial results for the fourth quarter and full year ended December 31, 2021. The release is available on the company’s website. In addition, a prepared slide presentation is available online at the web address provided in our press release.

Our discussion today will include statements relating to future performance and expectations that are or may be considered forward-looking statements and subject to many risks and uncertainties that could cause actual results to differ materially from expectations.

Please refer to our earnings press release and recent SEC filings, including our annual report on Form 10-K for information on certain risks that could cause actual outcomes to differ materially and adversely from any forward-looking statements made today.

The results and guidance we will discuss include non-GAAP financial measures consistent with our past practice. Please refer to our press release and the accompanying slide presentation at the Investor Relations section of our company website for a complete reconciliation of non-GAAP to GAAP results. Now I’d like to turn the call over to Rob Bodor.

Rob?.

the first, flexible lead times in our CNC machining; and the second, an enhanced digital-quality offering in injection molding. During the year, we received significant external recognition of our industry leadership and best-in-class digital manufacturing capabilities.

First, the World Economic Forum announced our induction into the Global Lighthouse Network, recognizing our leadership in implementing industry 4.0 technologies. We join this network as one of only 10 Lighthouse manufacturing facilities in the United States and we share the honor with Fortune 500 companies like BMW, HP, Siemens, Micron, and Foxcon.

Proto Labs was also recognized with awards in the software and digital manufacturing categories of Design World’s Leadership in Engineering awards, and most recently, we were recognized as one of five finalists for Plastics News Annual Processor of the Year Award for 2021.

As a customer-centric organization, external recognition is not the primary goal. However, it is very rewarding to have these widely respected global organizations validate our innovation, transformation, and market leadership. I am energized by what this company can do, and the number one reason for this is our deep and talented team of employees.

I want to recognize and thank Proto Labs and Hubs employees for their tireless efforts in 2021. Our team is our most important asset, which is why we continue to invest in our employees and their health and safety.

We are furthering our diversity, equity and inclusion efforts, prioritizing our safety programs, supporting new work environments, and providing development opportunities with personal and professional educational offerings.

The global contract manufacturing market is a multi-trillion-dollar industry and we are still in the early days of digitalization, which is bringing manufacturing online and driving growth for all players in the space.

Within the $100 billion digital manufacturing industry we’ve identified, we are the largest, the most technologically advanced, and we have strong cash flows and profitability.

In addition, Proto Labs is the only manufacturer with a truly hybrid fulfillment capability that combines the fastest in-house capabilities in the world with a global curated network of manufacturing partners. Our hybrid model is built to withstand economic cycles and continue to grow profitably.

Our internal rapid manufacturing offer outperforms the market during periods of high demand for innovation and growth, while the Hub’s model with longer lead times and lower prices performs well during periods of dampened innovation or supply chain disruptions.

As we begin to unite the two offers in a single e-commerce experience in 2022, we will become a one-stop shop, enabling us to serve all customer needs and capture the large opportunity ahead of us. In summary, 2021 was a transformational year for Proto Labs and sets the foundation for profitable growth for years to come.

With that, I’ll turn the call over to Dan Schumacher to take you through our financial results in detail.

Dan?.

Thanks, Rob. Good morning, everyone. I’ll take you through three areas of financial details. I will start with the fourth quarter, then go to full year highlights, and I will conclude with our outlook for the first quarter of 2022. Throughout my remarks, I will reference slides from our quarterly deck.

Our fourth quarter financial results begin on Page 7 of the presentation. Fourth quarter revenue of $123.6 million was slightly above our guidance range and represents a 17.5% year-over-year increase, or 8.6% organic growth in constant currencies.

Revenue came in ahead of our expectations due in part to strong production orders and execution on delivering these orders at the end of the quarter. Hubs generated $9.9 million of revenue in the fourth quarter, representing growth of approximately 40% year-over-year.

Changes in foreign currency had a $600,000 unfavorable revenue impact in the quarter. During the fourth quarter, supply chain constraints and electronic shortages impacted demand for our quick turn Proto Labs services.

As our customer endured near record lead times for production materials and components, they are willing to wait longer for custom metal and plastic parts. We offer the fastest lead times in the industry, but there are occasions when customers value price over speed.

Meanwhile, the broader of range of lead times and pricing options offered by Hubs really resonates with customers in today’s climate, as evidenced by Hub’s 40% growth. As Rob highlighted a few minutes ago, this is how our hybrid model is more resilient to economic cycles than many of our peers.

In Europe, fourth quarter revenue of $22.1 million amounted to growth of 20.4% year-over-year.

Excluding Hubs’ revenue in Europe and the impact of foreign currencies, our Europe revenue declined 4% year-over-year in the fourth quarter, reflecting continued supply chain challenges in the overall European manufacturing environment, especially heighted in automotive.

We served 23,376 unique product developers in the fourth quarter, up 28.7% year-over-year. Strong growth in product developers was driven primarily by the January 2021 acquisition of Hubs, while product developer growth in our legacy business was commensurate with our revenue growth.

Turning to Slide 15 and our detailed income statement, our non-GAAP gross margin in the quarter was 45.6%, within our guidance range and up slightly sequentially from 44.9%. Lower sequential contractor, overtime and recruiting costs were offset by labor inefficiencies around the holidays.

Hubs’ gross margin in the fourth quarter improved 30 basis points sequentially to 17.5%. For the quarter, Hubs represented a 240 basis point drag on our overall gross margin due to the lower margin nature of the outsourced manufacturing model.

Our total non-GAAP operating expenses were $42.9 million in the fourth quarter, down slightly sequentially from the third quarter and slightly below our guidance range of $43 million to $44 million. Fourth quarter non-GAAP operating expenses increased $5.5 million from the fourth quarter of 2020.

Most of this increase was driven by bringing on the operations of Hubs, which added $3.8 million of operating expenses in the most recent quarter. Moving to taxes, our non-GAAP effective tax rate in the fourth quarter was 16% compared to 25.3% in the prior quarter and 18.2% in the fourth quarter of 2020.

Our non-GAAP rate was lower this quarter primarily due to the release of uncertain tax position reserves as the statute of limitations expired on them during the fourth quarter.

The net result was non-GAAP diluted earnings per share in the quarter of $0.41, representing a sequential increase of $0.06 per share and a $0.09 per share decrease from the prior year.

The year-over-year decrease in earnings per share consisted of anticipated operating losses at Hubs, lower gross margins in our legacy business partially offset by higher revenue, and the absence of Protolabs 2.0 launch expenses incurred in the fourth quarter of 2020. Our cash flow performance is summarized on Slide 17.

We generated $23 million in cash from operations in the fourth quarter, up from $11.5 million in the third quarter. We also repurchased shares worth $10.2 million under our stock repurchase program in the quarter to offset dilution. I will now move to our full year 2021 results, which begin on Page 18.

As Rob mentioned, we generated record annual revenue, recognizing $488 million or growth of 12.4% over 2020. Organic growth in constant currencies was 4%. Hubs contributed $33.3 million in revenue between the January 21 acquisition date and the end of the year.

In Europe, our 2021 revenue declined 5% in constant currencies and excluding Hubs, reflecting lower demand for quick turn parts due to the supply chain issues, as well as difficulties caused by Brexit.

The added logistics complexity and increased shipping times caused by Brexit natively impacted our lead times and on-time delivery rates from our U.K.-based injection molding and CNC machining facility. These lead times are now back to pre-Brexit levels and we are excited about the growth potential in Europe in 2021.

We served 55,330 unique product developers in 2021, up 26.3% year-over-year. Now onto our detailed full-year income statement on Slide 24. Our non-GAAP gross margin in 2021 was 46.4% compared to 51% in 2020. Hubs gross margin in 2021 was 15.2%, representing a 220 basis point negative impact to our overall gross margin.

We will continue to drive sequential improvements in gross margin at Hubs. In 2021, total non-GAAP operating expenses were $171.6 million, up $27.9 million from 2020. Hubs 2021 non-GAAP operating expenses represented $13.2 million of this year-over-year increase. Moving to taxes, our 2021 non-GAAP effective tax rate was 22.7% compared to 20.2% in 2020.

Non-GAAP diluted earnings per share in 2021 was $1.55 compared to $2.36 in 2020.

The $0.82 year-over-year change in our non-GAAP earnings per share was driven by several headwinds throughout the year combined with investments we made in future growth opportunities, specifically Hubs represented a $0.32 per share anticipated decrease year-over-year as we continue to incur operating losses while we scale that business, and our legacy operations’ wage and material cost inflation as well as inefficiencies with the launch of Protolabs 2.0 partially offset by revenue growth resulted in $0.21 reduction in our earnings per share.

The depreciation of the Protolabs 2.0 software asset represented a $0.15 per share decrease. One-time Protolabs 2.0 cost to support the Americas launch and hyper care phase resulted in a $0.06 per share decrease. Continued investment in R&D resources that expand our customer offerings represented a $0.03 per share decrease.

Lastly, a year-over-year increase in our effective tax rate resulted in a $0.05 per share unfavorable impact. Transitioning to the cash flow statement and balance sheet on Slide 25, we generated $55.2 million in cash from operations in 2021.

We repurchased $23.5 million worth of shares under our stock repurchase program during 2021, primarily to offset the impact of dilution, and currently have $61.9 million remaining under our existing stock repurchase plan, which goes through 2023.

On December 31, our cash and investments balance was $91.8 million and our balance sheet remains strong and debt-free. Finally, I would like to detail our outlook for the first quarter of 2022, as outlined on Slide 27.

We expect to generate revenue between $116 million and $126 million in the first quarter, representing year-over-year growth of up to 8%. We saw a slow start to the first quarter in our legacy businesses as the omicron variant slowed demand to manufacturing, reflected by U.S.

manufacturing activity falling to a 14-month low in January; however, as the quarter has progressed and the omicron wave began to recede, our orders have begun to accelerate, creating optimism for the back half of the quarter and the rest of 2022.

We expect foreign currency to have an approximate $500,000 unfavorable impact on revenue compared to the first quarter of 2021, assuming foreign currency rates remain at current levels. Turning to gross margin, we expect first quarter non-GAAP gross margin of approximately 44% plus or minus 100 basis points.

While we’re beginning to see the positive impact of pricing changes in the quarter, the soft start to the year created low margins in January that will not be offset by the end of the quarter. In addition, there was $1 million of favorable gross profit items in the fourth quarter that we are not projecting to repeat in the first quarter.

We expect total non-GAAP operating expenses to between $42 million and $43 million in the first quarter, consistent with recent quarter. We estimate our first quarter non-GAAP effective tax rate to be approximately 25% compared to 16% in the fourth quarter and 22.7% in the first quarter of 2021.

Now I’d like to turn the call back over to Rob as he closes with the introduction of our 2022 strategic priorities.

Rob?.

first, to establish the platform; second, to accelerate our growth; and third, to expand profitability. We are on track.

We made great progress on positioning the company to achieve our plan during 2021 by developing and strengthening our platform with Hubs and the Protolabs 2.0 systems and by accelerating our growth throughout the year, culminating in strong double-digit growth in the fourth quarter.

For 2022, we have four strategic priorities to keep us moving forward. First is accelerating our revenue growth. Resources will be focused on expanding the capabilities of our services, integrating Hubs’ offering, improving pricing, and continuing to expand our production use cases to drive revenue growth.

We will expand our portfolio of services both through our legacy operations and through an integrated offer with Hubs, starting with CNC machining. Pricing will improve both at Proto Labs and at Hubs through continuous testing of our algorithms and adjustments to pricing based on various market factors.

New product launches and improved pricing will enable the final component of our revenue growth strategy, expansion of our production offerings.

We originally built this business to offer prototypes and remain the best in the world at prototyping as a result of our digital models’ ability to deliver custom parts in as little as one day with industry-leading reliability and quality.

We now stand poised to accelerate the transformation of on-demand production in 2022 through the combination of our expanded pricing and lead time options, expanded capabilities including the integration of Hubs’ offerings, as well as our new digital quality offerings that provide part quality and process assurance at all volumes.

I am confident these actions will drive double-digit revenue growth by the end of 2022. Our second strategy is to delight our customers. We have established an enhanced cross-functional customer experience team to drive continuous improvements to our customer offer during 2022.

Our customers value reliability and speed, and we offer the fastest lead times and more reliable on-time delivery rates in the custom parts manufacturing industry.

Although these metrics were challenged at times in the past two years due to the operating environment and internal disruptions caused by the launch of Protolabs 2.0, we are back to our industry-leading standards. Our third strategy for 2022 is to be the digital leader at scale through continuous improvement.

As it relates to Proto Labs internal manufacturing facilities, we will continue to prioritize process improvements and automation, including introducing robotics and work flow automation in our factories and back office processes. This strategy will drive improved operating margins in 2022.

Our fourth strategy for the year is to continue to be a great place to work in these changing times. We will continue to develop and empower employees as well as attract and retain top talent to continue to drive forward on our five-year plan.

We will expand our role-specific training and resources to support our flexible workforce and further our efforts in areas such as diversity, equity and inclusion. By investing in these areas that matter to all of our employees, we will maintain a great place to work and a winning culture.

We also believe that being part of a great company is being a great corporate steward. As a corporation, Proto Labs has many stakeholders and we’re focused on ESG initiatives that are impactful to them. Our board of directors and leadership teams are aligned on our top priorities within ESG.

In the past few months, our organization has reviewed our policies, programs and initiatives, identifying opportunities for expansion. We plan to address those areas and ultimately improve our impact on the environment and the communities in which we operate. As we enter 2022, I’m confident that we have the right strategic priorities in place.

The transformative moves we made in 2021 set us up for success in 2022 and beyond. Our scale, speed, brand and manufacturing experience position us optimally to grow profitably. Proto Labs is resilient and our employees are talented, driven and adaptable. We pioneered the digital manufacturing market in 1999.

We are the fastest digital manufacturer in the world and we’re just getting started with Hubs, where together we’re creating the world’s broadest manufacturing offer. As we enter 2022 after a challenging year of transformation, we are positioned very well and I am excited to continue our journey towards doubling our revenue by 2026.

This concludes our prepared remarks. Dan and I will now gladly take your questions.

Rob, can you open the line for Q&A?.

Yes, thank you. [Operator instructions] Thank you. Our first question is from the line of Brian Drab with William Blair. Please proceed with your questions..

Good morning. Thanks for taking my questions. First, just wanted to ask about gross margin. Thanks for the guidance for the first quarter.

Is there any sense you can give us for how gross margin might progress as we move through the quarters in ’22?.

Yes. We would – so Brian, we would expect it to improve sequentially through the year and that we would have improved gross margin percent year-over-year as volume is increasing quarter by quarter. .

Is there any aspirational range or something by the end of the year? I know Rob just mentioned for revenue, hoping to reach a double-digit revenue growth rate by the end of the year, but any idea where we should exit, maybe exit ’22?.

Yes. So we’re not really giving a guide, but I would just say that we expect to be -- our gross margin percent to be above what it is, non-GAAP gross margin percent to be above what it was in 2021..

Okay. And then I wanted to make sure I understood that comment about double-digit revenue growth by the end of 2022.

Does that imply -- I don’t want to put words in your mouth, obviously, but does that imply single-digit revenue growth until we get to the end of 2022? Is that the goal to get the company back to double digits by then?.

Yes. So what we’re saying is, look, we ended Q4 well, right? With a strong trajectory, the organic business was 9% and Hubs was growing 40%. We saw a slowdown in orders at the end of December and first week or so of January, given what happened with omicron, but since then orders have been on a good trajectory.

And so we’re feeling confident that we’ll be able to get to that double-digit growth later in the year..

Okay, thanks. And then another topic I wanted to touch on was the -- you mentioned the digital and seamless ordering platform. The user experience now on the website is still -- you still kind of get directed to a few different areas, right? You get - there’s Proto Labs legacy and then you could use MyRapid, and then Hubs still seems very separate.

I’m just wondering if you could explain where we are today and where we’re headed, and the timing of when all of those are really -- I feel like it could be more seamless, and I was wondering if you could just comment on that..

Yes, we agree - that’s exactly what we’re working for. Hubs right now is separate. Hubs is - you’re absolutely right. Hubs is separate right now, and we learned from the integration with rapid how critical a really seamless customer experience is, and that’s what we’re building..

And then I’m just wondering, too, is Hubs in the state of things today, does Hubs benefit really from being part of Proto Labs? Or are they – are you just kind of running them? How do they benefit today since they’re not -- you don’t go to the Proto Labs website and then find Hubs very easily? Are they kind of on a standalone basis and going for their earn-outs, and then sort of in an improving stage still? How are you thinking about that?.

So today, Hubs has been operating largely independently. We’ve been making continued investments in Hubs and we’ve seen good growth from them. We’re also continuing to invest in innovations within Hubs.

You’ve seen pricing improvements, right, which have driven gross margin, improvements there, and there have been investments in the manufacturing partner platform to improve the experience for our MPs and make sure we’re continually optimizing the opportunities that we sent to the MPs that are really tailored to them.

That’s the work that we’ve been doing, and alongside that working on the front-end integration to make that seamless..

Okay, great. Good luck with everything. I’ll talk to you more later this morning, thank you. .

Thanks, Brian..

The next question comes from the line of Greg Palm with Craig-Hallum. Please proceed with your questions..

Yes, good morning, and thanks for taking the questions here. I guess when you look back at the quarter, was there anything that surprised you? Revenue came in nicely above expectations, so just curious whether that was certain end market strength or whether it was just better execution overall..

Yes. So we had really good execution, especially in our injection molding production area. In that business, we got the lead times back to where they were. We entered the quarter with quite a big backlog in that business and our lead times probably were not where we wanted them to be.

And so I’ve got to give credit to our production group within injection molding for really performing well within the quarter. That was one place in which we ended up having higher revenue, getting back to those lead times that put us over the guide..

Okay, makes sense. And specifically on the Q1 guide, can you give us any more color specifically for what you’re seeing in January? I mean, it’s been, frankly, a long time I think since you’ve seen any sort of sequential decline in revenue from Q4 to Q1.

And I think if my math is right, it basically implies flattish organic growth on a year-over-year basis..

Yes. So Greg, we’re a quick turn business and we’re projecting things like we always have, so we’re taking a look at how the orders came in through January. And then based on seasonality trends that we’ve seen, based on uploading activity, we’re projecting out what happened in the quarter.

We talked a bit about this, but I know us as a company and our customers, as Omicron came through, there was a much higher rate of infection that occurred and there were a lot more people that were out of the office.

And so as we came out of the holidays into January, our thinking is that that kind of delayed starting everything up again in terms of when we come out of the holidays, when do orders start picking up. So that was a week or two later for us than normal, and we believe that some of that, the Omicron variant had something to do with that.

I hope that helps..

Well, I guess what I’m trying to get a sense for is, does the guidance assume that it’s maybe a slower ramp through the quarter than what is normal, or are you still expecting a pretty steady ramp, because I think March is typically the most important month anyway.

So I’m just trying to get a sense for what the guidance assumes for maybe March specifically..

Yes, I think it assumes that we get back up to where we would project or assume that we would be, so probably a steeper ramp up February and March because of the slow start in January. It’s just the ramp is happening a little bit later, and we can’t make up for the revenue shortfall that we’re seeing in January..

Yes, okay. Got it. Then last one, just a clarification, I think you mentioned something about a $1 million positive impact to gross margin in Q4. I didn’t catch what that was..

Yes, it was various items that had occurred in the fourth quarter, and we’re going to have margin fluctuations quarter to quarter and I’m just not projecting to see those coming in, in the first quarter..

Okay, all right. Thanks so much. Good luck..

Our next question comes from the line of Jim Ricchiuti with Needham & Company. Please proceed with your questions..

Hi, thank you. Good morning. I’m just wondering, as you look at the activity that you’re seeing in the quarter, early in the quarter, you cited omicron.

Are you seeing--since it appeared to hit Europe earlier and that has improved a bit, perhaps quicker than it has in the U.S, have you seen more of a pick-up there that gives you the confidence that that gets behind us and we start seeing that pick-up in activity midway to late in Q1 here in the U.S.?.

The trend in Europe is a bit different, and I think one of the things that at least we’re seeing is on the Hubs side, we’re seeing things fairly strong within Europe.

On our quick turn business, the legacy business that’s within Europe, we went out and surveyed customers and what they’re dealing with is a bottleneck in their supply chain around microchips and electronics.

As that occurs, they can wait a little bit longer for some customer parts, and they have alternatives, great alternatives like Hubs who they can wait a little bit longer for those parts and get them at a different price point, so we do feel like within Europe, at least with the trending that we’re seeing within Europe, that that bottleneck within the supply chain is impacting our quick turn business, but businesses like Hubs are benefiting from that.

But we do feel like that’s why this hybrid model is so important to us, so that we can offer the quick turn when the customer needs it, but we can also offer a little bit longer lead times at a different price point..

Got it, thanks for that. You alluded to pricing actions, which we’re hearing from a lot of companies. I’m wondering if you can shed a little bit more light on that in terms of how we should be thinking about the implementation and the impact of those pricing actions over the next one to two quarters..

Sure Jim, I can start, and Dan, please chime in. We looked at our pricing across the board by service, and our objective is really to offset inflation both from supply, materials, and then of course labor.

We have several dimensions that we manage this on, right - there’s kind of the base part has a certain price because there’s certain cost to make a part at, let’s say, quantity one, and then of course with volume, that will change because we’ve got volume price curves.

Then as you have different complexities, you’ll also have different prices for that base part, and then of course the lead times. We looked at all of those and we’ve made adjustments in pricing in some of the base parts, in some of the material costs and those components.

We’ve made adjustments to cover those, and then the shape of those curves, looking at how pricing falls with volume or how pricing changes with lead time, those were all adjustments that we made across the board in a really thoughtful way, to make sure that we’re covering our inflationary costs..

But in terms of seeing the impact as we go forward, is that going to be--do you expect to see the full benefit in Q2?.

We’re going to see continued improvement throughout the quarters as it relates to that. I said this in my prepared remarks - we are seeing an improvement in basically revenue per unit, pricing improvement in the first quarter.

It’s just January was very soft from us from a revenue perspective, otherwise you would see that improvement in the Q1 margin as well, but it will be a driver to show sequential improvement in our gross margin percent throughout 2022. .

One final question, if I may, just on Hubs. Rob, if I heard you correctly, I think you said you anticipate improvement in Hubs gross margins in the current quarter, and I assume going forward. I wonder if you could talk to that. You had noted in recent quarters just about some of the branding challenges around Hubs in Europe.

Are you guys past that, do you think?.

Yes, we’re past that. The point about gross margin is that we’re continuing to invest in pricing optimization, and we’ve seen gross margins improve in Hubs in part because of that work. Over time, we expect to continue to see gross margin improvement..

One thing, Jim, just to clarify, quarter over quarter gross margins are slightly lower for--there’s some seasonality with Hubs margins, they’re slightly lower in the first quarter basically due to Chinese New Year, but yes, for sure on the full year, we expect to see an improvement in the Hubs gross margin..

Got it, thank you. .

Thank you, Jim..

The next question comes from the line of Jared Maymon with Berenberg Capital. Please proceed with your questions..

Hey, good morning guys. First question for me, it sounds like the Hubs business and the base business in Europe kind of moved from a little bit of sequential stagnation in Q2 to Q3, back to growth in Q3 to Q4.

It kind of sounds like what you’re saying is maybe some of these automotive customers in Europe were kind of willing to accept the longer lead times because of some of these semi backups, and that’s providing a little bit of a boost to the Hubs business.

Is that correct in what you’re saying, and if that’s correct, is that kind of a temporary tailwind or do you think that’s sustainable in this return to strong sequential growth in Europe, could stick around through ’22?.

Yes, so we are seeing that as supply chain disruptions are happening and in this kind of economic cycle, where therefore there’s less need for the quick turn in that part of the business, by contrast we’re seeing our longer lead time business pick up nicely, as evidenced by Hubs continuing to grow.

We did 40% last quarter and we had strong double-digit year-over-year growth in Hubs throughout the year last year. .

Got it, okay.

Then another question on Hubs - I know you guys have owned this for about a year now, so I’m just curious, do you have any information on what percentage of the customers of the base Proto Labs business or Protolabs 2.0 business are using Hubs at this point, and then is there any difference between the percentage of top 100 or top 1,000 customers that are using this in comparison to the other 20,000 some-odd customers you guys have quarterly?.

The overlapping percentage between the customer bases is still relatively small today, and that’s part of the opportunity that we see as we do the integration and we bring the Hubs capabilities to our Proto Labs customer base. .

Okay, got it. Then last one from me, and sorry if you already mentioned this and I missed it, but it seems like there was a slight drop sequentially in G&A this quarter, and I’m just wondering if that’s typical seasonality or if there was something else there that is more sustainable..

Are you looking from a GAAP or non-GAAP perspective?.

Looking at GAAP specifically..

Yes, so there was some change in stock-based compensation quarter over quarter that impacted G&A..

We also recognized a benefit of a reduction in the contingent consideration related to the Hubs acquisition that appears in G&A. That was $4.7 million in the quarter. .

Both of those are non-GAAP items..

Okay, got it. Thanks guys..

The next question is from the line of Ben Rose with Battle Road Research. Please proceed with your questions..

Yes, good morning gentlemen. Some questions on the on-demand manufacturing service that you offer. I’m wondering in this environment how much of a competitive advantage is it for Proto Labs having its own facilities and not having the customers’ design shopped around to multiple sources.

The question is really, is it an advantage that you have being able to maintain the security and the privacy of your customers’ product designs?.

Yes Ben, we definitely hear that from our customers because oftentimes when they’re looking for a production vendor, they want to be able to audit, they want to be able to see the whole trail, they want to understand our security practices.

We have customers for whom we have to guarantee understanding of what the security is for the building, what the entry and exit controls are, and the IT security and a number of things.

Those audits can become very, very comprehensive, and so we definitely do see that as a benefit for our production customers who are looking for that kind of security, that we can provide that end-to-end.

Our digital thread that runs throughout our production from, quote, all the way through the plant floor to shipping and that full traceability that we’re able to provide them, that’s quite unique, and in fact we have comments from auditors all the time that that provides them a great deal of comfort and that’s a system that they’ve really never seen before..

Okay, and then a question also, Rob, with respect to design complexity.

I can definitely understand the use cases for the Hub service, where it might be a very large quantity of parts, perhaps, not with a great deal of design complexity, where the lead time isn’t that critical, but with respect to your core services, I can definitely see that being preferred by customers.

Is that the right way to think about part of the distinction between your core services versus Hubs’?.

I think Hubs brings two dimensions of additional capability. One is the higher quantities and longer lead times, lower pricing, so it extends in that context very much our production capabilities, right, into a broader range of needs for our customers.

But the second is added party complexity or specialization, right, because through the network, we’ve got these premium manufacturing partners who have specializations and capabilities that might be beyond our core offering and so can therefore complement, so that might be very tight tolerances or it might be some kind of specialty machining, for example, or certain secondary operations or those kinds of capabilities that we don’t currently have in-house, the network can help complement and we can provide to our customers..

Okay, great. Then finally, I know that there’s been some recent initiatives within the company to target some of the growing EV manufacturers’ prototyping needs.

Has that been a sector that’s been contributing to the performance in the last couple quarters?.

What I would say, Ben, is in multiple industries in which innovation is at the forefront, people are using us, and EV and automotive is just one. But we see that in many different industries and spaces that as they’re innovating, they’re coming to us because of how fast we are..

Okay, thanks. That’s very helpful..

Thank you..

Thank you. At this time, we have reached the end of the question and answer session. I’ll now turn the call over to Rob Bodor for closing remarks..

Thank you for joining us on our fourth quarter and full year 2021 conference call. I want to thank the 2,700 Proto Labs and Hubs employees across the world for their continued efforts and enthusiasm as we enter 2022. Lastly, thanks to our customers and shareholders for their continued support.

We look forward to updating you on our performance next quarter. Have a great day..

This concludes today’s conference. You may disconnect your lines at this time and thank you for your participation..