Manufacturing services provider Proto Labs (NYSE: PRLB) announced better-than-expected revenue in Q3 CY2025, with sales up 7.8% year on year to $135.4 million. The company expects next quarter’s revenue to be around $129 million, close to analysts’ estimates. Its non-GAAP profit of $0.47 per share was 19.9% above analysts’ consensus estimates.

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StockStory’s Take

Proto Labs’ third quarter results were marked by a negative market reaction, despite exceeding Wall Street’s revenue and earnings expectations. Management attributed the company’s performance to robust demand for U.S. CNC machining and sheet metal services, particularly in aerospace, defense, robotics, and semiconductors. CEO Suresh Krishna highlighted improved execution in the U.S. go-to-market teams and noted, “Our record revenue was led by increased demand in our U.S. CNC machining and sheet metal offerings, supported by strength across several key end markets.” Persistent weakness in European manufacturing and reduced prototyping demand in injection molding tempered overall momentum.

Looking ahead, Proto Labs’ guidance reflects confidence in expanded advanced CNC machining capabilities and ongoing operational improvements, while also acknowledging headwinds in certain segments. Management believes investments in automation and customer-facing digital tools will drive higher customer engagement and order volumes. CFO Dan Schumacher emphasized that network margin improvement and continued operational discipline will be critical, stating, “We will continue to embed AI and automation across our operations, driving both efficiency and better customer outcomes.” The company remains focused on executing its strategic plan to accelerate profitable growth and broaden its customer base.

Key Insights from Management’s Remarks

Management identified strong U.S. demand for CNC and sheet metal manufacturing, as well as expanded digital capabilities, as key drivers of the quarter's results.

• CNC machining demand surge: The company saw double-digit revenue growth in U.S. CNC machining, driven by demand from industries such as drones, satellites, and robotics. Management credited both factory and network fulfillment for this momentum.

• Sheet metal and industrial strength: Sheet metal revenue grew notably, supported by solid activity in industrial and commercial machinery markets, as well as robotics and semiconductors. This highlights diversification beyond Proto Labs’ traditional prototyping customer base.

• Factory and network integration: Adoption of combined factory and network services increased, with a 35% rise in customers utilizing both over the last year. This approach has helped deepen customer relationships and boost revenue per customer by nearly 15% year-over-year.

• Advanced CNC launch: Proto Labs launched advanced CNC machining capabilities, adding tighter tolerances, expanded finishes, and improved quality documentation—all available via its e-commerce platform. Management expects this to remove customer friction and drive future demand.

• Network margin improvement: The company improved network margins by adjusting pricing and sourcing algorithms in response to tariff challenges, resulting in an 80 basis point sequential margin improvement in the network segment.

Drivers of Future Performance

Proto Labs expects continued growth from investments in advanced manufacturing and digital automation, balanced by ongoing challenges in European markets and legacy product lines.

• Expansion of advanced CNC services: Management expects recent investments in CNC machining—including expanded capacity and enhanced digital ordering—to further boost demand among large and strategic customers. These efforts are designed to increase share of wallet and improve manufacturing lead times.

• Margin discipline and automation: The company is embedding more automation and AI tools across its operations, aiming for higher efficiency and improved gross margins. Management signaled that these technology-driven initiatives should help offset cost pressures and support non-GAAP margin stability.

• Softness in Europe and injection molding: Ongoing contraction in European manufacturing activity and reduced prototyping demand in injection molding present headwinds. Management is focused on mitigating these risks through product and service diversification, as well as targeted go-to-market strategies.

Catalysts in Upcoming Quarters

In future quarters, the StockStory team will monitor (1) the pace of adoption for advanced CNC machining services and their impact on total order volumes, (2) further improvements in network and factory margins resulting from automation and AI initiatives, and (3) signs of stabilization or recovery in European manufacturing demand. Progress in expanding the customer base and share of wallet will also serve as key indicators of operational success.

Proto Labs currently trades at $48.42, down from $53.11 just before the earnings. Is the company at an inflection point that warrants a buy or sell? See for yourself in our full research report (it’s free for active Edge members).

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