Proto Labs IPO Note

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					 PRE-IPO NOTE: PROTO LABS (PRLB $13 - $15)

                                TURNING VIRTUAL 3D INTO REAL PRODUCTS

                     AN INVESTMENT IN 3D AND SHORTER PRODUCT CYCLES                                   Kris Tuttle
                                                                                                February 21, 2012

Proto Labs specializes in taking 3D designs in software and manufacturing short-runs of real parts using either
injection molding or CNC machining methods. The company fills an important niche for manufacturing firms
that need smaller quantities of parts much faster than conventional methods. This is also different than what is
typically done on 3D printers. The company already has proven repeatable and growing sales model, high margins
and good management. Our IV of $32 suggests the shares will perform well if they are priced in the range.

                                   POSITIVES, NEUTRALS AND NEGATIVES
       Having custom parts manufactured quickly and economically has long been one of the “holy grails” for
        product companies. Proto Labs has focused on and solved this problem for machining and molding of
        parts in quantities from 1 to 25,000 units.
       More manufacturers are using 3D CAD software for their design, which is expanding the “ready” market
        for Proto Labs. . There are over 5M 3D users now. CAD software may not be a major growth market but
        the proportion that is 3D is growing as a proportion.
       The company has demonstrated both strong customer acquisition and recurring business with each that
        stretches over years. Although not quite the same as the Software as a Service (SaaS) model, it’s very close.
       Proprietary software is a key source of competitive advantage for Proto Labs. Immediately solving for
        price, manufacturability, process method, and automation is technically challenging. There are a few firms
        like Dassault that have this knowledge under one roof but not close to inside one product or service.
       The management team looks solid and the company has made investments in company building, culture
        and disciplined operations.
       Growth and profit margins have been very strong. Operating margins are already at 27%.

    =   3D printers have been around a long time and are getting better. We don’t expect them to be a credible
        solution for final product rendering for years but in the long term they could be.
    =   Margins are excellent but G&A looks high as a % of sales and R&D looks a little low. Also because the
        company is already at peak margins there are no further benefits from margin expansion.

       Even though competition is fairly limited today it will get tougher and come from multiple areas. As not-
        ed above 3D printers are not really geared to production service but they will improve. At the same time
        advances in machinery and tighter linkage with 3D CAD systems will continue to lower the bar to bring
        this capability in house for some manufacturers.
       Although still a small company Proto Labs does get impacted from ebbs and flows in global economic
        activity. If we have another 2009 recession the company will miss estimates and lower the bar. It would
        not change our IV much but “the street” tends to focus on the short term and overreact.

The valuation parameters for Proto Labs are more straightforward since the business is fairly well developed and
the company is already at their long-term operating model in terms of gross and operating margins. They only
remaining key variable is the implied P/E. The long-term growth rate for the business is 25-30% per year but as
noted above the rate will vary with pace of global economic activity. We’re using a 20 P/E to drive our intrinsic
valuation estimate of $32/share.

As another point of comparison the proposed pricing puts PRLB at 2.4x sales versus the 4.8x average of the two
leading 3D printer companies. If the deal is priced in the range it’s an attractive opportunity in the 3D space.

Proto Labs Pre-IPO Note                                 1                                       February 21, 2012

 Proto Labs

            Dec YE                 2007            2008        2009        2010           2011           2012          2013         2014         2015       2016
                 YoY Change $                           8.5        -0.6       21.1              34.0          41.1       42.0          43.0         50.0       50.0     PRLB         Ticker
                Total Revenue             $36          $44         $44        $65               $99           $140       $182         $225          $275      $325     Nasdaq      Exchange
                  YoY Growth                         23.7%       -1.4%      48.2%          52.4%             41.6%      30.0%        23.6%        22.2%      18.2%      39%       Rev Growth
                       COGS %       39.6%            39.9%       42.5%      39.1%          39.7%          40.0%        40.0%         40.0%        40.0%      40.0%     $14.00    Current Price
                       COGS $        $14.2            $17.7       $18.6      $25.4             $39.3         $56.0      $72.8        $90.0        $110.0     $130.0      24       Shares Out
                  Gross Profit           $21.7        $26.7      $25.2       $39.5         $59.6             $84.0     $109.2        $135.0       $165.0     $195.0      1%      Avg. Dilution
                 Gross Margin       60.4%            60.1%       57.5%      60.9%          60.3%          60.0%        60.0%         60.0%        60.0%      60.0%      $336        Cap (M)
                       S&M%         16.2%            16.9%       18.9%      16.8%          15.9%             15.8%      15.5%        15.2%        14.5%      14.0%       2.4            P/S
                        S&M$             $5.8          $7.5        $8.3      $10.9             $15.7         $22.1      $28.2        $34.2         $39.9      $45.5     $62             Cash
                         GA %       14.2%            12.2%       13.7%      11.7%          11.9%             12.0%      12.0
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Description: Note on Proto Labs PRLB with positives, negatives and neutrals. Includes an intrinsic valuation model.
PARTNER Kris Tuttle