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Abaxis Inc. (NASDAQ:ABAX)

F1Q11 (Qtr End 06/30/10) Earnings Call

July 29, 2010 4:15 am ET

Executives

Clint Severson - Chairman and CEO

Al Santa Ines - CFO

Donald Wood - Chief Operations Officer

Martin Mulroy - VP, North American Animal Health Sales and Marketing

Brenton Hanlon - VP, North American Medical Sales and Marketing

Analysts

James Sidoti - Sidoti & Company

David Clair - Piper Jaffray

Jonathan Block - SunTrust Robinson Humphrey

Ross Taylor - CL King

Neal Goldman - Goldman Capital Management

Daniel Owczarski - Avondale Partners

Shawn Bevec - SFG

Operator

Welcome to the Abaxis Inc. first quarter 2011 financial results. All participants will be in listen-only mode. (Operator Instructions) After today's presentation there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Joe Dorame. Please go ahead.

Joe Dorame

Good afternoon, and thank all of you for joining us today to review the financial results for Abaxis for the first fiscal quarter of 2011, which ended June 30, 2010. Again, my name is Joe Dorame. I am with Lytham Partners and we are the financial relations consulting firm for Abaxis.

With us today, representing the company are Mr. Clint Severson, Chairman and Chief Executive Officer, Mr. Al Santa Ines, Chief Financial Officer, Mr. Donald Wood, Chief Operations Officer, Mr. Martin Mulroy, Vice President, North American Animal Health Sales and Marketing and Mr. Brenton Hanlon, Vice President, North American Medical Sales and Marketing. At the conclusion of today's prepared remarks, we will open the call for Q&A session.

Before we begin, I would like to remind everyone this conference call includes statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including but not limited to statements related to the company's cash position, financial resources and potential for future growth, market acceptance of new or planned product offerings, process improvements and product manufacturing quality and efficiencies in future production of company's products.

Abaxis claims protection of the Safe Harbor for forward-looking statements contained in the Reform Act. These forward-looking statements are often characterized by terms may, believe, projects, expects or anticipates or words of similar import and do not reflect historical facts. Specific forward-looking statements contained in this conference call may be affected by risks and uncertainties, including, but not limited to, those related to the market acceptance of the company's products and the continuing development of its products, required FDA clearance and other government approvals, risks associated with manufacturing and distributing its products on a commercial scale free of defects, risks related to the introduction of new instruments manufactured by third parties, risks associated with entering the human diagnostic market on a larger scale, risks related to the protection of the company's intellectual property or claims of infringement of intellectual property asserted by third parties, risks related to condition of the United States economy, risks involved in carrying of inventory and other risks detailed under Risk Factors in the company's Annual Report on Form 10-K and other periodic reports filed from time to time with the United States Securities and Exchange Commission. Forward-looking statements speak only as of the date the statements were made. Abaxis does not undertake and specifically disclaims any obligation to update any forward-looking statements.

With that having been said, I would like to turn the call over to Mr. Clint Severson, Chairman and Chief Executive Officer of Abaxis. Clint?

Clint Severson

I will spend a few minutes here reviewing the accomplishments and the challenges for Q1 2011, and some of the goals for Q2. After my short presentation, I will ask Marty Mulroy, our VP of North American Vet Sales and Marketing and Brenton Hanlon, our VP of North American Medical Sales and Marketing to give an update on their respective businesses, and then we will take questions.

Q1 was another record quarter for Abaxis even though we are operating in a very challenging environment. Our challenges were fewer than the past, but included lower government sales and the foreign exchange hit due to the weaker euro.

Other than that, we continued to perform setting many new records that include record total sales, record gross profit, record vet sales, record European sales, record Pac-Rim sales and then of course domestic sales were at record levels as well. We had record disc sales and we had a record low disc cost and a record operating income.

We finished Q1 2011 with sales of about $35 million, up 18% year-over-year and up 4% quarter-over-quarter. Record worldwide vet sales came in at $26.8 million, up 23% year-over-year and up 7% quarter-over-quarter.

Total medical sales finished at $6.4 million, up 12% year-over-year, but down about $458,000 quarter-over-quarter due to fewer disc sales, which were at record levels in Q4. Now if you exclude the government medical sales, total medical sales were up 29% compared to Q1 last year.

For the quarter we sold 1,025 instruments, up 23% year-over-year were about 192 instruments. Quarter-over-quarter instrument sales were down about 40 units. We sold 377 VetScans versus 388 Q1 last year and 399 last quarter.

We sold 163 Piccolos, which included 16 units sold to the government, versus 149 Q1 last year and 150 last quarter. We also completed 15 reagent rentals in Q1 and made a payment to distributor of 16 free Piccolos in exchange for our participation in the joint marketing and sales promotion and there is more to follow from Brenton in a few minutes.

For those of you that are following the run rate of non-government Piccolo instrument sales, since we changed our strategy here it is. Q4 '09 82, Q1 '10 88, Q2 '10 116, Q3 '10 130, Q4 '10 144 and Q1 FY 2011 147 units. We are also sold 246 hematology instruments versus 192 Q1 last year and 236 last quarter. We sold 239 i-STAT and COAG instruments versus 104 last year and 280 last quarter.

Total record disc sales finished over 1.6 million units for the first time coming in at 1,605,000 up 10% year-over-year and 4% quarter-over-quarter. Record Vet disc sales at 1.1 million units were up 6% year-over-year and 13% quarter-over-quarter.

Medical disc sales at 521,000 units were up 21% year-over-year, were down about 11% over last quarter's record levels. North American sales of just under $28 million also another record finished up 15% year-over-year and 1% quarter-over-quarter.

European sales coming in at $5.6 million, up 28% year-over-year and 16% quarter-over-quarter. The Pac-Rim sales at record levels as well at 1,537,000, up 37% over Q1 last year and up 26% versus last quarter.

Total international sales at 7,164,000 were up 30% year-over-year and up 18% quarter-over-quarter. Government sales totaled 748,000 for the quarter down about 44% mostly due to lower instrument sales. Quarter-over-quarter government sales were down about 3%.

Domestic sales made up 80% of total sales for Q1 2011, while international sales made up 20%. This compares with 8119 Q1 last year and 8218 last quarter. Medical sales made up 18% of total sales, Vet sales were 77% and others made up 5%. This compares with 19,747 Q1 last year and 21,745 last quarter.

Capital sales made up 21% of total sales, while consumables came in at 79%, about the same as Q1 last year. Last quarter capital sales made up 22%, while consumable sales were 78%.

The disc average selling price finished up $0.15 quarter-over-quarter, but down $0.15 year-over-year due to a weaker euro and mix and that finished at $12.53. Disc cost at $4.02, a record low was down $0.01 year-over-year and down $0.10 versus last quarter.

Total gross margin for the quarter, which included a higher percentage of lower margin OEM products, compared to Q1 last year, finished at 56.6%, down about a 131 basis points versus the same period last year, but up 70 basis points versus last quarter.

As we become more efficient at selling the OEM products, margin should continue to expand. Gross profit for the quarter finished at $19.8 million, up 15% year-over-year and up 5% quarter-over-quarter.

Operating expenses for Q1 finished at 39.6% of sales, a significant improvement over Q4's 42.1% of sales mostly due to lower admin and selling costs. Year-over-year operating expenses were about 100 basis points higher.

Sales and marketing expense at $8.6 million, or 24.7% of sales were down versus Q4's 25.9% of sales, but up from Q1 last year, which finished at 21.5. R&D expense at $3.1 million, or 8.8% of sales were up 12 basis points year-over-year and up 83 basis points quarter-over-quarter.

Admin expenses of $2.1 million, or 6.15% of sales were down from 8.4% of sales Q1 last year and 8.3% of sales last quarter. Record sales and record gross profits along with good expense control led to record operating earnings finishing just under $6 million, up only 4% year-over-year, but up 28% quarter-over-quarter.

Net income of $3,580,000 was negatively affected by foreign exchange loss of $331,000 and finished at $0.16 a share are down about $176,000, or $0.01 per share versus Q1 last year that included a positive foreign exchange gain of $353,000.

Quarter-over-quarter our net income was up 36% due to our sales growth and efficiencies achieved in Q1. Excluding the foreign exchange, net income would have finished at about $3.9 million or about $0.17 a share about the same as last year's record level.

On the R&D side of the business, we are focused on the development of hemoglobin on the disc, both for the vet and the medical markets and the expansion of our rapid test menu. We expect most of these products and submissions to be completed by the end of the calendar year.

Goals for Q2 include maintaining our strong sales momentum and continue to reduce expenses as a percent of sales, and continue to focus on the 2x2 program in the factory and complete our development projects on time.

As I have mentioned over the past few quarters, I exercised 70,000 share stock option, that was close to expiring in October of '08, and because the price of Abaxis' stock was so unattractive, I borrowed the cash from a bank to exercise the option to pay the taxes.

Because of this obligation, under the right conditions, I may sell some of Abaxis stock over the next few months to pay back the bank. In addition, because of the tax law changes in 2011, I may also decide to exercise some other vested options this calendar year and if I do I will probably need to sell some.

With that out of the way, Marty, you're on.

Martin Mulroy

In my prepared remarks, I will break out some numbers for the Abaxis North American Animal Health business. I am pleased to report the business grew for the ninth consecutive quarter, our first quarter of fiscal year 2011 generating once again record revenues.

With $20.8 million in revenue Q1 the business grew 23% year-over-year and increase of $3.9 million and quarter-over-quarter the business grew 4%. The year-over-year increase was led by instruments, up 27%, while our consumable revenue was up 22%. Instruments were also up in terms of the unit sold year-over-year up by 25%.

With roll out of shipments commencing in October and the official launch at the North American Veterinary Conference in mid January, I am pleased to report we have already sold well over 20,000 VS2 Canine Wellness Profiles.

This product incorporates a canine hormone antigen test in to a comprehensive panel chemistries ideal for the annual checkup of every dog. This profile is performed economically immense and in office without technique dependent timed manual steps, and without the challenges associate with some other products and having to do what at times is a very difficult visual determination.

Additionally, last week we provided a software update for a VSpro Coagulation Analyzer for the customer base. The instrument is now having a [C1] application as well as canine. The times result has been improved upon as well results now in only nine minutes.

The potential for this instrument in associated consumables is significant. It should be incorporated on a large scale as we expect it will be as an integral component of the routine pre-surgical workout.

I want to thank and congratulate the North American Animal Health group and the entire Abaxis organization for job very, very, well done. It was a productive quarter in terms of revenue, margins and expense management.

The team here is excited about the balance of the fiscal year, and I am also pleased to report, everyone here is committed to not only continued, but accelerated success.

With that, we'll go back to Clint.

Clint Severson

Great. Thank you very much, Marty. Okay. Brenton, you're next.

Brenton Hanlon

Thanks, Clint. Good afternoon, everyone. In Q1 2011, we continue to implement repeatable and scalable approaches to expanding our customer base, and we added 129 new customers versus 86 in Q1 of last year. That's an increase of 50%.

Instrument revenues totaled 762,000, which was 28% higher than Q1 2010, but at 19% lower than last quarter. Of the instruments placed in Q1, 15 were additional reagent rental units for a large hospital system, which we had closed in Q4 2010. This customer is now operating 25 Piccolos in seven primary care clinics.

Along with our success with this particular customer, there have been other encouraging developments within what we called a Medical Systems segment. For example, an urgent care chain, which began with 13 Piccolos added five more. An urgent care chain, which began with 8 type of Piccolos, plans to purchase 32 additional units over the next six-month.

A health screening company, which began with 8 Piccolos, increased that number to 48 and the (inaudible) medicine chain, which began with 1 Piccolo, has now grown to 26.

Although this is preliminary data, indications are if we can get our foot in the door with these large organizations, we can anticipate growth from within as they experience first hand the benefits of the Piccolo.

In addition to the 129 units we provided to customers in Q1, 16 Piccolos were shipped at no charge to one of our distributors. This was the Abaxis contribution to various core marketing programs, which we expect will accelerate our placement rate in Q3.

Because of the [force] there is better control, I prefer distributors not stock Piccolos, however some distributors are more comfortable with units on the shelf. So going forward, I expect a number of Piccolos in the channel to fluctuate between 5 and 20 instruments and at the end of Q1, there were approximately 10 units in the channel.

Turning to the consumables side in the business, Q1 revenues were $3.4 million,compared to 2.9 million in Q1 2010. That's an increase of 16%, but 17% lower than the prior quarter.

Total Q1 revenues, that's instruments and consumables, were $3.6 million, an increase of 18% over last year, but 12% below the prior quarter. Going forward, we will further scale up those segments with our strategy that are yielding the best results in the POL segment and continue to expand our presence within the higher risk, higher reward Medical Systems segment.

Back to you, Clint.

Clint Severson

Brenton, now we are open for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from James Sidoti of Sidoti & Company.

James Sidoti - Sidoti & Company

First question is for Al, on royalty income. Al, can you let me know what that was in the quarter?

Al Santa Ines

For the course 141,000.

James Sidoti - Sidoti & Company

How did that compare to a year ago?

Al Santa Ines

Compared to year ago it was about 804, almost down 50% year-over-year, not in numbers, okay?

James Sidoti - Sidoti & Company

I assume that's because of the situation with Cepheid?

Al Santa Ines

That's correct.

James Sidoti - Sidoti & Company

Can you just give us an update on the patent situation with Cepheid?

Al Santa Ines

Clint will give you an update on that front.

Clint Severson

So, we have to be careful how we talk about here when there's all this pending stuff going on. But fundamentally, the Cepheid folks, claimed they had designed around our patent for some of their products.

We just asked to see the design around to see if it was a true design around. There was difficult making that happen, so we felt rather than waste of lot of time, which is file a law suite to get them to the table.

And once we have an opportunity to see how they have designed around, if they have designed around it, then my vote is we drop the suite. If they haven't designed around it, then we'll go forward with it, so it's pretty preliminary at this time.

James Sidoti - Sidoti & Company

How much time is left on the patent?

Clint Severson

2015.

James Sidoti - Sidoti & Company

And what are the protection do you have in terms of IP?

Clint Severson

So, the Abaxis' VetScan and Piccolo operate as a system, and so there are many components to the system then there is lots of patents. I think it's like 29 different patents. If you have all the patents except 29th one, the system doesn't work.

So, the whole thing works together. So, the patents that we have, the longest one that we have to ran goes to 2024. So, the 2024 patent is the patent for the system and methods for the detection of short and long samples, which makes the Piccolo and the VetScan foolproof. And then we have another patent that runs until 2017, and then we have that's tied to our electrolytes.

So, even though we have some patents expiring in '10, '11, '12, '13, you can't reproduce the Piccolo over the VetScan without all of them.

James Sidoti - Sidoti & Company

And then you went through a lot of numbers as usual on the call, what were the number of VetScan shipped again?

Clint Severson

377.

James Sidoti - Sidoti & Company

Brenton talked about some units in the channel. Did that Piccolo number 163 include the units to the distributor?

Clint Severson

Yes. So the 163 were only the units that were sold, so we report only sold units. And then in addition to the 163, there were 15 reagent rentals and then we shipped 16 free Piccolos to a distributor and some of those went to customers.

James Sidoti - Sidoti & Company

So, that 163 number though that's just the sales.

Clint Severson

Just the sales, yes.

James Sidoti - Sidoti & Company

Now, on gross margin side, you started to see things improve from the fourth quarter of 2010 even though you had lower rotor sales.

Clint Severson

You're talking about we had record rotor sales total? 1.6 million is a new record.

James Sidoti - Sidoti & Company

So is that the reason for the gross margin expansion from fourth quarter of 2010?

Clint Severson

Yes. So, it's a lot things. Also, we're getting more efficient and handling some of the OEM products. The margins expand when you sell more of it. So if you sell more, your margins gets better. When you sell more rotors or discs, the margin expands.

As we get more efficiencies in the factory with the instruments. Remember, our goal is $2,000 an instrument or cost. The margin expands, so it's all that stuff put together at the margin growing.

James Sidoti - Sidoti & Company

And if you would had that extra $400,000 of royalty revenue, I am just working it out, it looks like your margins would have been maybe 100 basis points below last year?

Clint Severson

They were about 176 last year.

James Sidoti - Sidoti & Company

So, there were a lot of that royalty revenue that you want from Cepheid?

Clint Severson

Clearly, the royalty revenue is a high margin, but the success or failure of Abaxis has little or nothing to do with royalty revenue. Royalty revenue allows us to be a little more sloppy in the factory is really what it does.

So, our goal is the rotor or disc gross margin was 68% on the way to 70 some percent. So that's the magic of Abaxis. It's not the royalty revenue. It's nice to have, but that's not going to win or lose it for us.

James Sidoti - Sidoti & Company

The last thing is, can you just update us on the number of direct agents on the medical and sales people on the medical on the vet side?

Clint Severson

Brenton you have what? 15 people on field?

Brenton Hanlon

16.

Clint Severson

16 people on the field. And Marty, what's your total number of people on the field?

Martin Mulroy

45 reps, 5 veterinarians and 17 sales managers.

James Sidoti - Sidoti & Company

And you got to add that up for us, Marty.

Martin Mulroy

Al, can you help me out?

Al Santa Ines

57.

Martin Mulroy

57. Okay, almost 60 people.

Operator

The next question comes from David Clair of Piper Jaffray.

David Clair - Piper Jaffray

Clint, just a general question for you here, but were there any distributor timing issues in the quarter, maybe skewing results one way or another?

Clint Severson

This quarter, I don't think so. I don't think there were any. Now, in Q4, we had a lot of extra Piccolo rotors that slipped into Q4, because the orders didn't get in December, Q3. So, really the Q4 medical rotors were probably abnormally high.

So, if you are doing a real time comparison, you would put some of those Q4 rotors into Q3, because a lot of those orders came in the first week of January, but we didn't have any unusual ordering patterns here.

Now, we did have, in Europe, we shipped to one distributor a container. Now, we are setting up our own warehouse now in Europe, so we ship directly from Germany to other parts of Europe. Normally, they do five containers a year, and so in this particular quarter and that's mostly that we did have two containers.

David Clair - Piper Jaffray

And then you talked about things that we have going on in the pipeline here for the rapid assay, the new products there. Can you maybe give us some color on what you guys are working on and when we should expect to see something?

Clint Severson

So, we are working on the full line. So, we are in the development phase right now, we are actually manufacturing some of the products for the clinical trials, and then we'll probably start clinical trials once we get that manufacturing scaled up, probably in a month or so. And then of course, we run all the data and then we submit it to the USDA, and then they do their thing and then we get approval.

So, our goal here is to do a bunch of these at one time. There is no guarantee, we're going to get them all done at one time, but that's the objective. So, our goal is to maybe get them launched in January at the big trade show in Orlando.

David Clair - Piper Jaffray

Any color on what you are working on? The Canine (inaudible) are they going to be multi-test and a single assay, or how should we think about it?

Clint Severson

So, I would love to lay out everything on what we are doing in rapid test. I would like to tell everybody every detail, because I'm pretty proud of all the work that everybody is doing at Abaxis.

But my marketing and sales folks tell me that I have no business, take a graphing to the market leaders, specifically what we are doing every step of the way. Really, stupid to do that.

David Clair - Piper Jaffray

Just thought I'd ask.

Clint Severson

So, I agreed to keep my mouth shut.

David Clair - Piper Jaffray

And then, Clint, as we look at the Medical business here, have you thought any about your pricing strategy and maybe some potential changes there or are we still just going to test drive the direct sales approach and see what it shakes out.

Clint Severson

We are still working with distributors. We haven't changed that. I think that Brenton and his marketing and sales team have an approach laid out that they believe is a good one, that they believe will work and I'm not going to interfere with what they have decided to do.

It is my opinion that our pricing, we are leaving money on the table here, but in the early stages, that's what you do. You're making it very attractive for the customer to adopt the product and then after they use it and they start realizing all the gains that they are making in efficiency and time and happier customers.

Yes, then you are in a position, where you can raise a price, because prior to them actually leaving the benefits it's many times hard to communicate those benefits. So, you start out lower price and then maybe we will move it higher down the road, but right now I think pricing is pretty stable on the medical side.

David Clair - Piper Jaffray

Then just one more here just on the medical business again. How many Piccolos where placed by the direct sales force and how many by distributors in the quarter?

Clint Severson

I think we ran most of our sales through the distributors this quarter. The goal here is to build strategic relationships with three major distributors out there and our sales people work with them even on the sale they did themselves.

David Clair - Piper Jaffray

Just one more last one for Al. Do you know by any chance, Al, operating margin for the vet business versus medical?

Al Santa Ines

I do, but I don't want to disclose it. I'll keep it with the company.

David Clair - Piper Jaffray

All right, fair enough.

Clint Severson

As you said, if it is engine, it is the Vet market and good choice is the America, right?

David Clair - Piper Jaffray

Yes.

Operator

(Operator Instructions) Our next question comes from Jonathan Block at SunTrust Robinson Humphrey.

Jonathan Block - SunTrust Robinson Humphrey

First one, G&A was great. It was really impressive. It was down maybe over 500,000 from your run-rate in fiscal year '10. Can you speak a little bit to that, I am guessing some of that is Starcom coming out of there, but what have you done with expenses specifically G&A and can you think about that as a new run-rate going forward?

Al Santa Ines

You want to me answer that, Clint?

Clint Severson

Yes, why don't you answer that Al.

Al Santa Ines

Okay, Jonathan, $0.5 million that is came from the RSU. Other expenses are not predictable like legal expenses and other consulting expenses. So, we have some addition there for the quarter not only from the RSU point of view.

Going forward in for the trend, of course, we have the benefit for the first quarter because of the expiration of some of our the expire ratio and it through up of the RSU expense for the top end in the first quarter that will not repeat on the second quarter and in third and fourth. It only happens once a year, but through out all of the RSUs.

Jonathan Block - Suntrust Robinson Humphrey

Shift gears a little bit for Clint or Marty, maybe, if you can just speak a little bit bigger picture in terms of vet market here in the US and what you are seeing in regards to trends and then, Marty, it looks like your VetScans were basically, give or take, flattish year-over-year. Your competitor was up when you combine their vet test and catalyst year-over-year. I thought, up until now, you guys were taking some shares so maybe your thoughts again, on the trends of that space and then how do you think share is shaking out on the chemistry instrument? Thanks.

Clint Severson

Marty, you want to go first, then I'll will follow.

Martin Mulroy

Sure. As far as general market conditions, like I said before, about a third with the veterinary clinics in the country are having some difficulties and not optimistic about a third or very optimistic in growing their businesses in about third year flat. There is absolutely economic macro challenges but we continue to sell a lot of instruments despite that.

As far as the VetScan is being down, we have now about 25% of the veterinary clinics in this country using the VetScan. So to get to the 30%, 40%, 45% market penetration will take a little bit of work but that's where we are headed towards.

Does that answer your question?

Jonathan Block - Suntrust Robinson Humphrey

Yes, maybe if I can just follow-up with the quick one there and it goes after the industry and trends. If you can speak the pricing, maybe both on the disc and also on the instrument, what you are seeing just out in the marketplace in general.

Martin Mulroy

Pricing on the instruments, I think it is stable right now. I think we are doing well, and the reason being is that our operating cost versus the competition is still quite a bit lower and then we compare in office testing to commercial laboratory testing, once again, we have efficiencies that allow us to maintain pricing for both, consumables and instruments, but there are some competitive pressures out there, but I think where you continue to do well in our sales prices and our unit sales.

Clint Severson

Jonathan, let me just do a couple of comments here. Domestically, the Piccolo or the VetScan instruments were up. Worldwide, they were down a little bit, but domestically they were up. And in dollars, instruments sales in dollars now just VetScan sales in dollars were up 20%.

So, Marty is doing a great job at holding the price and continuing to grow the customer base, and I think the reason that we are able with the fraction of the distribution of our major competitor continue to put up these numbers is because, when a vet acquires a VetScan in our other products, they are more efficient, they save money in a down economy that's what you want.

On the other side of that coin though, they have routine vet visits, I think are still a problem. There are not as many routine well animal visits and that affects the volume on the consumables that you sell, and so there is pressure there, but I think we are doing a good job overcoming all of that.

Jonathan Block - Suntrust Robinson Humphrey

Maybe one last question then I'll follow-up with you guys offline. On the medical, Brenton, general statistics you gave were really impressive of putting in a Piccolo and then having the adoption ramp.

Clint, I know you alluded to leaving some money on the table, but is there even more thought about when these Piccolo in even at a greater discount at least the first couple, you've got the repeat customer, you can always take price a little bit on the disc just getting more aggressive to get your foot in the door? Thanks guys.

Clint Severson

I will comment and then let Brenton chime in. I don't think the issue, when you go in to sell a Piccolo there is a lot of decisions that the plenty it has to make. One, they have to make a decision to do their in-house chemistries on site versus sending him out. There always concerned with am I going to get the same answers at the big lab. They are concerned with what if the machine goes down otherwise there is so many concerns that well price is one of them, it's not the biggest one. In this introduction phase that we are in this is validating strategy phase [runs]. I think to reduce the prices is not going to make that much difference.

Brenton Hanlon

I think for what we are trying to accomplish right now, the pricing is about right. I think we should keep in mind that we are still selling it concept at this point. We are selling the concept of Point-of-Care Chemistry testing and the Piccolo and the rotors are the vehicle for achieving that. Our sales presentation, we don't get in to the price early on. If we do a good job in selling the concept then the price itself is less of an issue.

I should also point out that in a customer satisfaction surveys we find that over time with the customer price becomes less of an issue and the benefits of the product, efficiency, throughput and all the other things that we are selling become the most important issue. So, we just have to sell through the price and get people thinking and visualizing and imaging the benefits, and if we do that, I think our price right now is about right. You can always go down but I don't know that's more in to that at this point in time.

Operator

Our next question comes from Ross Taylor at CL King.

Ross Taylor - CL King

I had a couple of questions. First of all, I knew last quarter you talked a lot about some of the expenses associated with integrating i-STAT product into your system and I just wondered if that's still an issue if that boosted your sales and marketing expense, new materially this quarter and you might have diminishes at some point over the next few quarters?

Clint Severson

All you have to do is look at our performance quarter-over-quarter, we just have figure out that one out. So quarter-over-quarter sales and marketing expenses, percentage sales went down.

Ross Taylor - CL King

Another question is does Marty have plans to expand his veterinary sales force at some point in the near future, is that going to stay fairly static?

Martin Mulroy

We're going to keep on expanding the portfolio here is growing and as you know we're continue to grow. So we do need further field sales people and sales management, and putting more veterinarians in the field. We're increasing staffing and cuts for service, tech service, setting up entire marketing groups. So here is a lot that we're doing.

Ross Taylor - CL King

In terms of your sales reps are there any new number you can share with us in terms of how many you would like hire and I think also related to this I wondered if you can give us any data about how much your Vet business is are going direct now as suppose to through distribution and how that might compared to say about it a year ago?

Martin Mulroy

The majority of the consumables are handled by our distributors. They do a very, very good job. Now we work with a small number of them but they do penetrate the Orbos accounts as well, and they handle the logistics best so that the veterinarian can place one phone call, get his pharmaceuticals, his vaccines and his rotors all together.

As far as the instruments go, it vacillates. Right now we are probably doing about 60% to 65% of our instrument as do go direct. The reason for that is that we and our distributed partners are interested in the residual business. That's where we make our money. So we will do what it takes, as in our partnership we will do it what it takes to get the instrument in and if the distributor needs a forego margin and if accessing support goes to margin to get the instrument in, we will go ahead and work together and get that done.

Ross Taylor - CL King

Last question maybe, it's for Al. Can you help me, where exactly did your foreign currency gains and losses arise from? What kinds of transactions or where they are coming from?

Al Santa Ines

It's on the receivables and the cash that we have in Europe. We have probably approximately 80% part of the sections in Europe in euro and British pound, 20% or less in US dollars. So the time that we had close the books whatever the dollars I had in the books, most of the dollar shipped items plus my cash itself, these adjust to whatever the rates are at that time and you can see in the upward momentum lately on the euro. So, I expect something that will robust going forward, right.

Operator

(Operator Instructions) Our next question comes from Neal Goldman at Goldman Capital Management.

Neal Goldman - Goldman Capital Management

Clint or anyone, could you address your progress in terms of really reducing the cost of the disc, you said we're down a $0.01 this past quarter, but when are we going to see some more significant reduction?

Clint Severson

The cost of the rotor is tied to a combination of a couple of things. One is volume and the other one is this two by two project, so the goal of the two by two project is to get the rotor down to $2.

Now, we know how to get it down to about $3.10, and that's a volume of about 3 million rotors a quarter, so 1 million rotors a month takes us to $3.10. Right now, we are investing in some inventions to allow us to get below that.

And when you're spending on your inventions that slows down the short-term progress a little bit, and some of those costs are going to go into your current quarter, and so we're balancing that, but clearly volume is the magic along with these inventions these guys are working on.

Neal Goldman - Goldman Capital Management

Number two, could you explain in terms of the RSUs in the stock-based comp in this quarter versus the year ago quarter, and then your assumptions for the full year versus a year ago?

Clint Severson

Al, can you do that?

Al Santa Ines

Sure. I'll do that. For the quarter the expense on the RSUs is $1.1 million against last year same quarter about 900,000, and compared to fourth quarter fiscal year 2010 about 1.6. You should expect a reduction next year. We ended last year at $5.4 million in expense in RSUs, and we expect these to go down this year, okay? To about 4.8, okay?

As I said earlier, the first quarter is little up for some of the true-up of the prohibited RSUs that have been over the years period and I would expect the same range for the next three quarter. So, you can use the 4.8 and you can realize it as you should be, okay?

Neal Goldman - Goldman Capital Management

What you are saying is for the quarter it was up 200, which is an expense, but for the year it will be down 600,000.

Al Santa Ines

That is correct.

Neal Goldman - Goldman Capital Management

One last question, Europe to $98.3 million in cash would probably no meaningful return on that money unless you are speculating derivatives, which I wouldn't expect that quite, right? So, what we are going to start using that money for?

Clint Severson

At the last board meeting we had some very interesting discussions and the board has asked us to formally present some proposals. So, Al is working on that and then we'll let you know when the decision is made, but we've got some ideas.

Operator

The next question comes from Daniel Owczarski at Avondale Partners.

Daniel Owczarski - Avondale Partners

Clint, I wanted to go back to the topic that Jonathan brought up about the Piccolos and the existing customers really asking for more units and Brenton, there has got to be some hard data they are looking at to make the decision to go forward and expand these programs, whether it's economic data, productivity data, something real world that these Piccolos are working other than just that it's making their life easier. So, what you are seeing that makes these accounts want to make this additional investment?

Brenton Hanlon

We have a value proposition which is a combination of efficiencies, yield more patients per day, improved billing per patient, more new patience as opposed to old patients, fewer second visits which pay less than first visits. We have a complex ROI that we present based on their patient mix, how busy each location is and we found with larger ones, initially we were trying to get all of the sites up and running as soon as we could but we found that it's easier to get a few up and running based on a proposal and a value proposition and then they confirm it, they find the visits real. They are seeing more patients per day and spending less time on call backs. Their billing is more favorable and then they expand.

Daniel Owczarski - Avondale Partners

So how close have you been to what you estimate they can do to what they are actually seeing? Are you in the ballpark? Are you doing better than you expected?

Brenton Hanlon

We do, as well as we expect but customers are skeptical. They have heard this stuff before. So they are usually pleasantly surprised when they find that what we have told them has actually turned out to be the case. I would point out that 85% of our customers reported in a latest customer satisfaction survey, 85% reported that they were enjoying greater efficiency in their practice and 83% reported that they are running more Piccolos today than they were when they bought, sorry, more rotors today than when they first bought the Piccolos. So these are anecdotal metrics but they do indicate, at least to me, that we are heading in the right direction.

Daniel Owczarski - Avondale Partners

Okay, and then just one last quick question on foreign exchange, just so I got the numbers right. What the impact was on the top line and the bottom line?

Martin Mulroy

The top line, I am assuming, is at least 400,000, bottom line is a combined, you are looking at 700,000 for the core.

Daniel Owczarski - Avondale Partners

Okay, and that was the penny?

Martin Mulroy

Yes.

Operator

(Operator Instructions). Our next question comes from Shawn Bevec at SFG.

Shawn Bevec - SFG

Few questions here. I am looking at the rapid Heartworm test, what traction are you guys getting in the market and, I know you typically never broke that out. Can you at least give us some sort of growth rate that you are seeing there?

Clint Severson

So like some of the other rapid test products we are working on, I would love to talk about how great we are doing with Heartworm but the fact is my marketing folks do not want us to telegraph by product group everything that we are doing on our rapid tests. We are only in the game here. We believe we will have a lot of strategic advantages. We don't want to telegraph it early so they can prepare for us. We want it to be a surprise to everybody. So at this point we are not sharing that data.

Shawn Bevec - SFG

What's driving the growth outside the United States? Is it more medical, more vet? Can you possibly breakout instrument sales?

Clint Severson

We don't break that out specifically, but I can give you a commentary on it here. We had some really good medical growth outside the US as well in Europe. Now, the numbers are small, so the percentages are a little bit high because the numbers are small, but our medical business grew in Europe, probably 10 points higher than the total business, so we grew 28% there, medical is probably around 38% growth. So that was very strong.

One of the challenges we had in Europe in the quarter was on VetScans. VetScans came in a little bit less than what we expected, but the other stuff came in really strong. So I think our balance of sales between medical and vet, even though I haven't done the exact numbers here are probably close to the same as the company.

Shawn Bevec - SFG

And looking at the royalty income, going back to the Cepheid issue, how many patents are they currently licensing?

Clint Severson

They are licensing all of our patents. There are, I don't even exactly know how many bean patents we have, but there's probably three or four of the bean patents and like our other patents, they all work together. So we have a strong patent position until 2015.

Shawn Bevec - SFG

Are there other companies that are licensing these patents, like the remaining 441,000 I think you said one of the income in the quarter. Is that all Cepheid or there are other companies?

Clint Severson

There is one other licensee and that's General Electric and they have a license for the research market only. So, it's smaller and then we manufacture our Orbos Ds for very large diagnostic company and so while that's not a royalty we actually manufacture the beans and we built in the royalty in the price of the beans.

Shawn Bevec - SFG

Last one. Is there any update on the clear waivers for those last two?

Clint Severson

So, the clear waiver environment is very difficult. We submitted everything to the FDA based on their request and they have decided that for the next two products that really are not material because we don't sell the magnesium on a wave panel today and the direct bilirubin is really only done in hospitals for babies.

They have asked us to resubmit everything all over again and we are taking a look at it. Right now, it probably doesn't make a lot of sense with this environment to spent bunch of money doing this because it really doesn't affect our top line.

Operator

The next question comes from James Sidoti, Sidoti and Company.

James Sidoti - Sidoti and Company

Just two quick follow-ups. I think you answered one, but you have $98 million about in cash, but you generated negative or you lost money on the other income line. Is that's the foreign currency translation?

Al Santa Ines

Yes. That's correct. We generated about $226 million in investment income and it was in the foreign currency loss.

James Sidoti - Sidoti and Company

226,000?

Alberto Santa Ines

Yes.

James Sidoti - Sidoti and Company

Okay and on the Heartworm test that Marty talked about, the Heartworm on the rotor. Is that something that you saw the premium for or is that something that you have been including with the standard test?

James Sidoti - Sidoti and Company

The rooter is a comprehensive rotor and the pricing is pretty much inline with our comprehensive diagnostic rotor that does not include the Heartworm and it actually is priced. When you add up a competitor that may have a chemistry panel and a separate Heartworm, we add up those costs, this rotor is price lower than some of a competitor selling them individually.

Operator

(Operator Instructions) Our next question comes from Shawn Bevec at SFG.

Shawn Bevec - SFG

Sorry, one last question on the K9 wellness test. Marty, did you say you did 20,000 rotors? So what was the time frame on that?

Martin Mulroy

We didn't really give the official launch until the North American Veterinary conference in mid January. Yes, we started shipping some products in October but we started gaining traction in January and yes, 20,000 profiles have been sold.

Shawn Bevec - SFG

In the first six months of the year, calendar year.

Operator

At this time, there are no further questions. I would like to turn the conference back over to Mr. Severson for any closing remarks.

Clint Severson

Great. Thank you very much. I would like to thank everybody for joining us this afternoon and I also thank all the employees at Abaxis for doing a fantastic job in brining in this record quarter, and then also I would like to remind everybody that regarding the foreign exchange, the euro now is tracking pretty close to that limit that we are in put our original plan together. So it's possible we won't have foreign exchange problem next quarter. Depends on how it trades, though.

So anyway, with that, I will wish you a good day. Thank you.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Source: Abaxis Inc. F1Q11 (Qtr End 06/30/10) Earnings Call Transcript
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