Abaxis' (ABAX) CEO Clint Severson on Q1 2015 Results - Earnings Call Transcript

Jul.24.14 | About: ABAXIS, Inc. (ABAX)

Abaxis Inc (NASDAQ:ABAX)

Q1 2015 Earnings Conference Call

July 24, 2014 4:15 p.m. ET


Joe Dorme - Lytham Partners

Clint Severson - Chairman and CEO

Al Santa Ines - CFO

Donald Wood – COO

Craig Tockman - Director of Field Operations, North American Animal Health

Rick Betts - Director of North American Medical Sales and Marketing


Jim Sidoti - Sidoti & Company

Ross Taylor - C.L. King

Ben Haynor - Feltl and Company


Good afternoon, and welcome to the Abaxis' First Quarter Fiscal Year 2015 Financial Results Conference Call. All participants will be in listen-only mode. (Operator Instructions). After today’s presentation there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Mr. Joe Dorme of Lytham Partners. Please go ahead sir.

Joe Dorme

Thank you, Denise. Good afternoon and thank you for joining us today to review the financial results of Abaxis for the first quarter of fiscal 2015, ended June 30, 2014. As Denise indicated, my name is Joe Dorme, I'm with Lytham Partners and we are the Investor 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. Don Wood, Chief Operations Officer; Dr. Craig Tockman, Vice President, Sales and Marketing, North American Animal Health; and Mr. Rick Betts, Director of Medical Sales and Marketing, North America. At the conclusion of today's prepared remarks, we will open the call for a question-and-answer session.

If anyone participating on today's call does not have a full text copy of the release, you can retrieve it from the company's web site at abaxis.com or numerous financial websites.

Before we begin with prepared remarks, we will submit for the record the following statement. This conference call may include 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, future recurring revenues and results of operations.

Abaxis claims the protection of the Safe Harbor for forward-looking statements contained in the Reform Act. These forward-looking statements are often characterized by the terms, may, believe, projects, expects, 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 transitioning medical sales to Abbott, losses or system failures with respect to the company's facilities or manufacturing operations, fluctuations in quarterly operating results, dependence on sole suppliers, 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 competing in the human diagnostic market, 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 the condition of the United States economy and other risks detailed under Risk Factors in the 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 statements were made. Abaxis does not undertake and specifically disclaims any obligation to update 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

Great, thank you Joe and good afternoon everybody. I will review the accomplishments and the challenges for Q1 2015 and then some of the goals for Q2. After my short presentation I'll ask Don Wood our chief operating officer, Craig Tockman, our VP of sales and marketing North American animal health and Rick Betts, our director of marketing for our North American medical market to give an update on their respective businesses, we will then take questions.

Challenges in Q1 2015 were fewer than the previous four quarters but included lower sales in the Pac Rim year-over-year and quarter over quarter. We believe this was mostly due to the timing of orders from our distributors. Other vet consumable sales were down about 5% year-over-year but up 11% quarter over quarter and the lower sales year-over-year were mostly due to our promotion in Q1 FY 14 that was not repeated in Q1 FY 15.

Accomplishments in Q1 FY 15 include total sales finishing at 47.5 million, up 10% year-over-year and 13% quarter over quarter. Worldwide vet sales finished the quarter at $39.4 million, up 8% year-over-year and up 15% over last quarter.

Worldwide medical sales totaled $7.2 million Q1 this year and were up 20% year-over-year and 3% quarter over quarter. We had strong European sales for Q1 FY 15 totaling $7.3 million, up 11% year-over-year and 4% quarter over quarter.

Total international sales at $9.1 million were up 7% year-over-year but down 1% quarter over quarter due to lower sales in the Pac Rim which finished Q1 FY 15 at $1.9 million, down 6% year-over-year and 16% quarter over quarter.

Total North American sales finished Q1 at 38.3 million, up 11% year-over-year and up 17% quarter over quarter. Government sales finished very strong at $1.6 million, more than tripling year-over-year and quarter over quarter. Our new vet contract along with the new VetScan instruments sales to be used in the field are the reasons for this impressive finish.

North American medical sales totaled 5 million, up 34% year-over-year and up 2% quarter over quarter; more to follow up from Rick in a few minutes.

North American vet sales including government sales finished Q1 FY 15 at 32.2 million, up 8% year-over-year and up 19% quarter over quarter. More from Craig in a few minutes.

Total disc sales for Q1 totaled 2.1 million units ,up 18% year-over-year and up 12% quarter over quarter. Vet disc sales at 1.3 million units for Q1 FY 15 were up 13% year-over-year and up 20% quarter over quarter. In dollars, vet disc sales totaled $21.4 million, up 17% year-over-year and up 19% quarter over quarter.

Medical disc sales finished Q1 at 740,000 discs, up 27% year-over-year and flat quarter over quarter. In dollars, medical disc sales finished Q1 at $5.5 million, up 21% year-over-year and flat quarter over quarter.

Other vet consumable revenues that include i-STAT and coag cartridges, rapid tests and hematology reagent packs finished Q1 2015 at $7.4 million, down 5% versus Q1 last year but up 11% versus last quarter.

Instruments sales in Q1 finished at 1077 instruments, down from 1229 instruments Q1 last year mostly due to lower instruments sales in the other category that does not include chemistry instruments.

In Q1 we sold a record 617 VetScans versus 475 Q1 last year and 487 last quarter. We sold 134 hematology instruments versus 271 Q1 last year and 141 last quarter. And we sold 151 Piccolos versus 126 Q1 last year and 148 last quarter. And finally we sold 175 i-STAT and coag instruments versus 357 Q1 last year and 284 last quarter.

AVRL sales finished a strong and totaled $3.4 million, up 55% year-over-year and up 21% quarter over quarter with a 5% positive gross margin, up 361 basis points versus last quarter when we had our first positive gross margin period. The loss at AVRL excluding stock-based compensation finished at a negative $410,000, down from negative 1,059,000 year-over-year and 543 last quarter .

Now if you include stock-based compensation the loss was $578,000 Q1 ‘15 versus 1.128 million Q1 last year and 620,000 last quarter. 16% of our sales for the quarter were capital sales while 84% were consumable and other. This compares with 2080 Q1 last year and 1783 last quarter.

19% of total sales were international sales while 81% were North American; this compares with 2080 Q1 last year and 2278 last quarter. 15% of total sales were medical sales, 83% were vet sales and 2% other which compares with 14842 Q1 last year and 17812 last quarter.

The disc average selling price Q1 this year at $13.07 was down 1% versus Q1 last year but up $0.31 versus last quarter. Disc costs for the quarter came in at $3.76, down $0.35 versus Q1 last year and down $0.20 versus last quarter.

Disc gross margin finished at 71% versus 69% Q1 last year and 69% last quarter. Gross margins finished the quarter at 50.3% and were up 188 basis points year-over-year and up 30 basis points versus last quarter.

Operating expenses for Q1 2015 were well under control and totalled $16.4 million or 34.6% of sales versus 37.7% of sales Q1 last year and 36.1% of sales last quarter .Sales and marketing expenses for Q1 FY 15 finished at $9.6 million or 20.2% of sales and were down from 23.2% of sales Q1 last year and down from 20.7% of sales last quarter.

R&D expenses for Q1 at $3.9 million or 8.3% of sales were up from 7.4% of sales Q1 last year and up from 8.2% of sales last quarter. Admin expenses for Q1 at $2.9 million or 6.1% of sales were down from 7.1% of sales Q1 last year and down from 7.2% of sales last quarter.

Operating income for Q1 finished at $7.4 million, up 60% year-over-year and 27% quarter over quarter. Pretax income for Q1 totaled 7.5 million, up 48.5% year-over-year and 28.2% quarter over quarter. Net income for Q1 2015 at $4.7 million was up 46% year-over-year and was up 26% compared to last quarter and finished at $0.21 a share, up 50% year-over-year and up 24% quarter over quarter.

On the R&D side of the business we achieved clearance for Ehrlichia and started the trials for the next three rapid tests. We completed the custom panel of chemistry tests for the Italian market and continue to work on the next phase of feasibility for the high sensitivity immunoassay project.

Our goals for next quarter include: building on the momentum we achieved in Q1. All of our distributors are fully engaged with aggressive goals and are getting the direction and support from the Abaxis team members that are responsible for working with them.

In addition, we’re looking forward to implementing the field activities with Antech. We expect this partnership to be successful and together with them we plan on setting another VetScan instruments sales record. Completing the trials and getting the clearance from the USDA on the three rapid tests in our pipeline will be a priority for Q2 and we will be launching our custom chemistry panel in Italy.

With that, Don, you’re on.

Donald Wood

Thanks, Clint and good afternoon. In my remarks I will provide additional information surrounding the first quarter of fiscal year ‘15 for the North American animal health business and I will turn it over to Dr. Craig Tockman, our vice president of sales and marketing to add some details for the quarter.

As you recall our veterinary management team assumed responsibility and leadership for North American animal health for the last three quarters with a positive and aggressive emphasis on or distributor relationships focusing on sales to customers from those distributors. We’re also pleased with our success in our efforts to reduce distributor inventory to normalized levels, correcting an imbalance which was caused by last year's transition from a direct selling mode to a focused distributor model.

So our focus in Q1 was to further accelerate our sales programs versus the competition and refine our instruments sales by adding new focus on instruments sales focusing on chemistry and hematology, to improve our overall gross margin by improving our sales tools that allow us to focus on broader sales and reagent consumables, continue improving and upgrading our sales team with the goal of increased our overall sales productivity for area sales manager; improving our focus on AVRL labs as a key closing tool for a complete laboratory solution that will deliver double-digit growth with improved profitability.

Our focus on national accounts resulted in May with the signing of two very exciting strategic long-term agreements with VCA Antech. Both of these agreements are game changers for Abaxis and will result in an increased level of sales for years to come.

Strategically this new relationship gives us the ability to attract new and larger diagnostic customers that will utilize our point of care instruments in conjunction with Antech labs that pick up several samples several times per day to meet these larger consumer needs.

We're also excited to see yet another rapid test come on board late in Q1 with the addition of Ehrlichia. Our strategy here is to give the customers the ability to decide to do one test or several tests versus our competition not giving them that choice.

And finally I'm very happy to tell you that our performance has improved three quarters in a row and our productivity is improvement. The programs and marketing strategy we put in place are effective and allow us to react positively to our competition, and we feel [indiscernible] consistent double-digit growth. Our strongest quarters are still yet ahead of us and I look forward to reviewing Q2 performance with you in October.

And with that I'll turn it over to Dr. Craig Tockman, our vice president of sales and marketing to provide you with additional details for the Q1 fiscal year ‘15 performance.

Craig Tockman

Thank you, Don. We have been discussing over the last three quarters our efforts to both increase our placements in new business as well as balancing our distributor inventory to be completely aligned with our customer utilization and purchases, allowing for a successful FY 15 and beyond. I am pleased to report that all these efforts appear to have been successful.

We also continued to set new placement record as well as maintain the outstanding productivity we've been experiencing both contributing to maintaining our budgeted cost of sales. The addition of rapid test will further enhance our product offering and we expect consistent double digit growth for the future.

Abaxis North American animal health Q1 fiscal year ‘15 revenue of 30.7 million was up 16% or 4.14 million quarter over quarter and up 4% or 1.16 million year-over-year. While total instrument placements were down 9.2% year-over-year and 8.4% quarter over quarter, we experienced strong VetScan chemistry placements.

Instrument sales remained incredibly strong overall with our new focus and program changes as we added 263 new instrument customers. In Q1 we placed 778 total instruments in the veterinary practices. In this quarter we chose to focus on our higher-margin core product line, the VetScan analyser. Because of the quality of these instruments, we believe that once we placed the VetScan into a veterinary practice, placing remaining instruments becomes far easier.

The quarter over quarter and year-over-year total placement decrease was due to fewer placements of other instruments which are lower margin products and more difficult to place without larger incentive programs for the customer. Both last year Q1 and last quarter we had expensive incentive programs for these products we did not continue.

With the focus on our core product, our field sales team set a new record for VetScan placements of 430 instruments, which represents an increase of 37.4% year-over-year and 19.8% quarter over quarter. We continue to have tremendous productivity with our field sales team as well as 79.8% of our placements in the core instrument categories of chemistry and hematology, also a record for us.

Over the last three quarters, we've now broken every instrument placement record except one. So our hematology record is our next target. In addition, our field sales team overall continues to remain outstanding -- maintain outstanding productivity with placements per rep up 41%. With our focus on gross margin improvements, we're selling more rotors and packs per new instrument a quarter than ever before adding to a better margin and product utilization. These numbers are reflected in our consumable sales.

Sales of VetScan rotors at the time of instrument placement were up an unbelievable 719% year-over-year. Total rotor revenue was up 22% quarter over quarter and 14% year-over-year and total hematology reagent revenue was up 19% quarter over quarter and 22% year-over-year showing our strategy to be working as planned.

Moving forward we can now incorporate the strategy with the placement of lower margin products without affecting sales of VetScan analyzers. Our national accounts business continues to grow as well. for Q1 national accounts revenue was up 47% year-over-year and up 15% quarter over quarter.

As announced earlier last quarter, we finalized two long-term agreements with VCA. One of those agreements is a product supply agreement for VCA’s animal hospitals. Under this agreement, VCA will purchase VetScan VS2 chemistry analyzers and reagent rotors from Abaxis for replacement in the majority of VCA’s more than 600 animal hospitals located in North America. These placements began this quarter.

Our director strategic accounts continues to look for new opportunities for similar placements. Our other long-term agreement is with VCA Antech diagnostic reference laboratories. With this relationship we plan to capitalize on new growth opportunities within the animal healthcare industry. This agreement allows us to now play on equal footing with our main competitor.

Our AVRL lab offering offers exceptional value and service for many veterinary practices. However because of its core design it may not fit [ph] initial practices that require multiple daily pickup or same-day turnaround time for routine test. These tend to be larger or busier urban and suburban practices.

We also know a percentage of the practice is used to point of care and send out lab services of our competitor. So where AVRL does not meet the specific needs of the customer, representatives from Abaxis and Antech Diagnostics will work together in providing complete state-of-the-art diagnostic solutions to better serve these customers and point of care quality and cost and will send out find [ph] and service.

Our focus together is these larger accounts where we both – we’re both lagging in specific area and now have the ability to compete with our mutual competitor at the same level. This relationship is new and we will need to evolve but we expect significant sales in these larger accounts for both Abaxis and Antech moving forward from this relationship.

AVRL continues to gain momentum in sales as a primary send out lab providers for our customers. Net revenues were 3.4 million, up 21% or 599,000 from the prior quarter, and up 55% versus a year ago with the positive gross profit and making overall profitability even closer. Our field sales team for the first time attained 100% of their sales goals adding to our excitement that we will continue to be able to sell AVRL services alongside the Antech agreement. Our management team continues to implement new efficiencies and increasing revenue, continue to make a positive impact in the net revenue.

This quarter, AVRL completed a BSL 2 safety requirements and started to receive samples for non-human primates. AVRL also began new courier service in several cities as well as participated in several clinical trials. All of our distributors are now at normalized levels of consumable inventory. More importantly those levels are consistent with the historic out the door sales to ensure we will not experience the distributor inventory channel issues experienced last year.

Finally at the end of Q1 we announced the launch of our Ehrlichia rapid test. With this launch, Abaxis can now veterinarians with the infectious disease test in combination of heartworm, Lyme and Ehrlichia taken off the market by our primary competitors some time ago.

Our customers have responded extremely positively and we have a nice backlog of business due to the late approval of this product. In addition, excellent progress has been made in the development of the test for anaplasmosis and dogs. Once that test is completed and we have the full menu of canine tests, veterinarians for the first time will be able to choose the test appropriate for their geographic area or for the specific need of any particular patient.

Our competitor for years now has forced veterinarians to buy all four of the core infectious disease tests together, heartworm, lyme and Ehrlichia and Anaplasmosis. This meant that the doctor had to run all these tests even if one or more of these diseases did not exist in their geographic area or if the symptoms of the sick pet only warranted the testing of one, two, or three of these diseases, often not needing the heartworm test.

In addition monitoring the pet once diagnosed required repeat testing for all four diseases which is completely unnecessary in almost every case. This drives up the cost of the test for the doctor and pet owner and they often reduce the ability of the doctor to perform optimal testing because the costs are too high for the customer in having to perform all four of these tests with the competition regardless of the circumstance. The only other options for the doctor to reduce their margins so they can do the proper diagnostics.

Our offering of each of these tests performed individually will be far more cost-effective for the veterinarian as well as the pet owner and allows the doctor to provide better medical care by targeting those diseases common to their geography for screening, testing only those diseases that fit the symptoms for ill patients and targeting the recheck protocols based on previous diagnoses. We anticipate approval of three other rapid tests soon. Once completed we will be able to truly compete in the infectious disease rapid test market in every aspect with the additional focus of improving patient care and lowering overall cost.

The competition continues to respond to our initiative and success, we will continue to make rapid changes to stay ahead of them. Our focus on the customer and their needs are people and our commitment will continue to provide Abaxis with market success.

Clint Severson

Great, thank you Craig. Rick, you are on next.

Rick Betts

Thank you, Clint. Good afternoon all. For the quarter the domestic medical division finished with revenues of 4.98 million, up 34% year-over-year and up 2% from Q4’s finish of 4.89 million. This included shipments of 601,000 reagent discs and 97 Piccolo analyzers.

During the quarter 123 Piccolo and 521,000 reagent discs were sold by Abbott in North America. These numbers compared to 108 Piccolos and 447,000 discs from the year prior. Abbott continues to do a great job of managing inventory and projecting demand. Inventory turns are less than 30 days for most catalog numbers and demand continues to accelerate despite a challenging regulatory and reimbursement environment. We look for continued growth from Abbott sales and marketing organization as they implement some planned Piccolo focused marketing campaigns to select markets. And with major distribution programs focused on point of care laboratory diagnostics running in Q2 and Q3 domestic Piccolo placement should continue to accelerate.

Our two pilots with our retail health partner continued to progress nicely. Both initiatives which again are focused on separate chronic conditions afflicting millions of Americans are growing nicely in usage and clinic level assimilation. While they continue to be deliberate and methodical in their implementation our partner has reported satisfaction with our technology and we continue to be mission ready when they choose to expand operations nationally.

In Canada, now that we have the correct classification sales continue to accelerate as more and more physicians become aware of the Piccolo technology and its benefits to patient care and clinic efficiency. Our two existing distribution partners on enjoying good growth and are focused on provincial population centers where we expect to see some low hanging fruit.

Our clinical trial initiative is also progressing nicely. During Q1 we solidified our partnership with one of the top reference laboratory servicing the clinical trial industry creating a robust end to end service offering for managing point of care blood chemistry diagnostics for patient recruitment and dosing decisions in clinical trials. And we received an expansion order from our existing pharma customer to widen the scope and use of the Piccolo in their clinical trial indicating satisfaction with the technology after two full years of use.

Thank you and with that I will turn it back over to Clint.

Clint Severson

Great, thank you Rick and now we are open for questions.

Question-and-Answer Session


(Operator Instructions) The first question will come from Jim Sidoti of Sidoti & Company.

Jim Sidoti - Sidoti & Company

Well, based on the vet sales you reported today it seems like the inventory issues that you were having in fiscal ‘14 are resolved, are you confident that you have a tighter work on what’s going on at the inventory of your vet distributors so that it doesn’t happen again?

Clint Severson

They do.

Jim Sidoti - Sidoti & Company

Can you give us an update on -- I know you said that you’re mission ready for the retail opportunity, are there any more test trials that need be done or is it the bow in their quarter at this point?

Clint Severson

Well I think we’ve got two of these validation trials going, so it’s pretty much in their court. Should they decide to expand to another geographic area we’re ready to work with them on that. I think like Rick said things are going well and we just have to have patients, they have a process they’re going through. We respect that process and we’re supporting them as they go through it.

Jim Sidoti - Sidoti & Company

There’ve been other retail chains that have opened up similar operations, are you in discussions with any of them?

Clint Severson

We’ve done demos with everybody. So we've done demos with all the different retail organizations. Clearly one is moving ahead of the rest of them and like I said in many conference calls for core, the one that we’re working with is successful and we expect others to follow, and that's what – we’re patient and we’re focused on the one that is moving ahead of everybody else.

Jim Sidoti - Sidoti & Company

You showed some good growth with Abbott, it seems like that relationship is starting to work out, do you expect that to continue the next couple of quarters, accelerator or do you think that was a particularly strong quarter?

Clint Severson

We think Abbott is fully engaged and like everything else it always takes a while to get traction in the marketplace which for them the Piccolos was a new product and so this is kind of the first quarter after the first year really that they’ve been doing this, actually probably in the second quarter and the first year. And so we’re seeing lots of engagement and I think the one indicator that was really strong is the medical rotor disc growth. That went way up year-over-year and that's an indication that we’re placing these instruments in accounts that have more sick people, hence higher volume.

Jim Sidoti - Sidoti & Company

Can you give us an update on distribution in China?

Clint Severson

Yeah, what we’re doing in China now is the responsibility for China I have moved over to our European operation and so our European team has good contacts with organizations that do a lot of export into China through Germany and so they are in the process of putting together their strategy and their plan and I expect to have something by the end of next quarter. China is a very complex market and we’re still a relatively small company and so the original discussions have been to approach this very large complex marketplace kind of one province at a time. And so that market development work is ongoing right now.

Jim Sidoti - Sidoti & Company

How about our CRO opportunities , any update to that and do you think you could get an order in fiscal 15?

Clint Severson

We expect to have CRO business in this fiscal year. Yes.

Jim Sidoti - Sidoti & Company

And then the last couple --- disc costs came down quite a bit, is that due to the increased volume or have you started to utilize the multi cavity mold?

Clint Severson

It’s mostly due to the increased volume, so the biggest upside for our two dollar goal here is doubling the volume, that takes a dollar off the cost. And so the nice uptick in volume this quarter clearly helped, the 2 x 2 project is still strong. I think it was difficult to start implementing a lot of the 2 x 2 programs when our volume the last three quarters was actually declining, it was very difficult to implement those programs. So we are back at now.

Jim Sidoti - Sidoti & Company

And what is the status on the multi cavity molds?

Clint Severson

So we have eight cavity mold for the barcode ring, eight cavity mold for the cover and the first path at it, there were some issues with balancing, so we’re correcting the mold to cure those balances and we should have something I would say in the next 6 to 8 months.

Jim Sidoti - Sidoti & Company

And then the last question is on the R&D spend, it was up a little bit about a million quarter over quarter, is that because of the activity on the vet side, or the medical side or – and is that something that you can continue at this pace?

Clint Severson

Well, it’s two things. So one, we’re doing the high sensitivity immunoassay project and that's taking resources, it’s a complex technology that we’re adapting to our discs and instrument platform. In addition to that -- there's a lot of work going on with the rapid tests, and we need to make sure that we’re not in violation of any IP out there, we got to make sure that we meet this sensitivity and specificity requirements of the marketplace and those two things is what drove the R&D up.


The next question will come from Ross Taylor of C.L. King.

Ross Taylor - C.L. King

I have several questions. I just wanted to start with the VetScan placements and you had excellent growth in North America this quarter and I think the trend has been probably more than pretty good for a couple of quarters. But what are some of the initiatives or programs that you all have been conducting that have been the biggest driver of the improved placement in the VetScans and how much of a role as your new distribution partner having in that?

Clint Severson

So I will give my comments on that and then turn it over to Craig, he probably knows more about that than I do. But one of the things that we did when we made up the changes in domestic North American animal health market three quarters ago was my emphasis on placing VetScans first and so in the past we really didn't have a focus on any particular instrument, it was only instruments, guys just sell instruments. And so what happened is that when you are not focused on the VetScan you’re just selling whatever instrument we offer. You don't get the leverage that you can get if you just focus on selling the VetScan first and then once the VetScan gets in there, then you go back and sell the rest of the stuff, because getting the VetScan and it’s really the easiest part of the sale. And so our salespeople were incented and were directed to focus on VetScans first. And so that's one reason that you see that kind of a performance with the chemistry instrument. Craig, I will let you comment.

Craig Tockman

Ross, I don’t want to give away too many of our secrets, it’s essentially what we are trying to do here. But I will agree with Clint, we had to focus on that core product, it’s the best thing out there and once we get that in the door, the rest kind of falls into place. But I will say that that it goes to our work with our distribution partners, all of them as far as engaging them, teaching them, training them and working alongside with them to identify the proper opportunities and target the right opportunities. It goes to the improvements with our AVRL offering, to be able to offer the full plan into the practice, it goes to how we pay our people, it goes to the excitement we’ve generated with our people with our programs. We’ve created some programs along with our distributors that are more cost effective than our competition. And bottom line Ross is when you have a better product and you leverage that the right way it’s not rocket science.

Ross Taylor - C.L. King

And my next question relates to the new agreement with VCA and I guess specifically the Antech lab aspect of that agreement but how do you anticipate going to market, I mean there is a Antech reps going to be the biggest driver of the new placements or do you guys work together as a team and how long before you have that up and running so that your reps and the Antech reps are out there promoting both their services and your product?

Clint Severson

So like I said briefly it’s a little bit of a process, we’ve been doing a lot of work with the folks at Antech in ramping up. The majority of the responsibility for these deals is in fact Antech identifying large high-tech lab opportunity that they want to go after and then we are identifying large competitor point of care opportunities where we feel the Antech offering fits best. So that combination of working at the executive level to identify the targets that we’re all going after and then filtering that down to the field is how we are approaching these things .And the focus is strictly on new business for both companies.

Ross Taylor - C.L. King

And is this something that it’s kind of actively out there in the field now or is there going to be a couple more months or another quarter or two before you’re really able to implement it?

Clint Severson

We are working now, we have some success already. We expect to steady ramp up over the next two quarters but we are working together at this moment.

Ross Taylor - C.L. King

Okay and my last question just relate to the expense side. With sales and marketing and your G&A the numbers were very low, and what's driving that? Is it just lower headcount on the sales force and can we expect these kind of low levels to continue over the balance of the fiscal year?

Clint Severson

So the increase in productivity that we get when we are working with our distributors, doing the things that the Abaxis team needs to do, targeting the right accounts, working with the distributors to get us in the account and get to demo, so that we’re just getting better at that. And the better you get at doing that the more productivity you get per person and expenses as a percent of sales go down. I mean that’s kind of it.

Now is it going to happen every single quarter? Well you know our goal right now is to kind of add resources after the sales come in. So we had a really good quarter this quarter where we brought in a nice growth and so we may add a few more people here now that that we've got the resources to do it. But we watch expenses really closer and the way people get paid at Abaxis is a combination of topline and bottom and so I think people are focused on efficiency here and we try to keep the expenses as a percent of sales going down every quarter.


The next question will come from Kevin Ellich of Piper Jaffray.

Unidentified Analyst

This is Carl Clark [ph] on for Kevin Ellich. Thanks for taking my question. So kind of following up on the VCA relationship, I am just wondering if you expand and provide any more color – if there is anything where you can quantify, or if there is way to think about how this is going to benefit, grow the margins as this kind of runs up further over the next couple of quarters?

Clint Severson

Clearly as we sell more customers, we sell more instruments, which use more consumables, which reduces the manufacturing costs, you add all that together and you get higher sales, higher gross margin. And because we have a very efficient system here with – Antech is kind of like a distributor in a way that this helps us leverage the work of those folks as well. So yeah, you just add all that together and you get like I said before higher sales, higher volume in the factory which leads to lower cost and higher gross margins.

Unidentified Analyst

Like you said I think just with what’s already been implemented it’s already seen effects, just announced a few minutes ago, they've already installed 60 machines, have another hundred orders. So that’s great news. Thank you and just one more quick question on capital deployment. Other than the dividend can you prioritize the use of cash flow now that there is 87 million of cash and 20 million of short-term investments in the balance sheet?

Clint Severson

I mean we’re doing a dividend, we have a disciplined stock buyback program in place and we didn’t buy any stock back last quarter but clearly that’s in place. And we’re always looking at opportunities to acquire new things and there are – we’re probably looking at two or three opportunities in any one given time and so that's how we use our cash.

Unidentified Analyst

So is it 47 million left in the buyback authorization, does that sound right?

Clint Severson


Unidentified Analyst

Okay and just following up on the VCA, I mean those numbers – should we – is that 60 machines already, another hundred ordered, is that some – do you think we can expect that pace to continue or you say that’s going to ramp a little faster in next couple of quarters?

Clint Severson

I mean it depends on how successful we are with the Antech program. I actually think we ought to do better than that.


The next question will come from Ben Haynor of Feltl and Company.

Ben Haynor - Feltl and Company

Some survey work that we've done suggests that MWY seems to be gaining some traction with your equipment both in terms of getting in front of clients and closing those clients. Can you maybe talk a little bit about maybe how that progressed throughout the quarter and how -- what you’ve seen in the first few weeks of this quarter?

Clint Severson

Yeah, I will make my comments and then let Craig coming after me. Okay so the way that we work with distribution is the Abaxis sales person identifies the next about hundred accounts that they believe that we have a good chance of selling of VetScan to. And so they may present those opportunities to our distribution because clearly MWI is the largest distributor, they get probably the most presentations. But we also work with our smaller distributors the same way and in some cases you might have potential account that MWI doesn’t feel comfortable in the way after, so we will need to do that direct or we will do it with another distributor. And as we get better at doing this, we get more effective at it. And so the goal of the distributor is to get us in the account, so we can do the demo.

And then the distributor kind of works with Abaxis rep in putting together the proposal because remember the sale is the distributor’s control in the sale now because they’re going to be doing the selling. We do various closing tool programs that we have each quarter to help our salespeople close sales and then make the sale happen. So I think it’s - as you get better at it, you see your performance increase, and I think that's what we’re seeing out there. And so Craig –

Craig Tockman

No, I can only add in addition to everything Clint said is the tremendous working relationship we have with the management at all of our distributor partners and their refocus on our product line based on the relationships we’ve built with them as well as the benefits to their business that we provide them. It’s – every time we place a VetScan or any of our instrument set, it’s an annuity to the distributor that that is good business for them. So they recognize that and working as a team makes it a whole lot easier.

Ben Haynor - Feltl and Company

And then my second one and last one is just what are you guys seeing out there, what did you see during the quarter in terms of vet disc growth and kind of the financial health of the average vet practice?

Clint Severson

We see it improving bottom line. Our customers are busier, they are buying more rotors. As far as we can tell vet business are up and people are spending money in their pets which is reflected in our out the door sales.


Ladies and gentlemen, that will conclude our question-and-answer session. I would like to hand the conference back over to Mr. Severson for his closing remarks.

Clint Severson

Great, thank you very much for joining us. And I want to thank all the Abaxis employee that pulled together for our first quarter of our new fiscal year. Everybody did a great job of managing their expenses and meeting their goals and objectives. And I thank all of you, and so -- and I thank all of you for tuning in and we look forward to tuning in again in October. So thank you very much.


Ladies and gentlemen the conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.

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