IDEXX Laboratories Inc. Q4 2007 Earnings Call Transcript

Jan.25.08 | About: IDEXX Laboratories, (IDXX)

IDEXX Laboratories Inc. (NASDAQ:IDXX)

Q4 2007 Earnings Call

January 25, 2008 9:00 am ET


Jim Moraldi - Director of Investor Relations

Jon Ayers - Chief Executive Officer

Merilee Raines - Chief Financial Officer


Rick Wise - Bear Stearns

Ryan Daniels - William Blair

Dawn Brock - JPMorgan Securities

Ross Taylor - C.L. King


Good day, everyone and welcome to the IDEXX Laboratories fourth quarter 2007 earnings conference call. Just a reminder, today's conference is being recorded. Participating in the call this morning are Jon Ayers, Chief Executive Officer, Merilee Raines, Chief Financial Officer, and [Jim Moraldi], Director of Investor Relations.

IDEXX would like to preface the discussion today with a caution regarding forward-looking statements. Listeners are reminded that statements that members of IDEXX management may make on this call regarding Management's future expectations and plans, and IDEXX's future prospects constitute forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. Such statements include, but are not limited to, statements regarding Management's expectations for financial results for future periods and the timing of new product introductions.

Listeners are reminded that actual results could differ materially from Management's expectations. Factors that could cause or contribute such differences are described in IDEXX'S quarterly report on Form 10-Q for the quarter ended September 30, 2007, and annual report on Form 10-K for the year ended December 31, 2006 in the section captioned Risk Factors, which are on filed with the SEC and also available on IDEXX'S website,

In addition, any forward-looking statements represent IDEXX'S estimates only as of today and should not be relied upon as representing the Company's estimates as of any subsequent date. The Company disclaims any obligation to update or revise any forward-looking statements in the future, even if its estimates or expectations change.

At this time I would like to turn the conference over to Merilee Raines. Please go ahead.

Merilee Raines - Chief Financial Officer

Thank you, Matt. Good morning and thank you for joining us today. In our earnings press release this morning, we reported fourth quarter revenue of $245 million, a year-to-year increase of 27% and diluted earnings per share of $0.40, a year-to-year increase of 5%. While the impacted discrete items on this quarter's earnings was negligible, last year discrete items had a net favorable impact on reported earnings. Year-to-year earnings growth adjusting for these items was 29%. I also remind you that we affected a two-for-one stock split in the fourth quarter. Accordingly prior year earnings per share and share counts have been adjusted for comparability in our press release.

The quarter's results contributed to produce full year revenues of $922.6 million, a growth of 25% and full year earnings per share of $1.46 on a reported basis. Full year earnings per share adjusted for discrete items were a $1.58, a growth of 19% when also adjusting 2006 reported earnings per share for discrete items. Reconciliation of adjusted to reported earnings per share is included as always in our press release.

Consistent with the prior quarters in 2007, we saw impressive revenue performance in the fourth quarter that brought us ahead of the full year guidance of $910 to $915 million we gave in October.

Greater than anticipated impact from currency in the fourth quarter contributed about $2 million to our revenue over delivery. Our full year earnings per share were at the high end of our guidance on both the reported and adjusted basis, as better than anticipated revenue performance was somewhat offset by a slightly lower gross margin than we expected.

Let me now provide some highlights on the P&L.

The fourth quarter revenue growth of 27% included 5% growth from currency and 7% growth from acquisitions. So organic growth adjusted for these two items was 15%, full year organic growth was 14%. Our Companion Annual Group segment had organic growth of 17% for the fourth quarter and 15% for the full year, with all product lines achieving double-digit organic growth for both reporting periods.

Placements of instruments in our IDEXX VetLab suite continued with the momentum we have seen all year. Instrument revenues of $19.1 million grew 17% on a constant currency basis, and placements grew by 35%. Full year placements grew by more than 40%.

As we have indicated, the fourth quarter is traditionally the highest quarter for placements, and this was the case as well this year across all geography. The cumulative placements of IDEXX VetLab Station, the information management system for the current in-house suite and soon to be launched Catalyst and SNAPshot Dx now stand at close to 5,900 which is higher than our previous estimates for the year.

Instrument consumable sales of $52.6 million grew organically 16% for the quarter and 15% for the total year. Our point-of-care rapid assays with revenues of $31 million had organic growth of 19% for the quarter and 13% for the year.

U.S. distributor inventory levels for rapid assays and instrument consumables remained in the three to four week range based on forward-looking demand and year-to-year changes in inventory levels did not have a meaningful impact on organic growth rates for these products lines.

I know, however, that in the fourth quarter in Japan, we changed distribution methods from a combination of direct sales and use of multiple distributors to an exclusive distribution arrangement for our kits and instrument consumables.

The initial stocking order resulting from this change favorably impacted our rapid assay growth rate by about 5%, and our instrument consumables growth rate by about 2 points. Our reference laboratories and consulting services business had reported growth in the fourth quarter of 33%, with currency contributing 4% and acquisitions contributing 17% to yield organic growth of 12%.

Organic growth for the total year was 15%, and for the first half of the year 16%, with the pet food recall benefiting the full year and first half by an estimated 1% and 2% respectively.

As for the longer-term organic growth rates for our largest companion animal product lines, we reaffirm 9% to 11% for instrument consumables and 8% to 10% for rapid assays, though the growth rate for rapid assays has been above this range for 2007.

Growth from price has been a significant contributor to overall growth, as we have redesigned marketing programs and as customers have converted to our higher value multiple analyte parasitic disease scream SNAP 4Dx. This test panel, which was launched in the third quarter of 2006, represented about 30% of our parasitic testing unit volume in 2007 versus about 5% in 2006.

Well, we believe there is still plenty of opportunity for further conversions from heartworm-only testing, we expect the rate of conversions and therefore the impact of price will diminish over time. Well, we are also reaffirming our longer term guidance for labs of 13% to 15%. We believe that near-term growth will be at the low end of that range or perhaps the couple of points or so lower due to the top compare with the first half of 2007 created by the pet food recall related testing.

Our practice information management and digital radiography system had organic growth of 21% for the quarter and 19% for the full year. We are very pleased to see improvements in our digital business over the last six months, and in addition to strong placements in the fourth quarter, we are entering 2008 with the healthy backlog. The 31% growth, we reported in our pharmaceutical business was favorably impacted by about 20 points due to the timing of a couple of large orders that will create a tough compare in the first quarter of 2008.

Production animal sales were $22.2 million for the quarter, a reported growth of 34%, which resulted in large part from the first quarter acquisition of Institut Pourquier contributing 16% and significant favorable impact from currency of 11%. Service business is influenced by disease outbreaks and government disease eradication efforts and therefore testing tends to be more episodic in nature than our other businesses. We believe the organic growth of 8% for the full year 2007, is inline with longer term trend.

Water sales of $17.3 million grew organically 12% for the quarter with the timing of shipment of some standing orders favorably impacting the quarter's growth by a couple of points. Additionally, our new collaboration with Invitrogen contributed another 6%. We anticipate that Invitrogen's products, which complement our IDEXX, developed products for Cryptosporidium and Giardia testing in water; will contribute about 4% to 5% to our water growth in 2008.

Looking at the rest of the P&L, gross margin at 50% of revenues was about a point below our expectation. The very strong instruments placements with the relatively lower gross margins were a contributor as our lab services was slightly lower then forecast testing volumes and slightly higher cost particularly in our more recently acquired labs. As we have noted, we see margin improvement in both instruments and lab services as eminently achievable and expect them to be key contributor to margin expansion over the longer term.

Operating expenses including R&D and SG&A were about 35% of revenues, about inline with our thinking, as with the effective tax rate of 30.5%. As for the balance sheet and cash flow we ended the year with $60 million in cash and $73 million in debt, for net debt position of $13 million. Free cash flow as defined in our press release was $18 million or 72% of net income for the quarter and for the year 78% of net income excluding non-cash discrete items.

And looking forward to 2008, we now project revenues of $1.05 billion to $1.07 billion for the year. This would represent a reported growth of 14% to 16% with acquisitions estimated to contribute 1% and currency to contribute 2% so organic growth of 11% to 13%.

For all of our businesses over the near-term, we will be watching closely to see if any negative trends develop as a result of the economic downturn. So far we do not see those trends, and while we can't entirely discount the potential for recession to impact our near-term growth rates, we have seen historically that our businesses are relatively recession resistant.

Accordingly we believe that any impact of an economic downturn would be unlikely to take us below our revenue and earnings guidance range, and we certainly would not foresee any change in the long-term favorable trends in our served markets.

We expect to see reported revenue growth rates strongest in the first quarter at 18% to 20%, as we still see incremental impact of acquisitions completed through the first quarter of 2007, and then growth rates for the remaining quarters are expected to be more on par at 13% to 16%.

We project gross margin as a percentage of revenue to be 51% to 52% for the full year with a highest gross margin as a percentage of revenue in the second quarter given the seasonality of our relatively high margin rapid assay products.

The full year 2008 gross margin percent is anticipated to be about on par with 2007 when adjusted for discrete items with product mix impact, that is instruments and service businesses showing higher volume growth than relatively higher margin consumables, largely offsetting operating efficiency gains and pricing favorability.

Our production learning curve for our new instrument platforms will be an important factor in our ability to achieve our anticipated gross margin performance over the year, and we believe we will benefit greatly from the learning experiences and competencies developed since our LaserCyte in 2002.

Operating expenses should average out to about 36% of revenues for the year and we expect operating margins to be about 16% of revenues for the full year, with the first quarter margin the lowest at about 15% due to the timing of commercial activities, and then showing some improvement in ensuing quarters.

As we indicated in our last call, we are not expecting much margin expansion in 2008 from 2007 as adjusted to exclude discrete items, as our first priority will be to ensure that we are effectively supporting out Catalyst Dx and SNAPshot Dx product launches and providing our customers the great experience that they are anticipating.

We do, however, expect that margin expansion will steadily develop over the next several years, driven primarily by improving cost profiles for instrument platform, scale economies and operating efficiencies in our reference laboratories and revenue mix shift toward our increasingly profitable instrument consumable sales.

We expect the tax rate to be 30% to 31% for the year. This rate anticipates the extension of the federal research and development credit into 2008. If this credit is not extended, our rate will likely increase. Net interest expense is expected to be about $2.5 million.

Share count is projected to decline about 500 shares or so over the course of the year from the 2007 fourth quarter levels. This is due to the net impact of share repurchases and equity compensation issuances.

All the aforementioned factors lead us to a full year earnings per share projection of a $83 to a $87. This translates to year-to-year growth of 16% to 18% from 2007 earnings per share as adjusted for discrete items.

As for the balance sheet, we project DSL to remain at approximately 40 days; inventories to range from $95 million to a $100 million and capital expenditure to be a $120 to a $130 million.

As noticed during our third quarter call, this is a significant step up from expenditures in recent year and it is driven by the expansion and upgrade of our primary facility in Maine. Worked down on this project in 2008 is estimated to be about $75 million. We anticipate the project will be completed in phases from 2008 through 2011 and will cost about a $140 million over this 3 year period.

The initial phase will provide us with much needed, more efficient manufacturing and R&D space. As a result of the significant investment for this project, we anticipate that free cash flow will be approximately 40% of net income, which is below historical levels of 80% to a 100% of net income.

Now, I'll turn it over to Jon for further comments on the business.

Jon Ayers - Chief Executive Officer

Thanks Merilee, for that review our financial performance for the fourth quarter, full year and our outlook. We have strong revenue performance driven by the organic growth of our businesses and aided by a variety of other factors, including favorable currency in acquisitions. We finished an already strong year with a great finish in most of our business, particularly, the Companion Animal Group, which comprises 82% of the company’s revenues.

Instrument placements worldwide in the fourth quarter were extremely impressive as Merilee reviewed. The most important of these instruments is our chemistry analyzer VetTest, which generates by far the most consumable demand of any of the analyzers in the suite.

Global placements of VetTest were up an amazing 68% for the fourth quarter over last year. As a result of great year and placements and royalty, we now have an estimated active worldwide installed base of 30,000 VetTest customers.

We also exceeded our targeted sales of IDEXX VetLab Station since the launch in Q1 of 2006 achieving almost 5,900 cumulative placements, versus the target of 5500 that we discuss in the quarterly calls over the course of 2007. As a reminder this cumulative number stood at about 4,600 at the end of the third quarter.

Customers who had purchased an IDEXX VetLab Station, either by buying a LaserCyte Hematology Analyzer or the standalone unit, benefit from some highly appreciated data management and reporting features that increases the convenience of the their in-house IDEXX VetLab.

In addition, they've also taken the first step getting ready for the future as IDEXX VetLab Station is also the controller soon to be launch next generation analyzers from IDEXX.

We also launched, on schedule, in December the IDEXX Coag Dx instrument, which adds to the IDEXX VetLab suite the capability to detect bleeding disorders. It is important to know of the bleeding disorder in certain high risk cases, in advance of going under surgery as you can imagine. And also in emergency cases the suspected accident of poisoning of the pet.

As customers still out there in-house lab suite, with LaserCyte, IDEXX VetLab Station, Coag Dx and are other instruments, they add capability for immediate diagnostic at the point-of-care that cannot be duplicated. So, as we up-sell our customers on addition to their in-house lab, they become more loyal.

Customer loyalty combined with new customer acquisition, are the primary drivers of consumable growth, which in turn is the primary driver of profit growth in this installed base business model. So, it was nice to see that the fourth quarter we had strong sales of all our instrument systems, both through existing and new customers.

Let us turn to an update of our major instrument launches, Catalyst Dx and SNAPshot Dx. We are proceeding right on schedule of the launches by having shown these instruments this week in Orlando at the North American Veterinary Conference. To remind investors, Catalyst Dx is our next generation chemistry analyzer. It is specifically designed to advance in-house testing with the following combination of features that puts it in a class by itself.

First, Catalyst Dx incorporates all the elements that makes VetTest the leading chemistry instrument choice in the market today, including the use of dry slides technology, which is the goal standard in accuracy and precision in both the veterinary and human medicines.

Second, Catalyst Dx allows the technician to provide a patient sample with less hands on time then it would take to prepare that same sample in terms of the outside lab.

Third, Catalyst Dx expands the manual test and instrument test capacity. For example, Catalyst can run a complete profile such as a 23-chemistry test panel, including electrolytes and deliver a result in 8 minutes.

Fourth, Catalyst runs multiple patients simultaneously, eliminating waiting during busy mornings when most preanesthetic panel are run. By running multiple patients simultaneously the instrument can complete four preanesthetic patients in 16 minutes.

Fifth, Catalyst has a variety of other key ease of use and other features such as the ability to run blood and urine simultaneously, easy quality control and minimum regular maintenance. Our second instrument SNAPshot Dx increases the speed and ease of use in running endocrinology.

Like Catalyst Dx, SNAPshot Dx brings a new level of convenience and throughput to the in-house lab. During the North American veterinary conference, we've received an extremely positive response from customers who had a chance to see Catalyst Dx and SNAPshot Dx instruments in person.

Customers were able to load the instrument themselves and thus have the direct experience with how easy new instruments are to run. We are estimating that well over 50% of the customers who came to our booth at the show and saw the instrument had an interest to purchase the system this year and an incredible response rate. Customer responses to the instruments at the show reinforces our confidence that we will be not be the demand constraint during 2008 as we ramp the manufacturing.

Both Catalyst Dx and SNAPshot Dx are on the schedule for initial customer sales and deliveries in March. Through the course of the next few quarters in 2008 we will be controlling the launch ramp volumes as we build experience. Our first objective always, is to ensure fabulous customer experience, expanding upon and reinforcing our brand and reputation in this market.

Our strategy is to continue to advance the ease of use of the IDEXX VetLab suit for new and existing customers and as investors know in past we typically announced new features. In this slide we have another one on the way. By way of background the endocrine test for thyroid function called T4 is the most important analyze on SNAPshot Dx and on the existing instrument in the field SNAP Reader.

For customers of both these instruments will be introduced in next few months a new shorter protocol, which will accelerate timed result by allowing the customer run either plasma or serum sample. I might mention, that we will continue to be selling and placing the test in 2008 and beyond. Giving us a two-tiered chemistry instruments strategy that address the need of all customer segment.

And as a result Catalyst Dx, we will be taking back many that test in trade that will be able to then recertify and place with new customers at low cost, continuing to grow the installed base customers for chemistry and thus consumable volume. As many investors know, we are focused on the long-term value of the IDEXX that allow franchise. We control manufacture of most of the instruments and many of the consumables. We also have a great long-term partnership with our supplier dry-slide technology J&J's Ortho-Clinical Diagnostics division.

Dry-slide or the chemistry consumables used for both VetTest and Catalyst Dx. We are pleased we recently extended our contract for dry-slide sourcing for another five years to 2025. This extension with the existing piece of economics give us the confidence to continue to invest in the instrument platform that utilize this both standard reagent technology in the veterinary market.

I would now like to turn to a question we have been asked quite a bit recently that is how would challenging outlook for consumers spending likely impact IDEXX. Merilee is taking you through our financial guidance for 2008. We feel very good about the plans we have in placed to achieve these financial results, which are rooted in the strength of our franchises and the growth nature of our markets.

Our experience with the market prepaid healthcare services particularly with our technology offering, is that a growth in good times and bad. Care for one's beloved pet is always paramount in the pet owner's mind and not a large part of their discretionary income in the grand scheme. The market for Companion Animal veterinary care has never shown price sensitivity, when the veterinary practice is able to demonstrate medical value for the cost.

The constraint of growth is typically been with the practice staff communicating this value, not with the pet owner's willingness to pay for high standard care. While we see continued top line and earnings per share growth in 2008, as outlined by Merilee in our guidance, we are also setting up the company for the right investments for continued double-digit top line growth and margin expansion in the years beyond.

Our IDEXX's VetLab instrument and consumable business have favorable long-term margin dynamics that derived from the new platform. Our worldwide Reference Laboratory business will achieve margin growth, as we leverage the benefits of global scale economic and continue with acquisition integration initiative.

Our new product pipeline continues to be extremely attractive across all of our lines of business and extends well beyond the new instruments that we have discussed in this call. There are a lot of exciting things going on in diagnostics these days in general, and we at IDEXX are extremely well positioned as the clear market and technology leader for diagnostics in the veterinary field, to bring these technologies in the form of new products to your customers around the globe.

Finally, before we open the call to your questions, I would like to thank all of the IDEXX customers and shareholders for their confidence in us this past year. And also offer special thanks to all of our employees around the world for their help in achieving 25% year-over-year revenue growth and at the same time building and strengthening the company for exciting future ahead of us.

So this concludes our opening remarks and Matt we would now like to open it up to Q&A.

Question-and-Answer Session


(Operator Instructions). Our first question today will come from Rick Wise with Bear Stearns.

Rick Wise

Good morning, Jon, good morning, Merilee.

Jon Ayers

Good morning, Rick.

Merilee Raines

Good morning, Rick.

Rick Wise

Let's start maybe if you worked with a little more perspective and color on gross margins. Merilee you highlighted some of the factors involved and I'm guessing like the strong VetLab placements which I assume are low margin. I mean that's another factor that could have helped.

And Merilee you emphasized again in your comments that margin improvements are very achievable. Can you help us think to some other moving pieces and talk about, a little more clarity, whether gross margin improvements are rebounds or are going to come from? Thanks.

Merilee Raines

Sure Rick. As we look forward with gross margins, I think that some of the things that we've talked about are, we've got the dynamic of a razor blade business. We've had a lot of focus on instrument placements, our lower gross margins relatively than our other product lines.

And so as we get those placements what we've seen is greater consumable growth, we rate that guidance on consumable growth rates a number of times pretty consistently over the last couple of years. And those consumables are at a high margin and because as we've mentioned a number of times of the economics of our contractual commitments, both margins continue to get more attractive over time. So there is a piece there on the mix side with our IDEXX VetLab product offering.

In addition, the reference laboratory business, we've grown quite a bit there over the last few years. And a lot of that growth has come through acquisition of laboratories. Typically those laboratories we've seen are at lower gross margin than our longer-standing laboratories. So we need to work on operating efficiencies with those labs in particular.

But also when you look at our worldwide network, we see lots of opportunities for additional efficiencies, things like global purchasing, commitments and what not that we can drive best practices across laboratories. And importantly, a big driver in the reference lab business will be continuing volume leverage, as we get more and more growth in that business, we get nice drop-through.

Rick Wise

All right. Not to pick on this at all. But I was still struck by the fact, I mean, I think in every quarter, they are moving pieces and obviously capital placements have been strong for last few years. But I am still struck that it's the lowest, if I am looking at right, the lowest fourth quarter gross margins since 2004. Is there anything unusual that happened in this quarter? Is that the acquisition, is that the biggest factor making that happen?

Merilee Raines

Well, acquisitions certainly are affect of reckon that. The acquisitions that we've done on the labs are those were the areas where we saw the lowest gross margins. We know and have plans in mind, we understand that the areas that we need to address there and we are working on that.

So, that certainly is a piece of it. And again the very, very strong instrument placements were another impact, just really a mix issue for us that does certainly should bold well for the future.

Rick Wise

Exactly. One last question for now. Coming back to Catalyst Dx, Jon, I think you highlighted the experience in the past that the testing you talked about in your conference there. And maybe just a little color on the curve with the roll out, I mean they are going to roll out four sites initially, let them use it for month or 10 or 20. May be give us a little more detail on that. Thanks so much.

Jon Ayers

Okay, thank you Rick, those are two quick questions. Yeah, we are in much better shape in the launch of Catalyst internally. LaserCyte was a very very successful commercial launch for us, but we devoted a lot of resources post-launch to come down a learning curve and devote a lot of recourses to ensuring that the customer experience was positive. And so, we've really – we've got three things that are different I think with Catalyst and then with hematology analyzer.

First is, we have the experience of having already launched a major instrument platform, and many, most of people that are in leadership position sure have been through that experience and that just very very helpful and was involved in the design of instrument all the way through.

Second, is that the fundamental technology of hematology is more complex than chemistry, by its very nature you are measuring a biological, variable cell in hematology and we were using a breakthrough technology in introducing that and there were some learning associated with that laser-flow cytometry and a point-of-care instrument had never been done before and we did achieve it to great results, but it was a higher technological risk that we took on with chemistry.

And then third, one of the great things about our chemistry strategy is we are using the exact same reagents. The slides have a little bit different shape, but the actual what's on the – and the way they measure the chemistry is no different than the goal standard that we use in VetTest. And so we don’t have any risk with the reagents or how they work or if anything along those lines with chemistry, they're well understood, well characterized and we feel good about that. So it also reduces the risk.

With regard to the rollout, thank you for that question. We expect to ramp this up higher similar to LaserCyte. If you recall Rick, , we launched LaserCyte in the fourth quarter of 2002 and we sold about 1200 in the first year of 2003 after the launch in the fourth quarter. We expect with regard to Catalyst, our plans are not totally down precise to the unit, but we'll be launching that of course, at the end of the first quarter. And expect to probably in this case to have placements of a 1000 to 1200 over the course of the year, and that will be accelerating towards the end of the year, as we go through our ramp process.


And our next question will come from Ryan Daniels with William Blair.

Ryan Daniels

Yeah. Good morning, everyone. Merilee, another quick question on the gross margin. I know you said on the last conference call that you would anticipate gross margins could be under some pressure in the first quarter, due to scale up in the new product launches. Do you still anticipate that we should see a drop from Q4 to Q1 looking forward?

Merilee Raines

Hi, Ryan. I think that, we are not going to have a significant impact from Catalyst particularly in the first quarter that the launch is going to be ramping. So, I suspect that we, as I guided here even with that range of margin about 51% to 52% that it'll be slightly lower towards the lower end or maybe in the first quarter and then we'll be ramping up.

Typically, as I mentioned I think, second quarter because of revenue mix and seasonality for heartworm products in particular drives the gross margin up, that will be higher. But then you'll see margin sort of more relative on par. So I suspect again, our big driver in Q4 was the mix, the product mix here of instrument sales. So, I suspect we will see some improvement from that in the first quarter.

Ryan Daniels

Okay. That's helpful. And then you mentioned in your prepared comments, that you had a kind of sales or distribution change over Japan going to an exclusive distribution arrangement. Can you just give us a little more color on, what that is and maybe what drove that decision more importantly?

Jon Ayers

Yeah. Ryan, we have, I don’t want to go into the details of the distributor, but we were really using a variety of distributors and they won't really adding much value other than logistics. And we started conversations with one distributor and had a value added sales force that could work in partnership with us, to help grow our business there. And so we felt that aligning with that just more full functioned or more like maybe the distributes that we have in the US.

That is the more function cover the entire country. I was very, very familiar with that Companion Animal business carry some other important and complementary lines in the companion animal business that if the more of a integrated solutions, would benefit us and in that case they are also a stocking distributor and we had a initial stocking order that came with carry inventory ongoing basis.

Ryan Daniels

Sure. Okay, that's helpful color. And then two more quick ones, this is the bit of a follow-up you've obviously shared your thoughts on the potential for domestic market slowdown and the ability to continue grow through that, but now with 40% or so of your revenues oversees. Can you give us a little bit of an update on what you are seeing in some of those markets and what's the growth outlook, looks like in your outside of US operation?

Jon Ayers

Our growth outlook is really unchanged in either the US market or in our international operations. And we feel a pretty good about the opportunity actually across all of our lines of business with interesting. As you mentioned, we do have 40% of our revenues that come from outside the US. The other businesses, then the Companion Animal businesses are more represented internationally of an even Companion, the majority of the revenues for example in the Production Animal Services business comes from the outside the US.

So, our revenue guidance put forward all of our businesses, incorporates really an unchanged and favorable outlook for growth. And we are pretty diversified, we are really, really in all major geographies in one way or another and most of our businesses and most of the geographies.

Ryan Daniels

Okay, great, helpful color. Then last question, Jon. You mentioned that the VetTest, if I heard you right was up 68% on a year-over-year basis, which is obviously a remarkably strong growth metric. Can you give a little more color was that an easy year ago comp or is it a just a lot more traction internationally or more market share gains here, any color you can get on what's driving that, that really solid growth there.

Jon Ayers

It was great growth, 68% you could have a, that's not going to be measured by simply an easy comp because typically the fourth quarter is an important quarter. So, I think standalone itself that is a pretty amazing statistic. It wasn't a particularly easy or hard comp last year.

I think what, what we really learned with how to market the integrated VetLab and the value of the pieces coming together, not just VetTest and all the new elements that we have included in VetTest that really is a very, very different instrument platform, today than it was two or three years ago and lot of that came together in our sales and marketing of the instruments suite in 2007.

And then on top of that, I think we really learned how to use IDEXX VetLab Station, as a value added piece to the initial placement of the suite. Again adding more capabilities, than we had with us, with a simple analyzer and customers are really appreciating and they're pretty wowed by the kinds of things out there, IDEXX VetLab Station news, it's very visual, it's very information rich, it's designed to make diagnostic information easily presented to the veterinarian.

And so I think we really learned how to go beyond just marketing individual instruments to marketing a modular suite that can come together in different configurations to provide in-house lab capability, specifically designed for a particular customer. And we did that both in the U.S. and internationally outside the U.S too so. But we still have an opportunity to improve in that area.

Ryan Daniels

Great. Thanks guys.


Our next question will come from Dawn Brock with JPMorgan Securities.

Dawn Brock

Good morning, Jon. Good morning Merilee.

Jon Ayers

Good morning, Dawn.

Merilee Raines

Good morning, Dawn.

Dawn Brock

A couple of questions here. On the operating margin side, it looks like G&A and R&D actually came in quite nicely, probably a little bit ahead of expectations while sales and marketing ramped up. Can you give us just some idea as to what you are looking at through 2008 for those expense lines?

Merilee Raines

Yes, Dawn. I think that, just as I had indicated in the guidance going forward, we expect that the operating expenses as a percentage of revenue are going to be about 36% of revenue. I think that's fairly consistent with what we have been seeing.

Dawn Brock

Is there anyway for you to just give us a little bit more clarity in breaking down those three different expense lines leading into the operating margin?

Merilee Raines

Well, I think typically I would see things as being kind of fairly similar to the profile that we have seen in 2007 when you adjusted for discrete items obviously. So our R&D typically is about 7% of revenues and the SG&A will be the balance there 28%, 29%.

Dawn Brock

Okay. Fair enough. The strong instrument placements, how does this typically, if you can just give us a little bit of color on how you expect the instrument placements and the timing of the strength of these placements, to play out from a consumables perspective? Are you expecting a nice ramp in the first quarter based on the way that instruments were replaced on in the fourth quarter?

Jon Ayers

Well, Dawn, thank you for that question. We have a very large install base, so the nice thing about our growth is we are growing instrument consumables and we've given that longer-term guidance of 9% to 11% off of the worldwide install base instruments.

Certainly the attractive placement success that we've had really over the course of 2007 combined with really high loyalty, meaning continuing existing customer base, a very high percentage of loyalty which we measure and which is really part of our strategy as we had more and more capability to even existing customers. And every quarter we've launched and announced something new that's make things, the VetLab have more capability than it had before, gives us strong confidence in continued consumable growth in that area.

Dawn Brock

Okay. Maybe just taking a little bit further, Jon, when we are looking at the VetTest analyzers, there was obviously great demand for the instrument. Taking that, the next step, demand for refurbished VetTest analyzers that are going to come, kind of out of offices as people order the Catalyst. Where are you seeing the most demand for those refurbished instruments? And I think that, at least the way that I am thinking about it, you are going its really going to be Catalyst additive. It's not going to be nearly a swap out. So, where do you expect a lot of those kind of older refurb instruments to go? Are you looking at them being mostly international, I know you do a lot of reagent rentals now, but where you are seeing the greatest demand for that?

Jon Ayers

Well, thank you. That's, I think you characterize that the situation correctly, of course, because the placement of Catalyst instruments will be weighted towards the backend of the year. If those recertified instruments from the VetTest side will also be available towards the backend of the year. We've to take them in trade, we have to go through a recertification process, doesn't take that long, but if they won't become available until we're really, into volume on the Catalyst.

We will be placing VetTest over the course of the year, and actually we have a very good outlook for the first quarter in terms of continued instrument placement really as a result of the great worldwide sales and marketing organization. With regard to where the incremental lower cost VetTest will go, I would say, I wouldn't see too much of a change in our strategy in the US with regard to smaller clinics, starter clinics wanting the value with integrated VetLab.

So, really where the incremental opportunity will be, that will come from instead of a little higher cost new VetTest, lower cost recertified VetTest will be for us to accelerate penetration in international market where typically practices can be a lot smaller. Nice thing about VetTest in those international markets is that the ability to actually use single slides is more appreciated in smaller clinic internationally, because the way they practice medicine, they aren’t use to, as much using profiles than they are.

They do like using singles and very small sort of testing exactly for what they want to test would like them to test more, but that's really how they were trying with [Vetpo], and so the VetTest works really well in say emerging markets and that’s where, and of course they are also little bit more price sensitive with regard to the instrument initial placement and that’s probably on the margin where we are going to see, the opportunities spill over as we have a greater number of recertified instruments available.

Dawn Brock

Okay great. And my last question is the revenue bump, may I guess wasn’t listening carefully enough, but I am wondering if you can just give us an idea of what its really representative of as we move in ’08? Is it continued momentum at instrument placements are you getting some pricing traction?

Merilee Raines

Dawn, just to be clear you are talking about is it the strong delivery in the fourth quarter and implications for 2008 is that or.

Jon Ayers

It was increase in our guidance.

Dawn Brock

The increase in the guidance.

Merilee Raines

Yeah it really is, we're definitely now launching off of a higher base we had in fourth quarter and I do we see, we really see strength across all the businesses clearly as we have indicated. We see continued momentum in the instruments placements, we will see some ability to have price increase as we have seen in previous year as we continued to just add more value to our products, we’ve been able to realize the price. I think its what we've seen here are really just continuation of all of the scenes, as we go into 2008 from 2007. Is that clear?

Dawn Brock

Yeah it is. Is there a lot of -- this is probably a little bit of check question, but is there a lot of conservatives on in, you are looking at margins as being flat. I mean, if you think about just that the product launches sales and marketing needing to ramp up that for that, but being able to pull back a little bit on that, even at the gross profit level of that were two remain in that 51 to 52 range. It seems us though there is a little bit of leverage in the model from the operating expense line. Am I misreading that?

Merilee Raines

No. Let me just say that clearly one of thing that we said that, next 2008 a little bit tricky for us, is just the instrument launches that we have. And so it's a just we feel like, we have a lot of great experience here. We are very well positioned as we have indicated. But it also a scenario that we have relatively left history with you, we are just launching. So I think we -- that becomes a key watch area for us.

As well as with acquisitions and integration of acquisitions, we have plans and actions to achieve margin improvement and these things take a while to execute. So, we try to build into our guidance performance best, we believe it is achievable and as we said is robust in offset -- not everything goes right. We can still meet our guidance and I think that's what we try to do...

Jon Ayers

History shown that, not everything always goes right.

Dawn Brock

Yeah, got you. Thanks so much.

Merilee Raines

Thank you.


And next we will hear from Ross Taylor from C.L. King.

Ross Taylor

Hi. I had a couple of questions. The first one relates to the SNAP platform. I think you mentioned, on your prepared remarks that was 4Dx penetration might be maturing some at around 30%. And I just wanted to know is there addition you can make to that product line going forward to keep it fresh and keep customers trading up to higher priced, more value-added products.

Jon Ayers

Thank you, Ross for that question. I think what we were saying was the impressive rate of growth that we had in the adoption of 4Dx from really 6% to 30%, might not continue at the same rate. Although, we do not feel that 4Dx or even 3Dx is by any means mature in a penetration. I think it just as a, you are building on larger base in 2008, than you were growing in 2007. And therefore the favorable mix shift will be at a smaller amount.

But I will tell you, we have a long time, long-term very attractive franchise for continued growth in parasitic disease testing. We are certainly less than I would say, less than half of ultimately, what we think we could be penetrated in that market and the veterinary world's penetration rates are slow, but they are also sustained a result. In answer to your question, I guess more generally about the pipeline for the SNAP product.

We have a continued very exciting pipeline. We will have some more information on that in later calls over the course of 2008. All of that really gives us confidence for sustained 8% to 10% growth in important franchise. It is a good margin franchise source. One of the things that we didn't talk about is we continue to be very excited.

It's not a big product, but we continue to be excited about the launch of our pancreatitis test, point-of-care SNAP cPL. And we achieved an extraordinary, over 25% penetration of the U.S. customer base in the first six months of launch and that's really, given that, it takes a lot get the word out in veterinary world.

That's an extraordinary, our first success and while that's not going to be anywhere near as big as our canine parasitic disease franchises. It's just a good single level continue to help us deliver growth. But we also have other areas in the pipeline beyond our existing franchises that will continue to build the SNAP family.

And then finally, I just remind Ross, all investors, I know you know this that we're excited that one of the features of SNAPshot Dx that we anticipate adding as a software update later in 2008 has the ability to interpret and log electronically the result from our entire SNAP family, not just the three quantitative assays that we have on SNAPshot Dx and SNAP Reader right now, but all the canine parasitic disease that screen the feline and SNAP cPL etcetera.

All of those will be able to be interpreted adding another convenience feature to the IDEXX VetLab and one of the nice things about the SNAP family is really the vast majority well over probably 90% of veterinary practices in the U.S, purchase some form or another SNAP. So it gives us a cross-selling opportunity.

Ross Taylor

Okay. That's really helpful. And with regards to the SNAPshot, I mean any estimates or projections as to how quickly that might be adopted by veterinary practices? And would you anticipate that consumption or utilization of some of the SNAP tests increases among the vets who do have the SNAPshot, particularly when it has the capability to read the parasitic test?

Jon Ayers

Yes. I think with regard to placement for the SNAPshot Dx, they will probably follow right along in lines with Catalyst. I would say the vast majority of purchasers of Catalyst will buy a SNAPshot or along with it. I think the thing we are most excited about with SNAPshot Dx is the ease that is going to provide in doing the thyroid test which is important part of a full panel for a senior or geriatric pet had over in this case, typically over seven years of age.

Typically you want to T4 to your panel, and today the vast majority of T4 that's run, the vast majority is actually send us to the reference lab because while we've had in-house people who are testing capability, it's hasn't been as convenient as it takes longer as chemistry or hematology and we are going to be changing that with the new capabilities of SNAPshot Dx that we will be introducing over the course of the year. And so again it's just nice when you have more complete capability in-house.

Ross Taylor

Okay good. And last question. It's, I guess, close to a year now since you all have completed any acquisitions. Are you all still active evaluating potential acquisitions? Or do you still want to digest which you've acquired about a year ago before adding some new businesses?

Jon Ayers

Right. Thank you. We did do four acquisitions across our businesses really spread between towards the tail end of fourth quarter of 2006 and the first quarter 2007. And that was an unusual period of acquisition activity for us. I think it was really, acquisitions aren’t necessarily something that you think the time and that was up certainly higher rate of acquisition than we’ve done historically or that we would anticipate doing going forward.

We're always considering on acquisitions there are little niche acquisitions sometimes this is the technology acquisition that we do, that we can do something with in terms of introducing a product. But with regard to the overall, sort of outlook if you will, I think we’re mostly an organic, a technology driven company and an organic growth story acquisitions historically before that period and probably going forward and playing minor role in contributing to revenue growth.

Ross Taylor

Okay. That’s helpful thank you.


And that is all the time we do have for questions. Mr. Ayers, I will turn the conference back over to you.

Jon Ayers

Okay. Again, just to conclude I want to thank everybody for calling in and just again thank our customers and our shareholders more broadly and certainly our employees for a great 2007 and we’re very, very excited to be looking forward to 2008. Our opportunities for the next five years, I think our next five year plan looks as exciting as it ever has in the period that I have been with IDEXX and we look forward to accomplishing another great year in 2008. So, thank you very much for that and this concludes the call.


That does conclude today’s teleconference. We would like to thank everyone for their participation and wish everyone a great day.

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