ABAXIS, Inc. (NASDAQ:ABAX) Q3 2016 Earnings Conference Call January 28, 2016 4:15 PM ET
Joe Dorame - IR, Lytham Partners
Clint Severson - Chairman & CEO
Ross Taylor - CFO
Don Wood - President & COO
Craig Tockman - VP, Animal Health Sales & Marketing, North America
Rick Betts - Director, Medical Sales & Marketing, North America
Kevin Ellich - Piper Jaffray
James Sidoti - Sidoti & Company
Nick Jansen - Raymond James
Ethan Roth - Stifel
Mark Massaro - Canaccord Genuity
Len Fuchs - Spade
Good afternoon, and welcome to the Abaxis Third Quarter Fiscal Year 2016 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. [Operator Instructions]. Please note this event is being recorded.
I would now like to turn the conference over to Joe Dorame of Lytham Partners. Please go ahead, sir.
Thank you, Denise. Good afternoon and thank you for joining us today to review the financial results of Abaxis for the third quarter of fiscal year 2016, which ended December 31, 2015. As Denise indicated, my name is Joe Dorame, 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. Ross Taylor, Chief Financial Officer; Mr. Don Wood, President and Chief Operating Officer; Dr. Craig Tockman, Vice President of Animal Health Sales and Marketing, North America; 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 the call does not have a full text copy of the press release, you can retrieve it from the company's website at abaxis.com or numerous financial websites.
Before we begin with prepared remarks, we 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, believes, projects, expects, or anticipates or words of similar import, and do not reflect historical facts.
Specific forward-looking statements contained in this conference call may be affected by risks and uncertainties, including but not limited to, those related to transitioning medical sales to Abbott; losses or system failures with respect to the company's manufacturing facilities and operations; fluctuations in quarterly operating results; the market acceptance of the company's products and the continuing development of its products; required FDA clearance and other government approvals; manufacturing and distributing its products on a commercial scale free of defects; 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 documents filed by Abaxis from time-to-time with the United States Securities and Exchange Commission.
Forward-looking statements speak only as of the date the statements were made. Abaxis does not undertake and specifically disclaims any obligation to update any forward-looking statements.
With that having been said, I'd like to turn the call over to Mr. Clint Severson, Chairman and Chief Executive Officer of Abaxis. Clint?
Great. Thank you, Joe, and good afternoon and welcome everybody to the call. I'll say a few words before I turn the call over to the team. So now while sales were little light in Q3 compared to last year. The comparisons for North America were difficult due to stocking orders that we received from new vet distributors, a big Piccolo order due to the Ebola outbreak, and we did sell 100 new VetScans to VCA in Q3 last year.
Now our sales outside of North America grew double-digits but that was mostly due to the 200 unit Piccolos order from China. In Europe, we experienced currency headwinds, we had a change in our distribution in Spain and there were some distractions due to the acquisition of our largest distributor in Germany scil by Henry Schein. We are now in our second phase of consolidation of our UK business and have all the new policies and procedures implemented. The next phase is getting our UK sales team performing to the levels of the North American team.
Our consumable sales however grew double-digits with record Piccolo disc sales, gross margins were up, rotor costs were down, operating and net income grew double-digits versus Q3 last year.
Our high sensitivity immunoassay project team continues to make progress in the R&D lab, and we highlighted our new connectivity software and rapid test reader at NAVC last week, our launch date scheduled for this calendar year.
The goals for next quarter include getting the sales force back to historical levels, launch the rapid test reader, keep making progress on immunoassay project, and keep the new connectivity project on schedule and do all this while growing earnings at double-digit rates.
So with that, Don you're on.
Thanks, Clint. Good afternoon and thanks for being with us today. I will review our challenges and accomplishments for the third quarter of fiscal year '16 and later go over our goals for Q4. After my short discussion, I will turn to Ross Taylor, our CFO to review our financials in detail for Q3 fiscal year 2016. After Ross, we'll hear from Dr. Craig Tockman, our Vice President of North American Animal Health Sales and Marketing; and then from Rick Betts, our Director of National North American Medical Sales and Marketing to give an update on their respective businesses. We will then take questions.
As Clint explained, we had tough comparison challenge versus Q3 last year and so our revenues for Q3 fiscal year '16 were $52.9 million down 6% for the same quarter last year. Our global vet revenues were down 6% from the same period last year. International revenue was up 12% over last year's quarter, total medical and reagent disc units were up a strong 12% over last year, and our medical disc sales were very strong increasing 23% over last year's quarter.
Global medical revenues were strong but off 7% versus last year due to a tough comparison with Ebola driven instruments revenue in the third quarter of last year.
Gross profit margin was 56.1% up from 51.4% last year. Our operating income grew 16% year-on-year, and our earnings per share at $0.35 is up 30% versus last year.
In our North American vet division we were very pleased to welcome Banfield Hospital as a new hematology customer and we will begin to see placements in Q4 with a full rollout beginning in the April quarter. We are equally excited to discuss our new vet products that were announced at the NAVC Conference last week, more from Craig in a moment.
Clearly our business is changing for positives since the beginning of our fiscal year '15 and we are seeing consistent gains in the North American vet market that includes strong performance with top-tier vet hospitals including VCA and Banfield, also we're improving in our vet national accounts, and our overall new customer base has grown once again in this period netting several hundred new accounts.
Our North American medical division continues its steady performance of growth in many of the metrics we measure. While instrument placements were expectedly down versus last year Ebola assisted quarter, the 256 instruments sold this year in Q3 equated to a record minus Ebola. Bigger yet we shipped 774,000 human disc which is up a whopping 26% versus last year's 612,000 disc. In addition, many of our new placements now are going into higher volume accounts like hospitals and group medical practices where disc utilization is three to four times out of the physician office.
With our partner Abbott focusing on these high utilization accounts, we expect the rotor volumes to continue at an improved growth pace moving forward. And finally, our operations production group continues to improve factory efficiency for Q3 fiscal year '16 rotor cost down $0.14 of rotor quarter-on-quarter were a 3.7% improvement.
Now I’ll turn it over to Ross Taylor for an extended look at our third quarter financial results.
Thank you, Don. I will review highlights from our financial results and other important fundamentals for the quarter. As a reminder, Abaxis completed the sale of its AVRL Reference Lab business to VCA in March of 2015 and reclassified AVRL as a discontinued operation at that time. Accordingly, when discussing the financial results today and comparisons against prior quarters, my figures exclude any contribution from AVRL.
Turning to the numbers, total revenues in Q3 declined 6% to $52.9 million compared to $56.1 million last year. Changes in foreign currency exchange rates reduced our total revenue growth by approximately 1.2% in the quarter. The incremental revenue impact from the acquisition of QCR, our distributor in the UK in early November 2014 was negligible.
Importantly, total consumable revenues in Q3 increased 12% to $38.4 million from $34.2 million last year. In Q3, instrument sales decreased 40% to $11.6 million from $19.2 million last year, primarily as a result of a very difficult comparison.
As many of you know, in the December quarter of last year, our instrument sales are very strong as a result of some unusual or one-time events. These unusual events in last year's Q3 included very strong Piccolos sales driven by the Ebola crisis, the sale of about 100 VetScan instruments to VCA for use in their hospitals, and the impact of adding several new veterinary distributors in North America. Global veterinary revenues were $40.9 million in Q3, a 6% reduction from $43.4 million last year, the decline was driven by lower instrument sales.
Global medical revenues were $11.0 million in Q3, compared to $11.8 million last year, a decrease of 7% again this was the result of lower instrument sales.
Focusing within our consumable product lines, Abaxis sold a total of 2.3 million rotor units on a global basis in Q3 compared to 2.1 million units in Q3 of last year for an increase of 12%. Total rotor revenues increased 6% to $28.6 million from $26.9 million last year. Total rotor revenues grew at a slower pace than units primarily as a result of the change in the sales mix of medical and veterinary rotors, plus a small impact from foreign currencies. Global sales of veterinary rotors were 1.39 million units in Q3 of this year compared to 1.32 million units last year. This represents an increase of 5%.
Looking at the various geographies, our sales of veterinary rotor units in North America increased at a high single-digit pace in the quarter, while our veterinary rotor unit sales outside of the U.S. were about flat. Europe was the source of weakness for our International veterinary rotors.
Global veterinary rotor revenues were $22.0 million in Q3 compared to $21.3 million last year an increase of 3%. Revenue growth was slower than unit growth mostly as a result of foreign currencies. ASPs for veterinary rotors in North America were about flat.
Global sales of medical rotors were approximately 920,000 units compared to 750,000 units last year which represents an increase of 23%. Global medical rotor revenues were $6.6 million compared to $5.6 million last year, an increase of 17%. Revenues grew at a slower pace than units mostly as a result of mix.
Revenues from other veterinary consumables which we defined to include hematology, reagents, i-STAT cartridges, coagulation cartridges, and rapid assays, increased 35% to $9.9 million in Q3 compared to $7.3 million last year. Most of the year-over-year increase in other veterinary consumables was the result of growth in our rapid assay product line which has had strong year-over-year growth since the March 2015 quarter.
Switching over to the instrument product category, Abaxis sold a total of 1,657 instruments in Q3 compared to 2,739 instruments in Q3 of last year. Looking at our individual instrument product lines, Abaxis sold 508 Piccolos in Q3 compared to 694 in Q3 last year. Our Piccolos sales were very strong last year as a result of the Ebola crisis. However our sale of 200 Piccolos to a distributor in China during the December 2015 quarter did help us partially narrow the gap with last year's very strong performance.
Within our veterinary business during Q3 Abaxis sold 513 VetScan chemistry instruments compared to 1,006 VetScans last year. Again it's important to keep in mind that in the December 2014 quarter, we had unusually strong VetScan sales due to the impact of bringing on several new veterinary distributors and we also sold about 100 VetScans to VCA.
Hematology instrument sales were 395 units in Q3 compared to 597 units in Q3 last year. In addition, Abaxis sold a total of 241 i-STAT and coagulation instruments in aggregate in Q3, compared to 242 last year.
Looking at our revenues by major geographic regions, our total revenues in North America declined 10% to $41.1 million from $45.6 million last year driven by instruments. Our international revenues were $11.8 million compared to $10.5 million last year; an increase of 12%.The sale of the 200 Piccolos to China was a key source of International growth in the quarter.
Now I will move on to items below the revenue line of the income statement. In Q3, our gross profit increased 3% to $29.6 million from $28.8 million last year. Our gross profit margin was 56.0% in Q3 compared to 51.4% last year. The increase in our gross profits and the large increase in our gross profit margins was driven by strong consumable growth and a significant shift in the sales mix towards consumables.
Instruments were 22% of revenues in Q3 compared to 34% of revenues last year. We view the instrument consumables sales mix of this Q3 to be much more typical level for Abaxis than the year ago quarter, given the significant upward spike in instrument sales that occurred in December of last year.
Total operating expenses were $18.4 million in Q3 compared to $19.1 million last year, a decrease of 4%. As a percentage of sales, operating expenses were 34.7% of revenues in Q3 of this year compared to 34.1% last year. Lower expenses associated with sales commissions and bookings have contributed the majority of the decline in operating expenses.
Growth in operating income was very strong in Q3 as a result of the increase in gross profits and the lower operating expenses. Specifically operating income increased 16% to $11.3 million from $9.7 million last year. The operating profit margin was 21.3% compared to 17.3%.
Our income tax rate was 30.8% in Q3 compared to 34.5% last year. Our tax rate in the quarter was lower than usual as a result of the impact of the change in the law related to the R&D tax credit. Year-to-date our tax rate was 34.5%.
Based on our current views we anticipate our income tax for the full-year ending in March 2016 should be roughly 34.8%.
As Don mentioned, reported EPS from continuing operations were $0.35 in Q3. This represents roughly a 30% increase from the $0.27 we earned last year.
I have a few additional data points before I complete my remarks. Our blended rotor average selling price was $12.34 in the December 2015 quarter compared to $12.98 in the December quarter last year, and $12.88 in the September 2015 quarter. The decline from last year is primarily due to a shift in the sales mix towards medical rotors and a small impact from currencies.
Our cost of goods for each rotor unit was $3.47 in the December 2015 quarter compared to $3.65 in the December quarter last year, and $3.61 in the September 2015 quarter.
I will wrap up by noting that while there were some puts and takes in Q3, overall we view the results for the quarter as excellent. Even though total revenues declined 6% this was due to an extremely difficult instrument comparison, and quarterly revenues from consumables which have much higher gross margins increased 12%. This resulted in a 3% increase in gross profits. The higher margin consumable sales, combined with a small decline in operating expenses, resulted in a 16% increase in operating income during Q3.
The strong consumable growth and the 12% increase in our total rotor unit sales are indicative of the underlying strength in our business. Notably our medical rotor unit sales increased 23% in the quarter and we are very pleased with the momentum in this business.
This includes my remarks and I will now turn the call back to Don.
Thanks, Ross. We turn now to Dr. Craig Tockman to update you on the North American veterinary results.
Thank you, Don. While Q3 was certainly a challenge as far as comparative year-over-year metrics, Abaxis North American Animal Health had a very good quarter in many areas. In addition our new products are coming to market and there is still palpable excitement of Abaxis in the industry.
Abaxis North American Animal Health team placed a total of 1,003 instruments in Q3 FY '16. This compares against 1,384 Q3 of last year which included 100 VCA analyzers and 895 instruments last quarter. We placed 404 VetScans and 326 hematology analyzers with 66% and 74% respectively in new customer accounts. With minimal customer losses recorded we continue to grow our market share in chemistry and hematology.
Q3 fiscal year '16 revenue of $32.2 million was down 8% or $2.9 million year-over-year and down 14% or $5.1 million quarter-over-quarter. We also placed a combination of 273 VSpro and i-STAT instruments. While this is down 5% year-over-year and up 31% quarter-over-quarter, 93% of these were to new customers to Abaxis in the consumable business and both these lines continues to grow.
Utilization of our products continues to grow as well, as total revenue was up, rotor revenue was up 6% year-over-year, down 11% quarter-over-quarter, and total hematology reagent revenue was up 11% year-on-year, and down 15% quarter-over-quarter. The quarter-over-quarter decrease was expected and normal based on historical trends for the time of year.
Rapid test sales were up 140% year-over-year and 8% lower quarter-over-quarter again with Q3 being historically lower. We anticipate a strong performance in Q4 in this category as we've launched a comprehensive booking program that we did not do last year as well as a new distributor initiative. In addition we showed the VetScan View at the recent North American Veterinary Conformance and received outstanding feedback. The View will be ready for shipment to customers by the end of Q4 and we saw customers sign up for the booking program at the conference in conjunction with seeing the View. The view works through a phone app times and test for the customer and actually reads the results for the veterinarian. The data can also be transmitted to the practice management systems. The functionality of this device is far above anything our competition offers.
Our national accounts business continues to grow as well. For Q3 national accounts revenue was up 15% year-on-year, excluding the 100 VCA instrument purchases this quarter last year. We also signed an exclusive point-of-care instrument contract with another new national buying group of 870 plus members.
The Banfield rollout is now scheduled and ready to go. As Don noted, we will have a few installations in March and April as we test the process in a limited number of sites and then move to a full rollout shortly thereafter. We are ready with systems, people, products, and training, and we expect this new transition for this customer.
Our VETSYNC connectivity is now been placed in more than 80 U.S. customer data sites as well as some international sites. The system works with all existing PMS systems and will be ready for full launch this quarter. In addition, our long-term connectivity solution was demonstrated at the NAVC conference as well. This is the next phase of the VETSYNC project that will allow control of our instruments from a tablet or smartphone allow results to be shown on the same device, immediately download it to the PMS and email to the client as desired. This is a bidirectional Cloud based solution and is again a significant improvement over the competitive offerings.
We discussed the launch of our Abaxis veterinary consulting service last quarter. This is a free program for our customers to help them grow their business, improve their diagnostic protocols, and leverage the use of our products as part of best medical practices. The value of this program was recently identified by the American Animal Hospital Association one of the premier veterinary groups in the nation.
AAHA has more than 3,500 accredited hospital members with a total of more than 6,800 total hospitals affiliated with the organization and there are more than 50,000 individual members from host of veterinarians, technicians, managers, and students, with more than 16,000 of those members' veterinarians. This highly respected organization that promotes quality medical care and the highest veterinary standards is now partnering with Abaxis. As just a small part of this exclusive sponsorship and partnership AAHA and Abaxis are developing custom content book that's utilizing the Abaxis veterinary consulting program that focuses on preventive care, pre-surgical testing, and illness diagnostics, and will be distributed through its Trends Magazine with a circulation of about 33,000 veterinary professionals, as well as being available to AAHA members through all of the AAHA channels.
In addition Abaxis and AAHA will co-develop regional workshops to help practice and implement our testing initiatives. I can take no greater honor than an organization such as AAHA partnering with our programs and concepts. We expect significant momentum from this contract and the associated initiatives.
We continue to be encouraged by our progress and growth. We had excellent instruments placements this past quarter of specialty and new customers. We had good growth in rotors packed rapid assays; we continue to grow our business in the national accounts and the number of groups desiring to work with us to increase our placements in those areas should not be overlooked. Our new AAHA partnership is also extremely important in validating our approach to the vendor community and how we are viewed in that space.
Back to you, Don.
Thanks, Craig. We will now go to Rick Betts for a report on the North American Medical results for Q3.
Thank you, Don. Good afternoon all. The North American Medical division finished with revenues of $7 million down 18% from last year's Ebola assisted finish of $8.5 million but up 19% from Q2 finish of $5.9 million.
In the third quarter we shipped a record 774,000 reagent disc and 233 Piccolos which compares to 612,000 reagent discs and 535 Piccolos from the year prior. Our disc shipments were up 26% year-over-year while instruments were expected to be down 56% year-over-year due to last year’s Ebola shipments.
Urgent care continues to be the dominant segment for placements. However emerging segment such as freestanding emergency centers and group medical practices, along with new IDN placements are growing in share. Additionally we are seeing a growing number of placements into the Oncology and Pediatric segments. Privatized ER centers are one of the fastest growing segments of healthcare and they need comprehensive lab results in order to handle the litany of conditions that patients presents.
As one can imagine this utilization is high for the Piccolos working in these centers and is a contributing factor to the cumulative growth of disc utilization year-over-year. Additionally our focus on the hospital systems and integrated delivery networks also produces placements with high disc utilization often three to four times as many discs that are traditionally run in the physician office. As healthcare delivery consolidates around the United States into these groups, networks, and healthcare conglomerate, the Piccolo is perfectly positioned to capture a LIONs share of the diagnostic tests that are required for efficient patient diagnosis, treatment, and monitoring.
Up north of the border in Canada adoption and usage of the Piccolo continues to grow roots as more doctors, laboratories, and healthcare administrators become aware of the Piccolos availability and utility. We are encouraged by the high level of attention and inspection that Piccolo is receiving from the various provincial plan administrators, and with our second provincial system now fully operational up in Nova Scotia, we look for continued growth of this usage from this cornerstone of the Maritime Provinces. With successes in Nova Scotia, and our existing Saskatchewan implementation, we look forward to additional provinces choosing to make the Piccolo a diagnostic centerpiece of their socialized medicine delivery platforms.
Outside of the government provider care in Canada, the naturopathic doctors continue to be a hot target for the Piccolo because they do it a comprehensive care and require accurate and timely lab results for the patients they serve. We expect the naturopath market to accelerate its adoption of the Piccolo in the coming quarters. And as we reported last quarter our private in the retail pharmacy locations continue to produce positive results and we look forward to expanding utility of the Piccolo in these markets as they mature into the mainstream care delivery continuum in Canada.
Here in the United States, the retail healthcare providers are still owning operating screening services for their walking patients and employees with cholesterol and diabetes screening being the predominant offerings. The complexities of offering comprehensive primary care successfully in a pharmacy based retail center in the U.S. continue to be a challenge. While the retailers and service hospitals and physicians are working to figure it out, the Piccolo remains the only point-of-care technology that can deliver comprehensive diagnostic grade chemistry results within the 15 minute visit window that retailers are targeted. And when they figure how to deliver full primary care, they will need to graduate from screening technology to diagnosis and treatment technology that Piccolo is a logical choice as the blood chemistry centerpiece to the retail primary care minilab.
Thank you and with that I will turn it back over to Don.
Thank you, Rick, and now our goals for Q4 will be to begin shipping the initial hematology units to Banfield, to improve our North American Animal Health Q3 total placements due to our ever improving selling programs, to continue to focus on our excellent momentum through Abbott with their higher utilization placements, to step up our performance outside the USA, specifically with UK and Spain and all of our core European markets, to rollout the Piccolo placements for our announced orders with the hospitals in China, and finally, to launch our new state-of-the-art view rapid test reader late in Q4 to complement and accelerate our rapid selling programs for this year.
With that Clint, I will turn it back to you.
Great, okay. Thank you all and we are now open for questions.
Thank you. We will now begin the question-and-answer session. [Operator Instructions].
And the first question will come from Kevin Ellich of Piper Jaffray. Please go ahead.
Hey guys. Just a couple of questions. I guess first off can you talk about your operating expense levels and how sustainable they are. And then, Ross, you gave us the full-year tax rate. I guess what's the outlook beyond fiscal '16, is the tax rate going to stay at these levels or should we expect that to go back up?
Yes, I think with the operating expenses, Kevin, I mentioned in my remarks that lower commissions brought the numbers down and lower bonuses compared to last year brought the numbers down and in this quarter and that's due to lower instrument sales compared to last year.
So our plan would be have strong sales here in the March quarter that's the case I would hope those commission and bonus numbers go up. But I think I'd probably model somewhat higher expenses than we had in the quarter for, your Q4.
In terms of tax rate looking beyond fiscal year '16, I think the best guidance or advice I can give at this point based on what we know now is that our tax rate in fiscal year '17 probably ends up somewhere between 35% and 36%. I think you could probably pick a number somewhere in the middle of that. There is a lot of things that can change, that can impact our tax rate. But I think if you're somewhere in the midpoint of that 35% to 36% range, you're probably okay at least based on our current knowledge.
Got it, that's helpful. And then just going back to the instrument numbers first of all could you, that the numbers that Dr. Tockman gave us in terms of the VetScan placements. Wondering if you could go over that again kind of missed some of those you went pretty fast. And then also, Clint, could you talk about the competitive environment the revenue came in lower than we expected, obviously you guys had some tough comps and I think one-time items last from a year ago. Just wondering where you think things are in terms of the competitive environment and market share shift?
Okay. So I mean it's a competitive environment. I think for us the key success factor is getting the demo. Once we get the demo we have a very high percentage close. So we're getting better every quarter working with our distributors and of course they clearly have the access to the accounts. And so the goal is that we increase our demos every single quarter. And what it does, it really doesn't make much difference if the deal closes December 28 or January 7.
So I think you can't just look at the quarter and say things are really great or things are not as good. You have to really look at that at the whole year. And I think based on the performance of new customers, new instruments sold to new customers we are taking a little bit of market share every quarter. And so our objective here is continuous incremental improvement. It's got to be better every single quarter and so with that I'll pass it back to Craig.
Kevin of the 1,003 total instruments, 404 VetScans, 66% of those into new accounts and 326 hematology analyzers, 74% new accounts. And are there any other numbers you needed?
Okay, no. So for an imported VetScan 66% new accounts so that was the number. Okay. Great, sounds good, thanks guys. Oh, wait. Actually one more question to Dr. Tockman you mentioned a new exclusive contract that had I think 870 members is that right?
I guess how is that for all of your instruments or do you have any more specifics behind the contract that has not been given?
No, these are contracts that provide us access to these accounts as an exclusive partnership. And of course we help with education rebates and those sorts of things. So it's for entire line of point-of-care tests that goes into all these national buying group accounts.
Okay. So is it just point-of-care test though?
That's how we have.
Okay. Got it, no, no, no. Okay got it, thank you.
Thank you. You're talking about not just the rapid, kind of the instruments involved around it.
Yes, exactly. Thank you.
And our next question will comes from James Sidoti of Sidoti & Company. Please go ahead.
Good afternoon, can you hear me?
Great. So it's just not over, I know that the previous quarter, the year-over-year quarter had a very tough comp. But revenues in this quarter was a little bit lower than we expected. Was there any area where you were disappointed in the performance?
Well I mean clearly we like to always sell more instruments, no matter how many we sell we would like to sell more. And so I think that you can't just look at one quarter, yes, you have to look at the whole year. We have Q3 coming up here and yes I mean he knows what's going to happen in Q4.
Like I say we get better working with distribution every single quarter with more interaction between our sales reps and their sales reps and of course the goal is get us the demo because once we get the demo we have a very high close rate.
Jim I would like to add to that too, I -- sorry Jim but I mentioned that rotor sales internationally were about flat obviously we would like those numbers to be better. So I think that's something we're really working on.
Okay. On the previous calls this year you had indicated your goal is double-digit top-line and double-digit bottom line growth and we've seen that you have no problem getting the bottom-line growth. Do you still think the double-digit top-line growth is an achievable number?
Well, it's the goal, and so we continue to strive for that goal.
All right. On the units that went to China, do you know what the status of those units are; are they starting to get installed now?
Yes, so we had our Chinese distributor sent his staff to Abaxis and we can go. We got everybody up and trained. They have contracts with thousands of hospitals where they have their other point-of-care equipment, the hematology machine, the blood gas machine and of course what they were missing was chemistry. So the goal that they've shared with us is to get blood chemistry in all their other point-of-care accounts. And so we have one of our people over in China as well working with them to install as many of those machines as possible. They have a pretty aggressive goal as far as how many they want to install by Chinese New Year. And of course I believe those when I see them up but they are very enthusiastic, they think there is a huge opportunity for the Piccolo in China and so we will see.
Excellent. All right. Do you have any sense whether they will be repeat order in fiscal '17?
Well I would say that the chances for another order should be good. I mean clearly it depends on how good we are at keeping our first 200 customers very happy that's the challenge that we have here. So making sure everybody gets their stuff installed, making sure that the distributor is up on all their technical training, so they can handle all the technical service. And I mean it's still a work-in-process. But I think we have a good shot at doing more business in China next fiscal year.
All right. And then with the retail pharmacy business there is another diagnostic name in the news quite a bit the past few months, they had relationship with Walgreens is there any opportunity there to step in and may be pick up where they dropped the ball?
Well I'll let Rick handle that one. He has been talking to the Walgreens folks.
Yes, so I think the other offering that you mentioned was a laboratory service offering not necessarily a point-of-care offering. So as I mentioned in my remarks, the retailers have yet to adopt diagnostic level devices for their care continuum. What they have in there now are screening devices. And so they continue to do screening as they are working out to try to figure out how to deliver primary care successfully. And when they do they are going to need Piccolo.
Right. And then on the website you talked about the launch of the rapid testing either. Is that something you are in charge for or do you think that will be something you will feel away with the test?
It will be a mix, Jim. Some folks will buy it and when they have a high enough commitment we will give it to.
The next question will come from Nick Jansen of Raymond James. Please go ahead.
Hey guys. Just two questions from me just sequentially your vet revenue dropped about $6 million sequentially. I'm going back to my model for a long period of time and having seen that level of dropdown sequentially outside of fiscal '14 when you had that distributor stocking dynamics. So I understand the tough comp year-over-year but was just wondering what would have drove that level of dynamic because it seems like the amount of VetScan sequentially then it weren't necessarily a gigantic drop off, so I'm just trying to get a better sense of what happened sequentially? Thanks.
I think it really was all driven by instrument sales. Again like just looking at the VetScans I think there was a big delta in the VetScans last year versus this year. We booked revenues for 1,006 VetScans in the year-ago quarter; we booked revenues for 513 VetScans and in the most recent quarter the December 2015 quarter. So I think all of that delta in our vet revenues is instruments. And obviously the consumable sales in vet were higher versus last year. So the instruments were down even more than that delta you just computed.
Ross, I was mentioning sequential. So if you look at the --
It looks like if my math is right, you only had to dropdown of may be a 100 instrument sequentially combined on the vet side. So that might have explained a part delta in the sequential revenue dropdown is that but wouldn't explain the vast majority. Is there anything going on from a consumable perspective may be last quarter that wasn't replicated this quarter. I'm just trying to get a sense it just seems like it's a big drop off and I'm not sure if I understand why?
Yes, so Nick, seasonally the December quarter the consumables are less because people do not go to the veterinarian or for the medical doctor for that matter for fact for routine things between Thanksgiving and New Year's. So every quarter when you compare December quarter with the September quarter consumables are always less and that's just the seasonality of the business.
Okay. All right. That's helpful. And then, secondly with regards to just the gross margin performance obviously mix plays a role here, but how do we think about the two-by-two initiatives some of the other stuff that you have going on as we anticipate gross margins in the future. What's the optimal gross margins here longer-term as we think about some of these initiatives playing out? Thanks.
Yes, this is Don. First of all the two-by-two program is -- has been running now for about five years and you're now starting to see some of the better, the improved fruits of those programs. And that program was focused on quality, capacity, and lower cost. So you surround the rotor, you have purchasing lowering the cost of reagents that go into the beast that make up our chemistry rotors. Engineering and R&D approve improvements and process. We've added many robots which actually reduces the labor content per shift and per line. And then basically you then have three phases of plastic parts that we then designed and now implemented two out of the three parts that are now multicavitated.
The last and probably the most impactful change will come over the next two, three years beginning soon because we placed orders for two of the tools that will absolutely yield the base which has potential savings of $0.30 to $0.40, and so all of that to rollout will need many tools to replace all the single cavities that we have today, older tools. And so you add volume to that, and volume is a big part of getting the cost down and we actually see our cost going over time as we were all from $10 million to $35 million down to $2 a rotor. And so it's based on how much we sell and when the need comes in for so many more of these multicavity tools, I think you can actually see yourself down to $2.
I may come back to your question also because I didn't understand you were asking sequentially before but just looking at the numbers I think there is a couple of dynamics that work in the sequential change. It is a seasonally slower quarter number one for consumables I think also you can see that we did have a slowdown in our growth rates for consumables. I think, for example, our rotor units for that grew roughly 10% in the September quarter; they grew about 5% this quarter. So I think the combination of the deceleration in consumables plus the seasonality is most of that change and we did take some instruments out of distribution inventory in the quarter but the impact on revenues wasn't really that significant.
Our next question will come from Jon Block of Stifel. [Operator Instructions].
Mr. Block, please go ahead with your question.
Hi thanks, this is Ethan on for Jon. You reported just going back to disc, you reported if I believe five consecutive quarters of double-digit VetScan disc growth coming to the quarter on the back of some strong new account wins. And then you called out soft international disc but it also looks like North American growth also slowed and high single-digit seems to be closer to overall market growth. But I guess in the absence of a pickup in new account win this market growth is the right way to think about VetScan discs specific to North America going forward?
I think that we would certainly hope the answer would be no. I think we had two quarters, the last two quarters where our new placements were less than we wanted and this quarter is more reflective of what we expect. So we certainly expect that double-digit every quarter.
Okay. And for Ross just the amount of operating margin expansion has been pretty robust over the past couple of years. You talked about lower commissions and bonuses this quarter but is there a good way to think about the level of margin expansion from current levels?
I think I had mentioned previously that certainly on a long-term basis I would expect the bulk of our margin expansion to be driven by the gross profit margins. I think the initiatives we have underway to bring down the rotor cost and other things should enable us to expand the gross margin over time.
I think on the operating expense level we are already so efficient I think to expect a whole lot of improvement there over time would be too optimistic. Potentially that could happen but already I think our margins there pretty tight. So I would not expect a great deal of improvement on a longer-term basis.
And the next question will come from Mark Massaro of Canaccord Genuity. Please go ahead.
So last week at the Annual Health Conference, Clint, I think you showed a microscope in your booth. Not sure if you’re able to comment on it now, but is this something that you're -- that you've possibly decided to offer and can you comment on the receptivity of this and how you think it could be used in animal health clinics?
Yes, so we're in the kind of the market research phase on having this microscope to our product line. And so we're going to show it at Western states as well to get a read on what we think the demand would be for bundling that with our product line. And I think the receptivity is actually pretty good. I think people when they saw a demo of the scope they are very impressed with it, but we haven't made the decision to go forward yet.
Okay. Is it fair to say that the -- if you do decide to go through with that there will still be obviously a lot of subjectivity as opposed to having a solution that is automated on behalf of the clinician correct. I mean there is still subjectivity as far as what the veterinarian would be looking at; is that right?
I'll let Craig handle that one. He is a veterinarian.
I think given the instrument you're referring is going to happen subjectivity to it. If we pick up the microscope the goal of this thing is that it is preset for telemedicine. And so any questions that the doctor might have would be easily confirmed or changed by a Board certified expert rather than an instrument. So we're just still investigating that but I guess, I'd have to disagree with your -- with the premise there.
Okay. And then Craig, I think you mentioned 404 VetScans and I think you confirmed that number twice. Earlier in the call and I think I might have misheard, did you guys say 513 VetScans earlier in the call and I'm just trying to reconcile the two numbers?
Yes, one is a worldwide number, one is a domestic number.
Okay, thank you. Can we just turn to Europe for a second? I think you noted that impact from the UK, Germany and Spain, I guess my broader base question would be what you are seeing in terms of the end user utilization in Europe. I think other diagnostic companies off late have commented on perhaps a slowing down in Europe. Do you think your concerns are more distributor specific or do you see may be a bit of a tick down in either utilization or unit ordering?
Yes so I mean clearly when you change distribution in a country, it takes a while to get the new people up and running and communicating to the customer, how they get their consumables, you get everybody trained. And so that slows things down and anytime a big distributor gets acquired, we got new policies and procedures have come in place and objectives, short-term objectives change. And so there are distractions there.
And then in the UK the big challenge we have there is focusing on getting all the accounting of the policies and procedures and all the things that we have to make sure happen because we're a public company in place and that's a distraction for the management there. So I don't know whether it's materially soft from a customer point of view, I'm not hearing that. So my guess is those distractions. I think that our team over there believes that we have lots of potential internationally; we've underinvested internationally in the past. This next fiscal year starting in April we are going to be making a lot of additions to our international business and it's going to be a focus also FY 2017 international will be a big focus.
I think we have a relatively small percentage of our sales coming from outside the U.S. and there is a lot more that we can do over there in other parts of the world. So that's how I see it. Ross do you have any other comments.
No I think Clint pretty much covered it. I think to the extent there is may be some economic softness in Europe and we're probably dealing that on the margin but I think the items that Clint identified are certainly in the majority of what we're facing in Europe right now.
Got it. And I know that you're always trying to improve traction with your large distributor partners especially in the U.S. market. Can you just comment I would echo the sentiment that the sequential decline in animal health was greater than most people were modeling? Is there a behavior change that may have occurred from one particular distributor? Did you see was perhaps the step down across your distributors or I'm really trying to determine if this might have been execution on one or more distributors or if this could have been perhaps end user demand drying up?
I will may be try to answer that Mark and Craig can chime in. But no I don't think we really certainly in terms of consumables I don't think we sensed any change in behavior or effort on the part of distribution and our sales out of our warehouses into distribution I think the percentage change was year-over-year was exactly the same as the number of units went out of distribution to end customers.
I think our year-over-year growth in our installed base has slowed. You can probably crack that on your own based on all the metrics we've given out over the last five quarters or so, but I wouldn’t necessarily attribute any other sort of deceleration in consumables due to distributor behavior whether there is a change in end customer behavior at this point. I don't think we see anything to suggest that.
Great and my last question what was the underlying rapid test revenue growth rate in the quarter?
There's a lot.
And I'm sorry, the dollar amount?
I'm not sure we're really giving that out, Mark based on some of the data I talked about you can probably come up with a pretty good estimate.
Okay. Thanks pretty much.
Mark, let me add to Ross comments, well I don't think we're seeing -- we're not seeing deceleration in the market in general if anything I think the market is full. When a market is growing nicely, again I think we typically see a drop-off we had. We did have -- we do have one distributor we don't feel is quite up to speed yet and the others is still growing. And I don't we just not look into these numbers as any kind of a red flag or a signal that if there's anything specifically wrong. We just fairly bigger business, fairly normal change in seasonality that's compounded by one distributor not functioning like we're quite happy with that. That helps.
Yes, it does. And just trying to understand what things you have in your tool chest perhaps to increase engagement with these folks, presumably the training has been done and so I'm trying to understand what you can do to increase engagement with the distributor?
Well I've a couple of things. I think the training is never done first of all, we're still constantly bringing groups in, every organization has turnover, every organization has new directions to get their teams and management. And so this takes time, we can see what is happening with Abbott on our Piccolo side it takes time for these things to develop properly.
We're only four quarters into this and we're seeing the traction that we want to see and we think it will get better but it boils down to people on the ground learning how to work together and learning how to put the schedules together and learning how to maximize their opportunities together that is developing and we will continue to develop and we see it continuing to get better and accelerate.
The next question will be a follow-up from Kevin Ellich of Piper Jaffray. Please go ahead.
Yes Dr. Tockman I don’t know if you give us this number this quarter yet. How many new vet things you guys are doing, have you started to do business with, last quarter I think it was 400, over 400.
We're -- I know they're over 400, yes.
Over 400, and is that all domestic, and I can't remember if that was just a domestic number or not?
That is domestic number, yes.
Okay got it. And then just wanted to make sure I got the hematology number because that you provided again I guess this will be probably third time now but you said 404 VetScans, 66% new accounts, hematology was how many and what percent were that new accounts?
326 with 74% new.
And our next question will come from Len Fuchs of Spade. Please go ahead.
Hi I'm sorry I came in late but did you cover in anyway the Abbott surface [ph] in the large hospitals the one that took in the Ebola units?
Yes, Rick, made some comments on our new accounts that Abbott has got, do you have a specific question on that Len.
No, I just wanted he made a comment and the number of new accounts or --?
Yes, okay. Yes, for year-to-date the Ebola accounts have strong over 100 new Piccolo placements into hospital systems in the United States. So we are pleased with that number and we did expect to accelerate moving forward.
And the next question will come from Kevin Ellich of Piper Jaffray. Please go ahead.
Forgot one more guys. So I think in your prepared remarks --
You mentioned a little weakness in Europe and I think Clint or Ross you made a comment about the scil, the Henry Schein acquisition of scil having an impact, was it all due to that or was there something else going on?
Well we had a change in distribution in Spain that impacted it. We were -- our UK business over there the last 12 months, the focus has been on policies, procedures, accounting and that kind of stuff. So the management there gets distracted with getting things up to snuff reporting from a public company. And so that's been a distraction. I indicated that we've done now with Phase 1. Now Phase 2 is to get the UK team sales performance up to the standards of the North American sales team. And so, yes, so Q4 now that's what the focus is going to be, we're done with all the policies and procedures.
Okay. But I guess is there any way to quantify what impact scil had?
That is really not. I mean I think -- I think the -- when you talk with the management folks over there they were very tied up with making sure that all the changes that need to be made when you're acquired by a larger company that was the number one priority. And so while the performance of scil as a distributor met the kind of the lower expectations of the team over Europe they felt had they not had that distraction things would've done better.
You know just thinking about it Clint I mean now that Henry Schein owns scil does that change their intent to sell Abaxis. I think we know they're selling Heska as well. I'm just wondering how much the impact you're seeing. Is that changing your relationship with you guys?
Yes so our objective looking with all our distributors is to make sure that the customers presented all the options. So the key success factor with looking with distribution is making sure that we get the access to do the demo. That's what makes the difference between a successful relationship and one that's not so successful. And so clearly we have agreement from those folks on the number of demos we would like to see a quarter, we have objectives and goals. Also because many of our distributors on a calendar year rather than a kind of weird March fiscal year we've been in the process now of coming up with objectives for their year.
So now remember our relationship with these guys is this is we've only done this for four quarters. So we're getting better at this every single quarter. So I think what's refreshing now to go through the last 12 months what the performance was and then put together a forecast for the next 12 months, get numbers that we agree on, and got in the plans for hitting them. And I think everyone of them the numbers that I've seen anyway look really good. So now we just have to make sure that we get it done.
But now outside the U.S. we have not had the kind of staff like covering Germany, we have one account manager that covers the whole country of Germany. So scil really has 100% of the responsibility to get to new accounts with not a lot of support from Abaxis and of course that's going to be part of this whole new process now reengineering our international operation. We need more people working with the distributors on the ground that speak the local language and that's a project that we're going to start implementing in April.
And this concludes our question-and-answer session. I would like to hand the conference back over to Clint Severson for his closing remarks.
Okay. Well thank you very much for tuning in and we look forward to the next conference call that's scheduled for July. So thank you all for tuning in again. I'm sorry April. I'm ahead of myself here already, thank you very much. Bye, bye.
Ladies and gentlemen the conference has concluded. We thank you for attending today's presentation. You may now disconnect your lines.
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