Abaxis' (ABAX) CEO Clint Severson on Q1 2017 Results - Earnings Call Transcript

Abaxis Inc. (NASDAQ:ABAX) Q1 2017 Results Earnings Conference Call July 21, 2016 4:15 PM ET

Executives

Joe Dorame - Lytham Partners

Clint Severson - CEO

Ross Taylor - VP, Finance and CFO

Don Wood - President and COO

Craig Tockman - VP, Animal Health Sales and Marketing, North America

Analysts

Nick Jansen - Raymond James & Associates

Jim Sidoti - Sidoti & Company

Erin Wilson - Credit Suisse

John Block - Stifel

David Westenberg - C.L. King

Mark Massaro - Canaccord Genuity

Operator

Good afternoon everyone and welcome to the Abaxis Reports First Quarter Fiscal Year 2017 Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions]. After today’s presentation there will be an opportunity to ask questions. [Operator Instructions]. Please also note that this event is being recorded.

At this time, I like to turn the conference call over to Mr. Joe Dorame, Lytham Partners. Sir, please go ahead.

Joe Dorame

Thank you. Good afternoon and thank you for joining us today to review the financial results of Abaxis first quarter of fiscal year 2017, which ended June 30, 2016. Again, 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; and Mr. Don Wood, President and Chief Operating Officer. At the conclusion of today’s prepared remarks, we will open the call for a question-and-answer session. If anyone participating on today’s call does not have a full text copy of the 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 record the following statements. This conference call may include statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Specific forward-looking statements contained in this conference call maybe affected by risks and uncertainties, some of which are detailed under risk factors in documents filed by Abaxis with the United States Securities and Exchange Commission, including the Annual Report on Form 10-K for the fiscal year ended March 31, 2016. 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, whether as a result of new information, future events or otherwise.

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?

Clint Severson

Yes. Good morning. Good afternoon, everybody, and welcome to our Q1 call. I’ll make a couple of comments about the quarter and then I’ll turn it over to the rest of the management team to get more into the details, and then after our shared presentations we’ll take questions. Now some of the challenges for the quarter, international sales were flat, mostly due to lower sales in the Pac Rim, and currency in the UK. But in Europe, we were up double-digits due to market coverage improving with additions, in market coverage for Spain, Italy and France. And we are currently working on our first new hire in China. So this expansion in the international marketplace of market coverage is ongoing.

Now our vet consumables grew less than double-digits, mostly due to not really having a competitive software option. However, this will be fixed this quarter with the launch of our FUSE integration system that Don will talk about a little later in the call. Now earnings were down slightly, mostly due to higher investments in R&D and international sales and marketing, and we expect these investments to pay off down the road. So we believe this makes sense to make investments.

Now we have some upsides as well. We had good growth, up 9% year-over-year. We had double digit instrument revenue growth and double digit North American sales growth, and North American medical sales growth, as well as worldwide vet sales up double digits. Our medical vet sales were up double digits and we sold our first 10 Piccolos to India, with a plan from our distributor for an additional 300 over the next 18 months. And then in the fast ring, we got the first parts for our new multi cavity based mold. Now this is a very big deal because we have a very complex, plastic part in our disk base and in the past it was – we were unable to do multi cavities. And so we got our first parts this quarter and this will be, if successful procedure in the first parts, if successful we can scale this up, we can have a big reduction in our manufacturing costs.

So with that, I'd like to introduce Ross, who will kind of run through the numbers.

Ross Taylor

Great, thank you, Clint. I’ll review our financial results and some other important fundamentals for our first quarter, which ended on June 30th. To begin, total revenues in Q1 increased 9% to $57.9 million compared to 53.1 million last year. The impact to changes and foreign currency exchange rates was insignificant in the quarter, and currencies reduced our total revenue growth by only about 0.3%.

Importantly, total consumable revenues in Q1 increased 7% to $44.7 million from $41.8 million last year. Instrument sales increased 16% to $10.1 million from $8.7 million last year. Global veterinary revenues were $47.7 million in Q1, a 10% increase from $43.6 million last year. This increase was driven by a 6% growth in veterinary consumable revenues and 27% growth in veterinary instrument revenues. Global medical revenues were $9.1 million in Q1, compared to $8.7 million last year, an increase of 5%. This increase was driven by an 11% increase in medical rotor revenue while Piccolo instrument revenues decreased 19%.

Focusing within our consumable product lines, Abaxis sold a total of 2.49 million rotor units on a global basis in Q1, compared to 2.37 million units in Q1 of last year for an increase of 5%. Total rotor revenues increased 3% to $31.3 million from $30.4 million last year. Rotor revenues grew at a slower pace than units, primarily due to a change in the sales mix of medical versus veterinary rotors.

Global sales of veterinary rotors were 1.54 million units in Q1 of this year, flat with 1.54 million units last year. Looking at the various geographies, our sales of veterinary rotor units in North America increased a little bit less than 1% during the quarter, while our veterinary rotor unit sales outside of the U.S. declined approximately 2%.

Global veterinary rotor revenues in Q1 were $24.5 million, compared to $24.3 million last year, an increase of 1%. Focusing on our international veterinary business, rotor unit sales increased at a mid-single digit pace in Europe during Q1. This marks a nice improvement from the prior two quarters, during which veterinary rotor units in Europe declined modestly.

The Asia Pacific region was the source of weakness for our international vet rotors during Q1. Veterinary rotor unit sales in Asia Pacific declined at a high teens pace in Q1. A very difficult comparison was the primary reason for this decline in Asia Pacific for this quarter as sales in this region increased over 40% from the June quarter last year due to the timing of a container shipment. We feel our veterinary business in Europe has started to turn a corner, given that rotor units returned to growth in Q1. However, we believe we have one or two quarters before we have better visibility on the outlook for our European veterinary business.

We believe our veterinary rotors in Asia Pacific should grow over the last three quarters of this year as comparisons are much easier. On the other hand, our veterinary rotor business in North America was soft during Q1, and we have multiple initiatives underway in sales, marketing and R&D that are focused on accelerating this business.

Turning to medical rotors, during Q1, global sales of medical rotors were approximately 949,000 units, compared to 829,000 units last year. This represents an increase of 15%. Global medical rotor revenues were $6.9 million, compared to $6.2 million last year, an increase of 11%. Medical rotor revenues grew at a slower pace than units, mostly as a result of changes in the geographic mix. During Q1, revenues from other veterinary consumables, which we define to include hematology reagents, i-STAT cartridges, coagulation cartridges, and rapid assays increased 17% to $13.4 million, compared to $11.4 million last year. The majority of the year-over-year increase in other vet consumables was the result of strong growth in our hematology reagents, most of which was the result of distributor purchases related to the deployment of our hematology instruments in the Banfield veterinary clinics. We initiated the rollout of our hematology instruments to Banfield in April when we had installed our hematology instruments in 395 Banfield clinics as of June 30th. Accordingly, reagent consumption from Banfield is ramping up very quickly.

Switching over to the instrument product category, Abaxis sold a total of 1,533 instruments in Q1, compared to 1,322 units in Q1 of last year. Looking at the individual instrument product lines, Abaxis sold 227 Piccolos in Q1, compared to 255 in Q1 of last year. Within our veterinary business, during Q1 Abaxis sold 698 VetScan chemistry instruments compared to 436 VetScans last year. Excluding the 295 Banfield installations during Q1, we sold 367 hematology instruments in Q1 compared to 301 instruments in Q1 of last year. In addition, Abaxis sold a total of 241 i-STAT and coagulation instruments in aggregate during Q1 compared to 330 last year. Looking at our revenues by major geographic region, our total revenues in North America increased 11% to $46.8 million from $42.3 million last year. Our international revenues in Q1 were $10.9 million, compared to $10.8 million last year, an increase of 1%.

Moving on to gross profits, expenses, and income, during Q1 our gross profits were $32.0 million, an increase of 9% from $29.4 million last year. Our gross profit margin was 55.5% in Q1, compared to 55.4% last year, an increase of 10 basis points. On a sequential basis our gross profit margin declined 120 basis points from 56.7% in the March 2016 quarter. Our gross profit margin performance was hindered by sales mix during the quarter.

During Q1, total operating expenses were $21.3 million, compared to $18.8 million last year, an increase of 13%. As a reminder, three months ago during our earnings conference call, we stated we plan to increase R&D spending and international SG&A spending during fiscal year 2017. As a result of these planned investments, our operating income was about flat with last year. Specifically, operating income was $10.7 million in Q1, compared to $10.6 million last year, an increase of 1%. The operating profit margin was 18.6%, compared to 20.0% in Q1 last year.

Reported EPS were $0.30 in Q1, compared to $0.31 in Q1 of last year. I have several more items to cover before I complete my remarks. First our blended rotor average selling price was $12.59 in the June 2016 quarter, compared to $12.82 in the June quarter last year, and $12.69 in the March 2016 quarter. The decline from both last year and last quarter is largely due to a change in the mix of veterinary and medical rotors. Our cost of goods for each rotor unit was $3.47 in the June 2016 quarter, compared to $3.60 in the June quarter last year, and equal to the $3.47 level of the March 2016 quarter.

We finished Q1 with $153 million in cash and equivalents, up about $1 million from $152 million at the end of March. I should note that during the quarter, we completed a $3 million investment for an 18% ownership position in an early stage Company with a unique point of care diagnostic technology. This platform technology has the potential to be used in both the human and the veterinary markets. Also, we announced today at our Board of Directors approved $30 million increase in our share repurchase program. This amount supplements the $24 million that Abaxis had remaining from its previous share repurchase authorization.

This concludes my remarks, and I will now turn the call over to Don.

Don Wood

Thank you, Ross. I will begin with some highlights and commentary on our results in Q1. Our record of total revenue grew 9% and our gross profit grew 9% as well. As Ross discussed, we increased our investment in R&D and international sales and marketing significantly, which resulted in flat operating income compared to last year. Confidence is high that the investments that we are making in R&D and our international business should drive solid growth in our revenue and income for the long-term.

Net revenues were up 10% globally, and up 9% in North American Animal Health. The rollout of our HM5 hematology instruments into Banfield Pet Hospitals is progressing rapidly. We’ve installed 395 hematology instruments through June 30th into the Banfield clinics. We have received excellent feedback from our partners on both the service and the instrument performance. We expect to install all hospitals by the end of September. Our overall instrument sales were strong, with total instrument sales of 1,533 units, up 16% over last year. Instrument revenues also increased a healthy 16%. Adding the Banfield units, in total we shipped and installed 1,928 instruments in Q1.

Our medical business continued its trend of strong growth as Piccolo rotors increased about 15% from last year. In Europe, our veterinary business had a nice improvement, with vet rotor units grew at mid-single-digit pace in Europe throughout Q1. This follows two consecutive quarters of mid-single digit declines for the region. Gross margin for each of the major product lines were very good and consistent with the levels of the March quarter. However, mix had a negative impact on our overall gross profit margin. Our rapid assay products continue to mature at a nice pace, but not the same as our prior four quarters, as we pass the one-year anniversary of several product introductions. Our rapid test sale did increase 9% from last year.

Looking forward, given our decision to meaningfully increased our R&D spending in fiscal year 2017, I'd like to spend a little time discussing a number of our current new product developments in our pipeline. Our sales team has begun demonstrating our new VUE platform, and we anticipate that VUE should result in accelerating the growth of our rapid assay test. The VUE is a highly innovative reader for our rapid assay test. The unit is operated wirelessly by a smartphone or tablet with an easy to use interface. Significantly, the VUE reached the rapid assay results at the proper time and interprets the results taking the variability of reading the test out of the testition’s hands.

It then sends the results directly to the practice medicine software, and to the tablet or phone that is used to operate the instrument, allowing the veterinary team to show the results to the pet owner. We believe these features of the VUE should make our rapid assay product offering even more competitive and provide an opportunity for us to introduce other new rapid assay products overtime.

We are excited to report our higher value connectivity product, the FUSE is in the final stages of development and currently undergoing beta test at several sites. After successful completion of our beta test, our plans are to launch the FUSE in late September. We believe the FUSE will largely eliminate a significant competitive gap we currently face with our major competitor in the veterinary market. The FUSE is a web based application that enables two-way communication between our diagnostic instruments and practice management software systems. The FUSE utilizes an advanced graphitic interface and orders placed by the clinic through their practice management system or through a tablet will be transmitted to our instruments and then seamlessly integrate back into the practice management software, the PMS. Veterinarians will now be able to display trends of live data for any patient as the FUSE will combine test results with archive test data from across our instrument suite.

In addition, the FUSE will enable presentation of patient results to pet owners in an intuitive and customizable format, and will permit easy communication of live results across the veterinary clinic, to the pet owner, or to the outside specialist. Importantly, the FUSE also represents a significant advantage in the transition of our instrument product line to mobile compatibility. We are currently in beta testing of the FUSE at multiple sites and the beta users have been enthusiastic about the easy and intuitive graphitic user interfaces of the FUSE, by its by-directional capabilities and the compatibility with veterinary clinics PMS.

While in the launch, the FUSE – when we launch the FUSE in September and we recently began strongly promoting and marketing the FUSE to potential customers as we believe it’s functionality value and benefits are highly desirable in the marketplace. With connectivity and information becoming even more important to the veterinary hospital, we believe the FUSE product should help to generate significant new business for Abaxis.

We have completed beta testing of our small VetSync connectivity device with over 100 customers. The VetSync device allows our chemistry and hematology instruments to combine their results into one report for easier download into the current practice management systems as well as for combined printing to VetSync, also connects the instruments through the internet, so that it can transmit diagnostic test results. The VetSync will formally launch this quarter.

We are also excited to report continued progress with our high sensitivity immunoassay platform. We now have red boards -- red boarded our new platform, which is taking the major step of combining high sensitivity immunoassays onto our existing chemistry rotors. The first high sensitivity test R&D plans to release will be targeted at the vet market. We still have significant work to do on this project, but we are on schedule and achieving the milestones on time. We anticipate our first product should be released in 12 to 18 months. Our high-sensitive immunoassay project will truly expand the capabilities of the VetScan, and eventually the Piccolo lines to offer truly competitive diagnostics where clinical chemistry can be combined with immunodiagnostics on a single panel.

We've recently released a new digital microscope, capable of providing HD images that can be used to for marketing of the pet owner, to increase medications and treatment compliance, as well provide HD photographs that can be shared with pathologists or other specialists for advanced diagnosis. This HD microscope provides a significantly better and lower cost alternative to an automated urinalysis analyzer.

Our R&D department is also developing several new assays. For example, we are also making excellent progress in developing a new semi-quantitative test to be used with our new VUE reader, that is for new disease category that we did not currently target with our existing Rapid Test. In addition, our T4 test is already one of the most popular panels and it has been on the market for more than 13 years. However, R&D is making upgrades that should take our team forward, and make it more useful and help increase rotor sales. We have previously discussed the Phenobarbital test for the rotor and we recently began working with a new reagent for this test that will speed completion of this project.

Turning to instrument development, we currently have several initiatives underway to add or enhance our instrument product line. For competitive reasons, we'll not provide any specifics on these efforts at this time. However, we think there's a good chance we will introduce some new instrument and a new consumable within six to nine months that is targeted to a market opportunity that is of modest size, though very popular with veterinary clinics.

A quick update on North American Animal Health show, that total revenues were $38 million in Q1, an increase of 9% from last year. We placed a total of 1,337 instruments in the quarter, compared to 829 last year. We placed 489 VetScans in Q1, and 39% of these were placed with new customers. Most of the remaining VS2s that were not classified as new customers were part of the successful second unit placement program that grows utilization immediately approximately 28%, and is expected to double utilization in approximately the first year. This VCS FUSE are also placed with long term contracts that help secure our customer base.

Excluding Banfield, we placed 256 hematology instruments in North America, with 60% of these being placed into new accounts. And as I stated earlier, in addition we placed 396 units with Banfield by June 30th. Lastly, we also placed a total of 178 VSpro and i-STAT instruments with customers in North America. Our North American Animal Health Group continues to perform well in a very competitive market. We are adding field to headcount in both sales and within our professional services group as our AAHA relationship with our veterinary consulting programs continue to help our customers improve their medical care and perform more testing.

In addition to continuing to target new customers, we’ve initiated new marketing programs targeted at our existing customer base in order to enhance customer loyalty and increase utilization of Abaxis products. With all of the additional R&D products coming to the vet market, we are providing our sales team with many new opportunities for sales growth in the future.

Now I’ll update you on North American Medical report. During Q1, the North American Medical Division had revenues of $6.5 million, up 17% from the $5.6 million in Q1 last year. Importantly within North America, we shipped 778,000 rotors, compared to 672,000 rotors last year for an increase of 18%. In addition, we shipped 147 Piccolo instruments, compared to 124 last year. In the first quarter, we created two additional training programs to help added sales reps and field support personnel to recognize opportunities for customer education and usage growth. Additionally, we were encouraged by Abbott's upcoming push into the high usage oncology sector. Real time diagnostics are extremely useful in this segment where chemotherapy treatments can change the body’s chemistry balance rapidly. Improving important lab turnaround times from hours to minutes’ increases patient throughput and reducing the waste of expensive chemotherapy titrations, it also raises the patient satisfaction. All of these factors combined to create a better environment for treatment of clinical oncology patients. With the focus on this sector, we expect good results in both free-standing and hospital based oncology centers.

Additionally, we are pleased that Abbott continues the sales and marketing outreach to their urgent care, ER, pediatrics, IVN and long-term care segments. Consistent marketing communications into these segments on healthcare, where the clinic need is high, sensitivity to reimbursement is low, it helps maximize instrument placement opportunities and give our reagent trail a good portion growing strongly. Overall, we remain pleased with Abbott’s performance growing Piccolo product line. And finally, our relationship with our major retail partner continues but we do not have any significant change from last quarter to report.

With that Clint, I’ll give it back to you.

Clint Severson

Okay. Great. Okay. Now we’re up for questions.

Question-and-Answer Session

Operator

Ladies and gentlemen, at this time we’ll begin the question-and-answer session. [Operator Instructions]. And our first question today comes from Nick Jansen from Raymond James & Associates. Please go ahead with your question.

Nicholas Jansen

Hi guys. My first question will be tied to the commentary on rapid assays, 9% year-over-year growth. It’s nice, but it seems like you were having some momentum last year with some new product introductions and I know you’re lapping more difficult comps here, but I would have thought with the VUE that was launched in the quarter, we might have seen a better performance there. So any comments on kind of your rapid assay positioning as we think about the balance of the year?

Clint Severson

Yes. I guess we probably should have commented that we did have a back order at the end of the quarter, and the factory was having difficulty keeping up with the demand, and I think the backorder was gone around $0.5 million. And so when you look at the demand, you probably ought to add another $0.5 million worth of demand in there. So that would have taken it up to double digits. Yes, and so we are in the process of filling that back order now and I don’t think any customers actually ran out of products. It's just that the inventories got very low. And so I think that the sales out to end users were probably $0.5 million higher than what we reported.

Nicholas Jansen

Okay, that's helpful. And then on the FUSE connectivity, what are the, I know you have some beta customers. What's been the feedback thus far? How do we think about the salesforce and the distribution partners being ready to capitalize on that launch, expectations for the back half of the year, probably nothing in the September quarter, but how do we think about kind of that launch in context of reaccelerating consumable growth?

Clint Severson

Okay, Craig I'll hand over to you.

Craig Tockman

I think the biggest piece there is that number one, we will have a defined effort to put this product into all the existing customer base. It's important to lock up our business. This connectivity issue has over the year caused us issues with obtaining new business, and holding onto our business. So we will be including connectivity solution with every sale that we do, so that we can effectively compete with what's been out there in the past. And we’ll use this product to lock-up our existing customers with that. Some of these will be included with new instrument sales. We’ll selling some of these and some of these will be as part of just a connectivity solution where customers need it. But the launch plan is under development. We expect the product in September and I think the biggest piece of that is that it effects significantly our ability to get new customers and to keep our customers, and that will directly affect our rotor numbers.

Operator

Our next question comes from Jim Sidoti from Sidoti & Company. Please go with your question.

JimSidoti

On the U.S. vet business, what are you going to do over the next couple of quarters regarding the consumable, the rotor usage, to get that up? What are the immediate plans for that?

Clint Severson

Yes, so I'll comment and then I'll let Craig follow my remarks. So our last fiscal year, our focus was reading on new business. And so the incentives we had for our sales people were totally tied to new instrument replacements. And starting this fiscal year, incentives are tied not only to new placements, okay but to consumable sales as well. So that's a big change we've had in our compensation program.

Secondly we have been at a disadvantage without having this connectivity, and so that's clearly been an issue and I think that the connectivity solution that we are providing is going to be superior to anything out there, which would be launching this quarter, and the reason I believe this is because we had a very large 41 clinic group practice outside the U.S. that did a comparison. Their decision was really based on software more than anything else. And they looked at -- we did our beta trial there, and our competitors came in with guns blazing, with the best show they could put on, and guess what, they picked ours. So we believe that we have this connectivity program figured out. And so we're -- it's all hands on deck in R&D, and in sales and marketing to get this launched, and I think you'll see a big change when we introduce this. So, Craig any further comments?

Craig Tockman

Let me just add that Jim, we continue to win new customers. To add on to Clint's comments there, we had a 21 clinic customer switch to us, another 16 deal this quarter. So we continue to win new business in spite of this connectivity issue, but it clearly has affected us. The lower growth clearly is in part due to some of our business being taken back. That goes along with this. And so along with this connectivity solution that is coming soon, Don stated in his initial comments, we have a very aggressive program to not only lock up our current customers, but to increase their utilization. Part of our plan here is that when we go into the existing customer, who is using our products happily and we provide them with the utilization techniques to do more with a second VetScan, it's a logarithmic growth. So we are pretty confident that we will get this under control here quickly, both because we have this connectivity solution solved, and because of the work that we're doing with our existing customer base. Now does this, did that help?

Jim Sidoti

Okay, and then regarding the four cavity mold, I assume what you meant is you’ve got the first rotors coming in that made up that mold. What’s the plan to save that in?

Clint Severson

Okay. So I'll let Don answer the big part of that question. We start with two cavity first, then we go to four cavity. So it was the two cavity pieces that came in just recently. So, Don you can.

Don Wood

Jim, the multi cavity project is -- there's a lot of steps to it. And what's exciting for me is that we actually -- it took about five years planning to get to this point where tools are cut, and we've got our first samples off the tools. We actually demonstrated them in a medium just recently. What we do with those is it’s just the beginning phases, because now you go back and you polish up the tools, you do a complete inspection, which we're in the middle of right now and that's a trigger point, because if there are any adjustments to the tool, then you go back to the manufacturer and you do this all over again.

But you've entered the period of time where we begin to get the lowest hanging fruit now in terms of cost. We've cut out a lot of things on rotor cost over the last several years, and the big ones that are left have to do with both productivity and automation, as well as multi cavity tools. And we start with two and when we get two, we try to expand it to four. This is a very complicated piece of plastic, and we do an intensive review. We sell to the vet market, but we also sell to the human market, and both the USDA and FDA would expect us to do a tough validation.

So to roll it in time, I think you will not see this roll into our actual manufacturing for months, and it will be just the first two. There will be many and if we can get expanded to four, we’re going to cut it up to four and we’ll roll those in. Because we have a lot of tools, but there are all singles. And now you have these big locomotive type engines that are pushing one out, will be making two; and we hope in a year’s time could be making four. So it will roll out over years, Jim, several years till we get all these tools remade.

Jim Sidoti

All right. So we should start -- assuming that it all works out, we should start seeing that in the margins some time I would say toward the end of the year after you’ve exhausted the inventory you have on hand now? Does that sound about right?

Don Wood

Jim, we expect our cost to go down every year, and that is just one of about 10 projects that we’re working on that will land this year. So there is all -- a bunch of little ones, but there are several big ones. And it really doesn’t matter if this hits this year in the numbers. Like will we have it rolling down the line by March. Because we have so many others that are coming online. A lot of robotic functions are coming into manufacturing that will improve our quality and our capacity. It’s a big capacity move too, because our rotor volumes have climbed so high. So yes, you will see lower cost as time goes on, and the earliest you’d see that is probably in the fourth quarter.

Jim Sidoti

Okay. And then the new instrument with the consumable stream you talked about, now is that in addition to the immunoassay project?

Don Wood

Yes. It’s in a complete area that we’re not servicing today. And so I really don’t want to go into a lot of detail on it, but it’s completely new to Abaxis.

Jim Sidoti

Okay. And then just two more. The Banfield business, you’ve locked down the hematology business. Is there any update on the chemistry business?

Don Wood

No. Banfield will decide if they when they want to do chemistry. That’s not our decision.

Jim Sidoti

Okay. And then Clint with Abbott, you’ve had a little bit of fits and starts, but it seems to have gotten much better over the last several quarters. Are you happy with the way the Abbott relationship is proceeding, and do you think that’s really a long-term relationship?

Clint Severson

Yes, we are. I think we’re always -- Abbott, as you know is involved with a couple of huge acquisitions. We’re always nervous that the Abbott people are going to get distracted with their acquisition stuff. But so far we have not seen that, and we are happy with the relationship, and I think that Piccolo is becoming more of a key part of their product line every quarter. And so we’re pleased.

Jim Sidoti

Okay. Do you think with the Zika outbreak, there's any opportunity for Piccolo or not is that not really something that Piccolo will help with?

Clint Severson

No, Zika is not a fatal disease, it’s not. Yes.

Operator

Our next question comes from Erin Wilson from Credit Suisse. Please go ahead with your question.

Erin Wilson

Can you speak to the investment need in that diagnostic company? Will this have a material impact to earnings and how will the potential contributions be recognized over time?

Clint Severson

Yes. Erin, I think there, that’s a passive investment and should not have any impact on our P&L. And again, it’s an early stage company. I think any products that potentially could arise from this Company are at least several years away. So I think I’ll just limit my comments to that, but it's an interesting technology. We think it has nice potential but it's a couple of years off.

Erin Wilson

Okay, great. and what sort of visibility do you have on underlying demand trends across the companion animal space? Do you feel like you are growing ahead of the market or inline or below based on the consumables flow through you are experiencing I guess in the latest quarter and I'd be speaking to the U.S. specifically? And then where there any major or meaningful distributor stocking or destocking in the quarter that you could call out that may be more onetime in nature? I know you mentioned the Banfield hematology reagents. Was there anything else you could call out? That would be great. Thanks.

Clint Severson

[Indiscernible] is really going change in the distribution inventories. I think we’re comfortable with where they are at. And I think on the overall growth, yes, we’re just under double digit growth, and actually we’re at 10% growth on the Vet side. So I guess it depends on how you rate the growth of the overall market. I'm not sure that overall market is growing 10%. I don’t think it is but it could be growing 7%. And so -- or maybe even 5%. And so it looks like we are doing better.

Erin Wilson

Okay, thanks. And just one last one. How should we think about the quarterly progression of incremental R&D and SG&A spending, I guess in the coming quarter specifically?

Clint Severson

Yes, so we don’t guide, but we expect that the increase in R&D spending and international sales and marketing will continue, probably at this rate, or maybe a little bit more, not materially more.

Ross Taylor

I think I might just add there -- we did see on our last call that our R&D spend would go up by about $5 million in fiscal year 2017 as compared to 2016. I think that's still our expectation. The international SG&A, we've said a couple of months ago that we plan to increase that by $3 million. I think the ramp up there probably lagged a little bit compared to our plan, but I would still anticipate we’re going to get pretty close to that $3 million incremental spend this year.

Operator

Our next question comes from John Block from Stifel. Please go ahead with your question.

John Block

First question, I'm really trying to push you a little bit on the -- I think it is about more in percent North American chemistry vet consumable growth, unit growth in the quarter. Are you surprised about the magnitude of the deceleration, especially I think Clint you mentioned some stability in terms of inventory? So can you help reconcile that number? When I look back the past couple of quarters, I think it was about 10%, 7% and 9% from the past three quarters. Why such a big decel, if this is sort of the recurring market unless one you think the market pulled back materially or there was a much higher level of attrition in the quarter?

Clint Severson

Yes, I think we have to face it. We did lose some business out there, and I think the main reason that we've lost some accounts is because our competitors were selling software, and we’re selling chemistry efficiency cost effectiveness, and we didn’t really -- when they asked, well where is your software, we say it's coming. And so I think with the launch of the FUSE, you are going to see a big change in that. But clearly that’s something not commented on in the past, but that is, yes, is a disadvantage that we’ve had in the past.

So, but we believe that what we have is better okay, than what the competitors have. And we are now in a position where we can actually demo the software on an iPad, and show the customers what to expect over this next three-month period. And that's really the bottom line when you get right down to it.

But I'm going to comment on the other side of the coin too. On the other side of the coin, like Craig mentioned, we've done some very substantial competitive tradeoffs with very sophisticated accounts where they said you know what, the efficiency and the cost effectiveness and ease of use really trumps this software we have here, this practice -- release practices. And so we're making the change because of that. We also believe that any business that we may have lost over the last couple of quarters, we're going to be able to get back, especially when we have -- and this new FUSE introduced.

John Block

That’s very helpful. And it’s a good segue to my next question which was, and I mean this obviously in a respectful manner. But previously Client, it was always the distribution, the lack of distribution that didn't put you in equal footing, and now you've got that and you've got the nationwide distributors. Now it seems to have shifted over to software. So I'm just trying to make sure, do you think this is the last variable if you would that puts you on equal footing? You’ve got the distribution. You’ll have the software in another handful of months. Is this the last sort of missing piece to the puzzle where you can see sustainable in your view market share wins going forward?

Clint Severson

I think it's -- I don't think there's any one thing. I think there are important things that make a difference. It's not just one thing. And I believe that adding the FUSE is plugging a really big hole. I don't think there's any doubt about that. I've never asserted that issue. I've always been straightforward that we have not had the connectivity that some market vendors have had. And now we will. And I think that will make a big difference. But clearly adding new products to the product line is always an issue. I think veterinaries as well as medical doctors want to do more in their office, and the more menu you have, the better chance you have of obtaining and keeping that customer. And so the work that's being done in R&D, and the business development stuff that we're doing here is going to make our product line more attractive as we go along. And then I think we're getting better working with distribution all the time. We're not 100% there yet, but we're improving every quarter. So yes. So I think that the key issue is launching our connectivity. That's the key issue.

John Block

Okay, great. And one last one for you just on the medical side. I think earlier in the call you mentioned the 300-unit Piccolo order O-U.S. if I heard you correctly. Can you talk about the certainty of that? Is that in contract? I think you mentioned 10 have gone out, 290 on the come over the next 18 months. Again, is that under contract if you would? And if so, how about the ensuing consumable stream with the utilization of those boxes?

Clint Severson

So, this is our first foray into India. So we had our first order into China, and that's going along actually slower than what we expected, because we really didn't have our person over there working with our distributor on the ground. But we're very close to hiring somebody now and we expect that to pick up. And this deal for 300 Piccolos over 18 months, like I always say, I’ll believe it when I see it. This is a contract that we’re working with our distributor in India. We did some pricing, based on them hitting their 300 over 18 months. And so if they miss their 300, they’re not going to get the price on the consumables that they expect. And I think the forecast they’ve given us on consumables, I’m not sure I believe it. I’m not going to believe it until I see it. But they have a forecast that looks very good. And hence we gave them a special price to close these deals. They have a medical tourism business in India, where people actually come from other parts of the world to get procedures done in India. And I think the fact that the Piccolo provides this immediate result, especially in cancer care, and various surgeries they need chemistry results really fast bodes well for Piccolo machine over there.

On the other side of the coin, India is a developing country. And you’d say well, why would they pay so much more to get things really fast, when they have a lot of labor over there that’s very low cost. So I think it’s early in the game, but we think it’s a milestone. We think this partner who is investing to them a lot of money, would not commit to this kind of thing if they didn’t believe it to be true. And so, yes, that’s where I stand on it.

Operator

Our next question comes from David Westenberg from C.L. King. Please go ahead with your question.

David Westenberg

So just a little bit more on the consumables. You called out some customer attrition. Can you talk about maybe some utilization in existing accounts? I don’t know how well you guys track that, but do you think there could be just some general softness in Vet volumes in the quarter?

Clint Severson

Okay. No, we don’t see that at all. We do track it. We do monitor it. And we’re fine with the existing customer utilization. There’s always some pressure from reference labs and that kind of pricing. But all of our data suggest that our customers are using as always. In fact, we’re working on uptick in that as one of our solutions.

David Westenberg

Perfect. And you guys brought back a little bit more shares in the quarter than I anticipated. Do you think this is going to be a regular part of your 2016 or I’d say fiscal year 2017 capital deployment strategy or is this could be more opportunism, the stock price is lower and less buys more shares here?

Clint Severson

David, we didn’t buyback any stock during the quarter. Maybe the change in the number of your shares is related to what we did during the March quarter. We did announce the increase in the share repurchase authorization, an additional $30 million. I think as we have in the past, I think we’ll just be very opportunistic and yes, conscious of price when we do buy back stock.

David Westenberg

Got you, thanks. And then finally on speed of consolidation in the industry, if you have a lot of data points that use less [ph] practice consolidation, continue to be in a very fast pace. Can you talk about some of your group practice strategies and some of the things you’re working on to get some of those practices? I know you called out in the quarter a 21-unit client, a new 16-unit client.

Clint Severson

Sure. I won’t get -- in terms that we’ve -- forcing [ph] on that data, but we have a specific team that works on those kinds of accounts. We already have significant numbers of contracts with large group purchasing organizations, where a lot of these opportunities come from, and it is a natural focus of ours. And as I said, we have a team that works on it. We have aggressive programs for those types of customers, and our distribution network helps with that significantly, because they are also visible to those opportunities. So I guess best I can say is that we have a focus on it, we have a team on it and we expect to win the majority of those, especially when we get the FUSE device to help us out. And I will add on too, that working with the cloud software companies for the practice management helps in those as well, the multi practice systems do need data. And we have those relationships as well.

Operator

Our next question comes from Mark Massaro from Canaccord Genuity. Please go ahead with your question.

Mark Massaro

Hey, guys’ thanks for taking the question and nice progress rolling out to Banfield. The first question is on customer retention and I appreciate the comments you made Clint, about losing some business. Can you just give us a sense of what your customer retention rates are and how it's compared relative to recent quarters?

Clint Severson

Yes, so there are in the high to mid-90s. So it's not that we necessarily lose a lot of accounts. I think we've had possibly some strategic larger accounts that believe that software is something that they need in their practice, and they want it now, not later. On the other side of the coin we’ve had some large practices come to us say that they switched because of the software that they now don’t use, and they want their VetScan back. And there is a penalty because of what they sign to get their VetScan back but we are working with them. We’re are also working with Amtech on some of these accounts that regret they made this decision. And so I think it's something that we need to focus on. It's a hole that needs to be plugged and the software in my opinion is the biggest part of it. And so we’re going to have that fixed this quarter. And I think that's what it is. I think that's what the situation is and we’re addressing it and we will get it fixed.

Mark Massaro

Great. And Clint, if you don’t mind on the software point, I know over the years you've touted the benefits of the quality of the VetScan, and how typical you win based on ease of use and cost, et cetera. A couple of years ago, you've downplayed software as a key component to the process. And so it seems like your tone has changed at least over the last two maybe three quarters. Had something change in the marketplace, where you see a greater demand for software and informatics at this point? Just curious how to reconcile comments from maybe a year or two years ago versus today?

Clint Severson

Yes, so our competitor is eight to 10 times bigger than us and they're out there selling software. We're selling efficiency, cost effectiveness, ease of use and they're selling software, okay. So there's a certain percentage of people okay, that buy the software story. And I think if we are not in front of the customer at the time of this discussion, we're at risk. So we have to be in front of all these customers ahead of time, because there's a number of them that bite, and they like I said before, come back to us and say look, we made a huge mistake there, we want our VetScan back. And so I think software is an issue because it's being sold by a very large competitor over a period of two to three years. And so we need to address it. And of course we've been aware of this need over the past. But we didn't want to just introduce something that was just as good as what the other guy had. We wanted to introduce something that was better. And so I think we proved in at least one very large group practice outside the U.S., because they looked at every aspect of this, ram bunked [ph] through the paces, I assume they ran the other guy through the paces like they ran us in the paces even though I did not see that happen. And they chose us. So we think we have a very good product coming out this quarter, and I think you'll see a change.

Mark Massaro

And can you comment how you plan on pricing the FUSE? Is it per number per month and any commentary at all about how we can expect FUSE to hit the P&L over the coming quarters?

Clint Severson

So we are in the point of care blood testing market. We're in the point of care blood testing market and software is a component to make that easier to use, easier to record, easier to retrieve, yes, and more customer friendly for those practices that believe they need that. And this will be probably revenue neutral to us. We'll see how it goes. We’ll see how the demand is. But right now I expect it to be pretty revenue neutral. Do you have any comments on that, Ross?

Ross Taylor

Yes. I would say revenue neutral to the device itself, but revenue plus to the ability to maintain customers themselves.

Don Wood

And to add a little bit to Clint’s comments about the connectivity and this change; has the market changed? I don't think the market has changed as far as the desire for the connectivity business. As Clint was saying, we sell our product on ease of use and quality, and the software has simply become a hole in the story. And so the competitor has in theory the full story, where the software helps overcome the deficiencies of their offering. And when we have that solution, then our advantages come back the forefront and corrects a lot of the situation. I think that's how I've been looking at it, anyway.

Mark Massaro

So, revenue neutral, obviously implying that you will not be charging or generating revenue additionally as a result of the capabilities of the FUSE?

Clint Severson

At this point, yes, that's where we stand. But you know, the future we might be able to -- it depends on how the market views our superiority. It’s really what it boils down to.

Mark Massaro

Okay. And then as far as VetScans to new customers, I appreciate the color there. 39% is below prior quarter levels. What -- I’d be curious to hear your thoughts on how that number can trend looking forward, and I think some of the work that I’ve done recently suggest that some of the leads might be drying up and a lot of the low hanging fruit has been picked. So I’d just be curious about where you see that going forward. Maybe what distributors are telling you as far as the number of leads that you’re better being sent to your sales reps?

Clint Severson

So first I would discourage the use of the percentage. The percentage is against the total number of sales. The number of placements was right under 200, and as we’ve been saying, that’s all along been kind of our target for new customer acquisitions on the VetScans for multiple quarters. So as far as the new customer acquisitions, we don’t feel that that’s slowing down really at all. Yes, the low hanging fruit from last year, if you want to look at it that way, was somewhat picked, but our leads are still consistent, our new placements are still consistent. The percentage is simply down because of our aggressive approach of locking up our customers with that second unit. And so to grow our rotor business. So that’s why the percentage is lower, but the actual number of new placements remains consistent. Does that make sense?

Mark Massaro

Yes, it does, thanks. And if you don’t mind, just for housekeeping. Do you mind sharing the number of VetScans North America, outside the U.S. and the number of hematology analyzers by region?

Clint Severson

Yes. We really don’t like to give that out. Mark. I think I went through all the GAAP numbers with you on a global basis and then Don gave out the placement numbers for North America. But I think beyond that, we just -- I don’t think we want to get into that level of detail.

Operator

[Operator Instructions]. And our next question comes from Ben Haner from Federal and Company. Please go ahead with your question.

Ben Haner

Just a couple of quick ones on the rollout of FUSE to existing accounts. How quickly do you think you might be able to accomplish that and is that something that the sales people are going to be in-charge of, or do you have kind of tax or implementation specialist that will handle that?

Clint Severson

Okay. I’ll comment and I’ll let Craig comment further. So kind of the first phase of the rollout is to get the FUSE features on an iPad so we can actually show our existing customers as well as new customers what they can expect this quarter. And that’s the first step. And of course the second step is complete the beta studies to make sure that we have what we believe we have, to make sure everything is perfect when we roll it out. And then the next step is to make the announcement, train our distributors and our sales people, and then go with it. So we have an aggressive program that is starting this month. Craig?

Craig Tockman

This unit is -- imagine this unit like an app on your phone. I mean it’s not a highly technical skilled installation. So we can take the box to the customer, we can plug it in, we can show down the app and connect it into the software and they’re using it. So we don’t need a special team. We need any kind of special implementations. Both our field sales and our distribution partners, the over 1,000 people that promise to do that can install this device when they’re visiting customers.

Ben Haner

Okay, so it won't take that long to get installed and it might be a quarter or two before you have most of the existing accounts converted over.

Clint Severson

We have a lot of customers. So it may take us a while, but yes, we will be hitting every customer with our -- every customer who wants it will have the ability to connect their systems.

Operator

And ladies and gentlemen at this time it's showing no additional questions. I'd like to turn the conference call back over to management for any closing remarks.

Clint Severson

Okay, well and we thank you all for tuning in and just remind everybody that our hands on deck for launching our FUSE. That's a key success factor for our quarter coming up, and we look forward to reviewing our performance on our next quarterly call, which should be scheduled for some time in October. And our Annual Shareholder meeting will also be in October. So there will be our proxies going out and I would encourage everybody to vote their proxies early. The sooner we get those in, the easier it is to manage the shareholder meeting. And so -- and also we’d like to welcome anybody that would like to attend the shareholder meeting to be held at Abaxis. We welcome them to attend us also.

So with that note, I wish everybody a very good afternoon and thank you again for tuning in.

Operator

Ladies and gentlemen, that thus conclude today's conference call. Thank you for attending. You may now disconnect your telephone lines.