Heska Corp (HSKA) 2007 Q4 法說會逐字稿

Good morning ladies and gentlemen. Thank you for standing by. Welcome to the Heska Corporation fourth quarter and full year 2007 earnings conference call. During today's presentation all parties will be in a listen only mode. Following the presentation, the conference will be open for questions. (OPERATOR INSTRUCTIONS)

This conference call is recorded today, Tuesday, February the 26 of 2008. I would now like to turn the conference over to Bob Grieve, chief executive officer. Please go ahead sir.

Thank you, Mary and thank you all for joining us today for our conference call. I'm joined today by Jason Napolitano, our chief financial officer.

We appreciate having the opportunity to review the results from both the fourth quarter and the full year 2007. Prior to discussing our results I would like to remind you that during the course of this call we may make certain forward-looking statements regarding future events or future financial performance of the company. We need to caution you that any such forward-looking statements are based on our current beliefs and expectations and involve known and unknown risks and uncertainties which may cause actual results and performance to be materially different from that expressed or implied by those forward-looking statements.

Factors that cause or contribute to such differences are detailed in our press releases or in our annual quarterly or other filings with the SEC. These forward-looking statements speak only as of today and except as otherwise required by law, Heska does not intend to update any forward-looking statements to reflect events that occur after today.

Before I turn the call over to Jason I want to make a few key points about our performance. Notably, revenue in 2007 was the highest total revenue generated in Heska history. And we produced record income from operations, an 80% improvement from 2006.

From a general trends perspective this is the tenth consecutive quarter with operating income and the seventh consecutive quarter of profitability. And 2007 was our third consecutive year of full year profitability.

2007 was a good year with growth in several product launches; in particular our new hematology offering, the HemaTrue Analyzer and our new chemistry analyzer, DRI-CHEM 4000 replaced previous products in those same categories.

As I described in our last call, we believe strongly in regularly upgrading product offerings as technology improvements breed the opportunity to meet our customers' needs. Of course such replacements invariably lead to associated transition effects. For example, sales training of both direct sales people and distributor sales representatives is critical for long term success but also decreases short term selling time. Replacement of low cost or no cost analyzers with high volume customers makes great long term business sense.

In the short term, there is negative gross margin impact. Generally using the enhanced benefits and features of a new analyzer to target high volume customers currently using competitive products provides a great opportunity to capture market share. But there are negative implications to gross margins in the short term.

Also quickly and efficiently moving inventory of last generation product while essential to the business will typically result in short term negative economic impact. Regardless of these transition issues, we remain committed to offering the best products possible. And we will remain focused on the best overall business solutions for enhancing shareholder value over the long term.

Before I turn the call over to Jason I want to investors to know that Todd Gilson, our former vice president of marketing, left the company effective January 4 to pursue another opportunity. We wish Todd the very best in his new endeavor and we are actively searching for a suitable replacement.

I would now like to turn this over to Jason. He will provide detailed information on our financial results and future financial expectations.

Thank you, Bob. 2007 was the best year in Heska's 20 year history with record revenue and net income. In the fourth quarter of 2007 our Core Companion Animal Health segment generated $17.1 million in product revenue, an increase of 11% compared to the prior year period. The largest factor in the increase was greater sales of our hematology instruments.

Fourth quarter 2007 hematology sales benefited from a now clear backorder situation which existed at the end of the third quarter of 2007 on the new product we launched in this area in July of 2007, the HemaTrue Veterinary Hematology Analyzer. We received very positive feedback from our sales force on this product, which we believe is the best hematology analyzer available on the market today.

The second largest factor was increased sales of our chemistry instruments. We launched a new chemistry instrument, the DRI-CHEM Veterinary Chemistry Analyzer, in November 2007. While fourth quarter revenue from that product was short of our expectations and we experienced some unanticipated launch costs, our sales force is highly enthusiastic about the product and its competitive potential.

With features including the ability to run up to 21 tests at a time with a single blood sample, we believe this product will give us greater access to higher end clinics than our previous offering. As one of our main competitors has not appeared to make commercially available a new competitor product it has announced, we've authorized our sales management to aggressively pursue opportunities to gain new customers in this area.

We also ran an aggressive free rental program late in the third quarter and early in the fourth quarter of 2007 for our previous chemistry instrument so that our inventory of that instrument was productive.

The success of this program meant our sales force had a relatively heavy installation workload later in the quarter, which somewhat constrained new sales calls.

Increased sales of our instrument consumables, our heartworm diagnostics products outside the United States, our microalbumin laboratory packs and our allergy test kits were also factors in the increase in fourth quarter 2007 Core Companion Animal Health Product Revenue compared to prior year period. These gains were somewhat offset by lower sales of our heartworm diagnostic products and our heartworm preventive products domestically.

In the fourth quarter 2007 we ran an aggressive program to try to sell certain i-STAT cartridge tests to users who historically had not used those tests in their practice in order to move some of our excess inventory. While results of this program were well short of our expectations, we did manage to grow i-STAT cartridge revenue by 7% in the fourth quarter of 2007 as compared to the prior year period.

However, this program entailed a significant commitment for our inside sales group so that there was less of a focus on selling our heartworm diagnostic products in the quarter by that group, which has historically been a key driver of sales in this area.

For the full year we grew Core Companion Animal Health Product Revenue by 10% to $65.9 million. Higher sales of our instrument consumables, our hematology instruments, our handheld blood analysis instruments, our IV pumps, international sales of our heartworm preventive, our microalbumin laboratory packs and our allergy test kits were all factors in the increase.

We shipped a large order of our heartworm preventive to Novartis for Japanese distribution in the first quarter of 2007. But as Novartis has acquired a business with a product competitive to our heartworm preventive, they have informed us they will no longer market and distribute our product.

We are currently seeking an alternative distribution relationship in Japan, although we do not expect to have anything in place in the first quarter 2008 in this area presenting a fiscal year-over-year comparison for us.

In 2007 approximately 49% of our Core Companion Animal Health Product revenue came from direct sales to veterinarians; 28% came from independent third party distributors and 23% came from other distribution relationships. Examples of other third party relationships are our canine heartworm agreement with Schering Plough Animal Health in the United States and our international allergy sales where our customer is typically an independent veterinary diagnostic laboratory to whom we sell allergy test kits. We believe we are significantly less dependent on third party distributors than some of our competitors.

Forty-six percent of our 2007 product revenue was from the sale of diagnostic and other instruments and supplies consisting of approximately 32% consumables and 14% new heartworm sales.

Thirty-five percent of 2007 product revenue came from single use diagnostic and other tests, pharmaceuticals and vaccines. Major products in this area include our heartworm and our allergy related products.

The remaining 19% of our product revenue came from our other vaccines, pharmaceuticals and product segment, or OVP. In 2007 OVP product revenue increased by 25% compared to prior year period to $14.9 million. The key factor in the increase was greater sales of fish vaccines.

Another key factor in the increase was approximately $1.6 million in revenue, which I will refer to as the United Revenue, recognized upon receipt of a payment for product previously shipped and taker pay minimums for 2005 and 2006 which previously had not been paid as part of a now settled dispute with United Vaccines Inc. or United, a former customer.

As United has ceased operations we do not expect to generate any future revenue from United.

Another key factor in our 2007 product revenue increase was increased sales of bovine vaccines under our contract with AgriLabs. These revenue increases were somewhat offset by lower sales of both bovine biologicals and our equine influenza vaccines. We licensed Intervet Inc. exclusive rights to our equine influenza vaccine in July 2002 and our last shipment of product prior to Intervet Inc. producing the product themselves occurred in the third quarter of 2006.

OVP product revenue was $2.6 million in the fourth quarter 2007, about 15% less than the prior year period. Key factors in decline were lower sales of both bovine biologicals and bovine vaccines for Canadian distribution, somewhat offset by greater sales of bovine vaccines under our contract with AgriLabs and increased fish vaccine sales.

As we have noted for some time research, development and other revenue presented a particularly difficult comparison for us this quarter. In December 2006 we completed the sale of the Allergopharma portfolio referenced in our press release. Upon completion of the underlying agreement, we recognized a gain on the difference between the purchase price, net of expenses, and the book value of the Allergopharma portfolio including all of our unamortized capitalized patent costs as well as approximately $1.5 million in revenue from previously deferred licensing fees.

As there were no remaining unamortized capitalized patent costs to match with this revenue, the revenue was at virtually 100% gross margin, hence the difficult year-over-year comparison.

This revenue, which I will refer to as the Allergopharma revenue, was the primary reason for the year-over-year decline in fourth quarter and full year research development and other revenue in both the fourth quarter of and full year 2007 as well as the fourth quarter decline in total revenue as compared to the prior year period.

Gross margin, that is gross profit divided by total revenue, was approximately 34.5% in the fourth quarter of 2007 as compared to 43% in the prior year period. Heartworm diagnostic tests represented the key factor in the decline.

We have higher margins domestically than internationally in this product area; hence both the lower domestic sales and higher international sales in the fourth quarter of 2007 as compared to 2006, hence a lower gross margin.

Increased new hardware sales in the 2007 period as compared to 2006 also contributed as these sales tend to have a low average gross margin and in 2007 certain instruments carried lower gross margins than in 2006 due to aggressive sales and marketing programs.

The Allergopharma revenue in the fourth quarter of 2006 obviously did not occur in the 2007 period and also contributed to the change.

For the full year 2007 gross margin was 40.3%, a slight decline from 40.8% in 2006. The product mix was a key factor in the change, including sales of our diagnostic instruments which represented a larger share of overall sales in 2007 than in 2006.

Our diagnostic instruments tend to be relatively low margin sales and in 2007 certain instruments experienced lower gross margins than in 2006 due to aggressive sales and marketing programs, another factor with the Allergopharma revenue, which occurred in 2006 but not 2007. These were somewhat offset by the United Revenue which occurred in 2007 but not in 2006.

Selling and marketing expenses were $3.9 million in the fourth quarter of 2007, up 10% from the prior year period. A key factor in the increase was cost related to the launch of our new chemistry instrument.

For full year 2007 selling and marketing expense was $16.1 million, a 12% increase from the prior year period. A key factor in the increase was cost related to our three major project launches.

Research and development expenses were $570,000 in the fourth quarter of 2007, down $250,000 from the prior year period. For the full year, research and development expenses were $2.7 million, a decline of approximately $800,000 compared to the prior year period.

A key factor in the decline in both cases was a decrease in accrual expenses related to our management intensive program or MIP recognized in 2007 as compared to 2006.

General and administrative expenses were $1.9 million in the fourth quarter of 2007, down approximately $800,000 compared to the prior year period. Lower incentive compensation in 2007 as compared to 2006 including incentive compensation related to our MIP was a factor in the decline.

General and administrative expenses were $8.9 million in 2007, down approximately 10%. Key factors in the decline were lower incentive compensation including compensation related to our MIP in 2007 as compared to 2006 and lower legal fees primarily related to our litigation with United in 2006.

In 2006 we paid the maximum allowable bonus under our MIP but in 2007 we actually had to reverse an MIP related accrual in the fourth quarter as we did not perform as we had expected.

In the fourth quarter of 2006 we issued all stock options with immediate vesting, an expense of over $500,000 of related compensation costs.

In the fourth quarter of 2007 we issued stock options to management on December 31 and these options vested monthly over four year periods.

We had no corresponding expense in 2007 as a result, so our MIP and stock option related charges tended to decrease our operating expenses in 2007 as compared to 2006, particularly in the fourth quarter but also for the year as a whole.

In the fourth quarter of 2006 we recognized a gain of $155,000 on the sale of the Allergopharma portfolio. The first quarter of 2007 we recognized a gain of $47,000 on the sales of certain patents we held net of cost.

Our income from operations was $528,000 in the fourth quarter of 2007, down $733,000 compared to the prior year period. The decline was due to slightly lower revenue at lower gross margin, somewhat offset by lower operating expenses.

For 2007 income from operations was $5.5 million, up $2.4 million from 2006 primarily due to greater revenue.

Depreciation and amortization was $2.2 million in 2007 as compared to $1.7 million in 2006.

We are offering guidance for 2008 depreciation and amortization to be in the range of $2.5 million.

Interest and other expense net was $155,000 in the fourth quarter of 2007, down $77,000 from the prior year period. For the full year 2007 this line item was $588,000 versus $1 million in 2006.

In both cases this was due to lower net interest expense resulting from lower borrowings at lower interest rates in 2007 as compared to 2006.

Our interest rate was lower in 2007 primarily as a result of lower interest rate spreads to prime due to our achievement of negotiated milestones under our bank agreement with Wells Fargo.

In the fourth quarter of 2007 we also benefited from a lower prime rate of interest compared to the fourth quarter of 2006.

The improvement in net interest expense was somewhat offset by a decrease in currency gains of a little less than $100,000 in both the fourth quarter of and full year 2007 compared to prior year period.

On December 21, 2007 we amended our bank agreement with Wells Fargo to increase our maximum line of credit from $12 million to $15 million.

You'll note that we have broken our income tax line into three components. The first is current, which basically represents the cash tax we expect to pay in a given period. Current income tax for the quarter and the year ended December 31, 2006 is $58,000, all of which relates to alternative minimum tax obligation in the United States.

Current tax expense for 2007 was $108,000 due to federal alternative minimum tax obligations and a recognition of certain state income taxes. We recorded a tax benefit of $4,000 in the fourth quarter of 2007 when we reversed $4,000 of an accrual related to our alternative minimum tax obligation that we had recorded on September 30.

We had over estimated our taxable income and therefore tax obligation on September 30, 2007, and that's a reversal of the accrual, was warranted at year end.

The second line is net operating loss usage. I want to stress that this is a non-cash line item and is relevant for accounting purposes only. This represents the amount of income tax we recognize for accounting purposes but did not have an obligation to pay in cash. Corresponding journal entry for this line item is a credit to a deferred tax asset on our balance sheet.

All net operating loss usage for 2006 and 2007 is related to Heska AG, our Swiss subsidiary, and its net operating loss carryforward, or NOL, in Switzerland. Although our NOL in Switzerland will expire at the end of 2008, we do not expect to pay any income taxes in Switzerland as we believe our NOL position is easily large enough to cover any taxable income we may generate in Switzerland in 2008.

Net operating loss usage was $8,000 in the fourth quarter of 2007, an increase from $1,000 in the fourth quarter of 2006. The factor in the increase was a tax holiday in effect for Canton Municipal and Church income taxes in the Canton of Fribourg that was in effect in the fourth quarter of 2006 but not the fourth quarter of 2007.

For the full year 2007 we recognized net operating loss usage of $17,000, a decrease from $79,000 in the prior year period. The main reason for the decline was agreements we obtained from the tax authorities in the Canton of Fribourg regarding our determination of taxable income, which I'll call the tax agreement and which I'll discuss in a moment.

The third line item is valuation of allowance adjustment. This line item is an adjustment due to a change in circumstances that causes the change in judgment of about the realizability of the related deferred tax asset in future years. Like net operating loss usage, this is a non-cash line item and is relevant for accounting purposes only.

Accounting rules dictate that unless a portion of an NOL is realizable on a more-likely-than-not basis, the NOL related deferred tax asset must be completely offset by an equal valuation allowance. However, once a company has included a portion of an NOL as realizable on a more-likely-than-not basis, accounting rules dictate that the company must reduce the valuation allowance by the number of currency units the company estimates not to pay in taxes as a result of its NOL position leading to a deferred tax asset on the company's balance sheet.

That deferred tax asset is reduced as the company uses its NOL and reports income tax expense on the net operating loss line item I described earlier. Based on the profitable operating performance of Heska AG, we concluded in the fourth quarter of 2005 that our NOL in Switzerland was realizable on a more-likely-than-not basis.

Accordingly, we recognized an income tax benefit and a deferred tax asset. This deferred tax asset was reduced as we recognized the net operating loss usage in the first nine months of 2006 as I described earlier.

In 2006 the tax agreements, reduced or taxable income in Switzerland in 2005 and 2006 for previous estimates for financial reporting purposes and reduced our expected taxable income and therefore tax obligation in future years as compared to prior expectations.

Accordingly, we reduced our net deferred tax asset related to this NOL and recognized the corresponding valuation allowance adjustment in the fourth quarter of 2006. This is the $69,000 valuation allowance adjustment, income tax line item you see for the quarter and year ended December 31, 2006.

Similar to Heska AG situation at the end of 2005, based on the profitable operating performance of Heska Corporation in the United States, we concluded in the fourth quarter of 2007 that a portion of our NOL in the United States is realizable on a more-likely-than-not basis. Accordingly, we recognized that income tax benefit and the deferred tax asset.

An order of magnitude of Heska's NOL in the United States is much larger than in Switzerland and both are obviously subject to review by the tax authorities. In the United States we estimate Heska's full NOL to be close to $165 million. It is scheduled to expire in various years beginning in 2010 and ending in 2025 with the majority of the NOL scheduled to expire in 2018 or later.

As outlined in our press release, we have not recognized the full value of the NOL. We recognized the valuation allowance adjustment of $30 million which is reported as the benefit on our valuation allowance adjustment income tax line item for the three and 12 months ended December 31, 2007.

This amount is equal to the estimated quantity of income taxes we will recognize as income tax expense on our net operating loss usage line item that we will not have to actually pay in taxes as we use our domestic NOLs, assuming our estimate of the realizable portion of our domestic NOL is exactly correct.

This is obviously not an exact science but we did the best we could.

We do not expect to make any further valuation allowance adjustments although circumstances in the future may dictate we do so, as they did for Heska AG in 2006 when we obtained the tax agreements or for other reasons such as significant over performance or under performance versus our expectations.

Going forward we expect to report net operating loss usage as an income tax expense in the United States in the same way we have done in Switzerland. Our net income will be an estimate of what it would have been had we not had any NOL position at all. Of course we expect to keep a far greater portion of cash per taxable dollar of income than one would estimate looking at net income because we expect to use our large domestic NOL to shield us from most U.S. federal tax for many years to come.

I want to stress again, the net operating loss usage and the valuation allowance adjustment line items are non-cash accounting entries only. So despite the large magnitude of the numbers, they really have no affect on the underlying economics of our business.

As you can see, our net income increased to $30.4 million in the fourth quarter of 2007 from $901,000 in the prior year period. Our net income for 2007 was $34.8 million up from $1.8 million in 2006. In both cases the change is primarily due to the valuation allowance adjustment income tax benefit in the United States I have described.

We have also included a pro forma table for your convenience. As you can see, this table is designed to adjust our income statement to show you what our consolidated statement of operations would have been like had we reduced our domestic valuation allowance on December 31, 2006 rather than December 31, 2007.

In this circumstance, there would have been no valuation allowance adjustment tax benefit line item in 2007. It would have occurred in 2006, hence the $30 million adjustment to this line item on the adjustments column of the pro forma page.

We would also have had a $30 million domestic income tax benefit at year end 2006 which would have been reduced by $1.8 million of net operating loss usage tax expensed in 2007, as you can see on the adjustments column for this line item on the pro forma page.

This represents the estimated tax Heska would owe if Heska did not have any domestic NOLs. Obviously in the real world this is a non-cash item.

I think it is worth noting the difficult comparison quarter we have coming up, which presents us with an even more difficult comparison than the fourth quarter 2006.

Just to review, in the first quarter of 2007 the United revenue represented $1.6 million in revenue reported in our OVP segment for products previously shipped and taker pay minimums for 2005 and 2006, which previously had not been paid and was thus a virtually 100% gross margin.

In our Core Companion Animal Health segment, we recognized over $575,000 in sales of our heartworm preventive to Novartis for distribution in Japan.

We also reported $100,000 of research, development and other revenue related to a now completed service contract related to the Allergopharma portfolio in the first quarter of 2007.

These add to nearly $2.25 million in relatively high gross margin revenue we do not expect to repeat in the first quarter of 2008.

Although we have noted this difficult comparison was on the horizon on our earnings calls since we reported this quarter, I thought it was important to highlight it again so no one was surprised. We clearly have our work cut out for us.

Turning to guidance, I think it is important to note as may be obvious that our business is quite difficult to predict and there are clearly no guarantees. I'll say a word to our valuation allowance adjustment, we will do the best we can and point out that this is a particularly difficult time to forecast, that we are working with an all new line of flagship diagnostic instruments and therefore don't have as much history to rely on, as well as a competitive landscape that is constantly changing.

We will continue to pursue opportunities as we see them, which could change our outlook significantly versus the guidance I'm about to discuss.

With that caveat, we are guiding investors to Core Companion Animal Health product revenue growth of 15% to 20%, an increase of approximately $1 million in OVP product revenue and $1.15 million in research and development and other revenue. If you add these up mathematically, our total revenue guidance is in the mid 90s.

We expect gross margins to climb slightly as compared to 2007 and think that 40% is a reasonable target for gross margin in 2008.

We are guiding to operating expenses in the neighborhood of around $31 million with research, development and general and administrative expenses coming in around our 2006 levels and the balance increasing sales and marketing spending.

We are guiding for about $500,000 in interest and other expense net and an estimated tax rate of 38.25% including approximately 36.5% for net operating loss usage income tax expense.

We expect net income of around $3.75 million, which obviously excludes a little over $3.5 million in net operating loss usage.

Based on our currently outstanding shares and options and yesterday's closing stock price, $3.75 million in net income translates to approximately $0.07 in diluted earnings per share on a GAAP basis.

For the first quarter of 2008 we are guiding investors to Core Companion Animal Health product revenue of a little more than $17.5 million, approximately 1.7--excuse me--approximately $4.25 million in OVP product revenue and $250,000 in research, development and other revenue.

If you add these up mathematically, our total revenue guidance is for just over $22 million.

We are guiding for gross margin around 38% with operating expenses around $8 million.

We are guiding for about $150,000 in interest and other expense net and an estimated tax rate of 38.25% including approximately 36.5% for net operating loss usage income tax expense.

We are guiding for a slightly profitable first quarter with net income of a little more than $100,000.

In summary, 2007 was our best year yet. We are excited by our prospects for 2008 and are enthusiastic about the quality of our product offering versus the competition. We have asked our sales management to aggressively pursue opportunities to gain new customers in this area. We hope to be reporting even better results to our investors a year from now.

With that, I'll turn it back over to you, Bob.

Thank you, Jason. With three new and enhanced products in each of the major diagnostic instrument categories we have offered historically, 2007 was a remarkably busy year. We are excited by the launch of our new products and turn from an emphasis on launch activities, sales training and many transition issues toward a focus on optimizing commercial execution.

We are enthusiastic for the business opportunities in 2008 and plan to deliver the best operating results in the history of the company.

Thanks for your attention today.

We appreciate your continued interest in support of Heska. At this time I would like to turn this over to our moderator for purposes of conducting our question and answer session.

Thank you. (OPERATOR INSTRUCTIONS) And our first question comes from Kirk Fox with State of Wisconsin. Please go ahead.

Hi guys. How are you this morning?

Fine, Kirk. Thank you.

If we could maybe start at the top and work our way down a little bit, if you could talk about the economy and if that's having any type of impact on some of your trends.

Kirk, I think, all I can say for sure, all we can say for sure is that historically surveys that have been done in times of economic downturn have indicated the vast majority of pet owners have maintained their same spending habits, same patterns of business at the veterinarian. That's all I can say for sure. Today with all the macroeconomic effects that are described every day out there, we simply don't know.

I think it would be reckless for us now to say that there is an effect or even that there isn't an effect. We simply don't know and wouldn't make any claims in that area.

You're not getting any type of a push-back from your sales guys just saying they're holding off a little bit or any of that nature?

I would just, again I'd say the only data I have is anecdotal and that's non-quantitative and I don't have any reason to believe, even with the aggregate of anecdotal data that we've collected from sales people that there is such an effect.

Okay.

I just want to caveat that really carefully, Kirk, because I just don't want to be reckless and say that there is or there isn't an effect.

No, that's fair enough. And then maybe if we could just look at the three product introductions you guys had last year and what type of I guess traction they're getting in the market place and if that's kind of meeting your expectations.

Certainly. I'd say in general, earlier in the year the i-STAT I launch was a really nice additional product to sell alongside the original i-STAT. It's a product that's well received. The predecessor product was extremely well received by customers and again it remains a competitive and exciting product.

The next product would have been the HemaTrue product launched in July. As you may remember and as Jason even referenced in the call today, we had a backorder situation right off the bat. It was well received. We recovered from that backorder within a month or so and again it's been a well received product. We've had more time in the market with that product and we're very satisfied with the results.

I think the DRI-CHEM would have been our last product we announced in November. The DRI-CHEM product was done in partnership with Fuji Film. Again, the evidence here is primarily anecdotal I'm afraid because it's been such a short time on the market, Kirk.

Right.

With season in, trade shows, sales training, these sorts of things, it's very hard to get a sense of run rate.

Right.

But even, as Jason mentioned earlier, the anecdotal evidence, the sense from the sales force is that it's being well received by customers and frankly even by the sales force; very happy with selling it.

Okay. Sounds exciting from your perspective.

It really is. It's been exciting to get these products launched and we have those launches behind us. And as I go back to my summary comments and say that with these launches, the sales training, transition issues, we're really focused now on optimizing the commercial execution and getting the benefit of--the economic benefit from all those launches last year.

You--I guess within those three products as well, have you--able to gauge I guess kind of new product, new customer wins or new client wins and then also within regards to pricing a little bit, has that been fairly stable or has there been some fluctuation within that as well?

I'm sorry, the last question, the last part of the question was about pricing?

Right.

Okay, so I think that the only comment that I would make in general would be we've had a number of wins. We've had wins certainly with our own customers that know us and know our products and our service reputation. And we've had some wins with competitors as well.

As far as pricing, the--we alluded to or I think spoke directly to the fact that in many cases when we go after our large volume customers, ours or the competition, in many instances we'll see lower pricing on our analyzer placement just to ensure that we have that long term consumable volume, Kirk.

Okay.

So again we've talked about that in terms of a transition area issue and we've talked about it in terms of short term depression of gross margins as a result. Again, just can't emphasize enough that we think these things make great business sense because the real value is in that consumable stream and having that install base is key.

Right, right. Thanks, Bob. And then maybe another question for either you or Jason, just in regard to kind of the gross margin a little bit right there. I know you guys were kind of guiding to the low 40s on an 07 basis and you came in a little bit lower than that and it looks like your 08 guidance is kind of at that 40 number. What type of factors should I look into that and I know you addressed that on the call. Could we ever see that maybe that gross margin number get a little bit higher or how should I look at that on a longer term basis?

I think certainly over the longer term we would expect it to trend back upward.

Okay.

We see some real opportunity with this as Bob just mentioned with some of the new product launches but of course you tend to have lower margin on the hardware placement, the razor, than you do the razor blade, so perhaps counterintuitively if the gross margin comes in a little bit lower than we're expecting, that probably means we're actually outperforming our expectations with the placements. It actually would be a good thing in the short term.

Okay.

As you--as those instruments are used, especially if we can get some of the larger volume clinics, absolutely you're going to see the gross margin I would expect trend upwards over time.

Okay. And then one last question and I'll hop back in the queue if there's any other questions. On the Novartis side, what--how do we look at that from I guess--I'm trying to quantify that from a revenue and profitability standpoint. What are we going to be--

Regarding the Japan shipment?

I'm sorry?

Novartis Japan?

Right.

Try hard.

Yeah, that was a little more than $575,000.

And then the margin on something like that?

Oh, you know I'm not going to go there.

The try.

Okay. I'll hop back in if there's anybody else.

Thanks Kirk.

Thank you. (OPERATOR INSTRUCTIONS) And we have a followup from the line of Kirk Fox. Please go ahead.

Very good.

Yeah, just need one last question, on the Fuji relationship. Can you tell me how that's going, if there's any new advancements there or if that's pretty much status quo since we last spoke?

I would say consider it status quo since we last spoke. It's been a very robust relationship. We've very happy with the product, the alliance, the cooperation and just virtually every dimension of the relationship. But beyond that, no update.

Okay.

And I was off to maybe a little slip in my last answer on margin. I will say, Kirk, it was an above average margin to, that we sold that heartworm preventive due to Novartis.

Okay. Good to know. Thanks Jason. Thanks Bob.

You're welcome. Thank you.

Thank you. And gentlemen, I'm showing that there are no further questions. I'll turn it back to you for closing comments.

In the event there are no other questions, thank you and again thank you all for your interest in Heska and for taking the time to join us today. Goodbye.

Thank you. Ladies and gentlemen that will conclude today's teleconference. We do thank you again for your participation and at this time you may disconnect.