Heska Corp (HSKA) 2013 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Heska Corporation's fourth quarter and year-end 2013 conference call. At this time, all participants are in a listen-only mode. Following the presentation we will conduct a question and answer session and instructions will be provided at that time.

(Operator Instructions) I will now turn the conference over to Mr. Jeff Stanlis, with Hayden IR. Please go ahead.

Thank you all for joining us today on our conference call. On the call today with us are Heska Corporation's Chair and Chief Executive Officer, Bob Grieve; Kevin Wilson, Heska's President and Chief Operating Officer; and Jason Napolitano, Heska's Chief Financial Officer. We appreciate having the opportunity to review the results for the fourth quarter of 2013 and comment on our competitive position in 2014 and beyond.

Prior to discussing the results, I would like to remind you that during the course of the call, we may make certain forward-looking statements regarding future results, events, or future financial performance of the Company. We need to caution you that any such forward-looking statements are based on current beliefs and expectations and involve known and unknown risks and uncertainties, which may cause actual results and performance to be materially different than what is expressed or implied by those forward-looking statements.

Factors that could cause or contribute to such differences are detailed in press releases and/or in annual, quarterly, and 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's call.

I would now like to turn the call over to Dr. Bob Grieve, Heska's Chair and Chief Executive Officer to provide opening remarks. Bob, congratulations on a record quarter.

Thank you, Jeff. I would also like to thank everyone for joining the call today. As we noted in the press release that summarized our results, this was a very strong quarter for Heska.

The results prove that we are right back on the right path. And it validates the timeline we provided in February of 2013, when we announced the majority acquisition of Cuattro Vet USA, an imaging and cloud veterinary medical data hosting technology company. Specifically, at that time, we said that the first quarter of 2013 was a reflection of prior commercial infrastructure, leadership, strategy, and tactics.

We said that Cuattro Vet USA acquisition would materially change our trajectory, providing new product lines, new bundling opportunities, new technologies, and significant new talent, all of which would be critical to fundamentally reshaping Heska.

We said then that Q2 would be a quarter of cleanup and reorganization, and it certainly was. We suggested that investors should begin to see the progress associated with the new commercial leadership, infrastructure, strategies, and sales programs in Q3. And the results we reported in November were entirely consistent with that narrative, demonstrating that the worst was behind us and we were on the right path.

Throughout this transformation, we also stated that the fourth quarter would be the clearest indication of our progress. We said the fourth quarter would show seasonal fourth quarter strength in both revenue and profit. Today, we are reporting that results are directionally as we predicted.

For the fourth quarter of 2013, Heska achieved strong topline growth, and record quarterly revenue, bolstered by strong analyzer placements. Even as we grew revenue, we expanded gross and operating margins and generated significant profitability in the quarter.

Reaction to our new subscription type sales model has been very strong and reception to our new Element POC handheld analyzer has been encouraging. We firmly believe our business has never been on a more solid footing.

We entered 2014 with tremendous momentum, a superior suite of differentiated and attractive products, a sales strategy that matches the needs of our customers, and a disciplined direct sales organization in place to expand our market share.

The commercial strategy for the companion animal business was notably enhanced with the addition of Kevin Wilson, the founder and CEO of Cuattro Vet USA, who joined Heska as President and Chief Operating Officer this past year. He has spearheaded the restructuring of our commercial efforts. With Kevin's experience and success in commercialization, he is the clear choice to lead Heska's growth into the future.

With this in mind, immediately following the filing of our 2013 Annual Report on Form 10-K, Kevin Wilson will assume the role of Chief Executive Officer and President. And I will transition to Executive Chair, where I will support Kevin and the executive team over the next several years by providing institutional and industry knowledge, helping on a limited number of strategic initiatives, managing areas of governance, and continuing as a lead person on our investor relations for the near future.

We are particularly proud of the financial results we are reporting today. Our consolidated fourth-quarter revenue was $23.5 million, the highest quarterly revenue level in our history, and an increase of 27.4% from the $18.5 million reported for the fourth quarter of 2012, a period which had benefited from a $3 million-plus nonrecurring stocking order to MWI.

Given that all main revenues in Q4 2013 flowed through to end-user customers and not to channel stocking inventory, growing revenues by 27.4% year over year is even more impressive.

In Q4 2013, gross profit margin increased year-over-year, continuing the positive trend after the second quarter write-offs that impacted our cost of goods sold. We maintained our focus on controlling our operating expenses with year-over-year increases associated primarily with the consolidation of the imaging business expense that was not present in 2012.

In summary, the majority acquisition of Cuattro Vet USA has delivered on our expectation as communicated to investors.

Beyond the performance of Cuattro Vet USA, this acquisition was a catalyst for us to fundamentally reassess how best to structure the Company for the long-term. We use this opportunity to develop the strategy and scope of the new Heska and this initiative has resulted in a new, much stronger Company.

Today, Heska has a best-in-class digital radiography, ultrasound, and cloud-based diagnostics data archival product suite. These products are complementary to Heska's own advanced diagnostic products. Taken in the aggregate, Heska's comprehensive offering is key to acquiring the interest and loyalty of the veterinary market's most coveted high-volume veterinary practices.

By combining with Heska's existing line of chemistry and hematology technologies, as well as our latest blood gas and electrolyte entry, we believe we now have bundling and cross-selling opportunities. The power of robust and complementary product areas should give us better access to even better customers.

Soon after the majority acquisition, Kevin Wilson began a comprehensive review of our sales strategies, costs, structure, and go to market offerings, followed quickly with a commercial integration and turnaround plan.

On the second quarter of 2013 conference call, we identified a number of fundamental changes we have made, including significant cross-training, reorganization of our sales force, as well as new bundling programs and opportunity-sharing between product lines. The combination of the two companies' marketing and sales efforts resulted in the identification of annual savings of approximately $1.9 million through synergies and re-prioritization.

In the last call, in November, we spoke about the progress we have made with placements as a result of a new blood analyzer placement strategy, which we rolled out in early June. The progress accelerated in the fourth quarter. While we have continued to replace these products with a variety of strategies, the new focus has been on a rental reset approach, which is analogous to a subscription model with no upfront costs for the analyzer, simple monthly payments, and access to discounted consumables. This strategy has been very well received by high-volume veterinary practices and we are seeing increased velocity in those placements.

By getting product, message, culture, costs, sales discipline, and hence this value proposition narrative right, we are now noting acceleration in analyzer placements across multiple technologies, even with fewer field sales positions due, in large part, to recruiting some exceptional talent with experience in capital equipment sales.

I think it is helpful to show the sequential progression of our placements. During the second quarter, we placed through various programs 153 total analyzers. In the third quarter, we placed 236 total analyzers. During the fourth quarter we placed 366 total analyzers, including our newest platform, the Element POC.

This total impressive for represents direct sales placements with no distributor stocking or participation. Clearly, productivity in outside sales continues to be strikingly improved.

In the fourth quarter, we launched our newest analyzer, the Element POC, or EPOC. We are very excited about this opportunity and this is a product category we have been working on for some time. The Element POC is a handheld wireless analyzer that delivers rapid blood gas, electrolyte, metabolite, and basic blood chemistry testing.

The analyzer has Wi-Fi and Bluetooth connectivity and it employs a single easy-to-use test card that can be stored at room temperature. We like the potential sales synergies as this Element POC complements our Element BC and HemaTrue analyzers that provide blood chemistry and hematology analysis, respectively.

We announced this product in mid-September, launched it widely in October, and it has been extremely well received at this point as Element POC wins over new entrants and existing users of other offerings in the market.

I will now turn the call over to Jason. He will provide detailed information on our financial results for the fourth quarter of 2013.

Thank you, Bob. The fourth quarter of 2014 was a record quarter for Heska. The $23.5 million in revenue we reported was the highest quarterly result in Heska history. The $2.8 million in operating income we reported was the highest quarterly result in Heska history.

In the fourth quarter of 2013, our record $23.5 million was over a 27% increase from $18.5 million in the prior year period. Core companion animal health revenue was $20.4 million, an increase of nearly 30% as compared to $15.7 million in the prior year period. The largest factor in the change was $6.1 million in revenue from Heska Imaging, which occurred in the fourth quarter of 2013, but not the prior year period.

An additional factor in the increase was greater revenue from sales of our canine heartworm preventative to Merck Animal Health, which was somewhat offset by lower revenue from domestic sales of our heartworm diagnostic tests, where competition remains fierce.

For Heska Imaging, the seasonal peak we saw in the fourth quarter of 2013 is normal for this type of business and we anticipate this seasonality to repeat going forward with the fourth quarter anticipated to be Heska Imaging's strongest quarter, and by extension, Heska Corporation's strongest quarter.

We believe the fourth quarter of 2013 reported financial results of Heska imaging was particularly strong, as there were product volume discounts and favorable allocation changes which occurred in the quarter which may not be relied upon to repeat in future quarters.

Revenue in our other vaccines, pharmaceuticals, and product segment, or OVP, were $3.1 million in the fourth quarter of 2013, an increase of nearly 13% from $2.8 million in the prior year period.

Greater sales under what used to be our contract with AgriLabs, somewhat offset by lower sales of our bovine biologicals were responsible for the increase.

For the full year 2013, revenue was $78.3 million, an increase of 8% as compared to $72.8 million in 2012. Our 2013 Core Companion Animal Health segment revenue was $66.4 million, an increase of 8% compared to $61.5 million in 2012.

$12.7 million in revenue from Heska Imaging, which occurred in 2013, but not 2012, was the largest factor in the increase. Greater revenue from sales of our canine heartworm preventive to Merck Animal Health also contributed to the increase. These were somewhat offset by lower revenue from domestic sales of our heartworm diagnostic tests, our chemistry instruments, our hematology instruments, our instrument consumables, and our international allergy business.

Our reported chemistry and hematology instrument revenue was affected by greater rental base or operating lease placements, which generally lower reported revenue in the period of placement as opposed a sale or capital lease, but provide for ongoing revenue similar to a subscription model. 2013 OVP revenue was up 6% to $11.9 million from $11.3 million in 2012. Greater revenue from sponsored research and development activities was a key factor in the increase.

We generated $10.4 million in gross profit in the fourth quarter of 2013, a $3 million increase as compared to $7.4 million in the prior year period. Heska Imaging generated $3 million of gross profit in the 2013 period but none in the 2012 period, as Heska Imaging was not consolidated into our financial results at that time.

Gross margin, that is gross profit divided by revenue, was 44.3% in the fourth quarter of 2013, up over 3 percentage points from 2012. Product mix as well as a particularly strong Heska Imaging gross margin were key factors in the improvement.

Heska Imaging had a fourth-quarter gross margin of nearly 50%. This was in part due to nearly $200,000 in volume-based rebates. We believe 35% is a reasonable target gross margin for Heska Imaging in the coming years, but of course are happy whenever we can exceed this for a given quarter.

For the full year 2013, gross profit decreased by 2% to $30.6 million from $31.1 million in 2012. The 2013 result included $5.1 million from Heska Imaging with no corresponding gross profit in 2012.

Gross margin was 39.1% in 2013, down over 3.5 percentage points from 42.7% in 2012. A shift in product mix to relatively lower gross margin product areas, as well as a large second quarter reserve, which I will call the Roche reserve, related to our former blood gas analyzer discontinuation and a relatively lower second quarter reserve, which I will call the SpotChem reserve, which is related to our former chemistry unit. In the aggregate, the Roche reserve was about $1.1 million and the SpotChem reserve was just over $450,000.

In addition, we had approximately $400,000 in charges related to separation charges for former employees in 2013.

In the fourth quarter of 2013, selling and marketing expenses were $4.9 million, including $1.3 million from Heska Imaging. This represented an increase of just under 13% from $4.3 million in the prior year period.

2013 selling and marketing expenses were $19.4 million, including $3.3 million from Heska Imaging. This was an increase of 6% as compared to 2012 expense of $18.3 million. The increase from Heska Imaging was a major factor in the increase in both cases, somewhat offset by lower spending and increased discipline in travel and compensation for members of our sales force, and lower, more targeted marketing expenses and advertising and other third-party services.

In the fourth quarter of 2013, research and development expenses were $303,000, including $60,000 from Heska Imaging. This was an increase of $62,000 from $241,000 in the previous period.

2013 research and development expense was $1.5 million, including 75% in officer expenses. The contribution of Heska Imaging -- excuse me -- including 75% in Heska Imaging expenses. The contribution of Heska Imaging in the 2013 period, but not the 2012 period, was a factor in the change in both cases.

In the fourth quarter of 2013 we had $2.5 million in general and administrative expenses, including $214,000 from Heska Imaging. This was an increase of 16% from $2.1 million in the prior year period.

In addition to the new spend at Heska Imaging, greater IT spending and separation payments were factors in the change. 2013 general and administrative expenses were $11.1 million, including $1 million from Heska Imaging. This was a 15% increase as compared to $9.6 million in 2013.

In addition to the new spend at Heska Imaging, separation payments earlier in the year, during our transition related to former employees, were a factor in the change. 2013 depreciation and amortization was $2.5 million, up $800,000 as opposed to $1.7 million in 2012. The difference primarily related to increased depreciation and amortization related to Heska Imaging.

We believe 2014 depreciation and amortization will be around $3.1 million.

Operating income was $2.8 million in the fourth quarter of 2013. This is the highest quarterly operating income in Heska's history of over 25 years and is over $2 million greater than the prior year period result of $720,000.

We had an operating loss of $1.4 million in 2013 as opposed to operating income of $2.2 million in 2012. Net income attributable to Heska Corporation is a line item that is inclusive of interest and other income, tax expense, and net income attributable to noncontrolling interest.

The latter represents the income attributable to the unitholders in Heska Imaging other than Heska Corporation. Due to Heska Imaging's LLC structure, this income is not taxed at the corporate level and, therefore, the income reported on our consolidated statements of operations is untaxed.

Fourth quarter 2013 net income attributable to Heska Corporation was $1.2 million, an increase of over $780,000 as compared to $389,000 in the prior year period. We had a net loss attributable to Heska Corporation in 2013 of $1.2 million as compared to income of $1.2 million in 2012. We expect to return to profitability in 2014.

For example, our November 2013 budget process showed us generating $2.5 million in operating income in 2014, a level which we believe remains achievable.

Before I turn the call back over to Bob, I think it is worth setting some expectations with our investors. We will have no further comments on today's call regarding Heska's anticipated future financial performance or guidance beyond what we have already said today. We do not anticipate that we will be updating any forward-looking statements or giving guidance in the near-term.

Since year-end, we have carefully arranged and provided for a CEO transition. We have completed our first audit with the majority position in Heska Imaging and we have begun preparations to design documents underlying the upcoming stockholders votes for May.

As Heska qualifies as a smaller reporting company, SEC rules give us until March 31 to file our 10-K. We believe it is intelligent to use these rules to our advantage to ensure we file documents in as accurate and complete a way as possible. It is one of the advantages of being a smaller company.

Investors should anticipate that we will continue to approach our SEC filings and other disclosures consistent with this approach going forward. We anticipate filing our 10-K this coming Monday with our proxy statement being filed soon thereafter.

In summary, this quarter we were pleased to see the early financial results from some of the investments we have made in our business. We had a very strong fourth quarter from Heska Imaging, as we had hoped. We improved our gross margins versus last year. We maintained discipline with our operating expenses.

The result: Heska posted its highest quarterly revenue and highest operating income levels in its 26-year history. We are eager to build upon this success in the coming months and years.

With that, I will turn the call back over to you, Bob.

Thank you, Jason. Clearly, our progress is encouraging and we enter 2014 with new strength. But beyond the near-term financial results we announced two important relationships in 2013 that further solidify our business.

In the second quarter 2013, we announced a new relationship with Elanco, the animal health business of Eli Lilly. At that time, they purchased certain cattle vaccine seeds essential to the development and maintenance of cattle vaccines. Subsequently, and as we have disclosed in our SEC filings, 11, Elanco purchased the rights to distribute Heska proprietary cattle vaccines from a previous distributor, AgriLabs.

Investors should appreciate the Elanco commitment to that cattle vaccine business and the importance of our Des Moines manufacturing facility to manufacture those vaccines for the foreseeable future. We are very enthusiastic about this relationship and we expect to withstand the areas of mutual interest in our OVP business.

In the fourth quarter of 2013, we announced a 10-year extension to the agreement with Merck Animal Health, where they will continue to market themselves to [try our plus] pharmaceutical that we registered with the FDA and manufacture in Des Moines. We anticipate steady growth in that product line over the 10-year term.

In summary, 2013 was a transition year, as we suggested it would be. But we completed this transaction quickly, and end-of-the-year showing meaningful progress in delivering significantly improved financial results. I am pleased that we achieved what we said we would and proud of the progress we have made.

As we look into 2014, we are very excited about growth opportunities, our OVP business is on very firm footing with long-term agreement in place with industry-leading partners. There will be no new products introduced -- excuse me. There will be new products introduced in our companion animal business, both this year and well into the future.

Our executive sales team has orchestrated a reorganization of how we go to market in the companion animal business in terms of a lean commercial organization, results-driven personnel, and innovative sales programs. As we drive additional products through this sales machine, we should see continued growth and incremental profitability thanks to the efficiency of our talented sales organization. I firmly believe that our sales strategy is precisely the solution veterinary practices are looking for today. And our comprehensive offering provides bundling opportunities that our competitors cannot match.

Finally, and very importantly, the entire Board, including me, believes that Kevin will be a great CEO to effectively lead a rapidly growing Company. I am more excited about the future of Heska than I have ever been, and I trust that our shareholders will share this enthusiasm.

With that, I now turn the call over to Kevin.

Thank you, Bob. I would like to begin by saying how excited I am to be working with Heska and with such an experienced and talented team. I am honored and humbled by the trust put in me by that team.

I think that Bob and Jason have covered our progress to date in sufficient detail, so I would like to make a few quick comments and observations, as I introduce myself to our shareholders.

I am encouraged by the progress we have made since February of last year. During our extensive month-long diligence that we completed prior to the Heska/Cuattro transaction, my sense was that Heska was an underappreciated diamond in the rough. Today, with the benefit of a full year of living in the details, and working directly alongside the people, customers, and suppliers of Heska, I am even more confident in that original assessment and I am very pleased to become the new CEO of Heska.

Heska has exceptional people. We have superior infrastructure, efficient systems and processes, marquis assets, new and refreshed product lines, direct and channel access to the market, multiple early mover positions that are hard to duplicate or dislodge, and Heska has a solid reputation for superior service and training, and long-term key partnerships with technology partners like Fuji and others.

These Heska strengths complement the disciplined sales and marketing culture of the Heska Imaging team from Cuattro, and the combination is as exciting as any I have seen in my 20-some-odd years in veterinary medicine. We will keep adding to this wonderful foundation.

We will get product mix features and pricing right, with new offerings and refreshes of our currently successful products. We will drive Heska's compelling narrative inside veterinary hospitals person-to-person to earn business by demonstrating value and performance. We will explore partnerships that make sense.

We will focus on efficiency and pass the benefits of that efficiency on to customers. And we will do these things with the daily discipline to stop or optimize old things, to start new things, and to improve on all things.

In the first three quarters, I am encouraged to see that some of our initiatives are gaining traction and showing up in the numbers. It is a good start, but we are in the early innings and, as with all things, I suspect we will see up and downs. We have fierce competitors and we will have to be at our best each day to win.

We, too, are fierce competitors and we look forward to winning for our shareholders and for our customers. Thank you for your attention today and we appreciate your continued interest in and support of Heska.

At this time, I would like to turn the call over to the operator for the purposes of conducting the question and answer session.

(Operator Instructions) Ben Haynor.

Congrats on the quarter. Just had a few quick ones for you. I know a couple of months ago -- a few months ago now you announced this allergy IGE serum testing. How has that been received thus far? And any commentary you could offer there would be helpful.

I would say it has been very well received. There is a redesign of the test that then complemented the recent -- relatively recent launch of the ALLERCEPT therapy drops, and we have seen very positive synergies between the two. We more formally rolled back out in roughly February at the Western Veterinary Conference, and I would say the uptake has been striking. Our allergy business is growing and we are, again, recognized for being the leader -- the market leader in that area.

Great. That's helpful. And then, on the 366 unit placements, I am assuming that was also a record by quite a bit. Was that a record versus the previous quarter or was there another quarter historically that maybe you had more placements than Q3?

Frankly, Ben, I wouldn't know if it was a record quarter over our history. We have had lots and lots of exciting product introductions and we don't really have certifiable numbers that we would be comfortable with in that regard. But I think, just if you look at the recent velocity, it certainly should be encouraging.

Okay. Great. And then, regarding the current quarter, Q1, have you guys seen any impact from some of the difficult weather that we have had in the northern parts and, really, all over the US? And any commentary on how Q1 is shaping up would be helpful.

We are not going to give really any color on Q1, Ben. That will come soon enough, probably the May earnings call. And I think, as to weather, I think you have experienced with us before, that probably fits in the same category as the global financial downturn.

These things may affect business in general. We don't see that as being sort of a reason to temper our comments or, for that matter, our expectations about what we do. We're not big enough to create big denominators or numerators globally or even nationally there.

And I think our view is that, hey, no matter what happens, we have got to create growth, period. And I hope that satisfies your question.

Sure. That will do it for me. Thanks for taking the questions.

Jon Block.

Really nice quarter. Maybe just my first question, certainly your big numbers imply some market share gains, especially in light of the other guys having reported. And so can you just talk at a high level of where you are seeing success? I mean, you talked about the strategy that is resulting in some of the big numbers, but where are you having a bigger impact when I think about some of the other in-clinic competitors out there?

I think the biggest impacts that we are -- think about it two different buckets. Think about it in terms of the new product innovations. We talked about Element POC. That is clearly, as we said, very well received and displacing share and maybe even growing share -- growing the market overall. It is a great product and that has resulted in some of that success.

And then this -- I think the go to market strategies that Kevin introduced, now as we said initially in early June, those are getting a ton of traction. They are very well received by our customer. So I think those are the key things to think about.

Okay. Great. And then, you also referred to some new products this year and next year. And if I think back, I remember you had sort of a plan to get a little bit more aggressive in the rapid assay market. And you were working on something there. Can you provide an update of the timing of when you would expect that solution to come to market?

Sure. As I have said in the past, and others are even -- just for the sake of others that are less familiar than with our story than you are, John, we had described an alliance with Rapid Diagnostics some years ago -- believe it was in 2011, thereabouts, April. And we have said that that process has been slower than we would have expected.

We have said that it's really nice technology, but neither we nor investors should model any expectations in the near-term. And I would stick with that narrative today.

In terms of other product offerings into the future, as I said, there will be new products. Again, consistent with our past practices, we won't be describing what those are when they are going to hit. It doesn't help us competitively.

As you would expect, we have our friendly competitors on this call along with you today. So it gives us no great advantage to tip our hand to them and, thereby, no great advantage to shareholders.

Got it. And maybe one last one, and Ben sort of went down this previously, but maybe just at a high level if you can talk to us about you have seen with the weather in the past. In other words, is it something that just creates noise and most of the cancellations come back in a subsequent week or subsequent weeks? Or is it something where you feel some of those cancellations just due to the nature of the business permanently go away? Thanks, guys.

I just don't they think -- again, I don't have much more to say about weather. We don't consider the weather to be much of an impediment to our business and, again, not a heck of a lot more to be said there. We will let others in the industry, others in the business, and our other competitors opine on weather.

Fair enough. Thank you.

Nicholas Jansen.

Thinking about the -- great quarter, by the way; thinking about the success you have seen on the instrument side over the last three quarters or the building momentum there, how do we think about the pull-through in terms of the size of the clinics that you are penetrating here? Just trying to get a sense of, is there a typical number where you could say that each placement pulls through a certain amount of consumables? Just trying to get a sense of how that should impact the revenue trajectory going forward.

I don't think we have had detail at that level, certainly not detail we would be -- that would be really comparable representative as something that you could model or think about into the future. It has been across the board.

We have emphasized big customers, for sure, here on this call today. We have talked about been a couple of times because of their obvious importance. But it is also -- these selling programs have really resonated with smaller clinics as well. Kevin, would you like to add anything to what I have just said?

Yes, Nicholas, it is Kevin. The short answer is all the customers are valuable. We focus on more details, I think, than the Company has in the past in terms of what is the value of the slide pull-through.

So, all customers, in terms of slide volume, are not created equal. And we have dived deeper into the numbers over the past several quarters to understand which of our opportunities are higher-volume customers.

That said, we don't have a strategy that has been articulated by others in the market to target just particular segments. The simple fact of the matter is, as a two-doctor practice will grow up someday possibly to be a five-doctor practice. And we very much want that business as well as the 15-, 20-doctor multi-site practice. So we target them all.

One of the things, too, that maybe provide a little bit of color to -- our strategy is protecting and taking fabulous care of the customers that we do have. And I think what you will see is that our sales force is focused -- intensely focused on what I would call net subscriber gains. And it is really something that we are driving throughout the entire Company, keeping the valuable customers you have while adding others.

And if you look at that, we believe that has to be market share gain. Obviously, all of those customer gains can't be brand-new clinics.

That is actually very helpful. And that kind of thinking about, since you have added since Heska Imaging, how many of these customers -- or in terms of placements are kind of bundled together with some of the DR stuff that you guys are doing on Heska Imaging? I am just trying to get a sense of how valuable that has been into driving some of the success you have seen thus far.

It's been successful, but it is early. So we continued to get better at that and we continue to leverage that. The advantage of the Heska Imaging piece is that we do have very high dollar, very important, very close relationships. It is a very high dollar investment, and you will find we firmly believe it is best-of-breed.

You will find that the Heska Imaging installs tend to very much be in the very best clinics in the country, which has opened the door for bundled sales and for winning customers for chemistry hematology. We are seeing something very similar even in our blood gas analyzer, the Element POC, which we believe is best-of-breed as well. So bundling is going well. It can always be better.

Okay. And then, lastly, thinking about the balance sheet, just your desire to maybe pursue more tuck-in M&A under your leadership relative to the old, how should we think about your view on cash generation and deployment over the next two years?

I would say opportunistically.

All right, guys. Thanks. Bob, congrats, and Kevin as well.

Ian Corydon.

On the analyzer placement sale, I am just curious how much of that growth might be driven by the element POC versus legacy products.

I don't know that we want to break out percentages. It was meaningful. We also see that selling an Element POC opens the door for a full lab suite.

So, breaking out that in terms of analyzers as we launch new features for different analyzers and even whole new analyzers, you will see spikes in particular segments. But I don't think that we are going to be breaking that out on a go forward basis.

I think qualitatively we would also emphasize that we have said here on the call and have said in the call prior, we saw the opportunity to displace an existing product line that was going out of service -- the competitive product was going out of service, and we certainly had success there in the fourth quarter in swapping that share out.

Got it. And what inning -- I imagine it's early, but what inning are you in, in terms of getting that product in front of potential customers? And then on the consumable side, are the gross margins for Element POC consumables materially different from other consumable margins?

They are consistent in terms of margins. And in terms of the inning, maybe the second inning.

Got it. Last question was just a clarification on Heska Imaging gross margin. You did mention -- I think that was unusually high in Q4. I just didn't catch the commentary around what might have driven that and if there is any longer lasting impacts from that, or if you go back to more like the -- I think you said a 35% run rate gross margin going forward.

One of the impacts we did call out was about $200,000 in volume-based rebates that we received that was built into the fourth quarter. And we think 35% is the right long-term target for that business.

You might see quarters -- we have got a new product launch -- like this year, we had the [slate for] -- I think it was launched in December. It is a very well received product. You might see, here and there, quarters where you are higher than that 35%, but I think when you look at a long-term trend, that is what you should be thinking.

Thank you. That's all I had.

Michael Needleman.

A question -- in terms of the instrument sales, how do you think about -- you just mentioned you were in the early innings. But asking it a different way, have you looked at the installed base that you currently have and the success of the new sales versus new customers? And can you kind of generally talk about what that share is that you have gotten off of the last three quarters, or care to make any kind of commentary on installed base versus new customers?

I guess my commentary would be -- this is Kevin, by the way. My commentary would be we are focused on both. It occurs to me that, if you sell 1000 units, but you lose 1000, you gain nothing. And then depending on the mix of what you have lost and what you have gained, you may have lost.

And so we have a dual-pronged approach where we have taken very good care of our existing country customers. And in some cases, they have agreed to work with us for many years in the future. And we think that existing customer base is far more protected than it has been in the past.

With that foundation and that continued focus, touching those customers on a regular basis and making sure that they stay with Heska, we can then turn our field sales force into acquiring new business, new opportunities, and focus on taking market share.

I guess, maybe a little bit -- and I appreciate how you answered that, but is there any direction you can talk about the acceptance of new customers versus the installed base? Are you finding more success initially with your installed base?

I don't think so, actually. I wouldn't say more or less success. It is a compelling offering.

I mean, look, we provide very accurate numbers. We provide very compelling pricing and value. And our existing customers appreciate that and customers that -- you could use competitive analyzers are also appreciating that. And we are having success in both.

I'm going to ask just one last question, maybe to try to get a better understanding. Your base of customers, in your opinion, what is the average age of their current equipment that they have?

I don't have that number at my fingertips. I am sure we could get that. Obviously, we track those assets, but I don't have that at my fingertips.

Thank you so much and congratulations on a good quarter.

Nicholas Jansen.

Just one follow-up for Jason. I think you mentioned something in the prepared remarks -- I just want to make sure I heard it correctly -- surrounding your budgeting process from November, about operating income. Can you just maybe rehash that again?

Yes. We said $2.5 million of operating income is what our budget showed, and we believe that remains a reasonable expectation and target for our team.

Great. Thanks.

We also said, just in case you missed it, we [saved] about $3.1 million in depreciation and amortization this year.

There are no further questions at this time.

Okay. That is great. If any of you have no further questions, I want to thank you all again for your interest in Heska and for taking the time to join us today. We look forward to share our progress with you in the coming quarters. Goodbye.

Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation. You may now disconnect your lines.