愛德士 (IDXX) 2004 Q3 法說會逐字稿

Good day everyone and welcome to the Idexx Laboratories 3rd quarter 2004 earnings analyst conference call. Just a reminder, today's call is being recorded. For opening remarks and introductions we will now turn the conference over to Mr. Conan Deady, Vice President and General Counsel for Idexx Laboratories. Please go ahead, sir.

Thanks, Michael. Good morning everyone and thank for joining us on the call this morning. As usual, I am going to start with our Safe Harbor language which is a little longer today so please bear with me. I will then turn it over to Merilee Raines, our Chief Financial Officer, who will review the financial results. John Ayers, our CEO will then add some further commentary on the quarter and our business and then we will open the call up to questions. Statements that we may make on the call regarding management's future expectations and plans and the company's future prospects constitute forward-looking statement for purposes of the Private Securities Litigation Reform Act of 1995. Our actual results could differ materially from our expectations. Factors that could cause or contribute to such differences include the company's ability to develop, manufacture, introduce and market new products and enhancements to existing products, the effectiveness of the company's sales and marketing activities, the company's ability to develop, license or obtain rights to new technologies, the company's ability to identify acquisition opportunities, complete acquisitions and integrate acquired businesses, the impact of competition and technological change, the effect of government regulation on the company's businesses, the impact of distributor purchasing decision on sales of our products that are sold through distribution, changes or trends in veterinary medicine, the company's ability to obtain patents and on intellectual property protection for its product, successfully enforce intellectual property rights and defend itself against third party claims, disruptions, shortages, or pricing changes that affect the company's purchases of products and materials from third parties including from sole source suppliers, the effect of government regulatory decisions customer demand pricing and other factors on the realizability of the company's inventories.

The company's ability to manufacture complex biologic products, the effect of international operations including from currency fluctuations, and a loss of key employees. A further description of these risks and uncertainties is contained in our quarterly report on form 10-Q for quarter ended June 30, 2004 which is on file with the SEC. In addition, any forward-looking statements represent our estimates only as of today and should not be relied upon as representing our estimates as of any subsequent dates. While we may elect to update forward-looking statements at some point in the future we disclaim any obligation to do so. Merilee, I will turn it over to you now.

Thank, Conan.. I think you succeeded in lengthening the portion of your presentation to exceed both mine and Johns combined.

That's my goal.

Good morning. As Conan has mentioned as we usually do I would like to start off by reviewing the financial results for the 3rd quarter and providing the outlook for the 4th quarter. John Ayers will then provide some commentary on the business including our guidance for 2005. As we indicated in our press release this morning, our fully diluted earnings per share was 56 cents on revenues of $134.1 million, year to year increases of 27% and 12% respectively. The earnings include 2 cents related to the revision of an estimate for a third party claim which we settled in the quarter and EPS adjusted for were 54 cents, a 23% increase and 5 cents above guidance and street estimates. First looking at revenues. As mentioned, total company revenues of $134.1 million marked a 12% increase over the same period last year, or 9% on a constant foreign currency basis. Our Companion Animal Group revenues of $108.8 million grew 12 percent, or 10% adjusted for foreign exchange. Within this segment sales of point of care rapid assays were $23.2 million, an increase of 9% or 8% currency adjusted led by solid performance in our canine product line. The balance of our inclinic diagnostic offering, Idexx lab instruments and their related consumables, accessories and services, totaled $47 million for the quarter, an increase of 5% over the 3rd quarter of 2003. Within instruments and consumables, consumable reagent sales were $32.6 million, up 5 percent, or 2% adjusted for currency. Instrument sales were $8.5 million, with LaserCyte placement of 304 and continued strong performance over the balance of our suite of instruments. With the average selling price for the LaserCyte system remaining in excess of $17,000, we are very pleased with the continued progress we have made to achieve a positive customer experience with the system under an improving cost structure and I will talk more about that in a moment. We project 4th quarter LaserCyte placement at 400 to 450 for total year installations of 1,350 to 1,400.

As you know a significant portion of our rapid assay test kits and instrument consumables are sold through distribution in the U.S. Distributor inventories remain between three and four weeks based on forward-looking demand which is where they have been over the last several quarters. Relative year to year changes in inventories did not significantly impact reported growth percentages of the product lines. Laboratory services of $28.8 million increased by 24% from the 3rd quarter of 2004 -- of 2003, excuse me. Lab acquisitions completed over the course of the last 12 months contributed 6% to revenue growth and foreign exchange contributed another 3%. In addition we performed an unusually large amount of work for a contract research organization which contributed 2% to growth. So adjusting for these factors, growth in lab services was about 13%. Our computer systems product line grew 11% to $5.8 million and our pharmaceutical products contributed $2.6 million to revenues. The water business posted another strong quarter with sales of $14.2 million, which is 14% growth on a reported basis and 10% adjusted for currency. The food diagnostics segment reported revenues of $11.1 million which is an increase of 6% or 2% currency adjusted, led by the performance of our production animal services line with revenues of $7.3 million, 15% growth as reported or 10% on constant currency. International revenues of $40.1 million were 30% of total company revenues. As mentioned, stronger international currencies year-over-year contributed about $3 million or just over 2.5% to top line growth. For the 4th quarter, we expect revenue to grow year to year by about 8% to 134 to $135 million. This is somewhat lower growth than we experienced in lower quarters is due to a few factors. First, a tough compare for rapid assay kits due to higher 2003 sales related to the temporary absence of a competitor from the market in 2003. Second, less benefit year to year from currency and, third, a leveling off of the LaserCyte instrument revenue contribution as we get further from launch. This 4th quarter revenue projection would also put us near the lower end of the guidance for the full year 2004 than we provided in our 2nd quarter call of 538 to $542 million.

Due to somewhat lower revenue expectation from our computer systems computed radiography, LaserCyte and pharmaceutical product lines. Turning now to other components of the P&L, the total company gross margin was 53% as reported, or 52% after adjusting for the settlement of the third party claims. This performance was two to three points above our guidance and is nearly a four point improvement over the 3rd quarter of 2003. A significant factor contributing to the better than expected performance and year-over-year improvement is our improved performance in manufacturing and servicing LaserCyte instruments. For example, we were able to reduce manufacturing and service costs through software enhancements, point of service upgrades to hardware and initiatives to more efficiently rework and use component parts. These efficiencies allowed to us achieve better margins on systems sold during the quarter and more significantly, to reduce our provision for warranty expense on our install base. In total year on year LaserCyte contributed over 1.5 points of gross margin improvement. In addition to LaserCyte efficiencies, the favorable impact of exchange and volume leverage contributed to the margin improvement over 2003. As we look forward to the 4th quarter we expect the gross margin to drop back to the 49 to 50% range. This will result from several factors. First, while we expect that we will maintain the improved gross margins on new Lasercyte sales we do not expect to repeat the same level of benefit we got in the 3rd quarter from a reduction in the warranty provision on the install base. In addition, we will achieve less volume leverage due to lower production volumes which are geared to the seasonality of our rapid assay kit sales. Finally from a product mix perspective high margin rapid assays will be a relatively lower percentage of our revenue mix while lower margin instrument sales will be a higher component of revenue.

Again, this is due to normal seasonality. For operating expenses R&D was $8.8 million or just over 6.5% of sales. SG&A at $33.8 million or 25% of sales compares to $27.4 million or 23% of sales for the 3rd quarter of 2003, and is right in line with the guidance we gave last quarter of 24 to 25% of revenue. We expect SG&A to remain at 24 to 25% of revenues for the 4th quarter. The operating margin of $28.4 million, or 21% of revenue, compares to $23.3 million, or nearly 19.5% of revenue for the 3rd quarter of 2003. Adjusting for the settlement of the third party claims, the operating margin becomes $27.5 million, or 20.5% of revenue. The operating margin as a percentage of revenues is one to two points above our guidance given during our 2nd quarter earning call primarily to the higher than anticipated gross margin. For the 4th quarter we expect the operating margin to be 17 to 18% of revenue and to grow year-over-year by nearly 55% on a reported basis. If you will recall the 4th quarter of last year, we highlighted the impact of some discrete events occurring in the quarter which we felt were important to understand in order to evaluate ongoing business performance. These items, which were the write down of certain manufacturing equipment and revisions to estimates for the collectability of a customer receivable and a royalty accrual had a net impact of reducing our operating margin by $5.8 million. Adjusting for these items, the year to year operating margin growth implicit in our 4th quarter guidance is approximately 12%. Our effective tax rate for the quarter, up 32.9% was favorably impacted by one-time benefits realized from certain state tax incentives. Looking ahead the effective rate for full year 2004 and 2005 will continue to be impacted by our mix of income across geographies.

The 2005 rate will be further affected by the recently enacted tax law changes and we are currently in the process of analyzing the impact. Subject to the effect of the new tax legislation, at this point we would use a rate of 33.3% for future periods. Our thinking on revenues, operating margin and tax rate yield an EPS estimate of 46 to 47 cents for the 4th quarter. This represents an increase of approximately 35% over reported EPS of 34 cents for the 4th quarter of 2003, or approximately 13% on an EPS of 41 cents adjusted for the aforementioned item and a change in the effective tax rate. Moving to the balance sheet and cash flow, cash and investments ended the quarter at $215 million, which was a decrease of about $19 million from June 30. Cash from operations was $24.3 million, and purchases of fixed and other assets were $6.5 million to produce free cash flow of $17.8 million. In the quarter we completed a small acquisition to compliment our production animal services line which consumed approximately $1.5 million of cash. We repurchased 720,000 shares of stock in the 3rd quarter at a weighted average price of $50 for a total cost of approximately $36 million. As you have seen from our press release, our Board of Directors has increased our share repurchase authorization by 2 million shares, so that the remaining authorization now stands at 2.7 million shares. Day sales outstanding was 40 days, flat sequentially and up one day year to year. Inventory of $86 million increased by $7 million from the end of the 2nd quarter primarily due to increases in instruments and consumables, which is consistent with seasonal sales trends and purchase patterns under our chemistry consumable contractual supply agreement. Terms were 1.5. We expect DSO to remain at current levels for the to 4th quarter and we expect inventory at year end to be 85 to $90 million. Total year fixed asset purchases should approximate 30 to $35 million. Thanks and now I will turn it over to John.

Thanks, Merilee, for the overview of the financial results and the comments on the remainder of the 2004. I would also like to welcome Jennifer Joiner to Idexx and our management team. Jenny joined us in August as Corporate Vice President in charge of our North American sales distribution and customer service organization for the Companion Animal Group. Jenny bring a strong background in diagnostic sales and marketing and general management with experience at G.E. Medical Systems and Bear Diagnostics. Turning to comments on the quarter our 12% revenue growth was consistent with our overall expectations with some businesses doing better and some coming in a little lower than expected. Earnings were very strong helped by the claim resolution and some key accomplishments in the manufacturing and service. Our Companion Animal Group and water business continued to drive the company's top line growth in this quarter at double-digit rates. The Companion Animal Group had good growth of 10% adjusted for exchange. We have a tremendous amount of new product activity within the Companion Animal Group with eight new products launched in the last 12 months and several others to be launched in the next six. While these products are not major drivers of revenue growth in the near term we expect that they will have a long run rate of growth in the future. These new products also leverage the value of our existing Companion Animal Group franchises including the Idexx vet lab suite of bench top analyzers, the snap platform use and rapid assay, laboratory service and our equine market niche. In the area of instruments and consumables, we continue to solidify and strengthen the foundation of this line of business. This quarter we completed the roll-out on a global basis of our 12 pack singles for our vet test. The new smaller singles packaging provides our customers easier access to the extraordinary menu flexibility of the vet test chemistry instruments.

In September we had a very successful launch of a new equine health profile for the vet test in U.S. and Europe. This coming December we are launching a very exciting expansion to the menu of the vet test with new slides that test urine for the effects of renal disease. This is the first menu expansion for the vet test in many years and is the result of our focus on extending the value of the Idexx vet lab with our customer install base. Our test called urine protein priatnene ratio or UPC for short, will test urine for renal dysfunction and UPC has the stamp of approval as the definitive test for both screening and monitoring by opinion leaders. Renal disease is the leading causes of death in older dogs and cats. In addition, we have other new menu expansion for our suite of instruments planned for 2005 launch. We also expect in early 2005 to launch a new member of the Idexx vet lab suite of instruments that utilizes a proprietary set of consumables that we will supply. This system will compliment the diagnostic capabilities of our Idexx vet lab suite with additional menu. We have modest expectations for sales of the new instrument and its consumable in 2005 but expect it will be another contributor to the growth of our instrumentation and consumable line through the decade. This expansion of the Idexx vet lab is all part of our strategy of continually enhancing our integrated diagnostic offering. We are making good progress on development of our next-generation chemistry instrument. This new platform will utilize drive slides, the gold standard in chemistry accuracy and precision and will have a host of futures including menu choice and flexibility, ease of use, throughput and integration with the Idexx vet lab. We will launch this next-generation chemistry platform sometime after 2005.

In the meantime we are continuing to do a lot of work to enhance our market leading position and inclinic instrumentation. Not only through product extensions and menu expansions like I just mentioned but also through continued placements or existing instrument offerings. Overall global instrument unit placements were very strong, coming in at about 35% above last year's Q3. To remind investors these placements include all five of our current instrument offerings. We have seen strong overall instrument placement since Q4 of last year when we expanded our sales force. Even though most of the instrument placements other than LaserCyte do not generate much revenue in the quarter place, they strengthen and expand the install base of Idexx vet lab customers that generate our profitable reagent revenues. As to LaserCyte Q3 placements were modestly under our expectations primarily as a result of performance in Europe where we had several new reps in Q3. However, the average unit price of LaserCyte remains strong and in fact increased in both Europe and the U.S. over Q2. The average unit price along with the warranty improvement gave us a nice increase in LaserCyte gross margin. Of course we still have more work to improve the cost of goods sold of the instrument and we have plans and staffing in place to do so. In the meantime we continue to be pleased with the customer reception and the value that LaserCyte brings by providing a full set of hematology parameters previously only available from an outside laboratory.

As a result, our best and most loyal customers are those who have our entire suite of instruments including the LaserCyte for hematology, the vet tests for chemistry, the vet light for electrolites and the vet test snap reader for endochronology. This suite works together using the power of the vet station, a PC that comes with the LaserCyte to provide the hospital with the most complete and accurate diagnostic results in a single integrated report at the time of the patient visit. This setup allows the veterinarian to achieve the highest possible pet owner satisfaction as a result of blood work and urinalysis that is available at the point of care for a more fully informed diagnosis, presentations to the pet owner and effective patient management. Moving on to rapid assays as expected our growth of rapid assay revenues in Q3 over the same quarter last year was lower than the 1st half of this year. Canine sales including 3DX, were strong and the 2005 launch which we did in September of our annual marketing program called snap up the savings, is proceeding well. Rapid assays with their ability to screen for disease at petside continues to be an important development priority for us. We expect that our giardia test launched earlier this year will have steady growth over many years as vet adopt the practice of screening for giardia during a routine fecal exam. In the latter half of 2005, we are planning to launch an important product line extension that we expect will propel the continued growth of the rapid assay line of business.

As Merilee mentioned we reported a very good quarter for laboratory services revenue. We continue to believe in the model of providing both diagnostics equipment and products for use in the veterinary hospital and diagnostic services through our outside labs and recent performance has pointed this out. In our emerging pharmaceutical business we have now laid the foundation for growth ahead with four products in the market, two for feline and the most recent launches of surpass and navigator for equine. We are still in the first year of launch of both equine products. We have come to learn that the market for that navigator is much smaller than we anticipated. However, we have begun to establish a loyal following for this effective treatment of this serious protozoal infection of the spinal cord in horses. Surpass, our nonstorital inflammatory cream is a different story. Revenue and ramp in Q3 was slower than anticipated and it is clear that asking for the equine vet's attention to consider a novel technology and a new mode of application during the busy summer months when they are out in their trucks is a challenge. However, we remain convinced that the longer term potential of Surpass and its safety and efficacy benefits that come from a proprietary method of topical application at the point of inflammation and certainly the customer response to Surpass has been great to date. We continue to be on track with preparing for FDA approval and launch of our Tomicasin single dose antibiotic for cats using an Idexx developed proprietary delivery technology. As we have indicated previously, given the work we need to do and the timing of the FDA review cycle we do not expect launch to generate revenues from Tomicasin until after 2005. We have other product candidates in the pharma-pipeline, not as far along as Tomicasin product for cats which utilizes platform technology. In production animal service we continue to be excited about the prospects for our post mortem tests for BFC, or mad cow disease. Our products already approved in the U.S., has completed all field trials and is in the final stages of the regulatory process in Europe which is of course where the real market is. We expect EU approvals and launch revenues in early 2005. When and if we ever achieve significant revenues in the U.S. remains substantially a function of the USDA testing policy.

Our production animal diagnostics line will also be strengthened in Europe when we complete the anticipated purchase of Bomely, based in Switzerland. As investors recall we announced this agreement in August. Bomely brings us important customer relationships at a highly complementary product position in continental Europe and we expect to close this transaction before the end of the year. Bomely will be earnings neutral in 2005 after the effect of about 4 cents in integration costs. Merilee gave you guidance for Q4 of this year. For 2005 we continue to see revenues of 590, $600 million and earnings per fully diluted share of $2.20 to $2.25 cents. This would imply about 10% sales and roughly 9% earning growth. So the key question arises, why no apparent operating leverage? First, we've been having a great year this year. And second, in 2005 we are using our operating leverage to invest in areas such as product development and marketing which will propel growth in 2006 and beyond. While we expect to launch a BFE test in Europe never next year and expect to have several smaller product launches that have strategic importance and longer-term potential, new products are not a major driver of revenue growth in 2005. In the meantime we've made progress in business development with the objective of making tuck in acquisitions that if accomplished would augment our revenue guidance in 2005. Beyond 2005 we have several factors that we expect be contributors to attractive and sustained growth of sales and earnings at Idexx. First, the general robustness of our markets including the growth in the companion animal market driven fundamentally by the bond between the pet owner and their beloved companion or companions.

Second, larger new product launchings that are in the pipeline for beyond 2005 including products in all of our major companion animal businesses. Instrumentation, rapid assay and pharma. Third, an improving cost position in our chemistry consumable over the decade as a result of our reagent supply agreement and our growth in chemistry consumable volumes. Fourth, the revenue growth and improved cost position hematology resulting from improved units cost for the LaserCyte instrument platform and growth in the high margin LaserCyte consumable as the install base grows each year. Fifth, expected improvement in the operating margin of laboratory services through a focus on operational excellence. Sixth, growth from our international market position in Europe and Asia and finally, seventh, further deployment of the cash generated by the business for tuck in acquisitions and aggressive stock repurchases. As a result we have a multi-year strategic plan that generates an average of 10% plus revenue growth and mid-teens earning growth and we remain focused on these longer term financial goals. In fact, if you look at 2005 in the context of 2003 and you look at the average annual growth in earnings per share for that two-year period, adjusted for certain discrete items in 2003 you get just that, mid-teens earnings growth in earnings per share. Of course our business like any business has risks and uncertainties which were laid out by Conan at the beginning of the call and in our SEC filing. However, we have a very strong strategic position in great markets at Idexx and we have a team that is proving its ability to execute. Michael will now open the call to the questions portion.

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question today, please press star, one on your touchtone telephone. We will take as many questions as time permits. And if you are using a speakerphone, please make sure that the mute function is turned off to allow your signal a chance to reach our equipment. Once again, if you would like ask a question, press star, one. Our first question will come from Rick Wise of Bear Stearns.

Good morning, John, Merilee.

Yep. Good morning, Rick.

Couple things, LaserCyte, this is I understand your accounts in Europe, but 2nd quarter placements were a little less than 1st. Now 3rd quarter less than 2nd, are placements plateauing here, is this the sort of annualized rate we should expect? Let me ask you a couple of LaserCyte related questions and you can just deal with them all. How long does it take the new European reps to get up to speed and, third, maybe you could talk a little bit about the average test per instrument that you're seeing in dollars and maybe how we could expect that to grow? Thanks.

Okay. First of all, generally in the instrumentation business the 2nd and 3rd quarters are busy quarters for the clinic and so they are generally weaker quarters for LaserCyte placement. So if you look sequentially, you will normally see that, sequentially. And, of course, the 3rd and 4th quarter are stronger quarters for LaserCyte. In general, though, we've certainly ramped up from zero LaserCytes before launch in Q4 of 2002 to the 1,350 or 1,400 run rate that we will achieve in 2004. I think it's fair to say that we may see a modest growth in LaserCyte placements but we've essentially, you know, gotten to what we think is the run rate. Certainly we won't have the kind of growth that we've had historically on the ramp. Second question with regard to the European reps it does generally take three to six months for European reps to come up to speed but we think we are in pretty good shape. It was just something our reps, we we think we are in pretty good shape for Q4 which is an important instrument quarter in Europe as it is in the U.S. And, Merilee, you want to, the third question?

On the consumables, Rick, I think at this point, you know, we have not seen really a significant increase in utilization from our, what our old system was that auto reader and the system prior to LaserCyte which of course we are still selling. And, you know, I think you see usage will vary across the customer base pretty widely. But, you know, consumables overall have grown a couple hundred percent year-over-year and, you know, perhaps a good number is to think maybe a couple thousand dollars of consumables per instrument.

Rick, we've been placing LaserCytes, first of all, of course some of the LaserCytes we place are Greenfields to us and then some of them are replacement for our existing QVC auto read system which we also continue by the way to sell and support both in the U.S. and internationally as part of our unit placement numbers overall for instrumentation. And I think the substitution is I want to say 50 or 60% range, meaning that the 50, 60% of our LaserCytes do have an auto retrade in them and the remainder do not. We would typically have for these placements that we are doing, you know, kind of low teens units, runs per week. And we sell them at an average AUP of around $4 so you can do the math on what that would be in terms of annual volume.

Just another point you made about navigator having a smaller market, can you share with us your latest pulse on the market opportunity for navigator and maybe help us think more specifically about the pharmaceutical sales kind of range you're comfortable with for this year? I assume you still think you can get up to an 11 or 12 million range. How do we think about the outlook for pharma-sales for '05? Can you get up to 20 million, is that still a reasonable place to be thinking?

Rick, I will try to handle all that. First of all with navigator, our thinking is on the size of the market is probably now about 10,000 treatments per year and I think based on our estimated market share and selling price that we would see that our revenues would ramp to somewhere around the 1.5 million range once we are in steady state for that product.

Per year, per quarter?

Per year.

Per year, okay.

And as far as looking to 2005, I would expect given just the longer ramps that John is referring to, for Surpass and now the market size for navigator and the fact that we would not anticipate launching the Tomicasin product until after 2005 that we would achieve revenues somewhere in the $12 million range for pharma next year.

Thanks, Merilee.

Our next question today comes from Timothy Lee with Merrill Lynch.

Good morning, guys.

Good morning, Tim.

A couple questions here. First on your mad cow opportunity I think in the past had you said European markets call it 125, 130 million. I mean if you launched a product here the early part of '05 what type of incremental revenue contribution should we expect from that product?

Tim, I think you can probably think in the neighborhood of somewhere around $5 million so, again, it's a little hard to tell on these things but that's probably not a bad place to be thinking.

The market is about, we think it's about 10 million tests and, you know, there's different kinds of pricing but you can call it $10 a test for round numbers so about a $100 million mark.

That's kind of your first year revenue contribution, what kind of long run share should we expect, should we get to a 20% share, 30% share?

I don't think we have specific numbers that we've talked about but we feel very good about our test. It is a second generation test. It eliminates several sample preparation steps. Therefore it's differentiated. There's nothing else like it on the market. It meets the gold standard in terms of sensitivity and specificity. So we think we are very, very well positioned, but, you know, it's hard to see how a market will develop. We certainly have expectations for this product in Europe.

And then just kind of following up on your comments on the lack of leverage in 2005, can you just provide some framework around the investments you're making in terms of the additional headcount on the sales infrastructure side?

The headcount in the sales infrastructure side aren't going to be anywhere near to the degree that we accomplished in the latter half of 2003 leading to 2004. They are more, they are a little bit more modest. But the investments are going to be more on the outside of the U.S. and inside of the U.S. and, of course, we are going to have investments in marketing which isn't really field sales but then in product development generally and also investments in our operations area to continue our disciplined path towards operational excellence.

Okay, and just one last question before I jump back in the queue here. So again, looking out a couple years as the leverage starts to continue to kick in on the '06 and beyond timeframe, what's kind of the corporate targeted SG&A and R&D goals on the percent of sales?

I don't think they are going to be substantially different than what we have in our current business model. We will continue to invest in both those areas to propel growth as the revenues grow. I would say our leverage would probably more come from, to some degree G&A if we can, but also gross margin.

Great. Thanks a lot.

Our next question will come from Chris Arndt with Select Equity Group.

Hi, John, congratulations on the quarter. I wanted to ask about the guidance for next year and specifically at least if I'm doing the math right, if you all make your revenue targets, and your EPS targets, it implies, the EPS target implies a contraction in the operating margin, you know, by as much as, well, 50 basis points at least but maybe as much as 100 basis points, and the EPS growth that's lower than the mid-teens growth that you cited as the corporate target. So I just wanted to ask what your thinking was there and why you expected margins to come down.

Well, first of all I don't have the exact -- I don't think there's much of a contraction in operating margin when you take out the discrete items in our 2004 numbers that we've talked about in the 2nd and the 3rd quarter. But you're right. The earnings growth as I mention in my opening remarks for 2005 implied in the guidance revenue of roughly 10% earnings guidance of roughly 9%. You know, I think you have to look at that in the context of really what was a great year in 2004 and if you look at our earnings growth over the two year period, just taking that and certainly any other period going back in history but just the two year period 2003 to 2005 because we did have, we just had a really good year in 2004. And earnings doesn't go up in a straight percentage line. Therefore, you know, 2005 is going to be more modest growth and our long-term corporate goal of mid-teens. 2004 was higher. I think again adjusting for those discrete items might be in the area of, you know, mid 20s. So, but it doesn't, it's not going to happen, you know, in an every year at the same rate. It's the nature of our business model. But we are very comfortable about the longer term outlook of mid-teens based on what we can tell now in the strategic plan, our markets and our technology plans.

No, that's fair enough and I understand that your EPS growth in 2003 and 2004 has been quite strong. Although I guess, you know, if you're going to grow at a lower rate than sales in 2005, you know, something needs to give either the gross margin will be lower, you know, the SG&A expenses will be higher, you know, or R&D, I'm just wondering where that is, is it primarily on the growth line and why would that be?

I think it's essentially -- I mean there are some lines below the operating margin but I think it's essentially steady state. You've got, you know, revenue growth of 10% and earnings growth of 9%. There may be a couple of small moving parts but nothing where really I think the model it's going to be reasonably consistent. Merilee?

I think, Chris, if you just, probably some of the issue is that, you know, again the adjustments for discrete items but I think as I look at that in the operating margin with those percentage -- as a percentage of revenue with those items excluded this year, it's about a 19.5% operating margin overall for the year and it's about that next year. So I don't think we are -- I just reiterate what John said, I don't think we are really seeing any significant change in any of the components of the P&L up through the operating margin.

Thanks.

Thank, Chris.

We have a question from Wells Fargo Securities, Chris Montano.

Hello, the other Chris.

Yes. I wanted to ask if you can talk a little bit about the competitive landscape and how you are viewing that with particular emphasis on maybe the labs and also the diagnostic equipment?

I would say it's a very competitive market. We have a very strong and respected competitor in the lab business. And we have a, I think a more, we have a certainly a larger relative market position in the inclinic diagnostics but we do have aggressive competitors there who have their objectives. What I will say is I feel very, very good about our integrated business model, both the integrated inclinic offering that we have, the full suite of instruments that work together as, you know, to provide a single mechanism for diagnostic information. The way those connect with our market leading position with the computer systems that run the veterinary hospital and are, the way it works with our labs, outside labs, and we like very much being in the position where we are kind of agnostic as to whether the work is does in clinic or in the outside lab. There are roles for both of those in serving the veterinarian. There is real advantages to inclinic for certain types of work and there are things that just can't be done in clinic and they need to be done in a lab and every customer has different preferences. So it's a very competitive market. We do like our position.

Thank you. On the demand side of things, veterinarian, the services market that you're selling into, are you seeing any significant changes in terms of the types of clinics that are purchasing or the questions they are asking or that, the dynamic of that particular market?

I'm sorry, which?

The hospitals that you're selling products into and that you're selling laboratory services to.

Well, I'd say that one of the trends that is happening, I'm not quite sure where you're going but a typical type trend that's happening is you're seeing a reduction in visits that are generated by a requirement for vaccine renewal as a result of change in vaccine guidelines and offsetting that is you are seeing an increase in wellness care. You are seeing an increase in a higher level of medical care provided to those pet owners who are deeply attached to their companions and who are, you know, either want and value wellness testing or, you know, want to have the best possible care for their pet when they have some kind of medical issue or issue related to age. So you've got really two types of changes taking place. Those generally benefit diagnostics because diagnostics is helpful in those drivers of growth in clinic visits offsetting the decline in clinic visits as a result of just vaccine renewals.

Thank you very much.

Lee brown from Merrill Lynch has a question.

Hey, good afternoon. How are you?

Good afternoon.

Just a quick question with regards to the new authorization for the 2 million shares and the existing 730 or so shares remaining under the previous authorization. Where do you see the share count going forward? It was a bit under our estimate for this quarter.

Lee, I would see it probably being around 35 million shares in the 4th quarter and that's what I would use for 2005 as well.

Okay. And just a quick follow up on lab services. It had a bit of a stronger performance than we had expected. And I know that some of these acquisitions are annualizing and the currency benefit is going to wane. But what is your projected growth for that and in Q4 and going forward, please?

Well, we've, the one significant lab that we made that's augmenting the acquisitive growth which of course only happens for the first year that you own that lab we made in the middle of the 1st quarter so we will continue to benefit from that in the 4th quarter. We think the underlying growth of lab services if you will, adjusting for currency and acquisitions is in the 9 to 11% range.

I'm sorry, just to clarify, when will the acquisitions be fully annualized?

Yeah, they remain -- it was one acquisition -- I mean it was a small one that was made in the 4th quarter of 2003. But the larger one was made in the 1st quarter of 2004.

Okay. Thank you very much.

We will go next to Josh Fisher with Pico Capital.

Great, thanks. Two questions. Did you say 50% of your placements of LaserCyte was from your older machines?

We said about 50 to 55% of our placements were in customer locations where we received a trade in of, I'm sorry 50 to 60%, and it changes a little bit each quarter, where we receive a trade in of our QVC auto read. And, of course, the trade in is netted against a price and the average unit price that we state for the LaserCyte is, it's actually lower than the list-price because we net down any trade-in value that we take.

And what were the placements in the quarter of your other two machines, the QVC and the other one?

We don't, we actually have four other platforms. We have of course the vet test, the QVC, and then we have two smaller platforms that are important but they don't generate nearly the reagent stream, the vet light and vet test snap reader. What we said is if you take all the placements together, all five categories including LaserCyte, our placements were up about one-third, about 35% year-over- year.

Okay. Thanks.

We have a question, follow-up question from Timothy Lee from Merrill Lynch.

Good morning, just one quick follow up on the pharmaceutical side here. Given the current sales trends and kind of the outlook here for next year, I have to believe some of the numbers are below some of the original plans when Blue Ridge was acquired way back. Does that require, I mean does that imply that some of the assets that were purchased are potentially impaired, with things like the market opportunity not being as large, could we potentially see a charge or write down of assets?

Rich, we looked at the intangibles that are associated with any acquisition on an ongoing basis for asset impairment and as we've looked at that business and looked at projections there, we have not assessed at this point that there would be any impairment of the intangibles and that's something that we will continue to evaluate as we go along.

Okay. Thank you.

That does conclude the question and answer session. Mr. Ayers, I would like to turn the call back to you for any closing remarks.

Okay, well thank you very much for joining the call. We appreciate your support. That ends the call. Thank you.

Thank you all for joining us today. That does conclude today's presentation.