愛德士 (IDXX) 2006 Q1 法說會逐字稿

Good day everyone and welcome to this IDEXX Laboratories first quarter 2006 earnings conference call.

Just a reminder today's call is being recorded. Participating in this morning's call are John Ayers, Chief Executive Officer, Merilee Raines, Chief Financial Officer and Ed Garber, Director of Investor Relations.

I also would like to preface the discussion today with a caution regarding forward-looking statements.

Listeners are reminded that statements that members of IDEXX’s management may make on this call regarding management's future expectations and plans and IDEXX's future prospects, constitute forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. Such statements include, but are not limited to, statements regarding management's expectations for financial results for future periods, and the timing of new product introductions.

Listeners are reminded that actual results could differ materially from management's expectations. Factors that could cause or contribute to such differences are described in IDEXX's annual report on form 10-K for the year ended December 31, 2005, which is on file with the SEC and also available on IDEXX's website at idexx.com. In addition, any forward-looking statements represent IDEXX's estimates only as of today, and should not be relied upon as representing the company's estimates as of any subsequent date. The company disclaims any obligation to update or revise any forward-looking statements in the future, even in its estimates or expectations change.

And at this time I'd like to turn the call over to Merilee Raines. Please go ahead, Ma'am.

Thank you, Tracy, and thank you for joining us today.

I'm going to start out with a discussion of the financials, both a review of the first quarter and our thoughts for the year.

John Ayers will share with you an update on the business, and then we will welcome your questions.

As you may have seen in our press release today, revenues for the quarter were $168.2 million and earnings per diluted share for $0.55. With our move in providing guidance to focus on total year financial performance, we did not provide explicit guidance for the first quarter of 2006. Based on the strength we see in key areas of our business, that John and I will talk about further, we are increasing both our revenue and earnings per share guidance the full year. We now project revenues of $704-712 million, up from our previous range of $700-710 million, and earnings per share of $2.44 to $2.52 up from the previous $2.40-2.50 range.

Let me give you some details.

As mentioned, revenues of $168.2 million grew 10% year to year on a reported basis. Currency had an unfavorable impact on growth of 3%, and acquisitions contributed 1%. So organic growth, that is growth adjusted for these 2 factors, was 12%. This is a good time to remind you that our earnings press release contains a table that details revenues and year-to-year growth rates by product and service category. I refer you to this table for reported and currency adjusted growth rates, as I will cite, at various points, growth adjusted for currency, acquisitions, and in some cases, changes in contributor inventories.

Our Companion Animal Group revenues of $139.4 million grew 12% on a reported basis and after adjusting for currency and acquisitions. Looking at the Companion Animal Group product and service category, instruments, consumables, and related services and accessories grew 9% on a constant currency basis. Instrument revenues of $9.6 million grew 16% on a constant currency basis, benefiting from sales of our IDEXX VetStat blood gas analyzer which was launched in the third quarter of last year. Unit placements to new customers of all the instruments comprising our IDEXX VetLab suite were essentially on par with the first quarter of last year.

In the first quarter of 2006, we launched an upgrade to LaserCyte analyzers' touchscreen software and computer systems called the IDEXX VetLab Station. These upgrades, which enhance our ability to provide a comprehensive lab information management capability to our IDEXX VetLab customers, were completed in accordance with our project timeline. However, they were not available until the latter part of the quarter. Accordingly, the timing of this launch contributed to relatively lower deliveries and installations across our suite of instruments in the first quarter than we would have expected were the upgrade available earlier in the quarter. We consider first quarter placement levels to be somewhat of an anomaly given the strength in instrument placements over the prior several quarters, and we expect placements will increase over ensuing quarters.

Instrument consumable sales of $41 million in the first quarter of 2006 had a currency adjusted growth of 6%. Year-to-year changes and distributor inventories negatively impacted the consumable growth rate by about 3%. So growth, adjusted for these items, was 9%. This is at the high end of the 7-9% longer-term growth rate that we cite during our fourth quarter call, and we reaffirmed that expected range.

Point of care rapid assay products with revenues of $26 million grew 6% on a constant currency basis. As with instrument consumables, relative changes in distributor inventories year to year had a negative impact on rapid assay products growth. The negative impact was, in this instance, about 10%, so the organic growth for rapid assays was in the midteens. This very strong performance was attributable to heightened salesforce focus from both IDEXX and our distributor routes on our heartworm products as we enter the prime time for this seasonal testing. Additionally, we saw higher price realization as a result of some changes in our heartworm marketing program. We expect the growth rate for this product line will decline somewhat in ensuing quarters and, we continue to project a longer-term growth rate of 6 to 8%.

Laboratory and consulting services revenues of $43.6 million, grew by 17% adjusted for both currency and acquisitions. We are pleased with this performance and with progress we are continuing to make in fully integrating our acquisitions of recent quarters into our laboratory infrastructure. Increased service levels have enabled us to realize increases in both test volume and price. We are revising upward our longer-term growth projections for laboratory and consulting services to 10-12% from our previous thinking of 8-10%.

Our computer systems and digital radiography product line posted revenues of $9.7 million, an increase of 23% year to year when adjusted for currency and the third quarter 2005 acquisition of our direct digital imaging product line. This growth is in line with the 20-30% growth rate for 2006 that we cited at the time of our fourth quarter call.

Water sales of $12.1 million for the quarter, were down 3% year to year on a constant currency basis. We believe this decline is primarily due to timing within the year. A key growth driver for this segment will be continued international expansion via additional country regulatory approval of our products as official testing methods. We're working on these approvals on several fronts, and they often entail lengthy processes. We project the longer term growth in water to be in the low-to-mid single digits.

The Food Diagnostic segment sales were $16.7 million, a year-to-year organic growth of 20%. As has been the case over the last several quarters, our production animal product line exhibited very strong performance with year-to-year organic growth of 27%. Livestock test kit sales were the primary growth driver, and we are pleased that the many enhancements we have made to our BSE test kit have brought us a number of new testing contracts in Europe. We now project BSE revenues for 2006 to be $8-10 million, up from our previous thinking of $5-6 million.

Our new revenue projection for full-year 2006 of $704-712 million represents year-to-year reported growth of 10-12%, with completed acquisitions projected to add 1-2% to growth and a projected 1% unfavorable impact from currency.

Looking at the rest of the P&L, gross margin at 51% of revenues was slightly higher than our expectations. The favorability was primarily due to pricing, and volume related production efficiencies. We project improvement in gross margin as a percentage of revenues of 25 to 100 basis points from the first quarter levels in Q2 through 4. There'll be some variability by quarter as a result of seasonal revenue mix. We now expect the total year gross margin percent to be at the high end of our previous guidance given in January of 51 to 51.5%. As a reminder, the fundamental drivers for improving gross margins are improving margins on instrument consumables in accordance with supply contracts, efficiencies in our manufacturing processes, lower-cost to provide after sale service of our IDEXX VetLab instruments, and improving margins in our lab services due to volume leverage and efficiency.

Operating expenses including R&D and SG&A were 35% of revenues, a little lower than our expectations and primarily due to slower than anticipated ramp in hiring. We expect operating expenses to be 34-34.5% of revenues for the remaining quarters of the year. The operating margin for the quarter of $27 million or 16% of revenues was stronger than our thinking, the result of the favorable gross margin and lower operating expenses. We expect operating margins to be 17-17.5% of revenues for the remaining quarters of 2006.

I'd like to take a moment to talk about the impact that the adoption of the FAS 123-R had on our first quarter results. If you'll remember from our fourth quarter call, we estimated that on a pre-tax basis, equity based compensation charges would be about 1.5-2% of revenue and felt spread fairly ratably over the year. The actual pretax impact of equity-based compensation in the first quarter was $2.8 million or 1.7% of revenues. We reaffirm the expected pre-tax 1.5-2% of revenues impact over the balance of 2006.

One aspect of FAS 123-R that has caused us to refine our projections for 2006 relates to taxes. Further interpretations of this very complicated standard arise with more companies adopting. Specifically, in 2006 there are very limited circumstances under which we can report a reduction in our book tax expense for one of our forms of equity based compensation instead of stock options, or ISOs. ISOs that have vested prior to the adoption of the FAS 123-R are not eligible to receive any book tax benefit. This is the case even though we receive an actual tax return deduction for certain types of ISO activity. We had assumed that we would record a greater tax benefit in our income statement related to ISOs when we developed our projection of the 2006 tax rate of 31-32%. The difference between our projection and the 34% rate we recorded in the first quarter was due primarily to this newly understood aspect of FAS 123-R. We are now projecting a tax rate for the year of between 33-34%. I will also note that other factors remaining constant as we record more compensation expense related to incentive stock options under FAS 123-R, over time we expect to recognize a greater book tax benefit.

Finally, this accounting issue just affects reported income. The actual tax treatment, and thus cash flow implications of stock options, has not changed with the adoption of FAS 123-R.

We have provided a table in our first quarter press release that adjusts the reported gross margin, operating margin, net income, and diluted earnings per share for the impacts of both the share based compensation expense recognized in 2006 and the acquisition integration costs we incurred in the first quarter of 2005. We have adjusted for these 2 categories of expenses to provide our investors with a more normalized view of year-to-year growth rates for these financial metrics.

As adjusted, year-to-year growth for earnings per share is 15%. The revised earnings per share guidance that we have given today of $2.44-2.52 would produce a year-to-year reported growth of 6-10% or 14-17% when adjusted for the anticipated impact of FAS 123-R for 2006 and a discrete items of acquisition integration costs and dividend repatriation totaling $0.08 in 2005. This adjusted midteens growth reflects the strong fundamentals in our business today, and incorporates focused investments in R&D and sales and marketing to drive sustained double-digit topline growth.

Moving to the balance sheet and cash flow, we ended the quarter with cash and investments of $93 million. The cash used by operations was $3 million, and was consistent with prior years and our guidance at the time of our fourth quarter call, that the first quarter will show uses of working capital for regularly occurring events such as tax and annual compensation payments and increases in receivables due to the beginning of the revenue ramp for the heartworm season.

In addition to these events there were 2 other items impacting the first quarter 2006 operating cash flow. First, we indicated previously that the first quarter would include the purchase of an additional shipment of chemistry instrument consumables -- that was received in January rather than in December. Also, under FAS 123-R, a portion of the tax benefit from option exercises, that was formerly shown in operating cash flow, is now shown in financing activities. This amount was $4.7 million in the first quarter of this year.

We expect operating cash flow to improve over the balance of the year, with DSO at approximately 40 days and inventories at $80-85 million. We continue to project capital expenditures at $55-60 million. This is higher than recent history, and reflects the purchase of our headquarters facility and surrounding land that we expect to complete in the second quarter and commencement of renovations in the second half, all totaling an outlay of approximately $20 million in 2006. We continue to project free cash flow, as has been historically calculated, to be 65-70% of net income for 2006. This is lower than recent history due to our projected higher capital expenditures, most significantly the purchase of our Maine facility.

Thank you and now to John.

Okay, thank you Merilee.

We're obviously pleased with the growth in the business. As Merilee has pointed out, our Q1 revenue growth at the practice level was even stronger than reported growth due to the unusually low ending distributor inventory levels of about 2.5 weeks. We achieved good growth revenue, of revenue, in many of our businesses including the IDEXX VetLab line of instrumentation and consumables, the rapid assay business, the global reference labs, the practice information management and digital radiography business, and production animal services.

Disappointments for the quarter included the water business, where we think the longer term growth rate is in the range of 3-5%. Also our capital sales revenue growth was a little lower than we would have liked in the quarter for a variety of reasons that are transitional in nature and we think are not indicative of future prospects. The outlook here is strong for the remainder of the year.

So let me give a couple of other updates before I open it up to Q&A.

In the instrumentation business, we had a successful and on-schedule release and shipment of the IDEXX VetLab station on March 1st. This is a significant upgrade to LaserCyte that adds new laboratory information management capabilities for the entire instrumentation suite. The IDEXX VetLab station touch screen and PC is also the next generation interface for all existing and future additions to the IDEXX VetLab line. The IDEXX VetLab station augments the in-house laboratory of the clinic, with key analytical capabilities, including the trending of blood parameters over time, quick reference look up to support clinical decision making, flexible and comprehensive reporting and instrument technical support through the Web. Essentially, all of our LaserCyte placements in North America in Q1 included this upgraded version.

As part of the launch, we increased the list price of LaserCyte by a few percent and saw the same in realized prices. And the superior reliability that we now have achieved with LaserCyte in the field has allowed us to move from a two-year to a one-year warranty in most regions. All told, our gross margin on LaserCyte was higher in Q1 than any other quarter since launch. We're also on track to launch LaserCyte with the IDEXX VetLab station in Japan in the second quarter and we believe laser-flow cytometry technology that is the basis of LaserCyte, will be well appreciated by the Japanese veterinarian. Further, we see Japan as a significant opportunity for our instrumentation business in general and have had strong instrument placements in that country over the last couple of quarters.

In other instrumentation news, we have launched our BioAccess assay for the IDEXX VetLab in Europe as well as our other recently introduced assays for the IDEXX VetLab, such as the QC panel, the NSAID panel and lactate. We have experienced accelerating IDEXX VetLab consumable growth worldwide, with Q1 coming in at over 9% year-over-year adjusted for currency and changes in distributor inventories. This growth has resulted from a series of enhancements we've made, the expanded test menu, and strong instrument placements with new customers.

Moving to the practice information management and digital radiography business, we're on track to launch by early summer the next model of our line of digital radiography systems, a direct digital system with a 14 by 17-inch plate designed to produce a digital image of the dog or cat within seconds are ticking the X-ray. To remind investors, our current digital radiography product line consists of a computed digital radiography offering for both the equine and small animal practitioner and a direct digital for correct equine use. In computed digital radiography, we are the clear market leader, and this line has continued to do very well, with good growth in Q1 of 2006. This new 14 by 17 direct digital model will address the small animal market and complete our digital radiography product lineup. For those who are not familiar, "small animal" means dogs and cats as opposed to horses and other large animals. We will then be well-positioned with this launch to continue the strong growth of digital radiography as the veterinary profession moves from film to digital x-ray image capture and storage.

In the pharmaceutical business, we continue to conduct studies with regard to Tilmax, our feline single dose antibiotic, in response to issues raised by the FDA in their review of our animal drug application. At this time we do not know the full extent of the studies that will be required or whether these studies will provide satisfactory resolution of these issues. To remind investors, we have about $14 million of goodwill associated with our pharmaceutical line from the acquisition of Blue Ridge back in 1998.

If, upon conclusion of these studies, we were determined not to proceed with the launch of Tilmax, we would be required to reassess the impairment of that asset. We will let shareholders know as to our further clinical work and discussions with the FDA when they give us a clearer direction on Tilmax.

More generally with regard to IDEXX pharmaceuticals, I remain very excited about the proprietary drug delivery technology we have developed in the pharmaceutical business, and the application in animal and even possibly human drug systems, Tilmax and in other areas, and we remain committed to our investment levels in this business.

In the rapid assay business, we had a very strong first quarter in growth and sales at the practice level. We're pleased with the continued success of SNAP 3Dx, our canine diagnostic, and our customers continue to convert from heartworm-only in-clinic testing to the parasitic disease screen that 3Dx prescribes. In the first quarter 2006 about 70% of our canine rapid assay units were 3Dx versus roughly 60 in the last year's first quarter. So not only have a good growth in canine, but the mix continues to -- to improve as we convert customers to higher-margin differentiated 3Dx offering.

This quarter we'll conduct a limited launch of what we call a SNAP 4Dx, the next generation in canine and parasitic disease screening for use pet-side. This new SNAP product offering adds to the existing product a test for the presence of another tick borne bacterial disease called anaplasma phagocytophilum, or APH. This canine disease is transmitted by the same tick, the deer tick, that carries Lyme Disease, and although the actual bacterial species is different, as are the symptoms, and the nature of infection, that is still a major concern. Many of our customers in Lyme-endemic regions have been asking for this test, as the recognition of the APH disease threat in certain parts of the country as well as the potential for co-infection of the patient with multiple disease agents has become better appreciated. We will charge a small premium for this even more comprehensive and differentiated SNAP test; and assuming all goes well with the limited launch this spring, we will proceed with a nationwide rollout this coming fall. Looking at the rapid assay business overall, we expect growth will moderate from the current levels in the second of half of the year meeting our expectation of 6-8% longer-term growth in this business.

So, summing up before Q&A, based on the strong fundamentals in the business as Merilee has mentioned, we have raised our revenue and earnings guidance for the year 2006 and we see no change in our longer-term targets of 10% plus revenue growth and midteens earnings per share growth. Our performance and I think what we also would characterize as strong markets allows us to achieve these targets of continuing to invest in the business with the sustained growth opportunity afforded by our market and technology pipeline. We certainly consider the companion animal business, and the animal health business in general, a very investable business.

So thank you and Tracy if you'll open it up to the call for questions.

Thank you.

[OPERATOR INSTRUCTIONS]

We'll go first Ryan Daniels with William Blair.

Thanks, good morning everyone.

Good morning, Ryan.

Merilee, you mentioned earlier in your prepared comments that the changes with distributor inventory had about a negative 10% impact on rapid assay growth going down to about 2.5 weeks. Is that something you think that will sustain that lower inventory level or was that unique during the quarter and we might see a bounceback and give you guys a benefit in Q2?

John wants to take that.

Distributor inventories bounce around. We've had distributor inventory at sort of the lower end of 3-4 weeks for a long time, at a natural level. This was an unusual quarter in the way things ended up.

OK.

And then on the lab and consulting business, obviously a nice increase in guidance there. Is that about across the board or is that more U.S. based or perhaps internationally based? Any thoughts on that?

It's pretty broad-based. U.S., Europe, Asia, broad-based across the Companion Animal business.

OK, great.

Two more quick ones.

John, you didn't comment on a new chemistry machine; I know you guys haven't provided a date, but can you maybe give us an update on the status? Is that through development? Has it begun production, kind of maybe where we are in the life cycle of that development of that machine? Or instrument?

We are very excited about the instrument. We're continuing in the development process. As I mentioned in the first quarter, I guess in the January call, we're not going to be giving a date of launch until kind of nearer-end. The only guidance that we would provide is that it wouldn't be before the latter part of 2007.

OK, great, and just the last question I have, I know this is a pretty small piece of your business from a revenue standpoint, but on the water side I would assume most of that is kind of recurring contracts with local government entities or whatever it may be. Was there anything unique in this quarter that caused a downtick, like you lost contracts or new competition or kind of just the nature of the business where you see those ebbs and flows?

The nature of the business, I will say that you know we -- we're giving a guideline for the year, and I can't longer-term, of 3-5%. But I think that it was really timing. Those are, as you said, it's a very slow-moving business, and water microbiologists are one of the most conservative customers and certainly in our product lineup.

Okay thanks for that. Nice quarter, guys.

We'll go next to Rick Wise of Bear Stearns.

Good morning, everybody.

Several questions.

First, just to follow-up on the distributor inventory point, John, I understand that you're saying this is sort of within the normal range of what you're seeing. But how confident are you that you have seen the last of the, I don’t know if the right word is destocking, but do we see a sort of a restocking or above trend growth there for in the second quarter as a result of this first quarter actions?

It's just -- Rick, good question, make sure I clarify this. We really see the natural distributor inventory levels -- what our distributors need in order to meet the customer's requirements as between 3 and 4 weeks, generally at the lower end of that range. This was just an unusual quarter in the way that clinic-level demand I think took place towards the end of the quarter in relation to our supply to distribution. So I don't see any change in what we have seen as the long term, you know, every quarter distributor inventories ending up in the 3-4 week range, as I said, probably toward the lower end of that 3-4 week range. So I think the 2.5 is a little bit of an aberration.

OK.

Just to make sure, if I rephrase it incorrectly, please tell me -- you're saying the quarter clinic-level demand was so strong that maybe distributors didn't have a chance to perfectly replace and, stay in their, what you refer to as their "normal band"? Is that --

Yeah in relation to -- and our relation of supplying them. That's right.

Ok so that's a good thing. Demand is strong.

Yes. And demand was strong. I think Merilee tried to --

15% on the ---

On the rapid assay and 9% on the instrument side.

OK.

On the VetLab launch, I understand it came late in the quarter and everything, but maybe you could frame the opportunity; is this the sort of thing that every LaserCyte that's out there is now a potential candidate for an upgrade in here? Can you frame the opportunity or is this a nuance or is this sort of a concrete incremental growth opportunity?

Well, it's all of the above.

It's, first of all, all of the new LaserCytes that were shipping have this new laboratory information management capability on it. Certainly we'll have the opportunity down the road to upgrade existing LaserCytes, it's not a big revenue item, but it adds to the capability of their suite of instrumentation. And so you know, we see it the next step in the capability of the clinic to provide better medicine. To give you an example, you know, it's one thing to know the value of a blood parameter, a snapshot; it's quite another to see it trend over time and that trending adds a whole dimension that vets appreciate once they understand how to use that.

And typically, pets, they don't change from vet to vet. Pet owners are pretty loyal to their vet, so they're going back and in fact they have that information but they not be accessing it because it's right now buried in paper files. And what the LaserCyte VetLab station does is it makes it easily accessible, reportable, explainable to the pet owner that "hey this parameter is trending up. We should take maybe some precautionary action to ensure that we have a good long life of your pet."

Okay.

And one last quick one.

On the BSE test, it came in, and I don't want to overdramatize, but nearly twice your estimated thoughts about where it might be in terms of revenues. Given this $100 million market that's out there, I mean are you feeling more optimistic than you were before now with these solid results in hand about getting a bigger chunk than you were willing to talk about in the past?

Yes, I think there's two things.

First of all, I mean we're feeling very very good about the test; Merilee gave the revised guidance for the year and of course the number of the contracts that we have are, you know, being taken up in the part of the year. So the annualized run rate is higher, and also we would see good growth in next year off of this year.

There's no question that customers appreciate our second generation tests, because it has some unique capabilities. It's a shorter protocol. Scrapie, which is the BSE form in sheep, is recognized as more and more of an issue and our test is the same test for both BSE and scrapie. There is some biodiversity now, meaning that different kinds of BSE that are out there. Our test is very robust in picking up different kinds of BSE.

So it's all, it's really a very powerful and flexible second generation and our customers are appreciating it. We're doing very well in the market.

On the other hand, it's not a $100 million market anymore because over time the price, the average unit price has come down to being maybe, depending on the country, and the market, a €5, €3-7 type of thing opposed to a €10 that was probably the number associated with a $100 million market.

But we're feeling very good about where this market is going and the differentiation of our tests. And it took a long time to bring to the market but it takes a long time to bring any test to the market. So once you have it in market, I think you've got a good position.

Thanks, John. Thanks, Merilee.

[OPERATOR INSTRUCTIONS.]

We will go next to Lee Brown with Merrill Lynch.

Hey John, Ed and Merilee, good morning how are you?

Good morning, Lee.

Hey, Lee.

A few quick questions here.

The change in the warranty from two years to one year, how's that going to benefit? I mean, it's obviously going to benefit you, how are you going to see that benefit going forward? Will it flow through the SG&A and what are your expectations?

It's a gross margin issue.

Lee, it --

It's a gross margin. OK.

And what are your expectations in terms of a bip basis point improvement there because of it?

Lee, we had really factored that into our projections. We knew that we're going to be launching the IDEXX VetLab station and with the improvements that we've made to LaserCyte over time, we were anticipating this, so it's already factored into the guidance.

That's super, that's good news.

And in terms of your share repurchase program, thanks for the information at the end of the press release on what you have doing there. Can you remind us how much you have still authorized, from the board and what your plans, are because the stock, the shares came in a bit below our expectations, which was obviously a good thing.

Well, Merilee's looking at the authorization, and we do have an outstanding authorization. We do have an active share buyback program; we grade it based on a sort of a sliding scale based on the stock price; at higher prices we buy back less, at lower prices we buy back more.

And so it's going to be hard to predict, you know, what will be the--you have to predict the stock price to predict the share buyback down to the--

Sure. Just before the -- maybe Merilee could grab it before the call ends, how much you have left?

We have 1.5 million shares left.

What is it? Is it going up for an extension or a new sort of tranche at the next meeting, would you say?

Well, we usually evaluate when we are getting towards the end of that authorization. The board evaluates the strategy, and so I think it will be awhile before evaluate that, given we have 1.5 million at this point in time. It won't be next quarter or anything like that.

Super. And then in terms of the Japanese market opportunity, could you help us and I'm sorry if I missed it but I don't think you specified what that market potential is and the growth rate there.

Well it is, it's anyone's guess on how you actually define a vet, but there are, the number we use is 8,000 veterinary hospitals or clinics in Japan. They are just as crazy about their pets as we are here and they are in Europe. The only difference is their pets are a little bit smaller. But maybe that means they have more medical issues.

I was hoping you weren't going to say the electronic kind.

Because that wouldn't be helpful.

There may be a product line extention for it, I don't know, but they are a big part of their culture, and the nice, the neat thing about the Japanese is they really do appreciate innovative technology. And, you know, there is nothing on the market like LaserCyte. It was innovative when it launched and it remains extraordinarily innovative in terms of laser flow cytometry, and the benefits of counting each cell individually with that. And the Japanese are highly appreciative of not only what a product provides but how it achieves it. So we're feeling very good about the LaserCyte launch.

It will just continue to be part of our growth plans. I don't think we've given any specific guidance with regard to what that will contribute to us.

Okay.

That's a nice segue in terms of the LaserCyte upgrade. Can you remind me what the premium was? I think you gave it out as a percentage?

The premium?

For the upgrade over the --

It was a couple percent, close to 5.

And did that fully cover and then some the increase in COGS to provide the upgrade?

And yes and that's why the gross margin went up. Because what we did is, we had a touch screen and a PC before, but we've upgraded. It's a much nicer, it's a bigger higher tech touch screen and a much more powerful computer. But of course the cost of all that stuff keeps coming down, so it didn't add much cost to the system.

OK. I had read that --

It imports, and we have the new software capability in it, too.

Super.

I'll wrap it up here; I don't mean to hog the call here.

I just wanted to see if you could break out the acquisition benefit between lab and consulting services on one hand and the computer systems and digital radiography on the other?

The -- I think I gave the growth on ....

I know, I think I just missed it, I was having a hard time keeping up with all the --

I know. There were a lot of talkers there, weren't there. It was about a 5% impact, the acquisition impact from labs and consulting. And the digital business, it was about a 7%.

Super.

Thank you very much.

And there are no further questions at this time. Mr. Ayers, I will turn it back to you for closing comments.

OK. Well, I want to thank everybody and also congratulate IDEXX employees on another great quarter and also express our appreciation for our diverse customer and partners for their continued confidence.

And with that, we'll wrap up the call.

Thank you all.

Thank you. That does conclude today's conference. Thank you all for joining and have a great day.