愛德士 (IDXX) 2007 Q4 法說會逐字稿

Good day, everyone, and welcome to the Idexx Laboratories fourth quarter 2007 earnings conference call. Just a reminder, today's conference is being recorded. Participating in the call this morning are: Jon Ayers, Chief Executive Officer, Merilee Raines, Chief Financial Officer, and Jim Moraldi, Director of Investor Relations.

IDEXX would like to preface the discussion today with a caution regarding forward-looking statements. Listeners are reminded that statements that members of IDEXX 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 quarterly report on Form 10Q for the quarter entered September 30th, 2007, and annual report on Form 10K for the year ended December 31st, 2006, in the section captioned risk factors which are filed with the SEC and also available on IDEXX's website, 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 if its estimates or expectations change.

At this time I would like to turn the conference over to Merilee Raines. Please go ahead.

Thank you, Matt. Good morning, and thank you for joining us today. In our earnings press release this morning, we reported fourth quarter revenue of $245 million, a year-to-year increase of 27%, and diluted earnings per share of $0.40, a year-to-year increase of 5%. While the impact of discrete items on this quarter's earnings was negligible, last year discrete items had a net favorable impact on reported earnings. Year-to-year earnings growth adjusting for these items was 29%. I also remind you that we have factored in a two-for-one stock split in the fourth quarter. Accordingly, prior year earnings per share and share counts have been adjusted for comparability in our press release. The quarter's results contributed to produce full-year revenues of $922.6 million, a growth of 25%, and full year earnings per share of $1.46 on a reported basis.

Full year earnings per share adjusted for discrete items were $1.58, a growth of 19%, when also adjusting 2006 reported earnings per share for discrete items. Reconciliation of adjusted to reported per share is included, as always, in our press release. Consistent with prior quarters in 2007, we saw impressive revenue performance in the fourth quarter that brought us ahead of the full-year guidance of $910 million to $915 million we gave in October. Greater than anticipated impact from currency in fourth quarter contributed about $2 million to our revenue over delivery. Our full year earnings per share were at the high end of our guidance on both the reported and adjusted basis, as better as anticipated revenue performance was somewhat offset by a slightly lower gross margin than we expected. Let me now provide some highlights on the P&L. The fourth quarter revenue growth of 27% included 5% growth from currency and 7% growth from acquisitions. So organic growth adjusted for these two items was 15%. Full year organic growth was 14%. Our companion animal group segment had organic growth of 17% for the fourth quarter and 15% for the full year, with all product lines achieving double-digit organic growth for both reporting periods.

Placements of instruments in our IDEXX VetLab suite continued with the momentum we saw all year. Instrument revenues of $19.1 million grew 17% on a constant currency basis, and placements grew by 35%. Full year placements grew by more than 40%. As we have indicated, the fourth quarter is traditionally the highest quarter for placements and this was the case as well this year across all geographies. The cumulative placement of IDEXX VetLab stations, the information management system for the current in-house suite and soon to be launched Catalyst and SNAPShot Dx, now stand at close to 5,900, which is higher than our previous estimates for the year. Instrument consumables sales, up $52.6 million, grew organically 16% for the quarter and 15% for the total year.

Our point of care rapid assays with revenues of $31 million had organic growth of 19% for the quarter and 13% for the year. U.S. distributor inventory levels for rapid assays and instrument consumables remained in the three to four week range, based on forward-looking demand, and year-to-year changes in inventory levels did not have a meaningful impact on organic growth rates for these product lines. I note, however, that in the fourth quarter in Japan, we changed distribution methods from a combination of direct sales and use of multiple distributors, to an exclusive distribution arrangement for our kits and instrument consumables. The initial stocking order resulting from this change favorably impacted our rapid assay growth rate by about 5% and our instrument consumables growth rate by about two points. Our reference laboratories and consulting services business had reported growth in the fourth quarter of 33%, with currency contributing 4% and acquisitions contributing 17%, to yield organic growth of 12%. Organic growth for the total year was 15%, and for the first half of the year, 16%, with the pet food recall benefiting the full year and first half, by an estimated 1% and 2% respectively.

As for the longer term organic growth rates for our largest companion animal product lines, we reaffirm 9% to 11% for instrument consumables and 8% to 10% for rapid assays. Though the growth rate for rapid assays has been above this range for 2007, growth from price has been a significant contributor to overall growth, as we have redesigned marketing programs, and as customers have converted to our higher value, multiple analyte parasitic disease screen, SNAP4Dx. This test panel, which was launched in in the fourth quarter of 2006, represented about 30% of our parasitic testing unit value in 2007, versus about 5% in 2006. While we believe there's still plenty of opportunity for further conversions from heartworm-only testing, we expect the rate of conversion and therefore the impact of price will diminish over time. While we are also reaffirming our longer term guidance for labs of 13% to 15%, we believe that near term growth will be at the low end of that range, or perhaps a couple of points or so lower, due to the tough compare with the first half of 2007, created by the pet food recall related testing.

Our practice information management and digital radiography systems had organic growth of 21% for the quarter, and 19% for the full year. We are very pleased to see improvements in our digital business over the last six months and decision to strong placements in the fourth quarter, we are entering 2008 with a healthy backlog. The 31% growth we reported in our pharmaceutical business was favorably impacted by about 20 points, due to the timing of a couple of large orders that will create a tough compare in the first quarter of 2008. Production animal sales were $22.2 million for the quarter, a reported growth of 34%, which results in large part from the first quarter acquisition of Institut Pourquier, contributing 16% and significant favorable impacts from currency of 11%. Though this business is influenced by disease outbreaks and government disease eradication efforts, and therefore testing tends to be more episodic in nature than our other businesses, we believe the organic growth of 8% for the full year 2007 is in line with longer term trends.

Water sales of $17.3 million grew organically 12% for the quarter with a timing of shipment of some standing orders favorably impacting the quarter's growth by a couple of points. Additionally our new collaboration with Invitrogen distributed another 6%. We anticipate that Invitrogen's product, which compliment our IDEXX developed products for cryptosporidium and giardia testing in water will contribute about 4% to 5% in our water growth in 2008. Looking at the rest of the P&L, gross margin at 50% of revenues was about a point below our expectation. The very strong instrument placements, with their relatively lower gross margins were a contributor, as were lab services, with lightly lower than forecast testing volumes and slightly higher costs, particularly in our more recently acquired labs. As we have noted, we see margin improvement in both instruments and lab services as eminently achievable and expect them to be key contributors to margin expansion over the longer term. Operating expenses, including R&D and SG&A, were about 35% of revenues, about in line with our thinking, as was the effective tax rate of 30.5%.

As for the balance sheet and cash flow, we ended the year with $60 million in cash, and $73 million in debt, for a net debt position of $13 million. Free cash flow as defined in our press release was $18 million, or 72% of net income for the quarter, and for the year 78% of net income, excluding noncash discrete items. In looking forward to 2008, we now project revenues of $1.05 billion to $1.07 billion for the year. This would represent a reported growth of 14% to 16%, with acquisitions estimated to contribute 1% and currency to distribute 2%, so organic growth of 11% to 13%. For all of our businesses over the near term, we will be watching closely to see if any negative trends develop as a result of the economic downturn. So far, we do not see those trends. And while we can't entirely discount the potential for a recession to impact our near term growth rates, we have seen historically that our businesses are relatively recession resistant. Accordingly, we believe that any impact of an economic downturn would be unlikely to take us below our revenue and earnings guidance range and we certainly would not foresee any change in the long-term favorable trends in our served markets.

We expect to see reported revenue growth rates strongest in the first quarter at 18% to 20% as we still see incremental impact of acquisitions completed through the first quarter of 2007, and then growth rates for the remaining quarters are expected to be more on par at 13% to 16%. We project gross margin as a percentage of revenue to be 51% to 52% for the full year, with the highest gross margin as a percentage of revenue in the second quarter, given the seasonality of our relatively high margin rapid assay products. The full year 2008 gross margin percent is anticipated to be about on par with 2007's, when adjusted for discrete items, with product mix impact, that is instruments and service businesses, showing higher volume growth than relatively higher margin kits and consumables, largely offsetting operating efficiency gains and pricing favorability.

Our production learning curve for our new instrument platforms will be an important factor in our ability to achieve our anticipated gross margin performance over the year, and we believe we will benefit greatly from the learning experiences and the competency developed since our latest launch in 2002. Operating expenses should average out to about 36% of revenues for the year, and we expect operating margins to be about 16% of revenues for the full year, with the first part margin the lowest at about 15%, due to the timing of commercial activities, and then showing some improvement in ensuing quarters. As we indicated in our last call, we are not expecting much margin expansion in 2008 from 2007 as adjusted to exclude discrete items. As our first priority will be to make sure that we are affectively supporting our Catalyst Dx a SNAPShot Dx launches, and providing our customers the great experience that they are anticipating. We do, however, expect that margin expansion will steadily develop over the next several years, driven primarily by improving cost profiles for our instrument platforms, scale economies and operating efficiencies in our reference laboratories, and revenue mix shift toward our increasingly profitable instrument consumable sales.

We expect the tax rate to be 30% to 31% for the year. This rate anticipates the extension of the federal research and development credit into 2008. If this credit is not extended, our rate will likely increase. Net interest expense is expected to be about $2.5 million. Share count is projected to decline about 500 shares or so over the course of the year from the 2007 fourth quarter levels. This is due to the net impact of share repurchases and equity compensation issuances. All of the aforementioned factors lead us to a full year earnings per share projection of $1.83 to $1.87. This translates to year-to-year growth of 16% to 18% from 2007 earnings per share as adjusted for discrete items. As for the balance sheet, we project DSO to remain at approximately 40 days, inventories to range from $95 million to $100 million, and capital expenditures to be $120 million to $130 million.

As noted during our third quarter call, this is a significant step up from expenditures in recent years and it is driven by the expansion and the upgrade of our primary facility in Maine. Work done on this project in 2008 is estimated to be about $75 million. We anticipate the project will be completed in phases from 2008 through 2011, and will cost about $140 million over this three-year period. The initial phase will provide us with much needed, more efficient manufacturing and R&D space. As a result of the significant investment for this project, we anticipate that free cash flow will be approximately 40% of net income, which is the below historical levels of 80% to 100% of net income. Now, I will turn it over to Jon for further comments on the business.

Thank you, Merilee, for that review of the financial performance for the fourth quarter, the full year, and our outlook. We had strong revenue performance driven by the organic growth of our businesses and aided by a variety of other factors, including favorable currency and acquisitions. We finished an already strong year with a great finish in most of our businesses, particularly the companion animal group which comprises 82% of the company's revenues. Instrument placements worldwide in the fourth quarter were extremely impressive as Merilee reviewed. The most important of these instruments is our chemistry analyzer, VetTest, which generated by far the most consumable demand of any of the analyzers in the suite. Global placement of VetTest were up an amazing 68% for the fourth quarter over last year.

As a result of great year and placements and loyalty, we now have an estimated active worldwide installed base of 30,000 VetTest customers. We also exceeded our targeted sales of IDEXX VetLab stations since the launch in Q1 of 2006, achieving 5,900 cumulative placement versus the target of 5,500 that we discussed in the quarterly calls over the course of 2007. As a reminder, this cumulative number stood at about 4,600 at the end of the third quarter. Customers who have purchased an IDEXX VetLab station either by buying a LaserCyte hematology analyzer or as a stand-alone unit, benefit from highly appreciated data management and reporting features that increases the convenience of their in-house IDEXX VetLab. In addition they have also taken the first step getting ready for the future, as IDEXX VetLab station is also the controller for the soon-to-be launched next generation analyzers from IDEXX.

We also launched on schedule in December the IDEXX Coag Dx instrument, which adds to the IDEXX VetLab suite the capability to detect bleeding disorders. It is important to know of a bleeding disorder in certain high-risk cases in advance of going under surgery, as you can imagine and also in emergency cases of suspected accidental poisoning of a pet. As customers fill out their in-house lab suite, with LaserCyte, IDEXX VetLab and Coag Dx, and other instruments they add capability for immediate diagnostic information at the point of care that cannot be duplicated. So as we upsell our customers on additions to their in-house lab they become more loyal. Customer loyalty combined with new customer acquisition are the primary drivers of consumerable growth, which in turn is the primary driver of profit growth in this installed base business model. So it was nice to see that the fourth quarter we had strong sales of all of our instrument systems, both to existing and new customers.

Let us turn to an update of our major instrument launches: Catalyst Dx and SNAPShot Dx. We are proceeding right on schedule with the launches by having showing these instruments this week in Orlando at the North American Veterinarian Conference. To remind investors, Catalyst Dx is our next generation chemistry analyzer. It is specifically designed to advance in-house testing with the following combination of features that puts it in a class by itself. First, Catalyst Dx incorporates all the tests that make VetTest the leading chemistry voice in the market today, including the use of dry slide technology which is the gold standard in accuracy and precision in both the veterinarian and human medicines. Second, Catalyst Dx allows a technician to run a patient sample with less hands-on time than it would take to prepare that same sample to send to the outside lab. Third, Catalyst Dx expands the menu of tests and instrument test capacity. For example, Catalyst can run a complete profile such as a 23 chemistry test panel, including electrolytes and deliver a result in eight minutes. Fourth, Catalyst runs multiple patients simultaneously, eliminating waiting during busy mornings when most preanesthetic panels are run. By running multiple patients simultaneously, the instrument can complete four preanesthetic patients in 16 minutes. [That said], Catalyst has a variety of key ease of use and features such as the ability to run blood and urine simultaneously, easy quality control and minimum regular maintenance.

Our second instrument, SNAPShot Dx increases the speed and ease of use of running endocrinology. Like Catalyst Dx, SNAPShot Dx brings a new level of convenience and throughput to the in-house lab. During the North American Veterinarian Conference, we have received an extremely positive response from customers who had a chance to see Catalyst Dx and SNAPShot Dx instruments in person. Customers were able to load the instruments themselves and thus have the direct experience with how easy the instruments are to run. We are estimating that well over 50% of the customers who came to our booth at the show and saw the instrument had an interest to purchase this system this year, an incredible response rate. Customer responses to the instruments at the show reinforces our confidence that we will not be demand constrained during 2008 as we ramp the manufacturing phase. Both Catalyst Dx and SNAPShot Dx are on the schedule for initial customer sales and deliveries in March.

Through the course of the next few quarters in 2008, we will be controlling the launch ramp volumes as we build experience. Our first objective, always, is to insure fabulous customer experience, expanding upon and reinforcing our brand and reputation in this market. Our strategy is to continue to advance the ease of use of the IDEXX VetLab suite for new and existing customers, and as investors know in the past, we've typically announce new features. In this light, we have another one on the way. By way of background, the endocrine test for thyroid function, called T4, is the most important [analy] on SNAPShot Dx and on the existing instrument in the field, SNAP Reader. For both -- for customers of both of these instruments, we will be introducing in the next few months a new shorter protocol, which will accelerate time of results by allowing the customers to run either plasma or serum samples.

I might mention that we will continue to be selling and placing VetTests in 2008 and beyond, giving us a two-tier chemistry instrument strategy that addresses the needs of all customer segments. And as we sell Catalyst Dx, we will be taking back many VetTests in trade that we will be able to recertify and place with new customers at low cost, continuing to grow the install base of customers for chemistry and thus consumable clients. As many investors know, we're focused on the long-term value of the IDEXX VetLab franchise. We control manufacture of most of the instruments and many of the consumables. We also have a great long-term partnership with our supplier dry slide technology, J&J's Ortho Clinical Diagnostics division. Dry slides are the chemistry consumables used for both the VetTest and Catalyst Dx. We are pleased to have recently extended our contract for dry slides sourcing for another five years to 2025. This extension, with the existing preset economics, gives us the confidence to continue to invest in instrument platforms that utilize this gold standard reagent technology in the veterinarian market.

I would now like to turn to a question we have been asked quite a bit recently. That is, how would a challenging outlook for consumer spending likely impact IDEXX? Merilee has taken you through our financial guidance for 2008. We feel very good about the plans we have in place to achieve these financial results which are rooted in the strength of our franchises and the growth nature of our markets. Our experience with the market for the pet healthcare, services, particularly with our technology offering, is that it grows in good times and bad. Care for one's beloved pet is always paramount in the pet owner's mind and not a large part of their discretionary income in the grand scheme. The market for companion animal veterinary care has never shown price sensitivity, when the veterinary practice is able to demonstrate medical value for the cost. The constraint to growth has typically been with the practice staff communicating this value, not with the pet owners willingness to pay for a high standard of care. While we can see -- while we see continued top line and earnings per share growth in 2008, as outlined by Merilee in our guidance, we are also setting up the company for the right investments for continued double-digit top line growth, and margin expansion in the years beyond.

Our IDEXX VetLabs instrument and consumable business while favorable long-term margin dynamics that arrive from the new platform. Our worldwide reference laboratory business will achieve margin growth as we leverage the benefits of global scale economics and continue with acquisition integration initiatives. Our new product pipeline continues to be extremely attractive across all our lines of business and extends well beyond the new instruments we have discussed in this call. There are a lot of exciting things going on in diagnostics these days in general, and we at IDEXX are extremely well positioned as the clear market and technology leader for diagnostics in the veterinary field, to bring these technologies in the form of new products to our customers around the globe.

Finally, before we open the call to your questions, I would like to thank all of the IDEXX customers and shareholders for their confidence in us this past year, and also offer special thanks to all of our employees around the world for their help in achieving 25% year-over-year revenue growth, and at the same time building and strengthening the company for exciting future ahead of us. So this concludes our opening remarks, and, Matt, we'd now like to open it up to Q&A.

Thank you very much, sir. Our question and answer session will be conducted electronically. (OPERATOR INSTRUCTIONS) We'll pause for a moment while we assemble our roster. Our first question today will come from Rick Wise with Bear Stearns.

Good morning, Jon. Good morning, Merliee. margins.

Good morning, Rick.

Let's start with maybe if you would with a little more perspective and color on gross margins. Merilee, you highlighted some of the factors involved and I'm guessing, like, the strong VetLab placements, which I assume are lower margin. I mean, that's another factor that could have helped, but -- and Merilee you emphasized, again, your comments that margin improvements are very achievable. Can you help us think through some of the moving pieces and talk about with a little more clarity where the gross margin improvements are rebounds are going to come from? Thanks.

Sure, Rick. Yes, as we look forward with gross margins, I think that, some of the things that we have talked about are -- we've got the dynamic of razor blade business. We've had a lot of focus on instrument placements, instrument placements. Our lower gross margin relatively than our other product lines and so as we get those placements, what we have seen is greater consumable growth. We've raised that guidance on consumable growth rates a number of times pretty consistently over the last couple of years and those consumables are at a high margin, and because, as we mentioned a number of times, of the economics of our contractual commitments, those margins continue to get more attractive over time. So there is a piece there on the mix side with our IDEXX VetLab product offering.

In addition, the reference laboratory business, we have grown quite a bit there over the last few years and a lot of that growth has come through acquisition of laboratories. Typically those laboratories we have seen are at lower gross margins than our longer standing laboratories. So we need to work on operating efficiencies with those labs, in particular. But also when you look at our worldwide network, we see lots of opportunities for additional efficiencies, things like global purchasing, commitments and whatnot that we can drive, best practices across laboratories. And importantly a big driver in the reference lab business will be continuing volume leverage, as we get more and more growth in that business, we get nice draw through.

Not to pick on this at all, but I'm still struck by the fact -- I think in every quarter, there are moving pieces and obviously capital has been strong for the last few years, but I'm still struck that it is the lowest -- if I'm looking at it right, the lowest fourth quarter gross margin since 2004. I just want to make -- is there anything unusual that happened in this quarter? Is it the acquisitions? Is that the biggest factor making that happen?

Well, acquisitions certainly are a factor, Rick, in that the acquisitions that we have done on the lab side, those were the areas where we saw the lowest gross margins. We know and we have plans in mind. We understand the areas that we need to address there, so that certainly is a piece of it. And, again, the very, very strong instrument placements were another impact, just really a mix issue for us, that certainly should bode well for the future.

Exactly. One last question for now. Going back to Catalyst Dx, Jon, I think you highlighted the experience in the past with LaserCyte and lessons learned, etc. Can you talk to us in a little more detail about why you are so confident that thinking back to LaserCyte that you have the manufacturing nailed this time, that the testing you're -- talk about your confidence there? And maybe just a little color on the curve of the rollout. Are you going to roll it out to four sites initially and let them use it for a month or 10 or 20? Maybe give us a little more detail on that. Thanks so much.

Okay. Thank you, Rick. Those are two good questions. Yes, we are very -- we are in much better shape in the launch of Catalyst internally. LaserCyte was a very, very successful commercial launch for us, but we devoted a lot of resources post launch to come down a learning curve and devote a lot of resources to insuring that the customer experience was positive. And so we really -- we've got three things that are different, I think, with Catalyst than with the hematology analyzer. First is, we had the experience of having already launched a major instrument platform, and many -- most of the people that are in leadership positions have been through that experience, and but that's just very, very helpful and was involved in the design of the instrument all the way through.

The second is that the fundamental team of hematology is more complex than chemistry by its very nature. You are measuring a biological variable, a cell, in hematology and we were using a breakthrough technology and introducing that, and there was some learning associated with that laser [probe dicometry] and a point of care instrument had never been done before, and we did achieve it to great results, but it was a higher technological risk that we took on than with chemistry. And then third, one of the great things about our chemistry strategy is we are using the exact same reagents. You have -- the slides have a little bit different shape, but the actual -- what's on the slide and the way to measure the chemistry is no different than the gold standard that we use in VetTest. And so we don't have any risk with reagents or how they work or anything with those lines with chemistry, they are well characterized and we feel good about that.

So it also reduces the risk. With regard to the rollout, thank you for that question. We expect to ramp this kind of similar to LaserCyte. If you recall, Rick, we launched the LaserCyte in the fourth quarter of 2002 and we sold about 1,200 in the first year of 2003, after the launch in the fourth quarter. We expect, with regard to Catalyst our plans, are not totally down precise to the unit, but we'll be launching that, of course, at the end of the first quarter, and expect probably in this case to have placements of 1,000 to 1,200 over the course of the year and that will be accelerated towards the end of the year as we go through a ramp process.

And our next question will come from Ryan Daniels with William Blair.

Yes, good morning, everyone. Merilee, another quick question on gross margin. I know you said on the last call that you would anticipate gross margin could be under some pressure in the first quarter due to scale up in the new product launches. Do you still anticipate that we should see a drop from Q4 to Q1 looking forward?

Hi, Ryan. I think that the -- we are not going to have a significant impact from Catalyst, particularly in the first quarter. The launch is going to be ramping. So I suspect that we -- as I guided here with that range of margin, of the 51% to 52%, that it will be kind of lower in the -- towards the lower end maybe in the first quarter, and then we'll be ramping up. Typically, as I mentioned, I think second quarter because of revenue mix and seasonality for our heartworm products, in particular, drives the gross margin up. That that will be higher, but then you will see margins sort of more relatively on par. So I suspect again a big driver in Q4 was the mix -- the product mix here of instrument sales. So I suspect we'll see some improvement from that in the first quarter.

Okay. That's helpful. And then you mentioned in your prepared comments that you had a kind of sales or distribution change over in Japan, going to an exclusive distribution arrangement. Can you just give us a little more color on what that is and maybe what drove that decision, more importantly?

Yes. We have -- Ryan, we have a -- I don't want to go into the details of the distributor, but we were really using a variety of distributors, and they weren't really adding much value other than logistics, and we started conversations with one distributor that had a value-added sales force that could work in partnership with us to help grow our business there. So we felt aligning with that more full functions, doctor more like maybe the distributors that we have in the U.S., that is more functioning and covering the entire country, was very, very familiar with the companion animal business, carried some other important and complimentary lines in the companion animal business that gives them more of an integrated solution would benefit us. In that case, they are also a stocking distributor, and so we have the initial stocking order that came with that, that they will carry inventory on an ongoing basis.

Sure, that's helpful color. And then two more quick ones. This is a bit of a follow-up. You obviously shared your thoughts on the potential for a domestic market slowdown and the ability to go through that, but now with 40% or so of your revenue, can you give us a little bit of an update on what you are seeing with those markets, and what the growth outlook looks like outside of the U.S. operations?

Our growth outlook is really unchanged in either the U.S. market or in our international operations, and so we feel pretty good about the opportunity actually across all of our lines of business. What is interesting, as you mentioned, is we do have 40% of our revenues that come from outside the U.S. The other businesses than the companion animal businesses are more representative internationally than even the companion analyst. The majority of the revenue, for example, in the production animal services business comes from outside the U.S. So, our revenue guidance for all of our businesses incorporates really an unchanged and favorable outlook for growth. And we are pretty diversified. We are really in all major geographies in one way or another in most of our businesses and most of the geographies.

Great. Helpful color there. Last question, Jon. You mentioned that the VetTest, if I heard you right was up 68% on a year-over-year basis, which is obviously a remarkably strong growth metric. Can you give a little more color with that an easy year-ago comp, is it a lot more traction internationally, or more market share gains here, or any color you can give on what's driving that really solid growth there?

It was great growth. 68%, you could have a -- that's not going to be measured by simply an easy comp. Because typically the fourth quarter is an important quarter. So I think it stands on itself as a pretty amazing statistic. It wasn't a particularly easy or hard comp last year. I think what we really learned was how to market the integrated VetLab and the value of the pieces coming together, not just VetTest, and all the new elements that we included in VetTest. It really a very, very different instrument platform today than it was two or three years ago. And a lot of that came together in our sales and marketing of the instrument suite in 2007.

And then on top of that, I think we really learned how to use IDEXX VetLab station as a value-added piece to the initial placement of the suite, again, adding more capability than we had with a simple analyzer. And the customers are really appreciating and they are pretty wowed by the kinds of things that IDEXX VetLab stations do. It's very visual. It is very information rich. It is designed to make a diagnostic information easily presented to the veterinarian. And so I think we really learned how to go beyond just marketing individual instruments to marketing a modular suite that can come together in different configurations to provide an in-house lab capability specifically designed for a particular customer. And we did that both in the U.S. and internationally, outside of the U.S. too. So -- but we are -- we still have an opportunity to improve in that area.

Great. Thanks, guys.

Our next question will come from Dawn Brock with JPMorgan Securities.

Good morning, Jon, good morning, Merilee.

Good morning, Dawn.

A couple of questions here. On the operating margin side it looks like G&A and R&D actually came in quite nicely, probably a little bit ahead of expectations, while sales and marking ramped up. Can you give us just some idea as to what you are looking at through 2008 for those expense lines?

Yes, Dawn. I think that just as I had indicated in the guidance going forward, we expect that the operating expenses as a percentage of revenue are going to be about 36% of revenue. I think that's fairly consistent with what we have been seeing.

Is there any way for you to just give us a little bit more clarity in breaking down those three different expense lines, leading in the operating margin?

Well, I think typically these as the -- I would see things as being fairly similar to the profile that we have seen in 2007, when you adjust out for discrete items, obviously. So, R&D typically is about 7% of revenues, and the SG&A will be the balance there, 28%, 29%.

Okay. Okay. Fair enough. The strong instrument placements, how does this typically -- and maybe you can give us a little bit of color on how you expect the instrument placements and the timing of the strength of those placements to play out from a consumables perspective? Are you expecting a nice ramp in the fourth quarter, based on the way that instruments were placed in the fourth quarter?

Well, Dawn, yes, thank you for that question. We have a very large install base so the nice thing about our growth is we are growing instrument consumables and we have given the longer term guidance of 9% to 11% off of the worldwide install base of instruments. Certainly the attractive placement success that we've had, really over the course of 2007, combined with really high loyalty, meaning continuing existing customer base, a very, very, very high percentage of loyalty, which we measure and which is really part of our strategy as we add more and more capability to even existing customers. And every quarter we've launched and announced something new that makes the VetLab have more capability than it had before. It gives us a strong confidence in continued consumable growth in that area.

Okay. Maybe just taking it a little bit further, Jon. When we are looking at the VetTest analyzers, there was obviously great demand for the instrument. Taking that to the next step, the demand for refurbished VetTest analyzers that are going to come kind of out of offices as people order the Catalyst. Where are you seeing the most demand for those refurbished instruments? And I think that at least the way I'm thinking about it, you are going -- it's really going to be Catalyst additive. It's not going to be merely a swap out. So where do you expect a lot of those kind of older refurb instruments to go? Are you looking at them being mostly international? I know do you a lot of reagent rentals now, but where are you seeing the greatest demand for that?

Well, thank you. That -- I think you characterized the situation correctly. Of course because the placement of Catalyst instruments will be weighted towards the back end of the year it -- if those recertified instruments on the VetTest side will also be available towards the back end of the year. We have to take them in trade. We have to go through a recertification process. It doesn't take that long. But they won't become available until we are really into the volume on the Catalyst. We will be placing VetTests over the course of the year, and actually we have a very good outlook for the first quarter in terms of continued instrument placements, really as a result of the great worldwide sales and marketing organization.

With regard to where the incremental lower cost VetTests will go, I would say, we wouldn't see too much of a change in our strategy in the U.S. with regards to smaller clinics, starter clinics, wanting the value of the integrated VetLab. So really where the incremental opportunity will be that will come from instead of a little higher cost, new VetTests, lower cost recertified VetTests will be for us to accelerate penetration in international markets, where typically practices can be a lot smaller. The nice thing about VetTest in those international markets is that the ability to actually use single slides is more appreciated in smaller clinics internationally because of the way they practice medicine. They are not used to as much using profiles and they are -- and they do like using singles and very small sort of testing exactly for what they want to test. We'd like them to test more, but that's how they were trained in vet school. And so the VetTest works really well in emerging markets, and that's where, of course, they are also a little bit more price sensitive with regard to the instrument initial placement, and that's probably on the margin where we are going to see the opportunities spill over, as we have a greater number of recertified instruments available.

Okay. Great. And my last question is, the revenue bump. Maybe I just wasn't listening carefully enough. But I'm wondering if you can just give us an idea of what is really representative of as we move into '08? Is it continued momentum in instrument placements? Are you getting some pricing traction?

Okay. Dawn, just to be clear, are you talking about the strong delivery in the fourth quarter and implications for 2008. Is that -- or --

The increase in the guidance.

The increase in the guidance.

Yes, it really is -- we are definitely now launching off of a higher base that we had in the fourth quarter. And I do -- we see -- we really see strengths across all of the businesses. Clearly as we've indicated we see continued momentum in the instrument placements. We will see some ability to have price increase as we have seen in previous years, as we continue to just add more value to our products. We have been able to realize price. So I think it's what we are seeing here are really just continuations of all of the themes, as we go into 2008, from 2007. Is that clear?

Yes, it is. Is there a lot of -- and this is probably a little bit of a trick question. But, I mean, is there a lot of conservatism in your looking at margins as being flat? I mean, if you think just about the sales and marketing needing to be ramped up for that, but being able to pull back a little bit on that, even at the gross profit level if that were to remain in that 51% to 52% range, it seems as though there's a little bit of leverage in the model from the operating expense lines. Am I misreading that?

Well, yes, let me just say that clearly one of the things that we said that makes 2008 a little bit tricky for us is just the instrument launches that we have. And so it's just -- we feel like we have a lot of great experience here. We are very well positioned, as we have indicated. But it also is an area that we have relatively less history with here. We are just launching. So I think we -- that becomes a key watch area for us, as well as with acquisitions and integration of acquisitions, we have plans and actions to achieve margin improvement. These things take a while to execute, so we try to build into our guidance performance that we believe is achievable, and as we have said is robust enough that if not everything goes right, we can still meet our guidance. And I think that -- that's what we have tried --

History has shown that not everything always goes right.

Got you Thanks so much.

Thank you.

And next we'll hear from Ross Taylor from CL King.

Hi. I had a couple of questions. First one relates to the SNAP platform. I think you mentioned in your prepared remarks that 4Dx, the penetration might be maturing some at around 30%. I just wondered, are there additions you can make to that product line going forward to keep it fresh and keep customers trading up to higher priced, more value-added products?

Thank you, Ross for that question. The -- I think what we are saying is the impressive rate of growth that we had in the adoption of 4Dx from really 6% to 40% might not continue at the same rate, although we do not feel that 4Dx or even 3Dx is by any means mature in its penetration. You are growing on a larger base than you were growing in 2007 and therefore the favorable mix shift will be a smaller amount, but I will tell you, we are -- we have a long time -- a long-term, very attractive franchise for continued growth in parasitic disease testing. We are certainly less than -- I would say, less than half of ultimately what we think we could be penetrated in that market. And the veterinary world penetration rates are slow, but they are also sustained as a result. In answer to your question of, I guess, more generally about the pipeline for the SNAP product, we have a continued, very exciting pipeline. We're -- we'll have some more information on that in later calls over the course of 2008. All of that really gives us confidence for sustained 8% to 10% growth in an important franchise. It is a good margin franchise for us. One of the things that we didn't talk about is we continue to be very excited. It's not a big product, but we continue to be excited about the launch of our pancreatitis test, point of care test now, SNAP CPL. And we achieved an extraordinary, over 25% penetration of the U.S. customer base in the first six months of launch, and that's really -- given that it takes a while to get the word out in the veterinary world, that's an extraordinary first success.

And while that's not going to be anywhere near as big as our canine parasitic disease franchise, it's just a good single that will continue to help us deliver growth. But we also have other areas in the pipeline beyond our existing franchises that will continue to build the SNAP family. And then, finally, I just remind Ross, and all investors, I know you know this, that we are excited that one of the features of SNAPShot Dx that we anticipate adding as a software update later in 2008, is the ability to interpret and log it electronically the result from our entire SNAP family, not just the three quantitative assays that we have on SNAPShot Dx and SNAP Reader right now, but all of the canine parasitic disease screens, the feline and SNAP CPL. All of those will be interpreted, adding another convenience feature to the IDEXX VetLab. And one of the nice things about the SNAP family is really the vast majority, well over probably 90% of the veterinary practices in the U.S., purchase some form or another of SNAP. So it gives us a cross-selling opportunity.

Okay. That's very helpful. And with regards to the SNAPShot, I mean, any estimates or projections as to how quickly that might be adopted by veterinary practices? And would you anticipate that consumption or utilization of some of the SNAP tests increases among the vets that do have the SNAPShot, particularly when it has the capability to read the parasitic tests?

Yes. I think with regard to placement for the SNAPShot Dx, they will probably follow right along in line with Catalyst. I would say the vast majority of purchasers of Catalyst will buy a SNAPShot along with it. I think the thing that we are most excited about with SNAPShot Dx is the ease that it's going to provide in doing the thyroid test, which is an important part of a full panel for a senior or a geriatric pet, a pet over, in this case typically over seven years of age. Typically you want to add T4 to your panel, and today the vast majority of T4 that's run, the vast majority is actually sent out to the reference lab, because while we have had in-house T4 testing capability, it has not been as convenient as -- and it takes longer as chemistry or hematology. And we are going to be changing that with the new capabilities of SNAPShot Dx, that we will be introducing over the course of the year. And so, again, it's just nice when you have more complete capability in house.

Okay. Good. And last question, it's been a -- I guess close to a year now since you all have completed any acquisitions. Are you all still active in evaluating potential acquisitions, or do you still want to digest what you have acquired about a year ago before adding some new businesses?

Right. Thank you. We did do four acquisitions across our businesses, really spread between -- towards the tail end of the fourth quarter of 2006 and the first quarter of 2007, and that was an unusual period of acquisition activity for us. I think it was really -- acquisitions are not necessarily something that you can time, and that was certainly a higher rate of acquisitions that we have done historically or that we would anticipate doing going forward. We are always considering acquisitions, they're little niche acquisitions, sometimes it's just a technology acquisition that we can do something with in terms of introducing a product. But with regard to the overall sort of outlook, if you will, I think we are mostly an organic -- a technology-driven company and an organic growth story. Acquisitions, historically, before that period and probably going forward will play a minor role in contributing to revenue growth.

Okay. That's helpful. Thank you.

And that is all the time we do have for questions. Mr. Ayers, I will turn the conference back over to you.

Okay. Again, just to conclude, I want to thank everybody for calling in. And just, again, thank our customers and our shareholders more broadly, and certainly our employees for a great 2007. And we're very, very excited to be looking forward to 2008. Our opportunities for the next five years -- I think, our next five-year plan looks as exciting as it ever has in the period that I've been with IDEXX, and we look forward to accomplishing another great year in 2008. So thank you very much for that, and this concludes the call.

That does conclude today's teleconference. We would like to thank everyone for your participation, and wish everyone a great day.