愛德士 (IDXX) 2008 Q2 法說會逐字稿

Good day everyone and welcome to the IDEXX Laboratory's second quarter, 2008 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 [Susan Astrals], Director, Investor Relations.

IDEXX would like to preface the discussion today with a caution regarding forward-looking statements. Listeners are reminded the 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 period 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 quarterly report on Form 10-Q for the quarter ended March 31, 2008, and Form 10-K for the year ended December 31, 2007. In the section captioned, risk factors, which are on file with the SEC and also available on IDEXX's website IDEXX.com. In addition, any forward-looking statement represent IDEXX's estimates only as of today and should not be replied 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 it's estimates or expectations change.

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

Thanks. Good morning and thank you for joining us. As we noted in our earnings press release today, revenues for the quarter were $280.6 million. A year-to-year increase of 18%. And diluted earnings per share were $0.63, an increase of 85% from the second quarter of 2007. To remind you, we had discreet items last year of $0.10 relating to acquisitions and the write down of pharmaceutical inventory and related assets. So earnings per share growth adjusted for discreet items was 43%.

This quarter's revenue and earnings were impacted by the timing of sales of our feline insulin product, PZI VET. As we noted in our first quarter call and 10-Q we expect that we will be selling substantially all of the remaining inventory of this product in the second quarter as we communicated to customers that the product would no longer be available once the current supply was depleted. We, in fact, did sell all the inventory in the second quarter and the incremental revenue impact was approximately $10 million with an earnings impact of $0.09 in line with our thinking.

As we also noted in April, our financial plans had anticipated sales of this product ceasing by the end of 2008 so this event does not impact full-year financial guidance. Earnings for the quarter were about $0.03 to $0.04 above our expectations at the time of our call in April and this was the result of a somewhat more favorable gross margin and continuing operating expense management in response to slightly lower revenue and now for some further detail on the P&L.

The second quarter revenue growth of 18% included 5% from currency, and virtually no impact from acquisitions. So organic growth was 13%. As we further normalized for the timing of PZI VET sales a 4% favorable impact to growth and a top compare created by last year's pet food recall of 1% negative impact, the adjusted organic growth is about 10.5% or about 2.5 points below the 13% we experienced for the full-year 2007 when adjusting for the ped food recall. Consistent with our thinking at the time of our first quarter call, we believe that the weakness in the economy is having a modest effect on some our product line and has impacted total Company growth by 1 point or so. I will discuss other factors influencing organic growth now as we look at revenue performance by each product and service line.

Our IDEXX VET Lab instrument revenues were $15.3 million, up 10% on a reported base and 4% when adjusted for currency. Placements were essentially flat year-to-year against a very strong compare in the second quarter of 2007 when placements were up approximately 35%. We continue with our controlled launch of Catalyst and SNAPshot Dx and delivered and recognized revenue on only a small number of each instrument in the second quarter. However, our salesforce has spent time detailing the instruments to customers and they have been building a significant order book for both.

Our instrument consumable sales of $57.1 million grew 8% organically and also 8% when taking into consideration the further impacts of changes in distributor inventories and the pet food recall. We estimate that the weakness in the economy impacted consumable growth by 9 to 11% driven primarily by the impact of new instrument placements. Our point of care rapid assays with revenue of $41.3 million had organic growth of 11% or 12% when adjusted additionally for changes in distributor inventories. There is some seasonality in this business with the second quarter experiencing the greatest volume of canine parasitic disease testing. Customers continued to convert their testing protocols to our most comprehensive parasitic panel, SNAP 4 Dx and in this quarter it accounted for more than 50% of our multi-analyte panel volume and nearly 60% on a dollar basis. As the rate of conversion to this higher value test declines over time, we continue to project an 8 to 10% long-range growth for this product line.

U.S. distributor inventories for instrument consumables and rapid assays averaged out to just over three weeks at the end of the quarter based on forward-looking demand. Our laboratory and consulting services delivered reported growth of 16% for the second quarter, with acquisitions contributing 1%, and currency contributing 5% to produce organic growth of 9%. We estimate that last year's pet food recall impacted organic growth by about 2% so organic growth as adjusted additionally for this factor was approximately 11%. As we believe that this business, along with instrument consumables is the most likely to experience a slight drag from the economy, we estimate that growth rates over the next few quarters will continue to be in the 10 to 11% range.

Our practice information management and digital radiography systems had another strong quarter with 18% organic growth. As in the first quarter, we exited this quarter with a healthy backlog, which positions us well for the start of the second half. Additionally, a recently released update to Cornerstone, our practice management software, enables customers to connect their IDEXX digital imaging systems to Cornerstone, in a manner that permits more efficient requesting, capturing, viewing, sharing and invoicing of digital X-rays, all from within the Cornerstone system.

As for pharmaceuticals, the acceleration of the PZI VET sales into the second quarter will reduce our run rate in the second half. We anticipate that pharma sales in the second half will be approximately $3 million as compared to $20 million for the first-half. As noted in our April call, we are currently working our way through the regulatory approval process for a replacement insulin product that we expect to be on the market next year.

Our production animal services line had 15% reported growth and 4% organic growth. The entire difference in growth rates attributable to currency. As noted in the first quarter, the impact of lower selling prices for BSE test is the primary driver for the lowering of organic growth rates from the 8% we experienced in 2007. Sales of our water products were very strong in the second quarter, with 14% organic growth. The collaboration commenced last year with Invitrogen contributed approximately half of the organic growth in the quarter. International markets also experienced solid growth in the second quarter including China as that country incorporates our microbial testing product into their post earthquake recovery efforts and also their preparations for the Olympics. Once we pass the first anniversary of our Invitrogen collaboration in the third quarter, we anticipate that growth in our water business will be in the mid-single-digits.

Looking at the rest of the P&L, gross margin at 54% of revenues was nearly 0.5 a point better than our expectations. This was driven largely by revenue mix with our relatively higher margin instrument consumables, comprising a larger than anticipated portion of our revenues. As an additional note, the seasonal ramp of our rapid assay products and the bolus of pharmaceutical sales were the key contributors to our our higher gross margin in the second quarter than that which we have seen in recent quarter as managers are adjusted for discreet items. Operating expenses at 33% of revenues were about 150 basis points lower than our expectations. As in the first quarter, we carefully managed expense growth to keep it in check with top line growth and at the same time, to ensure that key initiatives receive appropriate resources. I'd also note that the operating expense percentage is reduced in the second quarter by the incremental PZI VET sales that required minimal operating expense support. A normalized percentage would be approximately 34%.

Our effective tax rate of 32.4% was essentially in line with our thinking as was net interest experience. As for the balance sheet and cash flow we ended the quarter with $75 million of cash and $158 million of debt for a net debt position of $83 million. Free cash flow as defined in our press release was $46 million or 117% of net income for the quarter. With regard to our latest outlook for the full-year 2008 we project revenues of $1.06 to $1.07 billion, this would represent a reported growth of 15 to 16% with acquisitions estimated to contribute 1%, and currency to contribute 4%, to organic growth ever 10 to 11%. This is a $5 million reduction in the high-end of our previous guidance range and is primarily driven by the change in anticipated revenues from Catalyst and SNAPshot Dx instrument placements during their controlled launch phase.

Year-to-year -year growth rates for the second half will be about 5 points lower than the first half, primarily due to the impact of the timing of PZI VET shipments. We continue to project gross margin as a percentage of revenues to be 51 to 52% for the full year with a second half margin abut 3 points below the first half, driven largely by revenue mix. The first half margin benefited from the seasonal sales of K-9 rapid assay products and the timing of PZI VET sales as both products have relatively high gross margins. In the second half, we anticipate that instrument sales with relatively lower gross margins will play a more prominent roll in the revenue mix with the ramp of Catalyst and SNAPshot Dx combining with traditionally strong capital sales in the fourth quarter.

Operating expenses are projected to be 35 to 36% of revenues for the full-year, with the second half 1 to 2 points above the first half, due in large part to the PZI VET revenue timing. Given the timing of some program spending we anticipate that the third quarter operating expenses will increase 4 to 5% sequentially and then decline in the fourth quarter. Our thinking about gross margin and operating expenses leads to a projected full year operating margin of 16 to 16.5% of revenue. As we have done in the first half, we will carefully monitor spending. The biggest watch area will be the cost to manufacture and support Catalyst and SNAPshot Dx. Our priority remains to ensure a first rate customer experience and we'll dedicate the resources necessary to make that happen.

Achieving scale and learning curve experience Instrument Manufacturer will be a driver of future margin expansion in addition, to growth of consumable revenue resulting from the expansion of the installed base of our instruments. We also expect to gain over time volume leverage and operating efficiencies in our global network of reference labs. We continued to project the effective tax rate to be approximately 31% for the full-year, with rates in the third quarter and fourth quarter at 31.5 to 32%. As a reminder, a discreet event in the amount of $0.02 in the first quarter yielded an effective rate of 28%. Our projection does not incorporate the benefit of the federal research and development credit that has not been renewed post the expiration at the end of last year. Should the credit get renewed, we anticipate that it would reduce our full-year effective rate by 150 basis points. We project the weighted average share count for the year to be roughly at second quarter levels. All of these factors lead us to a full-year EPS projection of $1.89 to $1.92 on a reported basis or $1.87 to $1.90 as adjusted for the first quarter discreet tax item. Our previous guidance adjusted for the discreet item was $1.82 to $1.85.

The $0.05 increase in our guidance is due to our stronger than anticipated second quarter performance and our belief that we will continue this momentum in the second half of the year with focus on our key priorities and appropriate control of spending. With regard to other items we project free cash flow at 60% of net income and capital expenditures of approximately $100 million. And now I will turn it over to Jon for some further comments on the business.

Thank you, Merilee. We're very pleased with the second quarter and the first half of the year. Revenue for the second quarter finished just about on our expectations with a 14% year over year growth adjusting out the exceptional pharma revenue. In addition, we achieved impressive earnings growth. I think the most informative way to view earnings growth is to reduce the non-GAAP number in the press release from the $0.09 of income that resulted from the exceptional pharma revenue and if you do that, you get 23% growth in earnings per share for the quarter. Good . revenues and earnings results on any measure to be sure. I would also like to observe that IDEXX has now crossed the $1 billion threshold look at our trailing four quarters of reported revenue. This is a really exciting accomplishment for IDEXX and our employees, as it was a goal of the strategic plan we put together just a short three years ago when we were only a little more than half the size. At the time internally we dubbed this our, Blueprint to a Billion. And I would like to take the opportunity to congratulate and thank the IDEXX team for completing the construction of this blueprint and ahead of schedule, no less. At the same time we still have much work ahead of us in building a great Company.

We're a Company focused on bringing innovative technology to our served markets, most notably diagnostic and information systems technology to the pet veterinarian and the second quarter showed that our global markets continued to exhibit good growth, even during times when U.S. consumers, many of them pet owners are facing difficult economic times. People take care of their pets and generally do not view their pet's health as a discretionary expense.

In addition o our top line growth that Merilee has referenced I'm very pleased to see our cost management and productivity efforts resulted in good margin performance for the quarter and half year, adjusted for the exceptional pharma revenues and gross margin. Even as we continued to invest in the most important new product innovations in our R&D pipeline and other key initiatives that drive sustained growth and profitability at IDEXX. Our focus on productivity and cost control through such well established tools as Six Sigma, Process Re-engineering, Lean, Global Supplier Management and continuous improvement of all types is continuing to take shape and will add an important dimension to the Company's financial performance in the years to come. Our most significant set of innovations recently brought to the market involve ours IDEXX VET Lab, integrated suite of point of care instruments and related consumables.

As investors know we made our first deliveries of our next generation bench top analyzers, Catalyst Dx and SNAPshot Dx at the end of the first quarter. Customer feedback continues to be excellent. Customers are beginning to truly appreciate having IDEXX VET Lab suite upgraded with Catalyst Dx and SNAPshot Dx has the potential to create a paradigm shift in how lab work is performed in the veterinarian practice. Catalyst is so easy to run that it not only saves time versus other existing in clinic instrument systems it also provides a tech productivity advantage when compared to the time required to prepare that sample for send it to the outside lab.

What we're hearing from our customers who have Catalyst in their practices now and built into the routines is that they are surprised at how efficient their in-house labs run in the morning during the rush hour, if you will. A lot of in-house blood work is run first thing ahead of surgery scheduled for the day. Catalyst Dx has three features which really help at this point in time, the eight-minute turn around time, the high throughput by being able to run multiple samples simultaneously, and very little tech hands on time. In fact, customers tell us that Catalyst is a delight to the technicians an important element of the practice staffing model. These workflow and throughput advantages in the morning are particularly appreciated by medium to larger vet hospitals, which, of course are higher volume consumable users. So the larger the practice the more interesting are the economies and efficiencies of Catalyst Dx as part of a full integrated in-house IDEXX suite.

During the second quarter, our salesforce easily achieved their allotted order limitation of Catalyst and SNAPshots that we gave them at the beginning of the quarter. This market response is gratifying and demonstrates the reasons why we do not think we'll be demand-constrained with sales of the instruments any time soon. Our focus all along is to conduct a controlled launch process that gates our rate of instrument deliveries in such a way as to ensure a great customer experience and allows us to learn along the way.

In the second quarter, we built an installed base of instruments large enough for us to identify the design and software refinements needed to ensure that we could deliver an excellent customer experience at much higher production volumes. So for for example, as of today we have almost 100 units between Catalyst Dx and SNAPshot Dx placed with our customers.

As a result of early feedback that we have received during this part of the controlled launch process we're incorporating some modest changes to the instruments and more importantly continuing to advance the software programming. This will allow us to continue to achieve a great customer experience with a less intensive customer support approach as the installed base grows. In the meantime we're obviously building a nice backlog of orders as orders were significantly higher than deliveries in Q2. As a result of our controlled launch approach, we expect that we will ship about 600 to 800 units of each instrument type to customer in the second half of the year.

In our Rapid Assay line of business we continued to see strong growth in parasitic disease screening market with our SNAP 4Dx product, which tests simultaneously for heartworm, Lyme disease and two other check point diseases. We also have had an excellent reception by customers duration our limited launch of SNAP Feline triple. To remind investors where existing SNAP Feline combo tests for two important infectious diseases, feline immuno deficiency virus and feline leukemia virus, feline triple adds heartworm spot to the SNAP test kit. Heartworm is an underappreciated, underdiagnosed parasitic disease in cats although it is getting a lot mor attention lately. Feline Triple will provide expanded value to Feline Combo customers and for no increase in price. For this reason we will be simply replacing Combo offering with Triple from those two segments. We currently expect that switch to happen in the fourth quarter.

Speaking of the rapid assay business we continue also to progress with the introduction of expanded capability of SNAPshot Dx later in the year. We anticipate by the end of 2008, subject to U.S.D.A. regulatory approval time lines, SNAPshot Dx will have the ability to read, interpret, and log the results of our core SNAP devices including Feline Triple, Canine 4Dx and SNAP CPL. With our other SNAP products following early next year. This increased capability of the IDEXX VET Lab instrument suite in the area of infectious disease screening significantly broadens the customer's ability to move to the electronic medical record and the printout of all in-house lab results in a single report for that patient. SNAPshot Dx with Rapid Assay capability will also provide another gratifying boost to technician productivity and satisfaction.

We have made several other product advances that help our customer move to the paperless practice. As Merilee mentioned we have launched a new version of our Cornerstone Practice Management software that fully integrates our digital radiography offerings and its associated PAS software with our practice management system. These two systems are designed to work as one, where the radiology study can be ordered from the customer record and the result in digital images are included automatically back in the single patient medical record, all the while ensuring the invoice captures the charge associated with the study. We are by far the first to the market with this level of integration between a world-class digital radiography system and a market-leading practice information management system.

We continue to see a very attractive growth market for digital radiography and I'm pleased with the progress this business has made in the last 12 months. At the time we also lead the way with integration of our products and services with many other leading practice information management software providers . In fact, our IDEXX VET Lab instrument suite electronically downloads results to over 70 different information systems in use in the veterinary practice worldwide. We're committed to an open system approach for the electronic medical record integration and this is approach is much appreciated by our broad customer base.

In summary a combination of continued double-digit organic growth from a diversified portfolio of global technology-based businesses with our instrument business with Catalyst Dx and SNAPshot Dx and strong pipeline not only gives us confidence for updated financial guidance for the full year of 2008, but our longer term outlook of low-double digit revenue growth and mid-teens earnings per share growth, driven by both the top line and productivity initiatives that drive manager improvement. Particularly in our two largest businesses, the IDEXX VET Lab and consumable business and our Global Reference Laboratory business. So at this time I would like to open it up

(OPERATOR INSTRUCTIONS) Our first question will come from Ryan Daniels with William Blair, please, go ahead.

Thank you, good morning, everyone. A couple quick questions on Catalyst, Jon, I don't know if you have been able to track this yet, but I'm curious if those people using it, if you could comment on the use of the consumables, i.e. for your early adopters have you actually seen increased utilization and consumables? And then a second derivative of that is have you seen a decline in your outsource lab work with them, given the ease of use at the point of care?

Thank you for that question, Ryan. It's really, I think too early to draw any kind of conclusions with regard to utilization. There are just a lot of moving part there's. In general, we do not expect there to be a particular shift between in-house testing and reference lab testing. What we would like to see here is maybe a growth in overall testing just because of the ease of use. But to answer your question, I think it's just too early to be able to call out any trends.

Fair enough. Then on Catalyst, it sounds like maybe your thoughts now are 100 or so less than you may have previously thought. Is that just taking more time to make sure the software is upgrading appropriately before you get it out in the market or anything else in that particular that is bringing that down just a little bit?

Thank you, again, we're in the controlled launch process and the gating factor here is a positive customer experience with every new system installation. It's an important platform for the practice. It needs to operate consistently and flawlessly and as we have gained early installed base experience we have some improvements in software and in fact, we're going to be releasing a new version of the software next week which will take that up a notch.

Then on the Feline Triple you mentioned a successful early launch of that. Can you give us a feel for how many of Feline Assays have been replaced or shifted in the Triple? And then maybe any color on if if that is leading to market share gains or if at this point it's really upgrading your existing customers and distributors who use that?

We have a couple hundred customers who are using the Feline Triple and I think it's basically a one for one replacement. Our combo product is used in roughly 20,000 practices in the U.S. so it's pretty widely utilized as a way to test for these feline diseases and we really see this a one to one replacement.

Last question and I'll hop back in the queue. I'm just curious if you have any commentary about what is going on with the economy? If I look at your ex currency growth it seems like most of your divisions actually saw better growth this quarter, certainly the Labs was a lot stronger than we would have anticipated and uptick from Q1 as did instruments and even a practice management system. So is that a sign that you're actually seeing some stabilization or improvement, or is there anything unique that has driven some of the organic growth higher this quarter than last?

Ryan, it's Merilee, I don't think we see really any significant changes from the first quarter. As we said, the impact on the economy, I think, has been pretty minor on a couple of our product lines, but overall, the growth tends I I think are fairly consistent.

Okay. Fair enough. Thanks a lot, guys.

Our next question from Ross Taylor with CL King, please go ahead.

I wonder within some of your key companion animal lines like new instruments, consumables, and the labs, and whether you can give any color on how the U.S. business did versus outside the U.S.?

We are a global business in the Companion Animal business. I think, as Merilee said, we saw -- everybody asks us the question about the economy and we saw modest impact in the U.S. on that but I think it's a good growth business worldwide. So I don't think there is a particular story there, one way or another.

Okay. So not to put words in your mouth, but the organic growth rates probably weren't that much different between U.S. and O-U.S.?

Ross, I would say from the trends that each area has been exhibiting, we didn't see a lot of change.

And another question, the reference lab growth was very strong in the quarter and I just wondered if you get the sense that you are capturing much market share, within the U.S. or if anything has changed between Q2 and Q1?

Well, the reference lab business, I think everybody knows is a very competitive business in North America and at the same time, we're pleased with the global performance of the reference lab business. We continue to invest in that business. We're pleased with the service levels that we provide on that business worldwide and the advancements in technology innovation. So it's a great business for us.

And two other questions, I wonder with regards to the economy, whether regionally you can see much impact on your business in different areas of the United States? And last and final question, and you might have addressed this earlier in response to one of Ryan's questions, but with regards to market share shifts between in-house testing and the reference labs, are you seeing much change in behavior on the part of your customers in response to changing desires on the part of the pet owners?

We don't -- I wouldn't say that we spend a great deal of time looking regionally. We're a global business so there are a lot of regions to look at if we start doing that. Because it's really been only a modest impact to the economy. It hasn't been a huge focus as regional differentiation to answer your first question. With regard to your second question on in-house versus reference lab testing, they are -- we have really said consistently and wouldn't change that based on recent trends that we would see any difference in utilization of in-house testing and reference lab testing. They both have their roles in the practice. They both have some unique solutions that they are providing. We don't see a particular shift in one direction or the other, and what we really like about the business is that in general, testing begets testing. As customers appreciate the value, as our customers/client, meaning the veterinarian, appreciates the value of diagnostic testing and advancing their standard of care, they get more confident in utilizing it in different protocols, and that is just a reinforcing behavior.

Okay, that is helpful. Thank you.

And our next question is from Dawn Brock with JPMorgan.

Good morning, Jon,maybe if you could talk a little bit about Catalyst placements yet again, I know you said they were between SNAPshot and Catalyst, there were about 100 placements. Can you give us a better idea of how many Catalysts exactly?

That is a mix of the two system. They generally go hand in hand. It's really not much different than the equal share, as you would expect.

Okay. That is excellent. And then maybe just moving on to some macro issues. In speaking with your vets, with your clients, did you hear or were you getting any push back that as far as differences in the way that specific consumables volume is being utilized? In other words, I guess what I'm trying to get is it seems as though in-house may have seen a little bit of pressure in the quarter, and I guess my curiosity is where? Was it more on the emergent side? Where maybe there were more blood tests because you had more emergencies coming into the vet? Or was it on your wellness and preventative profiles?

Whether it's in-house or reference lab testing they are both used in emergency and they are both used in wellness, because we don't actually practice medicine we don't compete with our customers. We serve our customers. We're not able to have the best visibility of how they're using our diagnostic technology but I will say that saw -- we did see growth, same store growth in both sides of equation. So we don't really see a big shift one way or the other.

So just from an ordering perspective you didn't see any difference in the ordering patterns for consumables based on any shift in say, acuity, at the vet clinic?

No.

Okay. And again, just more macro, have you seen any changes, other than the typical seasonality for heartworm in the demand side over the last couple of months? Like, say, was April or May different than June or July for that matter?

I think in general what we are -- the trend that we're really seeing is the substitution of heartworm only testing, which is sort of, in most places where there is tick-borne disease is the old way of testing to full parasitic disease testing and really protecting the animal for the kind of diseases that they can be subject to and that annual screen, that penetration that occurs has been a continuing theme as we introduced 3Dx and then 4Dx. If you look at our overall, we did see a volume growth in our entire canine test portfolio that includes heartworm only or 4Dx or 3Dx, all three of those have heartworm in it so we throw all of it together, we did see good unit volume growth. Some people said that, anecdotally, that some of the testing was occurring a little later in the spring, then early in the spring. It's kind of hard for us to tell because we sell to the veterinary practice and then they subsequently use it. We can't measure when they use our product. We can just measure when they purchase purchase our product.

That is an important point. Is that we do have very, very good systems that give us visibility to sales by practices through distribution. So we have always had, for a number of years now, an excellent handle on what is happening at the point of purchase to the practice, and as a result have done a good job in terms of maintaining low distributor inventories or inventories and having an appreciation and thus lack of surprises on what happens in in terms of distributor back and forth. What we can't measure, of course, is when the products are used in the practice. So that would just would be anecdotal information that the testing, for a little bit, in some cases a little bit later in the spring..

Right. I wouldn't be asking you when the actual testing was done, just when the ordering was done because that would be in anticipation of the testing.

Right.

So I was just curious whether or not you guys saw any sort of shift or any sort of change from a year-ago in that pattern?

I would say that we had good growth in the first quarter and we had good growth in the second quarter year-over-year in our Canine Rapid Assay business.

Excellent, and the last thing is the MedTech side was actually quite strong. It seems as though vets don't mind spending money, but pet owners are tightening up a little bit. Can you just talk a little bit about that?

Can you be more specific on MedTech so I make sure I answer the question right?

Just as far as the PAM and the digital radiography side of the business is concerned?

Oh, yes, well, I think that is more of a technology cycle for us. We're very pleased with our digital radiography offering right now. We have made significant advancements in that offering both in hardware and software and we have a pipeline of continued advancements in that and we have really seen a great performance, particularly on the digital side, which is driving the majority of that growth this year over last. And I think we're just in a very interesting technology substitution cycle of people seeing the numerous of benefits associated with digital radiography over film radiography, but we're still early days in that substitution curve. So we're excited about that business.

Excellent, thank you very much. Good quarter.

Thank you.

There are no further questions at that time. If you would like to continue.

Just want to thank everybody for joining the call and congratulate IDEXX employees for a good quarter, for a good half year and for crossing the $1 billion threshold. Thank you all. That ends our call.

Ladies and gentlemen that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference service. You may now disconnect.