愛德士 (IDXX) 2010 Q1 法說會逐字稿

Good morning, everyone. Welcome to the Idexx Laboratories first quarter 2010 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 Astro, Director 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 1985. Such statements include, but are not limited to, statements regarding Management's expectations for financial results for future periods.

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, 2009, in the section Caption Risk Factors, which are on file 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.

Good morning, and thanks for joining our call today.

First a quick overview of our first quarter results.

In our press release this morning, we reported revenues of $268.5 million, a year-to-year growth of 14%, and diluted earnings per share of $0.55, a growth of 28%. Revenues came in roughly in line with our thinking at the time of our January call, while earnings per share were about $0.04 above our thinking at that time. Revenue performance versus our expectation was the net result of a few factors. Somewhat lower sales of rapid assay kits and instrument consumables in the first two months of the quarter and unfavorable currency movements were largely offset by higher-than-anticipated distributor orders at the end of the quarter and higher sales of lab services.

As for the earnings favorability versus our prior thinking, currency produced about $0.01 of negative impact and distributor orders contributed about $0.02 of favorability. The remaining $0.03 of favorability was attributable to our business performance, with operational efficiencies driving cost reductions that benefited our gross margin and control of operating expense spending, more than offsetting the modestly lower revenues exclusive of quarter-end distributor orders.

Now onto further highlights on our first quarter performance.

First quarter revenues grew organically 9%, after adjusting for a 4% favorable impact of currency and about a 0.5 point contribution from acquisitions. We anticipated the first quarter would show the highest revenue growth in our 2010 quarterly profile due to the easy comparison to the first quarter 2009 with its relatively weak capital sales. To gain insights into the fundamental activity levels in our largest market, the US vet services market, we have continued to analyze patient visit and practice revenue data that we derive from a subset of our customers who use our Practice Management Software.

The metrics we saw for the first quarter were largely consistent with what we saw in the fourth quarter of 2009. Patient visits were down about 1% year-to-year and practice revenues were up about 1%. This reinforces our thinking that a return to growth in this market will be gradual and gated by sustained improvement in factors that influence consumer spending, such as unemployment and consumer confidence.

In addition, we believe from what we have experienced and heard that adverse weather in parts of the US may have contributed to lower patient visits in the quarter, particularly in January and February. Weather was a challenge in January and February in many parts of Europe, as well. Asia Pacific continues to be an area of stronger economies and stronger performance for us with organic revenue growth of nearly 20% year-to-year for the first quarter across our portfolio of businesses.

Sales of instruments in our Idexx VetLab Suite at $17.5 million grew 15% in constant currency in the first quarter. Though it is noted up front, first quarter capital sales last year were relatively weak, providing for an easy compare. We are pleased with this performance, particularly given the strong placements in the fourth quarter of 2009.

Placements in our chemistry offering, Catalyst and VetTests, were up over 20% year-to-year, and we placed 484 Catalyst instruments in the quarter. Based on the very favorable feedback we are hearing from our current Catalyst customers and the momentum in our sales forces, both in the US and international, we feel we are on track with our estimate of placing 2400 Catalysts for 2010. Nearly 30% of the Catalyst placements in the first quarter were to new and competitive accounts, up from 25% in Q4. With Catalyst as a centerpiece, and the value of integrated information and workflow efficiency that can be obtained by purchasing other components of our instrument offering that has helped to promote the sales of multiple instruments per transaction.

As was the case last quarter, over 80% of the instruments we sold in North America in the first quarter were placed with others in our line. This compares to about 70% in the first quarter of last year. Instrument consumable sales of $56.2 million grew organically 11%, or 4% when further normalized for changes in distributor inventories.

This normalized growth is down a bit from about 4.5% we saw for full-year 2009 and 6% in the fourth quarter of 2009, primarily due to a couple of factors. First, in the fourth quarter last year we increased the margin that distributors receive on Catalyst consumables to reflect their increased involvement in selling these slides as we migrated from a drop-ship arrangement to the buy/sell arrangement we have with other products in our line. The increased margin to distributors now commensurate with our other products carried by distribution, reduces the sales price we realized.

Additionally, Consumable sales were off the to a slow start in the first two months of the quarter in the US and Europe and we believe weather was a factor. We expect the growth rates will tick up a point or two over the course of the ensuing quarters. We continue to see that growth in testing overall is approximately 15% higher for our Catalyst customers who were previously VetTest owners compared to our population of VetTest owners.

Our rapid assay sales of $39.4 million grew organically year over year by 3%. When further normalized for changes in distributor inventory levels, revenues were down by almost 9% compared to a 1% normalized growth for full-year 2009 and 2% for the fourth quarter.

If you recall in the first quarter last year we conducted a couple of Canine SNAP marketing programs, including a program done in conjunction with a pharmaceutical industry partner that shifted volume into the first quarter last year from the second quarter. This year the extent of our programs was less, thereby creating a top year-to-year compare. When we further normalized for the impact of these programs, our first quarter year-over-year revenue decline was about 2%. A portion of this decline was in the Feline segment, where it has been generally observed that feline vet visits have fallen off more in the tough economy than canine visits.

Additionally, on the Canine side, we have seen some price erosion due to the increasingly competitive nature of the heartworm market. Further, as with instrument consumables, sales were particularly slow in January and February, and we believe weather was a contributing factor to this occurrence. Having said all this, we observed more favorable trends in the later part of the quarter and expect we will see stronger performance in the second quarter.

Specific to our Canine franchise, 3Dx and 4Dx tests represent approximately 75% of our overall Canine SNAP unit testing volume in the quarter, and 4Dx screening at our reference labs, though a small base, demonstrated significant double-digit growth in the quarter. So despite the increase in competition for heartworm-only testing, we are pleased that the market continues to understand the value associated with canine Vector-borne disease screening with SNAP 3Dx and 4Dx, both in-clinic as well as at our labs.

In the Feline market, the SNAP Feline Triple Test for feline leukemia virus, feline immuno deficiency virus and feline heartworm now accounts for about 70% of our worldwide testing volume when we look at the combined sales of SNAP Feline Triple and the SNAP combination test for FIV/FeLV. Overall, we expect that normalized organic growth for rapid assay for the full year 2010 will be about flat to down about 1% from 2009.

US distributor inventory levels for instrument consumables and rapid assays averaged 4.2 weeks at the end of the first quarter based on forward-looking demand. This is slightly above the level at the end of the fourth quarter, though within the range we consider customary.

Our Laboratory and Consulting services, with revenues of $79.8 million, had organic growth of 9% in the first quarter compared to 7% in the fourth quarter of last year. Approximately 70% of this revenue growth was the result of higher testing volume with the remainder due to price.

Higher testing volume, primarily from the acquisition of new customers, continues to be driven by a number of factors, including our specialty test menu and advanced diagnostic protocol, as well as our ability to leverage the full breadth of the Idexx offering of integrated services, products and information management. Operationally, we continue to realize meaningful margin and service level improvements on a global basis that are driven by volume leverage, global purchasing scale and an array of lean processing initiatives.

Our practice information management and digital radiography systems, with revenues of $18.8 million, grew organically 22% in the first quarter, driven primarily by continued strong demand for digital radiography. Despite the still cautious outlook for the economy, veterinarians continue to migrate from older film-based systems to digital as the standard of care has evolved. We continue to be well-positioned in the market due to the breadth and depth of our product portfolio.

We entered the quarter with a solid order book and positive momentum and order volume throughout the quarter remained strong. Even as the overall economic environment remains challenging, we believe that favorable market dynamics will continue to support solid double-digit organic growth in this area moving forward.

Production Animal Services sales of $19.9 million represented 5% organic growth in the first quarter. This is consistent with the growth seen in the fourth quarter of 2009 and an improvement over the relatively flat performance for full-year 2009 from 2008. Most of the growth in the first quarter occurred in Europe, where the business won several tenders for testing related to a country-wide eradication program in Germany for a virus impacting beef and dairy production yield.

Our water segment had sales of $17.9 million for the quarter, which translated to 8% organic growth. This is up from 3% growth in the fourth quarter of 2009 and 2% growth for the full-year 2009. We saw significant improvement in North America, our largest region, as well as faster growth in several smaller regions. For the year, we are projecting about 5% organic growth based on sustaining the growth in North America at the level we saw in the first quarter, but anticipating that growth in smaller geographies will be somewhat more erratic.

Turning to the rest of the P&L, the gross margin, at 53%, was about 50 basis points above our thinking in January, reflecting better-than-anticipated gross margins in both our VetLab and Labs business. Our initiatives to drive productivity gains, in these, our two largest businesses, are proceeding very well.

Operating expenses, at 35% of revenue, were modestly better than our thinking, reflecting our continued focus on managing discretionary spending. As we indicated in January, operating expenses as a percentage of revenue are highest in the first quarter due to spending in support of commercial activities, such as trade shows and annual sales meetings. Our spending profile in 2010 is consistent with this pattern.

Finally, our net interest expense of $300,000 and effective tax rate of 31.4% were largely in line with our expectations. Share count was a bit lower than our projection in January as we augmented our repurchase program to take advantage of share prices we considered to be attractive.

Turning to the balance sheet and cash flow. We ended the quarter with $106 million of cash and $157 million of debt for a net debt position of $51 million. Our inventory balance was $122 million and that was up about $12 million from year-end levels. This was largely due to timing of receipt of chemistry slide orders, as we had noted in January, and normal seasonal builds. Day sales outstanding at 42 days remain in good shape and our free cash flow was $14 million, or 43% of net income. As noted in the past, free cash flow tends to be lowest in the first quarter due to regularly occurring events such as compensation payments and increases in receivables and inventory related to the ramp of some of our more seasonal businesses.

As we look forward, we continue to project full-year revenues of $1.1 billion to $1.115 billion, reflecting slightly higher organic growth offset by a modest reduction in the forecasted benefits from currency. Our revenue guidance implies 7% to 8% reported revenue growth, which translates to organic growth of approximately 6% to 7%. The difference being due to currency and some modest acquisitions made in 2009.

Organic growth is 50 to 100 basis points higher than our outlook in January and the components of this growth are also slightly different. With stronger growth coming from lab services and instruments, including digital radiography, offsetting somewhat lower growth in rapid assay revenues.

We continue to project full-year gross margin to be approximately 51.5% to 52% for the year, 50 to 100 basis points above the 2009 full-year rate. While we do see incremental opportunity for gross margin expansion in both our VetLab and Labs businesses based on first quarter performance, this upside is expected to be offset by revenue mix dynamics as relatively lower gross margin lab services and instruments drive more of the revenue growth versus our expectations in January. We continue to project operating expenses of approximately 34% of revenues for the full year. And so all of this results in full-year operating margin expected at 17.5% to 18%.

We expect the tax rate to be approximately 31.5% to 32% for the full year, about 150 to 200 basis points above the full-year 2009 rate due primarily to the expiration of the federal R&D credit at the end of 2009. As mentioned on the fourth quarter earnings call, an extension of this credit would reduce our full-year rate by approximately 1 percentage point and increase earnings per share by $0.03 to $0.04.

We continue to estimate net interest expense of $2 million to $2.5 million. We will see an increase in quarterly interest expense beginning in the second quarter of about $350,000 as the interest rate swaps that we put in place last March go into effect. These swaps enabled us to lock into a fixed interest rate of about 2.5% on a portion of our revolver over the next two years. The weighted average share count for the year is expected to be down about 2.5% from the full-year 2009 weighted average. This count is slightly lower than our expectation in January, reflecting the full-year benefit of higher-than-planned share repurchase activity in the first quarter.

All of this leads us to increase our full-year earnings per share projection to $2.23 to $2.28, compared to our January guidance of $2.20 to $2.25. This change in guidance versus January incorporates projected $0.03 negative impact from currency, partially mitigated by a projected $0.02 full year benefit from lower share count. The remaining $0.04 increase reflects our feeling that there is some modest further upside from business performance beyond the $0.03 we saw in the first quarter.

For a little more detail on currency, the rates implicit in our guidance today are the euro at $1.35, the pound at $1.53, and the Canadian dollar at parity with the US dollar. This compares to currency rate assumptions previously of $1.40 for the euro, $1.60 for the pound and $0.95 for the Canadian dollar. To remind you, every 1% strengthening of the US dollar vis-a-vis our basket of currencies reduces revenues by slightly more than $4 million and operating profit by about $750,000 on an annualized basis.

As for the balance sheet we project DSO to remain at approximately 40 days and inventories to increase $5 million or so in the next couple of quarters in support of new product launches, and then end the year at $115 million to $120 million. Capital expenditures are targeted to be $45 million, down slightly from the $51 million in 2009, and we project free cash flow to be approximately 110% of net income.

Now on to Jon for further comments on the business.

Okay, thank you, Merilee for the comprehensive review.

Overall, I was pleased with our revenue growth across our portfolio of businesses in the quarter. Despite continued, albeit moderating, headwinds in the US market for veterinary care, we achieved high single-digit organic growth. Even more impressive, we made excellent progress in our efforts to be more cost efficient, both at the gross margin line and below. In particular, we made excellent progress on margin improvement in our Instrument and Reference Lab businesses areas of focus for us.

Before I go further, I wanted to provide a brief update on our FTC matter that we mentioned in our last call and discussed in our 10-K. To remind everybody, in January we received a letter from the FTC stating that they were investigating our marketing and pricing practices in the US Companion Animal market. Last week we did, in fact, receive the subpoena from the FTC that we had anticipated and we intend to fully cooperate with the FTC in this process. We are at a very early stage in the process, and we have been advised that these investigations can last a year or more. Therefore we don't expect to have any further comments for quite awhile. While this matter will obviously require the appropriate time and attention to be responsive to the FTC, we certainly won't be losing focus on our strategy of continued innovation and global commercialization, and we remain confident both in our legal position and in the ability of our business to adapt successfully to any possible outcome to this matter.

Turning to the economy, Merilee mentioned our read on the US market for pet healthcare. We utilize actual clinic revenue data we receive from hundreds of independent practices from around the country. This is not survey data, actual data. We find from this data that pet owner traffic, or clinic visits, continue to be down about 1% year-over-year in the first quarter, essentially no improvement on this growth metric from Q4 2009. We continue to believe that we will see only a very gradual improvement over the course of the year and the underlying demand as measured by pet owner visits to their local vet.

However, I remain firmly convinced in the longer-term secular trends that are intact, that is towards greater pet ownership, a strong bond between their owner and their pet or pets, and stronger pet owner demand for quality medical care. A number of demographic factors are driving this trend, including an aging population in the US and other developed countries, as well as an increase in empty nesters, dual-income, no-children couples, singles and other types of households that value pet ownership as a form of companionship, comfort, health and well being. These households typically have more discretionary income to devote to the health of their pet.

At the same time, we are advancing the veterinarian's ability to deliver a higher standard of medical care through our advancements in diagnostics and information technology. We see a target-rich opportunity for conditioned innovation that will drive our growth for many, many years to come.

Investors know that one of our key strategies to make it easy and convenient for the veterinarian to obtain the results of routine blood work during the typical 15 or 20-minute exam window and have the opportunity to review those results with the pet owner. What we call real-time care. Catalyst Dx, our flagship chemistry analyzer, is at the center of this strategy. Catalyst allows a veterinarian to generate chemistry results within eight minutes of a blood draw, and with very little hands-on time by the technician. Catalyst Dx continues to build tremendous customer excitement, loyalty and word of mouth with each passing month. Customer satisfaction with Catalyst has now reached world class levels, according to our customer survey and salesforce feedback.

Our instrument placements were strong in Q1 of 2010, even more so when you consider that at this point, we don't operate with any substantial backlog when the quarter begins. And these are placements in customer sites that generate consumable volume right away.

Our real-time care strategy is also supported by our touch screen-based laboratory information management system that we call Idexx VetLab Station or IVLS. In Q4 of 2009, we launched a larger 15-inch touch screen that has received rave reviews from our customers. IVLS also integrates with the practice management software systems of many different vendors with an intelligent two-way interface that we call SmartLink or InterLink. SmartLink and InterLink, depending on the software used by the customer, eliminate the patient data entry step, and ensure that the results are automatically available in the electronic medical record and the bloodwork fee is captured on the client's invoice.

This easy and intuitive software integration is a key differentiator for our line of Idexx VetLab equipment and is of great interest to current and prospective customers when we are placing new in-house lab systems. IVLS is also able to be connected to Idexx through the Internet in what we call Idexx SmartService. We now have over 3,300 SmartService-connected customers, up from 2000 three months ago, and we will be continuing to connect existing and new customers at a pace of roughly 100 per week. SmartService allows us to easily troubleshoot instrument concerns of the customer and download new software.

SmartService also allows us to introduce this quarter what we call Real-time Care Protocols. A program that incentivizes customers with rebates based on usage that is tracked by IVLS and sent to Idexx via smart service. These real-time protocols provide incentives to expand the size of the diagnostic panel that the customers run on a patient, expanding the diagnostic database on that patient and supporting more informed medical decision-making. Real-time care protocols help justify the costs of new instrument purchases and expand utilization. Real-time care protocols will be a core element of our strategy in the years to come.

Again, all these capabilities, VetLab instrument integration, SmartLink, InterLink, SmartService, and real-time care protocols are offerings completely unique to the Idexx business model, what you might call a complete diagnostic ecosystem. But it gets even better. We are very excited to announce that in just a couple months we will be launching yet another significant innovation and point-of-care testing with ProCyte Dx, a revolutionary new hematology system. I view this product introduction as being as significant to Idexx to our launch of LaserCyte in 2002. LaserCyte was the first and still the only point-of-care hematology analyzer that offers a complete blood count with five-part white blood cell differential and an absolute reticulocyte count, the latter parameter important to characterizing certain red blood cell abnormalities such as anemia.

ProCyte will pair well with Catalyst Dx in higher test volume segment of the veterinary market. Complementary and cross-selling opportunities provided by ProCyte and Catalyst combo are key to our strategy, in that customers are looking for an in-house lab that has both hematology and chemistry and each alone would be an incomplete diagnostic solution. The two diagnostic modalities working together in an integrated system is of more value to the veterinarian who routinely runs both chemistry and hematology results to determine the health status of a patient. In fact, our SmartService data indicates that about 50% of runs in-house today on Idexx systems integrated with Idexx VetLab stations include both chemistry and hematology, or the CBC.

So it is all about having the best combination of instrument technologies that then, in turn, are integrated into one easy-to-use system that is the basis of customer preference for an in-house lab selection. It is also interesting to note that about 95% of chemistry panels sent to the reference lab include a CBC, a far higher percentage than today's in-house testing behavior, would suggest that ProCyte users will increase their utilization hematology once they add ProCyte to their Catalyst as it is just so easy and quick to add the CBC. With the Idexx VetLab including a Catalyst and a ProCyte, a customer can now easily run a comprehensive diagnostic profile, including a Chem 21 and a CBC in only 8 minutes, enabling real-time results within as short as a 15-minute appointment. Or the customer can run a preanesthetic profile on four patients, each including a Chem 10 and a CBC, in a total of only 18 minutes, transforming practice efficiency in the busy morning rush to prepare for surgeries.

So why is ProCyte such a special hematology analyzer? This instrument is a compact bench-top analyzer that, with just two minutes run-time and virtually no tech hands-on time, can provide a complete blood cell count with 24 different parameters, including the red blood cell indices, reticulocytes, platelets and an advanced five-part white blood cell differential with five different species. The ProCyte utilizes the same gold standard hematology technology laserflow cytometry as LaserCyte.

In addition, ProCyte Dx incorporates two additional technologies commonly used in reference laboratory hematology systems, optical fluorescents and laminar flow impedance. When combined, these three technologies offer unprecedented accuracy, precision and a two-minute run-time, providing veterinarians with the most advanced hematology results available in an in-house bench-top analyzer. ProCyte Dx is also a completely different kind of instrument launch for Idexx with a much faster expected ramp time.

ProCyte Dx was coded up through a partnership with Sysmex, a Japanese corporation that has worldwide leadership in hematology in the human diagnostic market, including an even stronger position in smaller platform systems. ProCyte is a veterinary-customized version of one of their platforms currently sold in the human market with mostly the same hardware. Sysmex has five years of experience with the human version of the system with over 5000 placements. The ProCyte instrument has been under co-development for three years, and in the last 18 months, Idexx has completed extensive field trials in veterinary clinical settings and universities with over 70,000 sample runs. That's a lot of runs. ProCyte has surpassed our own performance expectations in terms of speed, accuracy, reliability and overall customer experience in these veterinary field trials.

With ProCyte Dx, our comprehensive hematology offering now covers all segments of the in-house hematology market. ProCyte meets the needs of our higher volume customers, LaserCyte provides the same complete menu of tests for our mid and smaller-sized account and Vet Autoread provides a basic CBC for lower volume customers, especially in emerging markets. We will support all three platforms for many years to come and we have several significant advancements in the performance of our LaserCyte system planned over the next 12 months.

As far as targeted market, I would guess that for the US ProCyte will be the preferred choice and the new standard of care for the upper half of the customer base, which, of course, represents the majority of in-house testing volumes. ProCyte will also likely expand utilization of point of care of testing for hematology and chemistry in this important customer segment.

We will showcase ProCyte Dx at the all important American College of Veterinary Internal Medicine meeting forum in June with the presentation of four peer-review papers outlining the remarkable performance of this analyzer in different university and clinical settings.

We will begin to take orders this quarter and commence shipments in early Q3 with a controlled launch. ProCyte will likely take the place of what would have been LaserCyte sales to the higher end segment and its revenues have been incorporated into our guidance. I'm anticipating ProCyte, with a list price in the high 20s and a realized price in the neighborhood of $20,000, after customary trading allowances, will command a price premium over other hematology offerings in the market, including LaserCyte.

Similar to Catalyst Dx, a majority of ProCyte analyzers will be purchased by current Idexx customers. Many of these customers will trade in their current LaserCyte, which will have refurbished and sell onto developing markets at competitive markets. However, ProCyte will also be a unique offering to mid- higher-end practices that do not have Idexx equipment.

Our innovation of real-time care, real-time results from the routine bloodwork continues to unfold with everything that I have discussed on today's call. In addition we have a few other smaller advancements that will continue to build on the real-time care offering that I hope to discuss later this year.

So in summary, we had a strong first quarter, with solid momentum in our business despite a tepid economy, and have announced an exciting new instrument launch.

So at this point, Cynthia, I'd like to open the call to the Q&A period.

(Operator Instructions).

We will take our first question from the line of Ryan Daniels from William Blair. Your line is open.

Good morning, guys.

I just wanted to follow up with your line of comments on ProCyte. I was hoping you could maybe contrast it a little bit to LaserCyte. Sounds like the menu will be similar and I know LaserCyte is already a great product. Is the big reason that you think the upper end of vet clinics would want this is less hands-on time and quicker throughput. If that's the case, can you compare and contrast the LaserCyte, just to give us a better feel for that?

Sure. Ryan,thank you for the question.

ProCyte has a couple of key advantages. First is the time to result; two minutes. Of course that gives a second advantage, also, which is through ut that you can run 10 samples -- five samples in 10 minutes. And then the third advantage is its extremely easy to use, as is LaserCyte, but it maintains its hallmark ease of use. Finally, it has some additional technologies which provide further precision and accuracy in terms of a very tough thing to measure, which is cell counts.

So we are very excited about the fact that we have got actually university papers that will already be presented in two months at the ACVIM conference on ProCyte, which is a fairly unprecedented level of launch.

What is the kind of throughput on a LaserCyte? What's the turnaround time for a test on that system?

LaserCyte has a time-to-result of about 11 minutes. So LaserCyte works very well in a lower volume practice that wants to provide real-time care. But as you get to higher volumes, you're going to want the throughput of ProCyte.

Okay, great.

Then on the real-time care, I understand the value of linking to the client's practice and be able to drive behavior patterns and slide utilization. Is that something that you actually launched already at the start of April? Is that something that will launch? Do you have any thoughts internally or goals on what that might do to slide utilization? Is there an internal target of how much it could increase with the systems you have in place?

Yes, we have -- to answer your first question, we have already launched that at the beginning of April, and it's one of the reasons why the build in the SmartService install base is important. I suspect that we will have people that will want to get the SmartService because of the opportunity for Real-Time Care Protocols.

Our salesforce is very excited about Real-Time Care Protocols, both for existing customers and the ability to have another differentiator to place a complete systems in new customer locations. So we think it is going to be a great tool.

I think that real-time protocols are really just a continuation of the innovations that we're bringing in the market that are drive consumable utilization as a whole. Probably most important metric would be overall consumable utilization.

What about , similar question with InterLink, when you've got your customers hooked up so that they are doing the automatic medical records and billings. Are you also seeing slide utilization increase when people are on

I'd say we do find that InterLink is a productivity tool that is valued by our customers. Historically, before 2010, we really only had that version with one practice management software, our own Cornerstone, and the difference now is that we, early in 2010, we have launched InterLink capability with some very significant third-party practice management software systems. So I think customers value it. But I think it is just one more step in making it easier with less tech-time just to run the bloodwork now.

So when you combine InterLink with Catalyst and with outstanding performance that we are seeing with Catalyst in the field, and then for the higher volume practices, you've got now an outstanding hematology solution that matches with it and recognizing that the runs -- half the runs in-house and the vast majority of runs in the reference lab include both the hematology and a chemistry ru,n you're building a powerful real-time care solution.

Okay. Thanks for the comment. And one more quick and then I'll hop back in the queue.

Marilee, I think you mentioned in your prepared comments that you're seeing a little bit of pricing pressure on some of the assays given the more competitive heartworm market. Are you guys seeing the pressure just on your heartworm assays, the smaller portion of the business there, or is it prevalent across 3Dx and 4Dx, too. I would think it is the former given there is no competition for the latter. Is that fair?

Ryan, I think it would be primarily with heartworm only, but I think also our goal here is to continue -- have customers with 3Dx and 4Dx. I think it probably would be fair to say we have seen a little bit of price erosion across the board, however it would be less significant in those areas.

Great. Thanks for all the color. Nice quarter, guys.

Thank you.

Thank you.

Our next question comes from the line of Jonathan Block with Suntrust Robinson Humphrey. Your line is open.

Thanks. Good morning, guys. Nice quarter.

Just first one, John, maybe for you. On the lab showed really nice organic growth, I believe of it 9%. Up very nicely year-over-year, but yet you mention through your SmartService when you track the volumes and the revenues, they were essentially flat at the hospitals that you're able to essentially look into. So would love some commentary there. Is that lab growth all international or are we just seeing a shift on overall lab testing, on how that lab growth was able to well outgrow, if you would, the visits into these hospitals?

Yes, thank you for that question.

We had really growth in most regions around the world. And I would say that we got a little better price in there, we have some new customer acquisition, we have specialty testing adoption, these are all factors that contribute to what was, as you know, good organic growth in the quarter.

Okay, great. Perfect.

Then just maybe overall, when you look across a lot of different industries, the March quarter of 2009 was deer-in-the-highlights, awful, things bottomed, and you guys showed a greater level of resiliency where you didn't see volumes off 10%, 20%,etc. But fast forward to today and, like you mentioned, we are only seeing visits up 1%, 2% or maybe even flat or down 1%.

So I guess bigger picture question, do you think this is a little bit of a change where those that didn't bring in in 2009 have sort of said to themselves, "Gee I don't need to do this every 12 months, maybe I need to do it every 18, 24. Do you think we are going down the road to where people just lengthen the overall cycle of the typical vet visit?

I think there's probably a lot of different dynamics in that 1% down visit metric that we saw in the first quarter of 2010. I think retailers probably noted January and February were not very strong, were kind of tough. We saw that in our own business. March was a nice pick-up, although I'm not sure I would want to extrapolate March.

I would say that you've got a core of pet owners that are going to bring their pets in if they can at all possibly do so. And then you may have had some people who maybe didn't replace their pet right away. So maybe that's what is causing a little bit of a lag in the response time.

It is not a -- I don't think anyone would say it is a robust consumer economy that we have here and I think we are seeing that a little bit in the numbers.

Okay, great. Last one for you.

Like you said, we all do surveys, but you actually have the data. So what are your thoughts on chemistry market share? When we go ahead and do checks it looks like you guys have been seating some chemistry market share then you will give us the combined VetTesting/Catalyst placements up year-over-year and if you compare the two of those, which is really market share, if you would, it does seem like you're losing a little bit.

Would love your commentary, John, were you losing share and now with Catalyst having a broad appeal you're going to be able to stem that share forward going forward? Do you not think that you were never losing share? I would love some thoughts. Thanks, guys.

Okay, thank you for that question.

I'll just say that we actually think of it as point-of-care testing, both chemistry and hematology as an integrated system. And so we look at the revenues from point-of-care testing.

We feel very good about our market. We also feel very good about our momentum going forward.

And the other thing I would say is that be careful about looking at instrument sales. Obviously they have to translate into placements. All of our placements, any time we give 484 Catalyst numbers, those are placements in customers. That's what we want as a sale.

And second of all, sometimes and I think that's true, this is true for us and more than likely true for others, you may have a placement into an existing customer where they have got a second system going in just to meet their throughput needs and that kind of system wouldn't necessarily have the same incremental utilization as the first system. And, in fact -- in some of the competitive displacements we are actually taking out two competitor systems and placing with one Catalyst. So there's a lot of dynamics going on, that's why we feel, as we look at our own metrics, we feel good about the loyalty of our customer base and we feel very good about the momentum of our point-of-care offering. Of course now, with the additional excitement of the launch of ProCyte.

Perfect. Thanks, John. Nice quarter.

Thank you our next question comes from the line of David Clair with Piper Jaffray. Your line is open.

Hi, good morning. Congratulations on the quarter.

Thank you, David.

Just a quick one here on ProCyte. How many do we think we can place in 2010? And when do you expect to do a full launch on the instrument?

David, I'll take the first question here.

We are expecting -- and again, as John had indicated, because ProCyte has been in our planning for awhile it was fully integrated into our thinking and guidance back in January. I would anticipate, in total, we are probably talking here revenues of $5 million or so from the instrument in 2010. And with John's comment on the realized net AUP of about $20,000, I think you can do the math on that, 250 instruments, or so, placements.

David, let me take the second half.

One of the exciting things about ProCyte is that this instrument has been in customer settings now for 18 months and I will tell you the performance has been simply outstanding in terms of the customer experience and the reliability and the feedback that we get from these customers. We expect a much more rapid movement from a controlled launch to a full launch and I would give it probably three to six months depending on how our commercial experience goes. We will start to be placing commercial systems in the beginning of the third quarter so we will have a better read for where we are in the fourth quarter. But certainly the outside that range, our expectation, based on the field experience that we've had to date with ProCyte, would be six months.

Okay. And what do you think the useful life of a LaserCyte is, then?

The LaserCyte can be used forever. Whenever we bring a LaserCyte back we bring it up to current. We go through the whole thing and it is as good as new when it goes back out. The useful life of a LaserCyte is for a very,very long time. Longer than you and I are going to be thinking about it.

And second of all, the LaserCyte is a best-in-class technology. It is not being obsoleted by anything. It is a full 24-parameter hematology system, including a full five-part white blood cell differentiator and a reticulocyte count. There is no other hematology analyzer on the market today that is even matching that kind of medical information other than, of course, ProCyte with its launch.

Okay. And then just a couple on the Water and Production Animal businesses.

Much better than what we were looking for in the quarter. I guess can you just kind of discuss what's driving the reacceleration in these segments and the long-term what you are thinking as growth rates in these businesses?

Yes, we are very pleased with the performance of those two businesses. Actually, overall, if you look at the full portfolio of businesses for Idexx in the first quarter, we were pleased with the portfolio performance. But these two businesses were certainly contributors.The Production Animal Service, or PAS business, had particularly strong growth in Europe as a result of some commercial successes with our technology, as Merilee mentioned, and some eradication programs in Germany, which helped us. And we also feel very good about the pipeline of innovation that is coming through in the Production Animal Service business.

The water business, is -- we are very pleased with the organic growth of the Water business. That was actually a North America phenomenon. I think we have been successful in -- this is amazing, continuing to convert customers from the previous manual method called membrane filtration to Colilert. After 20 years, we are still converting customers, which just shows how tectonic the changes are in the customer base for water microbiology, about the slowest moving market I have experienced in my career. Which is good for us since we are going continuing to penetrate that, and we had some good successes on conversions of customers in North America which helped provide strong growth for the quarter.

I think we said for the year, for the Water business, about 5% organic growth, and we have always believed that was sort of the run rate of that business at that point in the life cycle.

Okay. Congratulations. Thanks.

Our next question comes from the line of Dawn Brock of Kaufman Brothers. Your line is open.

Thank you. Good morning.

Morning, Dawn.

I'd love to continue with Ryan's question on heartworm testing. John, is it fair to look at the volume trends and infer that the increased competition is more a result of pet owners using the lowest price heartworm test to get the results they need to continue providing healthcare. Meaning that those owners might not be going after 3Dx or 4Dx, they might be going heartworm only, and they have other options there?

Dawn, it is an interesting phenomenon and question. Certainly, if everything is on the margin because we had strong continued performance of 3Dx and 4Dx as a total of our Canine Parasitic Disease Screening market, but I think you are right that in a very challenged economy, you've got very price sensitive pet owners. There is going to be a segment that is very price-sensitive and, of course, veterinarians have a consumer-oriented behavior themselves and will be responsive to that. So you may have a small amount of trading down that is really as a result of the economy more so than you would have had in a different economy.

And of course at the same time we continue to talk about the medical benefits of screening, not just for heartworm but for tick-born diseases and, in particular, the risk of co-infection of multiple tick-born diseases. And so we are very successful in that conversion. So you have both those cross currents happening in the market.

Dawn, the other thing that I might say is if you look at the normalized growth, and we try our best to adjust for impact of programs and things so that negative 2% really the amount that would be attributable to volume changes in Canine was like 0.5%. Then you take that in combination with the fact that our mix of 3Dx and 4Dx of testing compared to the total of parasitic testing, which would be heartworm only, or 3Dx, 4Dx. It remains at that 75% level. That just kind of indicates there isn't really that much of shifting away from the multi (inaudible) panels to heartworm.

And the other 25%, which is heartworm only, is very, very price competitive so we have had some AUP erosion there and we have every intent to be remaining price competitive in that market.

That's really, really helpful. It is going to be interesting just to see how it plays out as far as when -- I think what Jon Block was saying, when you get the returning pet owners, they might end up going after that kind of basic test and that could drive volume but lower price volume, it's interesting.

My second question -- thank you very much for that. On PAM and digital radiography, could you give us some color where you saw the greatest demand? Are you still seeing a lot of interest around the lower price point CR system?

In the Digital Radiography and Practice Management segment, we are very pleased with our -- the combination of our technology offering.

We both have the lower-end computer radiography and higher-end direct digital radiography. They use the same software, the same PACS, Pictures, Archives, Communication System, which, by the way,y is also integrated, not only into our software, but being integrated into third-party software with InterLink in a very intelligent fashion. Because we have written that software ourself it is veterinary-specific an we are continuing to advance it with more and more value-added and veterinary-specific capabilities. Finally, these systems perform very, very well in the field and we have done a great job with our commercial sales and executions for the system.

So that combined with, I think, a healthy market for conversion from film to digital, the case to converting to digital radiography, whether it be the higher-end or lower-end system, depending on your volume, is very strong. People are moving away from film, film is a pain in the neck. It has got economic issues. It has environmental issues. So we have a robust market and great product offering.

Okay, if you could, just maybe 20 more seconds? When I'm looking at the Digital Radiography market, I think that, when we talk to people during our channel checks, they seem to be really excited about the fact that they can get that technology at a lower price point. That that is actually an option now. I don't think that, at least from my knowledge, it really wasn't an option before.

I guess I'm wondering whether or not you're seeing stronger demand for maybe the CR system versus the pure digital, the higher-end system. And that's something we can look to as an open and expanding market.

I think you're exactly right about that. We have been in the CR market for quite a long time and our product line has just gotten stronger and stronger in that area. So we do have, I guess, using your framework, we have a very price-competitive system for the even one- or two-doc practice. We have a very price attractive -- and also, one thing I will say, with the CR, the image quality is just as good as DR. It is really indistinguishable to almost anyone looking at those images. And so you are not making any sacrifice in medical quality by going with a CR system.

Just my last question is could you give us a quick update on the FTC investigation? Just anything that's going on? And maybe if possible -- I'm sure you guys have looked at this internally, if there is some way to just provide a risk assessment? If by chance the worst-case scenario happened and you had to unbundle the feline test or had to change your language in the distributor agreements, just what the impact would be as we move on?

We have looked at really -- first of all, we think we have very strong compliance anti-trust laws and we've have had it for a long time. We have been attentive to that for the last decade, and so we think we have a very strong legal case for our existing practices.

But, Dawn, the one thing I will say is our growth isn't dependent on any particular marketing practice. It is dependent on continuing to bring innovation to the market like we are doing today with ProCyte Dx and all the things that we've been talking about \, products and portfolio, whether it's cardiac testing in the reference lab or advanced digital radiography. And so we really doesn't see that there is any particular marketing practice that we would have to change that would have a material impact on our business and our strategy of growth and innovation, and that's why we are really quite comfortable by saying that we are confident in what any possible outcome will have that it would not really change our growth strategy.

Excellent. Thank you so much, John.

Thank you. Our next question comes from the line of Daniel Owczarski with Avondale Partners.

Your line is open. Yes, thank you. Good morning.

Morning.

John, I wanted to follow up on the FTC issue again. The subpoena that you received, how does that compare to the communication you received in January. Are they asking about the same narrow feline tests or are they expanding what they are looking at? Can you give us some idea of the progression of their investigation here?

It is very consistent with the communication that they are investigating our marketing and pricing practices in the US companion animal market.

Okay. So it is not -- so they are asking about distribution agreements and contracts and before it looked about like bundling on a feline but also a little bit about the distribution agreements. Does it seem like -- so you're saying it is not expanding but it is consistent?

It is consistent, yes.

Okay. Thank you.

And our final question comes from the line of Ross Taylor from CL King. Your line is open.

I just have two or three questions.

First one relates to your lab business. You've shown great acceleration there over the last three quarters and I just wondered if you could identify what the drivers of that acceleration have been, and, in particular, I guess I would be curious how much impact the specialty tests have had, if you can give any color there.

Ross, thank you for that question.

We have been investing over the years in expanding a portfolio of specialty test that comes from our understanding of unmet needs of the customers. And we have talked about cardiac. There are a variety of molecular diagnostic panels. We have an extensive set of VetTests for all sorts of wonderful infectious diseases, the pancreatic test. We have more in the pipeline.

It is really fun to bring new solutions to the veterinarians who have been struggling with some of these issues. And some issues they are not even aware of. Let's take the cat, for example. The cat can have a heart disease and no one could ever know it until it presents with acute death. And that could be a three-, four-, five--year-old cat. In fact, cats die on the operating table because of hypertrophic cardiomyopathy , which our test can now give an indication whether that is a silent killer and a condition within the cat. So what we are finding now is that customers are beginning to add that to actually their routine wellness or early disease detection screening for feline. And we have got a program in the second quarter for bringing new awareness of this disease to the feline.

But having said that, Ross, specialty testing is only part of our strategy of investing in the lab business. We have had made very significant investments and continuing to do well in the basics, that would be unprecedented level of quality, consistently of turnaround time, geographic footprint, both in North America and internationally, continuing to advance the information technology element of the business. And also some of these specialty tests fit nicely with protocols that are a point-of-care. So a test-reflex type of business model.

So really a variety of different things that have been a part of our strategy of investing in the lab business from a technology and for quite some

I see.

And second questions on the labs, and this is unrelated to the first, but can you look at your lab business on a same-clinic basis at all and draw any conclusions as to what might be happening with just the industry in general?

We do not see any real fundamental shift today or difference between what is happening in point-of-care and reference lab testing, as best we can tell. It seems like these are two important modalities but there isn't really a movement in the direction of one or the other. So we would say whatever the trends that are consistent apply to all of our businesses.

Actually, I probably wasn't very clear. I think I was trying to infer, just in terms of customer traffic on a same-clinic basis, or industry growth, whether you can draw any different conclusions from what you see in your lab business on a same-clinic basis versus what you draw from your Cornerstone customers?

We rely on the Cornerstone data. It's just really outstanding primary data. And anything else is derived and/or indirect and therefore has a lot more noise and uncertainty associated with it. That's why we like the cornerstone data as a metric for what's happening in the field.

Alright. Fair enough.

Last question just relates to, you mentioned the distributor orders picked up towards the ends of the quarter during the month of March, and I just wondered if there was anything that was driving those orders, anticipation of a pick up in demand or special programs that you might have offered.

Nothing really in terms of programs that we offered. I think our distributors felt better about March than they did about January and February and maybe that was the reason for their orders. It was really a response to their orders.

Okay. That's all I have. Thanks very much.

Thank you, Ross.

Thank you. And with that I'd like to turn it back over to you for any closing comments.

Thank you very much for joining the call. We have gone beyond our traditional hour. Appreciate the attendance, and will plan on updating everybody on our July conference call. Thank you.

Thank you. Ladies and gentleman, that does conclude your conference call today. Thank you for your participation and for using AT&T, the executive teleconference service.

You may now disconnect.