Moog Inc (MOG.A) 2006 Q2 法說會逐字稿

Welcome to the Zevex second quarter 2006 earnings conference call.

[OPERATOR INSTRUCTIONS]. As a reminder, this conference is being recorded today, Monday July 31, 2006. I would like to turn our conference over to [Colleen Dahl], Investor Relations Assistant. Please go ahead.

Thank you for participating in today's conference call. Joining me today are President and Chief Executive Officer, David McNally, and Chief Financial Officer, Phill McStotts to discuss 2006 second quarter and first half financial results.

A short time ago, Zevex released results for the second quarter and first half of 2006. If you have not received the news release, or if you would like to be added to the Company's fax or e-mail list, please contact me at 801-264-1001, extension 203. A replay of this conference call will be available on our Web site at www.zevex.com. You may also access archived copies of Zevex's news releases on the Investor Relations portion of our Web site.

Before we proceed, it is my duty to inform you that comments made by Management during this conference call may contain forward-looking statements that involve risks and uncertainties regarding the future results of Zevex International. Please refer to the Company's filings with the Securities and Exchange Commission, including the company's form 10-K, for the year ended December 31, 2005, and form 10-Q for the second quarter 2006, which will be available today. These filings identify specific risk factors that may cause actual results to differ materially from those described in forward-looking statements.

Now I'd like to turn the call over to David McNally, our CEO.

Thank you, Colleen. Good afternoon, listeners, and welcome to our second quarter 2006 conference call. We are again delighted to announce record results for the quarter.

As you may have seen by now, second quarter revenue grew 54% to $10.5 million, compared with revenue of $6.8 million for last year's second quarter. We reported net income of $0.24 per share for the second quarter of 2006, compared with net income of $0.03 per share for the second quarter of 2005. Compared to last year's second quarter, revenue from our therapeutics division increased by 78%, and revenue from our applied technology division increased by 27%. Phill McStotts will go into more detail on our financial performance during his review.

For those of you who may not know, we are committed to two businesses, our therapeutics division and our applied technology division. Our therapeutics division makes and sells Enteral nutrition pumps, which are used by patients who can not feed themselves. We believe our pumps are superior to all others combined in the market because they combine accuracy and nutrition delivery with small size, durability, long battery life, and patented safety features that allow Enteral patients to enjoy unprecedented mobility.

In addition, we develop, manufacture, and market disposable sets and accessories for the pumps. We are focused globally on the home health care market, which due to the aging population and pressure on controlling health care costs is the fastest-growing market segment for Enteral nutrition delivery devices. Last year we launched the EnteraLite Infinity pump and received the silver medical design excellence award from Canon Communications.

In August 2005, Nutricia Clinical, a division of Royal Numico, and our exclusive distributor of a private label version of the EnteraLite Infinity, launched the FlowCare Infinity in European markets. Market acceptance of this product through Numico's expanding global launch has continued to go well through the first half of 2006. In the United States, sales of disposable sets are accelerating based upon our rapidly growing installed base of pumps.

Our applied technology division develops and manufactures medical device components and systems under private label for many of the world's leading original equipment manufacturers. Our core competencies in the division include expertise and sensors, fluid management, and surgical ultrasound. We make surgical tools, components and systems that improve the safety of effectiveness of cataract surgery, open heart surgery, organ transportation, dialysis, blood component harvesting, and infusion therapies.

Before I provide insight into our performance and prospects, I'd like to turn the call over to our Chief Financial Officer, Phill McStotts who will provide detail on our financial results.

Thanks, Dave.

Revenue for the second quarter of 2006 was $10.5 million, compared to $6.8 million for the second quarter of 2005, a 54% increase. Revenue for the first six months of 2006 was $21.1 million, compared with $12.8 million for the same period of 2005, a 65% increase.

Net income for the second quarter of 2006 was a record $1.5 million, or $0.24 per share, compared with net income of $168,000 or $0.03 per share for the second quarter of 2005. Net income was $3 million, or $0.48 per share for the first six months of 2006, compared with net income of $214,000, or $0.04 per share for the same period of 2005. Notably, income before income taxes reflects a $948,000 patent infringement settlement during the second quarter, net of legal fees, on statement of operations.

In addition, the Company recorded a tax benefit of $302,000 for the second quarter and $748,000 for the first six months of 2006, which was related to a partial reversal of a valuation allowance from a prior period that would have resulted in a reduction in overall tax expense. Also, net income reflects a 95,000 charge during the second quarter of 2006, and a $174,000 charge during the first six months of 2006, relating to the expensing of stock options as required under the new accounting rules.

Our therapeutics division revenue increased 78% to $6.4 million, during the second quarter of 2006 compared to $3.6 million in the second quarter of 2005. Domestic therapeutics revenues, which is primarily derived from the sale of pumps and disposable sets increased by 10% to $3.2 million compared with $2.8 million for the second quarter of 2005. International therapeutics revenue from pumps, pump service, and disposable products in the same period increased to $3.3 million compared with $748,000 for the same period of 2005.

Increases in these international sales was due primarily to increased revenue from Numico, the Company's largest strategic international distribution partner. Revenue from the therapeutics division accounted for 61% of the company's total revenue in the second quarter of 2006.

Our applied technology division revenue increased 27% to $4 million during the second quarter of 2006, compared to $3.2 million in the second quarter of 2005. Specifically, during the second quarter of 2006, revenue from sensors and hand pieces increased by 43% to $3.3 million compared with $2.3 million for the second quarter of 2005. The increase is primarily because our largest customers for these products continued to post market share gains and substantially increased purchases of our products.

Applied technology engineering revenue increased 133% to $210,000 compared with $90,000 for the same period of 2005. These increases more than offset a decrease in medical systems revenue of approximately 32% to $529,000 compared with $778,000 for the same period of 2005. Revenue from the applied technology division accounted for 39% of the Company's total revenue in the second quarter of 2006.

For the first six months of 2006, our therapeutics division revenue increased by 105% to $13.3 million compared with $6.5 million for the same period in 2005. The increase in revenue from last year is due to an increase of 516% in our international therapeutics revenue, largely due to the growth of our business with Numico. Our domestic EnteraLite Infinity and EnteraLite portable feeding pumps and disposable set revenue increased 24% over the first six months of 2005. These increases were partially offset by a decrease of 10% in our stationary Enteral feeding delivery products for the same period.

Our applied technology division revenue increased 23%, $7.8 million, during the first six months of 2006 compared with $6.3 million for the first six months of 2005. Revenue from sensors and hand pieces increased by 38%, $6.2 million compared with $4.5 million for the first six months of 2005, while revenue from medical systems declined 33% to $1.1 million compared with $1.6 million for the same period of 2005. Revenue from engineering services increased by 148% to $440,000 compared with $177,000 for the first six months of 2005.

Our gross profits as a percentage of revenue was 35.2% for the second quarter of 2006 compared with 36.3% for the second quarter of 2005. Gross profit was 35.3% for the first six months of 2006 compared with 36.4% for the first six months of 2005.

We primarily attribute the decrease in gross profit during the second quarter and first six months of 2006 compared with the same period the prior year to three factors. First, we generated lower margin service revenue of approximately $600,000 in the second quarter and $1.4 million in the first six months of 2006. This service relates to the maintenance of Numico Enteral feeding pumps and is performed on our behalf by our third party service provider in Europe. Second, we incurred one time costs associated with the transfer of manufacturing of the Enteral disposable products of our therapeutics division to a new third party supplier. And third, the product mix delivered by each business division -- differed during each period.

Selling, general, and administrative expenses increased to $2.4 million of revenue for the first -- for the first second quarter of 2006 compared with $2 million for the second quarter of 2005. During the first six months of 2006, selling, general, and administrative expenses increased to $4.8 million, compared to $3.8 million for the first six months of 2005. The increases for these periods are primarily related to increased investments in sales and markets, and increased general and administrative expenses, including recruiting expenses, personnel and insurance costs, legal fees, non-cash stock-based compensation expense and incentive bonus accruals.

In the first six months of 2006, our selling, general, administrative expenses actually decreased as a percentage of sales from 30% in 2005 to 23% in both the second quarter and first six months of 2006. We had an income tax expense of $346,000 in the second quarter of 2006 compared with no income tax expense in the second quarter of 2005. We had an income tax benefit of $100,000 for the first six months of 2006, compared to an income tax expense of $3,000 for the first six months of 2005.

Income tax expense in the second quarter includes a tax benefit from the reversal of a valuation allowance that resulted in a reduction of our overall tax expense. The benefit from income tax for the first six months of 2006 is due to the reversal of part of our deferred tax asset valuation allowance related to net operating losses and reserves for operating accounts. Income tax expense for 2005 represents minimum tax payments due to the various states which we are required to file.

Working capital at June 30, 2006, was $11.8 million, compared with $7.9 million at December 31, 2005, and $6 million at June 30, 2005. The increase in working capital is primarily related to the increase in revenue and the corresponding increases in accounts receivable and deferred income tax assets. A portion of working capital represented by cash was $2.1 million at June 30, 2006, and $225,000 at June 30, 2005. Total stockholder's equity was $19.7 million at June 30, 2006, compared to $15.1 million at December 31, 2005.

Now I'd like to turn the call back over to Dave.

Thank you, Phill.

This quarter's record results again reflect strong sales growth from both of our business divisions. Total revenue from our therapeutics division grew by 78%. Sales of domestic Enteral feeding pumps and disposable delivery sets increased by 10% over the second quarter of 2005. Domestic ambulatory product sales grew 14%, based upon the continued success of our sales force in driving demand for our EnteraLite Infinity and EnteraLite pumps and disposable sets.

International sales of pumps and sets in the same period increased by 336%. The increase in these international sales was due primarily to increased revenue from Numico. International therapeutics sales again exceeded our forecast this quarter based upon the continued introduction of the FlowCare Infinity portable feeding pump by Numico in major international markets. Numico-related demand for service from our third party service provider in Europe was also strong, generating approximately $600,000 in revenue.

Based upon having achieved $3 million in revenue with Numico during the second quarter and $6.5 million in total revenue during the first half, we are increasing our projection for 2006. We now expect that revenue with Numico will exceed $11 million for the full-year 2006. Total revenue from the applied technology division increased by 27%. Revenue from sensors and hand pieces grew 43% based upon the success of some of our largest customers from capturing additional market share. Although system revenues declined the LifePort Kidney Transporter and disposable set business with Organ Recovery Systems is continuing to run very strong as market acceptance for the IifePort continues to increase demand for disposables.

The decline in systems revenue during the second quarter was due to a continued decline in demand from one of our other customers. Meanwhile, we are working to bring to market more component and systems products to utilize our core technologies for other applied technology customers. It is noteworthy that engineering service revenue increased 133% during the second quarter. Much of this revenue is generated from customers that are planning to introduce products to the market later this year and beyond. We are assisting these customers in the development of new products and we expect to manufacture and service those products throughout their product life cycles.

For the first half of the year, our revenue increased 65%. Therapeutics division revenue has more than doubled and applied technology revenue was up 23%. Based upon our performance so far this year and the continued strength that we are forecasting for both divisions and barring any unforeseen events, we are once again raising our overall 2006 corporate revenue growth forecast from 25% to 30%. We recognize that this full-year projection is well below the growth that we have achieved during the first half of the year.

I'd like to clarify that we do expect to grow during the second half, but acknowledge that the comparisons will become much more challenging as sales ramp significantly during the second half of 2005 when the international distribution of our Infinity pump by Numico began. The first half of 2006 was the most profitable six months in the history of our Company. In addition to record operating profit, we enjoyed significant profit contributions from some nonrecurring items. Although we do not give earnings guidance, I would like to note those items that will impact our earnings in the quarters ahead compared to the first half of the year.

Earlier this quarter, we announced reaching a settlement for $1 million relating to defending our patent. We had identified a possible infringement situation last year and filed suit earlier this year against an infusion pump supplier that holds a small market share of the U.S. IV pump market. One of the terms of the settlement agreement was for Zevex to hold confidential the name of the other party. Based upon projected litigation costs to us of approximate $500,000 per year for two to three years, and a remaining patent life of only six years, we settled for $1 million. This was recorded on the income statement as other income during the second quarter, net of legal expenses for a net gain of $948,000.

Further, as Phill mentioned, we have now exhausted our tax benefits and we expect to incur a 34% tax rate during the third and fourth quarters of this year. In addition, we estimate we will pay $200,000 to $300,000 in additional consulting and auditing fees during the second half of 2006, in our efforts to meet Sarbanes-Oxley section 404 requirements.

I would also like to note that we will continue to incur stock incentive expenses in the quarters and years ahead. Our Board of Directors and executive team believe that stock is an important motivational and retention tool and we intend to continue to utilize it to align shareholder and employee interests. Now, operator, I would like to open the conference call up to questions from our listeners.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from Bill Shriver from Pine Cone Capital.

Dave and Phill, Bill Shriver here from Pine Cone Capital. How are you doing?

Doing well, thank you Bill.

Well, congratulations on the all-time record here for the first six months.

Thank you.

I did want to ask you, Dave, you mentioned the comps compared to last year look very good, but going forward, it's going to get a lot tougher. And in fact, it looks like second quarter sales revenue was pretty even from first quarter profits and so forth. Maybe you can shed more light on sales that are going in, the installed base, how much is new versus replacement? And for those new, do you see any changes in usage rate or revenue margin generated from new pumps versus old pumps?

All right, Bill, I'll answer that on both the international and domestic front. As you're addressing, it sounds like you would like some color on the therapeutics business in particular.

Yes, that would help.

Domestically, we are mostly capturing the business from new pump placements. We have our sales force focused on the referral stream source as being the medical centers where Enteral patients have their tubes placed and are then sent out into the home care environment.

Most of the companies that are embracing our technology from the distributor side are trying to capture those referral streams from the hospital. And that is something that's very exciting, an aspect of our clinical outcomes is that we can help to drive their business by delivering referral streams to them as referral centers want to see their patients get the best technology possible.

So that business is growing based on new placements. When a pump does go on a patient, it is typical for a patient to use one disposable set per day, that's 30 per month. In aggregate, though, there are some inefficiencies in the health care system where pumps are in between patients in some cases, or they may be stocked by a distributor before going out on to patients, so the industry average is typically about 15 sets per pump per month per patient. In our portable line, we typically see better than that, 15-20 or so on the average. So a pump sold then results in a revenue stream from disposable sets on a monthly basis.

Internationally, we have less visibility to the end users of the product, of course, through Nutricia Clinical, the division of Royal Numico that distributes our products. We can say, however, that our knowledge is that that's a very efficient, well-managed company and those pumps are going right through on to patients, and we believe their demand is a combination of new patients as well as-planned the replacement of their installed base of pumps.

We also sell disposable set components to Numico and Numico builds them into their disposable sets, so we have a disposable stream associated with that business as well. Does that give you a little better color on that, Bill?

Yes, it does. I appreciate that flavor. Do you see any -- The usage rates are about the same, then if I understand. How does that affect the overall revenue or margins generated?

In terms of the margins on the overall business, the disposable set revenue is better than our corporate averages as reported. I should say the margins on the disposable sets are generally better on our portable pumps. The aging stationary business that we have, that's not the case. But in the portable business, we see higher margins than we're reporting. So long-term, we believe increased disposable sales can help to increase our margins.

Okay, great. Dave, I appreciate that feedback and appreciate the additional insight. Good luck going forward and keep up the good work.

Great. Thanks for your support, Bill.

Our next question comes from Rick Moss, a private investor.

Hello. I just have a question about institutional investing in your company. I noticed recently you guys have been out talking at different conferences and so forth, but yet the last time I had checked, institutional ownership of your stock is down around 10 or 15%. Do you see that increasing in the near future?

We'll let Phill answer that.

This is Phill, Rick. A little bit of that, I want to qualify. We break it down to a little bit different manner and then I'll give you some general numbers is -- if you strictly talk institutionals and those who actually file 13s, your number is relatively correct.

We actually look at it at little bit different in the manner of trying to qualify the institutional holder as those who are also wealth management institutions that don't necessarily file 13s because they hold under the 5% rule. We do a general survey process that when I talked to these wealth management investors to just get a general idea of what they own, my calculations from an institutional standpoint in relationship to those holdings are in the 40% range.

But we also believe that the more exposure that we gain, that the institutional holdings will increase over time.

Thank you very much. Appreciate the answer.

You're welcome, Rick.

[OPERATOR INSTRUCTIONS] Our next question comes from [Richard Tierney from Longport Partners.] Please go ahead.

Good afternoon. A couple questions. The tax rate going forward of 34%, I thought it was going to be 40%, or was I thinking incorrectly?

No. I have actually never said that it will hit the 40% range in any manner. Going forward through the 2007 period, the 34, the mid-30% range is where the tax rate will be, Dick.

Great. And then the -- what was the backlog at the end of the quarter?

Backlog is -- I'm going to look real quick, because I think it's 7.2, but I want to verify that I'm not -- actually, 7.6, Dick.

Okay. I didn't have time to calculate the DSOs, but last quarter your DSOs went up a bit. Would you just generally discuss the terms -- I mean, that might have been big shipments to Numico right at the end of the quarter, it could be lots of things. Are the DSOs for Numico close to your corporate average or are they higher, are they lower?

They're higher than my corporate average.

By a lot?

They're higher than my corporate average.

Okay.

Our days outstanding all in right now for the end of the quarter, we were roughly 64 days.

And what was last quarter?

Last quarter we were at about 58.

So they are going up. Is the increase largely Numico?

In relationship to my DOS?

Yes.

Yes. And again, to hit on that a little bit, it's a timing issue in relationship to their shipments, and if I have large shipments that go at the end of the quarter, it can have an impact on my overall calculation, but we don't believe that they're going to increase much from where they are. In fact, we actually expect them to go back down to the 60-day range.

Okay. I see. Is -- are you now expecting that Numico's maintenance revenues will stay in the $0.5 million or more range?

That's -- Dick, this is Dave. Hello.

Hi.

We expect that they will continue to decline for a period. The reason we say that is because as they replace their installed base with our technology, we believe it will reduce their service costs, so we're not counting on a strong revenue stream from the service side. The positive part of that is that of course it's not high margin business. But I would be reluctant to say that we'll see it stay above $0.5 million a quarter beyond this year. We did 600,000 this past quarter. As we look out into the second half of this year, I'm even reluctant to make projections that are going to be as strong as $0.5 million.

Right, okay. It looks as though your revenues in the U.S. pump business were probably high enough to be profitable. Is that true?

We're very close to that Dick. Yes, we're getting very close.

And were the stationary revenues, U.S. stationary pump revenues in the $0.5 million range or --

Yes.

Yes, Dick. And I didn't want to get too carried away and talk too much about it, but stationary revenue actually did increase slightly during this quarter over last year's second quarter.

I noticed. Looks great. Your R&D cost was only 4%. I thought that was going to trend up as a percent?

And it will. As a matter of fact, we've been very carefully hiring the right types of personnel to execute on our present and future programs and we expect it will continue to climb and maybe by the fourth quarter reach approximately 6%.

Actually, in the first quarter, we were just shy of 3%, and this quarter we were just shy of 4%. You can see that increase taking place over the next two quarters, that same type of increase.

I think even I can figure out the trend there.

Yes.

Let's see, with DSOs -- oh, what would -- I think you've talked about the market, the U.S. and worldwide market for pumps in dollars. What are they in units?

I'll give you some very broad figures there. In terms of number of patients and it becomes a little tricky because these aren't necessarily all pump patients, we've read of estimates on the order of 400,000 to 500,000 patients in the United States on Enteral nutrition delivery at any one time. They could be fed with pumps or they could be fed with gravity systems. We actually do sell both, but we're best known for our pumps. And internationally, that number is roughly 900,000 patients at any one time.

Okay.

So it's a significant patient population. Something I think is notable about Royal Numico as a distribution partner is they have the strength with their food products and their excellence in foods to bring pump technology to countries that may not have used it extensively in the past. So we believe there's an opportunity to capture more of those patients than certainly by going it on our own.

Right. And with the applied tech business, were there some new customers in there that helped to make revenues so strong?

As a matter of fact, the encouraging news is that that was from our existing applied technology, our historic customer base. It does reflect the hard work of our applied technology engineering and operations teams and sales teams in bringing in additional programs to those existing companies and that actually took place over the past couple of years, so we're enjoying the benefits of a lot of hard work over prior years in growing our business with those existing customers and then their ability to capture more market share. We do have more in the works with new customers that we expect to bring to market this year and into next year.

Well, $4 million was a quarterly record, wasn't it?

It's very close, if it's not. I can think of one quarter several years ago that was very strong.

Dick, I honestly -- I think it's actually about $100,000 short of what a quarter was back in 2000.

Okay, well -- it's still nice.

And thank you, Dick. Yes, certainly a strong quarter for applied tech and I think it's a great reflection on the types of customers we have. Their strength as well as our operations team in producing the product.

Right. Great. Well, thank you very much.

Thank you. Our next question comes from Vincent Staunton from Wedbush. Please go ahead.

Hi. I was wondering what you see driving growth forward in the future? Do you see Numico sales increasing, what exactly is going to drive growth in the future?

Vincent, this is Dave. We see three primary sources of growth in 2007 and beyond. First, continued domestic and international therapeutic market penetration. Internationally, through our relationship with Numico. But in the domestic market, our domestic sales force is making great progress driving double digit growth in a market that is reported to be growing in single digits and roughly 4-5%. So we're excited. We believe that our team is capable of continuing to drive that growth based upon their abilities and the strength of our product line.

Secondly, the production of sensors, surgical tools, and systems for new applied technology customers I mentioned in response to Dick's question that we're going to be bringing new products to market through those customers, at the component, subsystems, and systems level. And we're excited for the opportunity that could provide for growth.

And then thirdly, we are exploring new applications for our technology that we believe we can bring to market through the right partners beyond 2007. That's longer term. I think that's 2008, 2009 revenue. But it's a reflection on the way we're thinking. We're starting to do the early clinical work in observing procedures and trying to identify ways for us to use our technology to solve new medical problems.

But do you see plenty of growth available on Enteral feeding devices?

We do. We are still a very small market share player in the United States. Still one of the smallest. So I believe that we can continue to grow in the U.S. Internationally, I believe that our partnership with Numico can continue to drive more business there. So yes, I still believe there's plenty of upside in the therapeutics business as well as the applied technology business.

Okay, thanks, guys.

You're welcome, Vincent.

Thank you. Our next question comes from [Jay Bosnihan from WestPark Capital].

Congratulations guys on the quarter. Was wondering if you could talk a little bit about your Numico agreement and what kind of successes they've had and what's driving their purchasing above the minimum requirements?

Yes, this is Dave, Jay. Great to hear from you. With Numico's business, it's interesting, they have taken an approach to utilize this technology in not only classical home care or portable pump situations, but also in institutional applications, which would include nursing home and hospital applications. They're using the technology and as I understand it, they've been able to win new tenders, secure new pieces of business, and that is a large part of their purchasing forecast is capturing new business.

From the start, we'd had a plan together to replace an installed base of pumps, but I think they've been overachieving based on the success in their major markets and the country organization is actually securing new business and helping to drive their corporate growth, which I understand is in the low teens, which is exceptional for a company of their size.

So do you think by them taking market share, this will extend the replacement cycle for their installed base? So we could maybe see this as a three or four-year agreement?

I don't believe it will necessarily extend it, because together we were very careful in estimating the duration of time for the replacement of the installed base and from the early inception of the agreement has been on the basis of a number of years, not an immediate replacement. So I'd say that the upside is from the growth part and our expectations from the minimum commitment side of the contract are really based on the replacement of an installed base.

And lastly, do you think there's any opportunity to have this type of agreement with a domestic distributor?

I think that potential does exist. We certainly remain open to ideas. Our best success to date has been in partnering with home care companies, home care providers like Option Care, where in the U.S. they, with our model, they have the ability to drive sales and we have the ability to deliver not just the best pump in the world, but great technology to drive their business and capture referral streams. So, so far, that's the best model we've been able to demonstrate to date.

Thank you very much and best luck as you get out on the road and tell your story this fall.

Thank you, Jay.

Thank you. Our next question comes from Rick Panther, a private investor. Please go ahead.

Hi, guys. Great quarter. I was going to ask about product introductions and I think you've kind of answered it. It's going to be '07 or '08?

I'd say -- was it Rick?

Yes, sir.

Rick, this is Dave. We would expect within the next, I would say the next six months or so to be introducing product line extensions in our current proprietary line in the current therapeutics area. And then in the applied technology area, we're continually developing products for other companies. Those products will bear their names so we won't see product launch announcements from Zevex on their products, but we would certainly expect to see it reflected in our revenue.

Okay. All right, thank you.

You're welcome.

Thank you. Our next question comes from [Dan Thoussard of Mine Care Investment Management].

Hey, guys, how you doing? Great quarter. I was just kind of curious, I was a little surprised by the sequential decrease in the margins. Could you give me a little outlook going forward and what you're thinking of both gross margin and your operating income line?

Where we might want to start with and I'll turn it over to Phill an analysis of where margins were for this quarter versus last year, what some of the changes are, but we're very careful about giving guidance going forward.

And basically, and I tried to touch upon this a little bit in relationship to margins and the big comparisons in relationship this year to last year. A portion of that is related to the service business. And that service business from the Numico pumps on the maintenance of their current installed base is a very low margin business for us. And so it's pretty much in a passthrough process where we have a third party service group in Europe that performs a service and then there's a small markup in relationship to the administrative portion for Zevex. That drives down the margin.

If you actually pull those numbers out of our COGS, our numbers are very comparable to what they had been in the prior several quarters, excluding the first quarter, if you do the same thing in the first quarter, you pull that number out of there in relationship to our true manufacturing margins, our margins are very comparable. In the second quarter, we also had some one-time costs in relationship to a transfer of our third party manufacturing of our disposable sets.

And then literally, on a quarter by quarter basis, just a general product mix which takes place, depending upon what I sell, I'm going to see a point difference pretty much very consistently just because of what I sell. Those have been the three major factors of why the margins were down in this particular quarter and the same thing for the first six months. Going forward, again, we still have a corporate goal which we had talked about previously on our previous calls that the high 30s to 40% is where our corporate goal is.

Appreciate it. Do you have a good feeling for where you are in terms of servicing those Numico pumps relative to whatever size that contract could be?

On the service side. We expect that the service revenue will decline on that piece of the business. The reason I say that is we're replacing older technology with our technology, which is the most robust pump in the market today globally. So on the positive side, we've got the best technology. On the negative side, that bring service revenue down, but we certainly believe we can drive better, more profitable sales with new pumps than with -- and give up something on the service side.

Great. Appreciate it. Great quarter, guys.

Thank you.

There are no further audio questions at this time. Do you have any concluding comments?

Yes, thank you. In closing, I would like to again recognize and thank our employees and leadership team. The financial performance we have reported is a direct result of the continued efforts of our focused and dedicated team. I believe this team has the capacity and enthusiasm to continue to successfully grow our company.

We are pleased to announce that we'll be presenting at the Roth Capital Partners New York conference on September 6th and 7th and the Noble Financial On Track conference in Charlotte, North Carolina September 26 through 28th. Please look for news releases on our Web site, Zevex.com, to learn more about these conferences. Thank you all for participating today.

Thank you. Ladies and gentlemen, this does conclude our conference call for today. You may now disconnect. Thank you for your participation and please have a pleasant day.