IDEXX Laboratories Exceeds Expectations

For the second quarter in a row, animal diagnostics company IDEXX Laboratories (NASDAQ: IDXX) increased its revenue and earnings guidance. While other sectors of the economy are experiencing slower growth, IDEXX's core market -- companion animal diagnostics -- is growing nicely, and the company's 2015 shift to a direct sales model continues to generate impressive sales increases. Let's take a look at the details behind a good quarter of execution.

IDEXX Laboratories has good long term prospects thanks to spending trends on companion animals. Image source: Getty Images.

IDEXX Laboratories second-quarter results: The raw numbers

Starting with the headline numbers:

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• Second-quarter revenue increased 13% to $466.6 million, with Companion Animal Diagnostics (CAD) revenue up 14%
• Second-quarter EPS of $0.74 up 23% year on year, an increase of 33% when adjusted for currency

A good set of results, and management felt suitably confident enough to raise full-year guidance:

• Full-year revenue guidance of $1.76 billion-$1.78 billion compared to previous guidance of $1.73 billion-$1.75 billion
• Full-year organic revenue growth guidance of 10%-11.5% compared to previous guidance of 9%-10%
• Full-year EPS guidance of $2.32-$2.39 compared to previous guidance of $2.18-$2.25
• Updated EPS guidance implies constant currency adjusted growth of 19% to 23% compared to a previous estimate for 13% to 17%

It's an impressive increase in guidance. Moreover, the updated EPS guidance (using midpoints) represents a 10.3% increase from what management expected at the start of the fiscal year. Thelarge differencebetween the updated and original guidance is understandable when you consider the uncertainty created by the shift to the direct sales model and the launch of the SediVue urine analyzer. Fortunately, both actions are working out as planned.

What happened in IDEXX Laboratories' second quarter

CAG generated more than 87% of IDEXX's income from operations in the second-quarter -- CAG represents the key growth opportunity for the company. Within CAG, diagnostics recurring revenue generates around 85% of revenue, and, since IDEXX needs instrument placements in order to help generate future consumables and services revenue, it's useful to keep an eye on how instrument sales are progressing.

A quick look at CAG year on year revenue growth shows the acceleration in growth rate of capital instrument sales in the quarter. Moreover, diagnostics recurring revenue continues to grow at a double-digit rate.

Data source: IDEXX Laboratories presentations.

On the earnings call, CFO Brian McKeon talked of "outstanding growth in premium instrument placements" aided by the launch of SediVue. He went on to disclose "Globally, we've placed 1,334 Catalysts, 934 premium hematology analyzers, and 467 SediVues. Strong North America results were supported by accelerated competitive placement levels. We placed 502 Catalysts in North America in Q2 with 300, or 60%, at competitive or greenfield accounts."

SediVue. Image source: Idexx Laboratories.

For reference, IDEXX generated around 61% of its revenue from the U.S. in the second-quarter, so the strong increase in placements bodes well for future growth.

Future growth plans

The ground work for future growth in CAG diagnostic recurring revenue growth is being laid out by selling more instrument placements, and in this regard investors have cause for optimism. CEO Jon Ayers outlined how just this year IDEXX's diagnostic professionals had made more than 124 thousand visits to veterinary practices -- representing an average of five visits to every practice. In other words, the shift to the direct sales model is creating more awareness of IDEXX's products.

He went on to disclose that the U.S. commercial team had produced "greater than 50% growth in premium instrument orders over the second quarter of last year," citing strong growth with the Catalyst chemistry system and the SediVue analyzer launch. SediVue will be launched in some countries in the fourth-quarter of 2016 with "the bulk of the international launches to take place in 2017," according to Ayers.

Looking ahead

The shift to the direct sales model in the U.S. is working, and instrument placement growth is strong, suggesting that recurring revenue will grow strongly in the future. Meanwhile, international sales of Catalyst are growing strongly and the wide-scale launch of SediVue in international markets could boost revenue in 2017. There is always uncertainty around product launches and operational realignments (direct sales model) but so far in 2016 IDEXX has exceeded expectations.

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