On the surface, IDEXX Laboratories's (NASDAQ: IDXX) third quarter wasn't the kind of outstanding report we've come to expect from the animal-testing company, which narrowed its revenue guidance for the year. But dig a little deeper, and the revenue issues weren't that big of a deal.
The hurricanes hurt sales a little. And less testing of cattle is hurting the company's farm-animal testing business, although that's a relatively small fraction of sales. Finally, IDEXX increased the use of programs that result in placements of its instruments, but don't necessarily translate to immediate revenue recognition in the quarter in which they're placed -- which hurts short-term revenue, but should benefit long-term profits.
IDEXX Laboratories results: The raw numbers
What happened with IDEXX Laboratories this quarter?
- Sales for the companion animal group (CAG) were up 10%, with diagnostic tests and veterinary software services leading the way. Revenue from instruments fell, partially because the year-ago quarter was so strong, with a backlog order fulfillment for the SediVue instrument, but also because of the aforementioned deferred revenue recognition.
- Despite the decrease in revenue from instruments, the company placed 2,738 premium analyzers during the quarter -- more than the year-ago quarter -- including 1,385 of its workhorse Catalyst instrument, with 80% of the placements in North America going to competitive accounts where IDEXX hadn't previously had a strong relationship with the veterinarian office. Now that IDEXX has a foot in the door, those new accounts should drive future sales.
- IDEXX's two smaller segments had mixed results, with water testing up 11% year over year and tests for farm animals down 5%, as lower milk prices in Europe have decreased the use of antibiotic residue testing, pregnancy testing, and herd health screening for dairy cattle.
- IDEXX was able to increase operating income faster than revenue through increases in gross margins as it sells more high-margin diagnostic tests, and through increases in operating efficiency as fixed costs get shared by larger gross profits.
- Earnings per share grew even faster because of lower taxes, which investors shouldn't expect to continue to boost earnings growth in the years ahead.
What management had to say
Jonathan Ayers, IDEXX Laboratories' chairman, president, and CEO, explained how a move toward bundled sales that results in revenue from CAG instruments being recognized over five or six years, as well as rental programs in emerging markets, might hurt revenue in the short term, but benefits the company's profits in the long term:
Ayers also highlighted the SDMA test that will be available on the Catalyst instrument in the next few months as a driver for future growth:
Management increased 2017 earnings-per-share guidance to $3.22 to $3.26, which is $0.07 higher than the midpoint of the previous guidance, although about $0.05 of that will come from the aforementioned tax benefits. The company also released preliminary guidance for 2018, which has revenue increasing 9.5% to 11.5% year over year, with earnings per share increasing 8% to 12%, as reported, or 15% to 19% on a comparable constant-currency basis, as IDEXX plans to increase operating margins by 75 to 125 basis points.
10 stocks we like better than Idexx LaboratoriesWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Idexx Laboratories wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of October 9, 2017