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Edited Transcript of ABAX earnings conference call or presentation 24-Oct-17 8:15pm GMT

Thomson Reuters StreetEvents

Q2 2018 Abaxis Inc Earnings Call

UNION CITY Oct 26, 2017 (Thomson StreetEvents) -- Edited Transcript of Abaxis Inc earnings conference call or presentation Tuesday, October 24, 2017 at 8:15:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Clinton H. Severson

Abaxis, Inc. - Chairman of the Board & CEO

* Craig M. Tockman

Abaxis, Inc. - VP of Animal Health Sales and Marketing - North America

* Donald P. Wood

Abaxis, Inc. - President & COO

* Joe Dorame

* Ross Taylor

Abaxis, Inc. - CFO, Principal Accounting Officer, VP of Finance & Secretary

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Conference Call Participants

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* David Michael Westenberg

CL King & Associates, Inc., Research Division - Senior VP & Senior Equity Analyst

* Erin Elizabeth Wilson Wright

Crédit Suisse AG, Research Division - Director & Senior Equity Research Analyst

* James Philip Sidoti

Sidoti & Company, LLC - Research Analyst

* Jonathan D. Block

Stifel, Nicolaus & Company, Incorporated, Research Division - MD and Analyst

* Michael Ryskin

* Nicholas Michael Jansen

Raymond James & Associates, Inc., Research Division - Analyst

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Presentation

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Operator [1]

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Good afternoon, and welcome to the Abaxis Second Quarter Fiscal Year 2018 Financial Results Conference Call. (Operator Instructions) Please note today's event is being recorded. I would now like to turn the conference over to Joe Dorame from Lytham Partners. Please go ahead, sir.

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Joe Dorame, [2]

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Thanks, Rocco. Good afternoon, and thank you for joining us today to review the financial results of Abaxis for the second quarter of fiscal year 2018, which ended on September 30, 2017. As Rocco indicated, my name is Joe Dorame. I'm with Lytham Partners, and we are the Investor Relations consulting firm for Abaxis. With us today representing the company are Clint Severson, Chairman and Chief Executive Officer; Don Wood, President and Chief Operating Officer; Ross Taylor, Chief Financial Officer; and Dr. Craig Tockman, Vice President of Animal Health Sales and Marketing North America. At the conclusion of today's prepared remarks, we will open the call for a question-and-answer session. If anyone participating on today's call does not have a full-text copy of the press release, you can retrieve it from the company's website at abaxis.com or numerous other financial websites. Before you begin with prepared remarks, we submit for the record the following statements: this conference call may include statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Specific forward-looking statements contained in this conference call may be affected by risks and uncertainties, some of which are detailed under Risk Factors and documents filed by Abaxis with the United States Securities and Exchange Commission, including the annual report on Form 10-K for the fiscal year ended March 31, 2017. Forward-looking statements speak only as of the date the statements were made. Abaxis does not undertake and specifically disclaims any obligation to update any forward-looking statements whether as a result of new information, future events or otherwise. Now I would like to turn the call over to Clint Severson, Chairman and Chief Executive Officer of Abaxis. Clint?

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Clinton H. Severson, Abaxis, Inc. - Chairman of the Board & CEO [3]

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Great. Thank you, Joe, and welcome, everybody, to our quarterly call. I'll make a few comments and then I'll turn the call over to Ross and Don for further comments and then we'll take questions.

Now while the headline numbers for the quarter are light, we expect this trend to change in Q3 and Q4. We had some pretty good upsides in Q2, where we had good performance in the Pacific Rim, where sales were up 9% versus last year. Piccolo instrument sales were up 10% year-over-year, our rapid tests were up 12%, and hematology instruments sales were up 21% year-over-year. So now we need to get the rest of the company, the rest of the product lines performing in the same direction. In R&D lab, we continue to improve productivity with the introduction of our urine chemistry system in Q2, and a schedule introducing our urine sediment analyzer in Q4 as well as continued progress with our high-sensitivity immunoassay platform.

The FUSE connectivity system is now working with ImproMed and AVImark Axis-Q with additional hook-up scheduled for this quarter, and Don will cover more in a few minutes. Our domestic sales team will be expanding as we now better understand what support distributors require to be productive. We expect more additions in Q3 and Q4, and more from Don in a few minutes.

If you read the press release, you may have noticed that we've increased our stock buyback by $21 million to a total of $75 million and increased our dividend by 14%, meeting my goal of a double-digit dividend increase each year.

Like I mentioned on our call last quarter, we continue to spend more in fiscal 2018 on R&D to complete our new products and more in sales and marketing as we expand our field team. So with that, Ross, you're up.

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Ross Taylor, Abaxis, Inc. - CFO, Principal Accounting Officer, VP of Finance & Secretary [4]

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Thank you, Clint. I will review our financial results and other important fundamentals for our second quarter, which ended on September 30. Total revenues in the second quarter were $58.9 million, up slightly from $58.6 million last year. Changes in foreign currency had a very small impact in the quarter as currencies added approximately 0.4% to revenues. Our reported EPS were $0.29 per share in Q2. In comparison, last year, we earned $0.34 per share after excluding the gain from the sale of an investment. During Q2, total consumable revenues increased 2% to $46.4 million from $45.5 million last year. Within our consumable product lines, total rotor revenue was $31.6 million, about flat with $31.7 million last year.

Abaxis sold a total of 2.55 million rotor units on a global basis in Q2, down 1% from 2.57 million units last year. Hematology reagents increased in a mid-single-digit pace and rapid assay revenues increased 14%. Instrument revenues decreased 7% to $9.2 million from $9.8 million last year due to lower veterinary instrument sales.

Focusing on our animal health business. Global veterinary revenues were $48.5 million in Q2, about flat with $48.3 million last year. Veterinary consumable revenues increased 3% to $39.3 million from $38.1 million last year. Veterinary instrument revenues were $7.5 million, down 10% from $8.3 million last year. Global sales of veterinary rotors were 1.56 million units in the quarter, up 1% from 1.54 million units last year. Sales of veterinary rotor units in North America were flat in Q2. Outside of North America, our sales of veterinary rotor units increased 4%; that rotor unit declined slightly in Europe; Asia Pacific increased at a low-teens pace; and Latin America increased at a high single-digit rate. Revenues from other veterinary consumables, which we define to include hematology reagents, i-STAT cartridges, coagulation cartridges and rapid assays increased 7% to $14.8 million in Q2 compared to $13.8 million last year.

Within our veterinary business, on a global basis during Q2, Abaxis sold 459 VetScan chemistry instruments compared to 714 VetScans last year. With regards to hematology, we sold 413 hematology instruments worldwide in Q2 compared to 316 in Q2 last year. In addition, on a global basis, Abaxis sold a total of 215 i-STAT and coagulation instruments in Q2 compared to 205 last year. Importantly, Abaxis launched its new urine chemistry analyzer near the end of September and sold close to 100 units during the quarter. Total revenues for our North American animal health business were $38.0 million in Q2, approximately flat with $38.1 million last year. Within North American Animal Health, we placed 311 VetScans with end customers in Q2 compared to 503 last year. Of the VetScan placements this quarter, 49% were with new customers. In addition, excluding a small number of installation of Banfield clinics, we placed 259 hematology instruments in North America compared to 219 last year. 61% of the hematology placements this quarter were into new accounts.

Moving on to our medical division. During Q2, revenues for our medical business were $9.3 million, approximately flat with $9.4 million last year. Revenues for our North American medical division were $6.8 million compared to $6.7 million last year. Worldwide revenues for Piccolo instruments were $1.7 million, an increase of 10% from $1.5 million last year. On a global basis, Abaxis sold 225 Piccolos in Q2 compared to 208 in Q2 of last year. The increase in Piccolo instrument sales was driven by North America. On a global basis, during Q2, medical rotor unit sales declined 4% to 992,000 units from 1.032 million units last year. The 4% decline was the result of a difficult comparison since our Piccolo rotor unit sales had a very strong quarter in Q2 last year. During Q2 last year, they increased 22% in part because inventories increased significantly at our largest Piccolo customer. Looking at the geographic regions, within North America our Piccolo rotor unit sales declined 4% to 499,000 rotors from 831,000 rotors last year. Piccolo rotor unit sales also declined 4% in markets outside of North America during the quarter. We think underlying end customer demand for the Piccolo rotor remains very good both in North America and on a global basis. Our goal continues to be to grow our Piccolo business at a double-digit pace over the long-term. For modeling purposes, I remind everyone that for Piccolo rotor units, our comparison is a little bit easier in the current quarter as Piccolo rotor units declined 3% from the December quarter last year.

Moving on to gross profits and expenses. In Q2 our gross profits were $32.2 million compared to $32.3 million last year. Our gross profit margin was 54.6% in Q2 compared to 55.1% last year, a decline of 50 basis points. Our cost of goods for each rotor unit was $3.69 in the September 2017 quarter compared to $3.59 in the September quarter last year. During Q2, total operating expenses were $22.7 million compared to $20.5 million last year, an increase of 11%. Consistent with the plans we described on our conference call back in April, we continue to invest in R&D and sales and marketing during the quarter. Second quarter R&D expense increased $1.2 million over last year to $6.1 million. Similarly, sales and marketing expenses increased $1.2 million over last year to $12.5 million.

Finally, our operating income declined 20% to $9.4 million in Q2 compared to $11.7 million last year as a result of the investment in R&D and SG&A. The operating profit margin was 16.0% in Q2 compared to 20.1% last year.

This concludes my remarks. And I will now turn the call over to Don.

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Donald P. Wood, Abaxis, Inc. - President & COO [5]

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Thank you, Ross. Today, I want to focus and add some color on our performance and improvements going forward. Turning to the vet business. We continue to see the benefits of change in adjustments we have made and we will continue to make in our business with our commitments to adding additional resources to our sales team and realigning the territories to provide more consisting coverage for our customers. Our rotor sales to customers continues growing in the low single digits, and we expect even better results going forward. We remain committed to working with our distributor network for the long term. But we did increase our field presence to deliver a higher level of customer service, customer retention and new sales. We currently have more than 90 people in the field. And we will monitor the productivity of the entire group to determine if further change is needed. Having said that, we do plan on adding additional personnel in both this quarter and next quarter. We have hired diagnostic service specialists, and they will work alongside our current regional account managers to add more regular visits from Abaxis representatives, provide better equipment service, assist our current field team with instrument installations and work with our customers to increase utilization of their current analyzers and improve efficiency of their practice. They will also work with our distribution partners to help identify new opportunities in each practice to expand use of our products. This team will free our account managers to focus more on the opportunities as well as to present the new analyzers to current customers. When you add the regular visits provided by our distribution partners on top of the attentive care provided by the Abaxis team, we can tighten customer relationships and retention rates. These new changes in investments in sales capacity were necessary, particularly due to our new expanded product lines, including consumables. So it is very important to maximize our potential for success. Our future is evolving. And it also looks very bright with our previously announced investment in new products, now beginning to roll out and create excitement and interest for our customers. We have been consistently launching new products on time to improve and expand our offering to increase our competitiveness and retain customers. In the last four quarters, we have launched 3 new panels for the veterinary market, including the phenobarbital profile 2 quarters ago. These products have been very received by our customers and continues to add to our growth. At the end of Q1, we launched the canine-specific pancreatic lipase test or cPL, which has had a rapid uptake and is only available -- it is the only available semi-quantitive pancreatic test available at the point of care. More than 800 customers have already ordered this test along with the VUE instrument that is also required in just over 3 months time. This will continue to provide us excellent growth, particularly with the investment and improved sales coverage. As promised last quarter, in September, we released the VetScan UA urine chemistry analyzer. We began taking preorders in August and we had well over 300 orders by the end of September. With more orders now coming in daily, while this instrument and the associated consumables do not have a higher revenue expectation, the instrument will seamlessly combine with our soon-to-be launched urine sediment analyzer for a complete urinalysis report and will add value to the overall urine product line as well as broaden our product offerings. This urine chemistry analyzer has generated a significant excitement in both the Abaxis team and our distributor partners as our customers love the product and we're now truly showing a consistent pipeline of new products to sell and discuss with customers and prospects. More importantly, this strategic product provides point of care semi-quantitative results, not available anywhere else. Not only does it fill a menu gap of an important renal monitoring test, but also provides us with the new microalbumin test, not being provided at the point of care by any other product. Our FUSE connectivity solution has been officially launched and was installed in more than 100 practices worldwide in Q2. This is far more -- there is far more to the FUSE than the ability to communicate bidirectionally with the PMS system. The user interface, Internet connectivity, reporting and trending functions are highly desired by our customers for use as a customer communication tool as well as for improved practice workflow. Updating our progress this quarter, today, FUSE works in a bidirectional manner with the Henry Schein systems, AVImark, and ImproMed which is owned -- which owns at least 50% of the U.S. market as well as with a product called ezyVet. At the end of October, we plan on updating the FUSE to include unit direction capabilities that will allow our customers to use all the features of the FUSE, including downloading patient results into the PMS system exactly as it already works today. This will allow the FUSE to be used by the majority of our customers now while other PMS systems build the bidirectional capability in. This will also speed up installation of the FUSE with AVImark and ImproMed clinics as we install the FUSE with our instruments. The customers may begin using all the features of the FUSE immediately and then the team at Schein can install Axis-Q and work on the bidirectional whenever the customer desires, that the FUSE will be ready to use immediately. On reporting that our urine sediment analyzer is on schedule to launch in our fiscal Q4, we will begin taking preorders this quarter and expect even more excitement moving forward as this is a significant new revenue opportunity for Abaxis. We have been working diligently to produce a product that exceeds the performance of any competitor instrument as well as being able to exceed every expectation of the veterinary practice. Our analyzer is designed for the bench top and made with exceptional components. Unlike our competitor's instrument, there are no cartridges and the entire process is automated with virtually no hands-on time with the sample. The flow cell technology produces clear and detailed images and our software allows the doctor to truly evaluate the results as well as combine them with the urine chemistry instrument results. As with all Abaxis products, the sediment analyzer design is far more capable, easier to use, cost effective than our competitor's instrument. As previously discussed, our long-term projects of high-sensitive immunoassay technology platform move into the engineering phase during the March quarter. An excellent progress continues on this platform development. With this technology becomes available, we will be able to add high value immunoassays to our rotor platform as well as allow us to combine immunoassays with chemistry tests on a single rotor. There will be no other product available with this capability, and we believe this will likely be a complete game-changing way to practice laboratory medicine. We continue to get back customers that left us. Our field sales team is now armed with documented written and video stories of former Abaxis customers asking to come back to our family. The addition of our phenobarbital panel, canine-specific pancreatic lipase test, urine chemistry analyzers, and soon-to-launch sediment analyzer, along with the continued improvements in sales and customer care, will make coming back to us even more attractive and provide more benefits to attract new customers as well as keeping customers from leaving. Our friendly, easy-to-understand contracts, low cost, strong and available customer service and low hands-on maintenance are features that were missed by our customers. And we now have a proven system established to seamlessly help them back into the Abaxis platform. Our customer testaments are uplifting and proof of the robustness of our product offering. We are now very confident in our product pipeline with both new products and with improvements to our existing menu. We are working on improved thyroid panel with wider ranges to provide a more robust test for the customers. We are also working on other panels, the processes and software improvements that we identified by working closely with our customers. These products should improve customer retention and provide our sales team with a far better menu to sell. Our improvements in field personnel will also provide us with the people that can discuss all these new products and improvements with our customers and work to increase utilization in the customer base. Our sales team is excited. The addition of the new products, the improvements, the customer-centered service and educational team has our field people ready to take a significant step forward. Our distribution and engagement has been less than what we expected over the past 2 years. However, we are now providing our distributor partner management and field personnel, many more reasons and opportunities to engage with Abaxis account managers in the field. We have added additional personnel, and along with the previously announced distribution management team, we have provided all the tools that they need to grow their and our business in a big way. The plan is now being implemented will be fully rolled out to completion in our Q4. Our expectation is much improved engagement and performance going forward. With our work -- while our work is far from completed, strategically, during the last 18 months, we have made significant long-term decisions and progress internally in planning and setting up future quarters and managing these changes with our new products and personnel.

We are happy with the on-time performance of our product launches. There are many reasons to be excited about the future as we move into the implementation phase of launching our strongest products yet. And combined with our field changes to-date, we feel we will have strategically provided all that we need to do to return to double-digit growth trajectory, and we are nearing to this target.

Turning to the medical business. In Q2, Abbott continued sales and marketing focus into the satellite oncology centers with good success. In Q3, Abbott is launching a similar oncology focus with our hospital sales team, with emphasis on the hospital-owned higher volume oncology centers. We expect consistent growth in the attractive market moving forward. The medical business continues to expand sales and marketing efforts into markets that present attractive growth opportunities long term. These markets include, but are not limited to, corporate health screeners, retail clinics, CRO and clinical trials.

We are also enthusiastic about the continued growth of our largest corporate health screening partner. We project their rotor sales this year alone to be $1 million in 2017 and substantial double-digit growth expected in 2018. While the CRO clinical trial market is difficult to forecast, Piccolos were sold into a trial in Q2, another Phase II trial is expected in Q3, and a healthy pipeline of trials is encouraging for the future in this improved market. So overall, we're very happy with our relationship with Abbott and the programs that they are rolling out and how strong the Piccolo positions with all of their new point-of-care products that they acquired.

Now turning to our international business. Our international revenues increased 3% in September quarter compared to last year aided by currencies. Asia Pacific and U.K. were the strongest regions by 9% and 7% growth, respectively. Europe, Middle East and Africa increased low single digits. Asia Pacific business was driven by a 23% increase in rotor sales, both medical and vet rotor sales were strong. In Europe, instrument sales increased 16% while consumable sales were about flat. We continue to make investments and improvements in our international sales and marketing infrastructure. We constantly train our sales staff, reengineered our sales and marketing teams, and fill all gaps in the territories in order to a deliver the best products and service to our customers. While our international business can be volatile on a quarterly basis, we continue to believe our growth in the international markets should continue to improve over the next several quarters. Back to you, Clint.

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Clinton H. Severson, Abaxis, Inc. - Chairman of the Board & CEO [6]

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Great. Thank you, Don. Okay, with that, we're open for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And today's first question comes from Nicholas Jansen of Raymond James.

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Nicholas Michael Jansen, Raymond James & Associates, Inc., Research Division - Analyst [2]

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I just wanted to dig a little bit deeper into kind of the placement trends and consumable forecast that you have in the North American market. It still feels like we haven't yet seen any sort of major benefit yet from the expanded sales force and the improved distributor relationships. I just wanted to kind of get your thoughts on the cadence of when that should actually help drive better revenue growth, and it is still the goal for management to get back to double-digit revenue growth in the fourth quarter of this year?

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Clinton H. Severson, Abaxis, Inc. - Chairman of the Board & CEO [3]

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I think you'll see the trend change in Q3 and Q4. That's what we expect. And yes, we're seeing improvements, yes, in both the addition of more people in the field and better performance from distribution as well. And I think that some product lines and some areas were at double digits or very close to it. And we just have to get everybody up to the same speed throughout the whole organization. And yes, I think you're going to see improvements in Q3 and Q4. And Craig, I don't know if you want to comment any more on that.

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Craig M. Tockman, Abaxis, Inc. - VP of Animal Health Sales and Marketing - North America [4]

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I'm just going to add except -- there also is an increased focus on the existing customer base. And that's part of the ramp up of people. So we spent a lot of time taking better care of the customers. And as we come out with these new products as well, we'll continue that because there's a lot of opportunity in those customers as well. So I agree with Clint, we'll be seeing improvements as we continue to ramp that up, We're not at the numbers we want to be at yet, and so it's still a process.

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Nicholas Michael Jansen, Raymond James & Associates, Inc., Research Division - Analyst [5]

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That's helpful. And maybe for you Ross, and just in terms of the expenses that you've communicated, are the prior increases in R&D and sales and marketing still the right numbers to think about, particularly as you're adding more folks to the field in the back half of this year? And how do we think about the expense run-rate exiting this year relative to the leverage perhaps of returning in the business model in fiscal '19?

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Ross Taylor, Abaxis, Inc. - CFO, Principal Accounting Officer, VP of Finance & Secretary [6]

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Right. I think in terms of the expense ramp up, I think the $8 million that we communicated for sales and marketing is still a valid number to think about in terms of the year-over-year increase. For R&D, we communicated a number of $6 million. We probably fell a little bit short of our targets in terms of the spend for R&D in Q1 and Q2. So it's possible we may fall a little bit short of that $6 million. And then looking out to fiscal '19, certainly, on the sales and marketing side, I'd expect to see in a little bit of leverage on that figure. I think the pace of R&D spend is really going to depend on what the risk reward of the opportunities we have in front of us is going to look like.

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Operator [7]

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And our next question today comes from Jim Sidoti of Sidoti & Company.

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James Philip Sidoti, Sidoti & Company, LLC - Research Analyst [8]

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Let me put out Clint. There are 2 pretty major hurricanes in the quarter, one in Texas, one in Florida. I assume those are probably big customer areas. Can you quantify any impact from the hurricanes?

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Clinton H. Severson, Abaxis, Inc. - Chairman of the Board & CEO [9]

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Yes. Well, I'm sure there was some impact. Well, we have actually a pretty big business in Puerto Rico as well. So maybe Craig, you can comment on how you feel about the...

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Craig M. Tockman, Abaxis, Inc. - VP of Animal Health Sales and Marketing - North America [10]

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Yes, Puerto Rico was the biggest thing. We do have a very robust business in Puerto Rico. And that's obviously been damaged. Fairly minor impact in Florida and Texas. Obviously, some clinics were closed for a couple of days, some were closed for a lot longer. But in general, the ability for everybody to get back up and running was pretty good. And we also assisted as much as we could. So I would not put a huge amount on it, but a little bit of impact.

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James Philip Sidoti, Sidoti & Company, LLC - Research Analyst [11]

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Okay. And then with the 2 urine analyzers that are out now: the chemistry analyzer that is out now and the sediment analyzer that's coming out, can you just remind me what is the disposable component for those systems?

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Clinton H. Severson, Abaxis, Inc. - Chairman of the Board & CEO [12]

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The sediment analyzer is a fluid base. So it would be similar to our hematology system. What was the other part of your question, Jim?

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James Philip Sidoti, Sidoti & Company, LLC - Research Analyst [13]

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And then on the chemistry, is there a cartridge there?

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Clinton H. Severson, Abaxis, Inc. - Chairman of the Board & CEO [14]

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Yes. The urine chemistry is a strip. It's a chemistry strip with either 10 or 14 tests on it. And different pricing on those 2 product lines.

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James Philip Sidoti, Sidoti & Company, LLC - Research Analyst [15]

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Okay, right. And then what's the update on the next-generation chemistry analyzer for the high-sensitivity immunoassay test?

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Clinton H. Severson, Abaxis, Inc. - Chairman of the Board & CEO [16]

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Yes. So they're -- it's in the process of being engineered. They've put all the pieces together. They've identified vendors. And they're in the process of putting together the first prototypes.

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James Philip Sidoti, Sidoti & Company, LLC - Research Analyst [17]

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So do you still think that at some point in fiscal '19, that might be out to the market or do you think it might be delayed into fiscal '20?

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Clinton H. Severson, Abaxis, Inc. - Chairman of the Board & CEO [18]

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Well, that's the goal. Next year of this time, we should have the new instrument out with the TSH test on it.

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Craig M. Tockman, Abaxis, Inc. - VP of Animal Health Sales and Marketing - North America [19]

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And that would be in the vet market.

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Clinton H. Severson, Abaxis, Inc. - Chairman of the Board & CEO [20]

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That would be vet market first and then medical follows.

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Craig M. Tockman, Abaxis, Inc. - VP of Animal Health Sales and Marketing - North America [21]

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Because of the regulations, right.

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James Philip Sidoti, Sidoti & Company, LLC - Research Analyst [22]

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Right, right. And then last question on the medical business. Looks like it was up by about $0.5 million compared to the first quarter of this fiscal year. Is Abbott getting a little less distracted now that they've closed the earlier acquisition? And how is that relationship going?

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Clinton H. Severson, Abaxis, Inc. - Chairman of the Board & CEO [23]

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Jim, the relationship is very strong. We were very fortunate that a lot of our programs were dialed in already when this acquisition happened. And actually, they were able to get their hands on things. So I don't know how it will be going forward. But most of our programs, probably looking out a good 18 months, are set and done. And as I mentioned in the call that they're taking the Piccolo into a different market, the hospital market, which they have not done before, and strictly in oncology. But I would say that, yes, we had a very healthy relationship with them. We had very good meetings. We have a quarterly meeting with their management. And it was an excellent meeting. We love all of the new marketing materials they showed us. Some of it's pretty innovative. And all that is rolling now. And I don't fear all the potential distractions that they may have. There has been -- there has been significant change in personnel because there's a lot more to manage now and good people are moving up and out. And so we're just watching this happen and unfold. But most importantly, all their distribution are set, all their salespeople are set, and training is done, and we're just going to watch it roll.

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Operator [24]

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And our next question comes from Jon Block of Stifel.

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Jonathan D. Block, Stifel, Nicolaus & Company, Incorporated, Research Division - MD and Analyst [25]

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Maybe 2 or 3 questions from me and then I'll jump back in queue. But the first one, just on the gross margins, I believe they're the lowest since 2H of fiscal '15. Ross, maybe this is coming your way. Is that still predominantly a mix thing or is there any underlying pressure on the instrument ASP?

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Ross Taylor, Abaxis, Inc. - CFO, Principal Accounting Officer, VP of Finance & Secretary [26]

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No. I think pricing across both the instruments and consumables has been pretty flat. No pressure per se, but it's been pretty flat. I'd rather see some increases there. I think mix has been a little bit of pressure on the gross margin. If you track our rotor cost to good number, you could see that they have been trending up over the last 4, 5 quarters, that's primarily due to kind of the flattish volumes we've seen as well as some new facilities we've added. I think there will be some new programs, kicking in over the next 12 to 15 months that will start bringing those rotor costs back down. And I would expect volumes would get better that would help on the rotor cost as well. But those are some of the factors that have been putting some pressure on the gross margin recently.

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Jonathan D. Block, Stifel, Nicolaus & Company, Incorporated, Research Division - MD and Analyst [27]

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Okay. Got it. Very helpful. And then just to shift gears, on the urine sediment analyzer, there just seemed to be some increased level of conviction from you guys on the timing, specifically borne in to March 18, say you're going to start taking orders this quarter in December. So can you just maybe talk to why the increased level of conviction? Was there anything, from an R&D perspective, where you made significant headway in the quarter? And then maybe one more just specific to the urine sediment analyzer, the approximate ASP on how you plan to position that in the market.

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Clinton H. Severson, Abaxis, Inc. - Chairman of the Board & CEO [28]

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First of all, no, I'm not going to give you any pricing yet and -- or ASPs on it yet. We're confident because we have the production models here. They work beautifully. We're finalizing all the software and all the interfaces. And we expect an on-time launch. Everything's working, John. So it's just a matter of getting all the pieces put together. And we should have our sales programs and ASPs. At the next call, you'll -- we'll be able to talk about that because we'll have that sales programs announced in December as we take the preorders. But it looks beautiful. It's done and it's ready to go. That's why we're confident.

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Jonathan D. Block, Stifel, Nicolaus & Company, Incorporated, Research Division - MD and Analyst [29]

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Okay, got it. And one more quick one from me. I know there's a lot of moving parts going on at Abbott, but I think specifically your contract expires at the end of this calendar year. Can you comment as to whether that's been renewed officially or not?

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Ross Taylor, Abaxis, Inc. - CFO, Principal Accounting Officer, VP of Finance & Secretary [30]

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John, no. No official renewal of that contract at this point. We're still in discussions, working on some of the details there.

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Clinton H. Severson, Abaxis, Inc. - Chairman of the Board & CEO [31]

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Yes, and I might remind everybody that if we don't come to an agreement, the existing contract rolls over for another 12 months. So yes. Okay, next question.

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Operator [32]

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And our next question comes from Derik De Bruin of Bank of America Merrill Lynch.

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Michael Ryskin, [33]

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It's actually Mike Ryskin on for Derik. A lot of the questions have been asked already, but right off the bat, on the urine chemistry analyzer, you mentioned that you placed close to 100 units and it only became available at the very end of the quarter. Can you talk a little bit about maybe backlog, what the order pipeline looks for the rest of the year, even qualitative comments? And when you expect to see the consumables to start flowing through from that or has that already happened?

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Craig M. Tockman, Abaxis, Inc. - VP of Animal Health Sales and Marketing - North America [34]

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Consumables are already flowing. We -- the 100 we placed was simply because it was ready to go, essentially, the last week of the quarter. As Don stated, we had over 300 preorders and we're well past double that already this quarter. So I can't give you any forward-looking as to what we're seeing ordered already this quarter. But it's very strong, stronger than we expected. We have plenty of units ready to go. So we won't have any backorder situations. And we also have plenty of the strips ready to go, too. Distribution has placed their orders. They're getting their stocking orders. And any units are going out now, we're sending those strips direct until distribution is fully loaded up. So yes, everything's on track, and we're really pleased with the launch so far.

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Michael Ryskin, [35]

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Great. And then on the expense side. The sales and marketing came in a little bit better than we had expected given your guidance for the $8 million year-over-year increase and the commentary you made in terms of bringing additional sales personnel on. How should we think about the back half ramp? Is there pacing between the quarters both for the sales and marketing, for the R&D, as you mentioned, that your run-rate was a little bit better than you expected in the first half?

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Clinton H. Severson, Abaxis, Inc. - Chairman of the Board & CEO [36]

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I think, yes, the run-rate was a little bit better for R&D. And it's tough to really give you a sort of pacing guidance for Q3 and Q4 on R&D as well. Maybe defer on that. But SG&A, I did comment that we expected to get to that full realization of that $8 million increase that we're expecting for the fiscal year. So I would expect a good sized jump in SG&A this quarter and something similar in Q4.

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Operator [37]

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And our next question comes from Erin Wright of Credit Suisse.

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Erin Elizabeth Wilson Wright, Crédit Suisse AG, Research Division - Director & Senior Equity Research Analyst [38]

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This goes back to kind of one of the first questions. But I think you had mentioned potentially returning to sort of a mid- to high single-digit rotor volume growth on the veterinary side of the business and that's more in line with the industry. I guess, what sort of visibility do you have on that metric in your term? And is that still a realistic goal for you guys over the near term for the veterinary consumables side?

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Craig M. Tockman, Abaxis, Inc. - VP of Animal Health Sales and Marketing - North America [39]

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I think it is, Erin. We're mid-single digits right now. And as we continue to ramp up the team and have more contact with the customers and continue to get customers back that left and organically grow our customer base, the guidance we talked about earlier is absolutely attainable.

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Erin Elizabeth Wilson Wright, Crédit Suisse AG, Research Division - Director & Senior Equity Research Analyst [40]

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Okay. And Ross, I think you mentioned some opportunity to take price. Do you think that there's some opportunities, I guess, nearer-term that could be material there?

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Ross Taylor, Abaxis, Inc. - CFO, Principal Accounting Officer, VP of Finance & Secretary [41]

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Well, yes, I think I probably more specifically said I'd like to see us put more focus on realizing price. We did have a price increase go into effect recently. But beyond that, no specific comments or any changes that I would anticipate, I just think, as a company, we need to be more careful and thoughtful about our pricing actions on the various products.

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Erin Elizabeth Wilson Wright, Crédit Suisse AG, Research Division - Director & Senior Equity Research Analyst [42]

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Okay. And how is the initial feedback, I guess, so far with the FUSE platform? And how do you think that will help to drive overall customer wins? And that consumables growth? Are you starting to see that better traction for the customers that have adopted the platform?

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Clinton H. Severson, Abaxis, Inc. - Chairman of the Board & CEO [43]

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The customers that have it, love it. Like I said, there's about 100 customers using it right now. And the value of it, overall, I think is yet to be determined. But clearly, the veterinary clinics want these kinds of features as part of their products. Clearly, they want the ability to be bidirectional. And we now have the ability to provide that. And we can provide it for every software out there as they develop it. So it's been a huge hurdle to overcome for us. Some other folks had a good 10-year start on us as far as connectivity goes. But this is a really interesting product and a really interesting way to look at the data and use the data in the clinic. So as our sales team learns how to sell it, it will become a bigger value. But first step was to get it and to get it to be as good or better than anything else out there. And we finally have that. And at least it's a significant area that we're now starting to catch up in.

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Operator [44]

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(Operator Instructions) Today's next question comes from David Westenberg of CL King.

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David Michael Westenberg, CL King & Associates, Inc., Research Division - Senior VP & Senior Equity Analyst [45]

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So you talked about giving you sales force some additional resources. Can you talk about what were you -- can you clarify what you mean by that? And then again, on the sales force, you called out some hiring that you're going to do. Can you talk about some of the cadence on how you're going to hire?

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Clinton H. Severson, Abaxis, Inc. - Chairman of the Board & CEO [46]

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Yes. So Craig has a plan to add people to the team in Q3 and Q4. And I think the objective is to increase our direct market coverage. I think it's important that we take responsibility for our accounts. And that we have the kind of coverage out there that can support the distributors who sell a lot of other products other than just Abaxis products. And I think that with all the new stuff coming out, you don't want your capital equipment salespeople to be spending all their time installing machines and that kind of thing. You need other support out there as well. And so yes, so it's a combination of direct field capital people as well as support people to make sure that the accounts are happy with what they have and that they get the support they need on a lot of these new products. And so when you come out with a number of new platforms like the whole urine thing, the chemistry plus the sediment and then you'll be coming out with a high-sensitivity immunoassay probably within a year, that's a lot of new stuff to digest. So with that, I'll let Craig comment on it as well.

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Craig M. Tockman, Abaxis, Inc. - VP of Animal Health Sales and Marketing - North America [47]

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I guess, Dave, to your point about new tools that -- we're talking about the new products, some new sales tools we're coming out with, some new sales programs to address some of the pricing issues Ross has concerns about. And simply, to have enough of a support staff that we can make our distributors even more effective and spend more time with them as well. So those are all pieces of that puzzle that over the last 18 months or so, we've been planning for and kind of moving into place. And right now, with the availability of the new products, it's all kind of coming together at this point.

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David Michael Westenberg, CL King & Associates, Inc., Research Division - Senior VP & Senior Equity Analyst [48]

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Got you. And then in terms of the urinalysis machine that you just launched, can you talk about the kind the revenue contribution in terms of instruments and consumables? Namely, should we think about the instrument as maybe, say, something priced at around an i-STAT, give or take, and then maybe the consumable? I know the consumable's just a strip so it's not exactly expensive, but I don't know, maybe the utilization is high. Can you give us some sort of quantitative way of looking at the instrument consumable breakdown of that product as you launch it and it comes into the market?

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Clinton H. Severson, Abaxis, Inc. - Chairman of the Board & CEO [49]

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Well, the instrument retails for $600, David. So no, nothing close to the i-STAT. So it's really a -- it is a -- it's a salt-and-pepper shaker, right? I mean, it's a little chemistry unit is really -- it can -- obviously, it can stand alone. People are using it. It provides us with a test we didn't have. We didn't have a protein-creatinine ratio on our analyzer and it's an important urine test. And it also gives us a microalbumin test, which there are a lot of renal experts out there that will tell you that microalbumin is a very early indicator of kidney disease in -- even earlier than some other tests that are out there in the market. So from that perspective, the instrument stands alone and it's a big value to us even though it's not a high-price or a terribly high-volume product. We're still obviously watching to see how much -- how many strips get used per day. There's -- urine is a high-volume product. And so veterinaries run a lot of urine tests and they run these dipsticks first. So we're providing them with a semiquantitative result with these other 2 tests that they didn't have before at a cost that they've never experienced before. So that's part of why it's been so fast that it's gaining traction because it is a -- and it really is a very, very nice interesting product. But it will also sit alongside and connect with the sediment analyzer. That's the higher dollar instrument for sure. So from a revenue standpoint, there's not a ton of money in the instrument, but the strip should be well used. We'll report on utilization as we go along.

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David Michael Westenberg, CL King & Associates, Inc., Research Division - Senior VP & Senior Equity Analyst [50]

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Very, very helpful. And then just actually as a follow-on to that, do you anticipate a lot of those initial orders to be the exact same veterinary accounts that you're going to target specifically with SediVue? And what do you think the likelihood is that they buy that and what percent of those maybe already have the competitor, SediVue. I know that's a multipart question one. And this is my last question. I won't subject you guys to any more of this.

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Craig M. Tockman, Abaxis, Inc. - VP of Animal Health Sales and Marketing - North America [51]

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A, I don't know how many of our urine chemistry analyzers are in SediVue accounts. My guess is not many because they're mostly our customers that have bought them. I forgot the rest of his question.

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Clinton H. Severson, Abaxis, Inc. - Chairman of the Board & CEO [52]

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Yes, they were all -- all of our urine chemistry customers are candidates for the sediment analyzer.

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Craig M. Tockman, Abaxis, Inc. - VP of Animal Health Sales and Marketing - North America [53]

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Absolutely.

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Clinton H. Severson, Abaxis, Inc. - Chairman of the Board & CEO [54]

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I think -- really, yes, they are. But really, every one of our best paying customers is a candidate for a sediment analyzer. That's our target audience right there. So those 10,000 VetScans out there are highest interest for a sediment analyzer.

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Operator [55]

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(Operator Instructions) This concludes our question-and-answer session. I'd like to turn the conference back over to management for any final remarks.

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Clinton H. Severson, Abaxis, Inc. - Chairman of the Board & CEO [56]

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Okay, I want to everybody for tuning in. And we look forward to our next conference call, which is going to be in?

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Unidentified Company Representative, [57]

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January.

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Clinton H. Severson, Abaxis, Inc. - Chairman of the Board & CEO [58]

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Yes, yes. So thanks, again. And yes, tune in next quarter at this time. Thank you.

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Operator [59]

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And thank you, sir. Today's conference has now concluded. And we thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.