High-flying IDEXX Laboratories (NASDAQ:IDXX) took a bit of a breather from the 14% to 16% year-over-year revenue growth it posted in the first half of the year, but the animal diagnostics company still managed a solid double-digit growth in the third quarter as earnings expanded even quicker.

More importantly, management foreshadowed more of the same for next year.

IDEXX Laboratories results: The raw numbers

Metric

Q3 2018

Q3 2017

Year-Over-Year Change

Revenue

$545.4 million

$492.0 million

10.9%

Income from operations

$117.4 million

$100.4 million

16.9%

Earnings per share

$1.05

$0.79

32.9%

Data source: IDEXX Laboratories.

What happened with IDEXX Laboratories this quarter?

  • The companion animals business continues to drive overall revenue, with sales up 13% year over year.
  • The number of premium analyzers placed during the quarter increased by 10%, led by the workhorse Catalyst machine, which saw placements increase by 16% year over year, and the SediVue urine analyzer, which increased 18% year over year.
  • The machines placed in previous quarters drove consumable sales used to run diagnostic tests on the machines, growing 19% organically year over year. The new SDMA kidney test and additional SediVue runs by veterinarians combined to contribute about 4 percentage points of that growth.
  • Reference laboratory revenue, where IDEXX runs the tests for veterinarians, increased 11% organically. Most of the growth came from the U.S., while growth in Europe slowed due to a heat wave that led to veterinarians not wanting to send in reference samples for fear they might get degraded in transit.
  • IDEXX's water and farm animal businesses grew 9% and 7% organically, respectively. While they drag down the overall revenue, combined they only contribute about 11% of total revenue so, fortunately, they're not having a major effect on IDEXX's overall growth top-line growth.
  • A lower tax rate helped earnings grow substantially faster than revenue.
Technician using a SediVue machine

Image source: IDEXX Laboratories

What management had to say

Jonathan Ayers, IDEXX's chairman, president, and CEO, sees future growth coming from preventative care for pets: "We believe that our opportunity here is to create our own growth. And when we can get over 2,000 practices, 16% same-store sales growth in their diagnostics, when they start adopting preventative care." Later, he noted that those 2,000 veterinarian practices pushing preventative care to their clients only make up about 10% of IDEXX's total customers, leaving plenty of potential growth ahead.

As it usually does, IDEXX released 2019 guidance in conjunction with its third-quarter results, which Ayers sees as a sign of the steadiness of the company's business:

We are proud to have built a business model with enduring and predictable growth and profit dynamics. Perhaps this is why we are part of a small minority of companies that provides earning guidance in the Q3 call for the next calendar year. Note that this has been our practice for every year for the last 15. 

Looking forward

Management adjusted 2018 guidance, lowering the top end of guidance by 0.5 percentage points to reflect the lower expectations from farm animals and international lab growth. Nevertheless, revenue is still expected to come in 11.5% to 12% higher than last year.

Earnings in 2018 are expected to be about $0.04 higher than previously anticipated -- now at a $4.16 to $4.21 per share, a boost of 33% to 35%. Most of the increased expectation is coming from higher projections for share-based compensation tax benefits, but there's also a $0.01-per-share hike from higher-than-expected operating margins.

Looking to 2019, management is guiding for organic revenue growth of 9.5% to 11%. While that's slower growth than 2018, this year has a 1-percentage-point gain from new revenue standard accounting changes. Backing that out of this year's growth, the top end of the guidance is the same.

On the bottom line, IDEXX's management expects to continue to have efficiency gains with earnings growing 15% to 18% year-over-year growth at constant currencies, substantially faster than revenue.

Brian Orelli has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Idexx Laboratories. The Motley Fool has a disclosure policy.