Slow sales for a couple of IDEXX Laboratories' (NASDAQ:IDXX) segments and the stronger dollar led the animal diagnostic test company today to reduce its 2015 guidance. The stock was fell 17% today following the earnings report.
The culprits in the first quarter were IDEXX's rapid assay products, which test for infectious diseases such as heartworm. Specifically, a couple first-generation rapid assay products face new competition, which dragged year-over-year growth for the segment as a whole down to just 1.3%. Because the tests are so old -- some were launched in the 1990's -- there's little differentiation between products. It's a double whammy for IDEXX because it has lost some customers to the competition, and to retain other customers the company has had to lower prices. Management thinks the situation is going to get worse before it gets better -- if it ever does -- and has adjusted future quarters' guidance to reflect that.
Fortunately, newer rapid-assay products, such as the Snap 4Dx Plus Test that tests for six different diseases, are still selling well because the products' benefits are clearer when compared to IDEXX's rivals' products. The affected tests only make up about $50 million of annual sales, which is about 3%, so the competition isn't a major drain on the company.
IDEXX's digital imaging systems revenue also grew slower than expected, with the segment that also includes customer information management posting just a 5.7% year-over-year increase. The company said the slower growth was partially due to delayed contracts that will push the revenue into later quarters.
The stronger dollar also cut into sales by 5.9%, pushing overall year-over-year revenue growth to just 6.2% in the first quarter. Earnings per share grew faster at 10%, to $0.98, thanks to currency hedges that offset some of the lower revenue.
The dollar has actually strengthened further since IDEXX gave 2015 guidance in January. Add in the rapid assay product troubles, and management lowered its EPS guidance to between $4.14 and $4.24, down sharply from previous guidance of between $4.33 and $4.43.
Looking longer term
While the short-term issues are slowing growth -- the new adjusted EPS guidance is only up 4% to 6% from 2014 -- IDEXX looks healthy over the longer term.
The company's bread and butter comes from consumables run on its machines. To secure those sales in the future, IDEXX must sell more instruments, which it is still doing quite nicely. Placements of its Catalyst instruments increased 35% year over year in the quarter, and premium hematology instrument placements increased 13%. The new Catalyst One machine is selling well in Europe, where total instrument placements doubled in the second quarter. IDEXX still has to roll out the machine in many Asia-Pacific countries, including Australia, in the second and third quarters, which should sustain the instrument placement growth.
In the reference laboratory where it runs tests for veterinarians, IDEXX is rolling out a couple new tests -- SDMA and fecal antigen. The SDMA test, which can catch kidney disease earlier than existing tests, will be included in the standard panel at no additional charge, which management believes will drive veterinarians to switch to IDEXX. For those who don't want a full panel, there will be some added revenue from orders for the SDMA test individually.