Heska doubles Q2 operating income but misses on revenue

A year ago at this time, analysts following veterinary diagnostics maker Heska ($HSKA) were urging the company to do more to increase its visibility on Wall Street. At the time, the company was overhauling its business model--promising to rely less on capital equipment sales and more on recurring revenues--and its stock was trading at around $12 a share.

Heska's stock has more than doubled since then, but it's clearly experiencing some growing pains. On Wednesday, Heska missed analysts' sales targets for the second quarter, reporting year-over-year revenue growth of 4% to 23.9 million. Analysts had been expecting revenues of $24.3 million.

Still, the company's operating profit doubled to $1.8 million, and its net income grew 12% to $1.2 million, or $0.17 per share. That surpassed expectations of $0.10 a share, according to Zacks, and was enough to push the company's stock up almost 10% to $32.

The highlight of the quarter was Heska's Element HT5 blood analyzer. Placements of the product jumped 132% year-over-year, said the company's CEO, Kevin Wilson, in a press release announcing the earnings. Heska has been benefiting from a new distribution model and a partnership with distributor Henry Schein ($HSIC).

"During the period, we grew our net customer base in all key segments, including the highly competitive blood analyzer space, where roughly eight in ten new analyzer customers upgraded to Heska from a competitor," Wilson said.

In a conference call with analysts after the earnings release, Wilson noted that the quality of Heska's customer base is improving because the company is winning over a higher proportion of large veterinary clinics. "I'm very encouraged with the direction, the momentum, the sustainability, and the magnitude of these trends," he said.

One analyst expressed concerns that Heska might be aggressively undercutting its competitors on pricing and that could hurt profit margins going forward--a notion that Wilson dismissed. Though the company does offer some bundling deals, he said, "I don't think the pricing pressure is being reflected in our gross margins and our sales teams are not reporting that."

In conjunction with the earnings release, Heska also launched a new Element product that allows veterinarians to measure pets' thyroid and cortisol levels in their clinics. The company expects to launch the product by the end of the year.

- here's the earnings release
- access a transcript of the earnings call here

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