Q1 2022 IDEXX Laboratories Inc Earnings Call
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Speaker 2: Good morning and welcome to the IDEXX laboratory's first quarter 2022 earnings conference call. As a reminder, today's conference is being recorded. Participating in the call this morning are jam iselski, President and Chief Executive Officer, Brian mckkean, Chief Financial Officer, and John revis, Vice President, Investor Relations.
Speaker 5: idex would like to preface the discussion today with a caution regarding forward-looking statements.
Speaker 6: Listeners are reminded that our discussion during the call will include forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those discussed today.
Speaker 6: Additional information regarding these risks and uncertainties is available under the forward-looking statements notice in our press release issued this morning, as well as in our periodic filings with the Securities and Exchange Commission, which can be obtained from the SEC or by visiting the Investor Relations section of our website, IDEXX com.
Speaker 7: During this call, we will be discussing certain financial measures not prepared in accordance with generally accepted accounting principles, or GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is provided in our earnings release, which may also be found by visiting the Investor relation section of our website.
Speaker 7: In reviewing our first quarter 2022 results, Please note: all references to growth, organic growth and comparable growth referred to growth compared to the equivalent period in 2021, unless otherwise noted.
Speaker 5: To allow broa participation in the QA, we ask that each participant limit their questions to 1, with one follow as necessary.
Speaker 6: We appreciate you may have additional questions, So please feel free to get back into the queue at its time permits. We'll take your additional questions. I would now like to turn the call over to Brian mckn.
Speaker 8: Good morning and welcome to our first quarter earnings call. Today I'll take you to our first quarter results and review our recalibrated financial outlook for 2020 -two.
Speaker 9: idex delivered solid financial performance in Q1 compared to very strong prior year results.
Speaker 9: In terms of highlights, revenue increased to 8%, as reported in, organically driven by organic gains of 10% in our CAG business and 8% in our water business.
Speaker 8: Cag diagnostic recurring revenues increased 9% orgaranically ically compared to higher prior year levels, which inclued benefits from a significant expansion in new pet patients during the pandemic.
Speaker 9: Our commercial execution was excellent, reflected in 22% organic growth in caag instrument revenues and continued strong momentum in expanding cloud-based software solutions.
Speaker 10: Eps was $2 in 27 cents per share of 3% on a comparable basis.
Speaker 9: As expected, comparisons to high prior year gross margin levels and increased commercial investments constrained year-on-year operating profit gains in the quarter.
Speaker 11: Cag diagnostic demand levels and idaex's commercial execution continued to build on the significant step-up achieved during the pandemic, supported by ongoing gains and diagnostics adoption in utilization.
Speaker 9: We have seen a moderation in clinic visit levels compared to second half 2021 growth trends, which formed the basis for our original 2022 CAG diagnostic recurring revenue. Organic growth outlook of twelvepercent to 14% and.
Speaker 9: In the U's an addition OE Q1 impacts from higher covert cases globally. Visit levels have been affected by constraints on veterinary service capacity and availability and a challenging labor market following a period of significant demand expansion.
Speaker 9: We saw similar cot and capacity in constraint dynamics in international regions like Europe , with additional recent impacts for more challenging macro conditions.
Speaker 12: Which have also constrained clinical visit growth compared to strong prior year baselines.
Speaker 9: Factoring in our Q1 results and near-term CAG sector trends, we're recalibrating our 2022 full year organic revenue growth outlook.
Speaker 9: We're adjusting our overall organic growth outlook to 8% to 10%, primarily reflecting an adjustment of 3% in our targeted full year CAG diagnostic recurring revenue growth range.
Speaker 9: Now projected at 9% to 11%, compared to strong prior year levels.
Speaker 9: We're also factoring an additional $4 million impact from strengthening U's dollar.
Speaker 9: Combined, these changes reduced our reported growth outlook by 4%, or approximately $105 million, at the midpoint of our guidance range.
Speaker 9: We believe this adjustments are appropriate as we work through near-term kag sector dynamics and more challenging comparisons in the first half of 2020 -two.
Speaker 8: We're targeting higher growth in the second half of 2022 with the high end of our full year growth outlook, reflecting return to our original targeted caag diagnostic recurring revenue growth range in H two.
Speaker 13: We continue to be encouraged by the increased demand for companion animal diagnostics globally, building on the strong gains achieved during the pandemic.
Speaker 9: We're confident in the sustained long-term growth potential for our business, supported by our ongoing focus on innovation and customer engagement and driving CAG sector development.
Speaker 11: Alignment with this convictction, we're advancing high return investments in innovation and commercial capability this year, including approximately eight million into discrete investments related to the in-license of technology during the second quarter, which shaa will discuss in its remarks.
Speaker 8: Our 2022 EPS guidance of eight doll and 11 cents to $8 and 35 cents per share. Factors and updates to our operating outlook.
Speaker 9: Including 72 cents of discrete impact from the in-license of technology.
Speaker 9: As well as a 10 cent per share adjustment related to the stronger U's dollar and 5% of EPS impact related to higher interest rates.
Speaker 9: We'll discuss our full year outlook in more detail later in my comments. Let's begin with a review of our first quarter results.
Speaker 9: First quarter organic revenue growth of 8% was supported by 10% organic gains in our CAG business and 8% growth in our water business.
Speaker 8: These gains were moderated, as expected, by a 19% organic decline in LPD revenues, which included impacts from reduced to Africa swine feinger testing in China, as well as by a $3 million year-on-year decline in human COVID-19 testing revenues.
Speaker 9: Combined these factors reduced overall idex organic revenue growth by approximately 1% in the first quarter.
Speaker 9: Comparisons on both these fronts will improve in the second half of 2020 -two.
Speaker 11: Cag diagnostic recurring revenues increased 9% organically in Q1 compared to strong prior year levels, reflecting 10% gains in the U's and 8% growth in international regions.
Speaker 9: First quarter CAD diagnostic: recurred revenue growth benefited by approximately 1% from equivalent day effects.
Speaker 11: Overall Q1 CAG gains were also supported by 22% organic growth in CAG instrument revenues and 13% organic growth in veter software and diagnostic imaging revenues. In addition to benefits from the easy that acquisition.
Speaker 8: In terms of U's CAG sector demand drivers same-store clinical visits in the first quarter were approximately 2% below strong priory levels.
Speaker 13: This compares to 2% to-three percent increases seen in the second half of 2020 -, one when we began to lap the step-up in demand and testing demand that we saw during a pandemic.
Speaker 9: As noted, a factor influced in these trends is a near-term challenge related to capacity management of vet clinics that we're seening across global regions, which has resulted in constraints and clinic hours and access to veterinarians.
Speaker 9: Jay will speak more of these dynamics in his comments.
Speaker 8: At the? U's practice level, same-store diagnostic service revenue growth was a solid 7%.
Speaker 8: Underlying demand for pet health care services remains high, reflected in robust multiyear growth trends.
Speaker 8: Compared to the 2019 prepandemic base, U's same-store clinical busits and diagnostic revenues increased 4% and 11% respectively on a three -year compound annual growth basis.
Speaker 9: Idexx's U's CAG diagnostic organic recurrred revenue growth of 10% in Q1 continues to outpace sector growth trends, reflected in a one thousand one hundred and fifty basis point premium to clinical visit gains and part supported by relatively higher net price realization and equivalent day benefits.
Speaker 11: Global addics achieved solid organic revenue gains across our modalities in the first quarter. Vet lab andconcivable revenues increased 11% organically, with double-digit gains across the U's and international regions.
Speaker 9: Consumable gains were supported by 14% year-on-year growth in our global premium installed base, reflecting double-digit gains across our catalyst premium, hematology and set ofy platforms.
Speaker 8: Cag premium instrfrom replacements increased 31% in Q1, reflecting 24% gains in the U's and 35% growth internationally.
Speaker 8: As clinic, show confidence in investing towards support of increasing demand for diagnosics globally.
Speaker 11: The quality of the instrument placements continues to be very strong, reflected in 12% growth and new and competitive catalyst placements.
Speaker 9: procyite one momentum continues to build support a one thousand nine hundred twenty-four premium hematology placements in the quarter of one hundred and 1%.
Speaker 8: Rapid acay revenues expanded all Lin Q1 compared to high prior year growth levels.
Speaker 8: Global rapid asset revenues increased 8%, organically supported by solid volume gains in the U's and benefits from net price increases.
Speaker 8: Global lab revenues increased 8% organically in Q1, as double-digit growth in the? U's was moderated by low single-digit gains in international regions impacted by pressure on clinical visit levels in Europe .
Speaker 8: Reference lab. New business momentum and customer retention remained strong, glocally supported by expansion of idx 316 agreements.
Speaker 12: We achieved relatively higher benefits from net price gains in the first quarter, with four cent to 5% average gains on U's CAG diagnostic recurring revenues and solid levels of increases across international regions.
Speaker 12: In other areas of our CAG business- veterinary software and diagnostic imaging- revenues increased 13% organically and 34% on a reported basis, including benefits from the easybed acquisition.
Speaker 8: Results were supported by double-digit organic gains and recurring software and digital imaging revenues, and continued strong momentum in cloud-based software placements.
Speaker 8: Water revenues increased 8% organically in Q1, reflecting benefits from price gains and a continued solid global recovery in testing demand from constrained pandemic levels.
Speaker 11: Livestock poultry and dairy revenue decreased 19% organampling Q1 as expected. Tough comparisons to high prior year revenue levels for African swine fever and core swine testing in China offset moderate overall organic revenue gains at other areas of our LPD business.
Speaker 9: We expect to see relative improvement in LP growth rates in the second half of the year as we work through challenging comparisons in the Asia Pacific region.
Speaker 12: Turning to the PL: solid revenue growth supported moderate operating profit and comparable EPS gains compared to high prior year levels.
Speaker 8: Gross profit increased 6% in Q1, as recorded in 7% on a comparable basis.
Speaker 8: Gross margins were 60%, a decrease of 120 basis points on a comparable basis.
Speaker 12: Comparable gross margin declines reflect the lapping of high q1- 2021 levels. Business mix impacts from lower LD and higher CAG instrument revenues.
Speaker 8: And impacts from higher freight and distribution costs.
Speaker 14: Cag recurring revenue, net price gains and lab productivity initiatives helped to offset selected inflationary impacts.
Speaker 9: We're also seeing benefits from improvement in software service courseth margins as we expand our recurring revenue base.
Speaker 11: Operating expenses increased: 12% in year-on-year is reported in the first quarter and 13% on a comparable basis.
Speaker 8: Higher operating expense growth reflects comparisons to control prior year levels, as well as investments advanced in recent quarters related to our expanded global commercial capability.
Speaker 9: We also saw relatively higher travel costs compared to low prior year levels.
Speaker 9: We expect relatively higher year-on-year comparable OpEx growth in the second quarter. As we lap these impacts in addition to the second quarter impacts projected from discrete RD in license activity.
Speaker 10: Eps was two hundredcent and 27 per share, an increase of 3% on a comparable basis.
Speaker 10: Q1 EPS included benefits of $5 million or six cents per share rel to share-based compensation benefits, which was down 11 cent per share from high prior year group levels.
Speaker 11: foreort exchange reduced operating profits by four million at EPS by three SOS per sure in Q,1 net of $2 million in hedge gains.
Speaker 12: Free cash flow was 83 million in the first quarter on a trillil and 12 month basis. Our net income to free cash flow conversion rate was 84% and.
Speaker 8: For the full year. We now estimate free cash flow conversion of 65% to 70%, approximately 10% below earlier conversion estimates.
Speaker 9: The feoutlook reflects approximately 5% of free cash flow conversion impact from the discrete RND investments.
Speaker 12: Modestly higher inventory levels to sustain high levels of product availability and higher deferred tax assets driven by increased RD credits.
Speaker 9: We're maintaining a consistent fullyear outlook for capital spending of 100 hundred and eight million, including approximately five million per our new manufacturing and a warehouse expansion project.
Speaker 12: Our balance sheet remains in a strong position. We added the quarter with leverage ratios of one point one X gross and zero zero point nine X net of cash.
Speaker 9: We allocateded 273 million of capital, purchased 523 thousand shares in Q1.
Speaker 9: Our financial outlook assumes capital allocation to share repurchases aligned with maintaining a similar net leverage ratio supporting a projected 2% full year reduction in share count.
Speaker 12: Turning to our 2022 fourll-year outlook, were updating our organic revenue growth ranges to reflect Q1 performance, recent caag sector trends and projected impacts related to the Ukraine war.
Speaker 9: We're also adjusting our reported revenue growth outlook for the significant recent strengthening of the U's dollar.
Speaker 15: Our updated full year revenue growth range of three point three nine billion to three point zero zero zero four six five trillion reflects a $105 million reduction at midpoint compared to earlier estimates.
Speaker 9: This includes one million of projected revenue reductions related to our Russia, Belarus and Ukraine businesses and a $4 million adjustment related to the recent strengthening of the U's dollar.
Speaker 12: We now project foreign exchange will reduce year-on-year revenue growth by approximately 3% for the full year, with approximately 4% of year-on-year headwinds expected in Q2 and.
Speaker 12: Our full year organic revenue outlook of 8% se tember percent reflects an adjustment to our original guidance range of 2% to two point five percent.
Speaker 8: Primarily reflecting a recalibration or a full year growth outlook for CAG diagnostic recurring revenues.
Speaker 9: We're planning for overall organic growth at the lower end of this range in the first half of 2022, reflecting more recent CAG sector trends and challenging comparisons in the second quarter.
Speaker 8: We're tardgeting to improved growth rates in the second half of 2022, as thatt clinics work to adapt to capacity challenges and we benefit from our commercial initiatives.
Speaker 12: Our recalibrated TG diagnostic recurring revenue growth outlook is 9% to 11% for the full year, building on strong prior year gains.
Speaker 9: As noted, the high end of our full year growth range reflects second half GAG diagnostic recurring revenue growth aligned with our original full year goals.
Speaker 11: At our updated revenue growth rates. We're now planning for operating margins of 27% to 27%, down 170 to 220 basis points on a reported basis, compared to strong 2021 performance.
Speaker 8: This includes approximately 230 basis points of margin impact related to the discrete earned D investments.
Speaker 8: This outlook incorporates effects from high return commercial investments aligned with our long-term growth potential and captures projected inflationary effects on IDEXX's business this year.
Speaker 8: Adjusted for the discrete RD investments and approximately 10 basis points in year-on-year debt margin and benefit from foreign exchange hedges. This outlook reflects updated goals for zero to 50 basis points in operating margin gains since 2022, compared to strong prior year levels.
Speaker 10: Our EPS outlook is $8- 11 cents to $8 and 35 cents per share, a decrease of a dollar 20 cents at midpoint.
Speaker 9: This includes 72 cents of impact from discrete RND investments and additional 10 cents per share headwind related to foreign exchange and five cents per share of impact from higher projected interest rates.
Speaker 9: Our guidance for comparable EPS growth of minus 1% to plus 2% includes unfavorable growth impacts of 9% from the discrete RND investments and an estimated 2% impact in 2020 -two from international tax rate changes.
Speaker 13: We provided details on our updated estimates in the tables and our press release and earnings snapshot.
Speaker 13: That concludes our financial view. I'll now turn the call over to Jay forinss comments.
Speaker 16: Thank you Brian , and good morning. I'd ex had a solid start.
Speaker 17: 2022 building on a significant gains of demand for companion animal diagnostics and software solutions achieved over the last two years.
Speaker 17: Veterinarians continue to see increased demand in their clinics compared to prepandemic trends and routinely choose idaex's innovative products and services to meet rising standards for pet health care. This is reflected in our continued solid CAG diagnostics, recurring growth and record Q1 global premium instr placements.
Speaker 17: Supported by our global rollout of pro side one IDEXX's business strategy is focused on inspiring adoption in increasing the utilization of diagnostics.
Speaker 8: And our results reflect continued strong progress on this path. Our integrated solutions not only help veterarians expand capacity and grow their businesses, but also support an enduring recurring revenue stream in the future. While we seen some moderation in keag sector growth metrics through very strong growth levels during the pandemic, we have high confidence in the durability in ongoing growth potential of our business and our strategy to drive the significant long-term growth opportunity we see for compaying animal health care.
Speaker 18: Today I'll focus on discussing idaexx's performance and progress in advancing key growth initiatives that are enabling us to build on our strong growth and financial performance as we serve our mission-driven purpose of enhancing the health and well-being that pets, people and livestock.
Speaker 17: Let me start by providing some context on recent trends in the CAG sector.
Speaker 17: Overall keag sector demand trends continueed to expand at a solid rate, building on the very strong increases in diagnostics demand seening through the pandemic. As Brian noted, U's practice same-store diagnostics revenues increased 7% in the first quarter compared to very strong prior year results.
Speaker 17: Idexx's growth strategy has been consistently focused on driving diagnostics, adoption and utilization at the clinic level.
Speaker 17: Supported by our investments in commercial engagement and innovation. First quarter results show continued progress on this front. We provided some additional information in our quarterly snapshot, which breaks down practiceablevel diagnostics- revenue growth dynamics- into three key drivers.
Speaker 17: Ped co growth.
Speaker 19: Diagnostics. Frequency or the percentage of clinical visits including diagnostics.
Speaker 8: In diagnostics utilization. Where diagnostics revenue pervisit, that include diagnostics.
Speaker 8: This breakdown highlights benefits for both continued solid increases in diagnostics frequency and expanded growth rates in diagnostic utilization ahead of prepandemic levels, building on the very strong gain seen over the last two years.
Speaker 17: These impressive gains were moderated in Q1 by 2% year-on-year decline in clinical visits.
Speaker 17: Which is a change from the very solid 2% to 3% clinical visit growth trends we saw in the second half of 2021 .
Speaker 8: As we've analyzed these recent changes, it appears that, in addition to some effects from COVID-19 case bikes and weather dynamics in the first quarter, there are near-term constraints on vet clinic capacity that are impacting clinical visit levels.
Speaker 17: veterarans under staffs are continuing to adapt to the extraordinary growth in demand over the last two years, when the? U's pet population should expanded approximately 10%, resulting in double-digit increases in same-store clinical visit levels, reflective of the sustained pressure on their time as well as staffing challenges that many sectors are facing currentlyf clinics of scale back hours. The metric we can track is the percentage of clinics with weekend appointment activity, which declined to 42% in Q1 from 54% levels prepandemic, as clinics and vets themselves are looking to achieve more near-term balance in their workloads.
Speaker 8: As many pet owners way longer to secure appointments. Underlying demand for PEP health care remains strong, but these factors have had the near-term effect, moderated the extraordinary growth pace we've seen in the caaga industry over the last two years.
Speaker 17: We've seen similar dynamics in the international regions like Europe in terms of clinical visit levels, with some additional pressures potentially related to the more recent macro headwinds.
Speaker 8: Given the near-term clitinical visit in macrodynamics noted, we felt it was prudent to recalibrate our 2022 outlook. Our full year outlook for kag diagnostics- recurring revenue organic growth of 9% to 11% - builds on our 17% average annual growth over the last two years, with goals to accelerate gains in the second half of 2022, benefiting from continued advancement of our commercial and innovation efforts.
Speaker 17: The longer-term outlook for pet health care remains very strong, benefiting from increases in T ownership, favorable demographic trends and the continued strengthening of the pet and PT own ER bond. idaexx is well positioned to drive sector growth and health custommer service growing demand through our broad array of point to care and reference laboratory products and services, all connected by cloudbased software capability which supports clinic efficiency and workflow enhancements.
Speaker 8: The idx team is focused on driving this potential and continues to operate at an exceptional level. This has reflected in continued solid new business gains, recorded some adplacement levels, high growth in software services and the continued very high levels of customer satisfaction, reflected in record high retention level.
Speaker 17: Our high-touch customer commercial model and innovative diagnostics and software solutions positions us well to help customers work through near-term management challenges to extend the strong growth momentum in our business.
Speaker 8: Let's discuss some recent progress on these key strategic fronts.
Speaker 20: High levels of commercial engagement that supports sector growth remains pure of our growth strategy and we continue to build on our leading commercial capability globally. As noted, we continue to drive strong performance in terms of new business acquisitition.
Speaker 8: With solid net have customer grains across modalities and regions.
Speaker 17: Our highly skilled commercial teams delivered outstanding premium instrument placement performance in Q1 across our platforms.
Speaker 17: Supporting strong growth in our ebi metric in the quarter. We achieved strong growth overall across new and competitive and loyal customer segments, as well as within corporate accounts, as veedmarians are clearly looking to uidexx technology to manage elevated demand within their cllis and despite highly variable access levels globally, our sales teams demonstrate that they have strong and trusting relationships with their customers.
Speaker 17: Regardless of clinic type, and a keenability to meet customer needs for idx products, each of which are driving strong customer retention in healthy global install-basase growth.
Speaker 8: This momentum has been supported by the strengthening of our commercial capabilities in the international regions.
Speaker 17: We're encouraged by the early performance measures like reach a customer and reached to revenue from our recently completed international country expansions.
Speaker 17: These include Germany France Spain, South Korea, Italy and Brazil.
Speaker 8: We'll evhave smaller targeted investments in our commercial capabilities to complement these efforts, as opportunity awarrants, including in our largest reach in the? U's commercial expansions, are supported through our center of excellence approach, which enables efficiency, speed of execution and high return on our investments.
Speaker 8: Innovation is a critical enaber of our growth strategy.
Speaker 17: And key advancements, such as pros one.
Speaker 8: Ix is innovative and easy to use. Hematology analyzer continues to gain momentum and provide multiplier benefits for our business.
Speaker 8: Just one year after its launch, prosi one is now commercially available and around the world and has a global installed base of 4000 units, demonstrating the power of the right product in the hands of a dedicated commercial sales force.
Speaker 17: This trajectory aligns our premium hematology business with the approximately two thousand placement outlook we shared at our most recent Investor Day.
Speaker 17: And utilization rates are trending favorably for customers upgrading from laser S.
Speaker 8: Cross I want. Attach rates with catalysts are high in the mid- 90% range, highlighting the multiplier benefit to our broader point of care business. This innovative hematology platform is a key enabler to support penetration of our estimated two thousand worldwide premium instrum placement opportunity.
Speaker 17: Another key advancement in our innovation agenda is 40 X plus, the gold standard diagnostic for vetor Board disease in cana.
Speaker 8: Which will provide customers with benefits from multiple product enhancements this year, including the more sensitive and aapplasma detection clinical decision support and U USDA approval for two X longer room temperature storage for our point-of care test snap for D X plus.
Speaker 17: It's an example of idex's whole product approach of enhancing assay performance, workflow and critical decision support.
Speaker 17: Additionally, the SNAP pro analyzer, which has had excellent momentum and global placements during Q1, improves clinic workflows by seamlessly adding test results to our powerful diagnostic portal. econic costs.
Speaker 19: And ensuring charge capture of all tests run through the instrum.
Speaker 8: These innovative products help our customers improve clinic efficiency.
Speaker 17: And supported solid growth in our rapid assay franchise in the first quarter, as we saw seasonally aligned increases in demand for tickborne disease testing.
Speaker 8: As we capture near-term benefits from our existing innovations with customers.
Speaker 8: We continue to advance our long-term innovation agenda. As well as noted in our financial guidance updates, we made investments with two companies: the in-licensed technology for worldwide exclusive use.
Speaker 19: In developing point-of-care diagnostics platforms and applications.
Speaker 19: idex has a long track record of partnering with companies to apply technology that enhances the quality of PIT health care. We look forward to sharing more on these initiatives in the future as we build on our compelling real-time care portfolio.
Speaker 8: Another key area of strategic focus for idx involves delivering whole product software solutions that address a broad jobs-that-do capability within a single platform.
Speaker 8: Our pin solutions, along with veed, RaDaR and payment processing solutions that connect plus with clinical decision support and webpx, are all increasingly interconnected, offering our customers a seamless experience across these important clinical and productivity applications.
Speaker 17: Consequently, our customers purchased more of these applications in Q1 than in any previous quarter.
Speaker 19: We also had record global placements with over 350 pins insuallations, with a vast majority of customers choosing a cloud-based solution. Notably, we made significant headway in outfitting greenfield practices that the idx as a key partner they established and equip a new click.
Speaker 19: With many customers, capacity constraints.
Speaker 19: veterarians have a significant investment appetite for modern, mobile and well-integrated call-based software technology.
Speaker 19: These software solutions allow our customers to focus on providing care instead of maintaining technology.
Speaker 19: With our recent acquisition of easybit and this preference for cloud-based solutions accelerate, our software revenue base continues to move towards a highly profitable recurring revenue stream.
Speaker 19: As we advance our commercial and innovation capabilities. We are highly committed to sustaining outstanding levels of customer support, reference subservice, turnaround time and product availability, enabled by our highly capable operations organization.
Speaker 19: The manufacturing and supply chain capabilities that we've built over multiple decades allow us to support our busy customers.
Speaker 21: And keep up with a strong growth in industry demand while managing through a dynamic supply chain environment. Idexx customers benefited once again from product abilityability close to 100% and.
Speaker 8: And continuously high levels of on-time deliveries.
Speaker 19: These excellent service metrics demonstrate the benefit of our long product life cycles in deep supplier relationshipips.
Speaker 19: As well as our investment in highly skilled manufacturing centers.
Speaker 8: And while we continue to monitor the impacts of inflationary dynamics and regional COVID-19 outbreaks, we feel confident in our ability to build upon strong financial performance. Brian outlined in our full year financial outlook.
Speaker 22: Including our first quarter review. I'd like to welcome Michael Johnson to idax as our new Chief human resources Officer.
Speaker 19: Michael brings over 22 years of experiencing developing HR leadership capabilities across multiple disciplines and geographies, most recently in abverrt laboratories, where he was the visional Vice President of diversity and inclsion.
Speaker 17: The Chief human resources Officer role is a key enabler of our long-term growth strategy.
Speaker 17: In supporting employee engagement, talent development and organizational effectiveness.
Speaker 17: And we look forward to Michael's leadership in continually advancing our initiatives in performance in these areas. Welcome, Michael.
Speaker 23: This concludes our review of our first quarter performancebefore opening the line for QA, I want to extend our deepest sympathy to the people of Ukraine, as the escalating war has picted a devastating toll on people in pets in the regionas a purpose-driven company, we strongly condemned the invasion and violence there.
Speaker 17: We have been focused on supporting our customers, to health and safety of our employees in the region and true to the heart of idex, the PTS that are part of their families.
Speaker 19: We have significantly scaled back operations in Russia, including suspending sales veterinary diagnostic equipment in the country.
Speaker 17: Instead our focus has been on supporting the essential care pins.
Speaker 19: To the extent that we can through our existing veterinary customers.
Speaker 19: To support humanitarian needs to reach.
Speaker 19: We have leveraged idex foundation to provide funding to the international medical correx, the world central kitchen and the international fund for animmo welfare, while're also providing free Rady tests for displaced ukrainian pests all over Europe .
Speaker 17: Going forward. We will monitor the situation to identify additional way to support ukrainian refugees and their pets. I would like to thank our employees around the world who have taken part in the idx foundation matching program to make personal donations to these organizations.
Speaker 17: With that, we will turn to QA.
Speaker 2: Thank you. We will now begin the question-and-answer session. If you do have a question, press zero and one on your touchstphone phoneif you wish to be removed from the queue, please press zero and two if you're using a speaker phone, you may need to pick up the handset first before pressing the numbers once again. If you do have a question, for zero and one on your touchstphone phone.
Speaker 2: And our first question is from Chris, shot from JP Morgan.
Speaker 24: Great Thanks so much for the questions. On this issue of that constraints, it seems like we've been hearing about this issue for much of the pandemic, So I'm just trying to get a better understanding of kind of what's changed in 2022, where this is now starting to kind of back up into your revenue guidance is starting to hit numbers a bit more. Soi'm trying tounderstand. Finally had a breaking point with the ve's. justcan't sustain what they've been doing and may be, as a second part of that same question- what do you think will take to start to see visit growth to normale? Do we need to know- just take a little bit of a pausehere for hire people IM ING, ens- just what? The path forward to see growth, the start to normale and maybe lip 1, other one and on the same kind of topic, is the slowdown you're seeing here completely that capacity related. So if they were more slots for visits that you there D be demand for that, or is there also some elements of lower demand reflected in in the guidance today? Thanks so much.
Speaker 10: Thank ris question, Chris. Maybe they can set some context and Jake can provide more color on the clinical visit trends which we've highlighted. Really, where the the main change that's going on here, that that cause to kind of retalibrate our outlook this year. We started lapping this step up in demand in the pandynamic in the second half of 2021 and you know that that was flowing through the benefits of the pet additions and the big increases in services and diagnostics that we saw through the pynamic and the clinical visit levels were up solid and H 2, So they were growing two to 3% off that higher base and so this is a relatively more recent dynamic. I think Jake can go into this more in color, but it's it's clearly a significant factor here is that capacity. I think that there is a, you know, trying to adapt following significant expansion of the demand in the industry and just dealing with some of the labor dynamics that many sectors are dealing with in the near term and we're still working through these, these tough year on year compare. You know I think that that will continue through infirst half of this year in terms of the step up. So you know that that is the primary factor. Other dyics that are going on here are all credibly positive I think are at the clinical level: diagnostic free concontincedualization is up the, the service focus on services, service in sto, service revenues, still growing bills, great instruments are very strong, software placements, customer retention, record levels. So this, this is primarily this, this dynamic which we think is largely related to the, the capacity constraint, and you know that will normalize, I think, as as we work through some of these compares and as clinics adapt to this long term open demand that we think will sustain.
Speaker 17: Good good boarding trris. Let me try to address your question from a context standpoint, both from the standpoint of capacity or supply, and then I want to talk a bit about pet ER, pet owner dynamics and and demand. So you know all the surveys at all the conversations we've had with that areans indicate a good deal of optimism. You know about the future, and in that includes 2022, in terms of growth in their prospects. Know they, their focus is really, I think, pivoted. The pandemic is only accelerated. The pivot towards being able to provide excellent medical services and patient care as well as a pleasing client experience. So relatively less emphasis on things like product sales, specially specialty diets, that they're also seeing from a pet owner standpoint, demanding clients who who really want full service care. So speaking with a number of are just yesterday, you know they they remarked that pet owners come in, are still looking to really have sort of an end to end approach to care. So you know I talked about that, that strong pivo. If anything, the pandemic, I think, is only accelerated. That and they know that the diagnostic place a key role in being able to guide care services and a whole clitical envelope and that the Brian's point.
Speaker 19: At the same time there's been a very significant step up it activity, both in terms of, you know, a number of patients- there's 10 plus percent more pets, relative prepand-namic- 10 plus percent, you know, higher clinical visit- and the practices themselves. They haven't been immune to some of the labor and staff challenges that to some extent all businesses are facing. So they're working. They're working through that dynamic of higher activity while trying to create some, some balance and looking to increase capacity. And and they're looking at us in many respects and have this large appetite for things like ICS. In sumutation we saw that manifest itself in higher sales call based software solutions. I think it's both indicative of their optimism for the future and recognizing that if they have better tools that can support both staff productivity in higher standards of care, I mean. Let me pivot and talk a bit about pet owner dynamics because I think that addresses your your question how this is going to pay out over time by. By all accounts, we think pet own demand remains very strong. We all know there's a very strong animal bond in, by all accounts, all the data we look at that continues that the grow. We also know that from a spending power standpoint, just as a percent discretionary spend that they're spending all in on pets across all economic and demographic cs- still under under 2% and the medical services piece much, much smaller.
Speaker 8: And that so pet owners they they consistently indicate not just surveys but but actual behavior that they prioritiz spend veary care sometimes even to the extent that about a quarter or so. So that they would spend first on their pet before their own health care. But they prioritize you know consistently across much larger groups relative to things like entertainment and travel and going out to dinner and that's even more pronounced in the younger generations like generations the and millennials. So you know getting back we know there's been a significant number of adoptions to the pandemic 10 plus percent have the last couple of years. We look at things like surrenders and we don't see you know any any real movement for that baseline. In fact what the surveys say is the first time pet owners looking that actually opt potentially second pet in some appreciable numbers you know from a headwind standpoint. We know there are some overlays like working from home and and companies returning more to.