Heska Corporation
Q3 2018 Earnings Call Transcript

Published: 11 Nov 2018

[Operator:]

Good day, and welcome to the Heska Corporation Third Quarter 2018 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jon Aagaard at Heska. Please go ahead.

[Jon Aagaard:]

Thank you, everyone and good morning. Welcome to Heska Corporation's earnings call for the third quarter of 2018. I am Jon Aagaard, Director of Investor Relations for Heska. Prior to discussing Heska's third quarter 2018 results, I would like to remind you that during the course of this call, we may make certain forward-looking statements regarding future events or future performance of the company. We need to caution you that any such forward-looking statements are based on our current beliefs and expectations, and involve known and unknown risks and uncertainties, which may cause actual results and performance to be materially different than that expressed or implied by those forward-looking statements. Factors that could cause or contribute to such differences are detailed in writing in places, including this morning's earnings release and Heska Corporation's annual and quarterly filings with the SEC. Any forward-looking statements speak only as of the time they are made, and Heska does not intend and specifically disclaims any obligation or intention to update any forward-looking statement to reflect events that occur after the time such statement was made. We have with us this morning, Kevin Wilson, Heska's Chief Executive Officer and President; Catherine Grassman, Heska's Chief Accounting Officer; and Jason Napolitano, Heska's Chief Operating Officer and Strategist. Mr. Wilson and Ms. Grassman will provide details surrounding the results reported, and then we'll open the call to questions. At this time then, it is my pleasure to turn the call over to Kevin Wilson. Heska's CEO and President. Kevin?

[Kevin Wilson:]

Thanks, John, and good morning, everybody. Today, we're pleased to report a solid third quarter that remains in line with the outlook that we presented on our last call. Today's results demonstrate good progress in our efforts to focus on and grow our highest-quality revenue streams faster than lower-margin revenue stream and to better position Heska for increased scale. To that end, point-of-care laboratory consumable sales rose 19.3% in the period, at the higher end of our 15% to 20% full year outlook, even as point-of-care laboratory gross margins expanded 140 basis points. Pricing, utilization, and end user demand have remained strong for the first 3 quarters of the year and this trend appears to be intact as we enter the fourth quarter. Imaging sales also increased in the period, growing by 24.3% to a little over 15% for the year, which is above our 10% to 12% full year outlook and was driven by good year-over-year demand, excellent execution and an ongoing refresh in imaging's product line. Third quarter revenues of $31 million were in line with our outlook, with good mix driving margin expansion. We continue to focus resources away from lower-margin and less-strategic revenue stream and towards higher-quality revenue opportunities and growth initiatives. This focus is having positive results, with consolidated gross margin outperformance of 310 basis points in the third quarter compared to our outlook. Key products delivered solid sales growth and good margins in the period, while being offset by lower sales from lower-margin products in the period. Favorable balances of puts and takes were reached in other areas as well, increased stock-based compensation expenses and accelerated investments in product development and team expansion set us up well to achieve our future goals while dragging on current-period operating margins. We accept this is a good trade. And onetime nonrecurring TCPA settlement expenses were set against strong diluted earnings per share performance. Overall, our operating performance was in line with my expectations. Personnel, product development and research and geographic expansion investments continue to ramp up and step with our growth plan. Geographic expansion continues largely on pace with my expectations. New leadership has been hired and teams are forming to compete in Australia and core eurozone territories in the first half of 2019. During the third quarter, we invested $8 million in unconsolidated affiliates as part of our innovative product development and expansion strategy. We expect to continue to track and win several more business development opportunities of various sizes and types, with a particular focus on adding more next-generation technologies, new geographies and more product line extensions in the 2019 to 2020 period. On the research and product development front, assay development for our new Element i+ platform and accelerating preparation of our new Element R rotor chemistry are on track for release in the first half of 2019. Along with our leading Element HT5 Hematology platform, the Element R an Element i+ will form the core of our international product portfolio, which we think is superior to the competition in performance, price, ease of use and form factor. On the group veterinary hospital front, as demonstrated by this morning's release, Heska continues to punch above its weight with an exceptional combination of technology, programs, people and influential customers. Today, we are pleased - again demonstrate the success as we announced that Heska's has partnered with Ethos Veterinary Health, a leading independent veterinary specialist health care provider. Heska is to be Ethos' sole long-term provider of key point-of-care diagnostic equipment and consumables throughout their growing network of specialty hospitals. Ethos has an amazing group of some of the largest and most highly respected specialty hospitals in the United States. They have luminary influence that we anticipate will create a halo effect for Heska's point-of-care technology. The impeccably trained and credentialed Ethos team has a vision for providing a new level of service in local reference laboratory, specialty diagnostic consulting, compounding, emergency care, and medical referral procedures for their wide network of referring veterinary hospitals. To succeed in this mission, Ethos and their veterinary hospitals require point-of-care technology up to their expert standards, and that's why they chose Heska. When combined with Heska's PetVet Care Centers and Pathway Vet Alliance agreement wins, Heska's selection by Ethos further validate Heska's leadership capability in the growing corporate and specialty hospital markets. These wins have largely secured the group hospital commitments to meet Heska's market share goals from this class of customer for 2018. Entering the final quarter of the year, we are focused on installing and delighting these large multiyear customers as we continue to track additional opportunities with other groups in 2019. On a macro level, the global animal health and pet health care industry continues to see favorable, broad-based trends that are increasingly driving meaningful investment strategic activity. As a leading provider and innovator in this space, Heska's customer base, product portfolio, product pipeline, expertise in growth opportunities are Heska's specific strengths that point towards an important and rapidly scalable role for Heska in the race to serve animals and pets of all types and nationalities. As we enter the final quarter of 2018 and prepare for a very exacting 2019 and 2020, we are focused on making the necessary investments and working hard to secure an important role for Heska in the years ahead. Now I'll turn the call over to Catherine. She'll go over the details of the quarter. And following Catherine's comments, we'll open up the call to answer your questions. Catherine?

[Catherine Grassman:]

Thanks, Kevin, and good morning, everyone. We are pleased to report a strong performance in the third quarter of 2018, which, as Kevin mentioned, was in line with our previously communicated outlook. Strong product sales in our Core Companion Animal, or CCA segment, partially were offset by expected lower revenue in our Other Vaccines and Pharmaceuticals, or OVP segment, which resulted in a consolidated net revenue increase of 2% to $31 million as compared to the third quarter of 2017. CCA revenue was $27.2 million for the third quarter of 2018, a 6.3% increase over $25.6 million in the third quarter of 2017. Revenue from point-of-care laboratory products grew 5.6% in the third quarter of 2018 compared to the third quarter of 2017, driven by strong sales growth of consumables of 19.3%, bringing full year-to-date consumables growth to 17.3%. This was offset by lower-margin noncore infusion pump sales and capital lease revenue recognition in our reset descriptions program. Revenue from our point-of-care imaging products increased 24.3% in the third quarter of 2018 compared to the third quarter of 2017, bringing year-to-date imaging growth to 15.5%. Revenue from OVP declined 20.9% to $3.8 million in the third quarter of 2018 as compared to the third quarter of 2017 as a result of lower production and shipment. Consolidated gross margin in the third quarter of 2018 was 47.8% as compared to 44.7% in the third quarter of 2017. In the third quarter of 2018, gross margin in our CCA segment grew 140 basis points to 49.4% as compared to the third quarter of 2017, which was offset by OVP segment margin that was down 950 basis points to 36.2%., due primarily to lower plant utilization from lighter volumes of shipments. On October 16, 2018, we filed a Form 8-K with the Securities and Exchange Commission, regarding an agreement we entered into to settle a class action complaint related to legacy marketing factors with no admission of wrongdoing. Included in our third quarter operating expenses, on a US GAAP basis, our nonrecurring charges of $7.1 million related to the settlement, legal and other onetime costs. Inclusive of nonrecurring charges of $7.1 million, which are the majority of the increase in operating expenses, third quarter 2018 operating income declined 195.2% to an operating loss of $3.6 million as compared to the third quarter of 2017. Excluding the nonrecurring charges of $7.1 million related to the settlement, legal and other onetime costs, third quarter 2018 non-GAAP operating income decreased 8.5% to $3.5 million compared to the third quarter of 2017. The decrease in operating income is due to increased compensation cost, including stock-based compensation, and increased research and development costs. Depreciation and amortization was $1.1 million for both the third quarters of 2018 and 2017. Stock-based compensation was $1.4 million for the third quarter of 2018 compared to $0.7 million in the third quarter of 2017. The company's effective income tax rate for the third quarter of 2018 was a tax benefit rate of 52.9% compared to a tax expense rate of 18.5% for the third quarter of 2017. On a non-GAAP basis, excluding the tax effects of $2 million relating to the nonrecurring charges, the company's effective tax rate for the third quarter of 2018 was a tax expense rate of 3.6%, which includes an approximate 24% tax rate benefit from stock-based compensation activity. Net loss attributable to Heska Corporation for the third quarter of 2018 was $1.7 million or a loss of $0.23 per share, a 154.1% decrease over $3.1 million or $0.40 per diluted share in the third quarter of 2017. On a non-GAAP basis, excluding the $7.1 million of nonrecurring charges net of tax effects, net income attributable to Heska Corporation for the third quarter of 2018 was $3.4 million or earnings of $0.43 per diluted share, an increase of 9.7% over $3.1 million or $0.40 per diluted share in the third quarter of 2017. As of September 30, 2018, Heska Corporation had $9.2 million in cash compared to $9.7 million as of December 31, 2017. Cash flow from operations was $2 million for the third quarter of 2018 as compared to $1.4 million for the third quarter of 2017. During the third quarter of 2018, the company invested approximately $8 million in unconsolidated affiliates as part of its innovation strategy for product development. With that, Kevin, Jason and I would like to open up the call for your questions.

[Operator:]

[Operator Instructions] We'll take our first question from Bruce Jackson with The Benchmark Company.

[Bruce Jackson:]

Hi, thanks for taking my question. So starting with the incremental $8 million investment in product development, is that something that you're going to be continuing to fund going forward?

[Kevin Wilson:]

When you say fund, you mean -

[Bruce Jackson:]

So we had this additional - we had this additional expense in the quarter. Should we be - when we're looking at the operating expenses going forward, are you going to continue to invest in this particular area? And does it have any impact on the R&D line, for example?

[Catherine Grassman:]

So two points of clarification on that question, the first is the $8 million cash outflow was an investment, so that is actually recorded as an asset on the balance sheet. So that's not recorded as part of the operating expenses during the third quarter. We will have incremental operating expenses as it relates to one of those initiatives on - at least through the fourth quarter and into the first half of 2019.

[Jason Napolitano:]

This is Jason. One other thing, I believe, one of the investments is about a 29% position we have in the entity, which means as they invest in R&D, we're going to recognize our pro rata share of their expected loss.

[Bruce Jackson:]

Okay, okay. Then the other question I have, just real quick, is with the guidance in the past you've given, full year guidance for revenue and then also operating income guidance, do you have any thoughts on those two areas?

[Kevin Wilson:]

Yeah. I think when you give full year, by the time you've backed into three quarters you end up with the basic subtraction, so we're going to leave it at that. I think we commented on kind of our business-line trends, our margin, general market trend, and I think we'll just leave it at that.

[Bruce Jackson:]

Alright, fair enough. That's if for me right now. Thank you.

[Kevin Wilson:]

Thank you.

[Operator:]

We'll take our next question from Mark Massaro with Canaccord Genuity.

[Mark Massaro:]

Hey, guys. Thanks for taking the question. My first one is on the win with Ethos. Can you just confirm? It looks like, based on their website, they have 14 locations across the United States. Is this another of these larger providers that expects to grow? And can you also just comment on your pipeline of similar types of larger corporate-owned entities?

[Kevin Wilson:]

Yeah. I think they have a few more hospitals. I want to say they're roughly 20 hospitals total - precisely, I think 18 to 20, I don't recall. They're constantly acquiring hospitals. What's interesting about Ethos, and one of the things we're excited about with them is they are some of the largest and most highly specialty staffed hospitals throughout the country. So they serve a large network, and a lot of cases, hundreds of hospitals that surround them in major metropolitan areas. So when they're staffed with highly respected published very, visible specialists in surgery and radiology and internal medicine and pathology, we think that their model of delivering specialty medicine, a little more similar to the human model where we have large health care systems in regions where they provide reference lab, point-of-care surgery referral, advanced imaging and things like that, we think it's a great model. And we think it'll have a lot of influence. And hopefully, like I said in the prepared comments, a halo effect for the Heska products. With regard to additional targets, yes, we have conversations going with other corporate-owned and group practices that we think we've got a pretty good shot at. I think our success ratio has been good. And I think, probably above our market share rate in general hospitals, so I think we're doing quite well with group and specialty hospitals. And I don't see any reason that wouldn't continue. And one final comment on that would be the new element, DC5X, the high-volume analyzer that we launched a quarter or so ago was key with the Ethos account. I believe all of those hospitals will be getting DC5Xs, so they're high-volume, high-precision dry chemistry-based analyzers. And I think that level of throughput and dry chemistry technology, we were the only company who could deliver that. So it was nice to see product development drive a major specialty hospital win and sorry for the long answer, but you asked.

[Mark Massaro:]

No, that's helpful. Also, appreciate your comments on the Element i+ and the Element R on track to launch next year. Can you - you didn't mention the Element U, the urine box and the fecal box. Can you just comment about whether or not you still plan to launch Element U sometime early next year and Element F later next year?

[Kevin Wilson:]

Yes. And part of the reason we didn't call that out specifically, we are making good progress on that project. Without getting into the details too much and tipping our hand too much, there is the possibility that we'll be able to merge that technology to perform both modalities in the same analyzer. If we do decide to pursue that as a final launchable product, it will delay the year-end product and it will accelerate or meet the original, for the fecal project, with a couple of caveats, so that's hard. So we are developing - I think, would be the only combined urine and fecal analyzer that's on the market, human or veterinary that - at least that we're aware of. So that's why we didn't call out any specifics on it because I can't be specific at this point. So when we know more specifics, we'll let you know. I would personally trade a couple of quarters of a urine-only analyzer, which is being served by IDEXX and Abaxis today. I would trade that time delay for what I would consider to be a significant leap forward in functionality for the veterinarian, like a massive leap forward in my opinion. So I would make that trade if it's technologically and production feasible.

[Mark Massaro:]

That's great. Last one for me, can you comment on the size of your sales force? I know - I think you were indicating plans to grow by 25%, somewhere around the low 100 number. Any update there would be helpful.

[Kevin Wilson:]

Yeah. And so we're progressing on that. We were a little ahead of schedule and then tight labor market, you lose one or two and then you get a little ahead of schedule. We are progressing on that, the numbers have continued to go up. And we're hopeful that we'll conclude the year at our target, but it'll be close.

[Mark Massaro:]

Great, thank you.

[Kevin Wilson:]

Welcome.

[Operator:]

We'll take our next question from David Westenberg with CL King.

[David Westenberg:]

Hi, thanks for taking the questions and [indiscernible]. So my first question is actually on the corporate accounts in respect with PetVet and Pathway. Relative to your prior expectations, are the installs going on schedule right now, timing-wise?

[Kevin Wilson:]

I think, Pathway, I would categorize as perhaps ahead of schedule. And I think PetVet Care Centers I would categorize as a little behind schedule. Again, they're both great relationships. And I don't want to dive into - nobody is failing. They have different corporate cultures and they have different command-and-control, if you will. So I think, Pathway is installing quite nicely, and we continue to work with PetVet Care Centers as well.

[David Westenberg:]

Got it, so net-net in aggregate it probably is going as expected then, relative to your primary -

[Kevin Wilson:]

In aggregate, yes. It's within the realm of what you would expect. It's not something that you just ship hundreds of units, and there are always people, processes, training on the other side of each of those swap outs. And a vast majority of those installations or swap outs from other analyzer companies, some of which are gloriously, wonderfully, happy to do and some of which are pleased with competitor analyzer. And I don't think we've ever made any comments about that, I think our competition does a good job.

[David Westenberg:]

Alright, thank you. And then just moving on to international, you're expecting the launch in Australia and some select markets in Europe in early 2019. How long do you anticipate between getting to these markets and seeing kind of your first sales? Is there - should be - we expect a little bit of a lag or do you kind of anticipate hitting the ground running in these markets?

[Kevin Wilson:]

I think you hit the ground running sort of. Meaning, you have to stock the warehouse to be prepared to meet the orders. And it's like any startup, when you have 1 customer, you have effectively the obligations of the whole logistics chain. So it's a process. But for us, getting to a market is defined as a licensed veterinarian hit Heska and on Monday, wants to run a chemistry profile and a hematology profile. And we've got our equipment on the counter. They're trained, it works and they have the ability to get supplies to run those tests. So it's really the whole lifecycle. And so to do that, you have to have some revenues. I don't anticipate large revenue moving numbers in the first quarter. And perhaps even the first year. It's really just about building reputation, building happy customers and obtaining those customers on agreements that will last many, many years, not just quarters.

[David Westenberg:]

No, that's very helpful. And then just to - kind of a continuation of the question Mark asked and maybe continuations from the commentary. Just trying to quantify Ethos is highly - has a bunch of specialty hospitals. When you look at kind of the regular specialty hospital, can you talk about maybe the percentage of volume compared to the typical hospital of chemistry? Is it maybe double? Is it 50% more? Is there any kind of a rule of thumb we can kind of use and to try to figure out what these kind of bump ups could be?

[Kevin Wilson:]

There's really not a rule of thumb, I wish there were. They are similar to like the Blue Pearl hospitals that are owned by Mars. They're large specialty hospitals. But in terms of quantifying, the workflow is different in each hospital. And so it would be I think it would be imprecise to try and be precise.

[David Westenberg:]

Got it and then just one last question, this probably has a really simple answer that I'm totally overlooking and it's probably a dumb question, but why did the share count sequentially go down so much?

[Catherine Grassman:]

The share count, like it's - for calculating EPS?

[David Westenberg:]

From 7.8 million to 7.3 million fully diluted?

[Kevin Wilson:]

David, we'll get back to you on that. I don't think it did. We didn't do a buyback. We didn't do anything like that. So if anything, we have a fairly low float as it is.

[Catherine Grassman:]

Okay. Hang on. So 7.6 million to 7.3 million, is that what -

[David Westenberg:]

Yeah.

[Catherine Grassman:]

The reason it's showing that on the balance sheet is because the dilution would have been antidilutive because we were in a loss position on the GAAP balance sheet, so really, if we - on a non-GAAP basis, the shares are at about 7.6 million. Yes, about 7.6 million. Yes. And I think you might find that in the reconciliation in the release. And I think I footnoted it. Oh, 7.9 million actually. 7.9 million, sorry, so it wasn't - it's in the reconciliation on the release that was filed today.

[David Westenberg:]

Got it, perfect. Thank you.

[Kevin Wilson:]

Thanks, David.

[Operator:]

And we'll take our next question from Kara Anderson with B. Riley FBR.

[Kara Anderson:]

Hi, good morning.

[Kevin Wilson:]

Good morning, Kara. How are you?

[Kara Anderson:]

I'm well thank you. So in the press release and then in your comments you mentioned expansion in Australia and eurozone, I think we were also expecting some expansion in New Zealand in the second half of this year, and it seems that might be a little bit delayed, and notably New Zealand was absent in your comments, just wondering if you can talk about that.

[Kevin Wilson:]

So Australia, New Zealand, we have a Country Region Manager hired in Australia, who ironically is a New Zealander. So I think, culturally, he's got them both covered, but you don't lump them together. They're both very large islands and they're actually rather far apart, so we are still pursuing New Zealand. I think our plans in Australia are further along and so we wanted to call out the areas who are furthest along in terms of specific strategy and tactics. So we didn't call out New Zealand, we're still active in developing that, but we haven't landed on the exact go-to-market strategy and partner in that country yet. So we didn't call it out, it hasn't gone away.

[Kara Anderson:]

Got it, that's helpful. And then can you talk about the productivity of a new rep? Maybe specifically the ones you may have hired first, how they're tracking against your internal expectations? And what is like the typical ramp you would expect?

[Kevin Wilson:]

They have a training period of at least 90 days. So the first quarter, they're really not even designed to be productive. They're shadowing, they're coming in to headquarters for week-long training sessions, and then they arrive with their regional managers and other sales reps. And then, again, I think I would be imprecisely precise, some will exceed expectations and do a couple of transactions a month and some will not exceed expectations and do less than 1 a month, so it's all over the map, it's individual performance.

[Kara Anderson:]

Okay, thank you. That's it for me for now.

[Kevin Wilson:]

Thanks, Kara.

[Operator:]

We'll take our next question from Andrew Cooper with Raymond James.

[Andrew Cooper:]

Hey, guys. Thanks for the questions. A lot has been covered already, but just to poke on the fourth quarter a little bit. I know we had been expecting a pretty steep ramp in OVP, and just wanted to check on kind of what's the visibility from here? Obviously, you hit the number kind of right on the - in terms of what we had for the third quarter. So just how are you thinking visibility into that? And the process on the margin improvement, I know you called it out in the press release, but any more color there would be great, please?

[Kevin Wilson:]

Yeah. Everybody can throw in as they have comments. I think OVP we like and we have good visibility generally a couple of quarters out for what full year commitments are. And I think we've alluded to in the past, a lot of those are commitments for contract orders. And we think we've got good solid honorable counterparties. And so we think they'll meet their commitments.

[Andrew Cooper:]

Okay. That's fair. And then, on Ethos, is there anything else you can give in terms of timing and then kind of how you think about that ramp for them relative to kind of your more traditional corporate just given the specialty structure? I know you said they're all DC5Xs, but any additional thinking there would be helpful.

[Kevin Wilson:]

Yeah. They're prepared and we're prepared, and we'd love to get them in next week. There is still - just operational constraints. You have to send trainers in, you have to get the assets there, you have to prepare their team, so it's just work, but I don't think it's something that takes many quarters with 20. We will certainly prioritize the Ethos installs. They're super important to us, and again I think they'll be high volume. The good news with Ethos is they have highly trained lab technician staff. So making a transition to our dry chemistry from another dry chemistry, and our 5-part Hematology from another 5-part Hematology is not an earth-shattering event for highly trained laboratory technicians, and vet technicians, so yes. A lot of work to do but I think those installs will go quicker, perhaps, than maybe some of our larger corporate accounts where they've 150 and we're trying to prioritize and hurt a lot more cats. I think the 18 to 20 Ethos installs will go smoothly and my expectation would be over the next quarter or two.

[Andrew Cooper:]

Great, that's helpful. I'll stop there and follow. I appreciate it guys.

[Kevin Wilson:]

Thank you.

[Operator:]

We'll take our next question from James Sidoti with Sidoti & Company.

[James Sidoti:]

Good morning, can you hear me.

[Kevin Wilson:]

We can Jim. Good morning.

[James Sidoti:]

So you talked about $8 million investment in new products. Are those limited to the products that you've talked about so far? Or are there other products that you're working on that you haven't discussed?

[Kevin Wilson:]

I think the $3 million of that is related to our Element i+ product platform that we called out. And $5 million is related to what we think is the next-generation technology that we haven't called out specifically and I don't think we'll call out specifically. So that is a new product that hasn't been announced.

[James Sidoti:]

Okay. And I wasn't clear on your answer when it came to the outlook for the year, are you reiterating your outlook for sales and operating income for the year?

[Kevin Wilson:]

Yes. I think we're sticking with it. We try not to give quarterly guidance unless something major has moved. So I think two quarter - a quarter ago, we had a revenue move that we explained. But otherwise, I think we're sticking with the full year guidance, without falling into a pattern of going quarterly. So I think it's fairly easy for people to back into what our full year less our first three quarters are. And so we'll just leave it at that, so yes.

[James Sidoti:]

Okay, alright. Thank you.

[Kevin Wilson:]

Thanks, Jim.

[Operator:]

We'll take our final question from Ben Haynor with Alliance Global Partners.

[Ben Haynor:]

Good morning guys. Congrats on the Ethos win.

[Kevin Wilson:]

Thanks, Ben.

[Ben Haynor:]

I was just looking at these guys. And it looks like they've got, I don't know, if it's a subsidiary or a portion of their business what they call Ethos Diagnostics Science. It looks like - looks kind of a reference lab that they are operating in several cities. Is that something that they've done to kind of up their referral base, providing those services to referring hospitals? Or how does their business model work, if you're aware of it there?

[Kevin Wilson:]

Yeah. I think I alluded to it in the earlier comments. I think it's more of a model like large human medicine health networks, where instead of relying necessarily on a Quest Diagnostics or a LabCorp, like a nationwide lab, a lot of the physicians in a large human hospital network will refer all of their imaging, all their reference lab, all of their surgeries and things like that into a large specialty teaching hospital, referral hospital. And I think they have a similar vision, which I think is great. It's actually very similar if you rewind 25, 30 years ago, reference labs at universities were quite busy as well. But maybe didn't run efficiently for local referring doctors. And I think privately owned specialty hospitals would provide great reference laboratory services. So not a business that we're in directly, but I think they have an interesting model. And they have the best reputation I think you could have in most of their referral hospitals in major metropolitan areas. So I think they have a very good shot of penetrating that market quite well.

[Ben Haynor:]

Okay. And I mean could that be something down the road that could be - maybe a bundling opportunity for you with this relationship or is that taking on a bit too far?

[Kevin Wilson:]

No, we hope so. We've always looked at it and just dogs and cats who need to have their blood and plasma analyzed. And sometimes that's a reference lab model and sometimes that's point-of-care, and sometimes it's both. So we would love to support Ethos as they offer a reference lab service that use our point-of-care in their own hospitals and we think it would be very natural bundle to supply both of those things to their referral network as well. So that's the hope and it's one of the reasons we called it out, it's not just that it's 20-ish hospitals, it's the type and the quality of the business model I think that's most intriguing.

[Ben Haynor:]

No, looks like a pretty quality institution and then, just looking at commentary from one of our competitors on the imaging side. It sounded like they had a pretty strong quarter, expect a pretty strong Q4. Is there anything out there that you're seeing? Is it just continued strong vet visits, vet practice revenue growth that is maybe allowing some of these hospitals to invest in imaging more so than in the past? Or is there anything on the imaging side where you might expect also a strong quarter as we exit the year here?

[Kevin Wilson:]

Yes. I think, our outlook for the full year certainly guides to a strong fourth quarter. I think imaging will participate in that. I don't think there is any onetime tax change or anything driving that. Some of it is cyclical. Sometimes you tap into generations of products that might be five, six, seven years old that are materially not as good as the brand-new products. Some of it is bundling and success with bundling. And I suspect we're not the only one succeeding with that strategy as well. So I don't think it's anything specific. Our imaging guys are having a great year. I think they're above where we thought they'd be for the year. And I think they're pretty bullish going into the fourth quarter. But now I'll put my caution hat on, the competition is out there, they are strong, they both know every time they can, and so that's one of the competition. But I think the fourth quarter looks pretty good for imaging.

[Ben Haynor:]

Okay, great. And then just lastly for me, you mentioned that you might combine the urinalysis and the fecal on your coming platforms. Just going to your naming conventions, would you plan on naming that the Element UF or the Element FU?

[Kevin Wilson:]

I'm going to -

[Ben Haynor:]

Or yet to be determined?

[Kevin Wilson:]

There might be an internal name and an external name.

[Ben Haynor:]

Perfect, fair enough. Thanks a lot guys.

[Kevin Wilson:]

I appreciate it.

[Operator:]

That concludes today's Q&A session. I'll turn the conference back to CEO, Kevin Wilson, for any additional or closing remarks.

[Kevin Wilson:]

Thank you. And on that auspicious note at the end, we appreciate everybody's time today. We're proud of the quarter. We think the team did a good job and we're excited to work hard to finish the next 60 days and report to you in another three months or so. So thank you for your interest in Heska, and we appreciate it, and we'll talk to you soon. Thanks. Bye.

[Operator:]

This concludes today's call. Thank you for your participation. You may now disconnect.