Heska Corporation
Q1 2015 Earnings Call Transcript

Published: 10 May 2015

[Operator:]

Good day, and welcome to the Heska Corporation's First Quarter 2015 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Brett Maas, of Hayden IR. Please go ahead, sir.

[Brett Maas:]

Thank you all for joining us today on our conference call. On the call today with us is Kevin Wilson, Heska’s Chief Executive Officer and President; Jason Napolitano, Heska's Chief Financial Officer and Bob Grieve, Heska Corporation Executive Chair. We appreciate having the opportunity to review the results for the first quarter 2015 and provide an update on the Company’s progress. Prior to discussing our results, I'd like to remind you that during the course of this call, we may make certain forward-looking statements regarding future results, events or future financial performance of the Company. We need to caution you that any such forward-looking statements are based on current beliefs and expectations and involve known and unknown risks and uncertainties, which may cause actual results and performance to be materially different than what is expressed or implied by those forward-looking statements. Factors that could cause or contribute to such differences are detailed in our press releases or in our annual, quarterly or other filings with the SEC including the Annual Report on Form 10-K for the year ended December 31, 2014. These forward-looking statements speak only as of today and except otherwise as required by law, Heska does not intend to update any forward-looking statements to reflect events that occur after today's call. Now I will turn the call over to Kevin Wilson, Heska’s Chief Executive Officer and President. Kevin, the floor is yours.

[Kevin Wilson:]

Thanks, Brett. Heska had a great first quarter compared to the first quarter of 2014 Heska’s 2015 revenue was up 10%. Gross margins expanded a very nice 4%. Gross profit was up 22% and net income was up 221%. The team did a great job taking market share from our competitors and gaining the trust and friendship of customers and the hundreds of professionals at Henry Schein. In the first quarter, our teams delivered profits and growth by increasing sales, improving margins maintaining cost discipline, launching better products, building better teams and making strong daily decisions. These are the habits that we’ll focus on through 2015 as we press our advantages. Heska is proven to be nicely scalable. As sales continued to rise double-digits, our margins are improving, our cost per dollar sold are shrinking, our sales per employee are increasing and Heska’s profits are increasing faster than revenues. In a world where our profits maybe treated favorably on a cash basis due to our NOL tax benefit, I am increasingly encouraged that we are executing on our core businesses, even as we look to add new profit streams that will benefit from this NOL. At the end of the year, we announced the release of our new element HT5 Hematology Analyzer. Our commercial shipments release has gone extremely well and we’ve delighted customers while replacing numerous competitive systems in the quarter. And because the element HT5 is a true five-part analyzer, it opens a door to larger more sophisticated customer sites that demand a true five-part laser hematology system. We are seeing that this is a real-world advantage over all of our competitors. Because of the element HT5, the reach and friendship of Henry Schein, Heska’s effective bundling of imaging systems and blood analyzers, and Heska’s lower friction sales model, about eight in ten new analyzer sales in the first quarter were to customers that are brand new to Heska in the segment. Importantly, many of those customers are large and mega size users, which are often as much as ten and up to 100 times larger, than a low volume user. This is an important trend that we are watching and we are beginning to acquire data on what is effectively a net subscriber growth metric in each period that includes also the quality and the size of the net subscriber wins over the multi-year Heska subscription period. While we are not ready to report disclosure level numbers and trends, we can confidently say that Heska gained far more analyzer customers in Q1 than we lost and a much higher percentage of those net subscribers gained were large and mega size users. For example, as I track our internal reports, in chemistry devices, during Q1 of 2014, new customers were 59% of placements while in 2015, new customers were 77%. But perhaps more importantly, the quality of the make up of the rise in new customers has been remarkable. In Q1 of 2014, 43% of customers brand new to Heska and chemistry were large volume users. During Q1 of 2015, 63% were large volume users. The trend in our element POC, blood gas segment and our new element HT5 Hematology segment have been even more encouraging. This is an important trend that will benefit Heska for years to come as 100% of those improvements were under five year subscriptions. To illustrate the importance and this is important, if a company were to report 500 new analyzer placements in the quarter as an example, it’s nice, perhaps it’s even a record. But the lie of illustration, if all of those 500 customers average 2000 per year in usage of consumables over five years, it will result in an anticipated book of business gain of $5 million. But by way of illustration, if 100 of those 500 customers average $20,000 per year, over the same five year period, results in an anticipated book of business would be $14 million for the same number of 500 analyzers placed. With this principle in mind, I believe that growing our largest users in the quarter as compared to last year by over 20% was a huge win by the Heska team. And because those customers are all on five year subscriptions I have confidence in the future revenue stream from those wins. To gain these wins, Heska’s model has been to forego the sales revenue of the analyzer at the point of contract. Rather Heska places the analyzer for free and exchange for a five year subscription style agreement. This lower barrier, lower friction, fair model is back-end loaded in terms of how we recognize revenue and cash flows. I am very pleased with the uptake in the market and to Henry Schein of this unique and somewhat brave Heska model during the past 18 months. Now I will turn the call over to Jason for a more detailed review of our financial results.

[Jason Napolitano:]

Thank you, Kevin. The first quarter in 2015 exceeded our expectations. Total revenue for the quarter was $22.9 million, a 10% increase from the prior year period. Core companion animal health revenue was $19.6 million, an increase of 13% from $17.4 million compared to the prior year period. These results include consolidated results from Heska Imaging, which generated $4.2 million in revenue or more than double the prior year period result of $2.1 million. In addition to the strong revenue growth from Heska Imaging, increased revenue from our instrument consumables somewhat offset by lower revenue from our canine heartworm preventive was a factor in the increase. We anticipate our canine heartworm preventive sales will increase for the full year in 2015 as compared to 2014. In our Other Vaccines, Pharmaceuticals and Product segment or OVP we had $3.3 million in revenues a 3% decline as compared to $3.4 million in the prior year period. Lower sales under our cattle vaccine contract with Elanco was a factor in the decline. This was expected and we are pleased with the team’s results. We generated operating income of $1 million in the first quarter of 2015, an improvement of over $1.1 million as compared to an operating loss of approximately $100,000 in the prior year period. A major factor in the increase was Heska Imaging’s performance. In the first quarter of 2015, Heska Imaging had operating income of $15,000, as compared to an operating loss of approximately $1 million in the prior year period. Entering 2015, gross margin improvement was one of our priorities as we optimize our business. Gross margin, that is gross profit divided by revenue was 44% in the first quarter of 2015, up over 4 percentage points from 39.8% in the prior year period. A key factor in the increase was improved gross margin at Heska Imaging, where gross margin was 37.6% in the first quarter of 2015 as compared to 13.7% in the prior year period. We have stated in the past that we believe 35% is a good target for gross margin in this area. So the results for the first quarter of 2015 is consistent with our expectations for this business. Improved gross margin due to Heska Imaging’s results, and product mix in our OVP segment, somewhat offset by lower gross margin due to product mix in our core companion animal health business were factors in the improvement. Operating expenses were $9.1 million in the first quarter of 2015, an increase of approximately 8% from $8.4 million in the prior year period. Increased sales commissions and greater non-cash compensation expense recognized for our CEO and Executive Chair, were factors in the change. You will recall, we signed new employment agreements with our CEO and Executive Chair in late March of 2014 with both included the issuance of restricted shares. We have been recognizing non-cash compensation expense for these chairs. These agreements began late in the first quarter of 2014, so there is not a material expense in that period, which results in a year-over-year increase when compared to the first quarter of 2015. This is the last time this should happen for the prior year quarter as we report our 2015 results in the future. We had approximately $1 million in depreciation and amortization in the first quarter of 2015 as compared to $729,000 in the prior year period. An increase in instrument rentals including at Heska Imaging was the key factor in the increase. Interest and other expense net was $137,000 in the first quarter of 2015, up from $16,000 in the prior year period. Currency loss related to the strength of the Swiss Franc was a factor in the change. The Swiss Franc is the functional currency of our Swiss subsidiary, Heska AG. We had a higher income tax expense recognized in the first quarter of 2015 than in the prior year period due to improved operating performance. Current tax expense, which relates to taxes we expect to pay in cash for a given period’s operations was $44,000 in the first quarter of 201, an increase from $21,000 in the prior year period. Deferred tax expense, primarily relates to our domestic deferred tax asset position including our large net operating loss or NOL position. When utilizing our NOL positions, we recognize for GAAP purposes, the tax we would have paid had we not had access to our NOL. I want to emphasize that this is a non-cash accounting charge only and is not representative of the cash taxes we will actually pay, which due to the NOL are substantially lower. Deferred tax expense in the first quarter of 2015 was $257,000 or $0.04 per diluted share as opposed to $135,000 or $0.02 per diluted share in the prior year period. Net income attributable to Heska Corporation for the first quarter of 2015 was $598,000 or $0.09 per diluted share, a significant increase from $192,000 or $0.03 per diluted share in the prior year period. Heska had a strong quarter, broadly and in the operational details. We are pleased by the results we posted in the first quarter of 2015. With that, I’ll turn it over to Bob Grieve, our Executive Chair.

[Bob Grieve:]

Thank you, Jason. I’d like to spend a few moments providing you with thoughts regarding our future expectations. At our year end 2014 call, we provided some overall direction about what we expected for financial performance in full year 2015. We are very pleased that we outperformed our first quarter expectations relative to those directions. While we are not giving ongoing guidance or any more detail on future quarterly expectations, it is important to note that our first quarter operating income results particularly exceeded our expectations. Accordingly, rather than expecting annual operating income to improve by 50% to 70% in 2015, we now believe we will be at the top end of or just beyond that range. The growth we have described today and the growth we expect in the future is very exciting. It’s also worth commenting today on why we focus on the operating income metric. The reason in large measure, is that because of our valuable NOL asset, we do not expect to pay material federal income taxes for sometime. Investors may recall, we had $108 million in federal NOLs reported at the end of 2014. We will continue to show a deferred tax line on our income statement consistent with GAAP rules. However, there is no cash associated with that tax line. We believe the operating income metric is far more helpful for investors to understand our performance and relative value. With that, back to you Kevin.

[Kevin Wilson:]

Thanks, Bob. Let’s go and open it up for questions.

[Operator:]

[Operator Instructions] And we’ll take our first question from Nicholas Jansen of Raymond James & Associates.

[Nicholas Jansen:]

Hey guys, nice progress in the quarter. Just wanted to get a little bit more detail surrounding the Henry Schein agreement, what’s been in place, I know, it’s been given to effect until mid-December. So I just wanted to kind of get your thoughts of the first 90 days or 120 days post-agreements and how that’s tracking relative to your internal budgets?

[Kevin Wilson:]

Hey Nick. Thanks for the question. Now, we couldn’t be happier. We were at the national sales meeting for Henry Schein several weeks ago. The momentum is fantastic. Our pipeline and large measure due to their reach and their ability to get into accounts, frankly, were otherwise locked out to us for a long time has been impressive. So, just short answer is, we are very, very, very happy with it. And I think the feeling is mutual on the other side.

[Nicholas Jansen:]

Okay, that’s helpful. And then we look at the entire core companion animal revenue in the quarter. It looks like you had a very strong quarter of vet performance. If you kind of back that out, it looks like just the kind of core companion animal was maybe just up modestly year-over-year and I just wanted to kind of get a sense, I think you mentioned the heartworm was down, but any other kind of key puts and takes as we think about the 1Q, I am not sure exactly when the rental reagent model came into effect last year, maybe there was some pressure on the year-over-year from insurance perspective, but just want to get a sense of why it might not been a little bit faster despite the positive tone you had the large or the large consumable orders that you are starting to get.

[Kevin Wilson:]

Yes, the revenue, so I try to explain this a little bit in the prepared comments, when we have a great first quarter with placements, first quarter 2015, we don’t sell those analyzers and so you don’t get a revenue pop. So we have a great December in the blood analyzer business and we won’t get a pop from those placements, because we are not booking the revenue at the point-of-sale. If we were taking $10,000, $12,000 per analyzer, sales revenue at the point of sale, then you would see kind of that immediate pull through. So I am very happy with our consumable business is up nicely. It’s tracking exactly with what I would expect our results to event over the prior three quarters. But the pull through of that when you do a placement in the first quarter really begins and starts to ramp up a quarter or two out, and I think that’s consistent with what you see in the market as well. So, I am not surprised. There was some seasonality in terms of a revenue number related to our try hard business. We manufacture that for our partner who then sells it of course on their own schedule with their own stocking order. So there is some seasonal shift there that we didn’t realize in the first quarter in terms of booking the revenue and getting the shipments out, but nothing concerning. We look at that as an annualized business based on an annualized contract and annualized minimums and so we feel very good about it. So there would have been a little bit of dampening effect on that, but the areas that I feel like we control and that we track, were up nicely. We are very pleased with it.

[Nicholas Jansen:]

Great, that’s helpful. And then on Cuattro, just kind of going back to their 100% year-over-year growth. I think on the last call, you mentioned that some orders flipped from 4Q into 1Q and I just wanted to kind of get a sense of what’s the expectation that we should be thinking about for the next couple of quarters. So I know it’s usually a lumpier franchise typically more fourth quarter weighted, but just wanted to get your broader thoughts on some of the innovation that you brought to the table there and how that’s tracking in the marketplace?

[Kevin Wilson:]

Same, same, we feel really good about the momentum. It’s – yes, there is a difference between what you are reporting in terms of what’s shipping out the door. Some of which would be slippage from Q4, but suffice it to say we manage the business very closely. And I as a manager of the business, and the managers of that specific business report to me they are doing a great job of booking new sales. So we track internal bookings compared to last year in addition to what we report to you which are effectively shipments. And our internal bookings are very strong and in large part related to some product introductions that we did late last year and the uptake on those products has been very good. I’ll also comment, we spend an awful lot of time getting our blood analyzer business teams to work closely with our imaging systems teams and that is really starting to gel us well. So we are seeing a much greater amount of bundling, which we are also able to directly attribute to some of those large what we are calling mega users. Often times, really prefer a bundling approach where they want all diagnostics from Heska. So, that’s a long winded answer saying, we like the trends in imaging.

[Nicholas Jansen:]

Great, and then just lastly a quick one for me. Jason, in terms of the gross margins, I think you kind of quantified some of the dynamics there, but how should we be thinking about gross margin trajectory going forward? Certainly, I don’t think we get a 44% number, I am going back to my model, I don’t think I’ve ever seen one before. So, since 2007, so I just want to kind of get a better sense of the sustainability of that? Thanks.

[Kevin Wilson:]

Yes, we don’t give guidance, I think you know that Nick. So, I am not going to give you any particular guidance for this year. I will say in general, we expect gross margins to be trending upwards. I would caution you to look at any one particular quarter and say that’s going to be my baseline and build everything from that. I think you should be looking at things more like a rolling year to get a sense, if you just look at the results at Heska Imaging in the first quarter of last year, you would draw very different conclusions about our business than if you just looked at the first quarter of this year.

[Nicholas Jansen:]

Okay, that’s helpful. Thanks guys. Nice job. Keep up the good work.

[Kevin Wilson:]

Thank you.

[Operator:]

[Operator Instructions] And we’ll take our next question from Ben Haynor of Feltl and Company.

[Ben Haynor:]

Good morning gentlemen. Thanks for taking the questions. And first just following on a little bit on Nick’s question on gross margin, assuming that the mix stays the same as this quarter in subsequent quarters, would it be a reasonable assumption that the gross margin would come at in that – roughly similar levels?

[Jason Napolitano:]

Well, sure, if we did the same exact mix, we would have the same margin. There was nothing in this quarter that was in auditing that we got a particularly large order of a very high margin product or there is a low margin product that was oddly high this quarter. There is nothing like that in here.

[Ben Haynor:]

Okay. That’s exactly what I was look for. Thanks for that. And then, on the pipeline you kind of mentioned, how well it’s doing in the press release and in the prepared remarks, I think the last quarter you offered something like 1100 effective opportunities that you are pursuing. Can you talk about how that has moved either sequentially or year-over-year. Any color will there will be great.

[Kevin Wilson:]

I’ll just go with sequential, I mean, it’s up modestly. The idea being that obviously if you are doing your job, you are clearing hundreds and hundreds of those in a period. And if you are doing your job and you are effectively working which your partner at Henry Schein you are adding as much as more than you are clearing and I would say, modestly we are adding more than we are clearing but not exponentially.

[Ben Haynor:]

Okay. Great, and then on, it sounds like the feedback for the HT5 has been pretty phenomenal. Can you talk about some of the feedback you received and maybe how that product’s momentum is tracking?

[Kevin Wilson:]

Yes, I mean, internally, I hear things like it’s the best product launch we have done. There is no science behind that, but the support team, the install team, the sales team, we have a pile on pallets of competitive analyzers sitting down in our warehouse waiting for the crushing machine. So that’s again, non-scientific but I feel pretty good when I walk into work everyday and I see the pile is bigger. Probably the most intriguing thing is, again, it has literally removed a gating item to our ability to get into these largest clinics. If they want a true five part, no averaging of parameters and they like laser and colorimetric technology and they like what pros it has which can be set for a long time is a very, very nice unit. We are an excellent competitor to that. And I think we are by far the chosen competitor to that in terms of how the technology stack up. So it’s a nice win, it’s a nice credibility builder. So we are very pleased. I think we sold out of our actual inventory during the period and so there is reordering and stocking and supply chain and all those types of things going on with – you would hope for in a successful product launch.

[Ben Haynor:]

And then, with the selling through of the inventory, do you think that that will impact Q2 at all or is that something that you can get resolved before the end of the quarter?

[Kevin Wilson:]

Yes, actually, I mean, it looks like we resolved it just before the end of the quarter or probably some of those orders it could have shipped in Q1 probably dribbled into Q2, but, we don’t always want to play the game of we are chasing what we didn’t ship and there is – at some point, you got to report what’s on the scoreboard. But no, that situation has been resolved and I wouldn’t classify it as a back order other than to say, there was a weaker two in there what we probably could have shipped more analyzers than we had sitting on the shelf.

[Ben Haynor:]

Okay, great. And then, lastly for me, one for Jason, what was depreciation and amortization in the quarter?

[Jason Napolitano:]

It was $1 million, let me give the exact figure.

[Ben Haynor:]

Okay.

[Jason Napolitano:]

Yes, $1 million versus $729,000 last year.

[Ben Haynor:]

Okay. Great, thanks for taking the questions gentlemen.

[Operator:]

We will take our next question from Ian Corydon of B. Riley and Company.

[Kara Anderson:]

Hi, good morning. It’s Kara Anderson in for Ian. Most of my questions have been answered but I just had a follow-up, I guess, housekeeping question, what was the non-cash stock-based compensation number?

[Jason Napolitano:]

Sure, give me one second. Okay, stock-based comp, $398,000 versus $119,000 in the first quarter 2014.

[Kara Anderson:]

Great, thank you.

[Jason Napolitano:]

You are welcome.

[Operator:]

We’ll take our next question from Jonathan Block of Stifel, Nicolaus.

[Jonathan Block:]

Great, thanks guys. Good morning and my apologies as I jumped in a little bit late, but a question just sort of big picture. I don’t think you would have covered either these on the call and the prepared remarks, maybe just first, if you guys can talk to the pricing environment in the industry, some of the other players that reported already, it would seem to suggest that with the market unlocking from a distributor standpoint, it’s certainly positive. It seems like it’s been positive for you guys, but also maybe ushering in additional pricing pressure on products at a more like-for-like in nature. So can you just talk to the dynamics from pricing and what you’ve been seeing?

[Kevin Wilson:]

We are not seeing that, I think, Heska runs a lean organization with very good cost structures and we are not seeing pressure in that regard. Again, our gross margins were up 4% year-over-year which I think kind of speaks to that. So, we like the dynamics and I think from some of other friends in the industry, we are seeing visits to veterinary hospitals are up, lab requisitions are up. It seems to be pretty healthy globally and we like what we see.

[Jonathan Block:]

And even to push you little bit there, specific to the rapid assay market and I don’t believe my apologies, I believe you are a big player in the feed line side, but you are seeing sort of stable-ish pricing around the rapid assay market for the most part?

[Kevin Wilson:]

We are, yes.

[Jonathan Block:]

Okay, okay. And then just one more from me, you made the decision obviously to offer Schein the exclusivity rather than also looking for additional distributors several months ago, can you guys talk about the decision in retrospect? You seem to be very pleased with how you are fairing with Schein and the minds you are getting with them? But is that giving you the full reach into all practices here in the US and is there anything that you might be able to do to get into that stub aware and maybe Schein’s voices, is not as large? Thanks guys.

[Kevin Wilson:]

Great, question. Yes, I mean, Schein is the largest and we feel like the most sophisticated with the most reach. So they have an enormous sales force in the field. Some of these folks have been in the field for 25 years. So, in terms of reach and to the hospitals, we feel great about that and we also have roughly 60 Heska professionals out there beating the bushes and doing their own work as well which is important because again not every account is going to have a Schein rep. But we find in general, most accounts will have one preferred distributor and then in some cases, two or three secondary distributors. So, it’s pretty rare that it’s a 100% house in one direction. We think, again, that supporting Schein exclusively is a good strategy. We think that those clinics that are normal that have multiple national distributors calling on them. I suspect the churn and perhaps even price pressure of multiple national distributors trying to sell the same rotor and the same consumable to the same customer probably sets of a dynamic that’s not as healthy nor as positive as the one that we are building with Schein which is more exclusive protected loyal type relationship. So we like it. We think it was the right strategy.

[Jonathan Block:]

It makes a ton of sense. Thanks for your time guys.

[Kevin Wilson:]

Thanks.

[Operator:]

[Operator Instructions] And we’ll move to our next question from Ken Trbovich of MLV & Company.

[Ken Trbovich:]

Good morning gentlemen. Just a quick question, I know it is a little premature, but wanted to get a sense for the outlook for Heska Imaging and the likelihood that you will a year from now at the conclusion of the 2015 year look to consolidate more of that operation or entity?

[Kevin Wilson:]

Ken, it is great to hear from you and thanks for the question. The outlook is very good. I think the first quarter year-over-year was impressive. It’s healthy. The team is gelling. The integration into the Heska blood analyzer business, the bundling, all those things that happened behind the scenes with any type of integration are going very well. We expect good performance this year and now kick the can down the road a little bit on a definitive answer, but as things go according to plan, it would seem logical that we would look to integrate that more fully.

[Jason Napolitano:]

Yes and Ken, yes go ahead, Ken.

[Ken Trbovich:]

No go ahead, Jason.

[Jason Napolitano:]

If you are asking about the specifics of the puts, I think what we said in the last call was if it was going to be exercised, we would expect it would be that nine times operating income put, which was capped at, I think $13.6 million in terms of total payout. There has been no change in that expectation.

[Ken Trbovich:]

Okay and I guess the reason I was asking the question was it indicated it was a comment about $17 million following calendar year 2015 and I guess, that was sort of was prompting the question from my perspective is whether the outlook has changed?

[Jason Napolitano:]

No, I think the $17 million is in the risk factors. I think that’s the maximum put value we could have after 2015. But our expectation remains if it would be done, it would be the lower put value, the nine times operating income which is a maximum of $13.6 million on it.

[Ken Trbovich:]

Okay and then, just a quick sort of operational question, I know a lot of the components for the imaging systems are sourced overseas, specifically China, is there an opportunity on, now that you’ve got a better insight into the sales success of the team. The integration is somewhat complete. Is there a better opportunity in terms of sourcing components on the cost side or even perhaps taking little more risk on inventory for those components, so that you can more adequately meet fourth quarter demand that typically peaks in?

[Kevin Wilson:]

Yes, great question. Actually, we look at component manufacturers, daily, weekly, we get solicited by most of them. So, we are in a good position where we are industry-wide whether it’s human or veterinary sales, or a large volume player, our current and closest relationship is now manufacturing the products in the United States at a factory here in the United States based on German engineering. So, some of those supply chain challenges that are associated with import export and those types of managements coming at Asia, we think we have resolved by manufacturing and sourcing domestically. Ironically, it looks as if we’ve improved quality and improved pricing in making that switch as well. So, it’s a good detailed question. We haven’t gotten into that before. But, I do anticipate being able to meet that fourth quarter bolus that we see regularly.

[Ken Trbovich:]

Okay and then, last question, this one is more for Jason. I know, you guys are taking cash upfront, so you wouldn’t book deferred revenue on these long-term contracts, the fiver year contract, but to your point, with the start of the discussion, Kevin around the differences between a high volume and maybe a more average volume type of facility is there a way that you guys can give us a sense on backlog as opposed to reported revenues that would help us to quantify the relative strength of a particular quarter or a particular year?

[Kevin Wilson:]

Yes, well, first Ken, you are right. In most cases, we are not booking an upfront revenue we are recognizing what’s called an operating lease. So we recognize the payments as they come in over the life of the lease. There are certain tests that if a particular deal meets, it will be accounted for us what we call a capital lease, where we will recognize some of that revenue upfront as a typical sale. And we did have some of those built into the first quarter. It’s not a huge number. But, they are there. In terms of backlog and disclosure, that’s something we’ve kicked around internally. I am not at a point where I want to start bringing that out to a disclosure standard, but perhaps that’s something you need to be looking at down the line.

[Ken Trbovich:]

Sure, it’s just that challenge, right, because the business layers, so, - weak, but it’s really not going to be an indicator in terms of shipments of new placements, but it’s not going to be a real indicator when we are talking about layers of two, three, four, five years worth of contracts where if this was booked as a deferred revenue, we’d be able to look at the liability on the balance sheet and get a sense for what that number was.

[Kevin Wilson:]

Well, I would say that if we are talking about, let’s compare a pure rental model to a pure sales model. If you are recognizing a 100% of your sales every year, your year-over-year trends are 100% at risk. If you are doing a rental model, as you build that ladder if you were describing, I think obviously you’ve got a lot more stability in your year-over-year numbers.

[Jason Napolitano:]

Correct and I think that’s a benefit of which we can’t really forecast or get a sense for right, because it’s hard for us to know what the value of the units that were shipped really represents.

[Ken Trbovich:]

Right, and I guess, my point is it’s probably more stable than a sales model? More stable and I imagine most of the other companies are looking at the industry?

[Kevin Wilson:]

Totally agreed, I am just trying to give you a sense from the outside looking and the challenge it creates to sort of build that confidence when there is no visibility.

[Ken Trbovich:]

Great, thank you.

[Kevin Wilson:]

I appreciate it. Thanks again for the time.

[Jason Napolitano:]

Thanks, Ken.

[Operator:]

And that does conclude today’s question and answer session. At this time, I would like to turn the conference back over to management for any additional or closing remarks.

[Kevin Wilson:]

Thanks everybody. We love the quarter. We think the Heska team did a great job. The people with Heska made all the difference. So they formed relationships at Schein. They formed relationships with customers that are going to be valuable for years to come and we think as great execution. So, we look forward to reporting to you in the next couple of months on a strong Q2. Thanks.

[Operator:]

And that does conclude today’s conference. Thank you for your participation.