On February 28, 2023 Heska Corporation (NASDAQ: HSKA; "Heska" or "Company"), a leading global provider of advanced veterinary diagnostic and specialty products, reported financial results in two segments (North America and International) for its fourth quarter and full year ended December 31, 2022 (Press release, Heska, FEB 28, 2023, View Source [SID1234627909]).
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Fourth Quarter and Full Year 2022 and Year Over Year ("YOY") Metrics
$ in millions except Earnings Per Share ("EPS")
Q4 ($)
Q4 (%) YOY
FY ($)
FY (%) YOY
Consolidated Revenue
$66.3
(2.5) %
$257.3
1.4 %
Q4 (%)
Q4 YOY bps1
FY (%)
FY YOY bps1
Consolidated Gross Margin
41.9 %
100
43.2 %
150
Net Margin2
(5.8) %
(560)
(7.2) %
(730)
Adjusted EBITDA Margin3
9.4 %
(130)
10.6 %
(110)
Q4 ($)
Q4 (%) YOY
FY ($)
FY (%) YOY
Net loss attributable to Heska
$(4.2)
NM4
$(19.9)
NM4
Net loss
$(3.9)
NM4
$(18.4)
NM4
Adjusted EBITDA3
$6.2
(14.7) %
$27.2
(8.5) %
EPS, Diluted
$(0.41)
NM4
$(1.92)
NM4
Non-GAAP EPS, Diluted3
$0.55
57.1 %
$1.58
(1.9) %
1Basis Points is "bps". 2Net margin represents the ratio of net loss to revenue. 3See "Use of Non-GAAP Financial Measures" and related reconciliations provided below. 4Not Meaningful is "NM".
Report Highlights
Full year consolidated revenue increased 1.4% on a reported basis and 5.4% on a constant currency basis (see "Use of Non-GAAP Financial Measures") to $257.3 million, driven by North America Point-of-Care ("POC") Lab Consumables up 8.7% (up 9.0% in constant currency), POC Lab Instruments & Other up 10.1% (up 16.7% in constant currency), and POC Imaging & Informatics up 7.8% (up 13.0% in constant currency).
Consolidated gross margin up 150 bps year over year to 43.2%. International gross margin up 420 bps year over year to 37.3% and North America gross margin approximately in line with prior year at 46.7%.
Total Active Subscriptions up 18%, Months Under Subscription up 15%, and Minimum Contract Subscription Value ("CSV") up 17%.
Over 270 Element AIM analyzers installed in 2022, with over 370 total units now operating since general commercial launch in the fourth quarter of 2021. Despite early supply chain and International launch delays, Element AIM hit its stride by the fourth quarter- December was the product’s best month (>40), installed customer feedback and clinical utility are favorable, utilization is growing, and we continue to view Element AIM as a significant contributor to our high margin consumables and analyzer placements growth for years to come.
Fourth quarter global analyzer placements grew over 8%, led by over 28% growth in premium chemistry placements. Full year global analyzer placements grew over 2% excluding Element AIM and grew over 7% including Element AIM.
Fourth quarter North America analyzer placements grew over 5% led by over 20% growth in premium chemistry placements. Full year North America analyzer placements grew over 18% excluding Element AIM and grew over 28% including Element AIM.
Fourth quarter International analyzer placements grew over 10%, led by over 30% growth in premium chemistry placements. Full year International analyzer placements fell 6% excluding Element AIM and fell 4.5% including Element AIM.
2023 Outlook revenue growth of 8%-12%, includes POC Lab Consumables growth of 12%-15%.
"Heska finished 2022 with great execution and growing momentum for 2023," commented Kevin Wilson, Heska’s Chief Executive Officer and President, "to deliver full year results ahead of expectations across most key metrics. Full year revenue (constant currency) grew 5.4%, adjusted for $10 million of foreign currency effects. Heska again placed more new analyzers and converted more customers to our high-margin, high-retention, sustainable subscription model, especially in our International segment, where Active Subscriptions rose 56%, Months Under Subscription were up 47%, and CSV was up 56%. We expect continued sustained subscriptions growth from new and existing customers in 2023."
"In addition to our financial results, Heska invested heavily throughout 2022 to prepare several major drivers of future growth, proprietary differentiation, and scalable capabilities. Heska’s proprietary highlights now include the Element AIM urine and fecal analyzer, the Element i+ immunoassay platform, Heska’s Nu.Q Vet Cancer Screen and Monitor available exclusively at the point-of-care on Heska’s Element i+ in minutes and for under $50, and Heska’s trūRapidTM Series of tests designed to have the best performance for the best price. These innovations, our acquisition of MBio Diagnostics, Inc. ("LightDeck"), the creator of our Element i+ platform, our upcoming launch of new cloud-based Practice Information Management Software ("PIMS") and related software from our recent acquisition of and investments in VetZ GmbH ("VetZ"), and our other announced and unannounced projects are set to contribute to our growth, profitability, differentiation, scalability, and competitiveness in 2023 and beyond."
"As the pet industry laps difficult comparable periods, Heska is well positioned entering 2023, with strong 2022 analyzer placements under subscription, price, gross margin, new products, and other positives on tap to contribute to 2023," continued Mr. Wilson. "We have invested tremendous energy and resources for ten years to assemble the best assets in the global companion animal point-of-care diagnostics and informatics market. Today, we possess a full solutions stack, a highly scalable business model, an exciting pipeline into big opportunities, strong intellectual property, owned development and production capabilities, a steadily growing subscriptions customer base, good and expanding margin profile and leverage opportunity, a solid cash position, a respected position in the key western markets, and a great team. Now," concluded Mr. Wilson, "we set our focus firmly on our long-articulated Act Three goals to Win at Scale and Win at Innovation from 2023 through 2028. The work is hard and the competition is very strong- but we are energized because the rewards are meaningful and our success matters to pets and their families, veterinarians and their teams, and every stakeholder invested in our Heska mission. This is good work and work worth doing- and Heska is well positioned to do it well."
POC Lab Consumables Subscriptions
POC Lab Consumables Subscriptions 2022. POC Lab Consumables is Heska’s largest, highest margin, and generally fastest growing business. Heska grew key subscription metrics in 2022, including: (1) Active Subscriptions to 4,388 (+18%), (2) Months Under Subscription to 178,050 (+15%), and (3) Minimum CSV to $207.4 million (+17%). Several factors contributed to the performance, including healthy installed base and retention, positive new analyzer adoption and mix, above target success with high volume hospitals, positive pricing, and confidence from existing and new subscribers to increase utilization commitments for Heska consumables products over long time periods.
Year
Active
Subscriptions
%
Growth
Months
Under
Subscription
%
Growth
Min
CSV (Million)1
%
Growth
2013
370
2014
730
97 %
2015
1,235
69 %
54,200
$38.0
2016
1,665
35 %
68,750
27 %
$51.0
34 %
2017
1,950
17 %
75,950
10 %
$56.4
11 %
2018
2,175
12 %
90,844
20 %
$71.9
28 %
2019
2,376
9 %
100,249
10 %
$101.6
41 %
2020 Total Actual
2,980
25 %
124,695
24 %
$131.4
29 %
2020 North America
2,645
11 %
109,141
9 %
$121.0
19 %
2020 International
335
15,554
$10.4
2021 Total Actual
3,717
25 %
155,022
24 %
$176.6
34 %
2021 North America
2,793
6 %
105,845
(3) %
$143.6
19 %
2021 International
924
176 %
49,177
216 %
$33.0
218 %
2022 Total Outlook
4,650
25 %
192,500
24 %
$219.0
24 %
2022 North America
2,950
6 %
112,500
6 %
$165.0
15 %
2022 International
1,700
84 %
80,000
63 %
$54.0
64 %
2022 Total Actual
4,388
18 %
178,050
15 %
$207.4
17 %
2022 North America
2,949
6 %
105,716
— %
$155.9
9 %
2022 International
1,439
56 %
72,334
47 %
$51.5
56 %
2023 Total Outlook
5,250
20 %
206,500
16 %
$245.0
18 %
2023 North America
3,100
5 %
106,500
1 %
$170.0
9 %
2023 International
2,150
49 %
100,000
38 %
$75.0
46 %
1Contract subscription value includes individual subscriber minimums as estimates for corporate sites active.
POC Lab Consumables Subscriptions 2023 Outlook. Heska anticipates subscriptions growth in 2023, similar to 2022, with steady gains in North America combined with significant International subscriptions expansion to achieve in 2023: (1) Active Subscriptions to 5,250 (+20%), (2) Months Under Subscription to 206,500 (+16%), and (3) Minimum CSV to $245.0 million (+18%). Regarding International, Heska occupies a stronger market share position in International than it did in North America when the Company made a similar effort in 2013-2015. This leads us to again forecast faster International subscriptions growth than our historical North America 2013-2015 actuals. We expect to continue to see positive gross margin and revenue expansion in our International segment’s POC Lab Consumables in 2023.
Fourth Quarter and Full Year Financial Results
Revenue
North America Segment Revenue
Q4 ($)
Q4 (%) YOY
FY ($)
FY (%) YOY
North America Revenue
$43.2
(0.3) %
$161.8
1.8 %
POC Lab Instruments & Other
$5.4
11.1 %
$17.2
15.8 %
POC Lab Consumables
$19.6
8.6 %
$78.3
8.7 %
POC Imaging & Informatics
$7.7
(7.2) %
$27.3
(7.4) %
PVD1
$5.3
(30.5) %
$22.0
(11.7) %
OVP2
$5.2
15.0 %
$16.9
(3.9) %
1"PVD" is Pharmaceuticals, Vaccines and Diagnostic, and includes Tri-Heart heartworm preventive and Allercept allergy testing and therapeutics.
2"OVP" is former Other Vaccines and Pharmaceuticals segment contract manufacturing products for mainly herd animals.
Note: Numbers may not foot due to rounding. North America segment is not materially impacted by fluctuations in foreign exchange rates.
International Segment Revenue
Q4 ($)
Q4 (%) YOY
Q4 (%) YOY
FY ($)
FY (%) YOY
FY (%) YOY
Reported
Constant
Currency
Reported
Constant
Currency
International Revenue
$23.2
(6.5) %
2.8 %
$95.5
0.7 %
10.9 %
POC Lab Instruments & Other
$4.4
4.6 %
16.8 %
$15.7
4.4 %
17.0 %
POC Lab Consumables
$9.6
(9.3) %
1.7 %
$41.2
(10.5) %
0.2 %
POC Imaging & Informatics
$8.4
(4.0) %
2.5 %
$35.2
23.6 %
32.8 %
PVD1
$0.8
(36.7) %
(33.7) %
$3.5
(34.9) %
(32.0) %
1"PVD" is Pharmaceuticals, Vaccines and Diagnostic, and includes allergy testing and therapeutics.
Note: Numbers may not foot due to rounding.
Profitability
Full year consolidated gross margin improved approximately 150 bps to 43.2% (110 bps in constant currency). International gross margin improved approximately 420 bps to 37.3% as we continued our ongoing product rationalization efforts to replace lower margin legacy products acquired as part of the 2020 acquisition of scil animal company ("scil"), particularly within POC Lab. The addition of PIMS and other software to our product portfolio from our acquisition of VetZ in early 2022 also increased gross margin. Increased installations of Element AIM in our North America segment along with unfavorable product mix offset margin gains in our POC Lab Consumables resulting in neutral gross margin year over year.
Full year operating margin was negative 7.9%, a 750 bps decline. We invested $13 million more in research and development projects, the majority of which is attributed to our planned launch of a point-of-care cancer screening and monitoring test in the first half of this year. Additionally, we incurred higher acquisition related costs and other non-recurring items and extraordinary charges not indicative of ongoing operations.
Adjusted EBITDA margin, which excludes stock-based compensation and acquisition related costs, non-recurring items and extraordinary charges not indicative of ongoing operations, declined 110 bps (140 bps on a constant currency basis) driven by increased operating costs from investment in growth and new technologies, such as the ongoing development of a cloud-based PIMS and our new trūRapidTM portfolio.
Liquidity
We continue to demonstrate a strong liquidity position with cash of $156.6 million. On January 3, 2023, we closed the acquisition of LightDeck, utilizing cash of approximately $22 million.
2023 Outlook
The table below introduces the Company’s fiscal year 2023 guidance ("2023 Outlook") for revenue and adjusted EBITDA margin and other key financial metrics:
2023 Outlook
Consolidated Revenue
$278-$288 million
POC Lab Revenue
$165-$175 million
POC Imaging & Informatics Revenue
$60-$70 million
Adjusted EBITDA Margin1
12%+
Adjusted EBITDA Margin1 inclusive of LightDeck
~10%
Dollars in millions. 2023 Outlook are forward looking statements. Foreign currency exchange rate assumptions for 2023 are (in U.S. dollars): Euro $1.07 and Canadian dollar $0.74.
1Excludes estimates for taxes, interest, depreciation and amortization, purchase accounting, acquisition and other one-time costs, and stock-based compensation. Heska is unable to provide a reconciliation of the non-GAAP guidance measure to the corresponding GAAP measure on a forward-looking basis without unreasonable effort due to the high variability and low visibility of most of the excluded items. Material changes to any one of these items could have a significant impact on future GAAP results. Heska believes the non-GAAP presentation is more in-line with future ongoing operating performance.
Reported and constant currency revenue growth of 8%-12%.
North America segment is approximately 60% of full year 2023 Outlook consolidated revenue, which includes estimated POC Lab Consumable revenue growth rate of approximately 12%-15%.
International segment is approximately 40% of full year 2022 Outlook consolidated revenue, which includes estimated POC Lab Consumable revenue growth rate of approximately 12%-14% on a reported basis and 9%-11% on a constant currency basis.
Gross margin expansion of 100 bps to 200 bps excluding the impact of the LightDeck acquisition.
Expanded research and development capabilities and manufacturing capacity as part of our acquisition of LightDeck will be dilutive to 2023, impacting adjusted EBITDA margin by approximately 200 bps. Product pipeline expansion and cost rationalization is underway.
Heska’s Commitment to Corporate Responsibility and Stewardship
Heska is committed to corporate responsibility and stewardship. Driven by oversight from Heska’s Board of Directors and executive leadership, we are dedicated to promoting and engaging environmental, social and governance (ESG) priorities throughout the organization in order to align activities and resources with sound practices and accountability. In so doing, we hold ourselves to high standards to empower and enrich the lives of our employees, foster a culture that values diversity and inclusion, enhance sustainability in our facilities and operations, and contribute to the communities in which we serve. Heska has developed the necessary framework, roadmap and objectives to promote our commitment and produce meaningful results in the years ahead including its Corporate Responsibility Task Force consisting of management across key functional areas. The Company has begun to disclose practices and data using the framework of industry-leading standards such as Sustainability Accounting Standard Board (SASB) guidelines, United Nations Sustainable Development Goals (UN SDGs), and Heska will consider the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) as it pursues its objectives. For more information, please visit: View Source
Earnings Conference Call
Heska management will host a conference call on February 28, 2023 at 9:00 a.m. MT (11:00 a.m. ET) to discuss the Company’s fourth quarter and full year 2022 financial results. The call may be accessed by dialing 1-877-451-6152 within the United States and 1-201-389-0879 outside of the United States and by referencing conference identification number 13736218. The call will also be webcast online at View Source A telephonic replay of the conference call will be available through March 14, 2023. The replay may be accessed by dialing 1-800-512-2921 within the United States or 1-412-317-6671 outside of the United States and by referencing replay identification number 13736218. The webcast will be archived on the Company’s website for 90 days.