Idexx Earnings: Strong Pricing Gains Drove Growth in the First Half of 2023

Narrow-moat Idexx Labs IDXX reported a solid second-quarter performance, with the firm closely tracking our full-year projections. However, the minor adjustments we’ve made to our underlying assumptions weren’t material enough to shift our fair value estimate. As usual, the companion animal segment led the way with 11% quarterly organic revenue growth, and the water division wasn’t far behind with a 9% increase. Idexx did a nice job of keeping expenses under control, with quarterly operating margin coming in slightly above the 29% we’ve projected for the full year.

Two items caught our attention this quarter. First, total visits per practice fell by 2% in second quarter. While this is somewhat better than the 3% declines seen in most of 2022, it is still a larger decline than we’d expected, considering visit growth seemed to have bottomed out last year following the pandemic-inflated pet boom in 2020-21. If visit declines continue over the next few quarters, this could reflect a shrinking pet population, perhaps with more pet owners surrendering their pets to shelters. Based on Los Angeles County animal control data, there has been a slight uptick in owner surrenders in 2022 and 2023 compared with the pre-COVID-19 benchmark in 2019.

Second, both Idexx’s pricing and diagnostics utilization at the practice level remain strong. In the first half of 2023, Idexx gained around 8%-9% on price, and plans to moderate that to 6%-7% in the second half of this year. In turn, veterinarians continue to lean on diagnostic tests, as quarterly diagnostic revenue per visit rose 9%. We surmise these tests are a key factor in supporting second-quarter practice revenue growth of 6%. Thus far, this suggests that most pet owners are still willing to shoulder the increased cost of pet healthcare. Nevertheless, pet owner price elasticity is a key dynamic that could affect our cash flow projections if there were a pullback in spending.