Idexx Laboratories posted solid third-quarter results that fell squarely within expectations. The firm has made progress in its remodeling of its salesforce structure to a new configuration that makes it easier for customers to interact with a single point of access at Idexx, and we expect this reorganization should manifest itself in further growth over the next few quarters. We are keeping our narrow-moat rating on Idexx intact.

Idexx saw solid top-line performance with quarterly revenue growing 7.4% organically, fueled by the 9% boost in its companion animal segment. Within Idexx’s large pet business, instrument sales took a 10% dive on weak placements, which was more than offset by double-digit growth in consumables revenue.

It is not entirely clear what caused the equipment market to soften so much, though we recognize difficult comparisons to the prior-year period when promotional marketing activity boosted instrument placements exacerbated the decline. We see little in the larger environment that would portend ongoing weakness for instruments.

We note the pet-vet environment continued to strengthen in the third quarter with office visits up 2.6% and vet hospital revenue increasing 6.1%, according to Idexx’s quarterly survey. We speculate that the dip in equipment placements may simply be a blip as the new sales organization goes into operation, and must now be responsible for rapid assay kits and reference lab services, in addition to instrument sales.

The silver lining in this small equipment cloud is that quarterly gross margin improved by 80 basis points, with the slight shift in product mix toward high-margin consumables. Sales and marketing expense rose in the quarter, thanks to the retraining and reorganizing of the salesforce, but we expect this should pay off starting next year as these customer-facing reps strengthen those relationships.