愛德士 (IDXX) 2015 Q4 法說會逐字稿

Good morning, everyone, and welcome to the IDEXX Laboratories' fourth-quarter 2015 earnings conference call. As a reminder, today's conference is being recorded. Participating in the call this morning are Jon Ayers, Chief Executive Officer; Brian McKeon, Chief Financial Officer; and Ed Garber, Director of Investor Relations.

IDEXX would like to preface the discussion today with a caution regarding forward-looking statements. Listeners are reminded that statements that members of IDEXX Management may make on this call regarding IDEXX's future expectations, plans and prospects constitute forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements can be identified by the use of words such as: expects, may, anticipates, intends, would, will, plans, believes, estimates, should and similar words and expressions. Such statements include, but are not limited to, statements regarding Management's expectations for financial results for future periods.

Investors should be aware that any forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those discussed here today. These risk factors are explained in detail in the Company's filings with the Securities and Exchange Commission.

Please refer to these filings for a more detailed discussion of forward-looking statements and the risks and uncertainties of such statements. All forward-looking statements are made as of today and except as required by law, the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Also during this call, we will be discussing certain financial measures not prepared in accordance with Generally Accepted Accounting Principles, or GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measure is provided in our earnings release, which can be found on our website, IDEXX.com.

In reviewing our fourth quarter 2015 results, please note all references to growth and organic growth refer to growth compared to the equivalent period in 2014, unless otherwise noted. Also when we refer to normalized organic growth, in addition to adjusting for exchange and acquisitions, we have adjusted for changes in distributor inventory levels.

In order to allow broad participation in the Q&A, we ask that each participant limit his or her questions to one with one follow-up, as necessary. We do appreciate you may have additional questions so please feel free to get back into queue and if time permits, we will be more than happy to take your additional questions. I would now like to turn the call over to Brian McKeon.

Thanks and good morning, everyone. I'm pleased to take you through our fourth quarter and full-year 2015 results and provide an update on our financial outlook for 2016. We had a solid finish to 2015. We achieved 11% normalized organic growth in Q4, supported by 12.5% normalized growth in CAG Diagnostic recurring revenues and continued strong gains in instrument placements.

Recurring CAG growth improved from Q3 levels, supported by gains in US rapid assay revenues and higher consumable growth rates in Europe. Our full-year normalized organic growth was 11.3% slightly above our expectations, reflecting solid year-end performance. Full-year results were supported by 13% normalized organic growth in total CAG revenues, reflecting strong double-digit gains in both US and International markets.

Full-year adjusted EPS was $2.11, above the high-end of our guidance range, reflecting solid operating performance and $0.03 per share benefit from the permanent extension of the R&D tax credit. On a constant currency basis, adjusted EPS grew 14% in 2015. Our operating trends position us well to deliver strong constant currency revenue and EPS growth in 2016.

Let's begin with a review of our fourth-quarter and full-year 2015 results, beginning with an overview of regional performance. And reviewing our results today, please note that we will be normalizing down year-on-year growth rates to adjust for transitional impacts related to our move to an all-direct sales and distribution model in the US in the fourth quarter of 2014.

This included a reduction in revenues of $25 million in Q4 2014 related to the elimination of product inventories held at distributors as well as cost associated with the ramping of sales resources and one-time cost associated with the transition. We achieved solid organic growth in US and International regions in the fourth quarter driven, by improved CAG Diagnostic recurring revenue gains and strong growth in our Water business.

US revenues were $239 million in the quarter, up 12% on a normalized organic basis. Gains were supported by 13% normalized organic growth in CAG Diagnostic recurring revenues.

Note that on the fourth quarter of 2014, we started selling some of our US kits and consumables direct, in parallel with year-end reduction of US distributor inventories. This resulted in approximately 1% of prior-year growth benefit in CAG Diagnostic recurring revenues from this accelerated margin capture, which we have not normalized for. So our underlying Q4 2015 growth rate in CAG Diagnostic recurring revenues improved solidly from Q3 levels.

Recurring revenue gains were supported by continued strong double-digit growth in reference labs and consumable revenues, as expected and solid gains in rapid assay sales. IDEXX performance outpaced strong US market growth in Q4, reflected in our data set, from approximately 5,200 clinics.

In Q4, patient visits increased 3.7% and clinic revenues increased 7.1% compare to the prior-year period, benefiting from strong growth trends in November and December. For the full year, our US revenues were $980 million. We achieved US normalized organic growth of 12% in 2015, driven by 13% normalized organic CAG Diagnostic recurring revenue gains.

International revenues in the fourth quarter were $161 million, reflecting 10% normalized organic growth. International results were supported by 12% normalized organic gains in CAG Diagnostic recurring revenues, reflecting strong and improved growth in consumable sales across major regions including Europe, benefiting from record levels of new instrument placements. Full-year International revenues reached $622 million, or 39% of total IDEXX revenues.

Normalized organic growth of 10% and benefit from acquisitions were offset by foreign exchange rate changes, resulting in a 2% reduction in reported international revenues for 2015. For the full year, international normalized CAG Diagnostics recurring revenues increased 11%, reflecting 9% growth in Europe, 15% gains in Asia-Pacific, and 44% growth in Latin America.

Turning to segment performance, our Q4 results benefited from very strong instrument placements. Global premium instrument placements increased 35% in Q4, supported by 61% growth in Catalyst placements. Global instrument revenue of $29 million was up 28% organic year-on-year in Q4, including a modest 1% growth benefit from deferred revenue related to Catalyst One introductory offers.

For the full year, we placed 4,944 Catalyst and 3,744 premium hematology analyzers globally, representing growth of 59% and 17% respectively, well ahead of our goals. Including VetTest placements in international markets, we placed 9,771 chemistry and hematology instruments in 2015, demonstrating significant benefits from our investments in our expanded global commercial capability.

Strong premium instrument placement trends, including continued high placement levels at competitive accounts in the US in both chemistry and hematology, are supporting continued expansion of our premium instrument base.

We ended 2015 with an active install base of approximately 20,000 Catalysts and 21,500 premium hematology analyzers globally. Our US premium instrument base expanded approximately 3% this quarter sequentially, supporting 16% year-on-year growth in our Catalyst install base net of estimated customer losses in the US over the last year.

Catalyst customers now account for 97% of our US consumable revenue exclusive of corporate accounts. Our hematology install base also expanded solidly in the US this year, driven by 30% growth in ProCyte.

Strong global placement gains set a foundation for continued solid gains in CAG Diagnostic recurring revenues. In Q4, global CAG Diagnostic recurring revenues were $277 million, up 12.5% normalized. Overall CAG Diagnostics recurring revenues reached $1.15 billion in 2015, or 72% of IDEXX revenue.

GAAP recurring annuity growth reflected solid gains across modalities. Reference laboratory and consulting services, with revenues of $125 million, grew 11% organically in the fourth quarter. Gains were supported by 13% volume-driven revenue growth in the US compared to strong prior-year growth rates and 7% gains in international markets.

Instrument and consumables revenue of $98 million in Q4 grew 16% organically when normalized for the prior-year reduction in US distributor inventories associated with the go-direct transition. Please note that in Q4 2014, global consumable growth benefited by approximately 2% from accelerated US margin capture associated with go-direct change.

With this factored in, comparable growth in consumables increased by about 2% in the quarter from Q3 growth rates, reflecting continued solid growth in the US and accelerated gains in international markets. As expected, US consumable gains were moderated by carryover impacts from heightened competitor placement activity in our US customer base in Q4 of 2014 and the first half of 2015, which partially offset benefits from new customer placement gains in 2015 and solid same-store growth trends.

Rapid assay revenues increased 9% normalized in Q4 to $39 million. Note that Q4 2014 rapid assay growth results also benefited by approximately 2% from accelerated margin capture reinforcing the solid underlying performance in the quarter. Q4 rapid assay performance was supported by volume gains in SNAP 4Dx Kits in US, continued to stabilize trends in first-generation products, and benefits from US margin capture.

Our results demonstrate our maturing commercial capabilities to support this segment and increased customer understanding of our superior test accuracy. As we look ahead to Q1, we expect rapid assay revenues overall to be relatively flat as we anniversary growth benefits from US margin capture and work through relatively tougher comparisons early in 2016.

Combined information management and digital imaging system revenues increased 6% on a constant currency basis, supported by 5% organic gains and benefits from acquisitions. For the full year, combined information management and digital revenues reached $111 million, supported by continued expansion of our cloud-based platforms and increased penetration of our information management service offerings.

In Q4, information management revenues increased double digits. We also continue to drive solid digital imaging system placements supported by our highly differentiated cloud-based platform. Consistent with recent quarters, increased digital imaging system placements that were integrated with multi-year diagnostic business commitments, which result in deferred revenues, constrained overall Q4 growth.

Our Livestock, Poultry and Dairy business grew -- revenue grew 2% organically in Q4 to $33 million, as benefits from our expanded pregnancy testing and strong poultry and swine sales in emerging markets offset year-on-year declines in livestock services revenue in Australia. For the full year our LPD revenues were $127 million, down 10% on a reported basis as 2% organic growth was offset by negative impacts from foreign exchange rate changes.

Our Water business revenues grew 10% organically in the fourth quarter, reflecting worldwide increases in core product sales, and benefits from the launch of our Quanti-Tray Sealer PLUS product. Q4 capped a strong year performance in Water, reflecting solid underlying market dynamics and benefits from commercial investments that drove new business gains across major regions.

For the full-year 2015, Water business revenue reached -- it increased to $97 million, up 2% on a reported basis, supported by 8% organic growth which offset foreign exchange rate pressures.

Turning to the P&L, gross profit was $218 million in Q4, up 20% on a reported basis, reflecting comparisons to prior-year results, impacted by the reduction of inventory held by distributors in advance of our transition to an all-direct sales and distribution model. This resulted in a one-time revenue reduction of $25 million, with an associated negative one-time gross profit impact of $21 million.

Adjusting for this impact, gross margins increased moderately year-on-year as lower product cost and benefits from moderate net price increases offset mix impacts from very strong instrument sales. Foreign exchange hedge gains reported in gross profit were $6 million, or $0.05 per share, in Q4.

Operating profit in Q4 was $67 million. On a comparable basis, Q4 operating margins were down modestly compared to prior-year levels, as expected, reflecting year-on-year growth in global commercial expenses. For the full year, operating profit was $300 million or $308 million adjusted for the one-time software impairment charge recorded in Q3. This reflects an operating margin of 19.2%, including approximately 130 basis points of benefit from $20 million -- $21 million of 2015 foreign exchange hedge gains.

EPS in Q4 was $0.48 per share, up nominally compared to prior-year adjusted EPS and up 9% adjusted for currency impacts. The permanent extension of the R&D tax credit added $0.03 per share to EPS results, consistent with Q4 2014 and -- consistent with Q4 2014. For the full year, adjusted EPS was $2.11.

In 2015 foreign exchange rate changes reduced revenue growth by 6%, operating profit by $21 million, net of $21 million in hedge gains and EPS by $0.16 per share. Despite these impacts we delivered 6% growth in adjusted EPS, or 14% growth in EPS on a constant currency basis, reflecting solid underwriting -- underlying operating performance and discipline and Europe's substantial investment in the US fully direct model.

Free cash flow was $145 million for 2015, or 75% of net income. This equates to approximately 86% of net income, adjusting for net working capital changes associated with the US go-direct change.

Free cash flow was slightly lower than expectations, reflecting timing of year-end net tax payments, growth in volume commitment rental programs in international markets, and relatively higher levels of inventory in support of new instrument and test platform launches.

We're targeting free cash flow at 95% to 100% of net income in 2016. Our strong cash flows have been enabled continued allocation of capital towards share repurchases. We repurchased 1.3 million shares for $93 million during the quarter. In 2015, we repurchased nearly 5.7 million shares, or about 6% of our diluted shares outstanding at the beginning of 2015 for $406 million.

We ended 2015 with $1.17 billion in debt outstanding. At year-end, we had $343 million in cash and investment balances and $276 million of borrowing capacity available under a recently expanded $850 million revolving credit facility. Our leverage ratios, as a multiple of EBITDA adjusted to exclude the impairment change, were 2.95 times gross and 2.09 times net of cash and investment balances at year end, in line with our long-term target range.

Our solid finish to 2015 positions us well to deliver continued strong constant currency revenue and profit growth in 2016. Today we are reinforcing our outlook for organic revenue growth and increasing our EPS outlook by $0.01 per share, reflecting benefit from the permanent extension of the R&D tax credit and operational upsides which more than offset additional headwinds related to the continued strengthening of the US dollar.

Foreign exchange impacts related to the significant strengthening of the US dollar will be key variable impacting our reported financial performance in 2016. Given that approximately 25% of IDEXX revenues are related to products manufactured in the US and sold in local international currencies.

We've updated our financial outlook to more -- to reflect more recent rate -- exchange rates which have weakened relative to the dollar since we issued our preliminary guidance. At the updated exchange rate outlined in our press release, we estimate that foreign-exchange rate changes will reduce reported year-on-year revenue growth in 2016 by approximately 2.5% and EPS by approximately $0.26 per share.

Including impacts from the lapping of $21 million in 2015 hedge gains and a 50 basis point increase to our tax rate due to profit mix impacts. In terms of revenue, our updated outlook is for a reported 2016 revenue of $1.69 billion to $1.71 billion, $25 million lower than our preliminary guidance, driven entirely by the continued strengthening of US dollar over the last three months.

This outlook reflects consistent goals for 8% to 9% organic growth in 2016. Note that 2015 revenue growth benefited by about 0.5% from the recognition of deferred instrument revenues associated with our Catalyst One launch in the US to our underlying targeted organic growth in 2016 equates to 8.5% to 9.5%, adjusted for this impact.

Growth will continue to be driven by our CAG business, supported by targeted full-year growth of 8.5% to 9.5% in CAG Diagnostic recurring revenues. This reflects goals for sustained double-digit goal global reference lab gains, strong above-market growth in consumable revenue, supported by our expanded instrument install base and modest growth in rapid assay.

We expect to see improvement in our CAG recurring revenue growth rates in the second half of 2016 as we work through carryover impacts from prior-year competitive impacts in consumable and rapid assay revenues in the first half of the year and as we benefit from annualization of higher customer retention rates that we achieved in the second half of 2015.

While we're up against some challenging comparisons to very strong instrument placements in 2015, we are targeting solid gains in CAG instrument revenues as well, supported by the launch of SediVue and premium chemistry and hematology placements consistent with the record levels achieved in 2015.

In the US, our focus in 2016 will be on placements at new and competitive accounts As noted, lapping of deferred revenue benefits in 2015 will moderate reported instrument revenue gains for the year. For 2016, we are targeting sustained mid- to high-single-digit revenue growth in our Water business and mid-single-digit gains in LPD supported by continued expansion of our pregnancy franchise and growth in emerging markets.

In terms of P&L metrics, consistent with our preliminary outlook, we are targeting approximately 50 basis points of operating margin improvement on a constant currency basis in 2016, supported by operating expense leverage. Please note that this outlook adjusts 2015 for the software impairment charge recorded in Q3.

Reported operating margins will be lower than prior year, driven entirely by foreign exchange impacts including the lapping of hedge gains which will lower reported gross margins. Net of these impacts, we expect that operating margins for the full-year 2016 will be 18% to 18.5%.

As noted, free cash flow was projected at 95% to 100% of net income for 2016, consistent with our strategic plan outlook. Capital expenditures are estimated at approximately $90 million. Strong cash flow generation will support continued capital allocation towards share repurchases, resulting in an estimated reduction of approximately 3.5% to 4% and our shares outstanding.

We expect to maintain gross leverage levels of approximately 3 times EBITDA and expect annual interest expense of $32 million in 2016. Our full-year outlook reflects a projected effective tax rate of 30% to 30.5%, including benefits from the R&D tax credit. These drivers support a 2016 EPS outlook of $2.10 to $2.17 per share which equates to 12% to 15% growth in adjusted EPS on a constant currency basis.

In terms of our entry rate heading into 2016, we expect Q1 normalized organic growth to be 8% to 9%. Note that Q1 includes an extra day due to leap year, which we estimate will help Q1 growth by about 1%. Year-on-year foreign-exchange changes, including the lapping of $4.5 million in prior hedge gains will be significant in Q1, resulting in a 3% reduction of reported revenue growth and nearly $8 million of headwind to operating profits.

These impacts, as well as the lapping of the ramping of incremental commercial resources globally in 2015, will result in reported operating margins of approximately 250 basis points below prior-year Q1 levels, resulting in lower year-on-year reported operating profit and EPS levels in the quarter. That concludes the financial overview. Let me turn the call over to Jon for his comments on our business performance and our areas of focus heading into 2016.

Okay, thank you, Brian. We were pleased with the continued progression of our growth globally in Q4 2015 as well as the progress in bringing first and only innovations to our markets. Coming out of 2015 and all the investments we have made, we are well-positioned to achieve our financial goals in 2016.

Certainly, a highlight of our Q4 2015 performance was our record level of instrument placements globally that Brian reviewed, including the 61% growth in Catalyst placements in Q4, and 59% for the year. Another way to look at it, in 2015, globally we placed more than twice as many Catalysts as we placed in 2013.

Q4 was the highest premium instrument placement quarter for IDEXX globally on record, exceeding the quarter we just established in Q3. In the North American companion animal market, we achieved impressive results on another -- a number of important metrics that we track.

First, Catalyst placements were at record levels of 694 units. Importantly, placements in new and competitive accounts grew to 395 units, up 37% over Q4 2014, which itself was a quarterly record. Hematology placements were strong, too, at 582 units, driven by ProCyte, our higher-end platform.

Second, early indications from an analysis of our US install base shows that customer chemistry retention rates continued at the strong levels of Q3 of at least 97% annualized, if not slight further improvement. Third, the growth of the reference lab modality in the US continued at a strong 13%, and was primarily volume-led with about 2% attributed to price.

Fourth, rapid assay business in the US delivered strong results, our all-important SNAP 4DX unit volumes continued to be up for the quarter and for the year. On top of that, we had a very strong double-digit growth in 4DX run in the lab for the year, which now is about 10% of the volume of the SNAP Test Kits. First generation rapid assay revenues and volumes continued in Q4 their trends from Q3 of volume and revenue stabilization in accordance with our expectations set early in the year.

Fifth, the reach and frequency of customer visits by our veterinary diagnostic consultants reached record levels in Q4 of 2015 at over 48,000 visits, a quarterly total which has grown an average of 10% every quarter this year as we perfect the new sales model and territory management. Note that the 48,000 visits does not include customer visits from the other 120 field base professionals that support our Diagnostic recurring revenue in the US including our instrument specialists and professional service veterinarians.

Six, we saw a record high percentage of our instrument kits and consumables purchased through our eCommerce channel at 57%. This is a world-class level for the US of veterinary practice market when compared to other companies that sell direct, which is actually pretty amazing given we've only been at this for 13 months.

When customers go online instead of calling us to submit their orders, this frees up our 75 inside sales professionals to focus their efforts on outbound calls and demand generation. In fact, our outbound call volume increased nearly 20% from Q3 to Q4, one factor driving our continued good rapid assay performance.

So this array of metrics provides objective evidence that our US fully direct sales organization, including our 300 field-based diagnostic specialists, our phone-based employees, and the use of other marketing channels, including digital marketing, are having greater and greater impact on the growth of our diagnostic recurring revenues in the US.

Given the highly profitable and durable nature of this CAG recurring annuity, higher growth of these revenues from our expanded commercial capabilities yields a high incremental return on our investments. We are clearly maturing the fully direct organization with growing productivity and a presence that builds on customer relationships with every passing quarter.

In international markets, we achieved a nice rebound in the growth of CAG diagnostic recurring revenues. In Europe, in Q4, specifically, after a slow Q3, CAG Diagnostic recurring revenues were up 10%, bringing the full year to up 9%. As an interesting aside, our Brazilian business achieved 112% growth in the CAG in local currencies; too bad it's such a small contributor to global performance.

This shows that even in a tough macro economy, emerging markets like Brazil and China, can show strong local currency growth when we have a capable local team and an attractive pet health care market that is early in the adoption of a diagnostics. Regarding our SDMA roll out, we now have over 13,000 US customers receiving results and 1.6 million test runs through the end of 2015.

As of this month we have launched SDMA in a reference lab chemistry profiles in more than 10 countries globally, including all of the major markets, positioning us for continued strong growth in global lab revenues for years to come. In the US, the number of accounts ordering SDMA that don't use us as their primary lab grew 34% year over year in December and the volume of their submissions grew 80%.

Clearly, the profession, as a whole, is beginning to appreciate how important a parameter SDMA is as a screening test for kidney disease. One final comment on SediVue before we open the call to Q&A. We were tremendously pleased with the customer reception we have received to date regarding SediVue, our novel first and only urine sediment analyzer for use in the veterinary practice of the point-of-care.

Refining that SediVue intuitively appeals to a wide range of veterinary practices and interestingly, customer interest level show little to no correlation to their current level of IDEXX diagnostic use in-house or reference lab. For this reason, we believe SediVue will not only provide an attractive revenue stream from instrument sales and patient runs, this novel point-of-care solution will also allow us to introduce IDEXX's entire diagnostic offering to customers using competitive instruments and/or reference lab services.

As we have indicated in the past, our 2016 guidance assumes we'd place 1,000 SediVue analyzers at an average unit price of $16,000 to $18,000 per instrument. Each placement will generate [annualized] stream of recurring revenues, using our innovative new pay-per-run pricing model of between $3,000 and $6,000.

This month, we began to build, taking orders and building a backlog, including at the North American Veterinary Conference last week, where the novel Analyzer garnered a lot of attention. We are targeting customer revenue shipments against this backlog in April and do not expect to be capacity-constrained in serving the market over the course of the year.

In summary, key innovations, such as Catalyst One, SDMA, and SediVue are examples of how we are generating an attractive return on our R&D investment and commercial growth around the world.

So with that, Cynthia, we'll open the call to Q&A.

(Operator Instructions)

Ryan Daniels, William Blair.

Good morning and thanks for all the color. Jon, maybe a quick question for you just on Catalyst as we towards 2016. I know you mentioned it got approved in Japan so I guess two specific questions on that. One, when will that actually start shipping and then number two, I know Japan is a pretty receptive market for new technologies. So what kind of market opportunity is that, as we look to 2016 and 2017 in instrument placements?

Yes, Japan is diagnostic market that really is oriented towards in-house, point-of-care, real-time care. It's a market with significant opportunity because we probably have a lower share in Japan than any other market that I can think of. Of course, Catalyst One is a blockbuster product, as we've proven in virtually every other market around the world and we have a good organization, a direct organization in Japan that's been in place for decades so it is going to be a nice combination.

We've also launched VetConnect PLUS in Japan, which I think is highly appreciated by the Japanese veterinarians because they are very visually oriented. So we're excited about the growth opportunity in Japan for the next couple of years.

Do you have a date on when that will start shipping? Is that still on --

We'll start shipping this quarter.

Okay and then maybe a follow-up on the financials, just on CapEx. I think you were guiding towards about $100 million as recently in October but it came in about $83 million. I think next year the guidance is only $90 million. So I'm curious if you're seeing any specific capital efficiency that's allowing you to trend that down and could drive stronger, long-term free cash flow?

We're always focused on that, Ryan. I think the -- this year, a part of that was just driven by year-end prioritization and also some co/ into that's -- not unusual at year end where projects kind of carry over into the next year and that's all factored into our $90 million outlook.

I think our numbers are still probably a little higher than they normally would be, just reflecting the very strong volume growth that we've had in reference labs as well as some of the work we're doing on enhancing our manufacturing capability with new products. But I think we're -- our long-term outlook would be and our focus will be on continuing to drive capital efficiencies so we think that can be point of leverage for us over time.

Okay, thanks. I will hop back in the queue.

Jon Block, Stifel.

Great. Thanks and good morning. Jon, maybe just first one on the International CAG, you laid it out that it was choppy last quarter and it seemed to improve this quarter but oddly enough, there's some others that are calling out some international weakness in calendar 4Q. So maybe just walk us through how you see the international market unfolding now that you've entered 2016 and just your level of conviction that the worst is behind you there?

Yes, thank you for the question. The weakness that we saw specifically was the deceleration in recurring revenue growth in Europe. Obviously, international markets, we've had extraordinary level of growth in Catalyst One placements, including Europe. And that very same quarter, q3, I think we had 169% year-over-year growth in Catalyst platform placements internationally.

So we hypothesized in Q3 that was related to very hot weather in markets that don't traditionally have air conditioning, believe it or not, but this is Continental Europe and it was nice to see the rebound to 10% recurring CAG Diagnostic revenue growth in Europe.

Other markets around the world, I think have just been very strong. I mentioned Brazil. Asia is very strong and so I think we have the combination of investments we've made in a direct and strong commercial organization for the last several years internationally combined with new innovative market-leading products, such as Catalyst One.

VetConnect PLUS is now, I think we have customers using VetConnect PLUS in 60 countries, and of course, now the global rollout of SDMA for our reference lab modality which gives us confidence that we will continue to have above-US growth in the international markets. In part, because they are simply far less mature in their -- not that US is mature but they are just so much earlier than the US in their adoption of diagnostic of protocols for pet healthcare.

Got it. Very helpful and then just on the guidance and I just find, in my opinion, but I find the two set of rays that you call that in operations on a $2-plus number just a little bizarre at this stage of the year considering the events of last year. So can you just talk to your confidence that this isn't going to be the one step forward, two steps back in terms of the guidance and maybe tell us why you decided not to just keep some dry powder in case buyer gets even more competitive as the year progresses? Thanks, guys.

Yes, Jon, thank you for that question. What a difference a year makes. I think we're not entering a huge disruptive change. We're beyond that disruptive change and we're seeing the progression and productivity of our commercial investments in the US and internationally.

We expect to get productivity on those investments and operating expense leverage, particularly in US market in 2016, so we don't enter the year with the kind of risks that we entered last year. The only thing I can't really comment on is macro.

But our underlying markets are generally very strong so it's more of an issue of currency in those kinds of things.

And Jon, just to highlight the adjustment is entirely related to -- we had better-than-expected operating margins finishing the year in Q4 through good cost management. So we've basically just flowing that through.

We are still targeting 50 basis points of constant currency improvement and really, all you're seeing is that we had very good cost management at the end of year and we're flowing that through and driving towards the same objectives we talked about earlier. It's actually not an increase in our revenue outlook. We maintain a consistent view --

The 8% to 9% organic growth is consistent with the guidance that -- in October.

I appreciate it, guys. Thanks.

(Operator Instructions)

Kevin Ellich, Piper Jaffray.

Good morning. Thanks for taking the questions. Just a couple in the reference lab business. So the 13% growth -- excuse me, in the US was pretty strong, I guess. Can you quantify or break down how much of that coming from share gains and I guess how much is coming from that's ordering more test per requisition?

Obviously, you're getting great traction with SDMA and I guess following up on that as well. How much of the growth from SDMA is coming from non-IDEXX customers? Jon, I think you might have mentioned that.

Yes, thank you. Well, of course, the vast majority of our customers does come from continuing -- or revenues does come from continuing customers, so I think what we are pleased with, with the non-customers is that their growth in sending us panels is demonstrating that they're voting with their feet and seeing SDMA as an attractive addition but those numbers are small contributors to overall reference lab growth.

Getting back to the first part of your question, I think that the trends are balanced between net new account acquisitions and same-store sales account from existing customers who are adopting more and more of our unique, a menu of innovations such as fecal antigen and some of the other tests that we offer. And in some cases, we may have a core customer who's using us as their primary reference lab but maybe not using us entirely.

So with the value that SDMA brings to the core chemistry panel perhaps they are shifting more of their-- what they may have been splitting more of their chemistry volume to us. And of course, we have net new customer acquisitions which is also contributing to that growth. Why do I mean that? I mean continued strong retention metrics and new customer acquisition, exceeding whatever customer losses that we're seeing.

That's helpful and then just one follow-up. Brian, I think in your prepared remarks, you made a comment that in Q1, you expect rapid assay to be flat. Can you go over what's causing that again? I think you said tough comps and annualizing the margin capture?

Right. Yes, no, I think we obviously don't get the benefit of the margin capture as we move into 2016 and so it's really reflecting that we will have some compares from some of the losses in the first generation product that have stabilized and --

Which occurred over the course of Q1 and Q2 of last year so we have to anniversary those.

But I would highlight it's kind of a solid positive projection in rapid assay that we're seeing and it reflects that from -- we had some headwinds here that we've been sequentially improving in terms of the performance, very good growth in the 4DX business and we're going to be working through some of these compares and that will contribute to relatively flat performance in Q1.

Right. Great, and I guess one last one. Did you guys give any stats out on Cornerstone in terms of the number of users or anything like that?

No, but we're happy to. We have a highly loyal Cornerstone and DVMAX is our other client server platform, about 7,000 customers, I think the loyalty in that customer base is 99%-plus. We continue to invest in those platforms and -- but our focus on new customer placements will be with Neo, our cloud-based platform which is unique in not only its ease of use.

But the fact that it has virtually zero upfront cost where customers start using, consistent with cloud technology and has full integration into our Diagnostic ecosystem. So that will be a small but because of -- we don't get upfront revenues, seeing that the customers don't have upfront cost. But a growing contributor to our install base building on top of the high loyalty we have with Catalyst and DVMAX customers.

Sounds good. Thanks Jon.

It's interesting. If you look at the information management and digital revenues, that product line that we report actually, at this point, a little over 50% of those revenues are what we consider recurring revenues. They're kinds of things like subscriptions and maintenance and add-on services and the rest is things like hardware and supply sales.

These -- not what we call non-recurring. They're not capital per se, but they are hardware and supplies and our data business. Very good performance in 2015 and we are well-positioned in 2016 to build out our cloud-based customer adoption through our five or six cloud-based offerings in that segment.

Thanks again.

Mark Massaro, Canaccord Genuity.

Hi, guys. Thanks and congrats on a nice quarter. So I think Neo has rolled out now in January and can you help us to understand what the impact will be on the digital imaging business as presumably more people will order the subscription-based Neo as opposed to the more capital-intensive Cornerstone. So can you just help us understand the impact as we look at our model for Q1, Q2 throughout 2016?

Well, the growth in that segment is going to come from not only Neo which really won't be a large element but it will be a growing and strategically important element. But we are also growing the adoption of add-on services, primarily cloud-based incremental services, to our Cornerstone and DVMAX install base as well as continued growth in our digital radiography.

Including the cloud-based software that supports it and stores all the images on the cloud and eliminates the need to have a local server and back-up and all that for your digital radiography system, fully integrated with Cornerstone and with Neo. It is really both the continued growth and digital placements but more importantly, the growth and the recurring revenues, Neo and these add-on services to the existing install base that will propel profitable growth in that line of business in 2016.

Great. Thanks and on SediVue, I think at the conference last week, I think you mentioned that SediVue would sell for $20,000. Is that the list price because today I think you said $16,000 to $18,000. Is the $16,000 to $18,000, more your expectations for an average sale price? And when you take the midpoint of the recurring stream that you provided today and thank you for that color, would get me to somewhere around $21.5 million incremental for 2016 from SediVue; any clarification there would be helpful.

Yes, just to your latter point, I think we can all do the math. I can't -- you can take $16,000 to $18,000 and times it by 1,000 and that's pretty easy. You get $16 million and $18 million and then incremental value as that install base grows, obviously, you've got place the analyzers and they've got to start using it and generate the recurring revenue and the pay-by-run.

We are selling the Analyzer at $19,995. But in cases that we are selling it in a bundle with other equipment to competitive accounts where they're buying -- they're looking at SediVue and then they are saying, hey, this is a new look at IDEXX. And I see the benefits of IDEXX and our fully integrated approach and all the key differentiators.

Now I'm looking at SediVue for Catalyst and hematology and we put it under bundle, we will have a lower unit price associated with the SediVue placement and in some cases, some deferred revenue. So that's really what brings down what brings down what -- we're selling it at list price because it is a first and only innovation and customers are so excited about it. We had no pushback on that.

But the average unit price will come down and then we will have some sales in the latter part of the year that will be international that will probably be at lower AUP. So those are the things that bring down the average unit price from the list price.

Great. That's very helpful and last question for me. Thanks for commenting on the annualized 97% customer retention rate. Would you say that's modestly ticked up. I know you've called out some stability, saying rapid tests, but I don't recall you providing that number in the last couple of quarters. I know it is aligned with your historical numbers of, call it, 96% to 99% customer retention but can you just help us understand if that has ticked up at least modestly in the last couple of quarters?

It definitely ticked up in Q3. We saw a big -- we a nice tick up in Q3 from the -- in fact, it's -- as we look at the annualized retention rates by quarter it turns out that fourth quarter 2014 was our most challenging quarter. And every quarter since then, of the annualized retention rate for that quarter has ticked up and it ticked up to about 97% in Q3.

And what I will say is sometimes it just takes us a little while to absolutely solidify that number. Early indications are for Q4 as we sit here four weeks into 2016 because it takes time to see the dust settle and look at customer ordering patterns to really be secure, but certainly, the early indications are that we were -- we maintained, if not a slight improvement on that metric in Q4 2015.

Great. Thank you.

Nick Jansen, Raymond James.

Hi, guys. Nice job finishing the year. Just wanted to better understand, Brian, maybe the moving parts for the first quarter. I think you guys reported 11.1% organic growth in the fourth quarter when you addressed for the distribution dynamic in the prior year. And I think if I heard you correctly, you're saying 8% to 9% for the first quarter but that includes 100 basis point benefit from leap year and you've had a lot of moving parts in terms of share erosion and things along those lines.

So can you perhaps maybe bridge the Delta from that 11.1% normalized to, let's call it, a core 7% to 8% and then how we get the ramp for the balance of 2016? I assume SediVue and others are built into that but it would be helpful to better understand the mechanics of the guidance as I think the investors are still trying to figure out all the moving pieces given the variety of moving parts that we've seen over the last five quarters. Thanks.

Sure. I think one of the key elements in the bridge is you have to recognize that the 11% in Q4 benefited from margin capture. Right? So you have to -- comparing that to Q1, you have to normalize for that so, basically that's in the range of 3%. We don't quantify that specifically anymore.

But say we're at an 8% level and we're effectively saying 8% to 9%, or 7% to 8%, adjusting for leap year. So it's largely consistent trends. We did have really strong instrument revenue growth year on year in Q4 so that's obviously benefiting us. I think we are targeting continued solid progress on recurring CAG growth and improvement as we work through the year, as we -- as Jon highlighted, these improved retention rates and working --

For the chemistry customer base.

The consumables and for also the rapid assay, working through the headwinds there and getting to a place where we're growing versus down on a margin -- excluding margin capture, we had some headwinds, of course, this year from the first-generation losses so those things will benefit us as we work through the year and we'll basically project in Q1 out for another strong quarter.

That's very helpful and then secondly, I've always assumed that the -- let's call it the churn rate, at least in North America of instruments is like five to seven-year cycle where you're not necessarily -- once you buy one, you're going to be working with it for a while.

Have you see that change over the years? It just seems like the instrument numbers that obviously you guys are placing are quite strong and even some of your competitors, certainly not as strong but still are placing a fair amount of instruments.

I'm just trying to get a sense of how easy is it for a customer to say I'm going to use Catalyst One this year and next couple quarters, the distributor rep comes in and they switch to Abaxis or competing machine. Has there been any change in the churn? It feels like there has been but I'm not -- I can't fully grasp it. Thank you. Yes, thank you. I think the instrument placement is pretty sticky, as evidenced by our estimate of 97% retention. On an annualized basis. So that would be 3% customers who are in our install base, as measured by the revenue that they're contributing -- the consumable revenue that they're contributing are switching to a different analyzer.

That is, what I call, a very sticky and loyal install base and I think in the case of IDEXX, that's because they've adopted elements of our in-house lab, whether it would be advanced, a two-way integration or unique menu, or the benefit of real-time care or Vet Connect PLUS integrated with their reference lab results.

Also of course, when they purchase an analyzer, they typically buy it either in a six-year lease or a -- some kind of a contractual commitment, multi-year contractual commitment which also adds to the stickiness so it is not -- it is a very sticky install base, to answer your question.

Thanks for the color. Nice job.

Ben Haynor, Feltl and Company.

Good morning, gentlemen. Sorry if I missed it but did you give the vet visit and revenue growth?

Yes, the market growth?

Yes, correct.

No, we did. In -- we had, in Q4, patient visits increased 3.7% and clinic revenues increased 7.1%.

That was very strong number. That number can bounce around from quarter to quarter. I think we saw one quarter since the great recession that was higher than that but certainly would suggest that the underlying market trends are robust.

That's how it seems. And then secondly for me, are you seeing competitors become more aggressive at all in equipment pricing in North America?

I would say that it is always a very competitive environment. I think the difference in terms of IDEXX is that customers value unique aspects of what our solutions provide that they cannot get from others. So if something is lower-priced but does not provide an adequate solution, that's -- isn't going to be something customers would decide to do.

In addition, I mentioned we -- our Veterinary Diagnostic Consultants are really now covering the market. If you think of the 48,000 visits in a quarter, they're basically covering the market twice over on average. So our reach and frequency into the customer and that's just with our veterinary diagnostic Consultant, which are around 180, we have another 120 other types of field base professionals that are also visiting customers.

We are present. We have those relationships and I think customers value those visits because we're bringing value both in terms of support and new innovation. So always a very competitive market, but we win with a combination of innovation, new and unique, personally innovations and a very strong commercial presence.

Great. That makes sense. Thank you very much, gentlemen.

Thank you.

With that, Mr. Ayers, I'd like to turn it back over to you for any closing comments.

Yes, thank you, Cynthia and thank you, everyone for joining the call. I just want to also -- a very special call out to IDEXX employees, our 6,000 plus employees who worked really hard this year -- or last year, should I say 2015, in the face of a lot of competitive and macro challenges to deliver what I think was a very strong finish to the year. A special call out to our North American field organization.

It has really done a great job in coming online with the new territories and establishing customer relationships and bringing value and growing the level of care that our customers are providing to pet owners. This is a very satisfying outcome for all of us at IDEXX when we see this kind of growth that we're driving and we're seeing care providers being successful both medically and economically and pet owners benefiting with improved health of their pets.

So it's -- it really gives us confidence that we're on the right strategy for sustained growth for years to come with the investments we've made in 2015, both in the US and around the world. With that, we will conclude the call. Thank you.

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