IDEXX Laboratories' (IDXX) CEO Jon Ayers on Q4 2015 Results - Earnings Call Transcript

| About: IDEXX Laboratories, (IDXX)

IDEXX Laboratories, Inc. (NASDAQ:IDXX)

Q4 2015 Earnings Conference Call

January 29, 2016 08:30 AM ET

Executives

Jon Ayers - CEO

Brian McKeon - CFO

Ed Garber - Director, IR

Analysts

Ryan Daniels - William Blair

John Block - Stifel

Kevin Ellich - Piper Jaffrey

Mark Massaro - Canaccord Genuity

Nick Jansen - Raymond James

Ben Haynor - Feltl & Co.

Operator

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, 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, further 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 if necessary. We do appreciate you may have additional questions, so please feel free to get back in the queue and if time permits, we'll be more than happy to take your additional questions.

I would now like to turn the call over to Brian McKeon.

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 Diagnostics 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 about 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 trend positions 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. In 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 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, up 12% on an normalized organic basis. Gains were supported by 13% normalized organic growth in CAG Diagnostics recurring revenues. Note that in the fourth quarter of 2014 we started selling some of our US kits and consumables direct in parallel with the 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 us.

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 dataset from approximately 5,200 clinics. In Q4, patient visits increased 3.7% and clinic revenues increased 7.1% compared 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 $167 million reflecting 10% normalized organic growth.

International results were supported by 12% normalized organic gains in CAG Diagnostics 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% organically 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 catalysts 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 for our investments in our expanded global commercial capability.

Strong premium instrument placement trends including continued high placement levels at competitive accounts in the U.S. in both chemistry and hematology are supporting continued expansion of our premium instrument base. We ended 2015 with an active installed base of approximate 20,000 catalysts and 21,500 premium hematology analyzers globally. Our U.S. premium instrument base expanded approximately 3% this quarter sequentially supporting 16% year-on-year growth in our Catalyst installed base net of estimated customer losses in the U.S. over the last year. Catalyst customers now account for 97% of our U.S. consumable revenue exclusive of corporate accounts.

Our hematology installed base also expanded solidly in the U.S. 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 Diagnostic recurring revenues reached $1.15 billion in 2015 or 72% of IDEXX revenue.

CAG 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 U.S. compared to strong prior year growth rates and 7% gains in international markets. Instrument consumables revenue of $98 million in Q4 grew 16% organically when normalized for the prior year reduction in U.S. distributor inventories associated with the go direct transition.

Please note that in Q4 2014 global consumer growth benefited by approximately 2% from accelerated U.S. margin capture associated with the 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 U.S. and accelerated gains in international markets.

As expected, U.S. consumer gains were moderated by carryover impacts from heightened competitor placement activity in our U.S. 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 the U.S. continued stabilized trends in first generation products, and benefits from U.S. margin capture. Our results demonstrate our maturing commercial capability 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 U.S. 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 continued 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 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 of 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 of performance in water reflecting solid underwriting market dynamics and benefits from commercial investments that drove new business gains across major regions.

For the full-year 2015, water business revenue reached – 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 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 costs 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 reported in Q3. This reflects an operating margin of 19.2% including approximately 130 basis point of benefit from $20 million -- $21 million 2015 foreign exchange hedge gains.

EPS in Q4 was $0.48 per share, up normally compared to prior-year adjusted EPS and up 9% adjusted for currency impacts. The permanent extension of the R&D tax credit added a $0.03 per share to EPS results, consistent with Q4 2014. For the full year, adjusted EPS was $2.11 and 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 underlying operating performance and disciplined and substantial investment in the US fully direct model.

Free cash flow was a $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 our 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 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 our recently expanded $850 million revolving credit facility. Our leverage ratios is a multiple of EBITDA adjusted to exclude the impairment change with 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’s revenues are related to products manufactured in the US and sold in local and international currencies. We have updated our financial outlook to reflect more recent rate --exchange rates, which have weakened relative to the dollar since we issued our preliminary guidance. At the updated exchange rates 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 tapping 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 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 the 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. So 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 global reference lab gains, strong above market growth in consumable revenue, supported by our expanded instrument installed 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 to carryover impacts from prior year competitive impacts and 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 counts. As noted, lapping of deferred revenue benefits in 2015 will moderate reported instrument revenue gains for the year. For 2016, we’re 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’re 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 is 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 estimated reduction of approximately 3.5% to 4% in 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 -- helps 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.

Jon Ayers

Okay, thank you Brain. We were pleased with the continued progression of our growth globally in Q4 of 2015 as well as the progress in bringing first and only innovations to our market. Coming out of 2015 and all 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 Brain 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 replaced 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 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 of 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 installed base shows that customer chemistry retention rates continued at their 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, our 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 in the lab for the year, which now is about 10% of volume of the SNAP test kits.

First-generation rapid assay generation revenues and volumes continued in Q4 their trends from Q3 of volume and revenue stabilization. And in accordance with our expectation 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 is 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 123 field-based professionals that support our diagnostic recurring revenue in the US, including our instrument specialists and professional service veterinarians.

Sixth, we saw record high percentage of our instrument kits and consumables purchased through our e-commerce channel at 57%. This is a world-class level for the US 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 out bound calls and demand generation. In fact, our outbound call line increased nearly 20% from Q3 to Q4 when factor driving our continued good rapid assay performance.

So this array of metrics provides objective evidence that our US fully direct sales organization including over 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 growth of our diagnostic recurring revenues in the US. Given the highly profitable and durable nature of the CAG recurring annuity, 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 relationship 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 Diagnostics 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 macroeconomic, emerging markets like Brazil and China can show strong local currency growth when we have a capable local team and attractive pet healthcare market that is early in the adoption of the diagnostics.

Regarding our SDMA roll-out, we now have over 13,000 US customers receiving results on 1.6 million tests run through the end of 2015. As of this month, we have launched SDMA in our reference lab chemistry profiles in more than ten 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 professional 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 at the point of care. We are finding 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 allows 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 place 1,000 SediVue analyzers at an average unit price of $16,000 to $18,000 per instrument. Each placement will generate an 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.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question will come from the line of Ryan Daniels with William Blair. Your line is open.

Ryan Daniels

Yeah, good morning and thanks for all the color. Jon, maybe a quick question for you just on catalyst as we look 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 technology. So what kind of market opportunity is that as we look to kind of ‘16 and ‘17 in instrument placement?

Jon Ayers

Yes, Japan is a diagnostic market that really is oriented towards in-house point of care real-time care and 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. And of course Catalyst One is a blockbuster product that we've proven in virtually every other market around the world and we have a good organization, a direct organization in Japan that’s in place for decades. So it's 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. And so, we’re excited about the growth opportunity in Japan for the next couple of years.

Ryan Daniels

And do you have a data on when that will start shipping?

Jon Ayers

They’ll start shipping this quarter.

Ryan Daniels

And maybe a follow-up on the financials just on Capex. I think you are 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?

Brian McKeon

Yeah we’re always focused on that Ryan, I think this year part of that was just driven by kind of year-end privatization and also some carryover into – that’s not unusual at year-end where project is going to carry over into the next year and that's all factored into our $90 million outlook. I think our numbers is still probably a little higher than they normally would be just reflecting the very strong volume growth that we’ve had in reference lab 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 would be on continuing to drive capital efficiency. So we think that can be a point of leverage for us over time.

Ryan Daniels

Okay, thanks I’ll humpback in the queue.

Operator

Thank you. And the next question comes from the line of John Block with Stifel. Your line is open.

John Block

Great thanks and good morning. Jon, maybe just first one on international CAG, you sort of laid it out that it was choppy last quarter and it seemed to improve this quarter. But oddly enough there is some orders 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 have entered 2016 and just your level of conviction at the worst is behind you there?

Jon Ayers

Yes, thank you for the question. The weakness that we saw specifically was the deceleration in recurring revenue growth in Europe; obviously in international markets we've had extraordinary level of growth in Catalyst One placements including Europe. And that varied same quarter of Q3 I think, we had 169% year-over-year growth in catalyst platform placements internationally. And 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, that’s 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 years internationally combined with new innovative market leading products such 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 estimate 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 protocols for pet healthcare.

John Block

Got it, very helpful. And then just on guidance and I just find my opinion, but I find the two set of ways that you call that an 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 sort of 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 the environment gets even more competitive as the year progresses? Thanks guys.

Jon Ayers

Yes, John, thank you for that question. What a difference a year makes. I think we're not entering a huge disruptive change. We are beyond that disruptive change and we are seeing the progression and productive of our commercial investments in the US and internationally. We expect to get productivity on those investments and operating expense leverage particularly in the US market in 2016. So we don’t enter the year with the kind of risks that we entered last year. The only think I can’t really comment on is macro, but out underlying markets are very strong, so it's more of an issue of currency and those kinds of things.

Brian McKeon

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

Jon Ayers

The 89% organic growth is consistent with the guidance in October.

John Block

I appreciate it guys. Thanks.

Jon Ayers

Thanks.

Operator

Thank you. [Operator Instructions] And we will go to the line of Kevin Ellich with Piper Jaffrey. Your line is open.

Kevin Ellich

Hey, good morning. Thanks for taking the questions, just a couple in the reference lab business. So the 13% growth in the US was pretty strong I guess. Could you quantify or break down how much of that’s coming from share gains and I guess how much is coming from vets ordering more tests per requisition. Obviously you are getting great traction with SDMA. And I guess kind of following upon that as well, how much of the growth from SDMA is coming from non-IDEXX customers? Jon, I think you might have mentioned that.

Jon Ayers

Yes, thank you. Well, of course vast majority of our customer does come from continuing – revenues does come from continuing customers. So I think what we're pleased with the non-customers is that the growth in sending us panels is demonstrating that they are 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 menu 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 is using us as their primary reference lab, but maybe not using us entirely.

And 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 their chemistry volume to us. And of course we have net new customer acquisitions which is also contributing to that growth. [Indiscernible], I mean continued strong retention metrics and new customer acquisition exceeding whatever customer losses that we're seeing.

Kevin Ellich

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 driving that again? I think you said tough comps and analyzing the margin capture?

Brian McKeon

Right, I think we obviously don’t get the benefit of the margin capture as we move into 2016. And so it is really reflecting that we will have some compares from some of the losses in the first generation product that have stabilized.

Jon Ayers

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

Brian McKeon

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 with 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.

Kevin Ellich

Right. And then I guess one last one. Did you guys give any stats out on Cornerstone in terms of the numbers of users or anything like that?

Jon Ayers

No, but we are happy to. We have a highly loyal Cornerstone and DVMAX is our 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, 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 for customer to start using consistent with cloud technology and it has full integration into our diagnostic ecosystem.

And so that will be a small but because of we don't get upfront revenues, the same – the customers don’t have upfront cost, but a growing contributor to our installed base building on top of the high loyalty we have with Catalyst and DVMAX customers. 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. There are kinds of things like subscriptions and maintenance and add-on services and the rest is things like hardware and supply sales, they are not what we call non-recurring, they are 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.

Kevin Ellich

Thanks again.

Operator

Thank you. Our next question comes from the line Mark Massaro with Canaccord Genuity. Your line is open.

Mark Massaro

Hey, 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?

Jon Ayers

Well, the growth in that segment is going to come from not only Neo, which really won’t be a large element that 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 and stores all the images on cloud, and one needs to have a local server and backup and all that just the radiography system fully integrated with Cornerstone and with Neo. So it’s really both the continued growth and continued replacements, but more importantly the growth in 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.

Mark Massaro

Great, thanks. And on SediVue, I think at the conference last week, you – I think you mentioned that SediVue would sell for $20,000, is that the list price, because today I think you said 16 to 18? Is the 16 to 18 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 ’16 from SediVue? Any clarification there would be helpful.

Brian McKeon

Yes, let’s just a latter point, I think we can all do the math, I can’t – you can take 16 to 18 in times of by a 1000 and that’s pretty easy because $16 million to $18 million and then the incremental value as that install base grows, obviously you got pricing analyzers and they got to start using it in order to generate the recurring revenue of the pay by run. We are selling the analyzer at 19, 9, 95, but in cases that we are selling it in a bundle with other equipment to competitive accounts, when they are buying, they are looking at SediVue and then they are saying, hey, this is a new look at IDEXX and I see the benefits of IDEXX and fully integrated approach and all the key differentiators, now I’m looking at SediVue for catalyst and hematology. When we put on our 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 – we are selling it at list price, because it’s our first and only innovation and customers are so excited about it, we have 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 and will probably at lower AUP, so those are things that bring down the average unit price from the list price.

Mark Massaro

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 have called out some stability, say in Rapid Test. But I don’t recall you providing that number in the last couple of quarters. I know it’s in line with your historical numbers, 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?

Jon Ayers

It definitely ticked up in Q3. We saw big, a nice tick up in Q3 from – in fact it’s on – as we look the annualized retention rate by quarter, it turns out that fourth quarter 2014 was our most challenging quarter. And every quarter since then 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 maintain if not a slight improvement in that metric in Q4 2015.

Mark Massaro

Great. Thank you.

Operator

Thank you. Our next question comes from the line of Nick Jansen with Raymond James. Your line is open.

Nick Jansen

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 a 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 are saying 8% to 9% for the first quarter, but that includes kind of 100 basis point benefit from leap year. And you have 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% normalize 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 will be helpful to better understand the mechanics of the guidance is, I think investors are still trying to figure out all the moving pieces given the variety of moving parts that we have seen over the last five quarters. Thanks.

Brian McKeon

Sure. I think one of the key elements in the bridge is you have to recognize if the 11% in Q4 benefited from margin capture, right, so you have to – comparing that Q1, you have to normalize for that. So basically that’s in a range of 3%. We don’t quantify that specifically anymore. But say we are at an 8% level and we are effectively saying 8 to 9 or 7 to 8 adjusting for leap year. And 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 – Jon highlighted these improved retention rates and working –

Jon Ayers

For the Chemistry customer base.

Brian McKeon

The consumables and for also the rapid assay kind of working through the headwinds there and getting to a place where we are 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’re basically projecting Q1 for another strong quarter.

Nick Jansen

That's very helpful. And then secondly, I've always assumed that, let's call it, the churn rate, at least in North America of instruments is like a 5 to 7 year cycle where you’re not necessarily. Once you buy one, you’re going to be working with it for a while. Have you seen that change over the years? It just seems like the interest rate numbers that obviously you guys are poising are quite strong and even some of your competitors certainly not as strong, but still are poising 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 this year and then next couple of quarters, the distributor comes in and they switch to Abaxis or a competing machine. Has there been any change in kind of the churn, because it feels like there has been, but I can't fully grasp it? Thank you.

Jon Ayers

Yes. Thank you. I think the instrument placement is pretty sticky as evidenced by our estimate of 97% retention on an annualized basis. And so that will be 3% of customers who are in our installed base, as measured by the revenue that they are contributing, the consumable revenue that they are contributing are switching to different analyzer. That is, what I call a very, very sticky and loyal installed base and I think in the case of IDEXX, that’s because they’ve adopted elements of our in-house lab whether it be advanced 2a integration or unique menu or the benefit of real-time care or VetConnect PLUS integrated with the reference lab results. Also, of course, when they purchase an analyzer, they typically buy it either in a six-year lease or some kind of a contractual commitment, multi-year contractual commitment, which also adds to the stickiness. So it is not, it's a very sticky installed base to answer your question.

Nick Jansen

Thanks for the color. Nice job.

Jon Ayers

Thank you.

Operator

Thank you. Our next question will come from the line of Ben Haynor with Feltl & Co. Your line is open.

Ben Haynor

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

Jon Ayers

Yes.

Brian McKeon

The market growth?

Ben Haynor

Correct.

Brian McKeon

Yes. No. We did. Q4 patient visits increased 3.7% and clinic revenues increased 7.1%.

Jon Ayers

So that was a 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 I would suggest that the underlying market trends are robust.

Ben Haynor

And then secondly, for me, are you seeing competitors become more aggressive at all on equipment pricing in North America?

Jon Ayers

I would say that it’s always a very competitive environment. And 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. And so if something is lower price but does not provide an adequate solution, that isn’t going to be something that customers like to do. In addition, I mentioned – our veterinary diagnostic consultants are really now covering the market, you think of 48,000 visits in a quarter, they are basically covering the market price over on average.

And so our reach and frequency into the customer and that's just with our veterinary diagnostic consultants, which are around 180, we have another 120 other types of field-based professionals that are also visiting customers, we are present. We have those relationships and I think customers value those businesses, because we are bringing value, both in terms of support and new innovation. And so always a very competitive market. But we win with a combination of innovation, new and unique personal innovations and a very strong commercial presence.

Ben Haynor

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

Jon Ayers

Thank you.

Operator

And with that Mr. Ayers, I’d like to turn it back over to you for any closing comments.

Jon Ayers

Yes. Thank you, Cynthia and thank you everyone for joining the call. I just want to also, a very special callout to IDEXX employees, our 6000+ employees who’ve worked really hard this year or last year, should I say, 2015, in the phase of a lot of competitive and macro challenges to deliver what I think was a very strong finish to the year. A special callout to our North American Field organization that has really done a great job in coming online with 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. And so 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.

And with that, we will conclude the call. Thank you.

Operator

Thank you. And ladies and gentlemen, today's conference call will be available for replay after 10:30 A.M. today until midnight February 5. You may access the AT&T teleconference replay system by dialing 1-800-475-6701 and entering the access code of 384558. International participants may dial 1-320-365-3844. Those numbers once again, 1-800-475-6701 and 1-320-365-3844, and enter the access code of 384558. That does conclude your conference call for today. Thank you for your participation and for using AT&T executive teleconference service. You may now disconnect.

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