Illumina Inc (ILMN) 2014 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the first-quarter 2014 Illumina Inc earnings conference call.

My name is Shanna and I will be your operator for today.

At this time, all participants are in a listen-only mode.

Later, we will conduct a question and answer session.

(Operator Instructions)

As a reminder this conference is being recorded for replay purposes.

I would now like to turn the call over to your host for today's Ms. Rebecca Chambers.

Please proceed.

Thank you operator and good afternoon everyone, and welcome to our earnings call for the first quarter of fiscal year 2014.

During the call today we will review the financial results released after the close of the market and offer commentary on our commercial activity, after which we will host a question-and-answer session.

If you have not had a chance to review the earnings release, it can be found in the Investor Relations section of our website at www.Illumina.com.

Participating for Illumina today will be Jay Flatley, Chief Executive Officer; Marc Stapley, Senior Vice President and Chief Financial Officer; and Francis deSouza, President.

Jay will provide a brief update on the state of our business and Marc will review our first-quarter financial results, as well as provide our updated guidance for 2014.

This call is being recorded and the audio portion will be archived in the investor section of our website.

It is our intent that all forward-looking statements regarding our expected financial results and commercial activities made during today's call will be protected under the Private Securities Litigation Reform Act of 1995.

Forward-looking statements are subject to risks and uncertainties.

Actual events or results may differ materially from those projected or discussed.

All forward-looking statements are based upon current information available, and Illumina assumes no obligation to update these statements.

To better understand the risks and uncertainties that could cause actual results to differ, we refer you to the documents that Illumina filed with the Securities and Exchange Commission, including Illumina's most recent Forms 10-Q and 10-K.

Before I turn the call over to Jay, I would like to let you know that we will participate in that Bank of America Healthcare Conference in Las Vegas the week of May 12, as well as the Bank of America Global Technology Conference in San Francisco the week of June 2. We plan to also participate in the Goldman Sachs Annual Healthcare Conference the week of June 9 in LA.

For those of you unable to attend we encourage you to listen to the webcast presentations, which will be available through the investor relations section of our website.

With that, I will now turn the call over to Jay.

Thanks Rebecca and good afternoon everyone.

I'm delighted to report that we successfully navigated the challenges of our recent product introductions, and as a result recorded record quarters and revenue in Q1.

We saw astonishing demand for our new instruments, the NextSeq 500 and HiSeq X Ten, while the existing systems in our sequencing portfolio exceeded our expectations.

Additionally, development activities for the other new products announced in January are tracking to our committed time lines.

For the quarter, revenue of $421 million greatly exceeded our internal plan and marked our 10th quarter of sequential growth.

Growth was 27% year over year as result of positive underlying trends across all geographies and a universally positive reaction to our new sequencing systems.

First-quarter total sequencing revenue grew 36% year over year, driven by impressive demand for consumables, our new and existing instruments, and services.

These results clearly demonstrate the strength of our sequencing portfolio, with instrument options for customers at every experimental scale and across all applications.

Sequencing instrument revenue grew 40% compared to the first quarter of 2013 as a result of strong demand across the entire product line.

With two major platform announcements we cautioned that we might see a pause in purchases while customers reevaluated their alternatives.

Any pause was brief as instrument orders across the portfolio set a record and significantly beat our internal forecast.

The unprecedented demand for HiSeq X Ten exceeded our most aggressive assumptions, and moving into the second quarter we expect to book additional systems.

To date we've received orders from nine customers for a total of 104 HiSeq Xs, already doubling our original forecast.

This includes an order from the Wellcome Trust Sanger Institute which I'm pleased to announce today.

We're in conversations with a number of other customers around the globe who are interested in purchasing X Ten systems to perform population level sequencing.

The response we've seen to the $1000 genome reinforces our view that as far as that we can see, there's an insatiable demand for whole-genome sequencing.

We booked revenue on 12 HiSeq Xs in Q1, and importantly, machines installed during the quarter are already producing high-quality data in customer hands.

Sequencing runs have consistently generating over 1.8 T of data in three days, with many runs in excess of 2 T. The quality of HiSeq X data has also been exceptionally high with runs producing well in excess of 80% Q30 bases.

We're actively scaling our manufacturing capabilities to meet this overplanned demand.

As a reminder there are two components of our supply chain that are critical in ramping production: the high resolution cameras and the patterned flow cells.

We are now optimistic about the ability to acquire sufficient cameras from our supplier to satisfy the additional demand.

That said, volume production of the patterned flow cells has only recently begun, and as a result we believe flow cell production rates will be the key factor in scaling HiSeq X shipments through the end of 2014.

As I mentioned last quarter, the introduction of HiSeq X allowed us to rationalize pricing in FastTrack Services so that it's more economical to send samples to the Illumina genome network than to our FastTrack Services lab.

As result in the first quarter we saw close to 70% of samples submitted to an IGN partner, compared to less than 10% in the fourth quarter of last year.

This is consistent with our expectation that FastTrack Services will grow more slowly than previously seen.

Overall demand for the HiSeq family of products has increased over the last two quarters and this trend continued in Q1.

Shipments were higher sequentially due to improved ASPs as customers' purchases shifted toward HiSeq 2500 and X Ten from the HiSeq 1500 and 2000.

New customers accounted for approximately 70% of HiSeq orders, close to a record, the majority of which were commercial, clinical, and hospital customers.

Importantly, many of these customers are in the early phases of their assay development and validation, creating a potential for follow-on orders as their methods enter production.

We witnessed some cannibalization of HiSeq by our new products, however the magnitude of this impact was well within our forecast.

As we expected, some of the customers who opted for NextSeq over HiSeq bought multiple units.

Over the next 12 months or so we expect HiSeq customers with older generation instruments to consider whether the HiSeq 2500, HiSeq X Ten, or the NextSeq would be best suited to their emerging applications, economics, and workflows.

HiSeq 2500 remains a very important part of our instrument portfolio with a long road map ahead of it, including enhancements to throughput and read length.

One such enhancement, 1T kit began shipping last week and now allow generation of approximately eight human genomes in six days.

The 2 x 250 read length kits will ship later this quarter.

The NextSeq product launch has gone extremely well, resulting in shipments of 65 instruments in Q1.

As we would expect approximately 85% of early orders came from existing customers, with approximately half originating from non-academic sources.

These customers are running targeted panels, RNA-Seq, exome, and NIPT applications, and find the flexibility of NextSeq key to managing their workflow.

Early customer feedback on NextSeq has been very favorable.

More than 90% of shipments have been installed in a single day, with early sites noting the high data quality, flexible batch sizes, and fast runtime as important attributes of the platform.

We are very pleased with the order pipeline for NextSeq as we educate new customers on the systems' capabilities.

From our 60 city roadshow and numerous webcasts, we generated over 2,500 leads for new customers, demonstrating that this product is additive to our total addressable opportunity.

New customers account for a third of the current pipeline and clinical accounts are prominent in the fall.

Additionally, we have significant interest in our trade-in program for competitive platforms and expect this to drive incremental orders in future quarters.

Demand for MiSeq reached record levels in the quarter, with the highest unit shipments since launch.

This result was catalyzed by the FDA's recent clearance and the lower list price of MiSeq and MiSeq DX at $99,000 and $125,000, respectively.

Importantly, approximately two thirds of instruments were ordered by government, commercial, translational, and clinical customers.

This included an order from the Department of Defense for 13 MiSeqs to be used by the Army and the Navy in a bio-surveillance program focusing on whole genome sequencing of bacteria and viruses.

Additionally in the first quarter, we received follow-on multiunit orders from existing customers, building capacity in production facilities.

An example of this is HistoGenetics, which first placed an order in Q2 of last year.

The additional instruments will be used for high resolution sequence-based HLA testing services, and today HistoGenetics possess the largest fleet of MiSeqs in our install base.

Cannibalization of MiSeq by NextSeq was insignificant, with approximately two-thirds of orders from new customers.

We're not currently projecting significant cannibalization of MiSeq as we believe the platform is uniquely suited for specific applications and customer groups.

Moving now to arrays.

This quarter total microarray revenue increased 4% year over year due to growth in genotyping services and our IVF products, which was partially offset by a year-over-year decline in array instruments and consumables.

New array consumables pricing introduced in the fourth quarter drove samples ordered close to record levels, demonstrating the elasticity of the market.

This change fueled increased demand for OncoArray as well as whole genome arrays, specifically the Omni Express Exome and Core Exome products.

Our ag business also contributed strongly to the Q1 results as orders grew 20% year over year, driven in part by demand for the Bovine LD+ and the iSelect arrays.

We continue to see expanded use of selective breeding based on genotype in crop and livestock, with a significant number of customers standardizing on Illumina's products.

We remain focused on delivering complete sample-to-answer workflows, enabling new markets to embrace NGS technology through a variety of applications.

Our NeoPrep Library prep system, with radically simpler work flow, remains on track for a summer launch and early feedback from customers is extremely positive.

Additionally, we began shipping our BaseSpace Onsite platform late in the first quarter.

Translational customers have shown early interest, citing the simple user interface and installation as transformative to their ability to bring next-generation sequencing into their labs.

As a demonstration of the diversification of our business, again this quarter commercial, nonprofit, and hospital customers accounted for approximately half of shipments, despite an improved funding environment for academic customers in the US and the impact of the Horizon 2020 program.

Sequencing uptake in the oncology market is gaining significant traction, based in part on feedback from recent customer conferences.

As we shared at our investor day in January, we are collaborating with a number of oncology thought leaders to drive standards for the use of NGS in a clinical setting.

Feedback from the AACR conference points to standards being a critical factor for driving adoption.

We continue to further our discussions with major cancer centers, pharma, guideline-setting bodies, and the FDA on this topic, with extremely strong interest from the field.

We also recently introduced two new oncology products that will ship this quarter.

The TruSeq RNA Access library prep kit is our new solution for RNA analysis from FFPE tissues or other low-quality, low input samples.

The TruSight Myeloid Sequencing Panel is the latest extension of our TruSight family of products, which includes the very successful TruSight One panel.

This panel uses expert curated content to identify somatic mutations in myeloid malignancies in an accurate, efficient, and cost-effective manner.

With reproductive and genetic health, we made significant progress during the first quarter in both IVF and NIPT.

We successfully launched our preimplantation genetic diagnostics product, CytoSNP Karyomapping.

Additionally, our sequencing-based preimplantation genetic screening product, VeriSeq PGS, will launch shortly for use on the MiSeq platform, and will be available on NextSeq latter this year.

Recently, the Journal of Fertility and Sterility published an extensive preclinical validation and accuracy assessment of our VeriSeq product for aneuploidy screening on single cells.

They found a high level of consistency between our solution and established methodology such as array CGH.

The study concluded that VeriSeq PGS is a robust high-throughput method ready for clinical application in reproductive medicine, citing potential advantages of reduced cost and enhanced precision.

During the first quarter we announced a publication to the New England Journal of Medicine, which directly compared the use of NIPT using cell free DNA to standard prenatal aneuploidy screening in the average risk population.

This seminal study was the first in a number of studies that are being performed to demonstrate the efficacy of NIPT and the screening tool for the average risk population, a market which we believe is up to six times larger than our current market.

The NIPT market continues to grow at a breathtaking rate and we're very pleased with the performance of verifi in the first quarter.

Not only did verifi volume and revenue come in at record levels, we also completed tech transfer agreements in France, Germany, and Italy, and we're in discussions with more than two dozen other potential tech transfer customers.

As a result of this performance, Verinata was only slightly dilutive this quarter and is on track to breakeven on a non-GAAP basis for the full year.

In summary, Q1 was another remarkable quarter, with significant uptake of our new sequencing platforms coupled with strong interest in our existing systems.

We're extremely well positioned to address opportunities at every scale and our focus on developing the large, untapped markets is bearing fruit faster than we had projected.

We're confident in our technology leadership, and believe it will continue to deliver significant growth as we unlock the power of the genome.

I'll now turn the call over to Marc who will provide a detailed overview of our first-quarter results.

Thanks Jay.

As Jay described, Q1 marked another exceptionally strong quarter for Illumina.

Revenue grew 27% year over year to approximately $421 million as a result of significant uptake of our new instruments, as well as continued strong demand from MiSeq and HiSeq products.

In fact in the first quarter, we delivered record orders, shipments, and revenue, driven by record results across more than 15 different metrics including shipments and orders for sequencing instruments and services, as well as HiSeq and MiSeq consumables.

Globally, demand for our products remained strong during the first quarter, shipments in the Americas grew 24% year over year, and Europe saw a 32% increase over the same period last year.

In APAC, shipments grew 22% year over year, driven by continued strength in Japan where Q1 is a traditionally strong quarter, which was certainly the case again this year.

Instrument revenue grew 32% year over year to reach $116 million in the first quarter.

Growth across the sequencing portfolio was partially offset by a decline in array instruments.

Consumable revenue in the quarter was $243 million, an increase of 18% compared to the first quarter of 2013, primarily due to higher demand for sequencing consumables as well as our growing install base.

Consumable revenue represented 58% of total revenue, down from 62% in the prior-year period, and lower than the 63% seen in Q4, primarily due to the strength in instrument, services, and maintenance contracts during the first quarter.

Sequencing consumables grew 32% over Q1 of last year due to higher instrument utilization and our larger install base.

In Q1, sample prep shipments grew 16% year over year due to demand for RNA sample prep kits, Nextera XT, our library prep solution for small genomes, and record demand for our Nextera Rapid Exome Capture solutions.

HiSeq and MiSeq consumables reached record levels during the first quarter.

This translated to HiSeq pull-through for instrument, excluding HiSeq X, in our projected range of $300,000 to $350,000, down somewhat sequentially as expected given year-end spending seen in the fourth quarter, but higher year over year.

We continue to project HiSeq pull-through of $300,000 to $350,000 per instrument.

MiSeq utilization exceeded our internal forecast during the first quarter, and as a result, pull-through was above our projected range of $40,000 to $45,000.

In prior courses, we have discussed the impact of new customers developing assays on MiSeq, resulting in an early underutilization of the instrument, followed by an uptick in utilization as the assays are put into use.

This quarter we started to see the benefit of these activities, with more than 30 separate accounts ordering production levels of MiSeq consumables, most of which were clinical accounts performing oncology or HLA assays.

This compares to just 13 accounts a year ago.

While this is an indication that MiSeq utilization might trend above our range, given that this is the first quarter we've seen this dynamic we will not be updating the range at this time.

It is too early to provide an estimate of NextSeq or HiSeq X pull-through.

Historically it takes several quarters for this to normalize as our calculation method tends to overestimate pull-through in the early quarters of the new instrument ramp.

Services and other revenue, which includes genotyping sequencing services, instrument maintenance contracts, and revenue from verifi sales grew more than 65% versus Q1 2013, to equal $59 million.

This improvement was driven by ongoing growth in our extended maintenance contracts associated with our larger sequencing installed base, an $8 million genotyping services order that was completed and recognized during the first quarter, and strength in other genotyping services and verifi sales.

Turning now to gross margin and operating expenses.

I will highlight our adjusted non-GAAP results, which exclude legal contingencies, non-cash stock compensation expense, and other items.

I encourage you to review the GAAP reconciliation of non-GAAP measures included in today's earnings release.

Our adjusted gross margin for the first quarter equaled 70.4%, compared to 71.4% in the fourth quarter, primarily due to a lower mix of (technical difficulty), as a result of the strength in (technical difficulty).

Year over year in Q1 gross margin expanded 120 basis points as a result of improved instrument and service margins.

Adjusted research and development expenses for the quarter were $65 million or 15.5% of revenue, approximately flat compared to $66 million or 17% of revenue in the fourth quarter.

Additional labor and benefit expenses more than offset by a sequential decrease in cost associated with our new product introductions.

Adjusted SG&A expenses for the quarter were $84 million or 19.9% of revenue, compared to $86 million or 22.2% of revenue in the previous quarter.

The slight decline was primarily due to the higher commission and bonus payments earned in Q4, which was partially offset by additional headcount in Q1 and other spend to support our new product launches.

For the first two months of the quarter we muted our investing in projects and noncritical headcount as we felt it was prudent to manage the business conservatively through our new product transitions.

In March however, we began investing in our more normalized and planned rate, which will continue through 2014.

As a result, we are projecting operating expense to increase sequentially in the second quarter.

Adjusted operating margins were 34.9%, compared to 32.3% in the fourth quarter and 33.3% reported in the first quarter of last year, due primarily to impact of higher gross margins and spending discipline.

In the first quarter we recognized approximately $700,000 of adjusted other income, our non-GAAP tax rate for the quarter was 30%, lower than expected due to employee stock activity.

This compares to 27.5% in the first quarter of last year, which included the full-year impact of the 2012 R&D tax credit, as well as the quarterly impact of the 2013 R&D tax credit.

Non-GAAP net income was $80 million for the quarter and non-GAAP EPS was $0.53.

This compared to non-GAAP net income and EPS of $63 million and $0.46, respectively, in the first quarter of 2013.

We reported GAAP net income of $60 million or $0.40 per diluted share in the first quarter, compared to a net loss of $23 million or $0.18 per diluted share in the prior-year period, which included a charge of $107 million related to the Syntrix Biosystems litigation.

Current-period results include $6 million reported in cost of goods to reflect the ongoing royalty on BeadChip sales associated with the Syntrix litigation plus interest.

We generated cash flow from operations of $37 million during the first quarter, lower than previous quarters due to changes in working capital and the impact of tax benefits from stock-based compensation.

Excluding the impact of the tax benefit outflow, which is mirrored as an inflow in cash and financing, cash flow from operations would've been approximately $88 million.

DSO increased to 63 days compared to 56 days last quarter as a result of the relative timing of shipments.

Capital expenditures were $19 million, resulting in $18 million of free cash flow.

We ended the quarter with $1.1 billion in cash and short-term investments.

During the quarter we repurchased approximately 788,000 shares for $130 million as part of our discretionary repurchase program.

We have $238 million remaining under our previously announced programs.

Given our strong first-quarter results and the strength in demand for HiSeq X Ten, we have updated our guidance for 2014.

We now project revenue growth of 21% to 23%, an increase from the previous guidance of 15% to 17% growth, and non-GAAP diluted EPS of $2.10 to $2.15, higher than our previous guidance of $2 to $2.06.

This projection includes shipping a materially higher number of HiSeq X Ten than the five we included in the January guidance.

Additional modeling considerations include full-year weighted average non-GAAP diluted shares outstanding of 150 million, which assumes a stock price of $140, and a full-year pro forma tax rate of 29.5%, which includes the 2014 federal R&D tax credit that has yet to be enacted.

If the tax credit and other tax extenders are not passed, our tax rate would increase by approximately 200 basis points.

In summary, we delivered strong first-quarter results and are projecting significant growth throughout the remainder of 2014 and beyond.

We continue to drive the market development and adoption of the most innovative and extensive sequencing portfolio available.

We remain focused on building our business and our capabilities to address the more than $20 billion market opportunity ahead of us.

Thank you for your time.

We will now move to the Q&A session.

To allow full participation, please ask one question plus a related follow-up as necessary.

Operator, we will now open the lines for questions.

(Operator Instructions)

Your first question comes from Tycho Peterson, JPMorgan.

Thanks for taking the question and nice quarter.

Just first question on the actual genome and Onco panels.

Can you refine your thinking about how you're going to be bringing these to the market, and Jay, can you maybe just talk a little bit more about how you think about the market opportunity?

I know you talked about $11 billion TAM for clinical oncology, but how do we think about specifically action with the genome and the Onco panel?

Still early days, Tycho, in terms of exactly how we will bring that to market.

We have these consortia in place and operating now.

They're beginning to define the content.

We are working with the regulatory bodies to understand exactly how we would do clinical trials around these products.

They may wind up being more similar, perhaps, than we had originally envisioned, so that's, as we define the content, going to continue to evolve.

Hopefully, we will have a lot of progress by the end of the year in terms of what the definition of the products would look like, and then be in the midst of the development of the content and the assay methods and the regulatory filings in 2015.

In terms of the market size, we think that the $11 billion number for oncology overall is a great TAM for us to be thinking about.

The constraints to the market development, as we've done our homework on this, really revolve around standards, as I mentioned in the script, and so we're trying to move that ball forward as part of this consortium work, and getting these through the regulatory bodies so that they are approved products.

So both of those components are going to be key aspects of the programs.

Okay.

And has momentum from pharma picked up a bit?

I noticed that one of your first X Ten orders was with WuXi, so are the CROs stepping up capacity, and then also, what are the trends like within pharma?

Overall over the past year the pharma business has been increasing.

It's really for discovery purposes on the one hand.

I think there is interest in increasing level for use in clinical trials, but I suspect that won't be implemented by them actually buying large-scale purchases of sequencers into their laboratories, but be outsourced to the CROs.

But I think a general pharma is becoming a larger customer base for us, and in particular around companion diagnostics, which we believe are going to move increasingly toward sequencing for all the scientific reasons we've talked about previously.

And last one, any update on the population efforts?

I think we were supposed to hear something on Genome England one around this time.

Any of these big efforts going to get funded in the near-term?

Well they're definitely going to get funded.

They are continuing to move forward.

Genoming one is funded.

It's a question of what their process is to select the suppliers, and we're not at liberty to disclose any details around that.

But I think in other places around the world there are projects that are in, I would call it, the design phase, and by that I mean talking about specifically how and when to implement them, and we're quite confident that there will be funding behind those, as well.

Okay.

Thank you.

Your next question comes from Doug Schenkel, Cowen and Company.

Thank you and good afternoon.

I know this may seem like a silly question, given the strength, and really the magnitude of the Q1 revenue beat relative to consensus expectations, but I am wondering if there was any pause in the typical pattern of instrument demand in the quarter, given the breadth of new product offerings you announced in mid-January?

And if so, did you fully recover by the end of the quarter, or was there some excess backlog as you headed into Q2?

The first thing I would say Doug is that the order rate in Q1 was extraordinarily strong.

I mean it was quite exceptional.

If there was any pause it was a matter of weeks at the beginning of the quarter.

While we did have a backend loaded quarter just because the inherent strength of the orders in the quarter, our January order rate was quite reasonable.

So we didn't see anything that concerned us even early in the quarter.

Having said that, there clearly are some of our customers who are evaluating alternatives about which way to go, and that continues even into Q2.

As we mentioned the cannibalization effects of these new products were significantly less than we might have anticipated.

We had models internally about draconian types of cannibalization, and we were trying to prepare for that worst-case outcome, and hence our guidance coming into the quarter that we could have flat revenue if that scenario had played out.

But the actual cannibalization was much less than we anticipated.

Okay, that's great.

And then, as you guys pointed out in the past, you usually don't increase guidance in Q1.

Can you provide some detail on what has changed?

Clearly part of that was the Q1 strength, but I guess what I'm getting at is, would you be willing to talk us through your assumptions for X Ten placements in 2014?

Thoughts on cannibalization, in terms of what's factored into guidance?

And really any other key assumptions that have changed at the revenue line.

I can talk to that in general.

I guess the two initial factors are, number one, the magnitude of the revenue beat in Q1, and behind that the strength of the incoming order rate were both key factors for us.

Additionally, as I mentioned in the script as we look forward through the rest of 2014, we are increasingly confident about our ability to deliver more HiSeq Xs than were in the original plan.

And that's because we have now good line of sight on the cameras.

Our production is ramping on the patterned flow cells, as I mentioned we're still early in that, so we don't know exactly where the yields are going to wind up on those patterned flow cells.

But we are ramping quite quickly now.

So that gave us more confidence about that delivery pipeline for the Xs.

In addition, presuming the lack of cannibalization, let's call it, that we've seen in Q1, if that continues through the rest of the year, I guess our conclusion is that we've done a reasonably good job of positioning these new products from a price and a throughput perspective, where they are largely additive to the overall revenue.

We saw almost no cannibalization of MiSeq, which was quite a surprise to us.

We had great strength in the MiSeq product line.

We had a little bit of cannibalization, and our assumptions are that that continues from HiSeq 2500s down to NextSeq, so there's some customers that made that transition, but in a couple of cases at least, they ordered multiple NextSeqs.

So from a revenue perspective that was close to neutral.

So those are all factors that caused us to update the guidance for the quarter and to, I think, robustly increase the forecast through the rest of the year.

Great, and one last one.

Some have suggested that there should be some concern about your growth prospects due to uncertainty regarding the outlook for reimbursement of cancer panels and/or exomes.

In your opinion is there any risk to guidance associated with this dynamic?

Thanks again.

No.

We don't think there is.

We certainly in our guidance try to incorporate what we think is happening around the reimbursement front, and we are getting panels reimbursed, we're getting exomes reimbursed, even in some cases whole genomes.

That's not typical on all of these products, but I think the trend is overall favorable with respect to reimbursement.

And we are beginning to work behind the scenes with the payers to begin to educate them on the trends in next-generation sequencing and to build the economic arguments that NGS really is a money-saving proposition.

So overall we are confident about reimbursement over the next few-year period, and I think if it would go faster than it is now, that would be the upside to the guidance that we provided.

Your next question comes from Derik De Bruin, Bank of America.

Hi, good afternoon.

Hi Derik.

Do you know -- can you give me an idea of how many of your customers are using your sample prep and target enrichment products?

I'm just getting a sense of how much of that revenue stream you're capturing and potential upside as you expand that reach.

Yes.

I can't give you exact customers numbers, but I think in terms of market share, we in general position our market share somewhere between 20% and 30% of the revenue in the sample prep market.

Great.

That's helpful.

And the population genomics market, that's one we've sort of struggled with for a number of years, in terms of trying to put a size on that opportunity.

I guess can you help us frame that a little bit more?

And then also have you heard anything out of BGI and what their plans are with complete genomics and that, and any update on your relations with BGI and how they're responding to the X Ten situation?

Population sequencing is a bit hard to put in a forecast because they're digital, large opportunities.

And so we haven't for example, put our pen down on some specific number of pop-seq programs for this year.

I think that in general they will be X Ten customers, and embedded in our upside forecast for X Tens are some number of units for these overall pop-seq programs.

I can probably give you some indication that around the globe there probably are in the range of 3 to 5 of these that are quite serious, and probably a list of 10 to 15 of them that are theoretical potentials.

Those wouldn't necessarily be 2014 opportunities, but over the next couple of years, 10 to 15 that look quite interesting and potentially real.

With respect to BGI we don't have any more clarity than anyone else on what their rollout plans are for -- and use of complete genomics technology.

We continue to work with them.

They remain a customer.

We have not signed a clinical agreement with BGI.

For now, that's really all the information we have.

Great.

Thanks.

I'll get back in queue.

The next question comes from Dan Leonard, Leerink.

Thank you.

How much of the continued interest in HiSeq in the quarter was driven by the desire of folks with outdated instruments around the 1T or the version 4K as you're calling it.

Implying that they were upgrades from older units than 2500?

Replacements or whatever the right term is exactly.

Not much in the quarter.

So we didn't see a lot of that in Q1.

We think that's some potential energy for revenue here over the next year as 1T gets into the market and customers begin to understand the performance of the 1T kits.

As I mentioned in the script, we just started shipping those last week, so I suspect over the next month or so, customers will begin to share data on the performance of that 1T kit.

We're very excited about it, and our hope is that when customers understand the capabilities that they can have and the run cost they can get with the 1T kit, that it will begin to catalyze an upgrade cycle.

That upgrade cycle could go, as I mentioned in different directions.

It to go towards HiSeq 2500.

It might go toward NextSeqs or some combination of those instruments.

And in some cases we might even get some X Ten orders out of it.

But in the quarter I would say little to no impact with upgrades.

Okay, got it.

And then somewhat related follow-up question.

Jay can you comment at all to the price volume and mix dynamics in the sequencing consumables strength you called out in your prepared remarks?

Can you be a little more specific Dan?

What are you referring to?

I don't know if you want to talk to it specifically, but I'm wondering if price increases were a big component of the record HiSeq and MiSeq consumables numbers in the quarter.

No.

The price increase really hasn't taken effect yet.

And unlike other quarters, Q1s where we've had price increases, we didn't see significant pre-ordering or pre-stocking in Q1.

We saw that over the last two years in anticipation of price increases, customers built up some inventory.

If anything we saw a little bit of a rundown of inventory on the part of customers, largely in anticipation of the shipment of the 1T kit, and for that reason and because that kit wasn't shipping, there wasn't any frontloading of consumables in the quarter.

Okay, got it.

Thank you.

Your next question comes from Ross Muken, ISI Group.

Good afternoon guys and congratulations.

On some of the larger scale projects, what has been the feedback, both in terms of the ability to acquire the number of samples needed to satisfy some of these large projects, particularly on the oncology side?

And then also, just on the bioinformatics side, you guys have been doing a lot to simplify and make them more achievable.

What have you heard in terms of the feedback from the customer base, in terms of what the next leg that needs to happen there, just to Derik's question, make some of these more population-based studies more feasible?

One of our filters that we use on X Ten orders that we take really does relate to samples.

Particularly, I would suggest in the Asian market there's some sense of customers who might buy an X Ten and then actually not use it very extensively.

And those in the long run aren't great customers for us, and so we want to make sure we qualify the X Ten placements to be sure there's a pipeline of samples behind it.

In most of the cases of the customers we are dealing with there are caps into either the hospital systems or into the health system that gives us reasonable confidence of the sample flow to support the throughput level of the X Ten.

And that's certainly true in this first sample of pop-seq projects that we're talking about, the UK being a great example being directly tapped into the NHS.

In terms of the bioinformatics that is one of the core challenges I think in the X Ten installations.

One difference from our original set of assumptions on X Ten is that we thought, when we originally talked about five customers that these would all be very sophisticated customers who initially buy these products, and that they would have full bioinformatic capability and LIMS capability for sample tracking.

And what we found so far is that while they are clearly buyers, there are many other potential buyers who are less sophisticated in terms of sequencing.

So it's incumbent upon us to improve the overall sample support infrastructure around the X Ten, and we're very actively involved in developing that capability to help manage the sample prep and the LIMS workflow behind our sample numbers that are required to feed the system.

Additionally, with the NextBio capability and what we're doing in the BaseSpace App Store, we're bringing in much more horsepower to actually store and analyze the genomic data, particularly when it's hooked into the clinical information, which we can now store together in the NextBio environment.

So making lots of progress there.

Still a long way to go for us and everyone to improve the informatics side.

Excellent.

Thanks Jay, that's it for me.

Your next question comes from Amanda Murphy, William Blair.

Hi, thanks.

I just had a question on the X Ten if I may.

Now that you've got a few orders under your belt and you (inaudible) customers that are placing orders at this point, I'm curious if you have an update on how we should think about the number of customers who might be potential buyers of the X Ten in its current form?

And then just thinking beyond that group, what are you guys thinking about potentially opening up the X Ten restrictions at this point?

Well, I guess the early progress, Amanda, has been incredible on this and we're thinking through what say a 12- month forecast might look like on X Ten.

The pipeline is really strong here, as I mentioned in the prepared remarks.

We expect some additional orders in the second quarter.

I think a core question that's unanswered for us is how much this initial demand really represents an initial bolus that will slow down or flatten out as this set of initial customers really get their systems, and whether we are meeting a market demand that won't continue.

We don't quite know the answer to that yet.

Right now our pipeline looks quite good through maybe the middle of next year, and by that I mean that customers have talked to us about getting access to this technology, but not have funding into Q1 of 2015 or Q2 of 2015, which in some ways is good in that it stretches out the delivery and the order rate for these systems.

So it's a little hard for us to actually forecast where this is going to go right now, but we're cautiously optimistic given the early signs.

With respect to opening up the platform, it's really too early to think about that.

We've obviously done some internal work trying to understand what those market dynamics might look like, both in terms of changing from a requirement to buy 10 units and also what different applications could run on a HiSeq X. But we're also at least a year away from considering any serious decisions about opening that up in any way.

We're just waiting to see how this market evolves, what the demand looks like, and sort of how the dynamics interrelate and interplay throughout the rest of this year.

Got it.

Okay.

And then one quick one on the guidance.

Just curious what your assumptions are around stock-based comps, and then are you still looking for, I think you said before a 70% gross margin for the year?

I'm sorry if I missed that.

Just curious if that was an updated -- if you had updated that number, as well.

Marc, why don't you take that one.

Happy to.

Amanda you're right, we gave updated guidance on revenue and earnings per share.

I'm not actually sure how useful it is to give the guidance for the gross margin stock-based comp and so on, because even when we do, there's a pretty broad range of estimates out there, which I think is fine.

We have our own internal range of estimates as you can imagine.

So really wanting to get people to focus on the top and bottom line really, and have some degrees of flexibility around the individual line items that feature within that.

On stock-based comps specifically, I think it's fair to assume that the current quarter rate is a floor on a quarterly basis, and if anything it could uptick as we go on throughout the year.

Okay.

Thanks very much.

Your next question comes from Isaac Ro, Goldman Sachs.

Good afternoon guys, thanks.

Just a follow-up on the informatics strategy if I may?

Maybe you guys touched a little bit on the strategy there.

If you could talk a little bit more specifically on the operational plan?

You have opened a facility in south San Francisco last year, you're building that out.

Maybe give us an update on how that went this quarter, what the operating plan is for the rest of the year, specifically around the building up the informatics strategy?

Well just to be clear Isaac, the facility in Mission Bay in the Bay Area won't be open until this fall, so we are doing the build out there, but there's no staff in that facility as yet.

Most of the informatics staff that work on the NextBio part of this are located in Santa Clara where NextBio was, and we suspect that most of the people will continue to stay in the South Bay, at least for the next year or so.

So, we will be beginning to hire new informatics talent into the Mission Bay facility as we open that up in the fall.

In terms of operational aspects around informatics, we are running NextBio and BaseSpace in our new enterprise information business unit headed by Nick Naclerio.

We're focused on the NextBio side, in terms of generating revenue from independent sales of NextBio, and these are generally into pharmas and large institutional sales.

We're putting a sales force that fits into that business unit.

And I think we now have four or five people in that sales activity.

And then of course we are coupling NextBio into these large X Ten populations sequencing sales, because we think it's a fantastic back end, and to the extent we can integrate NextBio directly into the workflow and pipeline.

It greatly simplifies the installation and the implementation and is more of a turn key solution for our customers.

So you will find NextBio increasingly bundled into those large scale sales.

Got it.

That's helpful.

And then just a follow-up on MiSeq, you touched on the strength you saw there this quarter, but wondering if you could put that in the context of the competitive environment.

In the lower end of the market so to speak, really on a global basis, because your primary competitor, they're obviously trying to get some new products out the door this year, they're under the wing of a bigger distribution channel globally.

So just curious about how you see the MiSeq competitive environment playing out over the balance of the year?

Thank you.

MiSeq was as I mentioned an extremely strong performer in the quarter.

Part of that was due to the FDA approval, both directly by customers ordering the DX version of the product.

But I think even more so indirectly from customers who know that there is now an FDA approved platform and just putting some air under entire product line as a result of that.

I think the competitive position was greatly enhanced by the price decrease.

We got feedback from the field that the $99,000 price point, much like the $99 array price point was a year ago, sort of a magical place to be and it just inherently increased the demand getting under $100,000.

From a competitive position we won the vast majority of the head-to-head competitive situations with customers.

In fact, we didn't get any specific reports of lost orders from MiSeq to competitors, and hence the overall strength in the numbers.

Your next question comes from John Groberg, Macquarie Research Equities.

Thanks.

I wanted to just focus a little bit on the comments around new customers.

I think you said, if I remember correctly, about 70% of your shipments were to new customers, and I just wanted to maybe ask two questions.

One, if you think about it from a same-store sales perspective or existing customers, what rate are they growing at?

And how do you think about all the new products that you've launched, and their ability to evaluate those new products and potentially upgrade, and how that could change that dynamic?

And then the second point I wanted to explore was just how important this accelerator initiative that you've announced and launched is for you as you think about trying to develop new applications and new customers?

I think a key contributor to the high number of customer acquisitions actually might have to do with the 1T kits in a way.

Because what we saw in the HiSeq install base was perhaps fewer HiSeq orders from the existing customers in anticipation of the 1T kit, both to see how well it performs on the one hand, but also because of the inherent throughput increase.

Not to really say it stalled out the market, but I think customers were waiting to see what do they actually get delivered from that 1T kit before they begin ordering incremental HiSeqs to add to their fleet.

So that probably depressed the order receipt number a little bit from our existing install base of HiSeqs.

In addition, we didn't have the -- we hadn't really started the upgrade cycle from the older generation of HiSeqs.

And so I think just on a statistics basis that meant that most of the HiSeq orders came from new customers.

I think similarly on MiSeq because of the FDA approval we saw very broad adoption in new clinical sites across the MiSeq platform.

I think on NextSeq we had a little bit of the opposite effect, because it was very early on that new -- that most of the orders came from existing customers because they knew the technology, they knew the reputation of Illumina.

But, if you look forward in the pipeline, most of the forward-going pipeline of NextSeq was from new customers as we begin to educate this new target base on what that technology is and what it can do.

With respect to the accelerator, this is strategically quite important for us.

We planned this year to fund three companies in the accelerator.

We're in the process of receiving proposals now.

The purpose of this is of course for us to catalyze new companies that can develop great applications around NGS.

So we're co-investing here with Yuri Milner, funding them over a relatively short timeframe, and then either kicking them out as branded companies that would be self-sustaining, or if they are not successful at what they're trying to do, closing them down.

So I think we'll be very interested to see what the success of the initial set of companies is, and hopefully if it works the way we hope, we will be able to grow the program into 2015 and beyond.

Okay.

Thanks a lot.

Can I ask just one quick one for Marc.

On the cash flow on the receivables, is that all due to timing?

Is that what you said?

I just wanted to make sure I was clear on the cash flow.

Yes John, you are referencing the uptick in the DSO?

Yes.

Yes, that was.

It's the timing of shipments in the quarter and when we expect to collect that, which clearly goes into the second quarter.

Okay.

But as you are expanding these new customers, your bad debt or anything isn't increasing?

Not at all.

No change in the dynamic there at all.

Okay.

Thanks a lot.

Next question comes from Bill Quirk, Piper Jaffray.

Thanks guys.

First question is, just hoping you could elaborate a little bit on the interest level for the NextSeq, and specifically around the current customer list?

Not surprised that you have quite a bit of non-academic interest, in fact candidly, I though it might have been a little bit higher.

So maybe you can just talk to what you are seeing and maybe how this might transition.

Thanks.

Well, I think the interest in the platform has been incredible.

What we saw in actual order receipts was probably muted a little bit by the fact that we had this two-channel chemistry versus four-channel chemistry.

It took a while for customers to actually believe that the chemistry performed as well as our four channel chemistry does.

I think all questions about that were raised once customers began getting them into their sites, getting them up and running and actually beginning to share the data sets.

So the data that's coming out from the initial set of customers, I think unequivocally says that the data quality is as good as our four-channel chemistry.

And so I think that has really in the latter part of the quarter catalyzed the actual order rate or the orders that crossed the finish line into the quarter.

The pipeline is extremely strong for NextSeq and I think it will, while Q1 was focused largely on existing customers for reasons I just talked about, I think going forward it will be driven by a higher percentage of new customers because of the flexibility it provides, in a core lab setting in particular it's a perfect instrument for that kind of customer.

Got it.

And then, I will stretch the call to follow-up to that question, but can you talk at all to some of the rumors I guess market speculation around kitting the verifi test?

Well I don't know what the rumors are.

We've talked specifically about the fact that we're going to submit that into the FDA.

So that's public information and we're going to get that submitted by the end of the year.

That's our target.

Perfect.

Thanks guys.

Your next question comes from Tim Evans, Wells Fargo.

Hi, thanks.

I was wondering, Marc, if you might be willing to comment on your longer-term guidance, and specifically the component of that in which you want to grow EPS faster than revenue?

Is that still achievable given where your margins are now?

And kind of the dynamics around the share count?

And then maybe, Jay if you could also maybe comment on the longer-term outlook for the array market?

Tim, yes happy to comment on that.

There's no real change in our longer-term guidance, either the topline view that we had there, or the fact that we would expect -- it's more of a goal I would say than anything that we expect to provide leverage over that longer-term period.

Don't see anything in the current results that would cause us to think about that any differently.

In fact, on the contrary I would think.

So the dynamics that we have and the opportunities that we have are pretty much the same as they were previously, and I wouldn't change that at this point.

On the array market, it's a market where we have some offsetting factors at work; on the upside of the array market we have growing strength in the IVF opportunity, the ag business continues to do well.

We remain bullish about what's going to happen in the consumer markets using arrays here over the next couple of years.

And we're continuing to see remaining elasticity there as the prices come down.

That's offset of course by the fact that the traditional GWAS market, I think, is moving much more toward sequencing, as is the expression market moving toward RNA-Seq.

And so those are downward forces on the overall array business.

So in our internal forecast range from down in low-single digits to up low-single digits, and it will probably bounce around within that range quarter to quarter.

Great.

Thank you.

Next question comes from Jeff Elliott, Robert W Baird.

Thanks guys, and great quarter.

Jay, first question for you.

Can you give us an update on Moleculo, or any of the other long read programs?

Yes.

Moleculo is in late stage development now.

We expect to begin shipping that product late in Q2.

We are continuing to work internally on enhancement of long read options, and so we have a lot couple of other development programs that are early in research right now.

But very promising, we think, in the long run, and those would be complementary to what we're doing with molecular.

Good.

And Marc, can you clarify, did you see any weather impact in the quarter?

I know you had strong consumables numbers, but was there any weather impact in the US?

No really, there wasn't.

There really isn't for our business.

It's not something that has material impact on our revenue.

So, I wouldn't comment on that, nothing material.

Good.

Thank you.

At this time we don't have any additional questions.

I will now turn the call back over to Rebecca Chambers.

Thank you.

Thank you all for joining us.

As a reminder a replay of this call will be available as a webcast in the investor section of our website, as well as through the dial-in instructions contained in today's earnings release.

Thank you for joining us today.

This concludes our call and we look forward to our next update following the close of the second fiscal quarter.

Ladies and gentlemen, that does conclude today's presentation.

Thank you, and have a great day.