Illumina Inc (ILMN) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2015 Illumina, Inc.

earnings conference call.

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

At this time, all participants are in 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.

And I would now like to turn the conference over to your host for today, Ms. Rebecca Chambers, Vice President of Investor Relations.

Please proceed.

Thank you, Jasmine.

Good afternoon, everyone, and welcome to our earnings call for the first quarter of FY15.

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 Illumina.com.

Participating for Illumina today will be Jay Flatley, Chief Executive Officer; Marc Stapley, Senior Vice President and Chief Financial Officer; and Francis DeSousa, 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 updated guidance for 2015.

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 expected financial results and commercial activity 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 files 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 the Bank of America Health Care Conference in Las Vegas the week of May 11, as well as the Bank of America Global Technology Conference in San Francisco on June 3. We also plan to participate in the Goldman Sachs Annual Healthcare Conference the week of June 8 in Los Angeles.

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 hope that you all picked up that Rebecca was recently promoted to Vice President of Investor Relations.

So congratulations to Rebecca on a well-deserved promotion.

I'm very pleased to report a strong start to 2015, as we had another quarter of record results and our 14th quarter of sequential revenue growth.

Revenue was $539 million, an increase of 28% year-over-year, despite major currency headwinds that Marc will discuss shortly.

The leverage we delivered this quarter was even more impressive, as non-GAAP earnings per share grew 72% compared to the first quarter of 2014.

The contributors to these robust results included increased demand from clinical customers, solid operational execution, and a greater than anticipated tax benefit.

First quarter total sequencing revenue grew 40% year-over-year, driven by record consumables in NIPT samples, as well as increased demand for instruments.

Sequencing instrument revenue grew 32% compared to the first quarter of 2014, largely due to incremental demand for the HiSeq X and the NextSeq 500.

Shipments of HiSeq X instruments during the quarter were strong, due to deliveries to an existing customer expanding capacity, and new orders, which included a European personalized cancer center establishing a whole genome sequencing facility.

This center is focused on tumor profiling to direct treatment, clinical trial enrollment and discovery of new bio markers, with a goal to implement tumor sequencing as a standard of care within their country, delivering on the promise of precision medicine.

Our HiSeq X order funnel remains healthy, and we expect that to be the case throughout this year.

In Q1, we shipped a record number of Xs, normalizing our backlog, and therefore expect noticeably fewer shipments in Q2.

HiSeq X orders and shipments are expected to be lumpy, due to the timing of customer funding and operational readiness.

We're in numerous conversations with customers who are currently assessing whether the X Five or X Ten configuration is best suited for their needs.

As expected, customers considering the X Five are focused on the ability to gain access to lower priced whole genome sequencing with a lower overall capital investment.

We continue to believe that the addition of the X Five to the portfolio will grow the overall market more quickly and accelerate the evolution to sequencing whole genomes.

In January, we augmented the HiSeq family of instruments with the addition of the HiSeq 3000 and 4000, which open our patterned flow cell technology to all applications, delivering higher throughput and lower cost per base than the 2500.

Customer feedback on these new instruments has further fueled our excitement around this expanded portfolio, which we believe offers tremendous flexibility to address various budgets and scientific priorities.

Momentum is growing for these new models, as customers determine which HiSeq is optimally suited for their workflow needs.

Despite the short-term challenges of customers reassessing their pending purchases, we received total non-X HiSeq quarters in line with Q1 of last year.

We expect a growing fraction of orders to migrate to the newer models over the next few quarters.

A portion of this expected demand will come from the replacement cycle of the older generation HiSeqs that cannot run the 1T kits.

As an illustration of this, we received an order for a number of HiSeq 4000s from BGI, who has the largest fleet of older generation instruments, as they are assessing the new platform for use in their services lab.

Additionally, the majority of 3000 and 4000 purchases in the quarter came from current customers who needed to add capacity.

Despite the strong interest seen in the 3000 and 4000 during the first quarter, demand for the 2500 exceeded our expectations.

For clinical customers, the cost and effort to validate a new instrument, as well as the unique attributes of the 2500, such as rapid run mode and longer read lengths, will keep them committed to the 2500 in the near term.

Moving now to NextSeq, Q1 orders and shipments both experienced strong growth year-over-year.

The platform has also reached an important milestone with the introduction of the V2 chemistry, which improves error rates to the quality level of our more mature platform.

Despite shipments beginning halfway through March, V2 reagents accounted for close to a third of the orders.

NextSeq demand from clinical and translational customers accounted for about half of all orders in the quarter, while new to sequencing customers accounted for more than 40% of instruments sales.

On the regulatory front, we expect to register with the FDA and place the IVD CE mark on a DX version of the NextSeq 550 later this year or early in 2016.

With V2 reagents now shipping, as well as the availability of the NextSeq 550, we believe NextSeq will play an increasingly important role in both research and clinical markets.

MiSeq continues to benefit from being the first FDA cleared next-generation sequencer, as we again saw heightened interest in the MiSeq DX, as orders were near record levels in the first quarter.

Customer segmentation was similar to previous quarters, with approximately 60% of boxes sold to new to Illumina sequencing users.

As we discussed previously, V3 chemistry became available on the MiSeq DX in RUO mode in Q1, which we expect to continue to support demand.

Additionally, at AACR this weekend, we highlighted a soon-to-be launched enhancement to our TruSeq custom amplicon kit that lowers the sample input required to 10 nanograms, and in some cases to 1 nanogram, improving our competitive position in the amplicon market.

Additionally, we've optimized the protocol to reduce steps and the turnaround time.

Further enhancements include an easier to use and more robust version of DesignStudio, our custom amplicon design tool, as well as improved software analysis and reporting.

In Q1, we made several product launches that support our strategy to deliver complete sample to answer workflows.

First, we launched our neo-prep system at AGBT, and we now have 11 sites providing feedback on the instruments' performance and reliability.

While the system has met expectations, we've also identified continuing areas for improvement around user interaction and training.

As a result, we're ramping shipments in a controlled way to maximize customer satisfaction.

This sample to answer strategy also extends to our TruSight HLA and forensics products, both of which began shipping in Q1.

During the first quarter, our MiSeq HLA installed base increased to 125 units, and the number of opportunities in our pipeline continues to grow.

Customers are in various stages of evaluating and validating the TruSight HLA kit, and we hope to have adoption metrics to share with you on this product in the coming quarters.

In its first quarter since launch, the MiSeq FGX demand has exceeded our projections, as we placed instruments at state and federal law enforcement agencies, public corporations and universities.

Customers intend to use the system for targeted genotyping of criminal database samples, evidence samples from violent and nonviolent crimes, missing persons cases and mass disasters, and for generating investigative leads in cases that have gone cold.

We're very excited about the long-term forensics opportunity and believe our progress in this market will surpass our initial expectations.

Moving now to micro arrays, this quarter total micro array revenue declined approximately 11% year-over-year.

However, the year-ago quarter included a large genotyping services order that we worked on for over a year and completed in Q1 2014.

Net of this revenue, the array business was down approximately 3%.

Strength in genotyping services associated with the growing direct-to-consumer customer was offset by a decline in array instruments.

Interest in our Infinium portfolio was strong in Q1, bolstered in part by the new product introductions, including our Maze LD-Plus and our MEGA arrays.

Introduction of the MEGA array, which provides an improved understanding of diseases across diverse global populations, has enhanced our position in the bio banking market.

Since our last update, we closed three bio banking deals and are in conversations for additional orders which could exceed 1 million samples in aggregate.

This increased competitive win rate is partially due to new product introductions, as well as to our ability to offer genotyping and sequencing solutions.

Our informatics efforts continue to gain traction as we enhance the BaseSpace ecosystem.

11 new or upgraded apps have been added since the beginning of the year, resulting in a nearly ten-fold increase in the number of apps launched in the first quarter compared to last year.

Additionally, we plan to include the ability to store array data generated on the NextSeq 550 by year-end.

Our bioinformatics focus will more rapidly open new markets by removing the traditional challenges in storing and analyzing the large data sets necessary to understand the genetic underpinnings of human disease.

Overall, our market opportunities continue to broaden, due to accelerated demand from clinical and translational customers.

As an example, first quarter shipments to these accounts grew approximately 60% year-over-year, while other segments grew in the mid-teens.

This led to clinical customers accounting for close to 35% of total shipments.

Additionally, close to half of instruments shipped in Q1 went to clinical and translational laboratories.

This growing demand is primarily a result of market development activities in oncology and reproductive health.

In fact, research and clinical sales to the oncology market, excluding the HiSeq X, were approximately $100 million in the first quarter, growing 37% year-over-year.

We remain focused on delivering sample to answer solutions to address the more than $12 billion oncology market opportunity and continue to make progress toward this goal.

Product development activities for both versions of our onco panel remain on track.

During the quarter, we announced that Merck Serono has joined the onco panel program, adding to the partnerships we've previously announced.

Our liquid biopsy project continues to progress well and we remain on track to launch a targeted RUO kit by year-end.

Moving to reproductive and genetic health, the NIPT market continues to develop on a global scale.

During the first quarter, we signed four new technology transfer agreements, bringing the total to 13 European labs offering NIPT based on Illumina's protocols and software.

Additionally, we performed close to 50,000 tests during the quarter, an increase of 13% sequentially.

Globally, we have approximately 50 labs sending samples to our Redwood City facility for [aniploide] analysis.

Our regulatory strategy also progressed during the quarter, and we remain on track to launch our VariSeq NIPT assay with CE IVD marking over the summer.

The unique attributes of this product, which include one-day turnaround, a lower assay cost and the ability to detect fetal fraction, will enable broader adoption of prenatal testing in global markets.

We achieved a key milestone in China with the recent Chinese FDA clearance of the NextSeq CN 500 with an NIPT assay, which was specifically designed by Berry Genomics and Illumina for the Chinese market.

With the availability of this product for sale by jointly approved distributors, we are now able to place NextSeqs in hospitals and labs across China to further drive adoption of non-invasive prenatal screening.

In summary, Q1 was another remarkable quarter for Illumina.

Demand for our industry-leading products remained strong, and we exited the quarter with good momentum across our diverse customer base.

Looking ahead, we believe a relentless focus on innovation and market development are key to addressing our large and untapped opportunities, as we unlock the power of the genome.

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

Thanks, Jay.

As Jay mentioned, Q1 marked a strong start to the year, with revenue growing 28% year-over-year to approximately $539 million.

Foreign exchange rates in many of the currencies in which we book contracts continued to decline; and on a constant currency basis, revenue grew 33% versus Q1 2014.

This robust performance can be attributed once again to record sequencing consumables and strength in instrument shipments, in particular HiSeq X Ten and NextSeq, both of which we introduced in Q1 of last year.

Shipments in the Americas grew 32% year-over-year and European shipments increased 30% over the same period, in spite of the FX headwinds related to the euro and British pound.

APAC shipment growth, at 10% year-over-year, was muted due primarily to weakness in Japan, as allocations of funds remained constrained in the region and the yen declined against the US dollar.

We expect weakness in Japan to remain, as budget delays are anticipated to continue through Q4.

This decline in Japan was partially offset by strength in China, which more than doubled compared to the prior year, due primarily to the positive impact of HiSeq X.

Instrument revenue grew 26% year-over-year, to reach $146 million in the first quarter.

This increase was primarily driven by demand for NextSeq and HiSeq X Ten, which was partially offset by a decline in array instrument sales year-over-year.

Overall consumable revenue in the quarter was $308 million, an increase of 27% compared to the first quarter of 2014, as higher demand for sequencing consumables was partially offset by a small decline in arrays.

Consumable revenue represented 57% of total revenue, in line with Q4 but down from 58% in the prior year period.

Sequencing consumable revenues grew 39% over Q1 of last year, to reach a record $240 million, driven by our growing installed base of instruments.

Sample prep shipments increased more than 25% year-over-year, due to strong demand for our Nextera, TruSeq DNA, and TruSight targeted panel solutions.

MiSeq utilization was near the high end of our projected range of 40,000 to 45,000 and flat sequentially.

We continue to see an increase in the number of accounts running at full production levels.

Nearly half of these accounts are clinical customers, as MiSeq is now considered the gold standard for oncology and HLA lab developed tests.

HiSeq utilization for instrument excluding HiSeq X was slightly higher sequentially, and in our projected range of 300,000 to 350,000.

Consumable pull through for NextSeq and HiSeq X was slightly above the guidance ranges we provided of 80,000 to 100,000 and 600,000 to 650,000 per year, respectively.

While we're please with this result, we believe the heightened levels continue to be a function of the calculation method, which tends to overstate the metric in the first year of a product ramp.

As a result, we are not updating our expectations on either instrument.

Services and other revenue, which includes genotype and sequencing services, instrument maintenance contracts, and revenue from oncology agreements, grew 36% versus Q1 2014, to $79 million.

This improvement was driven by growth in NIPT services, which benefited from higher test fees, as well as increased test send-out revenue, revenue from our oncology agreements, and extended maintenance contracts associated with a larger sequencing installed base.

Turning now to gross margin and operating expenses, I will highlight our adjusted non-GAAP results, which exclude 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 was 72.2%, essentially flat compared to 72.3% in the fourth quarter.

Year-over-year adjusted gross margin has expanded 180 basis points, due to an improvement in instrument margin offset in part by currency headwinds.

Adjusted research and development expenses for the quarter were $80 million, or 14.9% of revenue, which is approximately flat compared to $80 million, or 15.7% of revenue in the fourth quarter.

Additional headcount and outside service expense was offset by absorption of spend associated with our oncology agreements.

Adjusted SG&A expenses for the quarter were $97 million, or 18% of revenue, which is also approximately flat compared to $97 million, or 18.9% of revenue in the previous quarter.

Returning to a more normal incentive expense in Q1 compared to the higher amount we recorded in Q4, resulting from the strong year-end performance, offset the higher headcount and benefit expense.

Adjusted operating margins were 39.3%, compared to 37.7% in the fourth quarter, higher sequentially due to leverage associated with the increased revenue.

Operating margin was also higher compared to the 34.9% reported in the first quarter of last year, due to the impact of improved gross margins and operating expense leverage.

In the first quarter, we recognized approximately $500,000 of adjusted other expense, primarily due to the impact of foreign exchange losses.

During the quarter our stock-based compensation equaled $32 million, lower than the $38 million reported in Q4, which was elevated due to additional accrued expense for our performance stock units.

For the remainder of 2015, we expect stock-based compensation expense to return to more normalized levels.

Our non-GAAP tax rate for the quarter was 24.5%, compared to 29.9% in the first quarter of last year, lower primarily due to the reversal of a valuation allowance related to state R&D tax credits.

Excluding the impact of this item, the Q1 non-GAAP tax rate would have equaled 28%, slightly better than our prediction entering the quarter.

Non-GAAP net income was $135 million for Q1 and non-GAAP EPS was $0.91.

This compares to non-GAAP net income and EPS of $80 million and $0.53, respectively, in the first quarter of 2014.

Additionally, the impact of foreign exchange lowered Q1 non-GAAP EPS by approximately $0.08 relative to Q1 2014.

We reported GAAP net income of $137 million, or $0.92 per diluted share, in the first quarter, compared to net income of $60 million, or $0.40 per diluted share, in the prior year period.

Current period results include a pre-tax gain of $15 million resulting from the acquisition of Sequenta by Adaptive Biotechnologies, given our minority investment in Sequenta.

Cash flow from operations equaled $67 million, lower sequentially due to $76 million of additional paid-in capital associated with excess tax benefits from stock compensation, as well as bonus and other year-end payouts which occur in the first quarter.

DSO increased to 59 days compared to 51 days last quarter, as a result of the relative timing of shipments being more back-end loaded due to the introduction of our new portfolio of products in January.

Capital expenditures in Q1 were $37 million, due primarily to spending associated with our ERP implementation, as well as other ongoing investments focused on scaling the organization, resulting in $30 million of free cash flow.

During the quarter, we repurchased approximately 180,000 shares for $35 million, and we have $96 million remaining under our previously announced program.

We ended the quarter with $1.4 billion in cash and short-term investments.

Turning now to our expectations for 2015, we continue to project approximately 20% total company revenue growth.

On a constant currency basis, we now expect revenue growth of 23%, previously 22%, as we now anticipate a 300 basis point impact from foreign exchange, given current rates.

While Q1 revenue grew 28%, for the second quarter we expect year-over-year revenue growth in line with our full-year guidance.

Foreign exchange continues to present a headwind similar to that seen in the first quarter.

We will see a sequential decline in HiSeq X shipments, which were particularly strong in Q1.

And we anticipate a $20 million sequential headwind from the Asia-Pacific region, due primarily to the challenging Japan funding environment.

We are now projecting for 2015 an increase in non-GAAP EPS to $3.36 to $3.42, up from $3.12 to $3.18.

Additionally, we now project a full year pro forma tax rate of 27%, which includes the benefit recorded in Q1, as well as the 2015 Federal R&D tax credit and other extenders.

For modeling purposes, we feel it is appropriate to assume a Q2 tax rate of 29%, given the expectation that the R&D tax credit will be passed in Q4.

And at that time, we will record the full-year impact.

In summary, our strong first quarter results, which included impressive revenue growth, a strong pipeline heading into Q2, and significant leverage, sets the stage for a robust 2015.

We continue to make progress on our market developing strategies to address our more than $20 billion market.

The combination of technology leadership, which was further bolstered early this year with our new product introductions, and our market enablement will catalyse the broad adoption of genomics.

Thank you for your time.

We will now move to the Q&A session.

To allow full participation, please ask one question and rejoin the queue if you have additional questions.

Operator, we will now open the line for questions.

(Operator Instructions)

Tycho Peterson, JPMorgan.

A question on reimbursement.

We're kind of in a holding period, waiting to see if the MACS are going to price the NGS codes.

Can you maybe talk about your discussions with some of your CLIA labs customers, how much of an overhang you think this is right now, and what you expect from commercial payers in the event that the MACS decide to price or not price the next gen codes?

So far, Tycho, we haven't seen much of an impact from this.

We think that the market is ready for more clarity around how NGS gets created, and so we are looking forward to these codes being fully issued.

We've seen a lot of growth in the clinical markets based on tests that aren't, frankly, reimbursed.

And so I think it's going to affect, at least in the next year or two, only a fraction of the total market growth that we anticipate.

So we're looking forward to it.

So far, little or no impact.

And then on informatics, we've heard some of your X Ten customers are only analyzing a small subset of the data being generated.

Can you talk about how much of the data you think being generated on X Ten is actually being analyzed and put through the informatics pipeline, and are there things you can do now to help some of those customers?

Certainly, most of those customers are analyzing the entire exome.

The analysis of the data outside the exome is much tougher, just because we are in the very earliest phases of having complete human genome data sets.

The analytical tools to analyze things outside the exome are vastly less mature.

So it is more of a challenge, but it's one of these cart before the horse problems.

We have to generate lots of whole human genomes before people are incented to develop the tools to do the analysis outside the exome.

But that's clearly coming.

And it's, frankly, one of the reasons that the X strategy is so important, that we begin to push sequencing all the way to getting the entire human genome, so that we can broaden the analysis out to regulatory regions and other regions that are, frankly, going to be quite important.

If you think about happened in the GWAS era, a very significant amount of the discoveries that happened in GWAS were outside the exome.

But we just haven't had a good way to characterize those.

Doug Schenkel, Cowen and Company.

Sorry about that, was talking to myself on mute.

Sorry about that and good afternoon.

So you indicated that demands for the 2500 exceeded expectations in Q1.

Does that mean 3000s, 4000s placements were weaker than expected?

Is there any consistent profiling of 3000 and 4000 purchasers versus 2500 new purchasers that you can provide?

And then the last part of this question is, could you provide us some information on backlog for the new instruments, given that I think that would be of broad interest, since this was a late in Q1 launch?

What I'd say is that if you look at the combination of 2500, 3000 and 4000 in aggregate, we sort of hit the total about where we'd expect, maybe a little bit over where we might've expected.

Our internal models had error bars around them, because we didn't know how fast customers would be able to make decisions or get additional funding if they were going to buy a 2500 to get up to a 4000.

So we had wide error bars around all of these products in terms of units.

And as a result of that, we had to, from a manufacturing perspective, have enough systems in the manufacturing pipeline to be able to meet any ranges of demand.

I would say if you looked at the center point of all of those ranges, we were probably slightly lower on the 3000, 4000 and somewhat higher on the 2500.

I think the reason for that, at least partially, I mentioned in the script, is that clinical customers who were already using validated methods on the 2500 just continued to do that, for reasons that we mentioned.

I think there is still going to be a period where people have to get additional funds to get the ability to buy a 4000.

And so if they had a tender or a grant already coming in place for the dollars for a 2500, they just went ahead and executed that.

As we mentioned, I think as we look forward over the next couple of quarters, that shift will begin to move, I think, much more aggressively toward the 3000/4000.

In terms of a profile of customers, I think, in talking to our commercial team, the people who are buying 4000s were, in many cases, those customers who had aspirations to get into the X world but couldn't.

And so they had a bigger pile of money already there.

They were hoping to get an X Five or an X Ten, but they just couldn't reach that far.

And the 4000 offers them the ability to run all applications.

So I think the 4000, our customers want a lower price per data point, have a broad application set, and had that incremental funding to be able to get to the 4000.

And BGI is probably a great example of a customer like that.

With respect to backlog, we don't really talk about specific backlog, and so we're probably not going to give you any additional color on the mix of the backlog at this point.

Derik de Bruin, Bank of America Merrill Lynch.

Marc, just a quick housekeeping question.

There was no M&A, right?

It was a 5% FX hit in the first quarter and then you are expecting it to taper off in the rest of the year.

Is that how you get to the math?

I'm sorry, Derik, I wasn't following.

You look at the reported versus the constant currency number in Q1 -- (Multiple Speakers)

Yes, no M&A.

That was the FX, when you look at the year-over-year change in FX rates.

Great.

And that had to do with the higher Asia mix and the European mix to the numbers in Q1.

You're expecting that to taper off and be less in the rest of the year, correct?

The comps are slightly different.

But a lot of the decline was towards the back end of the year.

So you would see similar FX throughout this year, maybe with the exception, a lesser impact in the fourth quarter, slightly.

Great.

Because the rates had already moved up.

(Multiple Speakers)

Obviously, we'll base it on where we are today, not where we might end up.

Great.

You mentioned that BGI has replaced some of its old 2000 fleet with 4000s.

Do they have 100-plus 2000s?

Are they planning to upgrade the entire fleet or some sub segment?

Are they done upgrading?

Could you give us a little color on that?

Yes.

I think BGI had mothballed some of their 2000s.

So if you looked at their entire fleet, some of those original 2000s were so early that they were no longer economical to run.

So they were running only a portion of their installed set of systems.

Our hope is that this initial purchase of 4000s is the beginning of a broader upgrade program, but we don't have any specifics from them.

They're in the process now, after the installation, of beginning to evaluate the performance of the 4000, and we are cautiously optimistic that we'll be able to continue to sell more instruments to them.

But no wholesale upgrade has been discussed, at this point.

Great.

And then one quick one.

It sounds like you're making a lot of progress in the forensic space.

So could you talk a little bit about the compatibility and particularly the backward compatibility with looking at the old --

I think the thing that makes this project so exciting for us is that it solves that challenging problem of how long we thought it would take to convert the installed base of forensics technology, because of the many years of database creation.

This product has backward compatibility with the SDR technology that was used to create those initial databases, but provides tremendous additional information in terms of SNPs, much broader analysis across the genome, initial information on traits, the ability to analyze mix samples that you can't get at with traditional technology.

So that's what so exciting and why we think the market opportunity is so large is that it solves the backward problem, as well as opening brand-new technology for the future.

Jon Groberg, UBS.

Good afternoon and congratulations on a solid quarter.

Maybe just tying some of these things together, if you think about this very strong first quarter, obviously, the increased guidance on the EPS, but maintaining the 20% growth for the year.

Can you talk a little bit about what some of your customers -- I know you price a lot in US dollars with some of your customers overseas.

Are you seeing any impact in terms of the weakening currency having an impact on what they're able to purchase, or just what it is that makes you think that the back half of the year maybe is a little slower, outside of obviously tougher comps, I'm curious if there's anything else specifically that you are seeing that leads you to believe that you are still going to be at that 20% rate?

Thanks.

Let me handle the commercial side of that and then I'll let Marc talk about the guidance.

I'd say with respect to individual customer situations, there probably are some particular cases where we didn't get orders that we might have otherwise, particularly in Europe, where there are a lot of tenders.

So we might have had a little bit of reduced order rate as a result of that.

We are going to adjust our peg rates going forward, so we'll normalize some of this in terms of how the pricing works in Europe.

But I expect to see a little bit of depressed demand, just because prices are going to be higher.

But I don't think it's material and it's embedded in the guidance that we've given today.

Marc, you want to talk about the specifics of the guidance?

Jon, obviously, there's a couple of factors there, one of which is, as we mentioned, our view around the impact of the foreign exchange headwind is about 100 basis points higher than it previously was.

We came off Q1 with very strong shipments in HiSeq X. We've got the headwind of Japan that we talked about, as well.

Clearly, based on our guidance, you'd have to have a Q2 to Q4, though given Q1 was 28%, that would be lower than 20% growth.

You mention the comps.

Clearly the comps are pretty high towards the back end of 2014, as well.

So those are the kind of headwinds that we are facing there that I think really explain why the guidance for revenue is what it is.

On the EPS side, obviously you mentioned, we brought that up.

We had a very significant beat in the first quarter, driven by a couple of items, obviously strong revenue, but also the expenses were flat, and so that's not the expectation going forward, in particular.

And we had a tax benefit.

So just to be clear, though, on the guidance, you wouldn't say it's anything around maybe the X Five or the 3000, there's nothing around the adoption or the interest that you're seeing from your new product that's driving the more conservatism.

It's just, to be clear, it's just the items that you laid out that you are pretty satisfied from a new product standpoint, how those are being adopted?

Yes.

I think we are very happy with the adoption.

So none of it is driven by that.

And just to put this guidance in perspective, it's the same number that we guided to coming into the year with a greater headwind from FX than we anticipated.

So the guidance, in that sense, is better than what we gave coming into the year, and certainly it's way better on the EPS side.

Of course, with a large portion, higher portion of it locked in in the first quarter than we obviously anticipated at the beginning of the year.

Amanda Murphy, William Blair.

A quick question, I guess a follow-up to Doug's earlier question.

I know it's still a bit early, but have you had a chance to talk to customers about 3000/4000, and how many of customers are thinking about not upgrading, but adding the 3000/4000 because of its capabilities?

Just trying to assess this idea of incremental demand, the HiSeq as a product portfolio has been pretty stable over the past few quarters.

Do you think is it still that the 4000 and 3000 could add some instruments to that in terms of opportunity over time?

Yes.

We think so.

It will certainly add in the dollars side, because they're higher priced instruments.

Customers want access to lower prices per data point as they're doing deeper and deeper sequencing for various applications, and the 3000/4000 will give you the capability with the patterned flow cell technology.

So we do think they're going to generate incremental demand over where we would have been had we just had the 2500 in the product line.

We can be very confident about that.

Just last question, I don't think you said this.

What was the breakdown between the 3000/4000 in terms of the products that are being shipped this quarter?

I know there wasn't that many.

But are you seeing better demand for the 3000 or the 4000, generally?

The 4000 is higher.

But I would say that we probably had a little more interest in the 3000s than we might've anticipated.

We had thought that the 3000 model was truly a way to deal with those customers who couldn't get the funding and is like the 1000 was to the 2000 back in the older days, which is only a couple of years ago.

So we probably were presently surprised on the fraction of people who had interest in the 3000s.

But I think in the long run, the 4000 is really going to be the instrument of choice.

Dan Leonard, Leerink.

Two questions for me on pacing.

First off, can you offer some color on your expected pacing of X shipments throughout the year?

You mentioned you expected a down tick in Q2, but do shipments pick up thereafter due to the availability of the Five configuration?

Well, I'd say, Dan, that what we've done now is we've normalized the backlog.

We had a buildup of backlog during the course of 2014, and we've been able to bring that backlog down into a reasonable range now, so we can supply whatever the customer's need.

So, I think what we will ship through the course of the rest of the year will be largely dependent on what the incoming order rate is.

And clearly, we don't care that much whether it's an X Five or an X Ten, in terms of the relative mix, as long as we are getting all those X boxes out into the market.

I think we are not giving guidance on the specific mix of orders there, but it's truly going to be driven just by the receipt side.

Got it.

My other pacing question is on Japan.

I think you said Japan would be -- or APAC in aggregate would be down $20 million sequentially in Q2, due to weakness in Japan, which was also weak in Q1.

So what are you expecting in Japan through the balance of the year on a sequential basis?

Is it going to bounce along the bottom from Q2 levels, or does it get worse?

Well, if you characterize Japan, Q1 on a year-over-year basis was down.

Because a year ago, Japan was in that come back mode, before they decided to reorganize the NIH equivalent there, reorganize toward something like the NIH in Japan.

And then through the course of 2014, it got really bad as a percentage of revenue in Q2, Q3 and Q4.

We expected a little bit of a rebound in Q1, because of the end of the year in Japan and the fact that a new head of their equipment with the NIH has now been appointed.

I'd say we saw a little bit of that, because on a percentage of revenue basis, sequentially, we were up in Japan.

But still behind where we were a year ago and way behind where we think Japan should be, overall.

I think through the course of this year, we'll begin to see Japan get their act together, but we just don't have a lot of evidence right now if that's going to happen over the next quarter or two.

So what we guided to in the script here is to expect Japan to continue to be weak through the end of this calendar year, and then our hope is that the funding resurges and that Japan can be strong in 2016.

Ross Muken, Evercore ISI.

Good evening, guys, and congratulations again.

I'm going to go back to this pacing question.

I still feel like I'm not totally sure I understand it.

It seems like you exceeded Q1 meaningfully versus your forecast and the business seems to be tracking well on all metrics.

So I understand the sequential change in terms of X Ten Q1 to Q2.

But as you think about back half, you do have a new product coming on.

Do you think about the original forecast versus the new forecast, and clearly the new forecast is better on a core basis?

Other than sort of accounting for the Q1 outperformance from an assumption basis, is there anything else underlying of notable difference?

It's not clear to me that anything else has changed, although it seems like relative to some of the expects on a number of the lines, things are better.

And so that's what I'm just trying to make sense of.

Is it more the uncertainty of the X Five uptake.

I'm trying to see where the sensitivity is and what sequentially is different?

I think, Ross, as Marc tried to articulate a bit, is it's that the FX effects are bigger than what we'd thought coming into the year, so we are going to have a little bit of that.

We do think that we had, in Q1, to catch up a little bit on Xs.

There were enough customers who wanted those units and we wanted to get them in place, because we want to start drawing reagents and getting the customers using those systems and getting their informatics infrastructure in place.

So we were able to bring down the backlog that we've been carrying on Xs in Q1.

What we will deliver on Xs through the remaining three quarters, as I mentioned, will be driven by the incoming order rate more than a reduction in overall backlog.

So we just have to watch how that goes here throughout the rest of the year.

But I would say the underlying strength of the business is good.

We don't see any major disruptions because of the new product announcements.

We always worry a bit about that when we have major product announcements that we run the risk of having short-term disruptions in the market, and we probably had just a little bit of that in Q1.

But we came through that really, really well.

We can manufacture all these products now.

So there's no sort of systemic concerns at all that we have coming into the back half of the year.

It's clearly caution around FX and the fact that we had such a great Q1 that we kept the guidance essentially where it was coming into the year.

Fair enough.

You are always relatively conservative.

So I just wanted to make sure there was nothing else we were missing.

Sequentially, on the service line, it seemed like there was a fairly big acceleration there.

If you had to characterize magnitudinally, it seems like NIPT continues to track well, that versus the rest of the service unit, how would you apportion, maybe qualitatively, not quantitatively, how that tracked, at least on a sequential basis?

NIPT continues to be a real strength there.

50,000 samples is a big number.

So, we are really pleased with that.

It's the time to mention that over time, we expect that to migrate more toward products, because many of these labs that are using our Redwood City services are in this tech transfer mode where they will be bringing the technology in house over time, but they do outsourcing to us in the meantime.

So there will be some shift in the revenue lines as we go forward.

But across all the main aspects and services, we did well.

NIPT did well.

We did really well on the regular services business, particularly because of strength from a consumer customer there, and our installed base is so big that our service contract revenue is really quite substantial, and our gross margins on that service revenues, those service revenues are pretty good.

Bill Quirk, Piper Jaffray.

Couple of questions.

One is a follow-up on Doug and Amanda's question, and just thinking about the X Five upcoming launch and the comments around the interest level there.

Can you help us think a little bit about the legacy HiSeq 2500, 3000 and 4000 franchise?

Are you thinking that we could maybe do an equivalent number across those three instruments to what you did in the 2500 last year?

Or should we assume for modeling purposes that that will likely be down in part due to some of the HiSeq -- excuse me -- the X Five interest?

In the rough ranges, we should do as well as we did for the 2500 by combining all three of those instruments, and perhaps better on the revenue side because of the higher ASPs.

There's a little bit of exchange at the very top end here of customer interest.

Someone, as I mentioned, who might have wanted to get into the X world, because the 4000 gives them all applications that Xs don't; if they were just trying to get to the X because they needed lower prices, the 4000 very often is a good solution.

So there may be some modulation of customers across that boundary between the 4000 and the X, particularly because of the X Five now.

But we continue to be really optimistic about the X. There are lots and lots of customers who want to get into the club of sequencing whole genomes at low prices.

We probably are seeing more customers who we thought might be interested in X Fives continuing to try to get enough money to get all the way to an X Ten, because of the overall lower price per genome.

So we are still early in this whole product rollout with the 3000s and 4000s.

So we have a lot to learn over the next quarter or two about customer interest and mix and how we deploy resources to continue to enhance these area of products.

Got it.

Second question is just, thinking about the collaboration with Merck Serono, when might we be able to see some data on this universal diagnostic?

And then secondary question to that, should we assume that this will be a single test or a series of tests, which appears to be, anyway, the strategy from some of the cell-free DNA companies?

There's a bunch of sub segments here.

The actionable part of the panel, we expect to have available in an RUO partnership mode by the end of the year.

What most of the pharma partners want to is very often a subset of that panel, in some cases, so those are truly companion diagnostic contracts.

In some of the other cases, they want to use the larger universal panel in the clinical trial setting to understand what genes might be relevant for them as an ultimate companion diagnostic, and that would largely be a subset.

So I think if you fast-forward a couple of years, there will be a series of various combinations of these panels driven by specific pharma interests, as well as the migration of knowledge about what genes are increasingly important in oncology.

So we'll be adding more to the actionable panel over time.

In the cell-free area, I think it's distinct from what we are doing in the onco panel part.

There, I think the focus on particular sub disease categories is driven by the fact that you want to create diagnostics where there is clear alternatives in the clinical decision-making.

And that's why there's so much focus in areas like lung cancer.

It's prevalent.

There's a lot known about the potential markers there, and there are various treatment options.

So we and others, I think, will focus initially on a couple of key cancer types, because you can do the clinical validation more narrowly on those, and then continue to add genes over time to make the panels increasingly universal.

Isaac Ro, Goldman Sachs.

Marc, question for you, just on the sequential trend, one more time.

If we put together the various puts and takes on your demand funnel for the products, as well as the FX trend, just want to get a sense of a range on 2Q sequential growth.

I think the trailing two-year trend on sequential quarterly growth is 6%.

Given what you were talking about, it certainly doesn't seem like that's a reasonable expectation for 2Q.

So is that the right way to look at the short-term outlook?

And then I had a follow-up question.

I just think, Isaac, to really go back to what I said in the prepared remarks, that we expect Q2 to be more in line with our annual growth rate guidance for the year.

Okay.

Maybe just a quick update.

If we look at the entire installed base, if you could try and give us a sense of what percentage of your current installed base would be in a predominantly clinical setting or maybe even exclusively clinical setting?

Just curious how you characterize that and what you are seeing in a snapshot today, with the understanding that it's still very early days.

Thank you.

In total, I don't have that number at my fingertips.

With 33% of the overall systems in the quarter going into clinical markets, as a fraction of the total installed base, it's growing quite quickly.

We can get you that number, in a ballpark way, off-line.

Steve Beuchaw, Morgan Stanley.

Two quick ones on NIPT.

One, Jay, I wonder if now that you have the approval in China with Berry as a partner, if you could talk about the extent to which the China NIPT business can be an incremental driver this year.

It's a little hard to parse out, just given that there was a good amount of progress made there last year.

And then also on the topic of NIPT, we have a little bit more clarity on reimbursement for NIPT here in the US in 2015.

Could you give us a sense for how you see that impacting the business?

Thanks so much.

In the China case, we did have a burst of business in China because of the initial work we are doing with Berry, and they required a reasonable number of NextSeqs to get that initial work done.

Then the business went into a pause mode while we were waiting for approval.

So our expectation through the rest of this year is that we will begin to grow the Chinese market in terms of placements quite significantly.

Having said that, the average ASP for a test in China is significantly lower than other places in the world.

So if you are multiplying numbers of tests times ASP, you need to use a much lower ASP for the Chinese market.

I didn't quite get your reimbursement question.

Are you talking about average risk versus high risk there, or something else on reimbursement?

In the US, we, I believe, have new rates in effect for NIPT reimbursement this year.

No.

Our reimbursement contracts are long-term contracts.

So we don't have any changes in our reimbursement.

Our hope is that we are moving toward guidelines -- average risk being put into guidelines and then ultimately getting reimbursed.

And we think optimistically the guideline changes could happen in 2016.

They might be toward the end of 2016.

You probably have a year variance on when that might happen.

We now have two publications that have those very similar results that show that this test is a good test to be using on average risk women.

And our hope is that within some number of quarters after average risk gets put into guidelines that reimbursement will come forward for average risk, as well.

Got it.

Thanks so much, Jay.

Jack Meehan, Barclays.

Thanks and good afternoon.

I just wanted to change and look at the near record MiSeq DX placements.

And curious where you're having the most success there in terms of the placements.

And as you think about the community hospital opportunities starting to open up, whether you've had any indications of interest through your conversations there?

I don't think we have at our fingertips any sort of customer type breakdowns in MiSeq DX.

So I can't really give you much color on how much is oncology versus other types of applications.

I think, overall, MiSeq DX having being an approved system has had a bigger impact than what we had originally anticipated.

We find many customers who aren't actually running regulated tests are buying the MiSeq DX because of the expectation that ultimately they are going to seek approval for those tests.

So I think that underpins the strength of the demand in that segment.

But I don't have a disease type breakdown at my fingertips for you.

Okay.

Got you.

Just one, really to the guidance.

I know you don't parse this out specifically, but expectations for R&D through the rest of the year.

I thought maybe we might see some level of re-leveraging on the faster top line growth.

But maybe just do you think this percentage of revenue is a good way to think about the balance of the year?

I would say that part of our great financial performance of the EPS line this quarter was in part driven by the fact that we had ambitious hiring plans that we didn't meet.

And we have fantastic programs for R&D people to be working on and we're trying to add a lot of commercial talent in the organization.

And as we typically are in our budgeting process a little overly ambitious in terms of the number of people we think we can actually hire and have start.

So in part, the fact that expenses were flat in both SG&A and R&D versus Q4 was the fact that we are significantly under the headcount plan.

Through the course of the year, we will begin to catch up on that, because the head counts are naturally, in budgets, front loaded.

And so we will begin to converge on the actual headcount numbers that we had planned for the year, which will get us back to a much more normalized SG&A and R&D rate as we go through the year.

And that quarter-over-quarter sequential growth in spending is embedded in the guidance we provided.

That's right.

Zarak Khurshid, Wedbush Securities.

This is Zarak at Wedbush.

Thanks for taking the questions.

One really on NeoPrep.

Just curious how customers look, generally today, and is the rollout here consistent with what you were envisioning, and then how should we be thinking about the evolution of the product road map on NeoPrep?

Francis, do you want to say something?

Sure.

As we talked about, we announced the product earlier in the quarter.

And we have it now in the hands of our early access customers.

Customers are really excited about the vastly simplified workflow, and so we are seeing a buildup in demand that I think will play out very well over the course of the year.

At this point, we are getting feedback from customers around improvements we can make, around user training, for example, and we're building that into our plans going forward.

But I'd say we're very pleased with the build up in the demand that we are seeing for the product.

Of course, we'll come out with additional assays to put onto the platform through the course of this year and into next year.

Super.

Thanks.

Jeff Elliott, Robert W. Baird.

Thanks for squeaking me in here.

One quick follow-up for Marc and then a question for Jay.

Marc, I hate to keep harping on this, but the second quarter guidance you mentioned in line with the growth rates for the year, but can you parse out what you mean by the constant currency growth rate and then the FX?

Because I think the FX impact is probably going to get a bit worse in the second quarter versus the first quarter.

Just to be clear, our guidance going forward and that 300 basis points currency headwind that we've assumed is based on current currency rates.

We are not predicting further declines in currency.

Obviously, if that happens, then that will create a greater headwind for us.

So hopefully, that clarifies.

So our growth rate net of FX for the year is the 20%, based on current rates, and that's what we expect for the rest of this year, with Q2 following a similar trend to that.

Does that help?

It does.

But I sit here and I look at rates and I think that you had a 5-point headwind in the first quarter.

It looks like second quarter could be a bit worse and then things would tail off such that the third and fourth quarter headwind would be less.

Like I said earlier, the rates really started to decline towards the end of last year.

So the comps, from an FX perspective, are pretty hard.

So I think you'll see that through most of this year.

Our final question comes from the line of Mira Minkova with Stifel.

Let me ask a question on HiSeq X utilization.

Can you give us a sense of where you are in terms of the capacity utilization or the instruments that are out there, and have you built out in anticipation of utilization will be increasing from here or steady, or how do we think about it?

We've done a lot of analysis of this, and it's clearly what we described as bimodal distribution.

We have a handful of customers that are fully utilizing their Xs and, in fact, ordering incremental instruments.

And there's quite a number of customers in that category.

We have a fair number of customers at the other end of the spectrum, that are using their systems at a very low level.

And some of those are showplace installations, in a couple of cases, and others are ones that are still struggling a little bit with the analytical side or the sample side.

We have very active programs to take those customers who were in the lower end of that bucket and move them more toward the center, both in terms of greater software support and training support around how to analyze data and how to use product-based space to make the storage analysis simpler, and programs to try to help them get access to samples.

So overall, we are not at the point where we're going to increase the range of our guidance there.

If you look at Q1, as Marc mentioned in the script, we were somewhat over our ranges, but that's because of how the calculation works in.

As the installed base gets bigger, that calculation normalizes.

We are probably a quarter or two away from where we'd say, okay, we're now at a normal way the math would work and that number would become representative.

Obviously, we always have a goal to push out the utilization, so we are doing everything we can to do that.

But we are not recommending that anybody model that at this point.

Thank you for that.

On the work horse HiSeq, the 3000 and 4000 instruments, can you help us understand, is your demand coming from new or existing customers?

In other words, is it new placements or how do you think about it?

Is it new placements or is it customers swapping out older 2000s?

And maybe comment on the capacity of your customers to continue to buy, fund equipment, given that you have shrunk the innovation cycle.

The vast majority of 3000s and 4000s are going to existing customers, or did in Q1.

And that's largely because from the time when we announced this in the second week of January-- the second week, I guess it was -- there was a very short cycle to close business.

And so naturally, you would expect most of those orders to come from customers who know the technology, know Illumina, customers we're calling on on a very regular basis.

So that's what you saw in Q1.

I think as we get a couple of quarters out, the sales force, of course, is building a new pipeline of business around these two products.

But it takes a while to get newer customers into that pipeline, just because the sales cycle for a product at this price point is six months to nine months.

You will see that mix shift from existing customers to a better balance between those two categories.

I'm sorry.

Was there a second part to the question that I missed?

Okay.

I think we're good.

This concludes today's question-and-answer session.

I would now like to hand the call back over to Ms. Rebecca Chambers for closing remarks.

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, thank you so much for your participation today.

You may now disconnect.

You all have a great day.