Illumina Inc (ILMN) 2016 Q1 法說會逐字稿

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

Q1 2016 earnings conference call.

(Operator Instructions)

As a reminder, this call is being recorded.

I would now like to turn the conference over to Rebecca Chambers.

Please go ahead.

Thank you, operator, and good afternoon, everyone.

Welcome to our earnings call for the first quarter of FY16.

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, Chairman and Chief Executive Officer; Francis deSouza, President; and Marc Stapley, Executive Vice President, Chief Financial Officer and Chief Administrative Officer.

Jay will focus on our Q1 results, Francis will provide the outlook for our business, and Marc will review our financial results and updated guidance.

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

It our intent that all forward-looking statements regarding our 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 on 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 our Q1 earnings presentation will be available on the investor section of our website shortly.

We plan to reference this document during today's call.

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

Thanks, Rebecca, and good afternoon everyone.

As we shared a few weeks ago, first-quarter revenue was $572 million, an increase of 6% over the prior-year period and lower than the guidance we provided in January.

Our analysis subsequent to the preannouncement has identified two key contributors to the shortfall: Orders we booked that were not recognizable as revenue, and instrument orders that we were expecting, but did not receive.

Additionally, after quarter end, we received a disappointing outlook from Europe, which is central to the guidance reduction for the remainder of the year.

I will address the Q1 factors and Francis will address our outlook and action plan.

The majority of the shortfall in Q1 resulted from orders booked that did not translate to revenue.

A combination of factors contributed, including capacity constraints in array manufacturing, resulting in back orders; orders that were received late in the quarter, resulting in systems in transit, and therefore not converted to revenue; customer-initiated requests for delayed shipment or conditions outside our control that delayed revenue recognition; and partial revenue deferrals, due to increasing complexity of large deal structures, particularly in the case of high throughput instruments including the HiSeq X.

Some of these deferrals will be recognized in Q2, while others will convert to revenue over the rest of the year.

Some were controllable by us and some were not, but none are related to fundamental market demand.

Individually, each was less than 1% of revenue, and that happens to a degree every quarter, but the combined effect was larger than we expected.

The second factor was HiSeq orders that were forecasted but were not received, accounting for $9 million of the shortfall.

As a consequence, we shipped 19 fewer HiSeq 2500, 3000, and 4000 instruments than anticipated, valued at $14 million, which was partially offset by strength in other portions of the portfolio.

We had anticipated sequential growth of 11 units, rather than a decline of 8 units, which led to flat placements year-over-year.

Over the last several weeks, we've gone through a detailed analysis of the underlying drivers deal by deal.

There were no dominant themes, but we do see a collection of factors including delays in funding release, customers opting to purchase NextSeqs, and one-off situations such as pending lab moves, financing deliberations, contract reviews, or an upcoming regulatory audit.

While outsourcing to service providers was also cited by a few customers, this is not a significant driver of our forward projections.

This feedback confirmed our view on questions of competition and market capacity.

While we can never be certain a few customers did not delay purchases to assess other platforms, our win rates remain stable, and to our knowledge, we did not lose a competitive deal in Q1.

We also did not get any information to indicate that excess market capacity was a factor.

As you can see in our investor deck, high throughput utilization as a percentage of available sequencing capacity has been on an upward trend since Q3 2014, when normalized for one large order that we shipped in Q3 2015.

Run data collected from BaseSpace which represents about a third of the high throughput installed base, confirms this analysis, showing roughly flat utilization for legacy HiSeq instruments like HiSeq X, 3000 and 4000.

Newly-announced initiatives like the Chinese precision medicine program to sequence millions of genomes, and the AstraZeneca project to access 2 million genomes create the confidence that today's sequencing capacity represents but a small fraction of that necessary to meet the growing demand for population sequencing programs.

Focusing now on products, orders for HiSeq X exceeded our expectations, and we added four new customers, bringing the total to 31.

Our outlook remains robust at 20 to 30 instrument orders per quarter.

HiSeq X consumables also beat our forecast despite the timing of customer shipments lowering pull-through to below the guidance range.

On a four quarter basis, which normalizes the impact of shipment timing, X utilization averaged $650,000 to [$700,000 annually] (corrected by company after the call), a range we feel comfortable with going forward.

HiSeq pull-through is in our projected range of $300,000 to $350,000.

For modeling purposes, we have removed 95 HiSeqs from our installed base, bringing the figure to just over 2,000 instruments, reflecting the units taken offline due to adoption of newer machines.

Our benchtop instrument portfolio performed well in the quarter, and the outlook is consistent with our expectations coming into the year.

This is being driven by lower than expected cannibalization of MiSeq, strong initial interest in MiniSeq, and NextSeq adoption for NIPT in China.

Benchtop consumables were strong in Q1, as both MiSeq and NextSeq saw utilization above their respective guidance ranges.

Microarrays were also an emerging bright spot this quarter, as revenue grew 1% versus the prior year period to almost $90 million, and orders dramatically exceeded our expectations, with growth of 85%.

A new consortium array, which will begin shipping in Q4, and demand from DTC customers, contributed to the strong order result.

Shipments to our clinical customers grew approximately 20% in the quarter.

As we've noted on multiple earnings calls, we've been expecting some NIPT services customers to shift to running samples in house on our sequencers, and a significant part of that shift occurred this quarter.

Normalizing for the effect of the lower revenue, because we're not getting the full service revenue, our remaining clinical customer base revenue grew 24%.

NIPT shipments grew 10%, or 28%, after adjusting for the shift, versus the prior year.

We now believe most payers will next assess average risk coverage decisions in 2017, which is later than we had anticipated.

Despite this, the rate of adoption is meeting our forecast, and we expect further acceleration as reimbursement decisions are made.

We believe the delay is a matter of focus by the labs that are working to obtain an in-network designation for existing coverages, as opposed to driving incremental average risk coverage for a faster return on investment.

Oncology shipments grew 9%, adjusted for the large HiSeq X shipments seen in the first quarter of last year.

This growth rate is lower than that we typically see from this market, due to a large number of orders shipped in the prior-year period.

We continue to expect expanded adoption in 2016, which will be fueled in part by the launch of TruSight Tumor 170 later this year.

In summary, while we're not happy with our performance in Q1, we do not believe our results are related to a change in fundamental market demand.

Instead, timing of instrument orders is creating late quarter revenue uncertainty, some of which we can and will take specific actions to mitigate, and unique customer situations impacting the HiSeq order rate.

With the lower European forecast, it was important that we realign our full-year expectations.

We continue to believe the demand for next-generation sequencing is far more robust than our first-quarter result, or the outlook our European forecast suggests.

I will now turn the call over to Francis.

Thanks, Jay, and good afternoon, everyone.

Today I plan to provide further details on our outlook and action plan.

Europe revenue declined 2% year-over-year in Q1, missing our projections, and we are forecasting low to mid single digit growth for the full year.

Revenue from the Americas grew 14%, representing a slightly slower start than we anticipated, for the reasons Jay outlined.

But we remain confident in the region's full year projection of mid-teens growth.

Asia-Pacific revenue declined 5% as forecasted, due primarily to a large HiSeq X comparable.

During the quarter, we began to see customer purchasing patterns in Japan improve, as research funds are now being released.

It's too early to call this a resurgence, but the signs are certainly more positive.

Our Asia-Pacific region is also forecasting mid-teens growth for the year.

The Q1 challenges are responsible for a minimal change in full-year outlook.

With the benefit of two additional weeks of analysis since our pre-announcement, we are more confident that Q1 was a result of operational challenges, and not market demand.

By far, the largest driver of our lowered guidance is our lack of visibility in Europe, as evidenced by the drop in the region's full year forecast, three months after we completed our budget.

We're taking steps to enhance visibility and improve our execution in the region.

In the meantime, we have incorporated the reduced outlook from Europe into our projections.

We're focusing on three areas to deliver on our full year.

First, we're making improvements to our sales process.

To address the variability in instrument orders and shipments during the last months of the quarter, we are focusing the sales team on early closure of instrument orders.

In addition, large instrument contracts, including those for HiSeq X, have become more complex, particularly in Europe, and so we are simplifying and standardizing deals.

Finally, we're building out our manufacturing capacity for arrays, so that we're able to clear the back orders and meet the increasing demand.

Second, we are committed to improving the execution and outlook in Europe.

As we mentioned a few weeks ago, we recently brought in an interim sales leader in Europe, who has already established accountability and ownership for the revised forecast, and is driving to the updated expectations.

He has already put in place greater discipline around opportunity management, accuracy of our CRM data, and quoting.

In addition, we're making good progress in our search for a permanent General Manager with large global Company experience, to ensure that our European organization realizes its full potential.

The last step in our plan is focused on expense management.

Last year we added close to 900 employees, 500,000 square feet of real estate commitments, and a new global ERP system.

While these investments were necessary to support both the growth we have experienced and our ongoing market opportunities, we recognize the need to meaningfully slow down the pace of investment in 2016, given our updated outlook.

We do not expect to have broad changes to our product portfolio or development pipeline, but do have other opportunities to delay initiatives that are less impactful to the long-term outlook.

We're working on a 2016 replan, and have incorporated those improvements into our guidance for the remainder of the year.

As a result, excluding GRAIL and Helix, our operating margin target for the year is expected to be 34.5%.

While disappointing, our Q1 results have not dampened our conviction in our market opportunity or our ability to deliver innovative technology to capture those markets.

I am personally committed and excited to move this organization to realize our mission, benefit patients, and deliver shareholder value.

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

Thanks, Francis.

While revenue for the quarter missed our guidance, orders of over $700 million significantly beat our expectations.

We billed more than $100 million of sequencing consumable backlog, most of which is expected to be delivered this year.

As a reminder, we typically see higher sequencing consumable orders in the first quarter, ahead of annual list price increases.

Instrument revenue declined 20% year-over-year to $118 million, given the large HiSeq X shipments in the first quarter last year, which accounts for more than $30 million of decline.

Consumable revenue was $361 million, an increase of 17% compared to the first quarter of 2015.

Sequencing consumable revenue grew 24% over Q1 of last year to approximately $300 million.

Services and other revenue, which includes genotyping and sequencing services, as well as instrument maintenance contracts, grew approximately 12% versus Q1 2015 to $89 million.

This improvement was driven by extended maintenance contracts associated with the larger sequencing installed base and genotyping services, partially offset by a decline in NIPT service revenue, given the shift to in-house testing, as expected.

Going forward, we expect new test send-out partners to at least partially offset the further impacts in transition of these two customers.

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, as well as our GAAP EPS guidance, both of which can be found in today's earnings release and presentation.

Please note that all subsequent references to net income and earnings per share refer to the results attributable to Illumina stock holders.

Our adjusted gross margin for the first quarter was 71.7%, flat compared to the fourth quarter, as the benefit of favorable consumables mix was offset by lower absorption.

Year-over-year, adjusted gross margins contracted 50 basis points, as the positive impact of consumables mix was more than offset by lower instrument margin, associated with fewer HiSeq X shipments, as well as a decline in services margin.

Adjusted research and development expenses for the quarter were $113 million, or 19.8% of revenue, including $5 million attributable to GRAIL and Helix.

This compares to $103 million or 17.5% of revenue in the fourth quarter, higher due to headcount additions and investments in GRAIL, Helix, and development projects, including Project Firefly.

Adjusted SG&A expenses for the quarter were $125 million or 21.9% of revenue, including $3 million attributable to GRAIL and Helix.

This compares to $124 million or 20.9% of revenue in Q4.

Adjusted operating margins were 30.1%, compared to 33.4% in the fourth quarter, and 39.3% in the prior-year period.

Excluding GRAIL and Helix, operating margins were 31.6% in the first quarter.

The year-over-year decline is attributable to the lower gross margins and increased employee-related expenses.

Stock-based compensation expense equaled $35 million, flat compared to Q4.

Our non-GAAP tax rate for the quarter was 25.5%, compared to 24.5% in the first quarter of last year, and non-GAAP net income was $106 million.

This resulted in Q1 non-GAAP EPS of $0.71, which included approximately $0.04 and $0.02 of dilution from GRAIL and Helix respectively.

This quarterly result compares to non-GAAP net income and EPS of $135 million and $0.91 in the first quarter of 2015 respectively.

We reported first-quarter GAAP net income of $90 million or $0.60 per diluted share compared to net income of $137 million or $0.92 per diluted share in the prior-year period.

As a reminder, prior period results include a pretax gain of $15 million from the partial sale of our minority interest in Sequenta when acquired by Adaptive Biotechnologies.

Cash flow from operations equaled $40 million, lower versus the prior year due to the impact of the operating expense growth.

Q1 DSO totaled 64 days, equal to last quarter, and inventory rose to $288 million, given the quarterly shortfall in sequencing instruments, and a continued build-up of consumable safety stock.

Capital expenditures in Q1 were $53 million, higher than the $37 million in the prior-year quarter, due primarily to our real estate build-outs.

Consequently, Q1 free cash flow was negative $14 million.

During the quarter, we retired the remaining $76 million of 0.25% 2016 convertible notes, and ended the quarter with approximately $1.34 billion in cash and short-term investments including the cash balances of GRAIL and Helix.

Looking forward, we now expect total Company revenue growth of 12% year-over-year.

Beyond the first quarter miss, the additional decline versus our original expectation of 16% is due to the lowered outlook for Europe, which went from high teens growth to low to mid single digits, including a smaller contribution than planned from the Genome England project.

Our outlook in the Americas and Asia-Pacific regions is much more robust, as both are expected to grow in the mid-teens for the full year, roughly in line with our expectations, due in part to strong orders in the first quarter.

For these regions in the second half, we expect to see HiSeq sales increase, but remain short of our original expectation.

We believe this will be more than offset by overplan MiSeq placements, given lower than expected cannibalization, as well as an increase in array revenue, NextSeq consumables, and HiSeq ex-placements.

We also continue to expect strong adoption across our four clinical markets in 2016.

We are forecasting Q2 revenue of $590 million to $595 million, driven by sequential seasonality in Japan and roughly flat HiSeq X shipments.

We're not forecasting an uptick in other HiSeq instrument shipments until the second half.

This Q2 revenue guidance implies a meaningful back-half acceleration.

Our confidence in delivering to these projections stems from our existing backlog, a third of which is shippable in Q3 and Q4, and our pipeline.

We are projecting Q2 non-GAAP EPS to be in the range of $0.72 to $0.74, as higher revenue is expected to be largely offset by a sequential increase in operating expenses, both from the headcount additions in the first quarter and additional GRAIL and Helix spend.

The steps we are taking to reduce spending will have a marginal impact in Q2, and a more meaningful impact in the second half of the year.

We anticipate significant EPS leverage in the second half, driven by the acceleration of the revenue growth, and our spending actions.

For the full year, non-GAAP EPS is expected to be $3.35 to $3.45, which includes GRAIL dilution of $0.20, an increase of $0.05 versus our prior estimate.

Illumina is retaining almost all of the GRAIL losses in net income attributable to Illumina shareholders, significantly greater than our majority ownership percentage, due to an unexpected accounting treatment.

We're in discussions with GRAIL regarding updates to the equity structure.

Our updated non-GAAP EPS guidance and GRAIL dilution commentary includes our expectation that we will continue to recognize most of the losses in the second quarter, and that drops substantially in the second half to closer to our ownership, based on the structural changes that are being contemplated in Q2 and the accounting treatment we are anticipating.

Any delay to this timeline could have a negative impact of up to $0.04 per quarter in the second half.

In closing, as a management team, we have a number of matters to address that we have outlined today, including our in-quarter linearity, our execution in Europe, our rate of investment, and the GRAIL equity structure.

Resetting our outlook so significantly is uncharacteristic of our Company, and unacceptable to us as a team.

We are committed to delivering strong results consistent with our track record, and our confidence in the long-term opportunity for our business remains high.

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 lines.

(Operator Instructions)

Our first question comes from the line of Tycho Peterson of JPMorgan.

Your line is now open.

Thanks.

Starting to hone in on the Europe issues, but I just would love to hear from you a little bit more about the steps you're taking to improve your forecasting ability.

Obviously, you had issues in Europe in 3Q last year as well, so if you could just talk a little bit about how you intend to improve visibility there, and really what gives you the confidence that the problem's going to be fixed by 3Q, since the back half estimates are essentially unchanged to get to the mid point of the new guidance range?

Sure, Tycho, this is Francis.

There are a number of things we are doing.

We started by moving one of our strong leaders from the US who ran the Western region, Scott Thomas, out to Europe, and he was out there at the beginning of this quarter, and has already started rolling out a much more disciplined sales process, and that starts all the way from capturing the opportunity, then tracking the opportunities, as well as managing our visibility into the opportunities that are in various stages of the process.

He's also instituted a process that frankly we use in the US, around managing the pipeline for some of our lower-end instruments.

That alone has started to give us better visibility into when deals are expected to close over the course of this quarter, and allowed us to add urgency, and also manage more for a weekly close process, rather than a close process that's so heavily tailored towards the end of the quarter.

That does a few things.

One, it gives us much better visibility into what we're working, for the course of the quarter.

It helps drive urgency into the team, and it helps make sure that we understand whether we have the pipe to get the deals we need.

Additionally, Tycho, the execution challenges that we've talked about in Europe, much of that related to this deferral challenge that I talked about in the script where we had a surprisingly large amount of revenue that was not recognizable, and part of the discipline we need in the team is to pull in the orders to make sure that we don't have a lot of systems that don't get shipped in time to be recognized as revenue, or they're small contractual issues at the end of the quarter, that wind up having a revenue recognition question, and therefore can't be counted.

That's all the discipline of making sure that hose deals get closed earlier in the quarter, and Scott's going to make a big difference there as well, we believe.

I would add one point to your question about confidence in the outlook for the rest of the year.

As I mentioned in the script, or Francis mentioned, we've got Europe in our outlook currently at the revised number that they've committed to, and provided recently, which is a lot lower than it was previously.

And so that gives us an opportunity to get these changes and improvements baked in, and start to get some positive impacts from them.

Okay.

That's helpful.

And then just on the other side, on spending I know you talked about maybe pulling back on some of the hiring.

Can you just get us comfortable that -- you're such an innovation-driven company that you're not necessarily going to be kind of pushing off stuff that could impact the pipeline, and really future growth?

Sure.

I mean, that's an important tradeoff for us to analyze and we're in the process of doing that right now, and of course the most important programs that are the largest revenue generators the ones with the highest ROI, will continue to be fully staffed and fully funded.

What we'll be looking for is other areas outside of the core product development activity.

For example, we may restaff some of our research at a bit slower rate, because we moved a lot of those people over into GRAIL and much of that research work has an effect three to five years from now.

Those are the kinds of things we can slow down for some short number of quarters, until we get back into the revenue growth rates that we believe we should be at.

And clearly, we're going to do that in some of the other support organizations, as well, without impacting customer support and the core product development activity.

So we're pretty confident we can make a big impact without hitting the core.

Another example of something we're doing there Tycho, we've already kicked off an initiative to drive more focus and prioritization, and one of the things that we had identified was that look at this terrific strategic planning process that ticks off the projects that we want to focus on for the future, and leads to the new products we put out.

One element that we hadn't focused on historically is to look at all the initiatives we have underway, and see what we could stop doing.

So we had already kicked off an effort to look at all the things we had going on, and proven that portfolio, if you like.

That's an effort we already had under way.

We're accelerating that to complete over the course of this quarter, and expect to roll that out, starting over the next quarter.

Thank you.

And our next question comes from the line of Doug Schenkel of Cowen and Company.

Your line is now open.

I guess first just a couple quick ones and then maybe a slightly longer answer question after that.

So the first one is, maybe as a follow-up to Tycho, regarding your guidance for the year, some seem to be focused on what seems to be some back-end loading of the guidance.

Does your guidance reflect an assumption that demand gets better or execution gets a lot better in the second half, or is your guidance simply reflecting that comparisons get a lot more favorable in the second half, keeping in mind first-half growth last year was around 30% and second half growth was 17%.

It doesn't seem you're baking in a whole lot more for the second half than the first half.

It seems like it's more comps-driven.

Is that fair?

Can you hear me.

It's Marc.

We're back, sorry.

We lost the call there for a minute.

I lost you about two thirds of the way through your question, I think.

It's really just your guidance for the year and the pacing doesn't seem to reflect a whole lot in the way of Herculean assumptions for an improvement in the second half, in terms of demand or execution.

It seems on the surface to be more a function of just changes in year-over-year comparisons, first half to second half.

Is that fair?

There's a couple of elements.

Comparisons are better or easier, in the back half for sure.

We're not anticipating any radical changes in the European outlook, because we've actually factored in the disappointing European outlook into the guidance numbers that we've given, and obviously we'll be working to do better than those numbers, and are working hard to achieve that.

But the single biggest factor that gives us a lot of confidence in the back half is the backlog, the strength of the backlog, the incoming order rate that we had in Q1, and the pipeline that we see for business in the Americas and Asia-Pacific in the back half.

So that's what really gives confidence in the increasing revenue rates in the back half of the year.

I'd say very strongly that the numbers we put out for the rest of the year were driven from a bottoms-up look at what the regions were forecasting, based on what they had in the pipeline and had visibility into, and so that's what gives us the confidence.

Okay.

Another area of focus has been clinical growth.

You grew 20% in the quarter, oncology growth was 9%.

These on the surface jump out as being light.

That being said, what you didn't point out was that clinical growth was up against a tough compare.

I think you grew to 60% in Q1 of last year, the oncology comp I think is 37% growth.

Can you just share any data on backlog, or really anything else that will help address concerns about a moderation in clinical demand?

Yes, I think as we try to indicate in the script, we didn't see any fundamental demand factors in our business.

We did very deep analysis, as you might imagine, over the after few weeks, and so that did not pop out from anywhere.

The clinical comparisons were very difficult against Q1 last year for sure, as you pointed out, and so I think that's the single biggest driver in the numbers that we saw in Q1.

So we continue to feel very positive about the clinical adoption rates going through the year, and a lot of the key inflections in our markets, whether it's average risk coverage, whether it's oncology reimbursement, those affect us largely in the clinical markets over the next year.

Okay.

And one last one.

Q1 was not your best quarter, and it's been a tough two out of three.

That said, you made it really clear in your prepared remarks that nothing occurred in the quarter that heightened concern about over capacity, competitive dynamics, the clinical outlook or market potential.

One of the big debates in the investment community is about Illumina's long-term growth outlook, given some recent developments, and clearly the moderation in revenue growth over the last few quarters.

We didn't hear anything in your remarks that would suggest there's a change in how you think about the market opportunity, or your ability to drive growth via innovation.

Could you help us with some commentary, in terms of how you're thinking about things on the longer term growth potential, and why we shouldn't think differently about Illumina, given what we've seen over the last few quarters?

Sure.

There's nothing that happened in Q1 despite our disappointment, your disappointment and all of our investors' disappointment in our actual performance there that caused us to change our thinking or our conviction in any way about the sequencing opportunity, the market position we have, the competitive prospect, or the future growth and TAM of our business.

So there are no fundamental changes there.

We clearly didn't think it was appropriate to emphasize those points in the script, on the back of a disappointing quarter for all of us.

So we didn't highlight that, but I can assure you that there's -- this is something we consider to be a short-term issue with us, and we're going to come through it, and there's no fundamental changes in our outlook to the market or our pace of innovation over the next couple of years.

Thank you.

Thank you.

Our next question comes from the line of Derik de Bruin of Bank of America.

Your line is now open.

Just one short question, which is stock option expense for the full year, and then a longer question which is following up on Doug's question, I think we've had a lot of incomings from investors questioning the outlook, and just the numbers.

But I think in particular, we've had a lot of questions on GRAIL and Helix, and the fact that those are dilutive to earnings right now, and when they would start to potentially be more accretive.

I guess the question being is like when are potentially we going to see some return on those investments.

And it's more of a question about valuation support for the stock relative to some of the other names in the med tech space, that are trading at similar types of top line growth levels right now.

So basically, give us some clarity or some indication of when do you think you're going to see some benefits from -- be able to communicate some benefits from Helix and GRAIL?

What was the stock comp question exactly?

Just when is the update for the full year.

What's the number for the full year?

Marc, you want to take that one?

Let me tackle that one really quickly.

Not giving that specific number at this point, but we're on a path here that isn't going to accelerate that substantially through the second half.

There are going to be some upticks, part of which is related to Helix and GRAIL, and part of which is related to core Illumina.

But it's not going to be that vastly different from what you've seen so far.

With respect to GRAIL and Helix, Derik, those are incredibly important strategic bets for our Company.

We think they both represent on their own massive markets as we have talked about in cancer screening, gigantic opportunity, probably the single biggest market segment that we can imagine.

We continue to believe that there's going to be a strong market for consumer genomics, but it's going to take some work to create the ecosystem to really unleash that.

That's the goal of Helix.

And as a Company, it is critically important that we take a long-term view, and that $0.05 a share in a quarter or even $0.10 a share in a quarter, compared to the opportunities that these two ventures portend for us in the next five years is insignificant.

And so we're not prepared today to talk about when these are going to turn profitable and begin to contribute to the bottom line, but GRAIL as we mentioned, is a long-term bet, and they're not going to be seeing product on the market for some time.

Helix will be quicker, and so once we get into 2017 we'll begin to get the earliest indications of revenue ramp, but I certainly wouldn't expect that to be a profitable enterprise in 2017.

Great.

I'll get back in the queue.

Thank you.

Thank you.

Our next question comes from the line of Dan Arias of Citigroup.

Your line is now open.

Jay or Francis, just to go back to Europe, as you've digested the issue a little bit, have you found that the shortfall on the HiSeq was due more to installs that didn't materialize on the clinical, or on the non-clinical side of things?

And then if I could just ask a follow-up for Marc.

Marc, what are you forecasting instrument revenues to be down year-over-year at this point?

Thank you.

There was nothing in the European numbers that was market specific, and so these were revenue recognition issues of various sorts, as I highlighted in the script.

None of those were particularly related to specific markets within the clinical sector or the research sector.

They're two sort of different issues.

If we look at Q1, that was really a HiSeq story, and that was a HiSeq story across regions, and we talked about the fact that a lot of that was the HiSeq shortfall, and the orders that came in, that we weren't able to recognize as revenue.

That's really what the Q1 story was.

Looking forward the issue is around the forecasted shortfall in Europe, and there, we believe a lot of it is around sales execution, and that's really what we are focused on, driving more discipline into generating pipeline, getting visibility into the pipeline and Jen urgency in working the deals through the process, and that's across instruments, and across markets in Europe.

Okay.

So Francis, if I could just crystallize for folks your thoughts on the issue itself in Europe.

Is it your estimation that what took place in Europe was pretty much 100% personnel related?

I think personnel and then the knock-on effect on the process we're running in Europe.

I feel like we have -- you're not going to put all this on one person, and we have definitely good people on the team.

What we are seeing is that we don't run as disciplined a process in Europe as we do in the other regions, and already, we're starting to see in the last few weeks, an improvement in the visibility of the pipeline through this quarter, and we're seeing more urgency in our sales process.

So that we believe were the biggest drivers in what we're seeing in Europe.

And Dan, on the instrument revenue, we're not bifurcating the guide for the year into the individual component pieces, but I gave some specific commentary.

Clearly, we've given commentary around Q1.

I gave some specific commentary around Q2 there as well.

So definitely a slower start for the year, driven by the high throughput.

And then as I mentioned, we'll see an uptick toward the second half of the year.

But not giving out specific commentary on breaking down the revenue growth by that category at this point.

Okay.

Thanks a bunch.

Thank you.

Our next question comes from the line of Jon Groberg of UBS.

Your line is now open.

So I guess my thought here, and you can just correct me if I'm wrong, Jay or Francis, but it feels a little bit, with like two misses out of three quarters, maybe you, just given the size of the Company, you have a pretty segmented market in terms of the products that you're in, it feels to me like there's a transition happening away from being necessarily a product story, and a little bit more market development story.

And I'm just wondering if you feel like you have a little less control or visibility into your quarterly results, and if you need to, not just Europe, but more broadly, if you're thinking about how you need to approach forecasting?

Yes, I maybe wouldn't characterize it exactly like that, Jon, but I think your points are important ones.

I've highlighted over the past year or 18 months that much of the market development that has to happen now in sequencing falls on Illumina, that we don't have a lot of other large companies who are spending marketing dollars developing markets, and so that is key for us to do, more than it ever has been.

And the big markets we're opening up now have each their own unique set of issues, whether it's reimbursement, or regulatory, or in the case of GRAIL, clinical trial work.

And so it is -- it does take some time to open up those new markets.

Having said that, there's no question that Illumina's still driven by product innovation.

In all of our businesses, we analytically see a cycle that's related to product cycles.

And whenever we launch new platforms, we get a surge of new orders for those instruments, and then the following year, the consumables begin to catch up, and then that platform begins to level out over time.

So every platform has an S curve associated with it.

It is true that we are a larger Company now, and therefore each individual S curve has a smaller of effect on the total revenue of the Company.

So there's no getting around that fact.

And so, we have much greater diversity in our business now, which is a good thing, but each individual product launch probably is less of an impact than it might have been, back when we had only one sequencer, for example, when we replaced the GA with the HiSeq, everybody bought a HiSeq, because it's the only product in the market.

That's not quite where we are today.

As we look to operationalize those dynamics, as Jay said, there are two dynamics playing out.

One is there is an opportunity for us to get more actively involved in the development of those markets, so we can accelerate the adoption of NGS into the different markets we play in, and work with our customers to help them with things like the trial that we're doing, the STAR trial we're doing in the PGS space, in the IVF world for example.

We're also getting more engaged with our customers in the payer community, and market access programs.

And part, as Jay said, of what we do to develop the market is actually bring new instruments into the market, which can catalyze the market through access to a lower price point.

Certainly a set of things we are doing to operationalize developing those markets.

Separate from that, there is a change in how you sell at this scale, and that in addition to tracking the big deals that get a high level of visibility at the executive level, a scalable sales process needs to make sure that we're taking care of the flow business, and that we do have really good visibility into pipeline, how pipelines are progressing, the opportunities.

And that's what we're putting into place in Europe, for example, right now.

That's helpful.

And then just as a quick follow-up, I think you remind us 5% Asia-Pac but you said you're guiding to mid-teens.

I know you had a solid book-to-bill.

Is there anything else that kind of gives you the confidence in that acceleration in Asia-Pac for the rest of the year?

Thanks.

Yes, that's exactly right.

So we did see as expected decline in Asia in Q1, but as we look at the forecast for the rest of the year, we do believe we have the opportunities and pipeline to support a mid-teens growth for the year.

The things that are driving those are, one, there is activity around the Chinese PMI.

That is causing purchasing to happen.

We saw that already start, and we expect that to play out.

We're continuing to see incremental improvement in Japan for example, and while that is slow and steady, it's slow and steady in the right direction, and we're seeing that show up in our pipeline as well.

And John, obviously Japan was a challenge quarter after quarter for us last year, and so that's reflected in the comps.

And the next question comes from the line of Ross Muken of Evercore.

Your line is now open.

Can you just go back to that capacity utilization slide and sort of help us understand exactly what we're looking at and how we should interpret the peaks and dips, in terms of how you relate that, or if it's at all relatable to how you think about your instrument forecast, or managing sort of that?

Marc, you want to walk through that?

Or do you want me to?

Ross, I missed the first part.

You're saying in relation to the utilization slide?

Yes, I'm just trying to exactly understand how we should interpret the various levels of capacity utilization across the base, and then how we should think about certain points?

Typically if you think about capacity utilization it signals capital purchasing depending on what level is.

How do we interpret what levels for you signal that you should see an increase in instrumentation demand, versus maybe a moderation at a certain level, and how you attempt to manage them.

I'm just trying to exactly interpret what we're supposed to gain from this?

So I think a couple things.

Firstly, the capacity calculation itself, which is based on the actual mix of types of kits that our customers buy and run, clearly that's increasing quarter-over-quarter, as a result of the both the installed base, a little bit of the change in mix, and us coming out with higher throughput instruments, which I'll come back to when I look at the capacity utilization chart.

If you think about the percentages, what you probably -- what you don't want to see is a very low percentage of utilization.

That would reflect a lot of spare capacity in the market, which would have a read-through, I think, to future instrument purchases.

You're obviously not going to see utilizations based on our trajectory, our past history and our trajectory of much over 50% on an ongoing basis, due to the decentralization of the market.

Only in a centralized market would you see it much, much higher than this.

If you look at the data, what you're seeing is -- you see a couple of inflection points, where the utilization tends to stabilize.

That happens to coincide -- in one case go down if you look at 3Q 2014.

That coincides with when we put new capacity in the market.

Back then was the V4 run kit, and that created an instant increase in available capacity, which caused a dip in utilization.

As you can see that recovered.

Same thing as when we introduced the HiSeq 4000.

That had an effect on the growth in utilization, because we introduced new capacity into the market with that instrument as well.

And then what you're seeing, if you see it normalized for that one large order, is a fairly consistent growth rate, which is exactly what you would want to see, which we believe reflects the capacity is not -- there's not excess capacity in the market.

It's being utilized at a rate that is increasing over time, in spite of the increased volumes or capacities that we're putting out there, with the higher throughput instruments and kits.

The take away of course, in this, is that to the concern that there is all this extra capacity being generated in the market, I think this analysis and what we've gotten from our base case analytics show that's just not the case.

That the average instrumentation utilization, if anything, is on a slightly upward trend, which is exactly what we would hope to see.

And expect to see.

I guess regionally, would Europe look any different?

I'm sure you've probably cut the data at some point.

Europe would be lower on the averages.

The trend line probably isn't much different, but we clearly see highest utilization in the US.

Europe tends to be significantly lower on average utilization across almost all the platforms.

That's helpful.

Jay, you started off talking about the various reasons for the HiSeq miss, and you have that nice little pie chart which breaks down the components.

As you stated, typically in a quarter maybe one or two will happen but not as many.

As you think about the complexity of your business, and what you can sort of manage versus what is just market oriented and the like, what period in the Company's history or what prior experience in all the years you've been doing this would you sort of harken back to say, and this reminds me of X, and because of Y, we feel confident.

I'm trying to figure out what this most looks like, in terms of any of the few periods of challenge that the Company's had.

There hasn't been very many.

Well, I think from a magnitude of the challenge, Q3 2011 was the other big one for us, driven by very different factors.

That was a collection.

It was one of those again rare quarters where you had the convergence of a whole bunch of factors all at once, which I think we had this quarter, as well.

The specific factors then were different than the ones we had in Q1, but it was one of those convergence effects that sometimes happens, and that's what happened to us in Q1.

So I'd say that's the closest analogy in terms of lots of things going in the wrong direction in one quarter.

Got it.

Thanks.

Thank you.

Our next question comes from the line of Amanda Murphy from William Blair.

Your line is now open.

I just had a follow-up to your answer to Jon's question earlier, about the R&D pipeline.

And I appreciate your comment about enabling markets and smaller S curves.

But I'm wondering if you think about technical -- or advancements that could further move the market forward, I'm just curious if you could give us some high level perspective there.

So obviously, you mentioned the innovation at the lower kind of CapEx portion of the market.

But is there anything in the works, obviously ordered arrays was quite meaningful in terms of the improvement in performance.

Is there anything like that in the works that you could talk to.

Obviously with respect to your R&D pipeline?

Well, we can't give you specifics on that of course.

If you think about it, ordered arrays have only been implemented on the highest end of our product line, HiSeq X and the 3000, 4000.

We could put ordered arrays on other products in the product line, when and if that becomes important for a throughput and cost reason, and is the highest return R&D program for us to invest in.

And so that technology can be applied to the other instruments.

We've not done that yet, because we don't think it's the most important factor in increasing the overall revenue from those segments.

But we have a broad product line now, and over time, various portions of that product line will age out, and they'll be replaced by brand-new products that we bring into the market, that of course will have dramatic new innovations built into them and we've been working on the fundamental technologies around this, and you've seen continued improvements in what we did in NextSeq, and then how we learned from MiSeq and NextSeq and even MiniSeq, and many of those improvements will get bundled into whatever the next system architecture is.

Clearly, we're working across the entire product portfolio, and we'll launch products into the segments we think are the richest opportunities there.

And we think that none of those segments is, I guess I'd describe it as permanently saturated, meaning that people won't change out their boxes if we bring something brand-new in, and that can be dramatically different in cost.

It could be dramatic improvements in ease of use and usability, dramatic improvements in speed.

There's all kinds of vectors we're working on and prioritizing in our R&D pipeline.

Instruments aside, we have very exciting stuff going in the sample prep area, in the informatics area, and it's a very broad product development portfolio.

One thing I'll add, in addition to looking to over time refresh everything we've got, one of the other things you can expect is, look, we are keenly focused on addressing the biggest impediments to getting NGS adopted in the different segments.

Some of that is through our own offerings, and you can expect innovations where customers are telling both you and us that there are the biggest bottlenecks.

So for example, one of the things we heard early on when we launched the X is that the informatics around was a problem and a challenge for our customers, and you saw us launch SeqLab.

You can expect that across the different segments, the biggest impediments that customers are telling you about they're telling us too, and through a combination of our own innovations and partner innovations, you should expect us to be looking to address those.

Got it.

Super helpful.

I guess a more specific question on one of the reasons that you cited around the NextSeq, I'm sorry, the HiSeq miss, was related to people evaluating the NextSeq.

So I was curious, I know it's not that many of them, but was that an NIPT driven factor, and if so, then how should we think about product mix maybe changing to the extent that average risk gains more traction next year?

Well, there was an underlying factor where one or a couple perhaps of our NIPT customers are converting to NextSeqs.

That was something we were aware of.

That was in the plan.

We knew that going in.

It was in the forecast.

We did exactly what we thought we were going to do in those examples.

The ones that we cited and referred to in the script and in the table were ones that essentially stalled the HiSeq order we expected to get at the very last minute, where we thought that those orders were coming in, and they didn't come in, because the customer was considering that and we didn't know about it.

That's the execution issue.

Got it.

Okay.

Thanks very much.

Thank you.

Our next question comes from the line of Bill Quirk of Piper Jaffray.

Your line is now open.

This is actually Alex Nowak filling in for Bill today.

Going back to the first quarter, just trying to understand what happened following the pre-announcement that changed the commentary from saying that the Q1 shortfall is predominantly due to customer outsourcing, to now being a myriad of different issues that you really have no control over.

Just trying to understand what was the change there.

So if you go back and look at the exact script, we didn't say primarily outsourcing.

We did cite the example of outsourcing as one factor that we knew about, at the preannouncement date.

You can imagine in those two weeks before the preannouncement we were scrambling hard to try to get as much data together as we could, and have a preannouncement that was timely.

We didn't want to wait another week to do a preannouncement, to have more data, and so we've learned a lot in the last two weeks, when all of the analytics from the Q1 have really come in and we've been able to digest them, talk to the regions, get the new forecast, and understand all of the background detail.

So we've been able to go order by order and look at every one of the circumstances, and break it into the pie chart that you see, in the deck that we provided.

So there were a lot of different issues, and no singular themes that dominate.

I think what happened is because we mentioned that one comment, people jumped on that one thing we mentioned as the cause, and it clearly wasn't, and we didn't intend to imply that it was.

So we probably should have said, among many causes, this was one we knew about at the time.

The factor was the shortfall in HiSeq.

That's the one factor.

Okay.

That's helpful.

And then just switching to a little bit longer term --

In addition to getting the orders in that didn't convert into revenue.

Those were the two issues that we talked about in the preannouncement, and those are the two issues still.

Okay.

That's helpful.

And then on the China precision medicine program, just a two-part question.

Sounds like you're starting to see the program move in the country.

Just wondering if you could provide some more color on what you're seeing, what you're hearing from customers.

The second part of the question is, if there's -- is there any risk that several customers in China are buying instruments, specifically HiSeq Xs in anticipation for sequencing volume?

And just because of the timing of the program ramp you're going to have some idle instruments sitting throughout China?

We are seeing a number of customers gearing up to try to be participants in the PMI.

We don't know who will win that ultimately, and I don't think they do either, frankly.

There's obviously a couple of very strong candidates to participate, and those are large entities, some of which own instruments already, some of which don't.

So we think they will buy in advance, to have some installation, and perhaps the pull-through will be a little bit lower on those in the early stages.

But they should get very highly utilized, once the program begins to ramp up.

So sure, we could have a little bit of lower utilization locally on some instruments, but that's not atypical.

People sometimes do that for other programs, as well.

And we'll take that into account in our forecast, in our plan.

Okay.

Great.

Thanks.

Thank you.

And our next question comes from the line of Dan Leonard of Leerink.

Your line is now open.

This overlaps a little bit with the last question, but Jay or Francis, I was hoping you could characterize the incremental X customers.

I think you grew to 31 in the quarter.

Also the funnel, in terms of, are these customers that have samples, have projects, or are they buying Xs in anticipation of some missionary sales, some different business model?

Sure.

So one of the things we talked about is, we did have the four Xs that came in Q1.

We did see some interest from the wanting to participate in the Chinese PMI, that is driving some of the X interest.

We haven't gone public with the customers that have come online in Q1, so I can't say that there's definitely demand generated from the Chinese PMI, but we can't talk about specific customers associated with that.

The only one that's public is Genewiz.

I know at least earlier in the HiSeq X program, you were careful to deliver instruments to folks that had samples and had projects.

Is that still the case, or are you still shipping orders as they come?

That's still a factor.

We still use the access to samples as a criteria for the purchase.

And what we've really seen in probably the past year is more of the X customers are metering out their instrument deliveries.

We're in the very early phases of X, people were converting their entire large existing programs over to the X. If you're a Broad, or you're an HLI.

What we see now is that someone will place an X order and say, okay, I want two units for now and then a quarter or two from now, I'll take another three.

And so we're not -- that's one way that we deal with the sample access problem, and they do, as well.

Thank you.

Thank you.

Our next question comes from the line of Steve Beuchaw of Morgan Stanley.

Your line is now open.

A couple clarifications.

Marc, I wonder, given the $700 million order figure that you provided, if you could give us just a little bit more context around it.

Could you give us any sense for maybe what the backlog growth was exiting Q1, or maybe how the growth in orders compares to what you saw in 2015, just so we can again put it in a little bit more context?

And then Jay, I wanted to follow up on a couple comments you made in the prepared remarks around clinical.

First on NIPT, I was a little surprised that given that we're here in May of 2016, that you talked about some reimbursement decisions around NIPT getting delayed out to 2017.

Maybe I'm just overly optimistic there, but I wonder if there might be some hope for the second half of 2016.

Curious what it is you're seeing there.

Just to round it out on clinical, on the clinical cancer side, I want to make sure I understand the narrative.

Is it stable reimbursement, new products, drives reacceleration, is that the way to think about it?

Thanks.

Marc, you want to start?

I'll start with the orders conversation, Steve.

Obviously, a large part of the orders that we booked in the first quarter were shipped in the first quarter, as you would normally expect.

But we built significant backlog, and I called out specifically sequencing consumable backlog, and that will ship mostly through this year.

In fact, almost entirely, there's some that carries over into 2017 and beyond, but most of that's going to ship this year.

The way I would think about that is it's an advanced ordering of reagent purchases that we're going to get, or we should get anyway, throughout the year.

So it gives us some confidence, but I wouldn't think of it as necessarily incremental.

It is relative to last year and prior years, it is larger than we've traditionally seen, and so it gives us a little bit more of the backlog than we would normally have at this time.

And then, I also mentioned that we have about a third of our ending backlog for the quarter rolling over into the second half, which gives us some confidence.

Obviously, that includes a portion of those sequencing consumables that I just talked about.

So nothing more quantitative than that at this point, but other than the sequencing consumables, I would say we're pretty pleased with the array business and the consumer- driven activity there, which has been another helpful part of building backlog.

What it wasn't necessarily was a significant proportion of instrument backlog.

That's not -- it's become much more of a -- instruments have become much more of a turn in the quarter type of activity.

We don't necessarily come into the quarter with significant levels of backlog, like you saw us have in Q1 of 2015.

And it's much more normalized now.

I would just add, the math on the backlog growth is pretty simple so it's 700 plus minus the revenue that we did, and so that growth in the backlog was more than we've typically seen in Q1.

So we felt really good about the incoming order rate.

With respect to NIPT, what we're seeing is that the large payers, the majors there tend to assess coverage decisions on specific dates, and so they're on a cycle.

And so if they're not on cycle to do this in 2016, there's little to no chance they're going to go off cycle to approve this.

As we have mapped out all those cycles, there still remains the possibility that some of them late in 2016, but the majority of them fall in 2017, which is why we have cited that we think the bolus of these coverage decisions will be made in 2017.

With respect to cancer, the narrative really isn't about stable reimbursement, because the vast majority of the cancer tests aren't reimbursed today.

Even foundation medicines isn't.

Most of that market is being driven by labs running these tests for market share reasons.

Most of the labs are losing money on the cancer test.

So the reimbursement opportunity in oncology lies ahead of us, and it's something that many of our customers are working on.

It's an area that I'll be spending a fair amount of my time on in the next year.

And it's related to the standardization challenges that I think exist here.

We're in the phase of the oncology market where it's becoming increasingly fragmented, with lots and lots of different panel products, and one of the things that Illumina needs to do is to begin to reconverge that market into a more standard set of products and more standard set of processes so that payers can get their heads around what is something they should be paying for, and that's something our TST15 is attempting to do initially, and that's had great reception.

Our TST170 will begin to move in that direction as well.

But remember, those are RUO products, because we can't sell those for clinical use.

And so we are evaluating what's happening with the FDA before we begin to push those toward regulatory approval.

Thanks so much.

Our next question comes from the line of Dane Leone of BTIG.

Your line is now open.

I had a quick one on how MiniSeq and MiSeq performed.

Could you give us color, because historically you commented that there would be with some degree of cannibalization of sales.

Can you give us a basket idea of collectively how MiniSeq and MiSeq performed as a group this quarter versus maybe last year, which would have only been MiSeq?

And how you expect that to ramp in MiniSeq, specifically, to continue over the course of this year.

If you recall, we had projected nominally a 20% to 25% cannibalization rate of MiSeq.

We're seeing a rate so far at least, that's less than that.

Part of it is an interesting phenomenon where the low price point of the MiniSeq opens the door to a new customer, and then as we begin to engage with that customer, we use it as an upselling opportunity to sell them the MiSeq rather than a MiniSeq.

We're seeing that phenomenon working well for our salespeople, because they'd love to sell $100,000 instrument rather than a $50,000 one, if they have the option to do so.

Having said that, the MiniSeq product did well in its first quarter.

We've got a great pipeline there, and we're continuing to be optimistic about MiniSeq.

And the data we have today at least indicates a lower cannibalization rate of MiSeq than we would have expected previously.

Okay.

Thanks.

Thank you.

And our final question comes from the line of Jack Meehan of Barclays.

Your line is now open.

Just to follow up, one on MiniSeq.

Do you have a sense at this point for what we should be building in, as a range for quarterly placements?

I know there's a long tail of labs that would like to do sequencing.

Have you found this customer class is more responsive to an instrument sale approach, versus reagent rental?

It's a little too early for us to have any data on that, Jack.

We're continuing to look at this, and the number of customers that actually cross the finish line, got installed, are actually running these at any volume is still a relatively small number.

So it's too early for us to put an estimate out there.

In general, what we've used across the product line is about half of the purchase price.

I think in this product, it will probably be less than that.

So I'd model something less, significantly less than half.

So we'll be looking probably three or four quarters out before we actually start quoting what the actual range is running.

Got it.

That's helpful.

One for modeling out.

I know here in May, you're not ready to be talking about 2017, let alone 2018 or 2019, but I think one of the moving pieces of the income statement across the street is the R&D line item, just given some of the expenses you're planning for both GRAIL and Helix.

Can you give us a framework for what we should be building in, in terms of long-term expenditure and R&D is closer to revenue growth, or do you think some of these new products we should be building in something more than that?

Thank you.

Well, I mean, clearly GRAIL and Helix in many ways are incremental to what we were doing before, and we should be thinking about them as such.

These are very important strategic bets that we think are the most important market opportunities for us to be working on.

The base level of R&D, and the growth rates you've seen over the past couple of quarters will begin to moderate based on our -- the absolute number will begin to moderate based upon the -- let me say it again.

The absolute growth rate will moderate in the R&D lines, because of the actions we're taking to slow down hiring, and that's important to more closely match what's happening in R&D with the recast revenue growth rate.

And so, we'll be analyzing this over the next quarter, and probably give you a little bit more update next quarter, not guidance for 2017 or 2018, but probably a little more qualitative statement about what you can think about R&D and sales and marketing.

One of the things we have said if you take out GRAIL and Helix over any three year time horizon, there is leverage in our operating model organically, right?

So we continue to believe that.

Thanks, Jack.

Thank you.

I would like to you now turn the call back to Rebecca Chambers for closing remarks.

Thank you, operator.

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 all 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 for participating in today's conference.

This does conclude the program.

You may all disconnect.

Everyone, have a great day.