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Illumina, Inc. (NASDAQ:ILMN)

Q1 2014 Earnings Conference Call

April 22, 2014 5:00 PM ET

Executives

Rebecca Chambers – Senior Director, IR

Jay Flatley – CEO

Marc Stapley – SVP and CFO

Analysts

Tycho Peterson – JPMorgan

Doug Schenkel – Cowen & Company

Derik De Bruin – Bank of America

Dan Leonard – Leerink

Ross Muken – ISI Group

Amanda Murphy – William Blair

Isaac Ro – Goldman Sachs

John Groberg – Macquarie

Bill Quirk – Piper Jaffray

Tim Ervin – Wells Fargo

Jeff Elliot – Robert W Baird

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2014 Illumina Inc Earnings Conference Call. My name is Shawna, 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 call is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Ms. Rebecca Chambers. Please proceed.

Rebecca Chambers

Thank you, operator and good afternoon everyone. And welcome to our earnings call for the first quarter of fiscal year 2014. During the call today, we will review the financial results released after the close of 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 deSouza, President. Jay will provide a brief update on the state of our business, and Marc will review our first quarter financial results, as well as provide our updated guidance for 2014. This call is being recorded and the audio portion will be archived in the Investor section of our website.

It is our intent that all forward-looking statements regarding our expected financial results and commercial activities made during today’s call will be protected under the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties. Actual events or results may differ materially from those projected or discussed.

All forward-looking statements are based upon current information available, and Illumina assumes no obligation to update these statements. To better understand the risks and uncertainties that could cause actual results to differ, we refer you to the documents that Illumina 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 Healthcare Conference in Las Vegas the week of May 12, as well as the Bank of America Global Technology Conference in San Francisco the week of June 2. We plan to also participate in the Goldman Sachs Annual Healthcare Conference, the week of June 9 in L.A. For those of you unable to attend, we encourage you to listen to the webcast presentation, which will be available through the Investor Relations section of our website.

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

Jay Flatley

Thanks Rebecca, and good afternoon, everyone. I’m delighted to reported that we successfully navigated the challenges of our recent product introductions and as a result recorded record quarters in revenue in Q1.

We saw astonishing demand for our new instruments the NextSeq 500 and HiSeq X Ten, all the existing systems and our sequencing portfolio exceeded our expectations. Additionally, development activities for the other new products announced in January are tracking to our committed timelines.

For the quarter, revenue of $421 million greatly exceeded our internal plan and marked our 10th quarter of sequential growth. Growth was 27% year-over-year as a result of positive underlying trends across all geographies and a universally positive reaction to our new sequencing systems.

First quarter total sequencing revenue grew 36% year-over-year, driven by impressive demand for consumables, our new and existing instruments and services. These results clearly demonstrate the strength of our sequencing portfolio with instrument options for customers at every experimental scale and across all applications.

Sequencing instrument revenue grew 40% compared to the first quarter of 2013, as a result of strong demand across the entire product lines. With two major platform announcements, we cautioned that we might see positive purchases while customers reevaluated their alternatives. Any pause was brief as instrument orders across the portfolio set a record and significant need beat our internal forecast.

The unprecedented demand for the HiSeq X Ten exceeded our most aggressive assumptions and moving into the second quarter, we expect to book additional systems. To date, we’ve received orders from nine customers for a total of 104 HiSeq Xs already doubling our original forecast. This includes an order from the Wellcome Trust Sanger Institute, which I’m pleased to announce today.

We’re in conversations with a number of other customers around the globe who are interested in purchasing X Ten Systems to perform population level sequencing. The response we’ve seen to the $1,000 of genomes reinforces our views that as far out as we can see, there is an insatiable demand for whole-genome sequencing.

We’ve booked revenue on 12 HiSeq Xs in Q1, and importantly machines installed during the quarter are already producing high quality data in customer hands. Sequencing runs are consistently generating over 1.8 TF data in three days with many runs in excess of 2T. The quality of HiSeq X data has also been exceptionally high, which runs producing well in excess of the 80% Q30 basis.

We’re actively scaling our manufacturing capabilities to meet this over-planned demand. As a reminder, there are two components of our supply chain that are critical in ramping production. The high resolution cameras and the pattern flow cells.

We’re now optimistic about the ability to acquire sufficient cameras from our supplier to satisfy the additional demand. That said, volume production of the pattern flow cells has only recently begun. And as a result, we believe flow cell production rates will be key factor in scaling HiSeq X shipments through the end of 2014.

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

As a result, in the first quarter, we saw close to 70% of samples submitted to an IGM partner compared to less than 10% in the fourth quarter of last year. This was consistent with our expectation that FastTrack Services will grow more slowly than previously seen.

Overall demand for the HiSeq family of products has increased over the last few quarters, and this trend continued in Q1. Shipments were higher sequentially due to improved ASPs as customers purchased and shifted toward HiSeq 2500 and X Ten from the HiSeq 1500 and 2000.

New customers accounted for approximately 70% of HiSeq orders, close to a record. The majority of which were commercial clinical and hospital customers. Importantly, many of these customers were in the early phases of their assay development and validation, creating a potential for follow-on orders as our methods into production.

We witnessed some cannibalization of HiSeq buying new products. However the magnitude of this impact was well within our forecast. As we expected, some of the customers who opted for NextSeq over HiSeq bought multiple units.

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

HiSeq 2500 remains a very important part of our instrument portfolio with a long roadmap ahead of it, including enhancements to throughput and read align. One such enhancement, the 1T kits began shipping last week, and now allowed generation of approximately 8 human genomes in six days. The 2x250 read align kits will ship later this quarter.

The NextSeq product launch is going extremely well, resulting in shipments of 65 instruments in Q1. As we would expect, approximately 85% of early orders came from existing customers with approximately half originating from non-academic sources. These customers are running targeted panels RNASeq, exome and NIPT applications and find flexibility of NextSeq key to managing their workflow.

Early customer feedback on NextSeq has been very favorable. More than 90% of shipments have been installed in a single day with early sights noting the high data quality, flexible vast sizes and fast run-time as important attributes of the platform.

We’re very pleased with the order pipeline for NextSeq as we educate new customers on the system’s capabilities. From our 60-city road-show and numerous webcasts, we generated over 2,500 leads of new customers demonstrating that this product is additive to our total addressable opportunity.

New customers account for a third of the current pipeline and clinical accounts are prominent in the file. Additionally, we have significant interest in our trading program for competitive platforms and expect this to drive incremental orders in future quarters.

Demand from HiSeq reached record levels in the quarter with the highest unit shipments since launch. This result was catalyzed by the FDA’s recent clearance and the lower list price of MiSeq and MiSeq DX at $99,000 and $125,000 respectively.

Importantly, approximately two thirds of instruments were ordered by government commercial translational and clinical customers. This included an order from the Department of Defense for 12 MiSeq, to be used by the army and the navy in a bio-surveillance program focusing an whole-genome sequencing of bacteria and viruses.

Additionally in the first quarter, we received follow-on, multi-unit orders from existing customers building capacity in production facilities. An example of this is HistoGenetics, which first placed an order in Q2 of last year.

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

Cannibalization of MiSeq by NextSeq was insignificant, with approximately two thirds of orders from new customers. We’re not currently projecting significant cannibalization of MiSeq as we believe the platform is uniquely suited for specific applications and customer groups.

Moving now to arrays, this quarter total micro array revenue increased 4% year-over-year due to growth in genotyping services and our IVF products which was partially offset by a year-over-year decline in array instruments and consumables. New array consumable pricing introduced in the fourth quarter drove samples ordered close to record levels, demonstrating the elasticity of the market. This change fuelled increased demand for Onco array as well as whole-genome arrays, specifically the Omni Express exome and core exome products.

Our Ag business also contributed strongly to the Q1 results as orders grew 20% year-over-year driven in part by demand for the BovineLD Plus and the iSelect arrays. We continue to see expanded use of selective breeding based on genotype in crop and livestock with a significant number of customers standardizing on Illumina’s products.

We remain focused on delivering complete sampled answer workflows enabling new markets to embrace NGS technology through a variety of applications. Our NeoPrep Library prep system, with radically simpler workflow remains on track for a summer launch and early feedback from customers is extremely positive.

Additionally, we began shipping our BaseSpace Onsite platform late in the first quarter. Translational customers have shown early interest citing the simple user interface in installation as transformative to their ability to bring next generation sequencing into their labs.

As a demonstration of the diversification of our business, again this quarter, commercial non-profit and hospital customers accounted for approximately half of shipments despite an improved funding environment for academic customers in the U.S. and the impact of the Horizon 20-20 Program.

Sequencing uptake in the oncology market is gaining significant traction based in part on feedback from recent customer conferences. As we shared our Investor Day in January, we’re collaborating the number of oncology thought leaders to drive standards for the use of NGS in a clinical setting.

Feedback from the AACR conference, for which the standard is being a critical factor for driving adoption to continue further our discussions with major cancer centers, pharma, guideline setting bodies and the FDA on this topic, with extremely strong interest from the field.

We also recently introduced two new oncology products that were shipped this quarter. The TruSeq RNA Access Library Prep kit was our new solution for RNA analysis from FFPE tissues or other low-quality, low-input samples. The TruSight Myeloid sequencing panel is the latest expansion of our TruSight family of products, which includes the very successful TruSight One panel. This panel uses expert curetted content to identify somatic mutations in myeloid malignancies in an accurate, efficient and cost effective manner.

With reproductive and genetic health, we made significant progress during the first quarter in both IVS and NIPG. We successfully launched our pre-implementation genetic diagnostics products CytoSNP Karyomapping.

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

Recently the Journal of Fertility and sterility published in extensive preclinical validation and accuracy assessment in our VeriSeq product for aneuploidy screening on single cells. They found a high level of consistency between our solution and established methodology such as Array CGH. The study concluded VeriSeq PGS is a robust high throughput method ready for clinical application and reproductive medicine, citing potential advantages of reduced cost and enhanced position.

During the first quarter, we announced a publication to the New England Journal of Medicine, which directly compared the use of NIPT using cell free DNA, standard prenatal aneuploidy screening in the average risk population. The seminal study was the first in a number of studies that are being performed to demonstrate the efficacy of NIPT and the screening tool for the average risk population, a market which we believe is up to six times larger than our current market.

The NIPT market continues to grow at a breathtaking rate and we’re very pleased with the performances verified in the first quarter. Not only we verified volumes and revenues come in at record levels, we also completed tech transfer agreements in France, Germany and Italy, and we’re in discussions with more than two dozen other potential tech transfer customers.

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

In summary, Q1 was another remarkable quarter with significant uptake of our new sequencing platforms coupled with strong interest in our existing systems. We’re extremely well positioned to address opportunities at every scale and are focused on developing the large untapped markets is bearing fruits faster than we had projected.

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

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

Marc Stapley

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

Revenue grew 27% year-over-year to approximately $421 million as a result of significant uptake of our new instruments as well as continued strong demand from MiSeq and HiSeq products. In fact, in the first quarter, we delivered record orders, shipments and revenues driven by record results across more than 15 different metrics including shipments and orders for sequencing instruments and services as well as HiSeq and MiSeq consumables.

Globally demand for our products, remain strong during the first quarter. Shipments in the Americas grew 24% year-over-year and Europe saw 32% increase over the same period last year. In APAC, shipments grew 22% year over year, driven by continued strength in Japan, where Q1 is a traditionally strong quarter which was certainly the case again this year.

Instrument revenue grew 32% year over year to reach $116 million in the first quarter. Growth across the sequencing portfolio was partially offset by a decline in array instruments.

Consumable revenue in the quarter was $243 million, an increase of 18% compared to the first quarter of 2013, primarily due to high demand for sequencing consumables as well as our grown installed base. Consumable revenue represented 58% of total revenues, down from 62% in the prior year period and lower than the 63% seen in Q4, primarily due to the strengthened instrument services and maintenance contracts during the first quarter.

Sequencing consumables grew 32% over Q1 of last year, due to higher instrument utilization and a larger installed base. In Q1 Sample Prep shipments grew 16% year-over-year due to demand for RNA sample prep kit, Nextera XT, our library prep solutions for small genome and record demand for our Nextera Rapid Exome Captured solutions.

HiSeq and MiSeq consumables reached record levels during the first quarter. This translated to HiSeq pull-through for instrument excluding HiSeq X in our projected range of $300,000 to $350,000 down somewhat sequentially as expected given year-end spending during the fourth quarter, the higher year-over-year. We continue to project HiSeq pull-through of $300,000 to $350,000 per instrument.

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

In prior calls, as we have discussed the impact of new customers developing assays on MiSeq, resulting an early under-utilization instrument followed by an up-tick in utilization of the assays up into use.

This quarter we started to see the benefit of these activities with more than 30 separate accounts ordering production levels of MiSeq consumables, most of which were clinical accounts performing oncology or HLA assays. This compares to just 13 accounts a year ago.

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

It is too early to provide an estimate of NextSeq or HiSeq pull-through. Historically it takes several quarters for this to normalize as our calculation method tends to over-estimate pull-through in the early quarters of the new instrument ramp.

Services and other revenues, which includes genotyping sequencing services, instrument maintenance contracts and revenue from verified sales grew more than 65% versus Q1 2013 to equal $59 million. This improvement was driven by ongoing growth in our extended maintenance contracts associated with the larger sequencing installed base and $8 million genotyping services order that was completed and recognized during the first quarter and strengthening other genotyping services and verified sales.

Turning now to gross margin and operating expenses, I will highlight our adjusted non-GAAP results which exclude legal contingencies, non-cash stock compensation expense, and other items. I encourage you to review the GAAP reconciliation of non-GAAP measures included in today’s earnings release.

Our adjusted gross margin for the first quarter sequenced 70.4% compared to 71.4% in the fourth quarter, primarily due to a lower mix of amounts, as a result of the strengths in CG extending reach. Year-over-year in Q1, gross margins expanded 120 basis points, as a result of improved instrument and service margins.

Adjusted research and development expenses for the quarter were $65 million, or 15.5% of revenue, approximately flat compared to $66 million or 17% of revenue in the fourth quarter. Additional labor and benefit expenses more than offset by a sequential decrease in costs associated with our new products introductions.

Adjusted SG&A expenses for the quarter were $84 million, or 19.9% of revenue, compared to $86 million, or 22.2% of revenue, in the previous quarter. The slight decline was primarily due to the higher commission and bonus payments earned in Q4, which were partially offset by additional headcount in Q1 and other expenses for our new product launches.

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

In March however, we began investing in our more normalized and planned rates which will continue through 2014. As a result, we are projecting operating expense to increase sequentially in the second quarter.

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

In the first quarter, we recognized approximately $700,000 of adjusted other income. Our non-GAAP tax rate for the quarter was 30%, lower than expected due to employee stock activity. This compared to 27.5% in the first quarter of last year, which included the full year impact of the 2012 R&D tax credit as well as the quarterly impact of the 2013 R&D tax credit.

Non-GAAP net income was $80 million for the quarter, and non-GAAP EPS was $0.53. This compares to non-GAAP net income and EPS of $63 million and $0.46, respectively, in the first quarter of 2013.

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

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

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

Excluding the impacts of the tax benefit outflows, which is myriad of an inflow in cash from financing, cash flow from operations would have been approximately $88 million. DSO increased to 63 days compared to 56 days last quarter, as a result of the relative timing of shipments.

Capital expenditures were $19 million resulting in $18 million of free cash flow. We ended the quarter with $1.1 billion in cash in short-term investments.

During the quarter, we repurchased approximately 788,000 shares for $130 million as part of our discretionary repurchase program. We have $238 million remaining under our previously announced program.

Given our strong first quarter results and the strength in demand for HiSeq X Ten, we have updated our guidance for 2014. We now predict revenue growth of 21% to 23%, an increase from the previous guidance of 15% to 17% growth and non-GAAP diluted EPS of $2.10 to $2.15, higher than our previous guidance of $2 to $2.06. This projection includes shipping materially higher number of HiSeq X Ten than the five we included in the January guidance.

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

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

In summary, we delivered strong first quarter results and are projecting significant growth throughout the remainder of 2014 and beyond. We continue to drive the market development and adoption in the most innovative and extensive sequencing portfolio available. We remain focused on building our business and our capabilities to address the more than $20 billion market opportunity ahead of us.

Thank you for your time. We will now move to the Q&A session. To allow full participation, please ask one question plus a related follow-up if necessary. Operator, we’ll now open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Tycho Peterson, JPMorgan. Please proceed.

Tycho Peterson – JPMorgan

Hi, thanks for taking the question and nice quarter. Just first question on actual genome and onco panels, can we kind of refine your thinking about how you’re going to be bringing these to the market and Jay, can you maybe just talk a little bit more about how you think about the market opportunity, I know you talked about $11 billion ramp on oncology, but how do we think about specifically actionable genome and the onco panel?

Jay Flatley

Still early days Tycho. And in terms of exactly how we’ll bring that to market, I mean, we have these consortia in place and operating now. They are beginning to define the content. We’re working with the regulatory bodies to understand exactly how we would do clinical trials around these products.

They may wind up being more similar, perhaps than we had originally envisioned. So that’s as we define the content going to continue to evolve. Hopefully we’ll have a lot of progress by the end of the year in terms of what the definition of the products would look like and then be in the midst of the development of the content and the assay methods and the regulatory filings in 2015.

In terms of the market size, we think that $11 billion number for oncology overall is a great camp for us to be thinking about. The constraints of the market development as we’ve done our homework on this, we revolve around standards as I mentioned in the script and so we’re trying to move that ball forward as part of this consortium work and getting these through the regulatory bodies so that they’re approved products and so both of those components are going to be key aspects of the programs.

Tycho Peterson – JPMorgan

And then, has the momentum from pharma picked up a bit. I noticed in a way your first X Ten orders was elusive. So, step it up capacity and then also what are the trends like within pharma?

Jay Flatley

Yes, I’d say overall, over the past year but pharma business has been increasing. It’s really for discovery purposes on the one hand. I think there is interest in increasing level for use in clinical trial. But I suspect that won’t be implemented by them actually buying large scale purchases of sequencers into their laboratories but be outsourced to the CROs.

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

Tycho Peterson – JPMorgan

And last one, any update on the population efforts, I think we are supposed to hear something on genoming around this time. Any of these big efforts are going to get funded in the near term?

Jay Flatley

Well, they’re definitely going to get funded. They are continuing to move forward and genoming when this is funded, it’s a question of what their process is select the suppliers and we’re not really disclosing any details around that. But I think in other places around the world there are projects that are in – I’d call the design phase, and by that I mean talking about specifically how and when to implement them in and we’re quite confident that they’ll be funding behind those as well.

Tycho Peterson – JPMorgan

Okay, thank you.

Operator

Your next question comes from the line of Doug Schenkel, Cowen & Company. Please proceed, sir.

Doug Schenkel – Cowen & Company

Thank you and good afternoon. I know this may seem like silly question given the strength and really the magnitude of the Q1 revenue being relative to consensus expectations. But I am wondering if there was any pause in the typical pattern on instrument demand in the quarter given the breadth of the new product offerings you announced in mid-January. And if so, did you fully recover by the end of the quarter or was there some excess backlog as you had it in Q2?

Jay Flatley

I guess the first thing I’d say Doug is that the order rate in Q1 was extraordinarily strong. I mean, it was quite exceptional. And if there was any pause, it was a matter of weeks at the beginning of the quarter while we did have a backend loaded quarter just because of the inherent strength of the orders in the quarter.

Our January order rate was quite reasonable. So, we couldn’t see anything that concerned us, even earlier in the quarter. Having said that there clearly are some of our customers who are evaluating alternatives about which way to go and that continues even into Q2.

As we mentioned, the cannibalization effects of these new products were significantly less than we might have anticipated. We had models internally about draconian types of cannibalization and were trying to compare for that worst case outcome and enhance our guidance coming into the quarter that we could have flat revenue if that scenario had played out. But the actual cannibalization was much less than we anticipated.

Doug Schenkel – Cowen & Company

Okay, that’s great. And then, as you guys have pointed out in the past, you usually don’t increase guidance in Q1. Can you provide some detail on what has changed, clearly part of that was the Q1 strength. But I guess what I’m getting at is, would you be willing to talk us through your assumptions for X Ten placements in 2014, thoughts on cannibalization in terms of which factored into guidance and really on the other key assumptions that have changed at the revenue one?

Jay Flatley

I can talk to that in general. I guess the two initial factors are number one, the magnitude of the revenue dealing in Q1. And behind that the strength of the incoming order rate were both key factors for us.

Additionally as I mentioned in this script, as we look forward through the rest of 2014, we’re increasingly confident about our ability to deliver more HiSeq Xs and we’re in the original plan. And that’s because we have now good one side on the cameras. Our production is ramping on the pattern of flow sales, as I mentioned we’re still early in that. So, we don’t know exactly where the yields are going to wind up on those pattern flow cells. But we’re ramping quite quickly now, so that gave us more confidence about that delivery pipeline for the Xs.

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

We saw almost no cannibalization of MiSeq, which was quite a surprise to us. We had great strength in the MiSeq product line. We had a little bit of cannibalization in our assumptions, that continues from HiSeq 2500 down to NextSeq, so there are some customers that made that transition but in a couple of cases that we recently ordered multiple NextSeq, so from a revenue perspective that was close to neutral.

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

Doug Schenkel – Cowen & Company

Great. And one last one. Some have suggested that there should be some concern about growth prospects due to uncertainty regarding the outlook for reimbursement of cancer panels and/or exomes. In your opinion, is there any risk to guidance associated with this dynamic? Thanks again.

Jay Flatley

Yes, thanks. No, we don’t think there is. We’ve certainly in our guidance tried to incorporate what we think is happening around the reimbursement front. And we are getting panels reimbursed, we’re getting exomes reimbursed even in some cases whole genomes.

That’s not typical on all of these products. But I think the trend is overall favorable with respect to reimbursement and we’re beginning to work behind the scenes with the payers to beginning to educate them on the trends in next generation sequencing and to build the economic arguments that NGS really is a money saving proposition.

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

Rebecca Chambers

Operator, we’re ready for the next question.

Operator

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

Derik De Bruin – Bank of America

Hi, good afternoon.

Jay Flatley

Hi Derik.

Rebecca Chambers

Derik.

Derik De Bruin – Bank of America

Do you know, can you give me an idea of how many of your customers are using your sample prep and target enrichment products. I’m just getting a sense of how much of that revenue stream you’re capturing and potential upside as you self expand that reach?

Jay Flatley

Yes. Well, I can’t give you exactly the customer numbers. But I think in terms of market share, we in general position our market share somewhere between 20% and 30% of the revenue in sample prep market.

Derik De Bruin – Bank of America

Great, that’s helpful. And the population genomics market, I mean, that’s when we’ve sort of struggled with for a number of years, in terms of trying to politicize on that opportunity. I guess, can you sort of help us frame that a little bit more. And then, also have you heard anything out of DGI and sort of what their plans with complete genomics in that and just any update on sort of your relationship with DGI and what help us in responding to the X Ten situation?

Jay Flatley

Population sequencing is a bit hard to put in the forecast because they’re digital large opportunities. And so we haven’t for example put our pen down on some specific number of pop-seek programs for this year.

And I think that in general, there would be X Ten customers and embedded in our upside forecast for X Tens are some number of units for these – overall pop-seek programs. I can probably give you some indication that – around the globe they’re probably are in the range of three to five of these that are quite serious.

And probably a list of 10 to 15 of them that are theoretical potential. So it wouldn’t necessarily be 2014 opportunities but over the next couple of years, 10 to 15 that looks quite interesting and potentially real.

With respect to BGI, we don’t have any more clarity than anyone else what their roll-out plans are for – and use of complete genomics technology. We continue to work with them, they remain a customer. We have not signed a clinical agreement with BGI. And for now, that’s really all the information we have.

Derik De Bruin – Bank of America

Great, thanks. I’ll get back in queue.

Jay Flatley

Okay.

Operator

Your next question comes from the line of Dan Leonard, Leerink. Please proceed.

Dan Leonard – Leerink

Thank you. How much of the continued interest in HiSeq in the quarter was driven by the desire of folks without deed of instrument to run the 1T or the version 4-kit as you’re calling it?

Jay Flatley

Implying that there were upgrades from older units to 25.

Dan Leonard – Leerink

Yes, over placements or whatever the right term is exactly.

Jay Flatley

Not much in the quarter so we didn’t see a lot of that in Q1, we think that there is some potential energy for revenue here over the next year as the 1T kits gets into the market and customers begin to understand the performance of the 1T kits. As I mentioned in the script, we just started shipping those last week. So, I suspect over the next month or so.

Customers will begin to share data on the performance of that 1T kit. We’re very excited about it and our hope is that customers understand the capabilities that they can have in the run parts they can get with the 1T kit that it will begin the catalyze and upgrade cycle.

That upgrade cycle could go as I mentioned in different directions, it could go towards HiSeq 2500 that it might go toward NextSeq or some combination of those instruments. And in some cases you might even get some external results. But in the quarter, I would say little to no impact or upwards.

Dan Leonard – Leerink

Okay, got it. And then it’s somewhat related, follow-up question. Jay, can you comment at all that the price volume and mix dynamics in the sequencing consumable strength you called out in your prepared remarks?

Jay Flatley

Can you be a little more specific Dan, what are you referring to?

Dan Leonard – Leerink

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

Jay Flatley

No, the price increase really hasn’t taken affect yet. And unlike other quarters, Q1 is where we’ve had price increases. We didn’t see a significant pre-ordering or pre-stocking in Q1. We saw that over the last two years in anticipation of price increases, customers built up some inventory.

If anything we saw a little bit of a run-down of the inventory out of customers, largely in anticipation of the shipment of the 1T kit. And for that reason and because that kit wasn’t shipping, there wasn’t any frontloading of shipment.

Dan Leonard – Leerink

Okay, got it. Thank you.

Operator

Your next question comes from the line of Ross Muken, ISI Group.

Ross Muken – ISI Group

Hi, good afternoon guys and congrats.

Jay Flatley

Thanks Ross.

Ross Muken – ISI Group

I guess on some of the larger scale projects, what has been the feedback both in terms of the ability to kind of acquire the number of samples, needed to satisfy some of these large projects, particularly on the oncology side. And then also just on the bioinformatics side, you guys are doing a lot to sort of simplify and make them more achievable. What have you heard in terms of feedback from the customer base in terms of what the next leg that needs to happen there just to kind of if there is question make some of these more population based studies, more feasible?

Jay Flatley

Yeah, what about our filters that we use on X Ten orders that we take, really does relate to samples. Particularly I would suggest in the Asian market, there is some sets of customers who might buy an X Ten and then actually not use it very extensively. And those in the long run are great customers for us and so we want to make sure we qualify the X Ten placements to be sure there is a pipeline of samples behind it.

In most of the cases of the customers we’re dealing with, there are taps into either the hospital systems or into the health system that gives us reasonable confidence of a sample flow that supports the throughput levels of the X Ten. And that’s certainly true in this first handful of proxy projects that we’re talking about, the U.K. being a great example, being directly tapped into the NHS.

In terms of bioinformatics, that is one of the core challenges I think in the X Ten installations, one different from our original set of assumptions on X Ten is that we thought when we originally talked about five customers, that these would all be very sophisticated customers who would initially buy these products. And that they would have full bioinformatics capability and limbs capability for sample tracking.

And what we found so far is that while there are clearly buyers, there are many other potential buyer who are less sophisticated in terms of sequencing. And so it’s incumbent on us to improving the overall sample support infrastructure around an X Ten and we’re very actively involved in developing that capability to help manage the sample prep and the limbs workflow behind our sample numbers that are required to feed the system.

Additionally with the next bio-capability and what we’re doing in the BaseSpace, appstore. We’re bringing in much more horsepower to actually store and analyze the genomic data, particularly when it’s hooked into the clinical information which we can now store together in the next bio-environment. So, thinking lots of progress there, still a long way to go for us and everyone to improve the informatics side.

Ross Muken – ISI Group

Excellent, thanks Jay. That’s it from me.

Operator

Your next question comes from the line of Amanda Murphy, William Blair. Please proceed.

Amanda Murphy – William Blair

Hi, thanks. I just had a question on the X Ten if I may. So, now that you’ve got a few orders under your belt and you never take the customers that are placing orders at this point. I’m curious if you have an update on how we should think about the number of customers who might be potential buyers of the X Ten in its current form. And then just thinking beyond that group, what are you guys thinking about potentially opening up the X Ten restrictions at this point?

Jay Flatley

Well, I guess the early products Amanda, has been incredible on this. And we’re thinking to what say 12-month forecast might look like on X Ten. The pipeline is really strong here as I mentioned in the prepared remarks, we expect some additional orders in the second quarter.

I think a core question that’s unanswered for us is how much this initial demand really represents sort of an initial bonus that will slow down or flatten out as a set of initial customers when we get their systems and whether we’re meeting market demands that won’t continue. And we don’t quite know the answer to that yet. Right now, our pipeline looks quite good through maybe the middle of next year.

And by that I mean that the customers have talked to us about getting access to this technology but not have funding until Q1 of ‘15 or Q2 of ‘15, which in some ways is good and that it stretches out the delivery and the order rate for these systems.

So, it’s a little hard for us to actually forecast where this is going to go right now, but we’re cautiously optimistic given the early signs. But with respect to opening up the platform, it’s really too early to think about that. And we’ve obviously done some internal, we’re trying to understand what those market dynamics might look like both in terms of changing from – a requirement to buy 10 units and also what those applications could run on a HiSeq X.

But we’re at least a year away from considering any serious decisions about opening it up in any way. We’re just waiting to see how this market evolves, what the demand looks like in sort of how the dynamics into sort of inter-related inter-play throughout the rest of this year.

Amanda Murphy – William Blair

Got it. Okay, and then just one quick one on the guidance. I’m just curious what your assumptions are around stock based comp and then are you still looking for, I think you said before 70% growth margin for the year, I’m sorry if I missed that, but curious if that was an updated, if you had updated that number as well?

Jay Flatley

Yes, Marc, why don’t you take that one?

Marc Stapley

Yes, happy to. So, Amanda, yes, I mean, you’re right. We gave guidance, updated guidance on revenue and no, actually show how useful it is to give the guidance for the gross margin, stock based compensation. Because even when we do this, there is a pretty broad range of estimates out there, which I think is fine.

I mean, we have our own, until the range of estimates as you can imagine. So really wanting to get people to focus on the top and bottom line really and have some degrees of flexibility around the individual line items that feature within that.

On stock based comp specifically, I think it’s fair to assume that the current quarter rate we kind of flow on a quarterly basis. And if anything it could up-tick as we go on throughout the year.

Amanda Murphy – William Blair

Okay, thanks very much.

Operator

Your next question comes from the line of Isaac Ro, GS. Please proceed.

Isaac Ro – Goldman Sachs

Good afternoon guys, thanks. Just a follow-up on the informatics strategy if I may, maybe you guys touched a little bit on the strategy there. Could you talk a little bit more specifically on the operational plan, you guys have opened a facility in Mission Bay, San Francisco last year, you’re building that out. Maybe just an update on how that went this quarter kind of what the operating plan is for the rest of the year specifically around building out the informatics strategy?

Jay Flatley

Well, just to be clear Isaac, the facility in Mission Bay, and the bay area won’t be open until this fall. So we are doing the build-out there but there is no staff in that facility yet. Most of the informatics staff that work on the next bio-part of this are located in Santa Clara, where next bio was going to be suspected.

Most of the people will continue to stay in your South Bay at least for the next year or so. So, we’ll be beginning to hire new informatics talent and it’s going to be Mission Bay facility as we open that up in the fall.

In terms of operational aspects around informatics, we are running next NextBio and BaseSpace in our new enterprise commission business unit headed by Nick Naclerio. We’re focused on the NextBio side in terms of generating revenue from independent sales of NextBio. And these are generally into farmers and large institutional sales, we’re putting a sales force that fits into that business unit. And I think we now have four or five people in that sales activity.

And then of course, we’re coupling NextBio into these large X Ten population sequencing sales because we think it’s a fantastic backend and to the extent that we can integrate NextBio directly into the workflow and pipeline. It greatly simplifies the installation and the implementation and it’s more a tricky solution for our customers. So, you’ll find NextBio, increasingly bundled into those large-scale of sales.

Isaac Ro – Goldman Sachs

Got it, that’s helpful thanks. And just a follow-up on MiSeq, you touched on the strength you saw there this quarter. But when you put that in that in the context of competitive environment, in the lower end of the market so to speak, really on a global basis, because your primary competitor there obviously trying to get some of the products out the door this year, but under a wing of a bigger distribution channel globally. So, just curious about how you see the MiSeq competitive environment playing out over the balance of the year? Thank you.

Jay Flatley

MiSeq was as I mentioned extremely strong performer in the quarter, part of that was due to the FDA approval both directly, by customer’s ordering the DX version of the product. But I think even more so indirectly from customers who know that there is now an FDA approved platform. And just putting some air under the entire product line is a result of that.

I think the competitive position was greatly enhanced by the price decrease. We got feedback from the field that the $99,000 price point much like the $99 array price point was a year ago sort of a magical place to be. And it just inherently increased the demand getting under $100,000.

From a competitive position we won the vast majority of the head to head competitive situations with customers. In fact we didn’t get any specific reports of lost orders from MiSeq 2 competitors and enhance the overall strength in the numbers.

Operator

Your next question comes from the line of John Groberg, Macquarie. Please proceed.

John Groberg – Macquarie

Thanks. Jay, I want you to just focus a little bit on the comments around new customers. I think you said if I remember that correctly 70% of your shipments for the new customers. So, I just wanted to maybe ask two questions.

One, if you think about – you think about from a same-store sales perspective or kind of the existing customers, kind of what rate are they growing at and how do you think about all the new products that you’ve launched and their ability to evaluate the new products and potentially upgrade and maybe how that could change that dynamic?

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

Jay Flatley

Yes. I think the key contributor to the high end customer acquisitions, actually might have to do with the 1T kits in a way. Because what we saw in the HiSeq installed base was perhaps fewer HiSeq orders from the existing customers in anticipation of the 1T kit both to see how well it performs on the one hand but also because of the inherent throughput increase.

Not to really say it’s stalled up the market, but I think customers were waiting to see what do they actually get delivered from that 1T kit before they begin ordering incremental HiSeqs to add to their fleet. And so, that probably depressed the order receipt number a little bit from our existing installed base at HiSeqs.

In addition, we didn’t have the – we have really started the upgrade cycle from the older generation of HiSeqs. And so, I think just on a statistics basis, that meant that most of the HiSeq orders came from new customers.

I think similarly and MiSeq because of the FDA approval, we saw very broad adoption in new clinical sites across the MiSeq platform. I think on NextSeq we had a little bit of the opposite effect because it was very early on that new product most of the orders came from existing customers because they knew the technology, they knew the reputation of Illumina.

But if you look forward in the pipeline most of the forward going pipeline of MiSeq for new customers begin to educate this new target based on what that technology is and what it can do.

With respect to the accelerator, this is strategically quite important for us. We plan this year to fund three companies in the accelerator, we’re a process of retrieving proposals now. And the purpose of course is for us to capitalize new companies that can develop great applications across NGS.

And so, we’re co-investing here with Yuri Milner, funding them over relatively short time frame. And they’re either kicking them out as brand new companies that will be self sustaining or if they’re not successful what they’re trying to do closing them down. So I think we’ll be very excited to see what the success will be initial set of companies is and hopefully if it works the way we hope, we’ll be able to grow the program into 2015 and beyond.

John Groberg – Macquarie

Okay, thanks a lot. And can I ask just one quick one for Marc, on the cash flow, on the receivables is that all due to timing, is that what you said, I just wanted to make sure on the cash flow?

Marc Stapley

Yes, John, you’re referencing the up-tick in the DSO.

John Groberg – Macquarie

Yes.

Marc Stapley

Yes, that was I mean, it’s a timing of shipments in the quarter and when we expect to collect that which clearly goes into the second quarter.

John Groberg – Macquarie

Okay. But as you’re expanding all these new customers, you’re bad debt, anything isn’t increasing?

Marc Stapley

No, not until – no change in the dynamic there at all.

John Groberg – Macquarie

Okay. Thanks a lot.

Operator

Your next question comes from the line of Bill Quirk, Piper Jaffray. Please proceed.

Bill Quirk – Piper Jaffray

Great, thanks guys. Good morning. First question, say first question is just – I was hoping you could elaborate a little bit on the interest level for the NextSeq and specifically I guess around the current customer list, not surprised that you have quite a bit of non-academic interest, is that – can I guess I thought money has been a little bit higher. So, maybe you can just talk to kind of what you’re seeing and maybe how this might transition? Thanks.

Jay Flatley

Yes. I think I guess yes, the platform has been incredible. What we saw in actual order receipts is probably new did a little bit by the fact that we had this two-channel chemistry versus four-channel chemistry. And it took a while for customers to actually believe that the chemistry performed as well as our fortunate chemistry does. That I think questions about that were raised once customers began getting them into their sites, getting them up and running and actually beginning to share the dataset.

So the data that’s coming out from the initial set of customers, I think on critically says that the data quality is as good as our four-channel chemistry. And so I think that’s really in the latter part of the quarter capitalize the actual order rate that – the orders that crossed the finish line into the quarter.

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

Bill Quirk – Piper Jaffray

Got it. And as, well, I’ll stretch the call to follow-up to that question, but can you talk at all to some of the rumors as market speculation around kidding the verified stuff?

Jay Flatley

Well, I don’t know what the rumors are, maybe we’ve talked specifically about the fact that we’re going to submit that into the FDA. So that’s probably information and we’re going to get that submitted by the end of the year, that’s our target.

Bill Quirk – Piper Jaffray

Perfect. Thanks guys.

Operator

Your next question comes from the line of Tim Ervin, Wells Fargo. Please proceed.

Tim Ervin – Wells Fargo

Hi, thanks. I was wondering Marc that you might be willing to comment on your longer term guidance and specifically the component of that in which you want to grow EPS faster than revenue. Is that still achievable given where your markings are now and kind of the dynamics around the share count?

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

Marc Stapley

Tim, yes, I’m happy to comment on that. I mean, no real change in our longer term guidance either the top line, due that we have there the fact that we would expect, it’s more of a goal I would say than I think that we expect to provide leverage over that longer term period.

Of course the other thing, in the current results that would – that cause us to think about that very definitely impact on the contrary I would think. It’s the dynamics that we have and the opportunities that we have are pretty much the same as they were previously and I wouldn’t change that at this point.

Jay Flatley

Yes, and the array market. If the market, where we have some offsetting factors at work. On the upside of the array market, we have growing strength in the IBF opportunity, the Ag business continues to do well. We remain bullish about what’s going to happen in the consumer markets using arrays here over the next couple of years. And we’re continuing to see, remaining elasticity there as the prices come down.

Now, that’s offset of course by the fact that the traditional G-Los market I think is moving much more towards sequencing as is the expression market moving toward RNASeq. And so those are downward forces on and the overall array business.

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

Tim Ervin – Wells Fargo

Great. Thank you.

Operator

Your next question comes from the line of Jeff Elliot, Robert W Baird. Please proceed.

Jeff Elliot – Robert W Baird

Thanks guys and great quarter. Jay, first question is for you. Can you give us an update on molecular or any of the other long-read programs?

Jay Flatley

Yes, the molecular is in late stage development now. We expect to begin shipping that product late in Q2. We are continuing to work internally on enhancement of long-read options and so we have a couple of other development programs that are early in research right now but very promising we think in the long-run. And those would be complimentary to what we’re doing molecular.

Jeff Elliot – Robert W Baird

Great. And Marc, could you clarify, could you say any weather impact in the quarter, I know you had strong consumables numbers, but was there any weather impact in the U.S.?

Marc Stapley

No really, there wasn’t. And there really isn’t for our business, it’s not something that has a material impact on our revenue. So, I wouldn’t comment on that, nothing there.

Jeff Elliot – Robert W Baird

Great. Thank you.

Operator

At this time, we don’t have any additional questions. I would now turn the call back over to Rebecca Chambers.

Rebecca Chambers

Thank you. Thank you all for joining us. As a reminder, a replay of this call will be available as a webcast in the events 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.

Operator

Ladies and gentlemen that does conclude today’s presentation. Thank you and have a great day.

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