Q3 2019 Earnings Call
Good day, ladies and gentlemen, and welcome to the third quarter 2019 Alumina earnings conference.
At this time all participants are in listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During the section you will need to press star one on your telephone as a reminder, this conference call may be recorded we'd now like to introduce your host for today's conference.
Jackie Ross.
<unk> Investor Relations good afternoon, everyone and welcome to our earnings call for the third quarter fiscal year 2019.
During the call today, we will review the financial results released after the close at the market and also commentary our commercial activity after which we will host a question 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 web site at alumina dotcom.
Participating for alumina today will be process, D'souza, President and Chief Executive Officer, and Samsung <unk> Chief Financial Officer.
Process will provide a brief update on the stage for our business and Sam will review our financial results.
This call is being recorded.
Your portion will be archived in the Investor section of our web site.
It is our intent that all forward looking statements regarding our financial results and commercial activity made during today's call will be protected under the private Securities Litigation Reform Act 1995.
Forward looking statements are subject to risks and uncertainties actual events or results may differ materially from those projected or discussed.
Oh forward looking statements are based upon current available information 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 document that alumina files with the Securities Exchange Commission, including Aluminas. Most recent forms 10-Q and 10-K.
With that I'll now turn the collaborative process. Thank you Jackie and good afternoon, everyone.
On a reported a solid third quarter with revenue of $907 million driven by 12% growth in our sequencing business more than offsetting a 24% decline in arrays revenue.
Tony revenue included more than $30 million associated with IBT licensing agreements, which was previously anticipated in the fourth quarter.
Sequencing systems and sequencing consumable revenue was largely inline with expectations.
Sequencing consumable revenue of $525 million grew 11% compared to the third quarter of 2018.
Exceeding half a billion dollars for the first time in the company's history.
Year over year dollar growth of $53 million reflected consumable growth for every system in our sequencing family excluding crises.
Hi, throughput sequencing consumable shipments were almost $300 million for the third quarter of which just under 200 million with no the seek.
Nova Sea consumables grew slightly more than 20% sequentially in the third quarter highlighting both the ongoing conversion from high seek and the expansion of sequencing volume.
During the quarter Novus IEC surpassed high see gags to become the platform generating the most sequencing data.
No. It was he pulled Cooper system was once again over a million dollars on an annualized basis and at the highest level. We've seen so far this year.
Moving to mid and low throughput consumables, there are a couple of trends worth noting.
First we're seeing strong uptake next week Dx, our SDK regulated and see Ivy, Denmark version of next week.
Shipments of next seek Dx have represented just over 20% of our next seek shipments so far this year compared to approximately 10% in 2018.
We're also seeing a number of a larger my seat customers transition to next cdx, notably driven by growing breadth and volume of clinical applications, including oncology.
Finally, we continue to see a handful of our larger nixie customers transitioning some or all of their sequencing volume to novus seek highlighting the broadening accessibility of high intensity sequencing applications.
These trends the increasing next CTX uptake and customers transitioning to larger platforms are positive indicators for future growth, but result in lower pull through on mice. He can next week in the near term.
Over time, we anticipate that these customers will grow total consumable spend but higher sample volumes larger content size and greater depth of sequencing.
Finally library prep contributor to sequencing consumable growth with a 13% increase compared to the third quarter of 2018.
Given by the strength of our Nextera flex solutions as well as adoption of our two side oncology 500 kit.
Library Prep continues to represent just under 15% of our total sequencing consumable revenue.
Moving to sequencing systems revenue of $142 million was up 10% sequentially and up slightly from the same quarter a year ago.
As we expected this was the strongest quarter of the year, so far and in fact represented the second highest shipment quarter ever for both Nova Sea and next week.
Next week SP remains quite consistent well know the C. S be was at the lower end of the historic range due to the multi unit shipments associated with the UK biobank.
No, but seek orders included 35% IC customers, taking their first Nova seek bringing the total number of high seek customers who have at least started their conversion to roughly a third.
It's clear that there's still plenty of opportunity for Nova Sea as we move into its fourth year of launch in 2020.
We continue to see strong adoption, among new tools, lumina or new too high throughput.
With close to a quarter, if nobody seed shipments going to these customers in the third quarter.
Moving to next week 29 team has been a very strong year for next week system shipments in fact, our strongest year to date shipment performance ever.
In part driven by the increasing momentum from next CTX, we expect the next seek portfolio to habits stronger ship and year to date.
Within our low throughput system family my seek many seek an ice each shipments were up sequentially in part driven by growth in EMEA.
Once again, we see strengthen the Dx version with year to date my seat Dx shipments already exceeding full year 2018.
Overall, we are very pleased with the expansion of our installed base, particularly for Novas. He can next week that reflects growing demand for sequencing and it's a promising leading indicator for growth in our consumable business.
Sequencing services and other revenue of $138 million was up 27% from the same quarter, a year ago and up 35% on a sequential basis with higher Ivy de licensing and development revenue more than offsetting the decline in sequencing services associated with the completion of the gel programming.
Okay.
I B D licensing and oncology development contributor to revenue growth in the third quarter.
In combination with our two side I'm Koji program, we see a clear opportunity to accelerate clinical adoption of Ngs based Ivy de tests through select partners, including Cogent and adaptive.
Through these partnerships, we expect to see multiplier effects in our patient reach and access efforts and you can expect illumina to further collaborate with others to leverage our technology for clinical testing.
Ultimately improving patient outcomes.
In the meantime, I'm pleased to share the T.S. So 500, our 523 gene oncology panel. Currently available is are you all continues to progress towards U.S. Ivy D.
Last month, we submitted the first pre market approval module to the FDA and remain committed to accelerating the adoption of comprehensive genomic profiling and movie Ngs tests into standard of care overtime.
The race continued to be a headwind for alumina in the third quarter, both sequentially and year over year, primarily due to DTC.
Total microarray revenue of $102 million was down 24% from the third quarter of 2018.
Reflecting lower revenue across systems consumables and service another.
We are starting to see the extension of consumer genomics into sequencing based offerings.
Ancestry for example announced last week in new product called ancestry help plus that Leverages ngs technology to deliver more comprehensive data on an expanded set of health conditions.
While we do not expect DTC to return to growth in the near term. We do believe that individuals will be engaging more directly with their genomic information through services like this in the future and we remain optimistic and be opportunity for consumer genomics overtime.
Before I hand, the call over to Sam I'd like to take a few moments to share some organizational updates.
First I'd like to welcome Joy Deep Goswami, who joined Illumina last month, as our senior Vice President corporate development and strategic planning.
Deepens over two decades of global experience across Biopharma diagnostics, and research tools, including senior leadership roles developing strategy and leading new product development partnership licensing and M&A, we're thrilled to have them join our leadership team.
And I'd also like to share the J sloppy will be transitioning from alumina as executive chairman to chairman as of January Onest.
James Serbia, Luminaires executive chair since he stepped down as CEO in July of 2016.
We thank him for his tenure as executive Chairman and look forward to his continuing contribution as chairman.
With that I'll hand, the call over to Sam for a review of our quarterly financials Sam.
Thanks for instance.
As discussed third quarter revenue grew 6% year over year to 907 million driven by 12% growth and sequencing, partially offset by 24% decline in micro raise.
Geographically the Americas revenue grew 8% versus the same quarter last year.
And approximately 30 million headwind than a raise was offset by growth across the sequencing business.
With particular strength associated with growing clinical oncology sequencing volumes.
EMEA growth of 7% wasn't part driven by large scale initiatives specifically the initial infrastructure investment from the UK buyback as part of their effort the sequence 450000 genomes.
Once again the region saw healthy contribution from emerging markets with a handful of Nova seeks placed into these countries.
Both for clinical and research use.
Greater China was down 7% year over year, but allowing for the next $6 million in Paris stocking activity from the third quarter of 2018 revenue was down 1%.
The region delivered strong clinical sequencing consumable growth driven by reproductive health in oncology.
This was offset by lower revenue from research customers.
Finally, a P.J. revenue of 63 million was up 9% from the third quarter of 2018, another growth quarter for the region in part driven by Japan with growth in both clinical and research.
Moving to product revenue sequencing consumables grew 11% from the same quarter, a year ago to 525 million or 30%, allowing for the tariffs stocking activity and the third quarter of 2018.
That's Francis noted low and mid throughput consumables were impacted by some transitional factors that resulted in Mexico pull through at the low end of RG 130 to $160000 range and mikes equal through below the low end of the 40 to $45000 range.
A re consumables were down 10% from the same quarter, a year ago, reflecting lower DTC demand.
Ray service and other revenue of 23 million was down 32% from the same quarter a year ago also reflecting lower DTC volumes.
Sequencing service and other revenue of 138 million was up 27% year over year.
As a reminder, this category includes warranty and field services licensing fees, including like the test fees Lab service revenue AD revenues associated with licensing and development agreements.
Typically the largest contributor in this category is warranty and field services, which historically represented between 50 and 60% of revenue.
It was below 50% this quarter.
The second largest contributor this quarter with revenue of more than 30 million that included the IB de licensing agreement with Cajun.
Oncology development revenue was also up both sequentially and year over year.
Sequencing service and other growth was partially offset by lower Jones sequencing volumes compared to a year ago.
Moving to systems sequencing system revenue of 142 million grew 3% from the third quarter of 2018 as a result of hiring overseas shipments.
A race system revenue was 4 million more in line with a typical quarter, but down significantly from the third quarter of 2018, when we saw record the rates system shipments associated with DTC.
Combined instrument revenue represented 16% of total revenue in the quarter.
Before I continue I'll highlight non-GAAP results that include stock based compensation.
I encourage you to review the GAAP reconciliation of these non-GAAP measures, which can be found in today's release and the supplementary data available on our website.
Please note that all subsequent references to net income in earnings per share refer to the results attributable to alumina shareholders.
non-GAAP gross margin of 72.5% was up 300 basis points sequentially, and approximately 140 basis points year over year, driven by favorable mix, notably the Ivy de licensing and oncology development revenue reported in sequencing service another.
With year over year growth, partially offset by lower instrument and consumable ASP.
non-GAAP operating expenses of $330 million were down 30 million from last quarter and were lower than expected due to delayed hiring program Reprioritization and project spend that shifted from the third quarter to the fourth quarter.
non-GAAP operating margin was therefore, 36.1%.
Up from 26.6% last quarter.
non-GAAP tax rate of 15.8% was lower than expected due to prior year return adjustments and discrete tax benefits related to the release of facts reserves.
For the third quarter of 29, T. non-GAAP net income was 286 million or dollar 93 per diluted share and GAAP net income was 234 million or $1.58 per diluted share with the primary difference being unrealized losses for marketable equity securities.
Cash flow from operations was $267 million.
Dsos were 54 days increased from 51 days last quarter as a result of revenue linearity in the third quarter.
In terms of other items impacting cash, we repurchased $199 million of common stock in the third quarter, leaving approximately $289 million available under the current plan at the end of the third quarter.
Capital expenditures were 49 million in the quarter.
We therefore ended the third quarter with approximately 3.2 billion in cash cash equivalents and short term investments.
Moving to guidance, we expect fourth quarter revenues to grow about 8% from the fourth quarter 2018.
We expect sequencing consumables to grow the high teens from the same quarter a year ago.
We expect non-GAAP gross margin to be approximately 250 basis points lower on a sequential basis, reflecting revenue mix and non-GAAP operating expenses to increase approximately 450 basis points as a percent of revenue compared to last quarter, reflecting a return to more typical rates as we catch up with delay.
Projects and expenses from the third quarter.
We expect other income to be down sequentially due to lower interest rates on our cash equivalents in the fourth quarter.
And our tax rate to be roughly flat compared to the 15.8% reported in the third quarter.
For the full year, we continue to expect 2019 revenue growth of approximately 6%.
We continue to expect our sequencing business to grow approximately 10% year over year, albeit with some shift in revenue mix, primarily between sequencing consumables and sequencing service another.
We continue to expect Nova seek shipments to be flat to slightly up from 2018.
Finally, we now expect to raise to be down approximately 15% from 2018, which compares to our prior expectation of down 14%.
Moving to the rest of the 2019 piano, we expect non-GAAP gross margin to be slightly up compared to the 70.1% reported in 2018.
We expect full year non-GAAP operating expenses as a percentage of revenue to improve approximately 150 basis points.
Since the 42.2% reported in 2018, reflecting opex and headcount prioritization activities.
And we expect weighted average diluted share count to be approximately flat compared to 2018.
This includes the dilutive effect of our 2021 convertible notes.
As a result, non-GAAP full year earnings per share is expected to be between $6 $46 45.
GAAP earnings per share is expected to be between $6 55, and $6 60.
With that I'll hand, the call back to Francis.
Thanks them before we open up the call two questions I'll make a quick comment and the CMH provisional finding and our proposed acquisition of Pacific Bio Sciences.
Well, we're still in the process is reviewing the document we continue to believe that this acquisition is pro competitive and in the best interest of customers and the genomics industry will continue our discussions of the C. I may in the weeks ahead.
Looking to 2020 momentum continues to build with a growing appreciation among clinicians that genomics will be integrated into the standard of care over time.
We're seeing a growing pipeline of partnerships for clinical Ibds that will extend the reach of Ngs and accelerate the adoption of genomics, we continue to see favorable developments and reimbursement with almost 75% of all insured lives in the U.S., having some coverage for oncology pounds, including some for liquid biopsy.
Coverage for undiagnosed genetic disease testing continues to grow for both whole exome and whole genome sequencing.
And we continue to see broader adoption of an IP TV with seven positive European and IBT reimbursement decisions in 2019 alone, including Germany's plan to reimburse the Nike for high risk pregnancies.
The UK biobank it started sequencing its 450000 samples and we expect both all of us and the UK National Health Service just started scaling in 2020.
And advancements in research methodologies, such a single cell and spatial transcriptome eggs have the potential to provide insights into therapeutic areas, such as immunology oncology and urology.
Illumina will continue to innovate for our customers and with partners to accelerate the availability of impactful clinical menu that lead to a world where genomics is incorporated into the standard of care and improves outcomes.
I'll now invite the operator to open up the call two questions.
At this time I would like to remind everyone in order to ask a question. Please press star one on your telephone keypad to be placed in Q.
I see you limit yourself to one question.
Our first question comes from Tycho Peterson from JP Morgan. Your line is open. Please go ahead.
Hey, Thanks, Francis can you talk on on pacing for UK Bio bank and as we think next year all of us.
I can talk about how much you actually capture this quarter from UK Bank and what you expect in the fourth quarter and then how we should think about popping next year.
Yeah sure Tyco, so the UK Biobank do you know signed the deal in Q3 and started to ramp up both in terms of taking their sequencing system as well as starting sequencing in Q3, we expect that to be running for the next few quarters as they work through the 450000 samples and so we.
I expect that to be a Q4 revenue driver as well as the revenue driver for next year.
In terms of all of US we expect that to be a 2020 revenue driver not really a 2019 revenue driver. So they are continuing to work through they've got the the genetic counseling services signed up they are working through the the IR be and their discussions with the FDA and we expect expect them to start to ramp.
Yup.
The first part of next year.
And I will add tyco that for Q3, specifically, even though we didnt sizes. We did have some instruments that we placed with the with the testing centers that are performing to work for the UK biobank milby seek instruments that we placed in Q3 and some consumables to start doing the work on the samples and if I just had one more thing to what Sam said take with the other.
The other national initiative that we expect to ramp up next year is the NHS and so we do expect not just start ramping up at the beginning of next year and we're working with them on the shape of that ramp over the course of the next year and from then on we expect to play out in the following years.
Okay, and if I could ask one follow up for Sam on China, you had a 14 million stocking in the comp I think and then you said 6 million that this quarter can you just talk about you know is this still customers moving in and out did you alluded to last quarter or what are kind of the underlying dynamics in China.
Yes, thanks, Tyco, so with regards to China.
We did see a decline this quarter.
Normalized for that it's roughly flat driven by the stuck in that you just mentioned, but essentially what we're seeing in China is on our clinical side of the business actually we're seeing very strong growth in clinical we're seeing strong growth in oncology testing and IBT testing genetic disease testing.
Where we see weakness in China is on the research side of the business and where we've seen a decline in that part of the business and fundamentally we believe that's driven by research funding that's declined or is down in China, driven by some of the macroeconomic concerns there we actually ask them data that says you know research funding is down 10% year over.
A year. So that's really the story there not as much I mean, there is some normalization related to stocking in Q3, but really we're seeing you know it's a two part story with clinical being very strong, but research being down.
Your next question comes from Preneed pseudo from SVB Leerink. Your line is open. Please go ahead.
Yeah, no friends as if I could.
Just ask around the desktop units, that's sort of I think in the last quarter. You gave a sense that I wasn't clear what was driving some of the weakness there you have any more clarity. It seems like next cdx, it's continuing to see growth, but you pointed out a couple of comments around.
The pulled through being on the lower end could you elaborate a little bit around what what is what's driving that fundamentally in the market.
Yeah sure. Thanks, winning so last quarter, we talked about the fact that we were seeing a lower pull through on the desktop side of the portfolio and now we've had another quarter of data and we're seeing two trends play out on one trend we're seeing play out as we're seeing customers migrated by bigger system. So we're seeing at the top end.
The might see customer base. Some customers are opting to buy next seeks and at the top end in terms of usage on the next seat customer base, we're seeing cut some customers move up to novus seek so these transitions from from their existing platforms to larger platforms are good signs for us, but in the near term do put some downward pressure.
And on the full through as they ramp up utilization on their bigger systems.
General customers tend to buy bigger systems, because they have expectations that their usage is going to go up overtime. The second trend that we're seeing play out is you touched on the next CTX and what we're seeing in actually both the might seek portfolio and the next seek portfolio is that we're seeing customers start to purchase the next week Dx.
Thats, a really good sign in terms of future growth of our clinical business.
And the in terms of our overall Nexi portfolio is a portion of that portfolio. That's next week has grown from 10% of shipments last year do 20% of shipments. This year. So some pretty good growth in the next seek Dx portfolio again, that's a long term positive indicator in terms of usage, but has put some downward pressure in.
In the near term as customers started that transition and validate the dx boxes. So those are the two trends that we're seeing layout that into the portfolio.
Okay. Thanks, and my follow up is a bit broader you know I'm going to go a bit back here in terms of the elasticities demand, that's a central pieces to alumina.
Yeah. When we look back at 2014, you launched high seek X on the market was drove the growth and you know through 2015 than we saw a little bit of slow down in 2016, the new launched 27 in 2017, Nova Sea and that drove strong growth throughout 2017, and 18, a then Leicester city of demand.
Played out very well and these two you know major periods here, but now as we head into 2020 here you seem to be suggesting the Nova Sea consumables will continue to drive growth. So I'm trying to understand its on potential absence of a new instrument here and I. Appreciate it that's really hard for you to say anything around that but.
How should we think about the catalyst to that next unless there's demand.
Which is key to the growth here in the and 2020 and beyond.
Sure. So you bring up an interesting points about the look back and there is a parallel but I want it sort of pick up that you touched on which is you know what we sell before is that when we launch a new instruments and customers transition and you touched on when we launched the X. I'll, even go a little bit further than that and talk about when we launched the high seek what we saw.
Is that as customers migrate to a bigger instrument and the heisey case. It was a couple of quarters, where we saw the pull through dropped through a couple of quarters and then pick up again and that's laid out again a few years later as you touched on with Dx and so you know when I just talked about the desktop side of the portfolio and customers who are migrating up to bigger instruments. So there.
Moving to the next week Dx for example, my see that's the exact same phenomenon right. So what we are what we've learned from our customers is that when they buy a bigger box. It's an expectation that they have that they will have more business and that's typically how it plays out and it doesn't play out in the quarter that they buy a box in some case. It takes for example, a couple of.
Orders in the case of the high seek.
So that's the elasticity fact, we're seeing separately you talked about you know that the drivers that we expect to see going forward in the business and some of the drivers include things like you know you just touched on the population sequencing efforts. For example that are starting to ramp up. So for example, UK biobank ramped up at the tail end of Q3 that.
It's going to play out not just in Q4, but all through 2020.
We talked about all of us that's going to start in the beginning of 2020, so really wasnt to factor in 2019 at all but it's going to play out over 2020 similar to the NHS wasn't a factor at all and in fact this year, we were caught in the gap between gel winding down and so less revenue this year from gel than we had last year and then.
It's just not yet ramping up and thatll be a factor next year. So those are some of the things that we expect to be incremental next year over this year.
Your next question comes from Doug Schenkel from Cowen. Please go ahead. Your line is open.
Okay. Good afternoon everybody.
So starting on sequencing consumable if we take the 14 million dollar bulk order out of the pace. It looks like you grew 15% or so year over year.
So.
Yeah on the surface that seems to be a step into right direction relative to first half performance.
<unk> you still came up almost $10 million light of my forecast and that was with a bigger than expected jump in instrument revenue in the quarter.
And while I at least from my standpoint, you weren't completely clear on it in your prepared remarks your guidance for sequencing consumable growth in the fourth quarter seems to imply that you're reducing your full year guidance assumption for sequencing consumable revenue so.
First off if my math right second what exactly has changed and why Isnt, Nova seek ramping as you expected what conclusions should we reach on your visibility and ability to forecast overall sequencing revenue growth given I think the expectation to spend the supposed to be more predictable and then longer term if we look.
At your history, even when we do the two year average growth stocks for the first half it looks similar to what we've seen in the past square alumina is at least a 20% sequencing consumable growth company using stacks normalizes for bulk orders. So that's the reason I do it that way as we look for the second half when we take your third.
Quarter performance and your fourth quarter guidance. It seems to assume stacked growth is going to moderate to low double digit level.
Is that the new normal or are you looking for more than that Francis and then I know that's a lot, but one more thing it seems like the biggest driver upside in the quarter, what's the cage and upfront platform access fee payment to you.
You indicated that this was already in guidance that said kind of talked about chain reader as a component of their growth strategy. After June Twentyth analysts day, you last provided guidance on July 29, it's a little hard to understand how this could go for something that was presented as an independent companies growth driver to something that you into included in your guidance 30 day.
Days later, so I just wanted to make sure Sam that I'm not missing anything thank you.
Yes, so Doug.
Thank you for the question, there's obviously a few parts to it here. So I'll start the maybe Francis can also a common so with regards to Q3, let me start with regards to Q3 and try to clarify in terms of the sequencing consumable growth and what that looks like and then I'll make my way to full year expectations on what that means for sequencing consumables as well although I.
One comment necessarily on what's the normal but I can give you a sense as to what Q4, it looks like per our expectation. So for Q3, we grew sequencing consumables by 11% and if you normalize for some of the stocking activity in China from last quarter. It was 13% normalized for some of the stocking activity. So that the expectation in Q3 and in fact, if we.
Or that's the actual results in Q3 and a few compares to our expectations for the quarter. It was actually better than expected. So you know normalizing for anything related to the IB de licensing deal revenues in fact for the quarter, we came in slightly better than expectations, because we had lower DTC revenues that were offset by better.
Our sequencing consumables revenues for the quarter itself now if I look at Q4 and a four year. So one thing you are correct on is the fact that we have taken guidance down slightly for modestly for sequencing consumables for the year. So initially we were in the mid teens in terms of sequencing consumable expectation growth.
And now we're expecting sequencing consumable growth for the full year to be and the low teens and that's a reduction is mostly driven by the by the drivers that Francis commented on earlier with regards to pull through on some of the non high throughput instruments. So the lower pull through that we're seeing with regards to next week and with regards to.
I see that drives most of the.
The lower guidance that we're expecting for the full year and finally with regards to Q4. You know we are now expecting Q4 to be into high teens in terms of sequencing consumable growth. So we do get back in Q4, two our highest growth quarter in the year in terms of sequencing consumables, albeit as I mentioned, we do have a modest reduction in terms.
Sequencing consumable outlook for the full year and were acknowledging that and that's driven by the the benchtop and them and the desktop phenomenon and then in terms of our partnership strategy and Cajun in particular, we as you know partnerships has been a core part of our sequencing strategy for a long time in fact, when we launched.
Am I seek Dx box at the end of 2013, we launched it as an open systems platform and it was cleared that way by the FDA and since then we signed a number of partnerships where they build ibds on our platform a number in China, like very and burning rock and Amboy and we've been in discussions with a number of other companies over the years, we have been talking.
Two cogent for a while we're not talking about gene meter and frankly, we've learned about their GGR either plans just like everyone else did from the news they put out so our conversations with them have been around their ivy de panels and their portfolio, there and building those panels and our sequencer and Matt continue to be an important part of our strategy. So as do the same.
Thing with adaptive and bring those panels to the market and so our strategy is going to be to look for partnerships that can help us bring tests to the market and expand our clinical platform and really we view our sequencing technology as a platform that engine to drive those tests.
You are now I'm sorry.
Maybe I'll add one more thing Doug just to address your points around guidance I mean, we we can't comment that's Francis said around the timing of the discussions with college and but we did have in our expected guidance revenue from potential partnerships and collaborations.
Your next question comes from Dan Brennan from you've yes. Your line is open. Please go ahead.
Great. Thank you for taking the questions I wanted to ask the question about topping.
Obviously, we look out to the fourth quarter.
We are guiding towards the doubling in placements for its universe, one Q. So I'm just wondering.
Kind of what data points can you share towards confidence towards reaching that number I know Francis in the prepared remarks or maybe into Q1 as you mentioned.
UK bio bank and how much was.
Corporated or occurred in Q3, so, possibly there's uptake during Q4, and then kind of relate it to that I know you've mentioned about a third of the customers have upgraded to date entering your four so I'm wondering as it related question.
What's your confidence level and kind of the most of these customers ultimately upgrading as you've been pointing clearone is there anything that needs to be done possibly to facilitate.
The rest of customers to upgrade whether it be pricing or possibly view inflow. So introductions. Thanks.
Sure there are a number of orthogonal vectors that lead us to feel good about Nova sea placements in Q4, so I'll start by saying that you know as we look back over the year. We're very pleased with the placements of notice you can also frankly next week over the course of the year. So we're entering Q4 with strong momentum around.
And Nova Sea placements, we are Oh, we have line of sight into a pipeline.
Potential deals that could drive the numbers placements that we need to meet the the guidance that we put out to that the number would be flat to slightly up from last year and then if we look at how much opportunity is still left in the installed base. We talked about the fact that only about a third I'll stop IC customers have begun that upgrade journey and so there's still a lot of.
Greenfield opportunity in front of as that we're addressing to get to the number we get to over the course of the or so all those vectors point to our level of comfort around the Nova Sea placements.
Your next question comes from Derik de Bruin from Bank of America. Your line is open. Please go ahead.
Hello, and good afternoon.
A couple of questions first one I just wanted to get it.
A sense on sort of like your confidence and you talked about feeling good about all of us in NHS coming in and so a couple of questions. One is.
Can you help us understand the magnitude of how you're looking at those in what they could potentially contribute as you look to that in thinking about the incremental those could be in 2020 and I.
Particularly on the the NHS one I mean is there any reason that gets pushed out given the uncertainties in the UK right now on Brexit and going on and I've got a follow up.
Sure. So I'll start and talk about you know the deals that you talked about specifically.
I'll go with the NHS. So we we have no revenue really from the NHS coming in this year.
And that we've been working with them on the ramp up which we have high degree of confidence that it will happen next year. In fact, we believe it will happen in the first half of next year. We're working with them now is what that shape of the curve looks like and so that's still a discussion point and so while I have high confidence that we will kick off DNA.
Yes, you know it'll take a little bit more work for us to come back to you and say okay. So this is what the shape of the curve over a 2020 looks like regardless all of it is incremental because we didn't do any NHS revenue this year at all.
If you look at all of US we're in a similar place where you know we are working through with with the the all of US team on the ramp.
And that we fully expect to happen in the early part of next year also both on the array side and on the sequencing side.
And again all of that is incremental I feel good about the fact that all of US has already recruited.
You know the participants and so they have that ready to go they've done the work around consent and return of results and so they're working on right now so they'll have a lot of the infrastructure ready to go once it gets off again of high confidence that will kick off and we will come back to with again, what that looks like but all of it is going to be incremental as.
We go into into next year.
Your next question comes from Steve.
Speak Shaw from Wolfe Research. Your line is open. Please go ahead.
Hi, Steve Beuchaw happy to be here.
Sure.
I wanted to try to address what I think is a kind of central theme of the call and it's the elasticity of demand associated with Nova Sea I would agree with Tunis comment earlier that.
No bid driving elasticity and ultimately acceleration is really critical to story. So I wonder if you might be able to leverage a very unique.
Opportunity that you have which as you get to see based space right from period to period, you see how much data is coming through from Illumina Sequencers and in a way that those of us on the outside don't get to see it'd be interesting to hear what you're seeing in base space and we're and whether you see that for you being evidence of elasticity.
Not necessarily just on revenue growth today, but on data generation project flow and aggregate demand for sequencing at the end user level.
That's a really great question, Steve and we do you can imagine you know.
Monitor the activity in base space very closely to get insights into what our customers are doing.
Some things that we looked at in some of that the data we've uncovered so far one of the things we look at pretty closely is what happens with customers that.
You know that transition to an overseas can so we look at it from a high throughput to high throughput conversion. So what happens to heisey corrects customers as they move to Nova Sea and we look at it from a next seeks to Nova seek perspective to say, okay. When a customer who's a nexi customer primarily at the notice seek do you see a drop.
Overall in their consumable spend because they're able to leverage the lower cost for GE or not and what we're finding and in both of those scenarios is that you actually see an expansion in their consumable spend right that customers will add the novus equal upgrade to a nova seek because they believe in that that they are having growth in their business and so in some.
I'll give you some some anecdotal color. So for example, you know we had a customer that was primarily in DNA PT business that was primarily a nexi customer.
And really looked at their incremental Nova seek purchase as the way they get into some of more sequencing intensive oncology segments. For example in so you know novus. He helped put together the business case for their entry into the oncology space and so that's an example of a customer you know that had.
Its business continuing to sequence for an I.P.T., primarily a next week, but is expanding its business based on the economics. It can get on on notice seek.
We also look at the kinds of applications that are driving.
No the seat utilization so we look hard at.
We expect customers to be doing genomes and certainly they are in the volume of data on Nov is he is very high last last quarter, we now crossed over where Nova seek as a platform is generating more data than any other platform. We have it could surpass the high cdx.
We expected genomes, we expect Exosomes and what we're finding again is those are exactly as we'd expect the biggest applications and Nova Sea. We got not finding cases, where customers are using that Nova sea because sort of the big machine to run other applications more cost effectively and and that's again most two on.
And so yes, we look at the mix and how customers using and those are some of the the qualitative data points that I can show with you around what we're seeing in base space.
Your next question is from Jack Meehans from Barclays. Your line is open. Please go ahead.
Thank you good afternoon.
Just had a two parter.
First one of the things we hear from the Big pop see customers that is that the volume is going to be dictated by price. So im just curious if you have any thoughts on flow sell innovation. When you think the right time is to pull that lever on price elasticity and then more of a guidance philosophy question.
Obviously some of these big projects have been delayed I'm curious you know as we're sitting here as we get to early January .
Just how you're thinking about guiding around some of these big projects, depending on the level of visibility that you have on at that time.
It's another great question, so as we talk to our.
Population sequencing customers and we've talked about the fact that were actively engaged with over 50 of these initiatives now around the world you know you're right in the sense that you know some of them, we'll move more quickly if they could access lower price points and so there's definitely some elasticities around the paid some of those those opportunities could move.
Related to the price, what we are able to do and what we've done before.
Gel for example, and we'll do going forward is as we get close to an initiative getting ready to go we do engage into discussions around you know looking at to the term of a project and we have good line of sight into our own roadmap of flow cells and instruments over their terms that project.
And were able to price for our customers you know based on where we expect the technology to go and so once.
Initiative gets closer to getting done we can engage and those kinds of just discussions due to accelerated and getting over the line.
So far you know they pricing has not been a gating factor on any of those initiatives to get done and we won't let it get to that right. As we feel that initiative is ready to to go we can engage in the discussions I talked about to make sure that we can match their needs do pricing based on the visibility into the roadmap that that we.
Yes.
We.
We also know that you know as we engage with them that overall you know their price per patient their price per sample is so much more than just the price of sequencing. So we help with reference architectures. We have examples where we have been implemented an end to end way with a set of partners.
So we help our customers take.
Friction out of the system and overall take the cost down for patients and per sample my helping helping them think about will be end to end flow could look like easily.
And maybe I can comment Jack on the guidance philosophy, maybe as we talked about in the last quarter. We are taking a more let's say cautious approach towards some of these population genomics initiatives. Because you know there's a high degree of an uncertainty around them and it's not a perfect science, we don't have perfect visibility to them.
Having said this we will look at them individually case by case and try to understand those that have you know a high degree of certainty that will start to where they will start to actually process samples. You know those that have recruited patients. Those that are you know have very specific timelines and deliverables and milestones that we have visibility too.
And obviously, we have discussions with the different governments around those as well.
So as we look at specific ones, we have good visibility to the all of US we know where they are we know what they've recruited and we have good insights on that so I think theres a high degree of certainty that that will start happening in 2020. The NHS commissioning we have a high degree of certainty that that will start happening. It's a question of how much you know and what that curve looks like as Francis alluded.
Earlier, obviously, there's ones that are in flux like the UK biobank and others that that will be part of our build as well, but too early to tell you about 2020, but thats. The general philosophy since those big ones as everybody knows I mean, those ones that we have personally involved with I've been to the UK a number of times now in the last three months. So I feel like we have good visibility.
Into how those playing out.
Yeah, and one last thing on that one Jack sorry.
We will also be transparent on telling you which ones are included in the guidance and which ones are not so we will be very specific and transparent on that.
Your next question comes from sung Ji Nam from B T. G. Your line is open. Please go ahead.
Hi, Thanks for taking my other question I'm, just I guess another question on China I understanding during some funding issues I was wondering if you could comment on the competitive dynamics. There. If you are seeing greater competitive headwinds. Thank you.
Sure I'll start by saying that overall, we're not really seeing a change in the competitive dynamic in China. It's a competitive environment. We we are maintaining our share in China, It's and it's something we monitor very closely.
The dynamics, we're seeing.
Is that Theres definitely growth playing out in the clinical market driven by oncology and then I PT and that's strong double digit growth and that continues that continues to be the case and so we're participating in it the other players in the market are participating in it.
And then if anything we're doing maybe even a little bit better than holding our share.
Research side of the market has slowed down so we saw growth and as you may say, we as an industry saw growth in that market. In 17, we saw growth in the research market in 18, and we're definitely seeing a slowdown overall in that market. This year there are.
There are numerous data points that show that overall funding in the research Arena has gone down from last year and so we're seeing we as well as.
Other players in that space are seeing a deceleration in the research side of the market. So that's happening across players in the market.
Your next question comes from Bill Quirk from Piper Jaffray.
Your line is open. Please go ahead.
Right. Thanks, and good afternoon, everyone. A two part question from my end here. So first off with respect to Nova Sea placements have all the systems for the UK Biobank project been deployed and then secondly, Francis if we think about some of the catalyst that you highlighted at the end of your prepared comments.
Can you help us think about the relative importance of them in other words, we have a number all of them really have outstanding catalyst.
Guidelines endorsements for things like MPT reimbursement for rugged clinical approval for some of the test moving through the FDA or obviously funding timing, which we've talked a lot about today in terms of options. So can you help us just think about relative magnitude of thanks.
Sure let me start with the UK Biobank question you had.
So certainly the the labs that are doing the sequencing for the UK by banks have ramped up and they are sequencing now you know they may choose to augment the fleet that they have over the course of the project and that certainly a possibility, but they are they're off they've got would they need to get started and they.
Our sequencing in full force to to get going so.
So that happened at the end of Q3, and it's going to play out again in Q4 and over the course over the course of that next year.
The clinical market units are big question, you've asked and as you pointed out there are a number of moving parts to the clinical market and so let me talk a little bit about what's most important.
And I'll start and it's a little bit of a segment story, so I'll start with an IP teeth.
In an IP the biggest drivers of growth are going to be the.
The national decisions that are coming out of Europe . So.
So for example, Germany, saying they entered reimburse for high risk.
Adding to what the UK is doing in France is doing in Denmark stay in Netherlands is doing.
And that's actually European story, that's true in Japan, and the U.S., it's going to be when you see the last two holdouts around average risk reimbursement agreed to cover averages so in and I P. T. I'd say the big story is around getting reimbursement.
Continuing to expand and we're seeing that we're making progress and that's going to be probably the biggest fuel on the fire in terms of the growth rate accelerating in any PT.
In.
In terms of a jump to genetic disease and they'll get to oncology in genetic disease. We've made really good progress in terms of reimbursement. So in the U.S. There over 150 million covered lives now that have access to trio whole genome or whole exome sequencing.
In the event of the child has a genetic disease.
The bone like there is not reimbursement the bottleneck there is utilization and so although there are 250000 children here in the U.S. that have the indication the condition and have reimbursement in place. If we look back over the last 12 months you had just over a thousand tests ordered and so in the genetic disease market and the biggest the biggest near term opportunity there is need.
Yes, the big driver is going to be around utilization and educating the physicians around went toward or the test, making sure that they're able to interpret the results when they when they get the test.
And so that's work that we're doing through our medical affairs clinical affairs teams and through Great partners and customers like radius Children's hospital in San Diego, that's sort of driving a lot of the awareness around genetic disease.
In oncology, we're seeing very strong growth we're seeing.
Already but we're.
Reimbursements continue to build we're seeing.
Panels proliferate.
And so there there are a number of things that will drive.
Further acceleration of that growth rate.
One is the availability of an Ivy product that now makes these tests accessible to community hospitals, nearly all of the action happening in oncology, even though we're seeing growth there is driven in the academic.
Cancer centers, so the sophisticated labs, and so and availability of an Ivy D actually will catalyze further acceleration of that market and then the continued development of precision oncology therapies as more therapies and measure the market. It really pulls the need for ngs testing for.
Patients to get access to those therapies. So those are some of the big drivers in oncology.
Your next question comes from Vijay Kumar from Evercore ISI. Please go ahead. Your line is open.
Hey, guys. Thanks for taking my question I had two quick ones, maybe I'll start would be a housekeeping one.
Sam looking at margins into Q can you give a sense for what the underlying margins for ex the.
I guess the collaboration payments.
Yes, Vijay Thanks for the question and welcome to the call. We we actually had very strong margins in the quarter better than expected and really of the key driver for that to your question was the or the revenue driven from some of the IB de licensing deals and those are at a 100% margin essentially because it's all margin.
Its revenue that's on margin.
Your next question is from Mark Massaro from Canaccord Genuity. Please go ahead, Sir your line is open.
Hey, Thank you for the question I guess of the revenue you recognize here in Q3, how much of that was related to the platform access fee from Cajun and then I guess more broadly Francis can you talk to why you think hydrogen is an ideal partner.
And just give us a sense on what types of additional kits, you think will be incremental to driving additional sequencing.
Yeah I'll take the first portion of that market. Thank you for the question, we haven't broken down. The you know the partnership revenue that we got from cryogenic, but as we indicated you know approximately 30 million was was driven by this deal which reflects.
Access fees and reflect some also.
Other other revenue that we recognized as well so it's not just entirely for the access.
Yeah, and then I'll take the second part of that question, which is what makes them a good partner and why did you choose them and led to choose adaptive and how do we choose the partners that we choose and when we're looking for is an ecosystem of partners that will.
Extend the menu on our Sequencers and give us access to additional clinical domains and so if you look at what kaizen has today in that portfolio and where they're strong right. So they have a set of small cancer panels, and we don't take to market any small cancer panels ourselves really.
And they also have strengthened and other clinical domains right. So that business in infectious disease. For example in a number of other clinical domains, where they already have the commercial capability to take products to market and so that's exciting for us that's exciting for us as a starting point in our relationship and also gives us line of sight and into how this relationship.
It could expand into other clinical domains. Similarly, if you look at adaptive no. They have also got a terrific set of products in areas like like Immunology for example in monitoring for MRV and into the blood cancers, and so they give us access to unique menu that we can take too.
Our customers and so no. That's what you should be looking for our other partnerships in China for example, Barry and road Amboy gave us access to two things they give us access to a set of a set of tests, so menu and our sequencer and in that case. They gain has also access to geographic.
Distribution and so those are some of the strategic capabilities. We're looking for as we sign. These partnerships. This is part of our business. This has always been part of our business plan is fundamentals in our opinion fundamentally we're a platform play and while we choose to take some end to end solutions to market ourselves and select area.
As we believe the best way to maximize long term value across all the different domains that sequencing is relevant for is to view ourselves of the platform and then find the best set of partners that give us both access to menu and access to commercial reach.
Your last question is from Derik de Bruin from Bank of America. Your line is open. Please go ahead.
Great. Thanks for taking me Dan so.
Jack essentially asked the question I wanted to on sort of guide me unless the city, but I wanted to actually I've. A question follow up a bit I thought of which is I wasn't quite sure about the mid the desktop situation and why you were seeing the soy and then could you go through that again and just reclarify.
What's the underlying cause that and how use receded the that resolving this than Q4.
Yeah. So we started to call that debt out in Q2 on the call and now we have additional quarter of data and so what we're seeing is to transitions playing out one transition playing out is we're seeing customers migrate up to bigger systems and that played out at the top end of some might see customers that moved to the next week.
Form and similarity we had some high volume next seek customers that started to purchase Nova seeks and so one trend playing out as customers moving up to bigger systems.
I said before we've seen this play out before whereas customer customers typically move to bigger systems, because they expect to do more sequencing and so well that puts some near term pressure on pull through per instrument in overtime to increase sample volume and growing business, we expect their consumables spend two to grow and.
Let us take the pressure off the the pull through per instrument. The second trend that we're seeing is people embracing the next CTX that we brought to the market and so we saw customers both on the may seek.
Base as well as the next seek base that are starting to purchase next seek DXP has now as a clinical box. It takes takes a little time for them to validate those boxes and ramp them up and so that drove the pull through the next equal through per instrument down in the quarter again, we believe long term, that's a really positive trend for our business.
And next seek Dx as a percentage of total shipments grew from 10% last year in 2018% to 20% in 2019. So in a really good progress from a clinical perspective in the near term those new Dx boxes put pressure on pull through per next seek until they ramp up but again its a.
Good sign for long term growth maybe to the only thing I would add to everything Francis said is that in terms of.
The timeframe as to when we expect us to continue happening for Q4 reflects the assumption that both next seek would be at the low end of the pull through range and might seek would be below the pull through range. So just to be very clear. We're expecting this in Q4 and that's what's included in our current guidance.
I would now like to turn the call back over to Jackie Ross. Thank you.
Thank you Christina as a reminder, a replay of this call will be available at the wet cost in Investor section of our website. Thank you for joining US today. This concludes our call and we look forward to our next update following the close in 2019.