Q1 2020 Earnings Call

After the speaker remarks, there will be question and answer session to ask a question during the session you'll need to press star one on your telephone keypad.

As a reminder, this conference is being recorded I would now like to introduce your host for today's conference Ms., Jackie Ralph Illumina Investor Relations.

[music] good afternoon, everyone and thank you for joining us for Twentytwenty first quarter results I sincerely hope that you're keeping while during this time.

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

If you've not had a chance to review the earnings release. It can be found in the Investor Relations section of our web site at Illumina Dot com.

Participating for them that today will be promises to see that president and Chief Executive Officer, and sounds Tomorrow, Chief Financial Officer.

Francis will share an update on our business and that will review our financial results.

Of course, we're hosting our call me number of different locations today. So please bear with US if there are any technical challenges reported.

This call is being recorded what are your portion will be archived any investor section of our website. 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 disguise.

All forward looking statements are based upon current available information and alumina 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 alumina filed with the Securities Exchange Commission, including alumina. Its most recent form 10-Q and 10-K.

With that I'll turn the call their budget process.

Thank you Jackie good afternoon, everyone and thank you for joining us I sincerely hope that you and your loved ones are healthy and safe as we collectively work our way through these challenging times.

As a global citizen and a leader in genomics alumina is committed to doing everything we can to support efforts to combat the covert 19 pandemic help patients in public health efforts and accelerate economic recovery.

And the earliest stages of the outbreak Illuminas technology was used by Dr fan Blue and the team at the Shanghai Public Health Center to sequence to first complete published star.

I've always later name stars Coke too.

Since then teams all over the world have been working with Illumina technology to identify strange and monitor mutations in support of surveillance efforts to understand therapeutic and host response and explore sequins based diagnostic testing as well this population screening to support back to work programs.

In terms of surveillance Dr. Trevor Bedford at the Fred Hutchinson Cancer Research Centre in Seattle, and Dr., Charles to and you see assess our among those monitoring virus transmission and tracking mutations.

And we have donated products to the Africa C. D C to expand their ngs based surveillance capabilities for infectious disease, and the Democratic Republic of Congo.

Egypt, Ethiopia, Gauna, Kenya, Molly, Nigeria, Senegal, South Africa, and Uganda in some cases, bringing sequencing capability to the country for the first start.

Susceptibility to covert 19 is almost certainly in part genetic and it's important to understand the interactions between viral and host genetics to potentially identified those individuals most at risk and support the development of therapies in vaccines.

We're supporting multiple collaborations with partners, including the New York Genome Center, Stanford adaptive biotechnology and genomics, England to better understand the evolution of the viral Gino.

And potential genetic factors determining an immune response.

Earlier this week genomics Medicine, Ireland announcing a little sequenced covert 19 positive samples to identify risk bearing and protective factors for cold 19.

In terms of testing, while the majority of testing will occur using DCR answer all your based tests that are numerous groups looking to multiplex testing using and yes.

Napoli one of our partners I'd by DNA offers clinically validated ngs based testing.

Actually multiple groups are publishing papers, describing the performance of Ngs essays with plans for clinical validation.

Finally, some customers are working on ultra high throughput Ngs based screening tests for return to work.

While these efforts are already our teams are working to help customers meet the testing challenges that have been highlighted is critical to enable our economies to sustainably to cover without placing individuals at risk.

As we support our customers efforts I'm always impressed but rarity surprised by the innovations delivered by the Illumina team.

Support covert 19 work, we introduced a number of workflows and data analytics to help identify the virus and track its transmission.

Including a shotgun metagenomics application to enable researchers and academics detectent characterize our schools to and other novel pathogens for a PD me allergy.

The application also supports the unbiased detection of Cowen section and the profiling of post response genes to study Comorbidities and human immune response and.

And in Richmond works, so for public health labs to enable a highly accurate detection of Saar schools to and viral sequence information to optimize containment strategies and identify co infections or other respiratory viruses that may require different treatments.

And now click on work flow to support public health labs studying source code to repeat immunology with co infections at higher sample volumes and a new software tool kit that makes it easier for researchers to detect and identify saar scope to viral sequences and contribute their findings to public databases.

We've made this tool could freely available to anyone who is using illumina sequencer.

Illuminas mission to improve human health by unlocking the power of the genome has never been more relevant I'd like to thank the global Illumina team for their dedication to keeping our employees safe ensuring supply for those customers who are performing critical work, where the covert 19 related or not doing everything we can contribute to.

Combating this pandemic.

I'd also like to recognize the many illumina customers and partners, who are working directly to fight covered 19.

We are inspired by a drive creativity and commitment and we'll do whatever we can to maximize the impact of your efforts.

With that I'll move to our quarterly update.

Illumina reported first quarter revenue of $859 million compared to our guidance range of 852 $855 million.

Clearly there are a lot of moving pieces. This quarter, so talk about our business in three ways. So that we can share many of the insights we have.

By region by customer and by product.

Starting with the region's China was the first to be impacted by covert 19 and was there for the most impacted in the quarter.

As the outbreak group our priority was to support customers as they scale their capabilities for covert 19 related work.

This included the installation of I seek and my seek systems starting in January and one of the CD season, the hardest hit region and supporting other CDC locations in hospitals in the country.

As China implemented measures to contained to covert 19 outbreak it became difficult for patients to maintain clinical appointments for oncology and then I P T testing.

As a result boats sequencing systems and sequencing consumables were lower than expected in China in the first quarter and total China revenue was $84 million.

We started to see run volumes increase in China in March and April.

It's not back to business is normal, but we are seeing both research and clinical customers returning to their labs in China and scaling up their operations.

EMEA and Tamar more resilient to covert 19 too much of the first quarter and we're tracking above our expectations in February.

Well, let them slowed quickly in mid March as a wave of closure and shelter in place orders flooded across these regions in the closing weeks.

Both AMEA and am are still beat our expectations for the first quarter, but what clearly impacted by covert 19.

First total system shipments were lower than expected in both AMR and EMEA.

Systems tend to be backend loaded in any given quarter and system purchases are not considered high priority for many customers at the end of the first quarter.

Second we saw some customers preemptively stocking up on sequencing consumables.

Total EMEA revenue was $221 million and total MMR revenue was $477 million.

Finally, a P.J. delivered revenue of $77 million with solid sequencing consumable growth, including record shipments in Japan. Despite covert 19 related headwinds in fact this was a record quarter for 80, Jay overall with the highest total revenue ever reported for that region.

We expect Q2 to be an extremely challenging quarter with revenue declining sequentially in each region.

Albeit more modesty in China.

On a positive note illuminas operations, just stayed up and running globally.

So far we've been able to overcome any covert 19 related challenges and deliver products to our customers in a consistent and timely manner.

Moving to a customer view, it's clear that covert 19 is impacting different customers in different ways and we have some insights drawn from the volume of runs associated with our connected network of sequencing systems.

Well not all our systems are connected we believe this is a useful reference that shows the general activity trend across our installed base.

<unk> reported regardless of volume of sequencing output and I'm not directly correlated to revenue.

First both research and clinical runs were ramping well throughout the quarter, peaking during the week ending March 14th.

Not surprisingly the number of research and applied run started to slow during the week, beginning March 15th, especially among academic institutions.

This reflects research labs scaling back in response to shelter in place requirements.

Those not working directly uncoated 19.

The decline was rapid into second half of March, but then stabilized quite quickly and that's been roughly flat since the beginning of April.

Overall research volume is running at close to 55% of what it was in the fourth quarter of 2019.

Moving to clinical run volume was impacted by covert 19, but was somewhat more resilient than research.

Clinical runs also reached their high point for the quarter during the week ending March 14th.

The week, beginning March 15th clinical run volume started to decline, albeit more slowly than we saw in research.

Unlike some of our research customers many of our clinical customers are considered essential health care services and have remained open although sample volume is being impacted as patients deployed healthcare facilities.

Well more modest the clinical declines extended for four weeks and we started to see stabilization and the week beginning April 12.

Clinical volume is currently running at just over 80% of what it was in the fourth quarter of last year.

In summary, the shape of the curve has been a little difference for research and clinical customers.

Research and run volume dropped faster, but also stabilized more quickly and has been roughly flat for the last four weeks.

The clinical run volume drop was more gentle, but your duration was longer before stabilizing in the last two weeks.

Both research and clinical run volume increased modestly on a sequential basis and the week beginning April 19th although it's clearly too early to call any kind of trend.

Finally, moving to the revenue view total sequencing system revenue of $79 million was down 25% from the same quarter of last year and substantially below our expectations driven by covert 19 disruption.

Excluding the covert 19 impact on sequencing systems, we would have comfortably exceeded our sequencing system revenue expectation for the quarter.

However system shipments were down across all families with the exception of next week 2000, and its first quarter of launch.

First customer shipments of our next week 2000 were delivered right on time on March nine.

Orders for the system were inline with our internal forecast for the first quarter shipments were lower than expected because of the cobot 19 disruption at the end of the quarter.

Early adopters of the next week 2000 included both existing and new alumina customers in research and academic institutions across all four regions.

Initial next week 2000 applications included food safety genetic disease cancer and covert 19 research we did not ship any new next week in thousands to heisey conversion customers in the first quarter.

The sales funnel so far is consistent with our expectation for very modest cannibalization of Nova Sea conversions, among the remaining IC customers in the quarters ahead.

Finally, almost half of the new next week 2000 shift work in new to alumina system customers ahead of our expectations.

Sequencing consumable revenue of $553 million grew 15% from the same quarter last year and was stronger than expected.

Less than half of the sequencing consumable beat was associated with covert 19 related stocking among our clinical customers.

No. They seek both Hooper system was higher than the same quarter last year and comfortably within the previous guidance range of $1.1 million to $1.2 million per Nova sea per year.

We do expect and oversee pull through to step down meaningfully in the second quarter.

Pull through for both my seek and our next week 505 fifties was flat with the last quarter and many seek was below its targeted pull through range.

Sequencing service and other revenue was $128 million up 13% due to higher licensing revenue compared to the same quarter last year.

Overall sequencing revenue of $760 million was slightly ahead of our expectation and represented 88% total revenue.

Moving to raise total array revenue was $99 million down 33% from the same quarter last year and inline with our expectations for the first quarter.

Out or re services business grew sequentially as we expected given the normal seasonality associated with DTC, but declined year over year.

Great conceivable declined both sequentially and year over year, consistent with our expectations of the DTC market.

In summary, our business was impacted negatively overall by $20 million in the first quarter, primarily driven by sequencing instruments, but this was partially offset by a modest contribution from covert 19 related stocking and broader strength across sequencing consumables and sequencing service another.

With that I'll hand, it over to send to discuss the financials in more detail.

Thanks, Francis and thanks to you all for joining us today.

I really hope you and your families are safe and healthy.

As discussed first quarter revenue grew 2% year over year to $859 million.

Looking ahead of our expectations, that's stronger sequencing consumables and sequencing services and other offsetting softer than expected sequencing system revenue.

Moving to gross margin operating expenses I will 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 on the supplementary data available on our website.

Please note that all subsequent references to net income earnings per share. We're further results attributable to alumina shareholders.

Non-GAAP gross margin of 73% was higher than our expectation with lower sequencing system revenue and higher sequencing consumable and other revenue, resulting in a more favorable mix. In addition to increased fixed cost leverage as we increased safety stock volumes.

Non-GAAP operating expenses of 339 million were down 33 million from the fourth quarter 2019, and down 24 million from the first quarter 2090.

This was lower than we expected due to delayed project spend reduce labor related expenses and less travel.

Non-GAAP operating margin was 33.6%.

From 31% last quarter and better than expected.

The non-GAAP tax rate of 16.1% was down from last quarter and lower than expected due to prior year return adjustments and discrete tax benefits related to the release of tax reserves.

Well the first quarter 2020, GAAP net income was 173 million or $1.17 per diluted share.

Non-GAAP net income was $243 million or $1.64 could they need a chair.

Additionally, in the first quarter cash flow from operations was $281 million.

First quarter capital expenditures were $40 million and free cash flow was 241.

Yes, so a 50 days compared to 55 days last quarter, you to more favorable revenue than <unk>.

To pay the Pacific Bio Sciences.

The expenses related to the fact bio payments are excluded from our Nongaap results.

Are weighted average deluded sure accounts for the quarter was approximately 148 million.

We have $563 million available for share repurchases under our current plan.

Looking forward, we have withdrawn all our previous guidance you to the uncertainties around the severity and duration of the covert 19 outbreak.

It'd be very clear this includes our revenue any P.S. guidance.

In addition to any other forward looking comments, we have made on overseas or other system pull through.

Seek 1000 in 2000 shipments and popped and expectations for the year.

One month, then we can see that the second quarter impact will be substantially greater than the impact we experienced in the first quarter and we are planning accordingly.

As mentioned before we expect revenue to decline sequentially and every region in the second quarter with the smallest dollar decline expected in China and the largest an M.R.

Why we have so far been able to produce and deliver it to our customers with minimal delays in the first quarter, we know to higher risk of transportation delays associated with border closures and a drop in airfreight capacity linked to fewer passenger flights.

Again, these are not impacting our business today, but our risks as we look forward.

Given the wide range of possible outcomes, we are not offering guidance on second quarter revenue at this time.

Even though we are not providing second quarter guidance, we can share some qualitative comments about factors that will in fact, R.P.N.L. and the second quarter.

For example, it is clear that substantially lower revenue will lower our gross margin. So you should expect the lower gross margin in the second quarter on both a sequential and year over year basis.

In terms of operating expense, we remain committed to investing strategically to ensure that we protect the strength of our business when we emerge on the other side of the covert 19 disruption.

As a result, we expect operating expenses to be roughly slots on a dollar bases compared to the second quarter of last year.

Aluminize, an innovation engine and while we have deprioritize. Some work we will do everything we can to retain are most important product development timeline.

That said, we are managing expenses very carefully.

In the near term there are savings associated with restricted discretionary expenses, including travel marketing events and consulting and.

Slower hiring associated with a lengthening hiring cycle.

We are also reducing spend on contract and temporary later in certain functions.

Finally, we have delayed certain non r., and D. project and delayed or canceled certain capital expenditure project.

Compared to our original budget for the year second quarter operating expenses there'd been reduced by more than $40 million.

We are also preparing for additional cost savings opportunities if shelter and place orders remain prevalence into the third quarter.

While we are all hoping for loosening of restrictions in the near future. We have planned for a range of scenarios that we can activate if needed.

We will monitor the situation carefully throughout the rest of the second quarter to assess whether we need to take more aggressive actions more quickly.

This includes a careful reassessment of our capital investment plans and gaining programs in some cases.

In the meantime, we continue to hire an onboard new team members virtually but retained flexibility to pause or limit hiring or slow other investments if the pandemic as for long.

What's that Oh hand, the call back over to Frances.

Thank you Sam.

Where mine for lived a balance between navigating the uncertain duration of this pandemic and ensuring that we don't do anything that slows our pipeline of innovation.

Or otherwise inhibits our ability to meet the needs of our customers.

They're hopeful that the biggest impact will be felt in the second quarter, but insuring that we are well prepared is it extends into the second half of the year.

As challenging is the current environment is we don't see any change to the long term trajectory of sequencing adoption and demand.

Cynical testing has proved quite resilient even in these challenging times, highlighting the importance and medical value of genetic testing.

Why don't shoot at some labs have positive research operations. It's also clear that a number of research labs are switching to cover it 19 related project.

Clearly we have a lot of work to do to find their way out of this pandemic.

Then prepare for the next one.

It's reassuring to see that governments around the world are committing resources to this important work.

For example, the last two relief packages from the United States Government has allocated over a billion dollars to the C.D.C. with the specific goal of building out surveillance and other capabilities in the hope that we can be better prepared for the next time.

We do not believe but there is a technological limitation to getting this done.

And it's clear that sequencing will be at the heart of the solution.

There's a challenging time to be running a business, but the illuminate community, including our employees. Our suppliers are partners in our customers have never been more United to a cause or more convinced of the importance of our shared work.

We are leaving no stone unturned as we actively look for more and more ways to contribute to the effort.

With that we can start to q. in a.

Brand you didn't have a first question.

At this time, if you would like to ask a question. Please press star one on your telephone keypad, we do ask that you've got yourself to one question well pause for just a moment to come home to any roster.

Your first question comes from the line at the end it Brennan with P.B.S.

Great. Thanks, Thanks for taking the the question and good luck managing through this period of time, so instead of two parter. It relates to first part as on the academic and market for you can you just give us a sense of when academic researchers start to come back to their laps help us into how quick.

<unk> think they can kinda ranpak up related to that we've heard that it'll be difficult to make up for last time in the lab vis-a-vis consumable usage, but that instrument orders like we could see <unk> can still be fulfilled. So if you can just comment on that and then.

Second part is related to covert N.G.S. testing, obviously, there's a lot of interest in the P.C.R. testing opportunity and you discuss some of the nascent a interest or or kind of impact from ingest testing could that turn out to be a real opportunity from lumina any any any color you can provide on that would be helpful. Thank you.

Oh. Thank you then so let me go through each of your question is the first question was around the academic market. How quickly you will have that ramp up when people get back to work and you know is there a possibility for them to catch up on the consumer those are capital purchase let me start with that one.

He started by acknowledging recently terrific work that some of our academic research customers haven't been doing over the last few months under some very challenging circumstances, I talked a little bit about the work that professor Robert Redford was Bedford who's doing out at the Fred Hutch in Seattle, Charles you at U.C.S.S. I would already be seen a research is really jump.

All in to help us come out the pandemic and understand you know the the the mutations on the virus the transmission vectors and the host response in terms of how quickly you know that business could ran back out now that business is going to continue to be impacted as long as the shelter in place mandates remain in effect.

But once those mandate good lifted we expect that business just started to Ram Dirty quickly. What's happening is that you know the work that they're doing isn't going away and so we expect them to be able to pick up on projects when they get back into the office in into the lines and we expect to see a number of things happen one in some cases.

And certainly true with the designer for example of the U.K. Biobank, where there'll be an attempt to catch up on the time.

Okay.

Urgency do the work that they're doing another tea.

See some academic customers, we expect C.B. granted extensions to their current funding windows. So they can finish the projects and they've been working on and frankly as as we think through our research customers. It's hard to think of of examples where the work they're doing goes away.

In other dynamic discipline, yeah, that's becoming very clear that there is a need for research to be done on on the covert 19 pandemic cells to understand things like the solution of the virus genome.

Reading also understand the genetic factors that you know are that create risk that provide drove a protective factors for individuals understanding origins of the virus and there's work going on in single cell research to understand how is so evolves into buyers enters the seven so there's a an emerging need for.

<unk> research to be done and we expect or academic customers and our commercial research customers to be involved with that through this quarter and certainly in the coming quarters as well and so we expect to see that work ramp up as well and as I mentioned to the prepared remarks no. There is funding that's been allocated to the N.I.H. to the C.D.C.U.K.

Yeah, There's research do decoding 19 genomics U.K. consortium that'll funded that research.

And then to yours second question around the opportunity for N.G.S. in and Coven 19 testing their number of places where <unk>. The N.G.S. is being used in testing one is there our customers of hours as I mentioned in the marks that are using N.G.S. based <unk> to to do die.

Nonstick testing their adding to the capacity in the market using N.G.S. based asses. That's one thing we're seeing secondly, we're seeing the need for N.G.S. technologies to be used in and surveillance capabilities and and that's true in C.D.C., starting with the C.D.C. in China, but now it's true in C.D.C.'s around the world.

And we recently just shift a C.D.C.'s to a number of countries in Africa as well. So there's another another need for N.G.S. to be used in surveillance capabilities.

In other area. That's emerging is the idea of using ultra high throughput screening testing to bring people back to work and so there are concepts being developed by customers of hours around using N.G.S. to deliver that ultra high throughput screening capability to move healthy people back to work.

And in some cases do regular testing to keep healthy people back at work and so we're seeing you know that emerged as a possibility as well for N.G.S. based testing and then and then finally.

There's a whole area around using N.G.S. to do the research and whether that's to develop additional diagnostic tests are for therapies are to understand whole host responses. You know, we're seeing that emerges another need for N.G.S. as well.

Then I'll I'll offer up one data point. This is Sam you know in the first quarter of a first month I should say of cute too. We've also and you know stronger than expected instrument a shipments actually to academic institutions. So that's a testament to the resiliency of that that part of the market. Despite the fact that we're still in you know shelter.

In place small Dan disruption here. So you know we are confident that once we got at this pandemic that this will this will rebound both in terms of instruments and in terms of consumable utilization as well.

You are next question comes from the line up tight show Peterson with J.P. Morgan.

Thank you press. It says we think about this growth drivers that were laid out the beginning of the year, obviously pop sequels, one of 'em political thing. Another I'm just wondering <unk>. If you can bring this up to speed on all of US NHS you keep I think how to think about some of those initiatives. Maybe you know restarting there are obviously some from all this stuff kick off in the backup you anyway, but a curious.

Latest on those and then are critical and appreciate it commentary that's critical drop is more gentle degradation of longer you know we've seen some numbers that cancer testings down 25 30 per cent just curious about how you think about the recovery on on the clinical side and then lastly on pandemic surveillance and this curious if you're doing anything differently organizationally or comfortable army dollars going forward.

So you think about future pandemics. Thank you.

Sure. So let's go through each of those questions.

Versus started with with an update on pop Jim and you know, it's clear that you know the shelter and place requirements have actually impacted the pop Gen programs and I'll talk about until the major ones. You know did you might have heard from the end age yeah.

No we are waiting to hear revise dates when they'd ramp up they haven't they haven't put out any new days, yet so because you need to stay engaged with them and their evaluating their plans around the ramp up that was bland over the back half of this year.

The U.K. by the bank and Sanger announced in March that they were pausing their sequencing and they said for a three month period.

Now there is urgency around that work and so you know in that effort. We expected when they started sequencing again they'll ramp up very quickly and they were running at about 10000 genomes a month before the pause to we expect them to be able to wrap that up pretty quickly and they're the kind of customer that would invest to catch up in terms.

The the sequencing that was miss because you know there's value to the data they're getting from a from a therapy perspective, and there's also a finite window of exclusivity with that data and so there's an urgency around getting back back up to speed and catching up.

In terms of all of US here in the U.S. They are currently working through their I.D.E. submission, which we expect shortly to the F.D.A.

And they already have their 270000 samples cohort and so really it's watching to see you know how the shelter in place requirements coming back and and people can get back into their labs, but they're making progress on their I.D.'s that mission, which is you know what they are working on.

In terms of the clinical market as I said in the prepared remarks, the clinical markets have been somewhat more resilient than the research markets, but they are operating ads you know below the baseline that we saw in Q. for.

And primarily that's because you have patience around the world that are holding back from going into hospitals in some cases are under their own sheltering plates requirements.

<unk>, though for cancer patients they do need to get that testing and so at some point it will be important for them to get back get back to the clinic to do the oncology tests and then in and then I.P.T. again, there's sort of a time urgency around getting that test and we saw some easing from a reimbursement perspective here in the U.S.

Around covering average risk from from from a large carriers here because they recognize that an I.D.T. is an easier tests to do than the alternatives until we expect and I.P.T. to be more resilient even for that clinical markets.

In terms of pandemic surveillance.

We we have organized an effort internally that is focused on creating workflows that our customers are asking for in each of the categories. I talked about so you know for diagnostic testing for surveillance for ultra high throughput screening.

Oh and for research, we've already put out three workflows the shotgun metagenomics work flow enrichment, the amplicon work flow and we've put down some informatics tools for researchers free of charge who've been asking for it in terms of helping them analyze that data around covert 19, and also making it easier for them to.

Submit the data, they're getting to the public databases out there. So they can shared more more easily.

At this point to the efforts have really been around you know ring fencing. Some are are are are folks who work on that on those efforts and then that's how we are thinking on so it's a little over reallocation rather than you'd rather than.

Different darn d. expense.

Your next question comes from the line as Steve <unk> Wolf Research.

Oh, Hi, Ah well for topics for the time second thank you for for everything you guys are doing.

For someone who's trying to scroll through all this.

My first question is something of a policy question for Frances I'll apologize for giving you the more difficult one and my second it's just a couple of fine tuning points for Sam So same gets easy ones.

Francis as you.

Discuss with your your policy teams and you'd think about the the guidelines that are popping up what do you think is the pathway for reopening for academic labs doesn't necessarily equate to what happens utters a university reopenings to their their number of questions that are operational wrapped in there. There's also a question as to.

You know what is deemed quote unquote is central so I know Dan Brennan asked a a good question about academic but I want us more specifically how do you think what the timeline for this last reopening for Sam one how do you think you know micro raise your progress from here does the trajectory feel any different now given the environment relative to what you thought coming into the year.

And then.

Sam could you speak it all to the balance of you know stocking versus shipment delays are tied to cobin, whether coded was a net positive or negative at the end of the quarter of the some controversy out there around stocking like so much.

So thank you Steve. Thank you for your your comments as well so let me start no talking about you know our expectations around you know when academic labs, you know sort of come back to capacity and and and you asked about how we think about universities reopening versus research that opening those time lines are.

So start by saying that we have very modest expectations in terms of last for this quarter and so not to be taken.

[noise] you touch on an important point, which is you know we are hearing from our customers that academic labs are likely to open up before universities too and that you know a lot of universities are thinking they you know staged way and that the bar for example.

Is different than the bar from bringing all undergrad students, especially back to campus. So our our belief is that he will see the academic research labs in universities open up even before you see the full universities open up the other dynamic that's Blaine.

Is a number of the act leading academic research lab are very actively involved in covert 19 research you know that's true across the board, whether you're looking at Johns Hopkins or Yale or Stanford and that means that the work, they're doing intentional and so a lot of them are going to be working a head off the broader world.

<unk> the of the academic labs in universities. So that's a staging I think first you'll see academics labs that are now focusing Kobe 19. The into you know begin to scale up, especially as the funding starts of low next you will see broader academic labs opening up and then finally is universities opening up to students brought me.

Yeah keep on your question. It around you know the between you mention so first of all for my for array microphone arrays are gonna be challenged obviously, a significant think here too just like the rest of our business for our prepared remarks and for the year specifically around D.C.C.

I would say first of all you know that's that pets continuously become a smaller portion of our business, but it will definitely be significantly impacted maybe even disproportionately because as we saw in China for us to think you one.

Even though that's a small part of the business, but you know saliva shipments were essentially band until you couldn't even perform testing on M.T.C. and then you have from a marketing that usually revolves around you know sporting events. The Olympics et cetera. All of those now were pushed out so I think D.C. will be disproportionately affected as well, albeit.

That's a very small part of our business now in terms of the stocking you know they not in fact was as we mentioned 20 million that represented a negative 24 million impact on instruments. So in the last two weeks, we definitely saw customers pausing on Capitol purchases and not represented a negative 24 million impact and.

Plus 4 million impact.

Positive in fact in terms of stopping on consumable. So small in fact overall one consumable so they're not in fact was 20 million negative and as you can see all of this was instruments offset by a very modest amount of consumable stock.

Your next question comes from the line of it <unk>.

Hey, good afternoon, and thank you for taking my questions.

Based on what you're describing your prepared remarks.

It seems like you're describing continue to recover in China, albeit not to level, where we were earlier.

Last year, and then it sounds like outside or trying to.

You are describing a situation where at least at the end of April including all and markets you were saying stabilization I just want to make sure that right and building off of that.

Are there any area, it's worth, noting either geographically or by on market, but are still deteriorating.

Kind of on the other side of that are there areas that are notably improving outside of China. Thank you.

Yeah, well thanks, Doug for your question.

You've got to exactly right, though what we are seeing is you know China size business and back to the first but has has definitely started changing the trajectory and continuing to build similarity <unk>. If you look at the rest of the World you know starting the last couple of weeks of March we did see a deterioration in <unk>.

Sharper in the research markets and more gradual clinical market, but they seem to stabilize and certainly if we look the data points for the last week you can start to see them. These seem to pointed towards the gradual building back in terms of areas, where you know we expected to be you know above average in terms of recovery are below average.

No the areas that have have seen.

Resilient or the clinical areas most of the an I.P.T., but then on college you testing as well those are the ones that did slow down but slowed down more slowly and the stabilization as at a higher level that you know the rest of the other segments that routine and those are also markets that we expect you know to build backup.

Quickly given the urgency.

Some of some of the testing in those markets. You know we talked we covered a lot about the research markets that you know the the shelter in place requirements are gonna inhibits the academic labs from reopening envy that to play out for the majority of this quarter. Although some of those labs are now <unk> or.

19 research until we expect to see incremental business from that to be search for those markets and in my opinion, one of the smaller markets maybe to recover would be the direct to consumer market directly because of the time talked about earlier.

[noise] [noise] <unk> since you're sitting on that question I'll just add just to remind is something we said in the script was that we did see a sequential increase the the run volume data for both research and clinical that the most recent we have actually ditch.

Show Us sequential increase from the prior weeks at at the positive sign they're just one data point will have seen look for more data point to support that trends that something that gives us a good amount of optimism.

And you're next.

[noise] comes from the line up there.

With the bank of America.

Hi, good afternoon, everyone.

Hi, there so I mean, I'm going to do I'm going to do a multi part or if I can first one's easy just quantify the size of a licensing.

Agreements that that benefitting services, given unreasonable bit higher than we thought second one is can you talk a little bit about.

Instrument ordering patterns are they still coming in have you things seem things slowed down just some sort of general trends on your order pipeline right now I mean, obviously since you're not you don't have people out there are sort of selling right now and the other one is.

You know how much.

How much inventory in consumable see your customers normally hold in the <unk> bring this up because obviously, you're gonna have lab shut down and people aren't going to be using things. So it's a question of when do we sort of see consumables ramp is things come back and what's the shelf life. There I'm just sort of curious on which the normal dynamics in how do we think.

About it you know people brain to they're gonna seen inventories before they start before they start reordering you know do we get an air pockets I'm just sort of trying to think about the the the the plague away through on that thank you.

[noise], yeah, so with regards to the like the same revenues <unk>. We're we're not disclosing exactly what the amount of the licensing revenues were for sequencing another but all I can tell you as we had some licensing revenue is built into our guidance that was realizing q. on as you saw we had growth in that line came in.

You know slightly better than expectation.

And you know so that that's a that's the dynamic bear in terms of the licensing revenue to this relates to some I.V. licensing deals that we had from last year and usually those are not necessarily all recognize at the time that you sign them. There are some that you know are you recognize that afterwards based on different a mile.

So is uncertain you know certain revenue recognition principle. So that's that's the answer to the first question.

What was the second question with regard to shelf life of consumable so I'll jump to that essentially the shelf life is usually around you know six months to nine months effectively. So that's a that's usually what what customers have in terms of Ah you know what our consumable shelf life is.

And what was the third question that.

The third question non consumable inventories of how much do customers hold typically and and how long to re order and so maybe I'll just take down to say typically customers hold about a month of of inventory on hand, and just as a reminder, for a lot of outrage and you know the shelf life is around six months.

And so no chance or if I just add a little more color on the system wondering you know certainly for you know the first couple of months of the quarter. We were seeing very strong ordering for systems. In fact, we were seeing stronger than than normal linear already and we were heading for a a strong quarter in terms of system orders.

Even say.

And so in a number so that it was a strong quarter of sending off to the last couple of weeks March from it systems borders perspective, I think it's I mentioned earlier, we've actually seen that continue into into Q.T. right. So.

The owners didn't actually shipped so far this claire everything a little bit ahead of sort of normal any already we're seeing orders from those critical research customers and but at this point actually.

My research of course, I could change it with one month the data that.

[noise]. Your next question comes from the line of plenty to suit up with S.V.B., we rank.

You have friends was thinks and thanks for the important work that you're doing independent mix. So.

First on if I could just go back to instruments again was hoping you. Just you know if you could elaborate what you had seen over the team as seen in the past dome terms here <unk>. What do you think his appetite for instrument purchases in situations in academic customers and some of those cases, where they're getting for a load.

In the current time frame and and when they returned back to the lab Oh, what's the expectation there and then among the diagnostic customers, what's the expectation sort of in the you know in the second happen, but potentially when we're expecting things to return back to normal and we're hearing about some pent up demand, obviously significant trial shutdowns anywhere from two.

Do you know, 70% new enrollment.

It is down so when we think about biopsies getting to the sequence or how do we think about an instrument purchases in in that framework and and if I could also if it's if I could ask the second one just briefly on run versus revenue clarification I just wanted to understand the run volume run numbers that you have provide.

How should what sort of <unk> should be think on that are these run counts or the <unk> <unk> already reflective or inclusive of the duration of the runs and bus inclusive of the sequencing volumes that you have thank you.

Sure I think so let me.

Work my way to those questions in terms of the appetites are instrument purchases as Jackie pointed out you know they were running strong through the majority off q. on and we we were on track for a very strong systems a quarter in Q1, and they're starting to run strong again.

Q2 in the first month of cute the disruption we saw was not in borders but primarily in shipments because in the last two weeks of Q1, what happened was a number of labs had shelter in place requirements and frankly, when just physically there to be able to take the instruments, a bad ordered and so the disruption does not ready and ordering activity was much more.

In shipments activities.

And as we talk to our customers what they're telling is is near the appetite for instance is completely driven by the demand a day or seem right. So if you talk to our in I.D.T. customers are in college and testing customers you know, they're ordering based on you know the the demand that they're getting from driven by number frequencies. You know that that are covered and then in college you testing.

And that they expect to recover so they're saying look we we saw we saw takes down but you know. These this is essential testing and so they shouldn't change and and that completely is what drives whether they get instruments or not so we're not seeing hesitation round capital purchases or capital spending it really is driven by demand and the same thing is happening on.

Academic side right. So it's driven by the bullets of work that they have they have to come back into the labs to take to take those shipments and so there'll be a dating factor around when the shipment touchy happened and not shows up in revenue in our expectation is that they will be sheltered in place for for the majority of cute too but.

Beyond that we you know they have a budget they need to spend it they still have those work when you're doing that now incremental work associated with coded research that will require new instruments as well.

[noise] questioned company spends a running on sorry, let me let me just finish up the last part of the question companies had which is run run towns. So the numbers were sharing with you are truly just number off runs they are not related to the type of round or the the data you know for.

Or each run or certainly the cost for run and so there's no direct correlation two revenue, but it does give you a sense for the level of activity now business.

And and pretty if they they you know it reflects the fact that not every single instrument that we have is connected but it reflects the fact that we have a portion of our instruments. The highest as connectivity is an M.R. the next higher than Europe.

And that avian j. and very little productivity in China. So it's a proxy, but it's it's a good indicator in terms of the direction that we're seeing in terms of other rebounded for business.

Your next question comes from the line as Dan area.

<unk>.

That's a good guys. Thanks, Francis maybe just to follow up on <unk>, let's related to the active projects and more those that it was sort of sitting out there in the planning in design stage can you comment on those I mean are those so complex that you kind of have to expect a pause if you're talking about large health networks or.

Or maybe Conversely, I mean as a pandemic just kind of serving as an advertisement for aggregating genomic health data I'm just wondering about the next wave of those initiatives.

Yeah, let me.

But we're seeing a down in terms of what's playing out in in those initiatives. If and initiative is in the planning stage then a lot of the work for that thing can happen while the principles are sheltered at home and so the work that can happen remotely is moving forward, we're seeing that even here in the U.S. around the I.D. submission.

All of Us and so it's an initiative is ready and planning stage than a lot of the work and continue to happen even even over distributed some parts of a a pop seek ramp up could be impacted by by the pandemic. So if you're in the midst of collecting samples for example.

You know that would be a part of the project that would be slow down you know until people started getting back you know getting back into the lives are are out into the into the fields and other dynamic. That's playing out is you know we're seeing the emergence of obviously the importance of covert 19 l. them into some of these populations sequencing efforts for <unk>.

Sample you know the work that Triple Bedford did add at the Fred Hutch in Seattle was really started out as a a flu population research projects that then got re purpose in that December January February timeframe to look for pulled it I'd incidents right and so.

We're we're starting to realize the importance of these population efforts in terms of helping combat. These this existing pandemic and giving as a surveillance capability into future Pandemics and we were seeing that emerge as part of the thinking for the population sequencing efforts that are playing out.

You are next question comes from the line of Patrick Donnelley what city.

Great. Thanks, maybe a one for you Sam on the expense control you know certainly appreciate that you guys want to keep.

Functions controlled in the near term, but also position to to capture the growth and the other side of this to your point about you know being nimble if things do kind of linger here you do have initiatives to pull the costs back further I guess what would it take for you to do that as a certain time frame that things stay shut down the that you would kind of you know.

Push a little harder on the costs are maybe there's talk through the scenarios on that front. Thank you.

[noise] yeah. Thanks, Patrick we've we've looked at a number of scenarios you know both to understand what potentially the revenue <unk>. In fact, my me for the year and also obviously the the in fact not affect the first time, you say I mean, even in the first half of the year, given where we are today and what we know today, we are taking a significant.

Amount of costs out of the business you know and Q1 have you heard we were roughly $50 million below our expectations in terms of span in Q2 were expecting to be somewhere around $40 million you know our expectations in terms of spans. So we are taken quite a bit of costs out of the out of the businesses that reflects you know some actions around discretionary expense.

It says you know some of it's driven by travel reductions conference lack of the time notes et cetera.

If this disruption <unk> and I don't want to give you a certain number of months or a a very specific timeframe, but if this if we believe that mean works shelter and play it's work from home restrictions will continue you know for definitely Q3 and beyond then we've got contingency plans that we have put in place.

That require us to be you know much more I would say look at Carnegie expensive in a much more significant way and that would involve things like you know pausing hiring altogether and so stopping hiring looking and looking at our contract and.

You know contract sales force in temporary workers looking at a significant reduction in our capital expenses and significant reduction in our non R. and D. project you know so broad based in terms of things that we would cut based on now that again that would involve US you know having a a view to the fact.

We're going to have a more prolonged disruption that goes definitely beyond Q3, so that that that's the way we're fortunate.

Brand or an expression.

Your next question comes from the line of some giant man with V.T.I.T.

I think particular question a friend says I think you mentioned that most of the Kobe 19 testing will be through P.C.R. based or for us or allergy testing was curious that q., what what do you think it's the biggest hurdle given that you know, we'll probably need on press, yeah, I didn't unprecedented level of [noise] diagnostics.

But the next.

Well, you know a year or two what's the biggest hurdle in terms of getting sequencing to take a bigger share in in providing a diagnostic testing is that the costs. They installed base. The accuracy. If you could talk about that I think yeah.

Yeah. Thank you for that and certainly today. The majority of testing is being done on on P.C.R., but looking forward I think you can expect to see more in G.S. testing happen in the market and you can expect to see it happen in a number of buttons first you will see more die.

Ignostic testing of <unk> symptomatic individuals happen on on N.G.S. technology, you're starting to see a number of P. allowed stand up diagnostic testing using N.G.S. capability and so you should expect to see more of that happened going forward. The second thing that'll happen is you will start to see.

The emergence of ultra high throughput capabilities, we believe for screening of healthy individuals to get them back to work and so there are a number of very exciting concepts being worked on by the number of customers around how you can screen very large numbers of healthy individuals to give employ.

Lawyers confidence to bring their employees back into the workforce to get schools confidence to bring their students back into schools now there's work that needs to be done to put together those workflows and so that's where it's being done right now, but a lot of a lot of work is happening in that arena because the cup.

Passing you could guess from N.G.S. and costs per sample you could get from N.G.S. could make that very very compelling and so that's where I've been happening right now similarity.

Next bucket, where you can see more and G.S. testing happening in the market is the area surveillance.

Driven in in some cases by C.D.C.'s around the world, but there are other organizations do that are putting together N.G.S. capability to monitor how this outbreak is progressing and so for that you need N.G.S. So you can understand how the viruses mutating you need N.G.S. eating track that geographic.

Transmission of of this virus and you were seeing that capability starting to come online and so if I look at diagnostic testing screening and surveillance. You know you should expect to see and just to be a bigger part of the testing paradigm going forward than it is today.

Your next question, where do you have time for one further questioning and your last question comes from the line.

<unk> I S. high.

Hey, guys experts my question not just a one not quick follow up thing friends. Since you mentioned that the runway on on the research side was <unk> down 45 clinical perhaps down in high teams.

I'm just shot like what is the revenue mix between clinical research and where we are not capacity utilization on the systems reason I'm asking us when we look at that the economy opening up is there a chance if we're running at 70, 80% capacity utilization N.B. system, Sark running 100% and there's a catch up in the backup. Thank you.

Oh.

Yeah sure. So if we look at the breakdown of our business on the sequencing consumable side, it's about 60% research and 40% Chronicle.

And if we think about how you know how.

The economy recovers and and and how to market with colors. There are some areas.

To see some catch up right. So for example, the U.K. biobanking. They should if that was moving you know you know at sort of full throttle going into March and then pause there's going to be some catch up we expect around that initiative similarity patients cancer patients who are holding back from going into the clinic to get tested we expect.

To see some catch up happened, there as well and maybe a little bit on the N.I.P.G. sites as well and so there w. parts of our business, where you can expect to see from catch up for the remaining part of our business. We expect people to go back and finish the work that they were working on so it's it's very unlikely that the work goes away and so the majority of business will pick back up in some.

Cases, there'll be some catch up as well.

Yeah.

And I were now like to turn the call back over to the speakers for closing remarks.

Thank you Brandy. Other reminder, replay this call will be available at the web <unk> any investor section of our website as opposed to the dollar constructions contained in today's earnings really thank you for joining us today that concludes our call and we look forward to our next update phone.

<unk>.

Discontinuities Conference call. You mean now disconnect. Thank you for your participation.

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