Q1 2021 Illumina Inc Earnings Call
Good day, ladies and gentlemen, and welcome to the Illumina first quarter 2021 earnings conference call. As a reminder, this conference call is being recorded I would now like to introduce your host for today's conference call Ms. Juliet Cunningham P. P. Illumina Investor Relations. Please go ahead.
Ken and Ken.
Good afternoon, everyone and welcome to our earnings call for the first quarter and 2021 during the call today and we will review the financial results released after the close after market and offer commentary on our commercial activity after which we'll host a question and answer session.
And if you've not had a chance to review the earnings release, it can be found and the Investor Relations section on our website at Illumina dotcom.
Participating for Illumina today will be Francis just use that president and Chief Executive Officer, and Sam Some on Chief Financial Officer.
Francis will provide an update on the state of aluminum business and Sam will review our financial results.
This call is being recorded and the audio portion will be available on the investors section of our website. It's on.
And our intent that all forward looking statements regarding our financial results and commercial activity made during today's call.
We will be protected under the private Securities Litigation Reform Act of 1995.
Forward looking statements are subject to risks and uncertainty.
Actual events or results may differ materially from those projected or discussed all 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 documents that Illumina files with the Securities and Exchange Commission, including aluminum and most recent form 10-Q, and 10-K with that I will now turn the call over to Francis.
Thank you and good afternoon, everyone.
And as we shared in our pre announcement Illumina had a very strong start to 2021 with the first $1 billion quarter and Illumina as history.
We achieved first quarter revenue of 1.0 93 billion.
Growing 27% compared to the prior year and 15% from the last quarter.
Sequencing revenue was especially strong up 29% compared to the prior year, driven primarily by accelerating growth and our core business with both clinical and research customers exceeding pre COVID-19 activity levels.
In addition, we're seeing global investment and the creation of a genomic epidemiology infrastructure to combat COVID-19, as well as monitor for future pathogen outbreaks.
I'd like to share some additional first quarter highlights by platform.
Beginning with our high throughput platforms Novus seek drove a significant share of the exceptional performance achieving its highest first quarter placements on record, which is remarkable as it enters its fifth year since launch.
We continue to see the positive impact of our version one dot five reagents, enabling both new high throughput customers as well as continued conversions from our existing hiseq customer base.
Our mid throughput platforms drove additional growth with a 23% increase and consumables revenue compared to last year.
We saw continued success for next week 1002 thousand as well as strong performance from next week $5 50.
Notably, we saw an increase and customers upgrading from their existing Illumina bench top sequences to next seek 1002 thousand.
Clinical customers continue to drive New next week $5 50 placements with next week Dx recording its highest ship and quarter to date.
In China, where the instrument received and MPA approval in Q4, we're seeing strong adoption and the hospital setting as we work with IV D development partners like burning rock bio Sam and Maitre Dx to provide comprehensive clinical solutions. Additionally, working with our strategic partner our farm next week the ex.
Received medical device registration in Russia, and March enabling the clinical use of next generation sequencing for more patients across Russia.
Our low throughput portfolio revenue had another strong quarter growing 33% year over year with robust growth and both sequencing consumables and instrument shipments in Q1.
My seek many seek and IC all generated year over year, and sequential growth and consumables as well as instrument placements.
Our low throughput platforms continued to be a compelling entry point for new two mgs customers with an ever increasing number of use cases.
One interesting customer example is blue and Hulu.
Start up using our technology and the development of cell cultured seafood to support sustainability and oceanic diversity. Additionally.
Additionally, these instruments play a critical role and Catalyzing localized COVID-19 surveillance programs across the globe.
Turning to our clinical and research and applied segments.
Total sequencing consumables revenue of $695 million was up 26% year over year, demonstrating strong demand for sequencing across both clinical and research segments and more.
More than 44% of our sequencing consumable shipments and the first quarter of 2021 were to clinical customers.
Clinical testing showed significant growth with consumables up 35% year over year.
These results do not include COVID-19 surveillance, which is reported and our research and academic segment.
Oncology testing exceeded our overall clinical growth rate and is our largest and fastest growing clinical segment. This growth was driven by our customers benefiting from expanded access to reimbursement for mgs based testing, particularly and comprehensive genomic profiling or CGP for therapy selection.
<unk> and some of the first reimbursement for sequencing based monitoring tests.
And <unk> oncology 500 or are you on comprehensive genomic profiling assay continued its success this quarter, adding over 20, new customers and.
On February the Belgian Society of medical oncology announced that they will use DSM 500 for a national pilot to evaluate the use of CGP for patients with advanced metastatic cancer.
As a leading distributable CGP assay DSO 500 continues to offer a compelling choice for our pharmaceutical partners.
And we announced last week and exciting new partnership with Carlos Therapeutics to develop a <unk> 53 companion diagnostic and expanding the <unk> oncology offering into blood cancers.
Beyond CGP, we've seen promising developments and the use of whole genome sequencing and cancer treatment this quarter.
Most notably our paper and the New England Journal of Medicine published by our partners at Washington University, St. Louis showed that for AML and Mds patient studied whole genome sequencing using illumina technology produce more accurate results in less time and at a similar cost compared to standard techniques like fish karyotyping.
And reproductive health the cascading effect of the AQR guidance on increasing coverage of <unk> for all pregnancies drove the third consecutive quarter of both year over year and sequential growth.
In the U S. Two large payers anthem and Blue Cross Blue Shield of Minnesota expanded their coverage criteria to include twin pregnancies just last months.
And in March we reported out on the results of our groundbreaking risk sharing real World study with Harvard Pilgrim, demonstrating the cost effectiveness of offering and IPD to all pregnant women. These.
These studies and to the building momentum for broader access to and IPG.
International support for and ITT coverage also continues to grow fueling the continued rapid adoption of our CE IBD, Marc and IPG kit.
For example, there was positive news from Italy, and Sweden, where new coverage requirements were approved during the first quarter of 2021.
Moving to genetic disease testing customers are choosing illumina is highly accurate and scalable sequences and our growth rate and this segment exceeded the company's growth rate in Q1, we.
We also continue to see new favorable coverage decisions being issued.
This quarter, two major health insurers, and Germany announced that they will cover the cost of whole genome and whole exome sequencing for rare disease. There are over 10 million members and <unk> and the U S expanded coverage to include epilepsy and cerebral palsy.
Research continues to demonstrate a 40% to 68% diagnostic yield for children and suspected of having a genetic disease and whole genome sequencing is used as a first Peter tests.
And the increasing coverage of these tests, we will provide more patients with faster diagnosis and better care.
Turning to our research and academic segment, we saw strong growth and the quarter compared to the prior year period as the majority of research and academic customers have returned to the lab.
The pandemic and emerging variance of concern have raised awareness within governments around the world about the essential role that genomic pathogen surveillance plays and the fight against infectious disease, we're seeing investment globally and the creation of a pathogen surveillance infrastructure to manage outbreaks and improve health outcomes include.
<unk> sequencing capabilities to determine the spread of pathogens the emergence of variant strains and emerging drug or vaccine resistance and.
And the U S. The American Rescue Plan Act includes $1 7 billion and funding for the CDC to improve sequencing capacity to identify and mutation and circulation of viruses.
And Europe, the EC announced $123 million euro commitment to combat COVID-19 variance and India. The government launched the Indian Sars COVID-19, two genomic consortia with a plan to sequence 120000 viral genomes over the next four months.
This investment and sequencing for national genomic surveillance activities drove approximately $55 million of incremental revenue and the first quarter comprising of $35 million and instrument placements and $20 million and sequencing consumables.
As countries around the world Battle. The pandemic, we expect continued investment and genomic pathogen surveillance to expand national genomic and PD neology capabilities.
While the initial focus of this infrastructure as COVID-19 surveillance, there are durable longer term needs, including tracking future emerging natural pathogens bioterrorism antimicrobial drug resistance and hospital acquired infections and determining how host genetics can impact the risk and severity of infectious disease.
While the pandemic has certainly fueled demand for our sequencing. We also believe it has established a new baseline of awareness and infrastructure build out that will support sustained activity.
As we work through the COVID-19 pandemic, we're also seeing an acceleration and several population genomics programs.
Expanding our presence and national health systems around the world.
In the U S. All of us ramped up sample volumes in Q1 to a level that we expect to continue throughout 2021.
And Japan, the Tohoku medical and Mega Bank organization chose Illumina sequencing for a 40000 and sample multi generational study to take place this year.
And February Egypt announced the first population genomics program and Africa with the launch of their Egyptian genome project.
This project is focused on establishing a map of the Egyptian human genome with the goal of assuring the country into the world of precision medicine.
Large population health initiatives serve as one good example of our focus on improving the health of patients communities and our planet earlier.
Earlier this month, we published our second annual CSR report outlining our specific commitments to help improve our world.
This 2021 report is available on our website and notable highlights include expanded transparency on us diversity and demographics climate resilience planning disclosure on trade group membership and data assurance on energy and emissions.
We look forward to continued investor feedback on the evolution of our environmental social and governance programs.
Our commitment to the advancement of human health is an illumina core tenant which brings me to grill. We are pleased with the progress <unk> is making and remain committed to pursue the completion of the Grail acquisition.
Recently presented affirmative data from its <unk> III study at the American Association for Cancer Research annual meeting and is expecting to launch gallery. Its breakthrough multi cancer early detection screening test in Q2.
What are the many reasons, we decided to acquire grill was to accelerate patient access to breakthrough multi cancer early detection blood tests, which could save tens of thousands of lives.
We are committed to supporting all our customers and strongly believe that our acquisition of Grail is pro competitive we.
We expect the acquisition to accelerate the early detection of cancer market as a whole.
We saw a similar dynamic play out in the non invasive prenatal testing market, where after illumina as entry the market grew and prices decreased making these important tests accessible to a much larger population of pregnant women.
And now I'll turn it over to Sam.
As Francis outlined first quarter revenue grew by 27% year over year to $1 <unk> 3 billion.
Driven by 29% growth and sequencing and 15% growth and micro arrays.
Record revenue across all regions contributed to the first billion dollar quarter and the company's history.
Total sequencing revenue reached a new high with first quarter revenue of $979 million growing 16% sequentially and representing 90% of total revenue.
Sequencing consumables revenue grew 26% compared to the prior year period, driven by strong growth and clinical testing and demand for Novo seek version one five flow cells.
Most clinical and research customers are running above pre COVID-19 activity levels as Francis highlighted.
COVID-19, and surveillance initiatives contributed approximately $20 million and sequencing consumables revenue during the first quarter.
Sequencing consumables also benefited by approximately $20 million from the timing of customer purchases during the first quarter.
Sequencing instruments revenue grew 123% year over year with revenue of $176 million and the first quarter, reflecting strong performance across all instrument categories.
The first quarter marked another consecutive quarter of record mill throughput shipments driven by strong adoption of next week 1002 thousand.
COVID-19 surveillance initiatives resulted in approximately $35 million of incremental instrument revenue due to some customers building additional capacity for genomic epidemiology.
As expected sequencing service and other revenue was down 16% year over year due to IBD partnership revenue recognized on the prior year period.
Sequencing service and other was roughly flat sequentially.
Moving to regional results, the Americas delivered revenue of $562 million with 18% growth compared to the prior year period.
Revenue growth and the region was driven by strength and sequencing product revenue from clinical customers and oncology reproductive health and genetic disease testing.
And contributions from genomic epidemiology initiatives related to COVID-19 surveillance.
These items were partially offset by lower IBD partnership revenue as expected.
EMEA delivered revenue of $305 million, representing 38% growth year over year.
<unk> performance was driven by strong sequencing demand for clinical testing applications that resulted in higher than expected sequencing consumables revenue and the first quarter and instrument demand by research customers, including initiatives for COVID-19 surveillance and genomic epidemiology.
Greater China revenue was $127 million representing.
Representing growth of 51% year over year, and 32% sequentially due to continued strength and sequencing revenue driven by clinical expansion and the region and growing demand and hospitals, including the successful launch of <unk> $5 50 Dx.
Finally, AC Jay revenue of $99 million grew 29% both year over year and sequentially.
Driven by sequencing consumables revenue growth and clinical applications, such as oncology reproductive health and genetic disease testing as well as and the fiscal year purchases.
Moving to gross margin and operating expenses I will highlight non-GAAP results, which 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.
Non-GAAP gross margin of 75% improved sequentially by 360 basis points due to increased fixed cost leverage on higher volumes and a one time inventory write down and the fourth quarter of 2020.
On a year over year basis, non-GAAP gross margin decreased 250 basis points due to IBD partnership revenue and the year ago quarter higher freight costs attributable to the COVID-19, pandemic and product mix, partially offset by fixed cost leverage on higher volumes.
Non-GAAP operating expenses of $420 million were up $81 million year over year and line with expectations due to increased performance based compensation expenses headcount growth and increased project spend during the quarter.
Non-GAAP operating expenses were slightly down sequentially, driven by an additional week and Q4 2020.
Partially offset by higher variable compensation expenses and Q1.
Non-GAAP operating margin was 32, 1% up from 29% and the fourth quarter of 2020.
The sequential improvement was better than expected due to higher revenues gross margin and resulting increased fixed cost absorption and the quarter.
Non-GAAP other expense of $3 million was $23 million lower sequentially as expected.
This was due to fourth quarter gains on short term investments that we sold as we repositioned our investment portfolio for the anticipated funding of the Grail acquisition.
In addition, we had lower interest income and the first quarter.
The non-GAAP tax rate of 23% was up from last quarter due to tax expense on certain foreign subsidiary earnings that are no longer indefinitely reinvested, partly due to the capital requirements associated with funding the anticipated Grill acquisition.
For the first quarter of 2021, GAAP net income was $147 million or.
Or $1 per diluted share and non-GAAP net income was $278 million or $1 89 per diluted share.
Moving to cash flow and balance sheet items cash flow from operations was $282 million.
DSO of 43 days compared to 50 days last quarter driven by revenue linearity.
First quarter 2021 capital expenditures were $42 million and free cash flow was $240 million.
We did not repurchase any common stock and the first quarter.
We ended the year with approximately $4 6 billion and cash cash equivalents and short term investments.
During the first quarter, we received approximately $1 billion and proceeds from bond issuances to fund the anticipated Grill acquisition.
Our weighted average diluted share count for the quarter was approximately $147 million.
Moving now to 2020 one guidance.
We expect full year 2021 revenue to grow and the range of 25% to 28% or $4 5 billion to $4, one 5 billion.
At the midpoint of our guidance. This represents an increase of approximately $858 million.
And a significant increase from our expectations earlier this year.
For the full year 2021 at the midpoint of our revenue guidance range. We now expect sequencing revenue to grow approximately 29% year over year, driven by strong orders and instrument placements.
This includes sequencing consumable growth of approximately 30% compared to 2020, driven by strong demand for <unk> version, 1.5, reagents and growth and clinical markets.
We expect sequencing system revenue to grow approximately 50% year over year, driven by Novus and <unk> placements to new to high throughput customers and continued Hiseq conversion and addition to mid throughput demand across our <unk> platforms.
And obviously pull through to be towards the high end of our initial guidance range of $1, one to $1 2 million.
Arrays to grow approximately 5% compared to 2020.
We expect full year non-GAAP gross margin to improve from 2020 levels, reflecting increased leverage on higher volume, partially offset by product mix and IBD partnership revenue and the first quarter of 2020.
We now expect 2021, non-GAAP operating margin to be approximately 26, 5%, reflecting our higher revenue expectations and.
And our ongoing commitment to investment and research and development.
We continue to maintain our focus on improving on core business operating margin leverage over time.
We expect non-GAAP other income to be about $60 million lower than 2020 due to the gains realized in the fourth quarter of 2020, lower interest income on shorter duration investments and anticipation of the close of the Grail acquisition.
And interest expense from our recent bond issuances.
We expect non-GAAP earnings per share and the range of $5 80 to $6 and <unk>.
And GAAP earnings per share to be and the range of $4 72 to $4 97.
And we expect diluted shares outstanding and 2021 to be approximately $148 million.
Moving to the second quarter of 2021, we expect revenue to be up approximately 60% year over year due to the broader economic recovery and strength in our core business.
We expect the year over year increase and non-GAAP gross margin due to the higher volume and resulting leverage non-GAAP gross margins are expected to be down modestly on a sequential basis due to mix and additional investments to support the higher than expected volume growth.
Non-GAAP operating expenses to increase significantly on a year over year and sequential basis due to investment supporting the growth of the business and research and development as well as compensation related expenses.
Non-GAAP other expense to be modestly unfavorable on a sequential basis compared to the first quarter.
Non-GAAP tax rate to be slightly lower on a year over year basis.
As a result, we expect non-GAAP earnings per share and the range of $1 30 to $1 35 for the quarter and GAAP earnings per share and the range of $1 21 to $1 26.
I'll hand, the call back over to Francis for his final remarks.
Thank you Sam Illumina.
And Illumina is off to a very strong start to 2021, and it's clear that momentum is building across our customers globally.
We witnessed the diversity and strength of our growing community and our first annual customer conference over the last couple of days.
About 8500 people registered to hear from the world's leading genomic and healthcare pioneers, including Jennifer Doudna, Francis Collins, Bill Gates, Francis Arnold and Dentsu Hill.
Topics included the critical role of genomics and fighting the pandemic, making genomics a foundational element of a national standard of care.
Integrating multi ohmic readouts and harnessing the power of AI and machine learning and oncology among others.
And from battling cancer to genetic disease diagnosis to fighting the pandemic. The transformative impact genomics will have on human health is accelerating and we had illumina are proud of the key role that our customers partners and employees are playing and making it happen.
Now I'll invite the operator to open for Q&A.
At this time I would like to remind everyone and order to husky quite price.
Star and the number one on your telephone keypad.
A reminder, please ask only one question and so that weekend and company.
And a list of possible.
And your first question comes from Puneet <unk> with SBB Leerink.
Yeah, Hi, Francis Thanks for.
Other questions. The first one is really.
And what are you baking in for COVID-19 surveillance air and 25% to 28% guide for the year I mean, I think the question really is.
COVID-19 surveillance opportunity and the cadence of that as you build out this immunological and infrastructure.
How is what's the cadence of that and I appreciate that COVID-19 is still raging and.
Different parts of the World use vaccinations are ramping and administration is investing $1 billion plus and sequencing. So just wondering.
How much of that is baked into this year and how what sort of a tail should we see longer term there and then my second one is just on grill.
As the process look like next for both the FTC and the European Commission Director and General.
What are the steps and obviously, you're implying a second half close here. So I'm just wondering.
And what are some of the next steps. Thank you.
Great well thanks for your questions Puneet I'll start by saying that it is.
Is.
It's exciting to see.
How the world is sort of moving forward with putting out a surveillance infrastructure for pathogens. Its something as you know puneet, we've been talking about from the beginning of last year and talking about the fact that in addition to testing what we really need is this genomic compete and biology infrastructure. So it's encouraging to see that play out.
Around the world and to see the the big commitments here made and the U S not to get to your question in terms of what we're building into this year.
Vast majority of the growth in that 25% to 28% is coming from our core business.
So the way we've modeled this year as we said look we expect small contributions from the surveillance infrastructure over the course of the whole year. We saw some investments in Q1, and so we saw a bolus of $35 million and instrument purchases that we that we got in Q1 to lay out some of that infrastructure.
Structure, and we saw some consumables infrastructure. So in terms of our model. We continue to model some consumable purchases over the course of the rest of the year, but not a lot in terms of additional.
Infrastructure investment now the way we expect it to play out is we are seeing the bid commitments made even in the U S. Around the American rescue plan and we expect some of that investment to be released towards the tail end of this year and start to play out more sort of next year.
And what's interesting is that this infrastructure, while it would be very helpful and fighting the pandemic is really a durable plan by the nations that are rolling it out and what they are thinking about as a long term creation of genomics based pathogen surveillance infrastructure to help fight this pandemic and preparers next for the next hour.
Break.
Whether it's a natural outbreak or bio-terrorism or emerging antimicrobial resistance or hospital acquired infections and so we do expect as you point out some tail on this that it's not a story of this year in fact, we've modeled and very little this year, but it really is a story that plays out into next year and going forward.
And so so that's how we're thinking about it in terms of model, obviously as more details come out we will make sure to share them with you in terms of Grail as I said, we are committed to pursuing the acquisition of Grail in the U S that means we're taking sort of our our case into district Court and we are also working with the European Commission.
On their review of the Grail acquisition, we continue to feel that.
The facts are on our site.
The law is on our side and we continue to expect that the deal will close and we'll close and the second half of this year.
And your next question comes from Doug Schenkel with Cowen.
Hey, good afternoon, and thank you for taking my questions.
I wanted to ask about anti trust and strategy and then also kind.
Guidance.
Philosophy, so on antitrust and strategy.
And all over the last couple of years Illumina has run into challenges with regulators on.
The Taliban and acquisition of Pac bio and the plan to acquire Greenhill and recognizing everything you said in your prepared remarks as well as and your response to <unk> question on Grill I am wondering one how is your criteria for strategic opportunities and evolving in light of these developments.
And two what changes youre, making and process.
Obviously, you've called out equipped in terms of how you approach and these deals but both proved to be a lot more challenging than you expected. So presumably you are making changes accordingly, I think it would be helpful to hear about those.
And then on guidance philosophy.
How would you describe confidence and your targets for this year at this point I mean, your targets and make a lot of sense to me, even though the growth numbers are really big and you did talk about I think it was $1 4 billion and backlog entering Q2.
That said the world is still uncertain.
As we all know coming out of 2020, and then if we go back to 2019. It was a tough year for illumina relative to self imposed targets. So with those things in mind I'm just I'm just I think it would be helpful to hear about the philosophy youre applying to guidance. This year and if you still think you are skewing towards the more conservative side of things. Thank you.
Great Hey, Doug So let me let me take both parts of your questions and I'll talk first about <unk>.
Our acquisition strategy specific to touching on any impact from from.
Our experience with the FTC.
And how it changes our philosophy going forward and then I will talk about guidance for the rest of the year and and Sam May contribute then to so I'll start by saying if you look at our acquisitions over the last couple of years.
We have.
We attempted the pack bio acquisition I think it's about three years ago, we initiated that and we obviously didn't get that through the FTC, but we were successful and closing the <unk> acquisition, which was a huge success in terms of billing and the Dragon technology into our sequencing and has been super well received by our customers and.
And it really created positive momentum on the informatics side. We also completed for example, the and NCO acquisition.
And Brock.
Lastly, on data compression technologies and capabilities into our into our sequencing as well and so what we're seeing is we've had success in terms of buying innovative technologies that we can build into our sequencers and take to market.
But we're also seeing that given how popular our sequencer Saar and our core market that we have work to do in terms of some of these bigger acquisitions and so one I think we're going to continue to.
Scan the marketplace and look for acquisitions that make sense, both technology tuck ins as well as from time to time larger acquisitions that makes sense. We continue to believe that vertical acquisitions are well within bounds and Thats why were going to go to court on the Grail acquisition.
And and we also recognize that given the scale, we are and given our position and the market.
And we'll have to do more work in terms of educating the regulators about our business and making sure. They are up to speed on our business, even before we do and acquisitions. So that's another takeaway over the last couple of years strategically, though I'd say, we're still continue on continuing to.
Our focus on making sure that we are looking for places, where we can allocate capital both internally and externally that deliver maximum shareholder value and that focus hasn't changed at all.
In terms of our guidance philosophy for the year.
You touched on on a couple of important points. It's a balance point of view, we feel that on the one hand recognizes that we're coming into the year and we're coming off the quarter with a huge amount of momentum and our core business. So if you look at both the clinical side of the business and the research side of the business, we're seeing real strength and that's showing up and turn.
The revenue numbers that we had in Q4, but obviously also in Q1, and it's showing up and the orders numbers, it's showing up and the instrument the huge instrument growth rate, we saw year on year, and Q1, and so huge amount of business momentum and our core business you add to that we are seeing very positive signs from the COVID-19 surveillance.
Add on business.
And so on the one hand with a huge amount of momentum going into the rest of the year, but as you point out there is still uncertainty because we are still dealing with the pandemic and so we're still watching to see how the pandemic plays out as countries are grappling with a third wave and our fourth wave and that could have impact on people's ability to go into the labs or.
Run run their clinical sequencing debate that they need and so we're balancing we're balancing those two and the numbers we put out although they are big numbers, we have confidence and and we think it strikes that appropriate balance I don't know Sam if you have anything else debt.
Yes, I think your head and Francis I mean, just to be very brief and add maybe a couple of comments. One is we have a high degree of confidence about our guidance range. It is a balanced outlook for the year and what gives US a lot of that confidence Doug is the strength of the core business, we are enjoying tremendous strength and the core business and that adds to the confidence that.
We have I think the only potential headwind that I would call out or risk is the uncertainty related to the pandemic as Francis mentioned.
And your next question comes from Tycho Peterson with Jpmorgan.
Hey, thanks.
Two quick ones here on the instrument strength Francis I'm, just curious as labs are getting back up and running how much of what youre seeing is kind of catch up spending from last year's delays. Obviously your guidance on the strength of the full year. So maybe maybe it isn't any sort of pull forward, but I'm wondering if you can comment on that and then on the COVID-19 work I think last quarter. You said you were winning over 70% of those projects can you maybe.
Just talk to the competitive dynamics, there and then as we think about your instrument fleet, which on the platforms. Do you think are going to be most suitable for kind of the ongoing surveillance applications.
And then.
One question on competition Theres kind of a third wave of sequencing companies coming single element on Neal and I'm. Just curious as you look out. The next couple of years, how do you think about the competitive landscape evolving and then last one for Sam FX contribution and I didn't hear that and curious if you break that out and the quarter.
Great. Thanks Tycho.
Alright, and a bunch of questions and there so let me make sure I capture them all.
I will so first you asked us about sort of the strength, we're seeing from the instrument portfolio and let's comment on what's driving that then you asked about COVID-19 surveillance and said look we talked about we will represent about 70% of the.
Of the surveillance testing that was done and how is that playing out since we last talked about the numbers which instruments.
Play best for that and then sort of a commentary on the competitive landscape.
Okay. So let me start with instrument strength.
Yes, we talked about the fact that we had an enormous instrument strength in Q1.
More than doubling year on over a year in terms of the revenue in Q1 that we got from sequencing instruments, a huge amount of strength and whats driving that is the strength and the core businesses. Both the clinical side on the research side, we talked about the strength that we saw on the clinical side in oncology testing.
That oncology testing as a segment is now not only our largest clinical segment, but it's actually our fastest growing segment and there's lots of drivers behind the strength and the oncology segment, right and more broadly and the clinical setting with one of the big drivers is we saw a very significant step forward and reimbursement a cross a number.
Clinical segments last year genetic disease testing oncology and <unk> and so what's happening is that the addressable market in terms of people who have access to the tests and are reimbursed way has expanded last year and so that's driving the increased business for our customers and the clinic and thats driving their purchases other dynamics that are playing.
Out.
Are the strength of the clinical business in China for example, and the the cleared the clearance we received from the NPA around next week, and Thats driving and instrument growth and so it is not catch up it's just the market continues to build right. So it's more reimbursement the addressable market expense with.
And with more cleared products the addressable market expands in terms of our ability to place instruments into into hospitals for example, in China, and that's really what's driving the instruments strengthen and obviously thats hugely exciting because that talks swirl about future consumable spend from all the instruments that we placed in Q1 in terms of COVID-19.
And what we talked about is if you look at just aid and CBI you can track in terms of the number of genomes that are deposited the platforms. They have been run on and so I think there was a helpful blog that came out and the last couple of days I think Keith Robinson debt Omics, Omics blog, and he sort of day.
And analysis, and it's pretty close to what we did two which says that our share. There is about service has gone up to about 79% now of all the genomes and and just aid have been done on Illumina platforms. I think the next highest is <unk>.
About 17% I believe and that sort of tapers off after that and so.
Similar, but maybe a little bit better than than what we talked about last time in terms of the instruments.
There's a broad range of instruments that are being used for surveillance, obviously and <unk> that are very popular instrument and the and the high volume shops, but we're seeing a lot of next week and <unk> being used as well and so it's sort of the blend if you like that are playing really well.
In terms of competition and there's always there's always competition and the market and as you can imagine a market thats. This early and growing this quickly is going to continue to attract investment dollars. So like you. We're looking at some emerging players that are going to be launching.
And the next year or two and I think you listed some of them. There are clearly players that are in the market right now too that we compete with but that's been true every year. So I'd say every year, we face that of a new wave of.
Venture funded competitors.
And it's up to us to continue to innovate and deliver more value to our customers.
Yes, with regards to FX Tycho so for Q1.
Say compared to Q1 of 2020 FX benefit contributed approximately 3% in terms of benefit year over year and that was driven mostly by the euro and the RMB so depreciation of those currencies.
If we look at the full year, we're expecting that benefit to moderate as we look forward. So definitely more of the benefit and the first half versus the second half and we're expecting for the full year approximately I would say, 2% in terms of overall benefit from currencies versus the 2020.
Okay. Thank you.
Youre welcome.
And your next question comes from Jay.
Sam.
T I D.
Hi, Thanks for taking the question Francis could.
Could you talk about oncology testing, obviously lot of strength, there and you kind of attributed that to better reimbursement and other kind of favor.
Favorable trends just kind of curious about given the visibility you guys have across all the diagnostic companies out there.
And you know what.
And if youre seeing any kind of catch up from all the delays to screening and cancer diagnosis last year.
And we'd love to kind of hear your thoughts there and.
And your visibility into that.
Yeah. So.
As you pointed out obviously, we work very closely with our customers and they are terrific customers like <unk> and gardens, and so on and oncology testing.
And our perspective is that they are if you were in the liquid biopsy space and so if you offered a blood based test.
You actually more durable through the pandemic than many other types of clinical testing and so some of our customers found very innovative ways in terms of mobile phlebotomy units are having home based access to the test even for some patients and.
And thats possible, if you have a blood test and so in oncology testing I think one of the stories of the pandemic is going to be that that was an acceleration of the acceptance of liquid biopsy and and I think thats a durable trend I think we come out of the pandemic and you'll continue to see the growth and liquid biopsy because people realize that not only can you get <unk>.
High quality results, but it's a much more patient friendly way to do the test then and then a tissue based test. So I think if possible and youll see youll see liquid biopsy being a preferred way to go now what that means is that there isn't really a whole lot of catch up to do and Q1, because you saw the durability of liquid biopsies and so far and.
I think the biggest driver of this strength and oncology are things like one expanded reimbursement for things like CGP.
On to the.
<unk> emergence of new therapeutics that debt leverage genomic biomarkers and and that's also showing up in terms of the companion diagnostic relationships that were signing up for TSA and 500, and then the availability of product like <unk> 500 from us from our from our partners that create products that make it easier.
And for labs to stand up those stats and so I think all of those factors are driving the the durable strength and oncology testing and there may be a little catch up but frankly, if there was it wasn't much in my opinion.
And your next question comes from Mark Smith.
<unk> with Canaccord Genuity.
Hi, Thanks for taking the questions and congrats on a great start to the year. So piggybacking on a prior question the language and the FTC's challenge of the Grail acquisition seems to be narrowly focused on blood based multi cancer screening, which is just one of the several emerging clinical.
Occasions within a block or broader liquid biopsy landscape, which does seek to serve a wide range of cancer types.
With this in mind Walter graph is under FTC review is it reasonable to expect that debt youll continue to be active on the M&A front and and.
The deal is blocked is it reasonable to expect that any future M&A activity would target companies that are developing a clinical liquid biopsy applications targeted for just one or a small number of cancer types versus sort of the home run opportunity and multi cancer.
Yes, I think thats a good observation in terms of the fact that liquid biopsy. Our blood based tests are used for various types of testing and oncology. So one type as you point out is <unk>.
Multi count cancer early detection, which is what <unk> does as well as other players that are looking to do that and the market and another area that liquid biopsy is used is for therapy selection. So helping match patients cancer patients who are already diagnosed with the right therapy for them.
And already have a product a kit that serve that space. So our TSA and 500 product is used for therapy selection and I completely different part of the market requires a different technology that looks for different things and the blood and so liquid biopsy can be used for many things, but they're very different segments.
And and all of them are different and require sort of different.
Different technologies as part of our liquid biopsy approach.
The answer is we are going to continue to look at M&A going forward.
To be both technology tuck ins that help us advance, our our mission and our strategic priorities.
And that could be a range of things that could be technology tuck ins and look it could look for capabilities that extend.
And the offerings as part of our sequencing offerings.
And so we're going to continue to do that.
And our next question comes from Jay Haas Sovereign with Morgan Stanley.
Hey, guys good evening and thanks for the time.
And a three part or for you one on COVID-19, one on arrays and one on sequencing services. So.
On COVID-19.
You mentioned, the surveillance efforts and India, both earlier during the pandemic and Neil prepared remarks. This afternoon.
I think you said about 125000 and viral genomes and the next few months here and obviously you have the funding coming through and the U S and Europe as well why is it that youre not expecting this kind of work to contribute a little more and the near term on SaaS.
<unk> million dollars consumables contribution and the first quarter, So thats my <unk>.
First question.
Second on sequencing services and this is more for Sam outside of the 25 million milestone and in the year over year comp.
Quarterly growth was essentially flattish are there any offsets that we should be thinking about and <unk>.
Terms of this quarter and then finally on arrays.
The business I mean, both from our services and consumables standpoint actually grew year over year up for quite a while.
Is it fair to think of the business finally, having bottomed you're outside of the usual seasonality that you'll see.
And in two Q and beyond.
Okay. So you've got a few parts there so.
I'll start and we'll talk a little bit about COVID-19 and the question is why not more right because it was clearly.
There is now a very recognized value in terms of using sequencing for genomic pathogen based surveillance both for COVID-19 and there is a recognition that this infrastructure is going to be valuable for many many many years to come. So the question is why not more the second question you had into the arrays have we bottomed out okay. So let's go to the first one.
And we absolutely believe that we are laying and infrastructure here. That's that's durable that is going to be a.
And important part of all National major net National Health systems going forward, we absolutely believe that this infrastructure is going to be valuable not just to protect the public health, but also from a national defense perspective. So we expect this is going to play out over a decade, plus right and we are going to we are going to have and.
And most countries some kind of genomic pathogen based surveillance going forward in terms of how we thought about it this year.
So the way we thought about it this year as we said youll see some bolus of instrument buying and Q1.
And we expect that was the bulk of the incident by and you should expect to see this year and we've talked about the fact that many countries now we engaged with them last year, they've they've bought some sequencing and so for the rest of this year, we expect to continue to see consumable buying.
But our expectation is book you saw the bulk of the instrument buying for what's going to happen. This year already happen. It is possible that and more happens and the things that would drive that are obviously the American rescue plan that talks about some very big numbers, our expectations are that.
It's going to take a while for the details to be worked out and so while youll see consumables being purchased over the course of the year and won't really be towards the end of the year. We expect that you will start to see people talking about okay, where are these six centers of excellence how much sequencing infrastructure do they already have how much additional hardware we need and.
So it's going to be a story of the tail end of this year going into next year and beyond from Instruments' perspective, and so that's how we thought about it and we'll keep you up to date, if any of that accelerates.
And over the course of this year.
In terms of arrays.
<unk>.
We did see some growth year over year.
And there are different parts to that business. There is the direct to consumer part.
And then there is sort of AG and maybe Sam will talk a little bit about how those parts play out.
Yes, so I think the way you characterize that task is correct and the sense that the businesses stabilizing and.
We're seeing less of a negative definitely not a negative impact from arrays, we actually saw them grow and Q1.
The fact of the matter is DTC is now a very small part of our business, it's somewhere between 2% and 3% of our overall revenues.
Back in 2018, DTC was a much bigger contributor to our overall revenue. So even though we're very pleased to say to see arrays growing and Q1.
DTC, specifically is less of a contributor and we still see the mature arrays that we have the mature business, whether it's average genomics or other applications continuing to grow as well and has continued to grow over time.
Maybe to go to the last question that you had with regards to sequencing services and other so let me explain the dynamics there.
Q1 over Q1 of last year, we do have a negative headwind related to $25 million IBD licensing fee that we had in Q1 of 2020.
And that we didn't see and Q1 of this year. So that was a negative and as you saw sequencing and other were down for the quarter by <unk>.
By 16%.
As we look for the year, what our guidance assumes no material licensing fees, our IBD fees with regards to any significant transactions or partnerships I should say for the year. So we're expecting mostly.
Sequencing service and other to be flattish for the year quarter over quarter, and that's consistent with our original guidance that we had back in January.
Your next question comes from Derik de Bruin with Bank of America.
Hi, good afternoon.
A few questions. So I guess the first one is just looking at your revenue guidance.
Just a couple of questions on industrial just the results first question is how much of your Hiseq.
And we.
You don't need to be upgraded and how much of the strength you saw on the first quarter was due to basically people that were planning upgrades last year and never did them.
Just trying to get a sense of.
Once again, I think theres a lot of questions on in terms of the instrument strength and and also just sort of looking at the guide you are.
It looks like roughly that debt.
<unk> you.
Roughly $1 billion, each and Q2, Q3, Q4 and sort of the way and acknowledging you probably have some conservatism built in there. So I'm just wondering.
As you look at that second half, it's like Wow.
Why would it sort of be flattish given historical trends.
And then just one other question on can you walk us through sort of like the forecast stock comp numbers this year.
And sort of like how those flow when and how those flow into 'twenty. Two just so we can get a better sense on how to model. Thanks.
Yes. So thanks, Derrick So couple of I guess three questions on around Hiseq and the second one about our guide and then the third about stock based comp. So I'll start talking about Hiseq and then I'll turn it over to Sam to talk about the other two.
So in terms of the Hiseq X.
<unk>.
Well when we first started the nozick upgrade path as you know we talked about the fact that our 850 hiseq customers that over time, we expect that the majority of the vast majority of them would move to <unk>. So between 2017, and then and be till the end of.
Last year, we went from 850 that had to upgrade and then we refreshed the numbers and shared with you that we are now left with 320 that had to upgrade and so that upgrade continued in Q1 I don't think there was a.
Bolus or a catch up I think it was more of a steady sort of course of upgrades as we continue to see and and we expect to continue to see that play forward over the quarters of this year and and going into future years. So that was definitely continued upgrading but there wasn't really a <unk>.
<unk> bolus or catch ups that happened.
And then I'll turn it over to you Sam Yes.
Yes with regards to your other two questions. There. So first let me talk about the linearity, which is I think what you're referring to with regards to the approximate $1 billion quarter. So.
First of all let's keep in mind for Q1, we did have a couple of I would say items that benefited Q1, one was with regards to the $35 million of instruments.
Purchases with regards to COVID-19 surveillance, we believe that was a one timer in terms of building the infrastructure. We don't expect material instrument placements going forward with regards to COVID-19 at least that's in our assumptions and our guidance assumptions.
One is we called it out which was a $20 million roughly consumable purchases, what we're calling catch up purchases in Q1.
Or the fact that there are customers, where maybe running a little bit lower on inventory and purchased by approximately $20 million higher than they would usually do not a material amount, but some some elements of that so that's what elevated Q1 and thats why Q2 is sequentially a step down and Thats why the year and the second half is also not higher.
Higher than the first half the other contributor to the second half not being higher than the first half as the UK biobank, which we expect to complete their sequencing in the second half so actually towards Q3 that will wrap up that project. So those are the contributions and Thats why I would say our linearity is flattish this year.
With regards to stock based compensation.
I called out at the beginning of the year, roughly just over $50 million year over year impact from stock based comp that is now higher actually from an expense standpoint, because also driven by our performance our stock base.
Accruals and stock based compensation accruals are actually higher so we are expecting higher stock based comp overall, so from a year over year standpoint, it's actually north of that $50 million. We haven't called out 2022, it's still early to talk about 2022 for stock based comp, but that that impact that negative impact, obviously moderates and 2022 versus 2021.
<unk>.
Yes, and thanks, Sam and maybe Derrick I'll give you some more color on <unk> because the reality is we're seeing a huge amount of momentum and the <unk> business. So we talked about the fact that in Q4, we saw our highest order quarter for <unk>. Since we first launched the product in Q1, and 2017, which is really impressive because we're entering the fifth year of Nova seek right. So.
So we had huge amount of momentum and Q4.
Third orders again second only to when we launched and then in Q1, we again had a huge amount of momentum just talked about the fact that it was our strongest placement order for first quarter of any year since we've launched and overseas. So youre absolutely right. We are seeing this huge amount of momentum now what's driving that I talked about the fact that it wasn't any kind of catch up in terms of upgrade.
And what's interesting and we called this out before and it's continued is that we're seeing a huge amount of strength from new to illumina, new to high throughput customers and Thats something we didn't expect when we launched no secret about half.
We're going to come from labs that were fundamentally enabled by the democratization of sequencing that seek represents and that continued the launch of version one dot five and so what we're hearing from the market is $1 five really catalyze the elasticity of demand and was the accelerant that drove those large amount of orders of <unk> and Q.
And for and the placements that we saw in Q1.
Okay.
And our final question comes from Patrick Donnelly with Citi.
Great. Thanks for taking my questions guys.
Maybe first one for you Sam just on the profitability side pretty nice profitability improvements and the last guidance three months ago.
Longer view can you just talk about kind of the recovery towards the old normal a year or two ago, given recent headwinds, obviously, COVID-19 and inventory write downs price adjustments and what the path looks like to get back to that kind of old normal Illumina and then as well just on the mid throughput instrument side can you just talk through the pull through there I guess, what's the right way to think about.
And next week, maybe it's this year going forward and any color you could give on that front would be helpful.
Yes sure Patrick Thanks for the question so with regards to profitability.
As you saw in terms of both our guidance and also our results in Q1.
Obviously, we've made a pretty significant strides here in terms of improving the profitability or building on the profitability of the business and that's that goes with our as we mentioned all along that as the volumes start to ramp and we saw significant strength in the business in terms of the core business and some contribution from COVID-19, we're seeing leverage improve we saw on Q1 that operating.
<unk> were north of 30%, we're expecting approximately 26, 5% for the year and we're expecting that to improve as we look forward over time, what are some of the things that.
Or maybe the contributors to that and the ingredients to that.
Obviously gross margins, which have improved since our last guidance and will continue to improve as we get past some of the COVID-19 aspects related to the higher freight expenses for instance, and obviously as volumes of ramp we're seeing improvements in gross margin.
We are making investments, though I want to mentioned and the business. Both in terms of manufacturing capacity and in terms of Opex investments.
The growth that we're seeing and the business ex far exceeds our expectations and we are incredibly encouraged by that and we have to catch up in terms of making some investments and the infrastructure to catch up to some of the demand that we're seeing both as I said in terms of manufacturing and in terms of Opex, which is why we are we're committed to that but as we as.
We look forward and we're also committed to improving leverage over time and getting back to historical levels and we're still on that path. We made good strides and just one quarter, but we're still on that path.
With regards to mid throughput.
Is it mid throughput our low throughput.
Was the question sorry mid throughput so.
With regards to mid throughput, we're not at the stage, yet where we can share what the expectations are for pull through in terms of <unk> 2000, <unk> 1000, suffice it to say and I know, you're asking more about consumables, but I can tell you. The the level that we're seeing in terms of placements on mid throughput for 2001 thousand as well.
And as $5 50, Dx and 550 is incredibly encouraging we're seeing record placements every quarter we're expecting.
Two to continue at that level going forward to improve on those levels going forward and so.
So when youre, having still when you're early stage of the launch of this instrument and you're seeing this growth, it's really hard now to put a level of.
Consumable pull through range at this stage. So we have to still give it a few quarters before we can do that.
And now I will hand, the call back over to Juliet Cunningham.
Alright, thanks, everyone for joining us we appreciate your interest and your time as a reminder, the replay of this call will be available on our website as soon as possible and this concludes our call. We look forward to updating you for our second fiscal quarter of 2021. Thank you.
This concludes today's conference call you may now disconnect.
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