Illumina, Inc. (ILMN) Q4 2018 Earnings Report, Transcript and Summary

Welcome to Illumina Fourth Quarter and Full Year 2018 Conference Call. My name is Atrian and I will be your operator for today's call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and answer session. [Operator Instructions] Please note this conference is being recorded. I will now turn the call over to Jacquie Ross. Jacquie Ross, you may begin.

Thank you, Atrian. Good afternoon, everyone, and welcome to our earnings call for the fourth quarter and full year 2018. During the call today, we will review the financial results released after the close of the market and offer commentary on our commercial activity, after which we will host a question-and-answer session. If you've not had a chance to review the earnings release, it can be found in the Investor Relations section of our website at illumina.com. Participating for Illumina today will be Francis deSouza, President and Chief Executive Officer; and Sam Samad, Chief Financial Officer. Francis will provide a brief update on the state of our business and Sam will review our financial results. This call is being recorded and the audio portion will be archived in the Investors 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 of 1995. Forward-looking statements are subject to risks and uncertainties. Actual events or results may differ materially from those projected or discussed. All forward-looking statements are based upon current 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 documents that Illumina files with the Securities and Exchange Commission including Illumina's most recent Forms 10-Q and 10-K. With that, I will now turn the call over to Francis.

Thank you, Jacquie. Good afternoon, everyone. Illumina ended 2018 on a high note. With record revenue of $867 million, up 11% from the fourth quarter of 2017. For 2018, Illumina reported of $3.3 billion, up 21% reflecting strong demand for sequencing and array systems, consumables and services. 2018 represented our 20th consecutive year of growth as genomics continues to enable an increasing number of research, translational and clinical applications across a broad range of customers. In the fourth quarter of 2018, sequencing consumable revenue of $466 million grew 8% compared to the fourth quarter of 2017. Normalizing for timing of stocking orders, sequencing consumable growth was 16% and oversea consumable pull through was roughly flat with the record level we reported in the third quarter. For the full year, 2018 sequencing consumable revenue grew 23% or more than $300 million to $1.8 billion. Growth was visible across our high throughput, mid throughput and low throughput categories. And Illumina continues to uniquely support the broadest range of customer application and throughput requirements. Within the high throughput family, HiSeq consumables continue their expected decline as customers' transition to NovaSeq. For the full year NovaSeq consumable revenue increased by a factor of more than five. For 2019, and as part of our strategy to support a multiyear transition from HiSeq, we are catalyzing the next wave of upgrades among our low throughput HiSeq customers. We are doing this in two ways. First, we are launching S Prime, our newest NovaSeq flow cell in February. And second, we've reduced the list price of the S1 and S2 flow cells by approximately 25% and 10% respectively. We believe it's important to help customers of all sizes unlock the power of the genome. And these changes will enable even greater flexibility allowing lower throughput customers to sequence on demand rather than waiting to batch on the larger flow cell. There have been no changes to the pricing of our S4 flow cell which continues to represent the majority of NovaSeq consumable revenue. It was another record quarter for our mid throughput sequencing consumable revenue. In large part due to growing adoption of oncology and NIPT applications. Once again NextSeq throughput system was at the high end of the $100,000 to $150,000 per year range. And the low throughput family delivered strong year-over-year growth with pull through for both MiSeq and MiniSeq within the respective ranges, and modest contribution from IC consumables. Moving to sequencing systems. Revenue of $159 million was up 21% year-over-year, representing a new quarterly record for Illumina. As we anticipated the fourth quarter was a strongest of the year with robust performance across the portfolio, including more than 100 NovaSeq shipments. Since launch, we had shipped approximately 600 NovaSeq by the end of 2018, up from the 285 installed at the end of 2017. And we continue to see strong demand from both existing and new customers. About 75% of the HiSeq installed based has yet to take even if its first NovaSeq. So we believe that we are in the very early stages of a conversion cycle that will span multiple years. In addition to the HiSeq upgrade cycle, we continue to see strong adoption from new to Illumina and desktop conversion customers. This group represents about 30% of orders since launch, expanding our footprint of high throughput users. In the fourth quarter, new customers included one lab that is using NovaSeq to build out a full service hematology pathology lab, bringing clinical trials to community hospitals. Other new customers who are bringing sequencing in house had initially plan on purchasing a NextSeq, but decided to purchase NovaSeq to prepare for higher output in the future. And one of our desktop customers is now using NovaSeq to support multi-omic translation research to drive precision medicine efforts. NextSeq placements were strong. And in fact NextSeq shipment revenue was the second highest in any quarter since launch. Once again, we saw good mix of existing and new to sequencing customers. With oncology and NIPT, the primary drivers of system acquisition. NextSeqDx was approved the PMDA in Japan, establishing Illumina's first IVD registered instrument in the country as we work to bring NGS applications into clinical care. Building on this approval, I am pleased to announce our partnership with Sysmex Corporation to commercialize the first NGS based oncology IVD panel in Japan. This test will be run the NextSeqDx system and be based on a PMDA approved 114 gene panel developed by Sysmex and the National Cancer Center, Japan. Within our low throughput system family both MiSeq and MinSeq shipments were up sequentially. And HiSeq ended the year with approximately 350 units shipped in his first two quarters of launch. About of half of these HiSeq shipments were to new Illumina customers. Collectively, these customers are utilizing the iSeq across a broad range of applications, including library quality control, metagenomics, targeted re-sequencing and infield disease and outbreak monitoring. For example, one customer is now using the iSeq for plasmid characterization and synthesis conformation in place of CE sequencing. Another customer is using the iSeq to sequence bacterial and viral genomes, as well as disease vectors from mosquitoes. Moving to sequencing services and other. Revenue of $104 million was up 20% from the same quarter a year ago, largely driven by GeL. Revenue was down sequentially primarily due to oncology collaborations payment in the third quarter that did not repeat in the fourth. In total, our sequencing revenue grew 12% in the fourth quarter of 2018. For the full year 2018, sequencing revenue grew 21% with solid growth across research, translational and clinical applications. Across these areas, we continue to be encouraged by a myriad of developments that we believe will enable genomic to continue to progression from research to the clinic and over time to standard of care. We continue to see a broad range of research efforts leveraging NGS. For example, just last week, Cancer Research, UK announced three new international initiatives to tackle some of the biggest research challenges in cancer. The microbiome, chronic inflammation and why cancer is doing some tissues but not others. These research programs were collectively awarded £60 million. One of the program is led by a team of the Dana-Farber Cancer Institute in Harvard Medical School that is exploring the relationship between the microbiome and colon cancer. Moving on, population genomics initiative has multiplied from a handful of failed lasers to dozens of efforts intended to improve human health. We are tracking around 50 global initiatives and expect several to begin ramping using Illumina technology in 2019. Despite GeL's completion of its 100,000 genomes and gradual transition into clinical practice, we expect population genomics to contribute to revenue growth this year. To give just a few examples, all of us will begin its journey to genotype and sequence one million participants. France will launch its pilot program for whole-genome and exome sequencing. As well as RNA-Seq to ultimately sequence 235,000 genomes a year. And Singapore will continue its - the first wave of the 10-K project, which is a three phase initiative to sequence 150,000 whole-genomes and genotype 1 million samples by 2028. We also continue to see excellent progress in the evolution of our oncology, rugged and NIPT markets. Next generation sequencing continues to redefine the way clinicians are approaching oncology. With the regulatory and reimbursement environment evolving rapidly to support to innovative approaches like comprehensive tumor profiling and liquid biopsy. Illumina is extremely proud to have been granted breakthrough device designation for the two site assay that is in development. We joined a short and prestigious list of leading innovators in oncology diagnostics and look forward to bringing our distributable 523 gene tumor profiling panel to market. The assay has been designed to detect known and emerging tumor biomarker including MSI, TMB and gene fusions in variation for targeted therapies. The hope is that this pan-cancer assay will deliver clinically actionable data to ensure patients are matched with the optimal therapeutic or clinical trial. While we continue to drive IVD development with partners the assay is based on the content of TSO500 which is now available as an RUO. We are pleased with the initial customer response from our early access sites around the world and we expect the vast majority to add the RUO assay to their lab offering. Other early adopters include China's ChosenMed which is working in support of the cancer genetic atlas of China. ChosenMed will use TSO500 as part of the $15 million grant to build the bank of 10,000 tumor samples. Moving to NIPT, coverage for average risk pregnancy continues to increase is not at 46% in the US, while higher risk pregnancy coverage is around 96%. More than 40% of all births in the US are to families eligible for Medicaid and with the addition of Pennsylvania and Ohio in January, the number of states covering average risk in NIPT increased to five. Looking abroad, France recently announces that they will reimburse at approximately EUR360 for trisomy 21 NIPT. Screen will be offered to women with contingent risk between 1 and 51 and 1 and 1,000 representing nearly 8% of pregnancies. Additionally, in the first half of 2019, we will ship VeriSeq NIPT version 2 which adds carrier type resolution across the genome, and increases the number of genetic diseases that can be detected. For rugged --, expanded coverage to whole-exome sequencing which brings total lives covered to 147 million. This coupled with the CMS' final CPT quote pricing of over $5,000 per genome for rugged patients enables more patients to access NGS helping to end the diagnostic oddities. And just few weeks ago, Priority Health, a health insurance plan was one million lives in Michigan issued the first positive coverage policy specifically for WGS for acutely old patients. While utilization today remains nascent, we believe the genomic testing is poised to become the standard of care for rugged patients. Illumina is working to help accelerate adoption. For example, recently partnering with Victorian Clinical Genetic Services and not for profit providing rugged service in Australia. Moving to arrays. Revenue up $132 million was up 7% from the same quarter in 2017. As we expected, revenue was down sequentially with lower system revenue following the record third quarter and a decrease in array services revenue. This sequential step down in array services is in line with the recent revenue trend from Q3 into Q4. That said, array growth is expected to slow in 2019. We have factored this into our guidance and expect revenue growth to reaccelerate as health based apps are more widely adopted. And as genealogy and other tests are introduced in new markets outside the US. Moving to regional results. Americas revenue grew 12% versus the prior year period and grew sequentially for the eight straight quarter with strong performance across the business. EMEA delivered record revenue quarter with 12% growth from the prior year period, including a strong contribution from Genomics England which announced last month that it sequenced the 100,000 whole genome. Other growth drivers included robust sequencing system placements notably NovaSeq shipments and sequencing consumables. Greater China grew 8% year-over-year with sequencing growth moderated by the effects of tariff related stocking in Q2 and Q3 of 2018. When adjusting for the tariff impact, the region grew 28% from the prior year period. Finally, APJ revenue of $70 million was up 9% from the fourth quarter of 2017. And up 21% sequentially. NIPT continues to make headway in the region as we signed up our first partner in Korea. Biogenome and look to expand further in 2019. With that I'll hand the call over to Sam for review our quarterly financials. Sam?

Thanks Francis. As discussed fourth quarter revenue grew 11% year-over-year to $867 million, driven by 12% growth in sequencing and 7% growth in micro arrays. Sequencing consumable revenue of $466 million was down slightly on a sequential basis. And up 8% from the same quarter a year ago. As discussed in previous quarter, we experienced some shifts on the timing of customer order associated with China tariff related stocking. In the fourth quarter, this included approximately $5 million of sequencing consumable revenue that was previously expected in the first quarter of 2019. Normalizing for the China related stocking in 2018, sequencing consumables revenue was up $19 million sequentially in Q4. And after also adjusting for sizable stocking order in the fourth quarter of 2017, sequencing consumable revenue grew 16% year-over-year. Array consumables in Q4 grew $13 million sequentially and were up $14 million or 17% versus Q4 of 2017. As Francis noted, sequencing service revenue of $104 million was down $5 million sequentially and up 20% year-over-year. Array services were down $9 million sequentially and down 22% year-over-year. Combined total consumable and service revenue represented 80% of total revenue in the fourth quarter of 2018 and 83% for the full year. This compares to 81% in the fourth quarter of 2017 and 81% for the full year 2017. Moving to systems. Sequencing systems grew $21 million sequentially and 21% versus the same period last year. Array systems were down $5 million sequentially and up $3 million versus Q4 of 2017. Instrument revenue therefore represented 20% of total revenue in the quarter and 17% for 2018. Moving to gross margin and operating expenses. I will highlight non-GAAP results that include stock based compensation. I encourage you to review the GAAP reconciliation of this non-GAAP measures which can be found in today's release and the supplementary data available on our website. Please note that all subsequent references to net income and earnings per share refer to the results attributable to Illumina shareholders. Non-GAAP gross margin of 69.1% decreased almost 200 basis points compared to the third quarter, primarily driven by product mix. Year-over-year fourth quarter non-GAAP gross margin decreased 180 basis points primarily due to product mix and lower margins in our services business. Non-GAAP operating expenses of $388 million were up $32 million from last quarter, largely reflecting the timing OpEx spend weighted towards the end of the year, specifically higher R&D and marketing spend. Non-GAAP operating margin was therefore 24.3% down from 29.4% last quarter, excluding Helix, operating margin was 27.1% compared to 32% last quarter. The non-GAAP tax rate of 16.3% was down from last quarter due to prior year tax return adjustments. For the fourth quarter of 2018, GAAP net income was $210 million, or $1.41 per diluted share and non-GAAP net income was $197 million, or $1.32 per diluted share. Cash flow from operations was $300 million. DSO at 54 days was higher compared to 46 days last quarter, driven by less favorable revenue linearity and geography. In addition to collection seasonality. Fourth quarter capital expenditures were $65 million and Q4 free cash flow was $235 million. This quarter we repurchased 98 million of stock leaving 49 million available for share repurchases under our current plan. We ended the year with approximately $3.5 billion in cash, cash equivalent and short term investments. As of January 1st, the 2019 and 2021 notes were no longer convertible. However, approximately one million shares remain in our Q4 diluted share count because our share price has exceeded the conversion price. As such our weighted average diluted share count for the quarter was 149 million. The 2019 notes will become convertible again on March 15, 2019 ahead of maturity three months later. We expect to repay the $633 million principal in cash and issue stock for the premium which is expected to approximate around $150 million depending on stock price. Moving to guidance, as we previously shared, we expect full year 2019 revenue to grow in the range of 13% to 14% or $3.77 billion to $3.8 billion, representing an increase of approximately $450 million at the midpoint. This guidance allows us for less favorable FX environment that reduced our full year growth expectations by approximately 1%. Regarding revenue linearity, we expect 2019 to be more back end loaded than it was in 2018. As a reference, revenue split in 2018 was 48% in the first half and 52% in the second half. We expect the proportion of revenue in the second half of 2019 to exceed 52%. We expect sequencing revenue to grow in the mid-teen and sequencing consumables to grow above 20%. And we expect the array revenue to grow in the low single digit range reflecting a cautious view on the consumer opportunity. In addition in 2019, we expect sequencing systems to grow in the mid single digit with NovaSeq shipments expected to be flat to slightly up compared to 2018, consistent with our expectation for steady, multiyear upgrade cycle. We expect full year non-GAAP gross margin to be down slightly from 2018 with a higher revenue contribution from lower margin population genomic initiatives and our oncology collaborations. Compared to 2018, we expect operating expenses to be down slightly on a percentage of revenue basis. We expect the 2018 tax rate to be approximately 17%, up from 2018 due to a onetime tax benefit related to Helix investment in 2018. Therefore, we expect GAAP earnings per share in the range of $6.07 to $6.17 and non-GAAP earnings per share in the range of $6.50 to $6.60. This includes approximately $0.20 of Helix dilution. For the first quarter of 2019, we expect total revenue to be down on a sequential basis due to lower sequencing system revenue which is consistent with the trend we've seen over the past four years. Following our record fourth quarter performance, we therefore expect sequencing system revenue to decline approximately $50 million compared to the fourth quarter of 2018. Offsetting this in part we expect sequencing consumables to be flat to slightly up sequentially from the $466 million reported in the fourth quarter of 2018. Sequencing services and others to be flat with growth offset by the expected decline in GeL revenue. And we expect micro arrays to grow sequentially in the mid to high single digits. We expect non-GAAP gross margin to be up slightly compared to 69.1% in the fourth quarter due to favorable mix partially offset by higher expected array service revenue. Non-GAAP operating expenses are expected to be flat on a percentage of revenue basis compared to the 44.8% reported in the fourth quarter of 2018. And we expect the first quarter tax rate to be meaningfully lower than our expected full year rate due to onetime benefit. Finally, we don't expect any meaningful change in share count this quarter compared to last quarter. Francis?

Thank you, Sam. 2018 was a spectacular for Illumina. We saw genomic inch closer to broad clinical adoption with an evolving regulatory environment and incremental reimbursement in NIPT, in rare and undiagnosed disease and in oncology. These developments can only further invigorate research and translation work in genomics as academics, institutions and even nations are around the world invests in the promise of precision medicine. As with many of the most exciting scientific discovery before us, the path is in perfectly linear. What is clear is that Illumina remains in the earliest innings and our journey to improve human health by unlocking the power of the human genome. A wave of population genomic initiatives will start to ramp this year. A growing number of cancer patients will gain access to genomic testing and oncology diagnostics, more pregnant mothers than ever before will be screened with the non-invasive prenatal test. And more children will have access to genomic test that could end unnecessary and costly diagnostic oddities. And above all, Illumina will continue to innovate and to push the limits of sequencing. We will continue to listen and partner with our customers to turn today's impossible into possible. With that, we will open the call for questions. Operator?

[Operator Instructions] And our first question comes from Tycho Peterson from JP Morgan. Your line is open.

Thanks. I want to start with the guidance for sequencing consumable growth, greater than 20% is certainly very impressing. I am just wondering, Francis, if you can provide a little bit color on how you are getting there? Is that really all driven by upside from NovaSeq or are you seeing any slower ramp down in HiSeq utilization and are you factoring in contributions from some of these expanded POPSEQ initiatives? And then just as a follow up I am wondering can you confirm whether you actually hit guidance for the NovaSeq placement for 2018? I think you talked about around 600 installed, but we had a few people asking about what you actually hit there, 320, 330, 350 guidance.

Sure. Let me start with the question around what will drive the consumable growth in 2019. We said the consumable growth to be driven by customers across the entire sequencing portfolio from MiSeq all the way through NovaSeq and across the range of applications. If we look into the rest of this year, we talked about the stock that we are seeing, a number of these population genomic initiatives ramp up over the course of the year. We talked about the fact that we saw record systems placements happened in the last quarter of last year. And so expect to see growth from the NextSeq step we placed. We expect to see growth from the record number of NovaSeq that we placed in Q4. And then we expect to see continued growth from the uptick in NIPT done primarily around that growth that we are seeing in Europe. So the growth in sequencing consumable is very broad based, across our portfolio, across the applications. In terms of NovaSeq placements, I said in the prepared remarks that we exited 2017 with approximately 285 NovaSeq placements in 2017 and we exited 2018 with about 600 NovaSeq. So the number we placed were short of the 330. And frankly that's driven by just timing in terms of customers and when they choose to take systems. As we take a step back and look at how the NovaSeq update cycle is evolving, it's really playing out generally as we had expected. We started last year with the S 4 building momentum just start to see some of our large NovaSeq customers begin the transition from HiSeq into NovaSeq. And then this year with the launch of S prime and the pricing adjustments on S 1 and S 2, we expect to start see some of the smaller high throughput lab begin their upgrade journey. So as we planned, this was a multiyear upgrade cycle for HiSeq customers and it's going to play out that way.

And our next question comes from Derik de Bruin from the Bank of America. Your line is open.

Hello, good afternoon. A couple of questions. So the first one on the array guide. Can you sort of walk through what you sort of seeing in the DTC genomics market? Is the question of basically people buying kits, not turning them back, or it's like all the people that sort of interested in ancestry testing and heritage testing basically done with that. And now you are looking for new expansion in that market. And also can you sort of do a comment on where we are with the PacBio transaction? And just update on regulatory there. Are you getting any incremental - you got request information. I am just really curious, can you update us on that process. Thanks.

Sure. On the array side, as you know we had very spectacular growth in 2017 where we genotype about 7 million consumers and then again in 2018 where we genotype about 12 million consumers. So in working with our direct-to-consumer customers and looking at 2018, they felt that the right answer was to think about growth moderating given the size of the numbers they've seen over the last couple of years. And so our forecast is based on working closely with them. What we believe jointly them we will see that growth reaccelerate as we start to see this market show up as a health market as well as the genealogy market. And then for us, we will see another vector of growth kick-in as we start to see the customers outside the US ramp up. So we had lots of interest from DTC customers especially in Asia. And so we started to engage with those customers. And we expect those customers to start to ramp up playing out starting this year and then going into the future. So we expect to see reacceleration of that market. But for this year we model it down into the single digit. And on the PacBio side, so where we are is we got the second request from the FTC as we expected. And so we are in the information gathering phase. And so the process in general is going as we expected and we still expected to be a midyear close.

And our next question comes from Ross Muken from Evercore ISI. Your line is now open.

Good afternoon, guys and congrats. So maybe just talking about going back to Tycho's point of both NovaSeq and just sort of kind of the cadence of consumable growth. Obviously, with all of the stocking orders, it sort of little bit hard to tease out some of the underlying. If you look at sort of where utilization is gone and as you can see sort of the projects starts and then project stops. I mean clearly the guides for the year on sequencing consumables are strong. I guess I am just trying to get sense in terms of the back half weighting. How much of that is sort of the dynamic we saw this year where you had instruments that really picked up in the back half? But it doesn't necessarily seem like that versus maybe project starting over the balance of the year and then cycling through some pieces that are coming off and so that all naturally pull up kind of the back half growth. I am just trying to get sort of little bit color on what's drive the cadence?

Sure. So if you look at the cadence in our business in any year, our business tends to back half loaded. So we talked about the fact. Last year we saw about 52% of our business done in the back half of the year. And that seasonality is driven primarily because you have two ends of year effects playing out. You have the end of the US federal; you have the government year that is in Q3. And then you have the fiscal calendar year obviously that closer to the end of the year. And so that's always driven for us not only strong system orders but also strong consumables orders. This year we expected to a little bit more pronounce than usual because as you pointed out we will see all the usual effects, but then we start to see things like some of the population sequencing efforts that will be ramping up over the course of the year. And really start to hit their stride over the back half of the year. As an example, if you look at GeL, they just wrapped their 100,000 genome in Q4. And they are in the transition phase to really moving into an NHS driven sequencing service. And that will take some time. And so that will really start to play out more in the back half of the year than in the first half of the year. Similarly, if you start to look at all of us in the US or France, you will see that same dynamic play out. And so you take our normal seasonality and then you layer in this effect and you will see this year is more back end loaded than the usual.

And our next question comes from Doug Schenkel from Cowen & Company. Your line is open.

Hey, good afternoon. I guess a couple quick ones. I am not sure if this relates to Helix or not but the redeemable non-control interest balance on your balance sheet dropped from $218 million in Q3 to $61 million in Q4. I am just wondering what drove that? And then going back to the placement number for the year for NovaSeq. You now acknowledge that you missed the low end of your target for 330 placements in the year. Yet you said you shipped over 100 in the quarter. So I am just wondering first off what exactly were you thinking you were going to do in the quarter because 100 is pretty good? A lot more than team on the surface pretty aggressive. So I am just wondering if there is some disconnect between timing of shipments and when revenue was wracked, if you just really were that aggressive on your quarterly expectation. Thank you.

So with regard to the redeemable, that's related to the valuation that we perform usually on annual basis regarding Helix. So that's a result of that annual valuation that we do. And Francis if you add the -

Yes. So if you look at the NovaSeq number, we did come short of the 330 as I said earlier. And what drove our thinking is always the customers are working, we are working within pipeline. And what we are expecting to close over the course of a quarter and then over the course of the year. As I said, we still have three quarters of our HiSeq customers yet to purchase their first NovaSeq. So you can imagine we are working with a lot of customers in the pipeline. And in any given time, we are working with them to estimate when they will take their NovaSeq. And the way it played out is in terms of timing, fewer took their NovaSeq in Q4 than we were anticipating, but that's just the timing issue. We are continuing to work with those customers. And we expect those customers to come in the coming quarters.

And our next question comes from Puneet Souda from Leerink. Your line is open.

Thanks for the question. Francis if I could ask about the broader 600 plus customers, you have S Prime on the market. You are discounting S1 and S2. I was hoping to get a sense from you in terms of how do you expect that market to uptake NovaSeq there? I mean on one hand you have a share number of this lab but on the other hand they have little bit less capital budget flexibility compared to the larger customers. You have given their grand cycle and projects and so. So I just wanted to get your view of uptake overall there and then just on population sequencing, what needs to happen in order to bring the 5 million plus or sort of 6 million genomes closer to the sequencer. Thank you.

Sure, Puneet. So let me jump in on the NovaSeq upgrade cycle first. So as you pointed out, it's the smaller lab that typically has less flexibility around and quick access to capital. And so as we were planning multiyear NovaSeq upgrade cycle, our size it was ready to target the larger labs first. So when what you saw is come out of the S4 a while ago and really around 2018 we engaged with the lot of larger customers. The lot of the larger high throughput customers. That have more ready access to capital and because of the high volume of sequencing that they do so we can have a shorter payback time. And so that was the story for us as of 2018. Yes, we did sell NovaSeq across the board and we did sell NovaSeq to new to sequencing customers too but really our focus was really taking the S4. And you can see the remarks I made around S4 being the majority of the NovaSeq flow cell revenue in 2018. In 2019, we now had time for the smaller lab to think about that NovaSeq upgrade. And to either write the grant that they needed to or get access to budget they needed to. And so this is the year that we want to activate that part of the HiSeq user base. And to do that we needed some very specific offerings. So for example, there are some customers, some HiSeq 2,500 customers that really use the rapid run mode a lot. And so what they wanted was a flow cell that gave them lower run cost, fast run time and be able to run fewer samples and therefore need less data output. And that's exactly what the S Prime is targeted at now. It's coming out this quarter and it's intended to catalyze that customer that part of the customer base, right, and the HiSeq 2,500 customers that love rapid run. And there are other HiSeq 2,500 customers at 3,000 and 4,000 that wanted a flow cell that can costing in the 12 to 18 months period. And those are not necessarily very small. They could be lab that do $0.5 million of business with us a year in consumable revenue. And for them the new pricing around S1 and S2 is a really good fit. And so this is the year we want to catalyze the smaller HiSeq customers and that the arsenal we have. The S Prime, S1 and S2 at their new pricing. And then the second question you had was around population sequencing. And your question was around, so what is it take to catalyze those opportunity? And there are a number of things that it takes. We did a few years ago actually starting with GeL was we created at Illumina a team that's dedicated to population sequencing effort. So that's the team that coordinates across Illumina but represents the point of engagement to those 50 plus population sequencing opportunities that I talked about. And depending on the initiative there are different roles that we play. We are deeply connected in some countries with the scientific and medical community to explain the value of a population sequencing effort, and help the local medical and scientific community articulate the population benefits to the citizens. In some cases, we put together and are able to share reference architecture around how you actually set a population sequencing effort. In another cases, we are able to convene groups from nations around the world with representatives from Genomics England for example where they can share their experiences around what they learned even in things like how you set up the cohorts for sequencing or how you collect samples. And so those are the roles that we play and different initiatives around the world need different catalysts. And that's what we set up.

And our next question comes from Dan Arias from Citigroup. Your line is open.

Good afternoon, guys, thanks. Francis just going back to the sequencing consumables outlook, is there any way you can add anything to the way in which you are thinking about the pace of Xs and HiSeq coming off? If I look at my model, the decommission number for several other quarters in 2018 was a lot lower than what we have. But it looks like it stepped in 4Q. So just wondering if you can help at all with the assumption there? An then maybe really I am curious if the beginning of the year is sort of brought any new visibility into some of the big projects that very obviously stayed on the Xs in 2018?

Yes. So we think about what we are looking for in 2019. I talked about the fact that in 2018 we were starting to catalyze the high throughput genome center. And in nearly all cases what they did was they would ramp up NovaSeq but keep their existing either X going and they were validating their work flows in NovaSeq. And so while they were using their NovaSeq and you see that in the high utilization numbers. A lot of them were maintaining parallel fleet. So one of the things that we are looking for in 2019 is to see that work flow, more of those work flows move off the Xs and HiSeq on to the NovaSeq. And so that's the dynamic in the very large genome centers in the high throughput that you expect to see play out this year. The other dynamics I said that we are looking for this year is with that trying word if you like S Prime, S1 and S2 to really catalyze the smaller genome centers. And so that's going to be another driver that comes on line this year that should generate additional demand and activate another part of the HiSeq customer base.

And if I can add one thing, Dan, as well. Decommission in the past that as we've talked about had not always been tied to necessarily the replacement cycle. And how customers are actually replacing HiSeq for NovaSeq. We've had some choppiness over the course of 2018 with regards to decommission. You are right. Q4 was a bit higher in terms of - was a higher quarter in terms of decommission. And the other thing I would remind as you well is that 75% of our HiSeq customers still have yet to take their first NovaSeq. So we do expect this upgrade cycle to be still in its early stages. And we will play out over the next quite a few quarters.

Yes. And then if could just add color on, so what would that means in terms of consumable pull through. And so what we are seeing is that customers that have both that are in that mix mode phase where they have either Xs and HiSeq with NovaSeq, they spend more in terms of consumable dollars at Illumina than the one that just have the Xs or the HiSeq. And so we are seeing the entry of NovaSeq into an environment catalyze additional sequencing activity which is obviously good news.

And our next question comes from Bill Quirk from Piper Jaffray. Your line is open.

Great, thanks, good afternoon, everyone. Francis, how are you thinking broadly about the oncology market here in 2019? I guess to get little specific, I believe a number of your customers should be getting very close to some FDA approval which should trigger some CMS reimbursement. So I'd love your color there and then secondly, if I read the press release correctly have you actually filed for approval for the TruSight Oncology array, excuse me, panel.

Yes. So, we've already engaged with the FDA and we recently announced that we've gotten from the FDA breakthrough device designation for the TruSight assay. And so what that means is we will get from the FDA a higher priority to get that assay through the process to get IVD clearance. What that means specifically is that they give you higher priority in queue. They dedicate a team to work with you for the application; they review your application in advance to make sure that they are comfortable with the design, the data requirement. And that as you are going through the clearance process that they will add additional resources if they need to, to get the application through the process in a speedy way. In addition, while PMA don't always require PIA inspection, this one will not because it's a breakthrough designated product. And so it's real positive to be recognized by the FDA for this designation. So we are in process with the FDA. We will be submitting with their help to get designation. As you pointed out, there is a lot happening in oncology. And so the story of oncology and NGS over the few years was primarily a research and translational story. And now we are seeing a lot more of clinical story showed up, partially because we are seeing just more therapies on the market that require a companion NGS test. And the approval by the FDA last year of larotrectinib as the first precision oncology therapy that is solely driven by the presence of genomic biomarker is a really big step forward. So we are seeing more therapies whether it's solely driven by genomic biomarker or like Keytruda where you going to have expansion of indication based on genomic biomarkers. So you've seen more therapy that required NGS testing. You are seeing more favorable reimbursement environment as you talked about. We had the national coverage decision earlier in the year. We've seen more private players and commercial players reimburse for NGS testing. And so we are seeing a lot of momentum buildup in terms of having oncology drive NGS testing in the clinic.

And our next question comes from Jack Meehan from Barclays. Your line is open.

Thanks, good afternoon. I was hoping you could provide some additional context into the difference we are seeing on the array consumable and service line in the quarter. You obviously have some exposure to consumer on both lines. So what was driving the underlying acceleration on the consumable side of things? And can you breakout between the two, the expectation for 2019?

Yes. So in general maybe starting with 2019, as we said, we obviously haven't talked about specific customers, well, we talked about the fact that we've taken a more cautious view on the array growth and specifically the DTC growth in 2019. As Francis mentioned earlier, that's just result of our conversation, our work with our customers and the DTC space and really looking at their forecast. With regards to 2018 and specifically regarding your question in Q4, we've talked about - I mean there are some dynamics within the quarter that we talked about before. With regards to one customer for instance going back to Q3, we had some ramp up related to instrument, some scan that they purchased from us ahead of the holiday season and then in Q4 we had some orders regarding consumables that helped the quarter. And with regard to array services in Q4, there was an expected drop with regard to the timing of array services and the samples and that we process. So these can be choppy. These can be seasonal as we talked about in the past. And we do expect in the future that same seasonality maintain.

And our next question comes from Dan Leonard from Deutsche Bank. Your line is open.

Thank you. So first off for Sam, just wanted to check my math. If I add up the different pieces of your Q1 outlook, I am coming up with something in the zip code of $820 million in revenue. So, first, is that right? And then secondly, you mentioned that the linearity in the quarter was more back end loaded? Is there anything that drove that you could identify the drove difference in linearity in the quarter? Thank you.

So let me start with Q1, Dan. And I'll reiterate some of the comments that I made on the call. Essentially where you should look at instruments being down roughly $50 million from Q4 to Q1. With regards to sequencing consumable, we expect them to be flat to slightly increasing. And keep in mind that we did mention that were was $5 million stocking order in Q4 that was accelerated from Q1, 2019 as well. And then we talked about also arrays slightly increasing as well in the high single digit range from Q4 to Q1. So you are little bit light on the $820 that you mentioned but obviously you can put the pieces together to come up with what Q1 looks like. And the new talked about sequencing services being roughly flat as well from Q4 to Q1. With regards to, I think you were referring to Q4 linearity when you said in the prior quarter. So really there was nothing specific about that. Usually, we do have in Q4 linearity is more tilted towards the back end of the quarter as we approach the end of the year. And that's typical in prior quarters that we've had. So I wouldn't point to anything that was unusual that that.

And our next question comes from Mark Massaro from Canaccord. Your line is open.

Hey, thanks for the question. Francis, I want to ask about NIPT. First, do you expect any change from ACOG as it relates to average risk NIPT? And then secondly, has your guidance for 2019 included any change? And then finally, can you give us an update on when the Harvard Pilgrim study will read out and when you might be able to drive or prove utility in that setting?

Sure. So let me start with ACOG. So, as you know, ACOG withdrew its practice mode in 640 which question the utility of averages NIPT. And I think as an industry everybody expect that a pre-cursor to them putting in a more favorable guideline in place. It's hard to predict when that happens. We haven't built in an expectation around that change into our plan. And this time lag between when that guideline changes and when you actually start to see your revenue flowing. And so because of that we frankly haven't built in big expectation based on any ACOG changing. In terms of Harvard Pilgrim study, we should start to see data from that coming over the back half of this year. And so in that timeframe you should start to see some results come out. And then I think there was a question from Mark around the whether our guidance anticipates average risk. So that wasn't - and it doesn't, yes.

And our next question comes from Daniel Brennan from UBS. Your line is open.

Great, thanks for taking the questions. So, Francis, with the X and higher throughput HiSeq customers in the majority of which who haven't adopted NovaSeq kit, is there anything different in 2019? Whether be pricing or marketing or strategies to kind of support your 2019 kind of placement outlook? I know obviously on the low end, you are making some price adjustments in order to stimulate demand, but I am wondering more on the high end.

Yes. In the high end we are not changing the prices of S4. Obviously, there is lots of work being done by our commercial organization primarily working with our customers to plan the rollout, help them with any validation that they need. And that's the work. A lot of them as you can imagine have either bought NovaSeq, so they are very largest customers and have NovaSeq and it's really about doing the entire fleet cut over. So they will do it at various spaces at any and the customers you are talking about. And so beyond the usual commercial engagement with those customers and as you can imagine we are close to all the very large high throughput services priors that is out there. Beyond that we are doing nothing exceptional.

And our next question comes from Sung Ji Nam from BTIG. Your line is open.

Hi, thanks for taking the question. I was wondering Francis or Sam, if you might be able to comment on for micro raise, what the growth rate was for the non-consumable genomic business in 2018. And then what's embedded in our outlook for 2019?

Yes. We haven't specifically disclosed that Sung Ji but usually that is a more mature business that grows into low to mid single digit. And that's more predictable business unlike DTC where we've seen significant growth over the last two years. So I would say that's a good proxy as well for 2019. Although we haven't disclosed that specifically.

And our next question comes from Catherine Schulte from Baird. Your line is open.

Hey, guys. Thanks for the question. For the customer mix outlook for NovaSeq in 2019. Is this now much more of a HiSeq upgrade story from here or do you think you'll still get 25% to 30% of orders coming from bench top or new to sequencing customers? And then on the flow cell side you talked about S4 being the majority of NovaSeq consumables. How much mix shift are you expecting away from that in 2019 as you catalyze the lower throughput users?

Sure. What's - what the really exciting things about the NovaSeq story so far has been the 30% of NovaSeq orders that have come from new to high throughput customers. And that had surprised us on the upside and it's been incredibly resilient. If you look at our results now over almost two years now of taking orders for NovaSeq and shipping NovaSeq, it stayed around that number and so we expect that to continue in fact, if anything you can construct a story like having S Prime and having the new pricing in S1 and S2 will make NovaSeq even more accessible to customers who are new to high throughput. So I believe that number has proven to be remarkably resilient and I expect it to continue to be a strong contributor in terms of NovaSeq orders going forward. In terms of mix going forward, the S4 customers represent some of our biggest sequencing customers. So I expect the S4 to continue to grow as we go into 2019 and beyond. But you should expect to see a bigger contribution obviously from S1 and S2 but then also from S Prime which is going to be new to the market coming out in Q1 and build its revenue base over the year.

And our last question comes from Patrick Donnelly from Goldman Sachs. Your line is open.

Great. Thanks. Maybe just building on that question, given the focus on the smaller labs with S Prime, price reduction on S1 and S2 further incentivizing HiSeq customers to convert over to NovaSeq. Is there potential for utilization or pull through of NovaSeq to mix down some of those lower volume users come online? I'm just trying to get a better feel for how the moving parts could impact utilization going forward on Nova?

Yes. So first I'll say that look we're going to keep our focus on the very large labs and we have teams that are dedicated just to those labs. So we're adding a focus now and we're looking to activate the smaller labs deliberately in 2019, that's an incremental focus on top of the focus that we have on the very largest lab. So it's an end. The - there will be likely a change in the overall pull through rate for NovaSeq as these new flow cells come on the market and build up their revenue base. At this point frankly, it's too early to call what that impact will be. And that's partially why we haven't given you the pull through range yet on NovaSeq. And so we want to see those flow cells in the market, we want to see utilization sort of normalize on them before we're able to sort of call an overall blended pull through rate on the NovaSeqs. And I know that a lot of you on the call are waiting for that and when we have that, we will certainly bring it out. But it's too early to call what the impact will be as these closeouts come onto the market.

And this concludes our question-and-answer session. I'll now turn the call back over to Jacquie Ross for final remarks.

Thank you. As a reminder a replay of this call will be available at the webcast in the Investor section of our website, as well as through the dial-in instructions contained in today's earnings release. Thank you for joining us today. This concludes our call and we look forward to our next update following the close of the first fiscal quarter.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. And you may now disconnect.