Rebecca Chambers - VP, IR Jay Flatley - CEO Marc Stapley - SVP & CFO Francis deSouza - President.

Tycho Peterson - JPMorgan Douglas Schenkel - Cowen and Company, LLC Derik De Bruin - Bank of America Merrill Lynch John Groberg - UBS Amanda Murphy - William Blair & Company LLC Daniel Leonard - Leerink Ross Muken - Evercore ISI William Quirk - Piper Jaffray Isaac Ro - Goldman Sachs Group Inc.

Steve Beuchaw - Morgan Stanley Jack Meehan - Barclays Zarak Khurshid - Wedbush Securities Jeffrey Elliott - Robert W. Baird & Company Inc. Miroslava Minkova - Stifel.

Good day, ladies and gentlemen, and welcome to the First Quarter 2015 Illumina Inc. Earnings Conference Call. My name is Jasmine and I’ll be your operator for today. At this time, all participants are in listen-only mode. [Operator Instructions] As a reminder, this call is being recorded for replay purposes.

And I would now like to turn the conference over to your host for today, Ms. Rebecca Chambers, Vice President of Investor Relations. Please proceed..

Thank you, Jasmine. Good afternoon everyone and welcome to our earnings call for the first quarter of fiscal year 2015. 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 have not had a chance to review the earnings release, it can be found in the Investor Relations section of our website at illumina.com. Participating for Illumina today will be Jay Flatley, Chief Executive Officer; Marc Stapley, Senior Vice President and Chief Financial Officer; and Francis deSouza, President.

Jay will provide a brief update on the state of our business and Marc will review our first quarter financial results, as well as provide updated guidance for 2015. This call is being recorded and the audio portion will be archived in the Investor section of our website.

It is our intent that all forward-looking statements regarding expected 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 information available and Illumina assumes no obligation to update these statements.

To better understand the risks and uncertainties that could cause actual results to differ; we refer you to the documents that Illumina files with the Securities and Exchange Commission, including Illumina’s most recent Forms 10-Q and 10-K.

Before I turn the call over to Jay, I would like to let you know that we will participate in the Bank of America Health Care Conference in Los Vegas the week of May 11 as well as the Bank of America Global Technology Conference in San Francisco on June 3.

We plan to also participate in the Goldman Sachs Annual Health Care Conference the week of June 8 in Los Angeles. For those of you unable to attend, we encourage you to listen to the webcast presentations which will be available through the Investors Relations sections of our website. With that, I will now turn the call over to Jay..

Thanks, Rebecca and good afternoon, everyone. I hope that you all picked up that Rebecca was recently promoted to Vice President of Investor Relations, so congratulations to Rebecca on a well deserved promotion.

I’m very pleased to report a strong start to 2015 as we had another quarter of record results and our 14th quarter of sequential revenue growth. Revenue was $539 million an increase of 28% year-over-year despite major currency headwinds that Marc will discuss shortly.

The leverage we delivered this quarter was even more impressive as non-GAAP earnings per share grew 72% compared to the first quarter of 2014. The contributors to these robust result included increased demand from clinical customers, solid operational execution and a greater than anticipated tax benefit.

First quarter total sequencing revenue grew 40% year-over-year driven by record consumables and NIPT samples as well as increased demand for instruments. Sequencing instrument revenue grew 32% compared to the first quarter of 2014, largely due to incremental demand for the HiSeq X and NextSeq 500.

Shipments of HiSeq X instruments during the quarter were strong due to deliveries to an existing customer expanding capacity and new orders which included a European personalized cancer center establishing a whole-genome sequencing facility.

This center is focused on tumor profiling to direct treatment, clinical trial enrollment and discovery of new biomarkers with a goal to implement tumor sequencing as a standard of care within their country delivering on the performance of the precision medicine.

Our HiSeq X order funnel remains healthy and we expect that to be the case throughout this year. In Q1, we shipped a record numbers of Xs normalizing our backlog and therefore expect noticeably fewer shipments in Q2. HiSeq X orders in shipments are expected to be lumpy due to the timing of customer funding and operational readiness.

We’re in numerous conversations with customers who are currently assessing whether the X Five or X Ten configuration is best suited for their needs. As expected customers considering the X Five are focused on the ability to gain access to lower price whole-genome sequencing with a lower overall capital investment.

We continue to believe that the addition to the X Five to the portfolio will grow the overall market more quickly and accelerate the evolution to sequencing whole-genomes.

In January, we augmented the HiSeq family of instruments with the addition of HiSeq 3000 and 4000 which open our pattern flow cell technology to all applications delivering higher throughput and lower cost per base in the 2500.

Customer feedback on these new instruments has further fueled our excitement around this expanded portfolio which we believe offers tremendous flexibility to address various budgets and scientific priorities. Momentum is growing for these new models as customers determine which HiSeq is optimally suited for their workflow needs.

Despite the short term challenges of customers reassessing their pending purchases we received total non-X HiSeq orders in-line with Q1 of last year. We expect the growing fraction orders to migrate to the newer models over the next few quarters.

Portion of this expected demand will come from the replacement cycle of the older generation HiSeq that cannot run the 1T kits. As an illustration of this we received an order for a number of HiSeq 4000/DGI with the largest fleet of older generation instruments as they’re assessing the new platform for use in their services lab.

Additionally the majority of 3000, 4000 purchases in the quarter came from current customers who needed to add capacity. Despite the strong interest seen in the 3000, 4000 during the first quarter demand for the 2500 exceeded our expectations.

For clinical customers the cost and effort to validate a new instrument as well as the unique attribute to the 2500 such as rapid run mode and longer read aligns will keep them committed to the 2500 in the near term.

Moving now to NextSeq, Q1 orders and shipments both experienced strong growth year-over-year, the platform has also reached an important milestone with the introduction of the v2 chemistry which improves error rates to the quality level of our more mature platforms.

Despite shipments beginning halfway through March v2 reagents accounted for close to a third of the orders. NextSeq demand from clinical and translation customers accounted for about half of all orders in the quarter while new to sequencing customers accounted for more than 40% of the instrument sales.

On the regulatory front we expect to register with the FDA and place the IVD CE mark on a DX version of the NextSeq 550 later this year or early in 2016. With each of reagents now shipping as well as the availability of the NextSeq 550 we believe NextSeq will play an increasingly important role in both research and clinical markets.

MiSeq continues to benefit from being the first FDA cleared next generation sequencer as we again saw heightened interest in the MiSeqDx as orders were near record levels in the first quarter. Customer segmentation was similar to previous quarters with approximately 60% of boxes sold to New to Illumina sequencing users.

As we discussed previously v3 chemistry became available on the MiSeqDx in RUO mode in Q1 which we expect to continue to support demand.

Additionally at AACR this weekend we highlighted a soon to be launched enhancement to our TruSeq custom Amplicon kit that lowers the sample input required to 10 nanograms and in some cases to 1 nanogram improving our competitive in the Amplicon market. Additionally we’ve optimized the protocol to reduce steps and the turnaround time.

Further enhancements including easier to use in more robust version of designed studio our custom Amplicon tool as well as improved software analysis and reporting. In Q1 we made several product launches that support our strategy to deliver complete sample to answer workflows.

First we launched our newer prep system at AGBT and we now have 11 sites providing feedback on the instruments performance and reliability. While the system has met expectations we’ve also identified continuing areas for improvement around user interaction and training.

As a result we’re ramping shipments in a controlled way to maximize customer satisfaction. The sample to answer strategy also extends to our TruSight HOA and forensic products both of which began shipping in Q1.

During the first quarter our MiSeq HOA installed base increased to 125 units and the number of opportunities in our pipeline continues to grow. Customers are in various stages of evaluating and validating the TruSight HOA kit and we hope to have adoption metrics to share with you on this product in the coming quarters.

Hence first quarter since launch the MiSeq FGX demand has exceeded our projections as we placed instruments at state and federal law enforcement agencies, public corporations and universities.

Customers intend to use the system for targeted genotyping of criminal database samples, evidence samples from violent and non-violent crimes, missing person’s cases and mass disasters and for generating investigative leads and cases have gone cold.

We’re very excited about the long term forensics opportunity and believe our progress in this market will surpass our initial expectations. Moving now to micro arrays, this quarter total micro array revenue declined approximately an 11% year-over-year.

However, the year ago quarter included a large genotyping services order that we worked on for over a year and completed in Q1 ’14. Net of this revenue the array business was down approximately 3%. Strength in genotyping services associated with a growing direct to consumer customer was offset by a decline in array instruments.

Interest [indiscernible] was strong in Q1 bolstered in part by the new product introductions including [MazeLD] Plus and our MEGA arrays. The introduction of a MEGA array which provides an improved understanding of diseases across diverse global populations has enhanced our position in the biobanking market.

Since our last update we closed three biobanking deals and are in conversations for additional orders which could exceed a million samples in aggregate. This increased competitive win rate is partially due to new product introductions as well as to our ability to offer genotyping and sequencing solutions.

Our informatics efforts continue to gain traction as we enhance the base space ecosystem. A 11 new or upgraded apps have been added since the beginning of the year resulting in a nearly tenfold increase in the number of apps launched in the first quarter compared to last year.

Additionally we plan to include the ability to store array data generated on the NextSeq 550 by year end. Our bioinformatics focus will more rapidly open new markets by removing the traditional challenges in storing and analyzing and large datasets necessary to understand the genetic underpinning of human disease.

Overall our market opportunities continue to broaden due to accelerated demand from clinical and translational customers. As an example, first quarter shipments to these accounts grew approximately 60% year-over-year while other segments grew in the mid teens. This led to clinical customers accounting for close to 35% of total shipments.

Additionally close to half of instruments shipped in Q1 went to clinical and translational laboratories. This growing demand is primarily a result of market development activities in oncology and reproductive health.

In fact, research and clinical sales to the oncology market the HiSeq X were approximately a $100 million in the first quarter growing 37% year-over-year. We remain focused on delivering sample to answer solutions to address more than $12 billion oncology market opportunity and continue to make progress towards this goal.

Product development activities for both versions of our onco panel remain on track. During the quarter we announced that Merck Serono has joined the onco panel program adding to the partnerships we previously announced. Our liquid biopsy project continues to progress well and we remain on track to launch a targeted RUO kit by year end.

Moving to reproductive and genetic health, the NIPT market continues to develop on a global scale. During the first quarter we signed four new technology transfer agreements bringing the total to 13 European labs offering NIPT based on Illumina’s protocols and software.

Additionally we performed close to 50,000 tests during the quarter an increase of 13% sequentially. Globally we have approximately 50 labs sending samples Redwood City facility for aneuploidy analysis. Our regulatory strategy also progressed during the quarter and we remain on track to launch our VeriSeq NIPT assay with CE IVD marking over the summer.

The unique attribute to this product which include one day turnaround a lower assay cost and the ability to detect fetal fraction will enable broader adaption of prenatal testing in global markets.

We achieved a key milestone in China with the recent Chinese FDA clearance of the NextSeq CN500 with an NIPT assay which was specifically designed by Berry Genomics and Illumina for the Chinese market.

With the availability of this product for sale by jointly approved distributors, we are now able to place NextSeq in hospitals and labs across China to further drive adaption of non-invasive prenatal screening. In summary, Q1 was another remarkable quarter for Illumina.

Demand for our industry leading products remain strong and we exited the quarter with good momentum across our diverse customer base. Looking ahead we believe on relentless focus on innovation and market developments are key to addressing our large and untapped opportunities as we unlock the power of genome.

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

Thanks Jay. As Jay mentioned Q1 marked a strong start to the year with revenue growing 28% year-over-year to approximately $539 million. Foreign exchange rates in many of the currencies in which we book contracts continued to decline, on a constant currency basis revenue grew 33% versus Q1 2014.

This robust performance can be attributed once again to record sequencing consumables and strengthen instrument shipments in particular HiSeq X Ten and NextSeq both of which were introduced in Q1 of last year.

Shipments in the Americas grew 32% year-over-year and European shipments increased 30% over the same period in spite of the FX headwinds related to the Euro and British Pound.

APAC shipments grew at 10% year-over-year was muted due primarily to weakness in Japan as allocations of funds remained constrained in the region and the Yen decline against the U.S. dollar. We expect weakness in Japan to remain as budget delays are anticipated to continue through Q4.

This decline in Japan was partially offset by strength in China which more than doubled compared to the prior year due primarily to the positive impact of HiSeq X. Instrument revenue grew 26% year-over-year to reach $146 million in the first quarter.

This increase was primarily driven by demand for NextSeq and HiSeq X Ten which was partially offset by decline in array instrument sales year-over-year.

Overall consumable revenue in the quarter was $308 million, an increase of 27% compared to the first quarter of 2014 as higher demand for sequencing consumables was partially offset by a small decline in arrays. Consumable revenue represented 57% of total revenue in-line with Q4 but down from 58% in the prior year period.

Sequencing consumable revenue grew 39% over Q1 of last year to reach a record $240 million driven by our growing installed base of instruments. Sample prep shipments increased more than 25% year-over-year due to strong demand for Nextera, TruSeq DNA and TruSight targeted panel solutions.

MiSeq utilization was near the high end of our projected range of 40K to 45K and flat sequentially. We continue to see an increase in the number of accounts running at full production levels. Nearly half of these accounts are clinical customers as MiSeq is now considered the gold standard for oncology and HLA lab developed tests.

HiSeq utilization for instrument excluding HiSeq X was slightly higher sequentially and in our projected range of 300K and 350K. Consumable pull-through for NextSeq and HiSeq X was slightly above the guidance range as we provided of 80K to 100K and 600K to 650K per year respectively.

While we are pleased with this result we believe the heightened levels continue to be a function of the calculation method which tends to overstate the metric in the first year of our product ramp. As a result we are not updating our expectations on either instrument.

Services and other revenue which include genotyping and sequencing services, instrument maintenance contracts and revenue from oncology agreements grew 36% versus Q1 2014 to $79 million.

This improvement was driven by growth in NIPT services which benefited from higher test fees as well as the increased tests in our revenue, revenue from our oncology agreements and extended maintenance contracts associated with a larger sequencing installed base.

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

Our adjusted gross margin for the first quarter was 72.2% essentially flat compared to 72.3% in the fourth quarter. Year-over-year adjusted gross margin expanded to 180 basis points due to an improvement in instrument margins offset in part by currency headwinds.

Adjusted research and development expenses for the quarter were $80 million or 14.9% of revenue which is approximately flat compared to $80 million or 15.7% of revenue in the fourth quarter. Additional headcount and outside service expense was offset by absorption of spend associated with our oncology agreements.

Adjusted SG&A expenses for the quarter were $97 million or 18% of revenue which is also approximately flat compared to $97 million or 18.9% of revenue in the previous quarter.

Returning to a more normal incentive expense in Q1 compared to the higher amount we recorded in Q4 resulting from the strong year end performance offset the higher headcount and benefit expense. Adjusted operating margins were 39.3% compared to 37.7% in the fourth quarter higher sequentially due to leverage associated with the increased revenue.

Operating margin was also higher compared to 34.9% reported in the first quarter of last year due to the impact of improved gross margins and operating expense leverage. In the first quarter we recognized approximately 500K of adjusted other expense primarily due to the impact of foreign exchange losses.

During the quarter our stock-based compensation equaled $32 million lower than the $38 million reported in Q4 which was elevated due to additional accrued expense for our performance stock units. For the remainder of 2015 we expect stock based compensation expense to return to more normalized level.

Our non-GAAP tax rate for the quarter was 24.5% compared to 29.9% in the first quarter of last year lower primarily due to the reversal of evaluation allowance related to state R&D tax credits. Excluding the impact of this item the key one non-GAAP tax rate would have equaled to 28% slightly better than our prediction entering the quarter.

Non-GAAP net income was $135 million for Q1 and non-GAAP EPS was $0.91. This compares to non-GAAP net income and EPS of $80 million and $0.53 respectively in the first quarter of 2014. Additionally the impact of foreign exchange lowered Q1 non-GAAP EPS by approximately $0.08 relative to Q1, 2014.

We reported GAAP net income of $137 million or $0.92 per diluted share in the first quarter compared to net income of $60 million or $0.40 per diluted share in the prior year period.

Current-period results include a pre-tax gain of $15 million resulting from the acquisition of Sequenta by adaptive biotechnologies given our minority investment in Sequenom.

Cash flow from operations equaled $67 million lower sequentially due to $76 million of additional paid in capital associated with excess tax benefits and stock compensation as well as bonus amount the year end payouts which occurred in the first quarter.

DSO increased to 59 days compared to 51 days last quarter as a result of the relative timing of shipments being more back-end loaded due to the introduction of our new portfolio products in January.

Capital expenditures in Q1 were $37 million due primarily to spending associated with our ERP implementation as well as other ongoing investments focused on scaling the organization resulting in $30 million of free cash flow.

During the quarter we repurchased approximately 180,000 shares for $35 million and we have 96 million remaining under our previously announced programs. We ended the quarter with $1.4 billion in cash and short term investments. Turning now to our expectation for 2015, we continue to project approximately 20% total company revenue growth.

On a constant currency basis we now expect revenue growth of 23% previously 22% as we now anticipate a 300 basis point impact from foreign exchange given current rates. While Q1 revenue grew 28% for the second quarter we expect year-over-year revenue growth in-line with our full year guidance.

Foreign exchange continues to present a headwind similar to that seen in the first quarter we will see a sequential decline in HiSeq X shipments which were particularly strong in Q1 and we anticipate a $20 million sequential headwind from the Asia Pacific region due primarily to the challenge in Japan running environment.

We are now projecting for 2015 an increase in non-GAAP EPS to $3.36 to $3.42 up from $3.12 to $3.18. Additionally we now project the full year pro forma tax rate of 27% which includes the benefit recorded in Q1 as well as the 2015 federal R&D tax credit and other expenses.

For modeling purposes we feel it is appropriate to assume a Q2 tax rate of 29% given the expectations of the R&D tax credit will be passed in Q4. And at that time we will record the full year impact.

In summary our strong first quarter results which included impressive revenue growth, a strong pipeline heading into Q2 and significant leverage sets a stage for robust 2015. We continue to make progress on market development strategies to address our more than $20 billion market.

The combination of technology leadership which was further bolstered earlier this year with our new product introduction and market enablement will catalyze the broad adaption of genomics. Thank you for your time. We will now move to the Q&A session.

To allow full participation please ask one question and rejoin the queue if you have additional questions. Operator we will now open the line for questions..

[Operator Instructions] Our first question comes from the line of Tycho Peterson with JPMorgan. Please proceed..

Hey thanks. Question on reimbursement we’re kind of in a holding period waiting to see if the Max are going to price the NGS codes.

Can you maybe just talk about your discussions with some of your clear lab customers, how much whatever hang you think this is right now and what you expect from commercial pairs in the event that the Max decide to price or not price the next gen codes?.

Yes, so far Tycho we haven't seen much of an impact from this. We think that the market is ready for more clarity around how NGS gets treated and so we are looking forward to these codes being fully issued.

We have seen a lot of growth in the clinical markets based on tests that aren't frankly reimbursed and so I think it’s going to affect at least in the next year or two only a fraction of the total market growth that we anticipate, so we are looking forward to it so far little or no impact. .

And then on informatics, we have heard some of your extend customers are only analyzing small subset of the data being generated.

Can you maybe talk about how much of the data you think being generated on X Ten is actually being analyzed and put through the informatics pipeline and are there things you can do now that kind of helps some of those customers?.

Well certainly most of those customers are analyzing the entire X home, the analysis of the data outside the X home is much tougher just because we are in the very earliest phases of having complete human genome datasets.

The analytical tools to analyze things outside the X home are vastly less mature so it is more of a challenge but it’s one of these part before the host problems we have to generate lots of whole human genomes before people are incented to develop the tools to do the analysis outside the X home.

But that's clearly coming and its frankly one of the reasons that the X strategy is so important that we begin to push sequencing all the way to getting the entire human genomes so that we can broaden the analysis out to regulatory regions and other regions that are frankly going to be quite important if you think about what happened in G-Los era a very significant amount of discoveries that happened in G-Los were outside the X home, but we just haven't had a good way to characterize those..

And our next question comes from the line of Douglas Schenkel with Cowen and Company. Please proceed..

Hey there Doug..

Sorry about that. I was talking to myself on mute. Sorry about that and good afternoon.

So you indicated that demands for the 2500 exceeded expectations in Q1, does that mean 3000, 4000 placements are weaker than expected, is there any consistent profiling of 3000 and 4000 purchasers versus 2500 new purchasers that you can provide? And then I guess the last part of this question is could you just provide us some information on backlog for the new instruments given that I think that would be a broad interest since this was a late in Q1 launch?.

Yes, I guess what I would say is if you look at the combination of 2500, 3000 and 4000 in aggregate we sort of hit the total about where we expect maybe a little bit over where we might have expected.

Our internal models had air bars around them because we didn't know how fast customers would be able to make decisions or get additional funding if they are going to buy 2500 to get up to 4000.

So, we had pretty wide air bars around all of these products in terms of unit and as a result of that we had to from a manufacturing perspective have enough systems in the manufacturing pipeline to be able to meet any ranges of demand.

I would say if you looked at the center point of all of those ranges we were probably slightly lower on the 3000, 4000 and somewhat higher on the 2500.

I think the reason for that at least partially I mentioned in the script is that clinical customers who are already using validated methods on the 2500 just continued to do that for reasons that we mentioned.

I think there is still going to be a period where people have to get additional funds to get the ability to buy 4000 and so if they had a tender or grant already coming in place for the dollars for 2500 they just went ahead and executed that.

As we mentioned I think as we look forward over the next couple of quarters that shift will begin to move I think much more aggressively towards the 3000, 4000.

In terms of our profile of customers I think talking to our commercial team the people who are buying 4000s were in many cases those customers who had aspirations to get into the X world but couldn’t and so that they had a bigger pile of money already there, they were hoping to get an X Five or X Ten but they just couldn’t reach that far and the 4000 offers them the ability to run all applications.

And so, I think 4000, customers want the lower price per data point, have a broad application set and have that incremental funding to be able to get to the 4000 and BGI is probably a great example of customer like that.

With respect to backlog and we don’t really talk about specific backlog and so we are probably not going to give you any additional color on the mix of the backlog at this point..

And our next question comes from the line of Derik De Bruin with Bank of America Merrill Lynch. Please proceed..

Hi, good afternoon.

Hey just, Marc just a quick housekeeping question, there was no M&A, right I mean there was – it was a 5% FX hit in the first quarter and then you are expecting that taper off in the rest of the year, is that how you get to them at?.

I’m sorry Derik, I wasn’t was following the –.

What I mean, if you look at the reported versus the constant currency number in Q1 by 28%..

Yes, no M&A that was the FX when you look at the year-over-year change in FX rates..

Great.

And that has to do with sort of the higher Asia mix and the European mix to the numbers in Q1 you are expecting that to taper off and be less in the rest of the year, correct?.

The concept is slightly different but lot of the decline was towards the backend of the year, so you would see similar FX mix throughout this year. Maybe with an exception lesser impact in the fourth quarter, slightly..

Great..

Because the rates had already moved up..

Obviously based on where we are today not where we might end up..

Great.

So on you mentioned that BGI has replaced some of its old 2000 fleet with 4000 are they – they have like a 100 plus 2000s they’re planning to upgrade the entire fleet or some sub sack number, are they done upgrading, could you give us a little color on that?.

Yes, I think BGI had sort of [mop hold] some of their 2000, so if you looked at their entire fleet some of those original 2000s were so early that they were no longer economical to run, so they are running only a portion of their installed set of systems.

Our hope is that this initial purchase of 4000s is the beginning of a broader upgrade program but we don’t have any specifics from them, they are in the process now after the installation beginning to evaluate the performance of the 4000 and we are cautiously optimistic that we will be able to continue some more instruments to them but no wholesale upgrade has been discussed at this point..

Great. And then just one quick one, it sounds like you’re making a lot of progress in the forensic space. So could you talk a little bit about the compatibility and sort of how do you, particularly the backward computability with booking at the old [Audio Gap]..

Yes, well I think the thing that makes this project so exciting for us is that it has, it’s all that challenging problem of how long we thought it would take to convert the installed base of forensics technology because of the many years of database creation.

This product has backward compatibility with the SGR technology that was used to create those initial databases, but provides tremendous additional information in terms of snips much broader analysis across the genome initial information on trades, the ability to analyze mixed samples that you can get out with traditional technology.

So that’s what so exciting why we think the market opportunity is so large is that it solves the backward problem as well as opening brand new technology for the future..

And your next question comes from the line of John Groberg with UBS. Please proceed..

Good afternoon and congratulations on a solid quarter. So, I guess maybe just tying some of these things together. If you think about the very strong first quarter obviously the increased guidance on the EPS but kind of maintaining the 20% growth for the year. Can you maybe just talk a little bit about, maybe some of your customers, price lot in U.S.

dollars and some of your customers overseas, are you seeing any impact in terms of weakening currency that’s having an impact kind of what they were able to purchase.

So just what it is that makes you think that back half of the year maybe as little, I thought obviously couple of conference because anything else specifically that you are seeing that kind of leads you to believe that historically will be that 20% range, thanks?.

Let me handle the commercial side of that and let Marc talk about the guidance. I would say with respect to individual customer situations there probably are some particular cases where we didn’t get orders that we might have otherwise, particularly in Europe where there are lot of tenders.

So we might have a little bit of reduced order rate as a result of that we are going to adjust our peg rates going forward so we will normalize some of this in terms of how the pricing works in Europe.

But I expect to see little bit of depressed demand just because prices are going to be higher but I don't think its material and it’s embedded in the guidance that we have given today. Marc you want to talk about the specifics to the guidance..

Yes and so John obviously there is a couple of factors one of which is as we mentioned our view around the impact of the foreign exchange headwind is about 100 basis points higher than it previously was. We came off Q1 with very strong shipments in HiSeq X. we got the headwind of Japan that we talked about as well.

So clearly based on our guidance you would have to have a Q2 to Q4 given Q1 was 28% that would be lower than 20% growth. You mentioned the comps, clearly the comps are pretty high towards the back end of 2014 as well. So those are the kind of headwinds that we are facing there that I think really explain why the guidance for revenue is what it is.

On the EPS side obviously you mentioned we brought that up. We had a very significant bid in the first quarter driven by couple of items obviously strong revenue but also the expenses were flat and so that's not the expectation going forward in particular and we had a tax benefit..

So just to be clear on the guidance you wouldn't say its anything around maybe the X Five or 3000, there is nothing around the adaption of the interest that you are seeing from your new product that’s driving the more conservative – just to be clear it’s the item that you laid out there you are pretty satisfied of the new product sampling [indiscernible]?.

Yes, I think we are very happy with the adaption [Sonata] is driven by that and just to put this guidance in perspective it’s the same number that we guided to coming into the year with a greater headwind from FX than we anticipated.

So the guidance in that sense is better than what we gave coming into the year and certainly its way better on the EPS side..

Yes, we are close with a large portion, higher portion of it locked in the first quarter than we obviously anticipated between the year. Right..

And your next question comes from the line of Amanda Murphy with William Blair. Please proceed..

Thanks guys. Good afternoon. Just a quick question I guess the follow-up to Dough's earlier question.

I know it’s still a bit early but have you had a chance to talk to customers about 3000, 4000 and how many of customers are thinking about not upgrading but adding 3000, 4000 because of its capabilities just trying to assess this idea of incremental demand, the HiSeq I guess as a product portfolio then pretty stable over the past few quarters.

Do you think still that the 4000, 3000 could add some instrument to that in terms of opportunity overtime?.

Yes, we think so it’ll certainly add in the dollar side because they are higher priced instruments. Customers want access to lower prices per data point as they are doing deeper and deeper sequencing for various applications and that 3000, 4000 give you that capability with the pattern flow cell technology.

So we do think they are going to generate incremental demand over where we would have been, had we just have the 2500 in a product line where we can be very confident about that..

And then just last question I don’t think you said this but what was the breakdown between that 3000, 4000 in terms of the products that are being shipped this quarter.

I know there wasn’t that many but are you seeing better demand for the 3000 or the 4000 generally?.

The 4000 is higher but I would say that we probably had little more interest in the 3000s that we might have anticipated. We thought that the 3000 model was truly awaited just deal with those customers who couldn’t get the funding and is kind of like the 1000 versus the 2000 back in the older days which is like a couple of years ago.

But so we’re probably presently surprised on the fraction of people who had interest in the 3000 but I think in the long run the 4000 is really going to be instrument choice..

And your next question comes from the line of Dan Leonard with Leerink. Please proceed..

Thank you.

Just two questions from me on pacing, first off can you give – offer some color on your expected pacing of X shipments throughout the year, you mentioned you expected a down take in Q2 but your shipments pick up thereafter due to the availability of the Five configuration?.

Well, I would say Dan that what we have done now is we kind of normalize the backlog we had a buildup of backlog during the course of 2014 and we have been able to bring that backlog down into a reasonable range now.

So we can supply whatever the customers need and so I think what we will ship through the course of the rest of the year will be largely depending on what the incoming order rate is and clearly we don’t care that much whether it’s an X Five or an X Ten in terms of the relative mix as long as we are getting all those X boxes out into the market.

So I think we are not giving guidance on the specific mix of orders there but it’s truly going to be driven just by the receipt side..

Got it. And then my other pacing question is on Japan. So I think you said Japan would be or APAC in aggregate would be down 20 million sequentially in Q2 due to weakness in Japan which was also weak in Q1.

So what are you expecting in Japan through the balance of the year on a sequential basis, it can bounce along the bottom from Q2 levels or does it get worse?.

Well if you characterize Japan, Q1 on a year-over-year basis was down because year ago Japan was kind of in that comeback mode before they decided to reorganize the NIH equivalent there reorganize towards something like the NIH in Japan and then through the course of 2014 it got really bad as a percentage of revenue in Q2, Q3 and Q4 we expected a little bit of rebound in Q1 and because of the end of the year in Japan and the fact that a new head of their equivalent of NIH has now been appointed.

I would say we saw a little bit of that because on a percentage of revenue basis sequentially we were up in Japan but still behind where we were a year ago and way behind where we think Japan should be overall.

I think through the course of this year we will begin to see Japan get their act together but we just don't have a lot of evidence right now if that's going to happen over the next quarter or two so our – what we guided to in the script here is to expect Japan to continue to be weak through the end of this calendar year and then our hope is that the funding resurges and that Japan can be strong in 2016..

Okay..

Your next question comes from the line of Ross Muken with Evercore ISI. Please proceed..

Good evening guys and congrats again. So, I am going to go back to this pacing question because I still feel like I am not totally sure I understand it.

But it seems like you exceeded Q1 meaningfully versus sort of your forecast and the business seems to be tracking well on metrics and so I understand the sequential change in terms of X Ten Q1 to Q2 but as you think about back half, I mean you do have a new product coming on it, do you think about the original forecast versus the new forecast and clearly the new forecast is better on the core basis other than sort of accounting for the Q1 outperformance from an assumption basis is there anything else underlying of notable difference I am just – it’s not clear to me that anything else has changed although it seems like relative to some of the expects on a number of lines things are better and so that's what I am just trying to make sense of.

Is it more of the uncertainty of the X Five uptick I am just trying to see where the sensitivity is and what sequentially is different?.

I think Ross, it’s as Marc tried to articulate a bit it’s that the FX affects are bigger then what we thought coming into the year so we are going to have a little bit of that.

We do think that we had in Q1 to catch up a little bit on Xs there were enough customers who wanted those units and we wanted to get them in place because we wanted to start drawing reagents and getting the customers using those systems and getting their informatics infrastructure in place.

So we are able to bring down the backlog that we have been carrying on excess in Q1 and so what we will deliver on excess through the remaining three quarters as I mentioned will be driven by the incoming order rate more than a reduction in overall backlog. And so we just have to watch how that goes here throughout the rest of the year.

But I would say the underlying strength of the business is good, we don’t see any major disruptions because of the new product announcements, we always worry a bit about when we have major products announcements that we will, we run the risk of having short term disruptions in the market and we probably had just a little bit of that in Q1 but we came through that really, really well we can manufacture all these products now.

So there is no sort of systemic concerns at all that we have coming into the back half of the year, it’s clearly cautioned around FX and the fact that we have such a great Q1 that we have kept the guidance essentially where it was coming into the year..

Fair enough you guys are relatively concern so I just want to make sure that there was nothing else we were missing and just sequentially on the service line.

It seems like there is a fairly big acceleration there maybe you had characterized magnitude I mean it seems like NIPT continues to track well that versus kind of the rest of the service unit, how you would sort of, a portion maybe qualitatively not quantitatively how that track at least on a sequential basis?.

NIPT continues to be a real strength there and 50,000 samples was a big number. So we are really pleased with that.

I guess this is the time to mention that overtime we expect that to migrate more toward products because many of these labs that are using our Redwood City services are in this transfer mode where they will be bringing the technology in-house overtime but they do outsourcing to us in the meantime so there will be some shift in the revenue lines as we go forward.

But across all the main aspects and services we did well, NIPT did well, we did really well on the regular services business particularly because of strength from consumer customer there and our installed basis are big that our service contract revenues is really quite substantial and our gross margins on those service revenues are pretty good..

And your next question comes from the line of Bill Quirk with Piper Jaffray. Please proceed..

Great. Thanks and good afternoon everybody.

Couple of questions from me I guess, one is, I guess is follow up on probably Doug and Amanda’s question and just thinking about the X Five upcoming launch and the comments around the interest level there, can you just I guess help us think a little bit about the legacy 2500, 3000, 4000 franchise, are you thinking that we could maybe do an equivalent number across those three instruments what you did in 2500 last year or should we assume from all-in purposes that will likely to be down in part due to some of the HiSeq excuse me the X Five interest?.

Yes, I think in the rough ranges that we should do as well as we did for the 2500 by combining all three of those instruments and perhaps better on the revenue side because of the higher ASPs.

There is a little bit of exchange at the very top end here of customer interest someone as I mentioned who might have wanted to get into the X world because the 4000 gives them all applications that Xs don't if they were just trying to get to the X because they needed lower prices the 4000 very often is a good solution.

So, there may be some modulation of customers across that boundary between 4000 and the X particularly because of the X Five now. But we continue to be really optimistic about the X. There are lots and lots of customers who want to get into the club of sequencing whole-genomes at low prices.

We probably are seeing more customers who we thought might be interested in X Five continuing to try to get enough money to get all the way to an X Ten because of the overall lower price per genome.

So and we are still early in this whole product rollout with the 3000s and 4000s so we have a lot to learn over the next quarter or two about customer interest and mix and how we deploy resources to continue to enhance these various products..

Got it and then second question is just thinking about the collaboration with Merck Serono when we be able to see some data on this universal diagnostic and then I guess kind of secondary question to that is should we assume that this will be a single test or kind of series of tests which appears to be anyway kind of the strategy from some of the DNA companies?.

Yes, there is a bunch of sub segments here the attributable part of the panel we expect to have available in an RUO partnership mode by the end of the year what most of the pharma partners want is very often a subset of that panel in some cases so those are truly companion diagnostic contracts.

And some of the other cases they want to use the larger universal panel in the clinical trial setting to understand what genes might be relevant for them as an ultimate companion diagnostic and that would largely be a subset and so I think the fast forward to couple of years there will be a series of various combinations of these panels driven by specific pharma interest as well as the migration of knowledge about what genes are increasingly important in oncology.

So, we will be adding more to the attributable panel overtime.

In the cell free area, I think that's a little – its distinct in fact from what we are doing in the onco panel part there I think the focus on particular sub disease categories is driven by the fact that you want to create diagnostics where there is clear alternatives in the clinical decision making and that's why there is so much focus in areas like lung cancer.

Its prevalent there is a lot known about the potential markers there and they are various treatment options. And so, we and others I think will focus initially on a couple of key cancer types because you could do the clinical validation more narrowly on those and then continue to add genes overtime to make the panel to increasingly universal..

Your next question comes from the line of Isaac Ro with Goldman Sachs. Please proceed..

Good afternoon guys. Thank you.

Marc question for you just on the sequential trend one more time, if we put together the various puts and takes on your demand funnel for the products as well as the FX trend just want to get a sense of a range on 2Q sequential growth I think the trailing kind of two year trend on sequential quarterly growth is like 6%, given what you guys are talking about certainly doesn't seem like that's a reasonable expectation for 2Q so is that sort of the right way to look at just sort of the short term outlook and then have a follow-up question?.

I just think Issac to really go back to what I said in the prepared remark. We expect Q2 to be more in-line with our annual growth rate guidance for the year..

Okay.

And then just maybe just quick update on, if we look at the entire installed base you’ve been trying to give us a sense of what percentage of your current installed base would be in a predominately clinical setting or maybe even exclusively clinical setting just curious how you guys characterize that and what you are seeing just in a snapshot today with the understanding that it’s still very early days.

Thank you?.

Yes, in total I don't have that number at my fingertips but with the third of the overall systems in the quarter going to clinical markets as a fraction of the total installed base its growing quite quickly. We can get you that number in a ballpark way offline..

And your next question comes from the line of the Steve Beuchaw with Morgan Stanley. Please proceed..

Hi. Good afternoon everyone.

Two quick ones on NIPT, one Jay I wonder if now that you have the approval in China with various partners if you could talk about the extent to which the China NIPT business could be an incremental driver this year it’s a little hard to pass out just given that there was a good amount of progress made there last year and then also on the topic of NIPT we have a little bit more clarity on reimbursement for NIPT here in the U.S.

in 2015, could you give us a sense for how you see that impact in the business? Thanks so much..

The China case, we did have a burst of business in China because of the initial work we are doing with Berry and they’ve acquired reasonable number of NextSeq to get that initial work done. Then the business swing into a pause mode while we were waiting for approval.

So our expectation through the rest of this year is that we will begin to grow the Chinese market in terms of placements quite significantly.

Having said that the average ASP for a test in China is significantly lower than other places in the world, so you have to if you are multiplying numbers of tests times ASPs you need to use a much lower ASP for the Chinese market. I didn't quite get your reimbursement question.

Can you tell about average risk versus high risk there or something else on reimbursement?.

In the U.S.

we I believe had new rates in effect for NIPT reimbursement this year?.

No, I mean, our reimbursement contracts are long term contracts so we don't have any changes in our reimbursement.

Our hope is that we are moving towards guidelines average risk being put into guidelines and then ultimately getting reimbursed and we think optimistically the guideline changes could happen in 2016 they might be toward the end of 2016 you probably have a year variance on when that might happen.

We now have two publications that have very similar result that show that this test is a good test to be using on average risk women. And our hope is that within some number of quarters after average risk is put into guidelines that reimbursement will come forward for average risk as well..

Got it. Thanks so much Jay..

Sure. .

And your next question comes from the line of Jack Meehan with Barclays, please proceed..

Hi. Thanks and good afternoon.

I just wondered I guess change and look at the near record MiSeqDx placements and just curious where you are having the most success there in terms of the placements and then as you think about the community hospital opportunities starting to open up whether you’ve had any sort of indications of interest through your conversations there?.

I don't think we have it on our fingertips any sort of customer type breakdowns MiSeqDx so I can't really give much color on how much is oncology versus other types of applications.

I think overall MiSeqDx having being an approved system is – had a bigger impact then what we had originally anticipated we find many customers who aren't actually running regulated tests or buying the MiSeqDx because of the expectation that ultimately they are going to seek approval for those tests.

So I think that underpins the strength of the demand in that segment but I don't have a sort of disease type breakdown at my fingertips for you..

Okay. Got you.

And then just one really the guidance, I know you don't parse this out specifically but just maybe expectations for R&D through the rest of the year I thought maybe we might see some level of re-leveraging just on the faster top line growth but maybe just do you think this percentage of revenue is sort of a good way to think about the balance for the year?.

I would say that part of our great financial performance of EPS line this quarter was in part driven by the fact that we had ambitious hiring plans that we didn't meet and we have fantastic programs for R&D people to be working on and we are trying to add lot of commercial talent in the organization and as we typically are in our budgeting process a little overly ambitious in terms of the number of people we think we can actually hire and have start and so in part the fact that expenses were flat in both SG&A and R&D versus Q4 was the fact that we were significantly under the headcount plan.

Through the course of the year we will begin to catch up on that because the headcounts are naturally in budgets front loaded. And so we will begin to converge on the actually headcount numbers that we had planned for the year which will get us back to a much more normalized SG&A and R&D rate as we go through the year..

And that over quarter sequential growth in spending is embedded in the guidance we’ve provided. That's right..

And you next question comes from the line of Zarak Khurshid with Wedbush Securities, please proceed..

Yes hi, good afternoon it’s Zarak at Wedbush, thanks for taking the question guys.

One really on NeoPrep so just curious how customers look generally today and is the rollout here consistent with what you are envisioning and then how should we be thinking about just the evolution of the product road map on NeoPrep?.

Yes sure. So as we talked about, we announced the product earlier in the quarter and we have it now in the hands of our early access customers. Customers are really excited about the vastly simplified work flow and so we are seeing a buildup in demand that I think will play out very well over the course of the year.

At this point we are getting feedback from customers around improvements we can make around user training for example and we are building that into our plans going forward. But I would say we are very pleased with the build up in the demand that we are seeing for the product.

Of course, we can have additional assays to put under the platform through the course of this year and the next year..

Thanks..

And your next question comes from the line of Jeff Elliott with Robert W. Baird. Please proceed..

Yes, thanks for sleeking me in here. Just one quick follow-up for Marc and then a question for Jay.

Marc I hate to keep harping on this but the second quarter guidance you mentioned kind of in-line with the growth rates for the year but can you parse out what you mean by the constant currency growth rate and then the FX because I think the FX impact is probably going to get a bit worse in the second quarter versus the first quarter?.

So we’re not going to, just to be clear our guidance going forward in that 300 basis points currency headwind that we have assumed is based on current currency rates. So we are not predicting further declines in currency there obviously if that happens then that will create a greater headwind for us. So hopefully that clarifies.

So our growth rate net of FX for the year is 20% based on current rates and that's what we expect for the rest of this year with Q2 following a similar trend to that.

Does that help?.

It does.

I guess but we are actually going to look at rates and I think yes, you had a 5 point headwind in the first quarter it looks like second quarter could be a bit worse and then things would kind of tail off such that third and fourth quarter headwind will be less?.

Like I said, I think like I said earlier I mean, the rates really started to decline towards the end of the last year so the comps from an FX perspective are pretty hard, so I think you will see that throughout most of this year..

And our final question comes from the line of Miro Minkova with Stifel, please proceed..

Hi good afternoon everybody, thank you for squeezing me in. let me maybe ask a question on HiSeq X utilization.

Can you give us a sense of where you are in terms of perhaps the capacity utilization of the instruments that's out there and have you build up an anticipation of utilization will be increasing from here or steady or how do we think about it?.

We have done a lot of analysis to this and its clearly what we describe as bi-modal distribution we have a handful of customers that are fully utilizing their access and in fact ordering incremental instruments and there is a quite a number of customers in that category.

We have a fair number of customers at the other end of the spectrum that are using new systems at a very low level and some of those are showplace installations in a couple of cases and others are ones that are still struggling a little bit with the analytical side or the sample side.

We have very active programs to take those customers who are in the lower end of the that bucket and moving more toward the center both in terms of greater software support and trading support around how to analyze data and how to use products like BaseSpace to make the storage analysis simpler and programs to try to help them get access to samples.

So overall we are not at the point where we are going to increase the range of our guidance there if you look at Q1 as Marc mentioned in the script we were somewhat over our ranges but that's because of how the calculation works and as the installed base gets bigger that calculation normalizes, we are probably a quarter or two away from where we say okay we are now at normal way the math would work and that number would become representative.

Obviously we always have a goal to push up utilization so we are doing everything we can to do that but we are not recommending there anybody model that at this point..

Thank you for that and maybe on the work HiSeq the 3000 and 4000 instruments, can you maybe help us understand if your demands coming from new or existing customers, in other words is it new placements or how do you think about, is it new placements or is it customers swapping out older 2000 and maybe comment on the capacity of your customers to continue to buy or fund equipment given that you have shrunk the innovation cycle?.

The vast majority of 3000s and 4000s are going to existing customers or did in Q1 and that’s largely because that’s from a time when we announced this in the second week of January, second week I guess was, there is a very short cycle to close business and so naturally you would expect most of those orders to come from customers who know the technology, know Illumina, our customers were calling-on on a very regular basis.

So that’s what you saw in Q1, I think as we get couple of quarters out the sales force of course is building a new pipeline of business around these two products but it takes awhile to get newer customers into that pipeline just because of sale cycle for a product as this price point is six to nine months.

So you will see that mix shift from existing customers to a better balance between those two categories. I’m sorry what’s your second part of your question that I missed? Okay, I think we’re good..

This concludes today’s question and answer session, I will now like to hand the call back over to Ms. Rebecca Chambers for closing remarks..

As a reminder, a replay of this call will be available as a 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 second fiscal quarter..

Ladies and gentlemen thank you so much for your participation today. You may now disconnect. You all have a great day..