Jacquie Ross - Vice President, Investor Relations Francis deSouza - President & Chief Executive Officer Sam Samad - Senior Vice President & Chief Financial Officer.

Doug Schenkel - Cowen & Co. LLC Ross Muken - Evercore ISI Daniel Arias - Citigroup Global Markets, Inc. Tycho Peterson - JPMorgan Securities LLC Derik de Bruin - Bank of America Merrill Lynch Steve Beuchaw - Morgan Stanley & Co. LLC Patrick Donnelly - Goldman Sachs & Co.

LLC Tim Evans - Wells Fargo Securities William Quirk - Piper Jaffray Dan Leonard - Deutsche Bank Sung Ji Nam - BTIG, LLC.

Hello, and welcome to the Fourth Quarter and Full-Year 2017 Illumina Earnings Conference Call. My name is Michelle, and I will be your operator for today’s conference. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] Please note that this conference is being recorded.

I’ll now turn the call over to Ms. Jacquie Ross. Ma’am, you may begin..

Thank you, Michelle. Good afternoon, everyone, and welcome to our earnings call for the fourth quarter and full-year 2017. 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 Francis deSouza, President and Chief Executive Officer; 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 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 the 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 finished 2017 on a high note, with revenue of $778 million, growth across both our sequencing and array businesses and notable strength in sequencing consumables. For the full-year, revenue grew 15% to $2.75 billion.

Sequencing consumables grew by more than 30% year-over-year to $432 million, with contributions from each of our product families. The primary contributor to the more than $100 million year-over-year increase was NovaSeq, followed by NextSeq and the HiSeq family and then our other desktop platforms.

NovaSeq consumable revenue almost tripled sequentially with strong demand for the newly released S4 flow cell in addition to growing interest in S2. Even excluding $19 million stocking order, NovaSeq consumables grew by more than 75% sequentially. Fourth quarter HiSeq X consumables were up modestly from Q3.

Most of our HiSeq X customers have taken, at least, one NovaSeq. And now that S4 has been launched, some of these customers will transition their fleets in 2018, while others will move in 2019 or later, depending on the cadence of their clinical, translational and research activities.

Excluding HiSeq X, HiSeq consumables were up driven by clinical customers. Similar to HiSeq X transition plans, among the approximately 800 customers are staggered across the multi-year horizon. That said, we continue to expect HiSeq consumables in aggregate to start to trend downwards in the coming quarters.

NextSeq consumables had another strong quarter, and average pull-through was once again above the high-end of our target range, driven by production clinical customers. Nextera DNA Flex got off to a strong start in October, as growing appreciation of the simplified workflow led to orders for more than 300 unique customers.

Since the launch of AmpliSeq for Illumina, a few weeks ago, I’m pleased to share that we have received and shipped our first orders for the latest addition to our library prep portfolio. We also reported a strong sequencing systems quarter with revenue of $131 million.

NovaSeq shipments were in the high 80s, the most we shipped during any quarter in 2017, reflecting customer readiness for their systems. As expected and consistent with the third quarter, we did not ship any HiSeq Xs in the fourth quarter and we shipped just a handful of HiSeqs as most high-throughput customers are now looking to NovaSeq.

With approximately 285 NovaSeqs shipped in 2017, we are very encouraged by the systems performance in its first year of launch.

Interest to date has included an impressive cross-section of HiSeq X customers, HiSeq customers, new customers, as well as customers moving up from desktop instruments to take on higher output applications or increased sample volumes. NovaSeq is demonstrating a very broad appeal.

For the third consecutive quarter, about one-third of NovaSeq’s orders received were from new to Illumina or straight from benchtop customers. New to Illumina customers included a number of academic and transitional labs looking to build out their offerings for clinical testing, whole exome sequencing and whole genome sequencing.

Straight from benchtop customers included a diverse set of labs building on their MiSeq and NextSeq capabilities to extend into exomes, methylation arrays, RNA, ctDNA and whole genome sequencing.

Beyond this group, the HiSeq conversion opportunity remains very much ahead of us with only 15% of the approximately 850 HiSeq or HiSeq X customers having ordered their first NovaSeq as of the end of 2017. NovaSeq represents a compelling opportunity for these customers, most of whom will recognize a significant economic benefit from the transition.

Beyond the price per sample economics, NovaSeq offers higher throughput, easier workflow and the ability to easily scale output to support a diverse suite of application and sample volumes. So we expect that the vast majority of these HiSeq customers will transition to NovaSeq over time. NextSeq continues to perform well.

And the system and associated consumables remain a very important growth driver for Illumina, as customers use a system for a broad set of research, translational and clinical applications.

Rounding out our benchtop systems, we continue to see stable win rates and solid adoption by new to sequencing customers, who represented approximately 60% of MiniSeq and MiSeq shipments in the fourth quarter. We look forward to shipping the first commercial units of our latest desktop system, the iSeq, towards the end of the first quarter.

iSeq delivers exceptional accuracy at a low-capital cost of less than $20,000, making our SBS technology accessible to any lab. You will have seen that the beta units are operating very well in the field, and we have already received customer orders reflecting strong initial demand.

As is routine for a product launch at Illumina, we will be shipping a small number of iSeqs this quarter to be followed by a manufacturing ramp to 2018. That said, we do not plan on sharing order or shipment details on the iSeq on a quarterly basis.

While this is an important strategic platform for Illumina, it is unlikely to have any material revenue driver in the near-term.

In other product updates, we look forward to adding the S1 flow cell to the NovaSeq portfolio to further extend the flexibility for our lower throughput customers and those looking for rapid turnaround on higher output applications.

We’ve completed internal validation and started beta testing of S1 in anticipation of commercial release later this quarter. S1 offers very compelling per sample economics versus HiSeq and the ability for HiSeq customers to easily transition projects due to its lower output.

S1 also delivers the fastest run times of all NovaSeq configurations, delivering 500G runs in just over 24 hours. Reflecting our investments and focus, our clinical business continued to grow in the fourth quarter, notably in oncology and NIPT.

In total, clinical and translational customers represented about 45% of our shipments in 2017, compared to 39% in 2016. And we expect incremental adoption of our products and technology in the coming years, given the importance of genomics and solving human health challenges.

As we have shared previously, our strategy to further catalyze clinical adoption is to provide clinical-grade instruments and reagents to customers who wish to develop their own solutions, while developing sample to answer solutions in areas of the market, where we are uniquely positioned.

As part of this, we launched NextSeqDx in mid-November to bolster our clinical instrument offerings and we shipped our first systems in the fourth quarter. These initial customers plan to use their systems for routine non-small cell lung cancer liquid biopsy testing and clinical assay development.

Oncology is the largest and fastest growing area within clinical, driven primarily by customers focused on therapy selection and liquid biopsy. In total, our oncology testing shipments grew about 40% in 2017. Development work on our sample to answer solutions progressed in the fourth quarter, with TST 170 now available as an IUO as well as RUO.

Building on our TST 170 panel, we have launched an immunooncology program. As we believe that Illumina is uniquely positioned to deliver a distributable IVD solution, offering a turnkey solution to pharma partners and customers. We continue to see positive coverage decisions in the field of oncology.

Most recently, Cigna announced a significant policy change, extending previous coverage for panels of less than 10 genes with proven clinical utility to larger panels with a medical necessity criteria is met for, at least, one gene on that panel.

We believe that this will be particularly helpful for clinical trial enrollment, increasing the utility and utilization of multi-gene panels over time. NIPT is another focus area for Illumina and we’re very pleased with the performance of VeriSeq NIPT, which received CE Mark in April 2017 and it’s our first true sample to answer IVD product.

Sales are expected to more than double in 2018, driven in part by the Dutch National contract, which we were awarded during the fourth quarter and some other key competitive wins. We will submit NIPT IVD solutions in many more countries throughout 2018 and look forward to the continued adoption of this product globally.

Our microarray revenue grew 21% from the same quarter in 2016, due to strong growth among our direct-to-consumer customers. Full-year growth was 20%, driven by the acceleration in the number of consumer samples processed during 2017.

Our consumer affiliate, Helix, announced a partnership with the Healthy Nevada Project to expand one of the first community-based population health studies in the United States. Led by the Renown Institute for Health Innovation, the project plans to enroll 40,000 Nevadans and utilize the Helix platform to collect and sequence the samples.

The Healthy Nevada Project started in 2016 with an initial 10,000 participants, who submitted samples for genotyping analysis. Phase II of the project has expanded to exome-plus analysis in an effort to gain additional health determinants data.

Before I hand over to Sam, I would like to formally welcome Aimee Hoyt, who joined Illumina to lead our Human Resources team earlier this month. We believe that our corporate culture is one of our strongest competitive differentiators, and we’ve invested a good amount of time in finding our Chief People Officer.

I’m confident that Aimee is the right person to evolve our unique culture and our commitment to innovative people practices. With that, I’ll hand the call over to Sam for a review of our financials.

Sam?.

Thanks, Francis. As discussed, fourth quarter revenue grew 26% year-over-year to $778 million, driven by growth in sequencing consumables that once again exceeded forecast, as well as strong performance in sequencing instruments and on microarrays portfolio.

Graphically, Americas grew revenue 32% versus the prior year period, driven by strong growth in both sequencing instruments and consumables, while EMEA grew 25%. Asia-Pacific grew 9% overall with 12% shipment growth in Greater China.

Revenue from sequencing instruments grew 18% year-over-year to $131 million, driven primarily by NovaSeq and offset in part by muted shipments of the HiSeq family of instruments as expected. Microarray instrument revenue was $8 million, down as expected from an unusually strong Q3.

Total instrument revenue was therefore $139 million, an increase of 22% year-over-year and represented 18% of total revenue. As Francis noted, fourth quarter sequencing consumable revenue was $432 million, up more than 30% from last year. Microarray consumable revenue of $82 million was up 8%.

Total consumable revenue of $514 million represented 66% of total revenue. Fourth quarter total product revenue, which includes freight was $659 million, up 26% from the year-ago quarter.

Service and other was $119 million, up 27% from the same quarter last year, driven by strength in genotyping services due to consumer demand, as well as sequencing services and instrument maintenance contracts. Moving to gross margin and operating expenses, I will highlight our non-GAAP results, which includes stock-based compensation.

I encourage you to review the GAAP reconciliation of non-GAAP measures, which can be found in today’s earning release and supplementary data available on our website. Please note that all subsequent references to net income and earning per share refer to the results attributable to Illumina shareholders.

Non-GAAP gross margin of 70.9% improved 210 basis points from last quarter, due to a more favorable sequencing consumables mix, as well as improved cost savings from NovaSeq.

Year-over-year, gross margin increased to 140 basis points and was impacted by higher sequencing consumables mix and the favorable impact associated with the lack of product transition reserves that occurred in Q4 of 2016.

Non-GAAP operating expenses were $307 million, up $8 million from last quarter with higher stock-based compensation expense, partially offset by lower Helix expenses. Non-GAAP operating margin was 31.4%, up 460 basis points sequentially and higher than the 25.1% reported in the fourth quarter of last year.

Excluding Helix, operating margin was 33.9% compared to 29.7% in the third quarter. For the fourth quarter, GAAP net income was $68 million, or $0.46 per diluted share. Non-GAAP net income was $212 million, or $1.44 per diluted share, and Helix dilution was $0.06. The non-GAAP tax rate was lower sequentially due to our higher foreign mix of earnings.

Cash flow from operations equaled $294 million. Continued reductions in our collections cycle led to Q4 DSO of 48 days, compared to 49 days last quarter. Capital expenditures in Q4 were $76 million and Q4 free cash flow was $218 million. We ended the quarter with approximately $2.1 billion in cash and short-term investments.

During the quarter, we repurchased approximately 368,000 shares under our previously announced buyback program at an average price of $204. Moving to guidance, and as we previously shared, total company revenue is expected to grow between 13% and 14% in 2018, including a modest revenue contribution from Helix.

Mix remains the primary driver of our gross margin. And we therefore, currently expect full-year non-GAAP gross margin to be up slightly from 2017. GAAP EPS is expected to be between $4.14 and $4.24, and non-GAAP EPS is expected to be between $4.50 and $4.60.

This includes an approximately $0.10 benefit associated with tax reform and about $0.25 of Helix dilution. Some other items for you to keep in mind. First, and as Francis discussed, the activity we are seeing among our customers is consistent with our belief that the NovaSeq upgrade cycle will span multiple years.

Going forward, we will report NovaSeq shipments on an annual basis in an effort to minimize volatility associated with normal quarterly fluctuation. For 2018 and compared to the approximately 285 NovaSeq shipments reported in 2017, we expect to ship between 330 and 350 NovaSeq systems.

With regards to Q1, specifically, I’ll remind you that we do not expect the $19 million stocking order to repeat. Additionally, you should expect sequencing system revenue to be down sequentially in line with normal first quarter seasonality.

As a results and after an exceptional fourth quarter, we expect first quarter revenue to be up to $35 million lower on a sequential basis. With that, I’ll hand the call back to Francis for a few comments before we open the Q&A session..

Thanks, Sam. Looking forward, I’m excited about Illumina’s opportunity in 2018 and beyond. As I just discussed the JPMorgan a few weeks back, we are seeing the regulatory and reimbursement decisions that will ultimately enable sequencing to move firmly into the clinic, where it will positively impact patient outcomes.

In many cases, these changes are emerging faster than we could have expected, which is a positive indicator for Illumina’s growth in the years to come. For 2018, specifically, there are many factors that will contribute to Illumina’s continued growth.

First, our NovaSeq system that remains in the earliest stages of the upgrade cycle, and as we expected, looks set for a multi-year transition. Notable within this category, Xp workflow and S4 were launched late in 2017, so we will benefit from a full-year of release in 2018.

Additionally, we have the launch of S1 this quarter, so we expect NovaSeq consumables to continue to grow rapidly in 2018. Beyond NovaSeq, we have an impressive portfolio of products that are new or just launched, including iSeq, Nextera DNA Flex and AmpliSeq for Illumina.

In population genomics, we have a number of national initiatives that are ramping in 2018. And of course, our consumer business continues to grow through our array customers in addition to a modest contribution from Helix, still only in its first few quarters of launch.

In clinical, 2018 will represent our first full-year of sales of VeriSeq NIPT CE-IVD and the ramp up of some new large customers. NextSeq is proving to be a workhorse for our clinical customers, so we expect to continue strong – to see strong pull-through performance and consumer growth.

We expect to see continued and potentially accelerating traction in rugged, given the expanded insurance coverage for whole exome sequencing achieved in 2017. Finally, we expect to see continued growth among our oncology customers, as they continue their important and potentially transformative work.

I look forward to updating you on our progress throughout 2018. 2017 was a terrific year, and I’d like to thank the Illumina team for the commitment and execution that delivered such a strong year. Operator, we’d now like to begin our Q&A session..

Thank you, sir..We will now begin the Q&A session. [Operator Instructions] The first question in the queue comes from Doug Schenkel from Cowen. Go ahead, sir. Your line is open..

Okay. Good afternoon and thank you. You closed out 2017 clearly with a lot of momentum in addition to having the NovaSeq out there without manufacturing constraints. You now have the S4 and the single line loading device out in the field, and as you just mentioned, the S1 coming soon.

Essentially, you have all the tools at your disposal out there to drive placements and utilization and probably visibility is improving. With that said, for those of us outside the company, there’s still lingering questions on how replacing HiSeqs with NovaSeqs is going to impact overall consumable revenue.

Based on what you’re seeing in the field about a year into this launch on a dollar basis, do you expect same-store consumable sales to increase in labs that replace HiSeqs with NovaSeqs? Essentially, based on what you’re seeing out there with placements and replacements, how confident are you today that volume elasticity will be enough to offset pricing reductions afforded to these customers?.

Sure. So thanks for that question, Doug. Even as we were planning for the launch of NovaSeq, we were spending a lot of time with our HiSeq customers and our HiSeq X customers.

And as we do with all major, especially high-throughput launches, we spend a lot of time understanding the drivers of demand for the new platforms and we released new platforms when we feel that we are about to tap into sort of the next wave of elasticity.

And so as we got into the NovaSeq wave, what we heard from customers very clearly was that with the power that they would have access to it, NovaSeq. And you remember, for a lot of these customers who were HiSeq customers that haven’t bought the Xs.

So, the 800 HiSeq customers that were outside the 35-plus X customers, they really haven’t had power – the access to the power of the X. So what they’re telling us is, when they got access to NovaSeq, what they would do is, they would be able to drive more sequencing in a number of ways.

They’d look at doing larger cohorts, they’d look at doing broader sequencing, so panels to exomes, exomes to genomes and they’d look at doing deeper sequencing. And so that’s the – that’s what built the model around NovaSeq and the demand for NovaSeq. As now we look back sort of a year from having lunched NovaSeq, it’s playing out as we expected.

As you heard me talk about at JPMorgan, we’re now seeing examples of customers that are tapping into this elasticity in each of those buckets. We’re seeing customers doing a larger cohorts and they would have planned.

We’re seeing customers doing much deeper sequencing, especially in areas like liquid biopsy, but other areas of oncology, too, and then we’re seeing customers doing broader sequencing.

If you look at projects, for example, like the consortium with Regeneron announced in terms of sequencing the UK Biobank, that’s the kind of project that really is made available through NovaSeq, that frankly wouldn’t have happened on the HiSeq.

And so in each of those categories now, we have examples that NovaSeq is delivering on the elasticity of that market..

Okay, that’s helpful. And this one is a bit quicker. Based on your installed base disclosures the last couple of years, it looks like you maybe retired only about 100 HiSeq and HiSeq access in 2017, or at least, something in that ballpark. This is far less than what you retired the year before.

Again, assuming my math is right here, why did the pace of retirements moderate in 2017, and maybe more importantly, looking ahead to 2018? What is your expectation for HiSeq and HiSeq X replacements that you embedded into full-year guidance? Thank you..

Sure. So in Q4 itself, we added another 20 – about 20, sorry, HiSeqs that we retired from the installed base and we didn’t actually take out any Xs in the installed base from Q4. So I think, that adds to the numbers you’ve heard from the rest of the year.

As we were thinking about the upgrade cycle and the pace of retirements and transitions from the HiSeqs and the Xs, this really is a three to five-year upgrade cycle. And the way we sort of measured it out, as we said in the first years of 2017, the focus was really on the HiSeq customers not the X customers.

And the focus on the HiSeq customer base was to get them comfortable in the higher utilization HiSeq customers get them comfortable with the NovaSeqs get them starting to validate their workflows in the NovSeqs.

And so the way it showed up in demand for us in 2017 was certainly I talked about in Q3, especially we saw lots of orders that were onesie-twosie.

And those were driven by some of the higher throughput chops looking at NovaSeq and starting to get comfortable with the workflow in NovaSeq, as well as and some of the smaller labs that we’re looking to upgrade. We expect the bigger part of the transition to happen starting this year, driven by two things.

One, some of those HiSeq customers are going to start to move more of their workload onto NovaSeqs. And so you’ll start to see more instruments being retired as we go through 2018. And then, as you know, we launched the S4 in Q4. And so the intent was always 2018 was the year for X customers to start their transition to NovaSeq.

And so you should start to see Xs start to be taken out of commission this year going forward. And so that’s what led to the lower retirements – part contributor to the lower retirements of those instruments in 2017..

Okay. Thank you. The next question in the queue comes from Ross Muken from Evercore..

Hi, Ross..

Good afternoon, guys, and congrats on a fantastic quarter..

Thank you..

As we think about your conversation with your customer base around the NovaSeq from an application perspective, it seems like the size and the scope of the types of studies one would want to do and sort of even things that a few years ago were kind of envisioned as impossible or being made possible obviously by the ramp in the technology.

And sort of now that we’ve had sometime where this has been introducing with the S4 out in particular. What are the types of discussions you’re seeing globally in terms of some of these newer projects? So I assume some of things coming to market now were probably derived 12, 24 months ago.

And so, we will probably see some of the newer studies, or new scopes studies come over the next few years.

So just help us understand how that has changed and how folks after they’ve had a time to understand what’s possible and what they can do with – particularly with the S4 or how they’re planning?.

Yes. So let me start by saying, look, some of the things that you heard about last year the – I talked about Regeneron, but the work that GRAIL was doing, for example. Those sides of studies have been fundamentally enabled by having access to the power of NovaSeq.

Now, if I look back at some of the new customers and new applications, and I think, you touched on globally that are being enabled.

Let me give you some examples, right? So we saw, for example, a new service lab customer in Eastern Europe that purchased the NovaSeq and is planning to establish whole genome, whole exome pipeline for genetic disease testing. We saw large Canadian University that’s going to use NovaSeq for population genetics and repatriating clinical exomes.

We saw a benchtop customer that’s working to develop ctDNA technology used for early cancer screening. And they moved to NovaSeq considering the sequencing cost and the higher throughput that they would need for that application.

We also saw, for example, a couple of benchtop customers that originally were HiSeq 3,000, 4,000 opportunities that purchased NovaSeq. To your point, that’s an opportunity that’s been percolating for awhile. But then really what got it over the line was, when they saw NovaSeq and what it would do for them.

We also saw a new customer, which is a recently opened cancer center that wants to do whole genome sequencing or high-throughput exome for NovaSeq. So globally, those are examples of new applications, new customers that have been enabled because of NovaSeq..

No, that’s super helpful color. And I guess, just maybe in terms of how much of this outperformance you’re sort of willing to drop through? I mean, this quarter, obviously, a big uptick in gross margins, but also OpEx was held pretty tight. What I think is kind of implied in the guide, it’s a little bit more reinvestment.

I mean, how do you think about, particularly on the R&D line, where incremental dollars are being allocated just, because you’ve obviously got such a great presence in your space and there’s so many dynamic opportunities, it seems like your R&D budgets already quite sizable.

But considering some of the opportunities ahead of you, there’s still lot to invest.

And how are you sort of balancing that and what you’re willing to kind of show on the dropdown?.

That’s a really good point, Ross, because we spend a lot of time internally and have just gone through a few month process, where we were sort of laying out our three to five-year strategic plan.

And the reality of the opportunity facing us and where we are in that opportunity is that, there is a lot more that we could go after than we want to go after then frankly, we’ll be able to go after.

And so a big part of our strategic planning process is to be very thoughtful about, okay, what are the opportunities we actually want to go after? What are the opportunities we want to go after ourselves? And then how do we enable the rest of the opportunity to develop maybe through a partner ecosystem, through things like the accelerator and ventures.

And obviously, we don’t talk about the things that we have in development. But you’ve noted, we have a commitment to innovation in R&D. And we think that there is opportunity in continuing to expand the market through innovation, through innovation and improving the workloads and improving the cost of sequencing.

There’s opportunity for innovation and delivering in targeted areas the sample to answer solutions that we talked about. There’s opportunity from continuing to get our products cleared in markets around the world.

And then the other area we’re looking to expand is, we believe that it will be money well spent to continue to expand our commercial infrastructure.

That means feet in the ground, especially in growing markets like China, that means our – continuing to invest in our infrastructure like our digital and e-commerce capabilities, that also means expanding our partner ecosystem.

And so, those are some of the things that we consider – the kinds of things that we consider as we prioritize our investments. But we truly believe, again, we’re still at the very early stages in almost every market we’re in of this very large opportunity in front of us.

And so the hard thinking is, what do you invest and when?.

Super helpful. Thank you..

Thank you. The next question in the queue comes from Dan Arias from CGI. Your line is open..

Yes. Hi, guys, thank you..

Hi, Dan..

Francis, just on the instrument side, I mean, we can kind of talk to how much of the NovaSeq customer base has placed a multi-system order, but is still kind of waiting for a portion of that order.

It seems like there’s a good number of labs that have machines, but they don’t have everything that they bought, and that maybe that’s a meaningful part of the placement dynamic this year.

Do you agree with that? And if so, is that something that maybe you can put numbers around?.

It’s definitely a part of the dynamic. If I look at, the – certainly, the large genome centers, the X shops. The majority of them have purchased, at least, one NovaSeq. But for most of them, the actual both delivery and then replatforming is still in front of us.

Some of that will happen in 2018, some of them will start delivering additional units even in Q1 and then we will work over the course of the year to move more of their workloads on to NovaSeq. But that’s a dynamic that will play out not just this year, it will play out next year and the following years as well.

That dynamic is definitely a factor in our backlog. So as we walked into 2018, if I look at the NovaSeq backlog we’re carrying, definitely, the remaining units of a multi-unit order from a large genome center. So that category makes up a chunk of the backlog we’re walking into 2018 with.

But if I look at overall NovaSeq for this year, a large number of the orders are still going to come from that onesie-twosie orders from the customers – the HiSeq customers that are moving to NovaSeq. So if you look at the order profile over the year, I’d say, a bigger chunk of it is coming from the HiSeq customers, not the X customers.

But if I look at the backlog we’re walking to 2018 with, there’s more of the X remaining units to be delivered in there..

Yes. Okay, that’s great. And then maybe just on NIPT, curious about your sense for the capacity needs of labs there, if you do take a big step forward on volumes and then to the extent that that does impact system demand.

How much do you think goes to the NextSeq versus the NovaSeq?.

Yes. I definitely think that the NIPT segment will see a continued growth in demand and mostly because of two things. One, the continued growth in reimbursement around the world and we talked about how that’s building, especially globally built nicely over 2017 and we’ll start to see that play out in 2018.

In that segment, the first area that we see impacted is consumable growth. And so, the first thing you’ll see as, you start to see NIPT reimbursement expand as we should see that show up in our consumable revenue. And then, obviously, they continue to add systems as well as, as they need more capacity. That is primarily a NextSeq business, I’d say.

And so if you start to think about where it shows up in terms of instruments, say, today, it’s primary sort of NextSeq..

Super. Thank you..

Thank you. The next question in the queue comes from Tycho Peterson. Your line is open..

Hi, Tycho..

Hey, thanks. Francis, I appreciate all the color on – in NovaSeq. I’ve just got one or two clarifications. Now that you’ve got the Xp Sample Prep out and the S4 chip.

Can you give us a sense of how much of the funnel incorporates the Xp device? I’m just wondering on kind of some of these larger multi-system orders? And then separately, how do we think about the S1 launch driving Nova demand? I mean, these are really for kind of newer to high throughput sequencing and benchtop customers that you’re trying to upgrade, is that the right way to think about it?.

Yes. So let me start with S1, and that’s exactly is. So S1 is really targeting the HiSeq customers that have either the lower sample volume. They’re the ones that are most attracted to S1. And for them, that could be the trigger that causes them to start to look at moving from HiSeqs to the S1.

But it’s also going to be customers that won the fast turnaround time. As you remember, from our HiSeq customer base, there was a group for which a rapid turnaround was a key criteria. And so, S1 does appeal to that segment of the HiSeq customer base, too.

We think that is a segment that some of them were waiting for an S1, because that’s what makes the most economic sense for their business model. I think, Xp is helpful to this market, and there are definitely customers who needed it for their workflow and the way they ran their business was they were doing.

In some cases, if they were a service lab, they were doing one lab per customer, one lab for genome. And so the Xp workflow does help them with their business. I think, it’s going to be incrementally helpful. I think, we’re going to call out sort of the attach rate or how many of those units we sell.

But it definitely is helpful in terms of having NovaSeq embedded into the workflow some of our – certainly some of our larger service customers..

Okay.

And then if we think about iSeq, is MiSeq a good proxy? I know, you talked about having 600 MiSeqs out there, and how we think about cannibalization and maybe where MiSeq fits in going forward?.

Yes, I think, it’s somewhat of a proxy. I think, though, it’s not a great proxy, because in – if you look at genomics, there’s a pretty big difference between iSeq and MiSeq, right? So, iSeq is $20,000, MiSeq is 2.5 times as much as $50,000. But MiSeq is 2.5 times as expensive, but it delivers six times the output.

It delivers six times the number of reads per run. And so if you have the capital, if you have the sample volume, you would go for MiSeq. And so, I think, it’s really targeted at customers that are saying, look, a $50,00 instrument is just out of reach for our lab, or they just don’t have the sample volume to warrant even a MiSeq.

And so, I really think of it as opening up a different segment. And I – and there may be some cannibalization, but I don’t expect there will be a lot of cannibalization.

And in that sense, there’s a bit of analogy, where we didn’t end up seeing MiSeq cannibalize the iSeq, we thought maybe up to 25% and they end up not being that at all, and I think maybe that that’s similar..

Okay. And if I could just ask one last one.

Can you comment on what’s baked into guidance for arrays, given the inflection you saw in samples last year, could arrays be up 20% again, this year, or how should we think about it?.

Yes. So, I would say, it’s is in line with overall guidance, Tycho. So basically, building some of the very strong demand and growth that we saw in 2017, and I would say, we would expect the same trends in 2018 as well..

Okay. Thank you..

The next question in the queue comes from Derik de Bruin. Your line is open..

Hi, good afternoon, everyone..

Hi, Derik..

Hey, when you look at the overall instrument number for 2018, when you think about the revenue number, it’s like, do you expect total revenues for instruments to be up in 2018? Because I’m trying just – trying sort of the follow-up on Tycho’s question.

I’m just trying to get a sense of, sort of like the underlying demand for the MiSeq and the NextSeq as you sort of look at that? And what’s sort of the ASP are you looking at for, or are using for your calculations on the Nova?.

Yes. So, Derik, I’ll talk about the instrument demand for 2018 or what’s basically embedded in guidance. So, obviously, we gave you the the NovaSeq shipment expectations for 2018, so that’s self-explanatory there. So we do expect growth in placements of NovaSeq..

Yes..

We also expect growth in placements across really all of our instrument platforms with the notable exception being the HiSeq family of instruments. And for – iSeq is also going to be a tailwind driven by the fact that it’s a new product introduction. So, and – basically and someway, we do expect growth in the instruments line for 2018..

Great, that’s helpful. On the – is there anything embedded in terms of for GRAIL, I mean, you caught out, Helix.

I assume that Helix is in a DNA – is Helix being recorded in a DNA sequencing services line?.

Helix essentially shows up across our revenues and shows up across our whole income statement, and then we essentially record a noncontrolling interest adjustment when we’re calculating the effect on EPS..

And for GRAIL, I mean, the – and maybe are you shipping instruments to GRAIL right now as part of that the ramp up in placement for this year?.

So the way it works, GRAIL is just like any other customer of ours, right, a great customer and a large customer, but like any other customer. So as they need additional capacity, they buy instruments from us and they buy consumables from us.

So we talked about the fact that, they were one of our larger customers last year, and we expect them to continue to be a big customer of ours going forward. We don’t share specifics about what instruments are buying when obviously..

Great. Thank you. I’ll get back in the queue..

Yep..

Thank you. The next question in the queue comes from Steve Beuchaw from Morgan Stanley. Your line is open..

Hi, this is Steve Beuchaw in for Steve Buckchaw. [ph] Thanks for taking the question.

I wonder, Sam or Francis, if you could give us just a little bit more modeling help with the trend on sequencing consumables that you anticipate for 2018? Any sense for the distribution first-half versus second-half, does it look – I mean, 2017 was a little unusual, given the first-half destocking dynamics.

What is the growth rate for sequencing consumables look like in 2018, and any view on distribution would be super helpful?.

Yes. So, Steve, we’re not going to give a specific number in terms of sequencing consumables growth. But I’ll give you some of the underlying drivers at a high-level. So we do expect growth over the course of 2018 in terms of overall sequencing consumables versus 2017.

That growth is going to be driven by the NovaSeq update and by also growth across NextSeq and other platforms as well. Again, with the exception being that, HiSeq, we do expect across the HiSeq family to see a reduction in terms of the overall consumable dollars across HiSeq. But that’s going to play out there now.

I would say, over time, it’s going to be fairly choppy. So, there’s going to be some, I would say, fluctuation over the course of the quarter. So I’m not going to give you a specific number in terms of what to expect for each quarter. There will be seasonality though mostly in Q1.

And so you will see a lower sequencing consumable number in Q1 driven by seasonality. But across the course of the year, you will see growth..

Okay. And then just two housekeeping items for me, one, apologize if I missed this.

But could you give us the – or give any sense directionally for the NovaSeq order number in the fourth quarter? Did we get a step up there relative to third quarter? And then any commentary on China, given the growth commentary there just thinking through the drivers would be really helpful? And I’ll get back in queue there. Thanks, again..

Yes, for orders, Steve, we’re not providing order information anymore as we had mentioned last quarter, so won’t give you much there. But in terms of China, we had 12% growth in terms of shipments in Q4, as I mentioned, and this was lower than the Q3 number that we have reported.

But China is essentially choppy as well in terms of overall growth driven by sometimes the timing of instrument placement. So back in Q2, I believe, we had in the mid-teens of growth, so it’s fairly in line with what we saw in Q2, but a step down from Q3..

Yes. And then what we said, Steve, in terms of NovaSeq shipments, so we said that, in Q4, we shipped in the high 80s NovaSeq unit, and that was the highest we’ve shipped of any quarter over the course of the year. So you can see that’s continuing to build..

Thanks, again..

Thank you. The next question comes from Patrick Donnelly with Goldman Sachs..

Thanks, guys. Can you provide any color on the utilization mix of the NovaSeq customers as you continue to see new sequencing customers make up about a third of the customer base.

Is it a wider range for pull-through between low utilization and high ones compared to prior systems? I guess, I’m just curious if the new sequencing customers are meaningfully lower than kind of the existing customers who buy them?.

The trend is not frankly, in my opinion, very different than what we saw before. And so what happens is and we saw this with the X and what we see is the first customers who come on Board certainly what’s true with the X, too, are higher-utilization customers. So they’re the ones that, they understand sequencing.

They typically had been using another high throughput platform before. And so the first few instruments, you see utilization that’s extraordinarily high, and then you start to see from the newer to sequencing customers come on. And so,.

initially, you see a little bit by model and then very quickly it sort of normalizes to almost aligned, not quite aligned, but almost aligned where people will come in and they’ll start to build up their pull-through on the instrument and work their way up that line. And so, we’re still – we’re seeing that with NovaSeq.

We know with experience now that, it will still take maybe a couple more quarters before the – that cohort settles down to a more normalized state, where we can call up pull-through that you guys can use to model..

Okay, helpful. And then maybe just on the balance sheet and cash continues to build, now you guys are over $2 billion in cash.

How should we think about the capital deployment strategy? I mean, maybe just talk about the pipeline, the assets that are out there and what makes sense to add to the portfolio here?.

Yes. So I’ll start and I’ll just say that, our capital deployment philosophy hasn’t really changed. We remain very focused on. First of all, we need to invest in our capabilities. We need to invest in potential improvements to our technology, be it through partnerships, or other opportunities that we have.

And then, in terms of other opportunities out there, obviously, hard to comment. I’ll give you specifics there, but they need to essentially be aligned with our strategic priorities and focus and be also accretive to us from an overall growth standpoint. So nothing really has changed materially from what we’ve discussed before.

It really remains focused on how do we improve our technology, how do we upgrade our technology and look for partnerships in that space as well. And then finally, on a probably less material note, we also continue to focus on offsetting any equity dilution with the share repurchases as we did in Q4 when we bought back some shares..

Yes, and if I could just sort of underline what Sam said. Look, our top priority continues to be organic innovation to accelerate the market. And so, we’re doing a lot of work there. But I mean, frankly, I think, it’s almost every six weeks, the leadership team meet and we review what’s happening outside Illumina.

And we review the landscape to see if there are innovations that we think would be better as part of Illumina, and we’ve done this for many years now. And so, we are very willing as we’ve demonstrated in the past to go out and acquire something that we think will be long-term accretive to us. You’ve seen us do technology tuck-ins.

You’ve seen us do bigger ones like even way back where there was Verinata or Solexa. Obviously, in the last couple of years, we haven’t seen anything out there that we feel, we had to have, but we are – we look at it all the time..

Thank you..

Thank you. The next question in the queue comes from Tim Evans with Wells Fargo. Your line is open..

Thank you. Now that we’re at the end of 2017.

I was wondering if you might update us on the mix of your consolidated revenue when it comes to clinical translational and research? And what I’m really trying to get out here is, what – how fast is research growing versus how fast is clinical translational grow? I know, you’ve given us a few pieces here and there.

But is there – could we get a little bit of a higher-level view of that?.

Yes. So let me give you some top level sort of observations. I’d say that, we – what we said now is that, if you look at the mix of our business, the clinical part of our business that includes translational is about 45% of our business and that’s up from the high 30s in 2016.

So we are continuing to see more of our business come from the clinical markets. That’s clear, because we’re seeing higher growth in those markets, right? So we talked about the growth rate that we’ve seen in oncology that has been over 20%. As we look at the growth rate, we talked about the growth rate that we see in NIPT.

And we also talked about the fact that the clinical markets are also just very much larger over time. And so, they’re growing faster and they are larger over time. So they will be over time the majority of our business. They will represent the majority of our business over time. So we do expect it to tip over the 50% mark over time.

The research markets are going to continue to be an important market for us. They’re important, because one, today they represent over half of our revenues. But also they’re very important customers, because very often everything that shows up in a clinic at some point started in a research lab.

And so our research customers represent not only an important source of revenue for us, but they are an important source of thought leadership. They are great customers in terms of helping us think about the direction that our technology needs to evolve.

In terms of growth, we talked about the fact that, overall, the research markets rough and tough are growing in the high single digits is how you should think about it. Now, there’s still an opportunity for us to grow faster than that in the research market to the extent that you’re seeing research dollars moved into genomics research.

And so, in the U.S., for example, it’s been a good sign for us. But you’re starting to see more and more of the NIH agencies take on projects that are genomics projects. It’s not just coming from the NHGRI that you’re starting to see incremental dollars from NHLBI, NCI and a whole bunch of other agencies.

And so the extent that you can see more research dollars moving into genomics. There’s a chance to grow faster than the overall research and growth as well..

Thank you so much for that. Real quick question on tax rate. A lot of moving parts here, and I hear you on the $0.10 from tax reform.

But can you just tell us what the tax rate is embedded in the 2018 guide?.

So we haven’t communicated an exact tax rate. All I would tell you is, there are some improvement in the tax rate from 2017 to 2018, driven by the tax reform benefit. But as you said, there’s a lot of moving parts.

In Q4 of 2017, we actually had a significant benefit related to the mix from foreign earnings driven by consumable and where we manufacture consumables. We also had some benefit in Q4 related to some release of reserves, what we call, provision to return benefit from prior year return.

So that was a one-time benefit in Q4 that at this point of piece, we have a model to repeat in 2018, but there is moving parts. But I would say, just overall, some benefit in 2018 in terms of the total tax rate versus 2017..

Thank you..

The next question in the queue comes from Bill Quirk with Piper Jaffray. Your line is open..

Great. Thanks. Good afternoon, everybody..

Good afternoon..

Good afternoon..

I appreciate the color around NIPT expectations for 2018 and the color around the Dutch tender.

Francis, I wanted to talk a little bit about, I guess, expectations for the oncology franchise, given that we obviously have some important book label and reimbursement milestones that we crossed in 2017?.

Sure. Oncology has been a really important story for us as we look at 2017, right? If you look at even just in Q4, oncology testing was up 60% in Q4. And oncology testing, if you look at the whole year, was up 38% over 2016. And so we’re seeing a – the real emergence in oncology of a number of factors that are driving it.

One is just the emergence of liquid biopsy. And so some of our liquid biopsy customers are driving some of the demand that we’re seeing. But as you pointed out, we’re also seeing a number of trends play out in terms of regulatory approvals, in terms of reimbursements that may not have yet had the impact in 2017.

But I think are setting us up well for future growth in oncology. So we talked about the change in guidelines from and reimbursement procedure at Cigna, which we think is a good step in the right direction towards the routine adoption of multi-gene panels.

And as we said, what’s happened there, as Cigna said, that they will reimburse multi-gene test as long as the clinical utility for one of the genes in the test has been established, that’s a good step forward.

We talked about the CMS decision, where they’re going to reimburse genomic test for more than just non-small cell lung cancer, but for all solid tumors, which they used to not do before. We also like what’s happened with both the regulatory decision and also the reimbursement decision around the foundation one test.

And so there are number of things that got put into place in 2017, that may not have been responsible for the results in 2017, but we think set us up well for the future..

Got it. Thank you. And then just a follow-up on the array business. Given some of the increases in traffic around Ancestry and 23andMe, particularly relating to the Christmas Holiday. I guess, as a little surprised the array consumables went up a little higher than they were.

Is there some sort of delay by any chance? And we tend to see, say, Christmas benefit coming in the first quarter as the samples are processed? Thank you..

Yes, that’s exactly right. So the way it works and then so two things, I’ll call it. One is just sort of where you would see the results. So the ancestry business really shows up in terms of array services. So it’s not the only thing in there, but it’s one of the bigger things in our array services line.

So that’s where you would have seen it not necessarily array consumables. But the other consumer customers we have like 23andMe would be an array consumables. Now, in terms of how it actually plays out.

So, look, the way it plays out in the market is a consumer will buy the kit, and they’ll buy the kit either over Thanksgiving or for Christmas holidays, some of that buying is to be gifted. And so what happens is, the kit is purchased. It shows up as an order for Ancestry or 23andMe and sort of they talk about as orders as they got in Q4.

That kit then as we gifted, the person who receives it has to spin in a tube and send that tube to us before we start to work on it. And therefore, it shows up as revenue for us as array revenue. And so you can see with that process why a Thanksgiving or a Christmas purchase could show up as Q1 or even Q2 revenue for us.

And so there’s an actual delay in how that works between what shows up for them and what shows up for us..

And the last thing, I would just add to Francis’s delineation between ready array revenue shows up or where the consumer revenues shows up. The microarray consumables is not – also not just consumer business, there’s a lot more other something there as well. So when you’re thinking about growth rate just keep that in mind..

I appreciate all the color. Thank You..

Thank you. The next question in the queue comes from Dan Leonard with Deutsche Bank. Your line is open..

Thank you. So just want to press on the NovaSeq ship guidance a little bit. It looks like you’re allowing for a lighter quarterly shipment trend in 2018 than its recent trend. But presumably, you ended the year with a big backlog, you’re manufacturing at full tilt. So you can draw down your backlog.

You have the S1 chip, the S4 chip, or S1 soon, S4 chip already, Xp already. So you can open up all the applications.

Why couldn’t the NovaSeq shipments be a bit higher than 330 to 350?.

Sure. So we shipped the last year $285 million, approximately $285 million NovaSeqs. And so the range we’re talking about this year $330 million to $350 million is a step up from last year. But what we said before is, you should think about it as a step up more, because you’re seeing a full-year effect in 2018.

And we only – we were constrained for, at least, the first two quarters of last year. And so, what we said is, we expect this to be a more measured so upgrade cycle playing out over three to five years, and we’ve done a number of things to make that happen.

So shipping the S4 flow cell and the Xp device in Q4 rather than earlier in the year having S1 come out now. And so what we want is and what we’re expecting to see in the market is this more and measured sort of upgrade cycle that plays out over the three to five-year period.

So, yes, you will see more shipments this year at $330 million to $350 million than you saw last year approximately $285 million. But again, think about of it as more of a full-year effects rather than we do not want to see a pop and then sort of a decline..

Okay.

And then, Francis, for my follow-up, a year into the NovaSeq launch, do you have any better sense of what the swap ratio looks like some 1,900 HiSeqs could convert to what number of NovaSeqs?.

Yes, what we said before, and I think it’s even more true than it was last year. The way we think about it is not the number of instruments back, so we don’t think about it as an instrument swap ratio. We think about it as number of customers out.

So, you can start with about 1,850 HiSeq and HiSeq X customers and work out, and say, look, some of them, certainly, some of the HiSeq customers may go to NextSeq, but the majority of them will go to NovaSeq.

And certainly on the X customers, they will go to NovaSeq, right? So, the way we’ve thought about it and now that I’ve spent a lot of time talking to customers, I think, it is the right way to think about it is really start from number of customers out assuming that, the majority of them will purchase, at least, one and likely more than one.

And the reason for that is, when customers think about purchasing the NovaSeq, their demand profile isn’t static, right? So as they start to think about a NovaSeq, they start to think about what else they could do.

I mean, Regeneron is the perfect example, right? So, they took on the 500,000 samples UK Biobank project and said they could get it done by 2019. But it’s not something they would have done on their HiSeq.

And so, as we have those conversations, the dynamic happening there is that the demand profile changes, in many cases, as they start to think about where NovaSeq allows them to do. And so taking the old demand and then trying to figure out what capacity of NovaSeqs they’ll need would get you to the wrong answer..

Okay. I appreciate those thoughts. Thank you..

Yes..

We have time for one more question in the queue, and it comes from Sung Ji Nam. Your line is open from BTIG..

Hi, thanks for taking the question. Just one kind of a two-part question on microarray – on microarrays. You guys showed the inflection point for the consumer genomics in terms of the volume, the sample volume in 2017.

And was curious as to what – from your standpoint, what’s driving that? Is that kind of more consumer genomics providers entering the market, or is it just kind of curious as to – I’m just trying to get a better sense of where this could go? And then also, I think, Sam alluded to other areas – other applications within microarray is also driving growth for that business.

And if you could provide more color, in the past you talked about add Bio, et cetera, so if you could provide more color there as well? Thank you..

Yes, sure. I think, one of the biggest factors that’s driving this inflection point we saw last year is the elasticity in the market. And we talked about elasticity a lot at Illumina and we talked about the elasticity in the oncology market and NIPT, and it’s very true in the consumer market, too.

If you talk to the leading players in the space, 23andMe and Ancestry, they’ll tell you. And I don’t know if you heard Ann speak at JPMorgan. She has a terrific story about just the huge spike in demand she saw when the 23andMe raised lowered the prices of their kids.

And she will talk about when they went from about $150 to $100 a test, in some cases, now $50 a test. It opens up a fast demand for them.

And so probably the biggest thing that drove the inflection point last year was that the tests reached prices, the $99 mark, and in some cases over the Black Friday weekend, the $50 mark that that really capped into this elasticity of demand in the consumer market. I think, that’s simply the biggest like. There are a number of entrants in that market.

But in the U.S., I think, it’s primarily Ancestry, 23andMe and then maybe Family Tree DNA a little further behind there sort of the big players. So it’s not that you have many more entrants in the space. It’s just that you have price points now that are really attractive to customers. Now Helix allows more experimentation in that space.

And so, the players that I talked about are all targeting the genealogy space, and that’s emerged as the first killer application in consumer genomics.

What Helix allows us to do as a market is pretty test all the other markets, right, with the wellness market, the nutrition market, the fitness market and see what’s the next killer application in consumer genomics beyond genealogy..

Great.

And then a bit more color on kind of other applications where you might be seeing a lot of growth as well?.

Yes. So as Sam touched on it. If you look at the numbers we report, we reported an array services line. And there, the majority of it is the consumer genomic space. And so, they – that business does drive the growth rate of that line. If you look at array consumable line, there are a number of other segments that show up in the line.

So our ag business, our agriculture business, for example, shows up in that line.

And so while that’s an important segment, it’s growing at a much lower rate than the consumer genomics, right? So if you look at the blended growth rate in array consumables, you’ll end up with something in the single digits, because the majority of that line is actually not consumer genomics..

Thank you so much..

Thank you. I’ll turn the call back over to Jacquie now. Ms.

Ross?.

Thank you. As a reminder, a replay of this call will be available as a webcast in the Investors section of our website, as well as to 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 quarter..

Ladies and gentlemen, thank you for participating. You may now disconnect..