ILMN
#There was nothing in the European numbers that was market specific, and so these were revenue recognition issues of various sorts, as I highlighted in the script.
None of those were particularly related to specific markets within the clinical sector or the research sector.
They're two sort of different issues.
If we look at Q1, that was really a HiSeq story, and that was a HiSeq story across regions, and we talked about the fact that a lot of that was the HiSeq shortfall, and the orders that came in, that we weren't able to recognize as revenue.
That's really what the Q1 story was.
Looking forward the issue is around the forecasted shortfall in Europe, and there, we believe a lot of it is around sales execution, and that's really what we are focused on, driving more discipline into generating pipeline, getting visibility into the pipeline and Jen urgency in working the deals through the process, and that's across instruments, and across markets in Europe.
I think personnel and then the knock-on effect on the process we're running in Europe.
I feel like we have ---+ you're not going to put all this on one person, and we have definitely good people on the team.
What we are seeing is that we don't run as disciplined a process in Europe as we do in the other regions, and already, we're starting to see in the last few weeks, an improvement in the visibility of the pipeline through this quarter, and we're seeing more urgency in our sales process.
So that we believe were the biggest drivers in what we're seeing in Europe.
And <UNK>, on the instrument revenue, we're not bifurcating the guide for the year into the individual component pieces, but I gave some specific commentary.
Clearly, we've given commentary around Q1.
I gave some specific commentary around Q2 there as well.
So definitely a slower start for the year, driven by the high throughput.
And then as I mentioned, we'll see an uptick toward the second half of the year.
But not giving out specific commentary on breaking down the revenue growth by that category at this point.
Yes, I maybe wouldn't characterize it exactly like that, <UNK>, but I think your points are important ones.
I've highlighted over the past year or 18 months that much of the market development that has to happen now in sequencing falls on Illumina, that we don't have a lot of other large companies who are spending marketing dollars developing markets, and so that is key for us to do, more than it ever has been.
And the big markets we're opening up now have each their own unique set of issues, whether it's reimbursement, or regulatory, or in the case of GRAIL, clinical trial work.
And so it is ---+ it does take some time to open up those new markets.
Having said that, there's no question that Illumina's still driven by product innovation.
In all of our businesses, we analytically see a cycle that's related to product cycles.
And whenever we launch new platforms, we get a surge of new orders for those instruments, and then the following year, the consumables begin to catch up, and then that platform begins to level out over time.
So every platform has an S curve associated with it.
It is true that we are a larger Company now, and therefore each individual S curve has a smaller of effect on the total revenue of the Company.
So there's no getting around that fact.
And so, we have much greater diversity in our business now, which is a good thing, but each individual product launch probably is less of an impact than it might have been, back when we had only one sequencer, for example, when we replaced the GA with the HiSeq, everybody bought a HiSeq, because it's the only product in the market.
That's not quite where we are today.
As we look to operationalize those dynamics, as <UNK> said, there are two dynamics playing out.
One is there is an opportunity for us to get more actively involved in the development of those markets, so we can accelerate the adoption of NGS into the different markets we play in, and work with our customers to help them with things like the trial that we're doing, the STAR trial we're doing in the PGS space, in the IVF world for example.
We're also getting more engaged with our customers in the payer community, and market access programs.
And part, as <UNK> said, of what we do to develop the market is actually bring new instruments into the market, which can catalyze the market through access to a lower price point.
Certainly a set of things we are doing to operationalize developing those markets.
Separate from that, there is a change in how you sell at this scale, and that in addition to tracking the big deals that get a high level of visibility at the executive level, a scalable sales process needs to make sure that we're taking care of the flow business, and that we do have really good visibility into pipeline, how pipelines are progressing, the opportunities.
And that's what we're putting into place in Europe, for example, right now.
Yes, that's exactly right.
So we did see as expected decline in Asia in Q1, but as we look at the forecast for the rest of the year, we do believe we have the opportunities and pipeline to support a mid-teens growth for the year.
The things that are driving those are, one, there is activity around the Chinese PMI.
That is causing purchasing to happen.
We saw that already start, and we expect that to play out.
We're continuing to see incremental improvement in Japan for example, and while that is slow and steady, it's slow and steady in the right direction, and we're seeing that show up in our pipeline as well.
And John, obviously Japan was a challenge quarter after quarter for us last year, and so that's reflected in the comps.
<UNK>, you want to walk through that.
Or do you want me to.
<UNK>, I missed the first part.
You're saying in relation to the utilization slide.
So I think a couple things.
Firstly, the capacity calculation itself, which is based on the actual mix of types of kits that our customers buy and run, clearly that's increasing quarter-over-quarter, as a result of the both the installed base, a little bit of the change in mix, and us coming out with higher throughput instruments, which I'll come back to when I look at the capacity utilization chart.
If you think about the percentages, what you probably ---+ what you don't want to see is a very low percentage of utilization.
That would reflect a lot of spare capacity in the market, which would have a read-through, I think, to future instrument purchases.
You're obviously not going to see utilizations based on our trajectory, our past history and our trajectory of much over 50% on an ongoing basis, due to the decentralization of the market.
Only in a centralized market would you see it much, much higher than this.
If you look at the data, what you're seeing is ---+ you see a couple of inflection points, where the utilization tends to stabilize.
That happens to coincide ---+ in one case go down if you look at 3Q 2014.
That coincides with when we put new capacity in the market.
Back then was the V4 run kit, and that created an instant increase in available capacity, which caused a dip in utilization.
As you can see that recovered.
Same thing as when we introduced the HiSeq 4000.
That had an effect on the growth in utilization, because we introduced new capacity into the market with that instrument as well.
And then what you're seeing, if you see it normalized for that one large order, is a fairly consistent growth rate, which is exactly what you would want to see, which we believe reflects the capacity is not ---+ there's not excess capacity in the market.
It's being utilized at a rate that is increasing over time, in spite of the increased volumes or capacities that we're putting out there, with the higher throughput instruments and kits.
The take away of course, in this, is that to the concern that there is all this extra capacity being generated in the market, I think this analysis and what we've gotten from our base case analytics show that's just not the case.
That the average instrumentation utilization, if anything, is on a slightly upward trend, which is exactly what we would hope to see.
And expect to see.
Europe would be lower on the averages.
The trend line probably isn't much different, but we clearly see highest utilization in the US.
Europe tends to be significantly lower on average utilization across almost all the platforms.
Well, I think from a magnitude of the challenge, Q3 2011 was the other big one for us, driven by very different factors.
That was a collection.
It was one of those again rare quarters where you had the convergence of a whole bunch of factors all at once, which I think we had this quarter, as well.
The specific factors then were different than the ones we had in Q1, but it was one of those convergence effects that sometimes happens, and that's what happened to us in Q1.
So I'd say that's the closest analogy in terms of lots of things going in the wrong direction in one quarter.
Well, we can't give you specifics on that of course.
If you think about it, ordered arrays have only been implemented on the highest end of our product line, HiSeq X and the 3000, 4000.
We could put ordered arrays on other products in the product line, when and if that becomes important for a throughput and cost reason, and is the highest return R&D program for us to invest in.
And so that technology can be applied to the other instruments.
We've not done that yet, because we don't think it's the most important factor in increasing the overall revenue from those segments.
But we have a broad product line now, and over time, various portions of that product line will age out, and they'll be replaced by brand-new products that we bring into the market, that of course will have dramatic new innovations built into them and we've been working on the fundamental technologies around this, and you've seen continued improvements in what we did in NextSeq, and then how we learned from MiSeq and NextSeq and even MiniSeq, and many of those improvements will get bundled into whatever the next system architecture is.
Clearly, we're working across the entire product portfolio, and we'll launch products into the segments we think are the richest opportunities there.
And we think that none of those segments is, I guess I'd describe it as permanently saturated, meaning that people won't change out their boxes if we bring something brand-new in, and that can be dramatically different in cost.
It could be dramatic improvements in ease of use and usability, dramatic improvements in speed.
There's all kinds of vectors we're working on and prioritizing in our R&D pipeline.
Instruments aside, we have very exciting stuff going in the sample prep area, in the informatics area, and it's a very broad product development portfolio.
One thing I'll add, in addition to looking to over time refresh everything we've got, one of the other things you can expect is, look, we are keenly focused on addressing the biggest impediments to getting NGS adopted in the different segments.
Some of that is through our own offerings, and you can expect innovations where customers are telling both you and us that there are the biggest bottlenecks.
So for example, one of the things we heard early on when we launched the X is that the informatics around was a problem and a challenge for our customers, and you saw us launch SeqLab.
You can expect that across the different segments, the biggest impediments that customers are telling you about they're telling us too, and through a combination of our own innovations and partner innovations, you should expect us to be looking to address those.
Well, there was an underlying factor where one or a couple perhaps of our NIPT customers are converting to NextSeqs.
That was something we were aware of.
That was in the plan.
We knew that going in.
It was in the forecast.
We did exactly what we thought we were going to do in those examples.
The ones that we cited and referred to in the script and in the table were ones that essentially stalled the HiSeq order we expected to get at the very last minute, where we thought that those orders were coming in, and they didn't come in, because the customer was considering that and we didn't know about it.
That's the execution issue.
So if you go back and look at the exact script, we didn't say primarily outsourcing.
We did cite the example of outsourcing as one factor that we knew about, at the preannouncement date.
You can imagine in those two weeks before the preannouncement we were scrambling hard to try to get as much data together as we could, and have a preannouncement that was timely.
We didn't want to wait another week to do a preannouncement, to have more data, and so we've learned a lot in the last two weeks, when all of the analytics from the Q1 have really come in and we've been able to digest them, talk to the regions, get the new forecast, and understand all of the background detail.
So we've been able to go order by order and look at every one of the circumstances, and break it into the pie chart that you see, in the deck that we provided.
So there were a lot of different issues, and no singular themes that dominate.
I think what happened is because we mentioned that one comment, people jumped on that one thing we mentioned as the cause, and it clearly wasn't, and we didn't intend to imply that it was.
So we probably should have said, among many causes, this was one we knew about at the time.
The factor was the shortfall in HiSeq.
That's the one factor.
In addition to getting the orders in that didn't convert into revenue.
Those were the two issues that we talked about in the preannouncement, and those are the two issues still.
We are seeing a number of customers gearing up to try to be participants in the PMI.
We don't know who will win that ultimately, and I don't think they do either, frankly.
There's obviously a couple of very strong candidates to participate, and those are large entities, some of which own instruments already, some of which don't.
So we think they will buy in advance, to have some installation, and perhaps the pull-through will be a little bit lower on those in the early stages.
But they should get very highly utilized, once the program begins to ramp up.
So sure, we could have a little bit of lower utilization locally on some instruments, but that's not atypical.
People sometimes do that for other programs, as well.
And we'll take that into account in our forecast, in our plan.
Sure.
So one of the things we talked about is, we did have the four Xs that came in Q1.
We did see some interest from the wanting to participate in the Chinese PMI, that is driving some of the X interest.
We haven't gone public with the customers that have come online in Q1, so I can't say that there's definitely demand generated from the Chinese PMI, but we can't talk about specific customers associated with that.
The only one that's public is Genewiz.
That's still a factor.
We still use the access to samples as a criteria for the purchase.
And what we've really seen in probably the past year is more of the X customers are metering out their instrument deliveries.
We're in the very early phases of X, people were converting their entire large existing programs over to the X.
If you're a Broad, or you're an HLI.
What we see now is that someone will place an X order and say, okay, I want two units for now and then a quarter or two from now, I'll take another three.
And so we're not ---+ that's one way that we deal with the sample access problem, and they do, as well.
<UNK>, you want to start.
I'll start with the orders conversation, <UNK>.
Obviously, a large part of the orders that we booked in the first quarter were shipped in the first quarter, as you would normally expect.
But we built significant backlog, and I called out specifically sequencing consumable backlog, and that will ship mostly through this year.
In fact, almost entirely, there's some that carries over into 2017 and beyond, but most of that's going to ship this year.
The way I would think about that is it's an advanced ordering of reagent purchases that we're going to get, or we should get anyway, throughout the year.
So it gives us some confidence, but I wouldn't think of it as necessarily incremental.
It is relative to last year and prior years, it is larger than we've traditionally seen, and so it gives us a little bit more of the backlog than we would normally have at this time.
And then, I also mentioned that we have about a third of our ending backlog for the quarter rolling over into the second half, which gives us some confidence.
Obviously, that includes a portion of those sequencing consumables that I just talked about.
So nothing more quantitative than that at this point, but other than the sequencing consumables, I would say we're pretty pleased with the array business and the consumer- driven activity there, which has been another helpful part of building backlog.
What it wasn't necessarily was a significant proportion of instrument backlog.
That's not ---+ it's become much more of a ---+ instruments have become much more of a turn in the quarter type of activity.
We don't necessarily come into the quarter with significant levels of backlog, like you saw us have in Q1 of 2015.
And it's much more normalized now.
I would just add, the math on the backlog growth is pretty simple so it's 700 plus minus the revenue that we did, and so that growth in the backlog was more than we've typically seen in Q1.
So we felt really good about the incoming order rate.
With respect to NIPT, what we're seeing is that the large payers, the majors there tend to assess coverage decisions on specific dates, and so they're on a cycle.
And so if they're not on cycle to do this in 2016, there's little to no chance they're going to go off cycle to approve this.
As we have mapped out all those cycles, there still remains the possibility that some of them late in 2016, but the majority of them fall in 2017, which is why we have cited that we think the bolus of these coverage decisions will be made in 2017.
With respect to cancer, the narrative really isn't about stable reimbursement, because the vast majority of the cancer tests aren't reimbursed today.
Even foundation medicines isn't.
Most of that market is being driven by labs running these tests for market share reasons.
Most of the labs are losing money on the cancer test.
So the reimbursement opportunity in oncology lies ahead of us, and it's something that many of our customers are working on.
It's an area that I'll be spending a fair amount of my time on in the next year.
And it's related to the standardization challenges that I think exist here.
We're in the phase of the oncology market where it's becoming increasingly fragmented, with lots and lots of different panel products, and one of the things that Illumina needs to do is to begin to reconverge that market into a more standard set of products and more standard set of processes so that payers can get their heads around what is something they should be paying for, and that's something our TST15 is attempting to do initially, and that's had great reception.
Our TST170 will begin to move in that direction as well.
But remember, those are RUO products, because we can't sell those for clinical use.
And so we are evaluating what's happening with the FDA before we begin to push those toward regulatory approval.
If you recall, we had projected nominally a 20% to 25% cannibalization rate of MiSeq.
We're seeing a rate so far at least, that's less than that.
Part of it is an interesting phenomenon where the low price point of the MiniSeq opens the door to a new customer, and then as we begin to engage with that customer, we use it as an upselling opportunity to sell them the MiSeq rather than a MiniSeq.
We're seeing that phenomenon working well for our salespeople, because they'd love to sell $100,000 instrument rather than a $50,000 one, if they have the option to do so.
Having said that, the MiniSeq product did well in its first quarter.
We've got a great pipeline there, and we're continuing to be optimistic about MiniSeq.
And the data we have today at least indicates a lower cannibalization rate of MiSeq than we would have expected previously.
It's a little too early for us to have any data on that, <UNK>.
We're continuing to look at this, and the number of customers that actually cross the finish line, got installed, are actually running these at any volume is still a relatively small number.
So it's too early for us to put an estimate out there.
In general, what we've used across the product line is about half of the purchase price.
I think in this product, it will probably be less than that.
So I'd model something less, significantly less than half.
So we'll be looking probably three or four quarters out before we actually start quoting what the actual range is running.
Well, I mean, clearly GRAIL and Helix in many ways are incremental to what we were doing before, and we should be thinking about them as such.
These are very important strategic bets that we think are the most important market opportunities for us to be working on.
The base level of R&D, and the growth rates you've seen over the past couple of quarters will begin to moderate based on our ---+ the absolute number will begin to moderate based upon the ---+ let me say it again.
The absolute growth rate will moderate in the R&D lines, because of the actions we're taking to slow down hiring, and that's important to more closely match what's happening in R&D with the recast revenue growth rate.
And so, we'll be analyzing this over the next quarter, and probably give you a little bit more update next quarter, not guidance for 2017 or 2018, but probably a little more qualitative statement about what you can think about R&D and sales and marketing.
One of the things we have said if you take out GRAIL and Helix over any three year time horizon, there is leverage in our operating model organically, right.
So we continue to believe that.
Thanks, <UNK>.
Thank you, operator.
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 all for joining us today.
This concludes our call, and we look forward to our next update following the close of the second fiscal quarter.
