illumina (ilmn) earnings report: q4 2014 conference call...

CompanyName:IlluminaIncCompanyTicker:ILMNSector:HealthCare

Industry:DrugsEventDescription:Q4 2014 EarningsCall

Illumina(ILMN)EarningsReport:Q42014ConferenceCallTranscriptThefollowingIlluminaconferencecalltookplaceonJanuary27,2015,05:00PMET.Thisisatranscriptofthatearningscall:

CompanyPart icipants

RebeccaChambers;Illumina;SeniorDirector-IRJayFlatley;Illumina;CEOMarcStapley;Illumina;SVP,CFOFrancisdeSouza;Illumina;President

OtherPart icipants

TychoPeterson;JPMorgan;AnalystDougSchenkel;CowenandCompany;AnalystDerikdeBruin;BofAMerrillLynch;AnalystDanArias;Citibank;AnalystRossMuken;EvercoreISI;AnalystAmandaMurphy;WilliamBlairandCompany;AnalystBillQuirk;PiperJaffray;AnalystDanLeonard;LeerinkSwann;AnalystIsaacRo;GoldmanSachs;AnalystSteveBeuchaw;MorganStanley;AnalystJeffElliott;RobertW.BairdandCompany;AnalystBryanBrokmeier;MaximGroup;Analyst

MANAGEMENTDISCUSSIONSECTION

Operator:

Goodday,ladiesandgentlemen,andwelcometotheQ42014Illumina,Inc.,earningsconferencecall.

(OperatorInstructions)

Asareminder,thisconferenceisbeingrecordedforreplaypurposes.

Iwouldnowliketoturntheconferenceovertoyourhostfortoday,Ms.RebeccaChambers,SeniorDirectorofInvestorRelations.Pleaseproceed.

RebeccaChambers (SeniorDirector-IR):

Thankyou.Goodafternoon,everyone.Welcometoourearningscallforthefourthquarterandfiscalyear2014.Duringthecalltoday,wewillreviewthefinancialresultsreleasedafterthecloseofthemarket,andoffercommentaryonourcommercialactivity,afterwhichwewillhostaquestion-and-answersession.Ifyouhavenothadachancetoreviewtheearningsrelease,itcanbefoundintheInvestorRelationssectionofourWebsiteatillumina.com.

ParticipatingforIlluminatodaywillbeJayFlatley,ChiefExecutiveOfficer;MarcStapley,SeniorVicePresidentandChiefFinancialOfficer;andFrancisdeSouza,President.Jaywillprovideabriefupdateonthe

stateofourBusiness,andMarcwillreviewthefourthquarterandFY14financialresults,aswellasdetailourguidancefor2015.

Thiscallisbeingrecorded,andtheaudioportionwillbearchivedintheInvestorsectionofourWebsite.Itisourintentthatallforward-lookingstatementsregardingourexpectedfinancialresultsandcommercialactivitymadeduringtoday'scallwillbeprotectedunderthePrivateSecuritiesLitigationReformActof1995.Forward-lookingstatementsaresubjecttorisksanduncertainties.Actualeventsorresultsmaydiffermateriallyfromthoseprojectedordiscussed.

Allforward-lookingstatementsarebaseduponcurrentinformationavailable,andIlluminaassumesnoobligationtoupdatethesestatements.Tobetterunderstandtherisksanduncertaintiesthatcouldcauseactualresultstodiffer,wereferyoutothedocumentsthatIlluminafileswiththeSecuritiesandExchangeCommission,includingIllumina'smostrecentForms10-Qand10-K.

BeforeIturnthecallovertoJay,IwouldliketoletyouknowthatwewillparticipateintheCowenHealthCareConferenceinBostontheweekofMarch2.Forthoseofyouunabletoattend,weencourageyoutolistentothewebcastpresentation,whichwillbeavailablethroughtheInvestorRelationssectionofourWebsite.

Withthat,IwillnowturnthecallovertoJay.

JayFlat ley(CEO):

Thanks,Rebecca,andgoodafternoon,everyone.I'mverypleasedtoreportthatQ4wasanotherrecordquarter,whichclosedoutarguablythemostimpressiveannualperformanceinthehistoryoftheCompany.Revenueincreased32%yearoveryearto$512million,our13thquarterofsequentialrevenuegrowth.

Equallyimpressivewastheleveragewedeliveredthisquarter,asnon-GAAPearningspersharegrew93%comparedtothefourthquarterof2013.Theserecordresultswereduetostrongunderlyingtrendsacrossourcustomersegmentsandsequencingportfolio,solidoperationalexecution,andagreater-than-anticipatedtaxbenefit.

Fourth-quartertotalsequencingrevenuegrew48%yearoveryear,drivenbydemandacrossourplatforms,recordconsumables,andcontinueduptakeofourproductsacrossmarketsegments,applications,andexperimentalscales.

Sequencinginstrumentrevenuegrew93%comparedtothefourthquarterof2013,drivenbydemandfortheNextSeq500andtheHiSeqXinstruments.Inaddition,HiSeqandMiSeqagainexceededourprojections,ascustomerscontinuetoviewtheseinstrumentsastheNGSgoldstandardintheirrespectivesegments.

AswesharedattheJPMorganconference,inQ4weaddedthreenewHiSeqXTencustomers,andbookedatotalof37systems.Wenowhave18customerswhohaveordered201systems;134ofwhichshippedin2014.

Aspredicted,Q4sawnoticeablyfewerXshipmentsduetothetimingofcustomerreadiness.Goingforward,ourorderfunnelremainshealthy,atrendthatweprojectwillcontinueinto2015.

Werecentlyannouncednewadditionstoourportfolio,whichnowincludesHiSeqXFive,aswellastheHiSeq3000and4000.Earlycustomerfeedbackhasfurtherfueledourexcitementaroundthisexpandedfamilyofhigh-throughputsequencers,whichwebelieveoffertremendousflexibilitytoaddressvariousbudgetsandscientificpriorities.Weexpectmanylabswillhavemultipleversionsofourinstruments,andusethemtomeetdifferentoutput,time,andeconomicdrivers.

TheintroductionofXFive,whichwillshipinQ2,allowsadoptionofwholegenomesequencingwithalowercapitalinvestmentandanattractivepricepergenome.TheintroductionofthisconfigurationwasnotpromptedbyalackofdemandfortheHiSeqXTen.Instead,it'sclearthatprovidingalowerentrypricetotheX

technologywillgrowtheoverallmarketmorequickly,andacceleratetheevolutiontosequencingfullgenomes.

TheHiSeqfamilyhasarichdevelopmentroadmap,includingtheenablementofpatternedflowcelltechnology,withtheintroductionoftheHiSeq3000and4000.Goingforward,webelievemostcustomerswillpreferthesenewsystemsoverthe2500,giventheimprovedeconomicsandthroughput.Therewillbeanumberofcustomerswhoremainonthe2500,however,duetotheuseofvalidatedworkflowsortheimportanceofaccesstorapidrunmodeandlongerreads.

Theintroductionofthesesystemswillfurthercatalyzethereplacementcycleofoldergenerationinstruments.Weestimatethatapproximately1,000HiSeq'sinthefieldcannotrunthe[OneT]kits.Thesesystemsarestrongcandidatesforreplacementoverthenextthreeyears,ascustomersevaluatetheirruncosteconomics.

DuringQ4,demandforHiSeq2500exceededourexpectations.ShipmentsinthequarterweresimilartothelevelsseeninQ42013;andintheAmericas,ordersreachedthehighestlevelseeninthepasttwoyears.Toensurecustomersatisfaction,weareofferingaspecialpromotionaltrade-inprogramtolabsthatreceived2500sinQ4.Asaresult,wedeferredasmallamountofrevenuetoaccountforthisprogram,whichwillberecognizedoverthefirsthalfof2015.

MovingtoNextSeq,sequentialordertrendsremainedstrong,withapproximately15%sequentialgrowthinQ4.Incomingorderscontinuedtobefueledbytheover2,500newleadswegeneratedfromtheroadshowconductedshortlyaftertheproductlaunch.Theseleadscontributedtoanaccelerationofadoptionbycustomersinthefourthquarter,andaccountedforclosetohalfofallorders,upfromthe30%wesawinthethirdquarter.

NextSeqcontinuestodrawsignificantinterestfromtheoncologymarket.Inthefourthquarter,shipmentstothissegmentgrew50%sequentially,andincludedamulti-unitorderforareferencelaboratorythatisscaledtoproductionlevel,bodingwellforfutureconsumableutilization.Thefirsthalfof2015willseetwoenhancementstothisplatform,withtheavailabilityofthev2chemistry,aswellasthelaunchoftheNextSeq550.

Thev2chemistryvastlyimproveserrorrates,nowconsistentwithourmorematureplatforms.Asaresultofthisimprovedperformance,themachineisnowsufficientlylockeddowntoprepareforopenplatformclearance,whichweexpectlaterthisyearorearly2016.

AvailableinQ2,theNextSeq550furtherenhancestheplatform'sflexibility,addingthecapabilitytoscanvchips.Initially,we'vequalifiedourcytoandkaryomappingarrays,andwilldecidewhethertoenableotherarraysbasedonmarketfeedback.

Thisfunctionalityisparticularlyimportantinreproductivehealth,asitprovidesaccesstoourarrayandsequencingtechnologywithasingleCapExinvestment.We'reverypleasedwiththeroll-outoftheNextSeqplatformoverall,andbelievedemandforthisinstrumentwillbeenhancedwiththesenewimprovements.

MiSeqcontinuestooutperformourexpectations.Ordersandshipmentsbothexceeded300unitsinthefourthquarter,thehighestlevelseensincethelaunchin2012.New-to-Illuminasequencingcustomersdrovethisoutperformance,andaccountedformorethan60%oforders.RecordordersfortheMiSeqDxweregeneratedfromcustomersinterestedinclinicalmarkets,includingHLAandcysticfibrosistesting.

Additionallyinthefirstquarter,wewillenablev3chemistryontheMiSeqDxinRUOmode,andplantoupdatetheintendedusetosupportFFPEsamples.Ourcompetitivepositioninthismarketstrengthenedthroughout2014,whichwebelievewillcontinuewiththeintroductionofourHLAandforensicsample-to-answersolutions.

Movingtoarrays,wecontinuetowitnessgrowthinsamplevolumes,butatlowerprices.In2014,volumesgrew5%comparedtotheprioryear;butduetoaggressivepricing,totalmicroarrayrevenuewasdown6%forthefullyear,includingadeclineof11%inQ4.Despitethisreductioninrevenue,ourag,IVF,andbiobankactivitieshavebeenstrong.

In2014,large-volumeopportunitiesinbothcropsandlivestockresultedinapproximately2millionsamplesshippedtohigh-throughputbreedingoperations,a47%increaseversustheprioryear.Wewillcontinuetofocusonarraysasacriticalcomponentofouragbusiness,andexpectsampleshipmentgrowthtoexceed25%in2015.

TheIVFmarketalsocontinuestogaintraction.Thisbusinessisnowapproaching$30millioninannualrevenue,withagrowthof36%yearoveryear.Wealsoremainfocusedonbiobankingactivities,andasaresult,introducedourMEGAarrayinthefourthquarter,whichprovidesanimprovedunderstandingofdiseasesandphenotypesacrossdiverseglobalpopulations.Webelievethisproductwillprovideuswithasuperiorcompetitivepositioninginthebiobankingmarket.

Asanexampleofourlong-termcommitmenttoarrays,weplantoincreaseourR&Dinvestmentin2015,expandourconciergeserviceforcustomproducts,andbroadenourcommercialactivities.Asaresultoftheseadditionalinvestments,weareprojectingarrayrevenuetobeapproximatelyflatin2015.

Weremainfocusedondeliveringcompletesample-to-answerworkflowstoenablenewmarkets.ThisstrategyincludesofferingssuchasNeoPrepandourHLAproduct,bothofwhichareexpectedtoshipthisquarter.Thestrategyalsoextendstoourforensicsgenomicsystem,whichisnowshipping.Withasingleworkflow,thissystemenableslabstoperformamorerobustanalysisofabroaderrangeofgeneticmarkersthanwithexistingtechnologies.

Overall,ourmarketopportunitiescontinuetobroaden,asdemonstratedbycommercial,non-profit,andhospitalcustomersaccountingforapproximately55%ofshipmentsinboththefourthquarterand2014overall.Thisyearwemadegreatprogressonourstrategytoenableclinicalmarkets,as30%ofourinstrumentswenttoclinicallaboratories.

Additionally,salestotheoncologymarket,forbothresearchandclinicalapplications,grew40%comparedtotheprior-yearquarter.In2015,wehopetofurthercatalyzethismarketwithprogramssuchasourrecentlyannouncedActionableGenomeConsortiumandourdevelopmentprograminliquidbiopsies.

Liquidbiopsiesareexpectedtoplayaroleacrossmultiplesegmentsoftheoncologymarket.WearefocusedonfirstdeliveringanRUOkitintothemarket,andexpecttobeinapositiontopresentclinicalutilitydatabyyearend.WewillrunthistestatIllumina'sRedwoodCityCLIAlabtorefinetheproductanddevelopdataforFDAsubmission.SimilartoNIPT,ourstrategyhereistoprovidethebesttechnologyintothemarket,asopposedtoofferinglong-termlabtestsor[sellingtophysicians].

Movingnowtoreproductiveandgenetichealth,themarketcontinuestodeveloponaglobalscale,whichresultedin47%revenuegrowthin2014comparedtotheprioryear,withNIPTsamplesgrowing31%sequentiallyinthefourthquarter.Aswementionedlastquarter,werecentlyundertookanassessmentofourentireregulatorystrategy,whichwasledbyourMyraqateam.

We'reworkingwiththeFDAtodeterminetheappropriateclaimsanddatasetstobroadenthismarkettoincludetheaverageriskpopulation.WewillsharemoredetailedscheduleinformationoncewealignwiththeFDA.

InQ2,wewilllaunchournewVeriSeqNIPTassay,whichwebelievewillenablebroaderadoptionofprenataltestinginglobalmarkets.Basedonpaired-endsequencing,thisassayisideallysuitedfordecentralizingNIPT,duetoitsabilitytosequence48samplesperrun,andthesignificantworkflowandcostbenefitsderived

byeliminatingPCR.

Withthedevelopmentofthisnewassay,wearemovingforwardwithwhatwebelievetobeasuperiorregulatorystrategy.ThisincludesgainingCEIVDmarkingfortheHiSeqsoftwareinEurope.

Additionally,weplantogainaCEmarkontheVeriSeqNIPTassay,andtheassociatedsoftware,whichwillenableustodistributethisproductasanIVDacrosstheEU,astepthatwebelieveisnecessarytodevelopandpenetratethislargemarketopportunity.Asaresultofthesestrategychanges,aswellasrecentenhancementswehavemadetotheHiSeqfamilyofproducts,wedecidedtosuspendoureffortstoseekFDAapprovaloftheHiSeq2500intheUS.

Insummary,ourQ4and2014resultsexceededourexpectations,andourmomentumremainsstrongasweenter2015.Ournewproductintroductionswillcontinuetofuelthehigh-throughputmarket,furtherenablingcustomerstotailortheirfleetofinstrumentstomeetdiverserequirements.

Withthemostpowerfulandwell-positionedsequencingportfolioavailable,ourtechnologyleadershipisdeliveringrobustdemandandanexpansionintonewmarkets.Ourfocusoninnovationisstrongerthanever,andlookingahead,weexpecttodeliversignificantshareholdervalueasweunlockthepowerofthegenome.

I' llnowturnthecallovertoMarc,whowillprovideadetailedoverviewofthefourth-quarterresults.

MarcStapley(SVP,CFO):

Thanks,Jay.AsJaydescribed,Q4markedanothersolidperformanceforIllumina,tocloseoutarecordyear.Revenuegrew31%in2014versustheprioryear,to$1.86billion,reflectingtheimpactofthenewHiSeqXTenandNextSeqinstruments,aswellaslower-than-expectedcannibalizationofMiSeqandHiSeq.

Reportedfourth-quarterrevenuegrew32%yearoveryeartoapproximately$512million.Thisstrongresultcanbeattributedonceagaintorecordsequencinginstrumentsandconsumables.Thecombinedimpactofunfavorableforeignexchangefluctuations,aswellasdeferralofrevenuerelatedtoourHiSeq2500trade-inprogramforinstrumentsshippedinQ4,resultedina$15-millionheadwind.

Globalinterestinourproductsremainedstrongduringthefourthquarter.ShipmentsintheAmericasgrew34%yearoveryear,andEuropeanshipmentsincreased33%overthesameperiod.InAPAC,shipmentsgrew8%yearoveryear,asstrengthinChinawaspartiallyoffsetbyadeclineinJapan,asfundingdisbursementsremainedconstrainedintheregion.

Instrumentrevenuegrew75%yearoveryeartoreach$156millioninthefourthquarter.ThisincreasewasprimarilydrivenbydemandforNextSeqandHiSeqXTen,aswellasstrongMiSequnitshipmentsandstableHiSeqsales.

Overallconsumablerevenueinthequarterwas$290million,anincreaseof19%comparedtothefourthquarterof2013,ashigherdemandforsequencingconsumableswaspartiallyoffsetbyadeclineinarrays.Consumablerevenuerepresented57%oftotalrevenue,modestlyhigherthanthe54%wesawinQ3,butdownfrom63%intheprior-yearperiod.Thisdecreaseyearoveryearwasduetothestrengthinsequencinginstrumentsduringthequarter.

Sequencingconsumablerevenuegrew32%overQ4lastyear,duetoourlargerinstalledbaseofinstruments,includingtheadditionofHiSeqXTenandNextSeq,andreachedrecordlevelsduringthefourthquarter.ShipmentsofourSamplePrepproductsbenefitedfromthepricereductionweputinplaceinQ3,whichwasmorethanoffsetbyincreasedvolumes,ascustomerdemandforourcoreDNAandRNAlibraryprepproductsgrew.

MiSeqconsumablepull-throughremainedwithinourprojectedrangeof$40,000to$45,000.HiSeqpull-

throughperinstrument,excludingHiSeqX,wasroughlyflatsequentially,andcomfortablyinourprojectedrange.Infuturequarters,pull-throughforHiSeq2500,3000,and4000willbereportedasafamilyofinstruments,andwecontinuetoprojectarangeof$300,000to$350,000.

Inthefourthquarter,consumableutilizationforNextSeqandHiSeqXTenwasaboveourforward-lookingguidancerangesthatweprovidedonJanuary12.Thisisafunctionofhowwecalculatepull-through,whichgenerallyresultsinanartificiallyhighnumberinthefirstyearoflaunchduetotherampintheinstalledbase.

Asareminder,weareprojecting$80,000to$100,000ofannualconsumablesonNextSeq;andonHiSeqX,includingXTenandXFivecombined,weareexpectingtogenerate$600,000to$650,000peryearofreagentutilizationperinstrument.

Servicesandotherrevenue,whichincludesgenotypingandsequencingservices,instrumentmaintenancecontracts,andrevenuefromNIPTservices,grew22%versusQ42013,to$62million.Thisimprovementwasdrivenbygrowthinourextendedmaintenancecontractsassociatedwithalargersequencinginstalledbase;NIPTservices,whichbenefitedfromtestfees,aswellasincreasedtestsend-outrevenue;andstrengthingenotypingservices.

Turningnowtogrossmarginandoperatingexpenses,Iwillhighlightouradjustednon-GAAPresults,whichexcludelegalcontingencies,non-cashstockcompensationexpense,andotheritems.IencourageyoutoreviewtheGAAPreconciliationofnon-GAAPmeasuresincludedintoday'searningsrelease.

BeforeItalkaboutthetrendsforthequarter,IwouldliketohighlighttheGAAPtreatmentoftwosignificanttransactionsthatwearepleasedtohaveresolvedinQ4.Firstly,wesettledtheSyntrixlitigationforanamountlessthanourprioraccrual,resultinginanaccountinggainof$109million;$27millionofwhichwasrecordedincostofrevenue,and$82millionofwhichwasrecordedinoperatingexpense.Inaddition,werecordeda$30-millionintangibleasset,reflectingthefuturebenefitofthelicenseacquired.

Secondly,weenteredintoanagreementwithSequenom,resultingin,amongotherelements,thepoolingofourpatents.Asaresultofthistransaction,werecorded$49millionoflegalcontingencycostsinresearchanddevelopmentexpenses,reflectingtheupfrontpaymentswemadetoSequenom.Bothoftheseitemshavebeenexcludedfromournon-GAAPresults.

Turningnowtomargins,ouradjustedgrossmarginforthefourthquarterequaled72.3%comparedto73.2%inthethirdquarter.Thesequentialdeclineisduetotheimpactofdeferredrevenueandotheritemsassociatedwiththenewproductintroductions,partiallyoffsetbythehighermixofconsumables.

Yearoveryear,adjustedgrossmarginsexpanded90basispointsfrom71.4%to72.3%,asthelowermixofconsumableswasmorethanoffsetbyimprovedinstrumentmarginsandmanufacturingefficiencies.Additionally,GAAPgrossmarginexpanded820basispointsversustheprioryeartoequal75.1%,primarilyduetotheaforementionedgainontheSyntrixlitigation.

Adjustedresearchanddevelopmentexpensesforthequarterwere$80million,or15.7%ofrevenue,comparedto$70million,or14.6%ofrevenueinthethirdquarter.ThesequentialincreaseinR&Dexpensewasprimarilyduetoheadcountadditionsandotherexpensesrelatedtoournewproducts.OnaGAAPbasis,theincreaseinresearchanddevelopmentexpensesto$143millioncomparedto$85millioninQ3wasprimarilyduetotheupfrontSequenompaymentpreviouslymentioned.

AdjustedSG&Aexpensesforthequarterwere$97million,or18.9%ofrevenue,comparedto$91million,or19%ofrevenue,inthepreviousquarter.Thesequentialincreaseinexpensewasprimarilyduetocommissionpaymentsarisingfromtheexcellentyear-endperformance,andhigherheadcounttosupportourrevenuegrowth.

Adjustedoperatingmarginswere37.7%comparedto39.7%inthethirdquarter,adecreasesequentiallyduetolowergrossmarginandincreasedinvestments.Operatingmarginwashighercomparedtothe32.3%wereportedinthefourthquarteroflastyear,duetotheimpactofimprovedgrossmarginandoperatingexpenseleverage.

Inthefourthquarter,werecognizedapproximately$700,000ofadjustedotherexpense,primarilyduetotheimpactofforeignexchange.Duringthequarter,ourstock-basedcompensationwas$38million,lowerthanthe$45millionreportedinQ3,whichwaselevatedasaresultofadditionalaccruedexpenseforourperformancestockunits.

Ournon-GAAPtaxrateforthequarterwas16.2%comparedto32.6%inthefourthquarteroflastyear,lowerprimarilyduetothefull-yearimpactoftheR&Dtaxcreditandothertaxextenderswhichwereenactedinthefourthquarter.Thefourth-quarterratewassignificantlybetterthanweexpectedatthetimeofourrecentpre-announcement,aswebenefitedfromfavorableadjustmentsrelatedtomultipleprior-yearprovisionsandhigher-than-expectedstockdeductions.

Thesefavorableitems,whichsurfacedinthelastfewweeksaspartofournormalquarterandyear-endcloseprocess,equatedtoapproximately$0.06ofEPSimprovement.Excludingtheimpactoftheseitems,theQ4non-GAAPtaxratewouldhaveequaled22%;andforthefullyear,ournormalizedtaxratewouldhavebeen28.2%,whichexcludesalsothefavorabletaxitemwenotedinQ3.

Non-GAAPnetincomewas$129millionforthequarter,andnon-GAAPEPSwas$0.87.Thiscomparestonon-GAAPnetincomeandEPSof$65millionand$0.45,respectively,inthefourthquarterof2013.WereportedGAAPnetincomeof$153million,or$1.03perdilutedshareinthefourthquarter,comparedtonetincomeof$81million,or$0.56perdilutedshare,intheprior-yearperiod.Current-periodresultsincludetheaforementionedSyntrixlitigationgain,whichwasoffsetinpartbytheSequenomexpenseitem,andtheirassociatedtaximpacts.

Wegeneratedcashflowfromoperationsof$141millioninthefourthquarter,evenaftertheoutflowof$51millionduetotheSyntrixsettlementandSequenomagreement.Forthefullyear,cashflowfromopswas$501million,anewrecord.Q4DSOwas51days;aslightimprovementfromthe52daysseeninthepriorquarter.

CapitalexpendituresinQ4were$35million,resultingin$106millionoffreecashflow.Duringthequarter,werepurchasedapproximately185,000sharesfor$35million,andwehave$130millionremainingunderourpreviouslyannouncedprograms.Weendedthequarterwithover$1.3billionincashandshort-terminvestments.

Turningnowtoourexpectationsfor2015,weareprojectingapproximately20%totalCompanyrevenuegrowth,andnon-GAAPEPSof$3.12to$3.18.Thisguidanceassumescurrentcurrencyrates,whichwouldresultina200-basis-pointheadwindtogrowthcomparedtolastyear.

Additionally,weareprojectingapproximately73%grossmargins,full-yearweightedaveragenon-GAAPdilutedsharesoutstandingof150million,andafull-yearpro-formataxrateof28%,whichdoesincludethe2015federalR&Dtaxcreditandothertaxextenders.Formodelingpurposes,wefeelitisappropriatetoassumethetaxcreditispassedinQ4;andatthattime,wewillrecordthefull-yearimpact.Therefore,atthispoint,weexpectaQ1taxrateofapproximately29%.

Insummary,wedeliveredremarkablefourth-quarterresults,includingimpressiverevenuegrowthoverastrongprior-yearquarter,aswellas93%growthinnon-GAAPdilutedearningspershare,whichcappedoffanexceptional2014.Thisyearwemadesignificantprogressonourmarketdevelopmentstrategies,andwelookforwardtopushingtheseinvestmentsevenfurtherin2015.Webelieveourstrategyoftechnologyleadershipandmarketenablementwillcatalyzetheadoptionofgenomics,andenableustoaddressthemorethan$20billionmarketopportunitywehaveaheadofus.

Thankyouforyourtime.WewillnowmovetotheQ&Asession.

(CallerInstructions)

Operator,wewillnowopenthelineforquestions.

QUESTIONS&ANSWERS

Operator:

(OperatorInstructions)

TychoPeterson,JPMorgan.

TychoPeterson(Analyst-JPMorgan):

Thanks,guys.

Questionaboutmaybejustanythoughtsyoumighthaveaboutcannibalizationwith3000,4000,andtheNextSeq5500.You'veobviouslydoneagoodjobinthepastmitigatingcannibalizationofthecurrentportfolio,butmaybetalktowhereyouseesomepotentialcannibalizationforthecomingyear?

JayFlat ley(CEO):

The550willbeapurelyincrementalproductanditwillbeasmallincrementontopofthestandardNextSeqbase,sinceisreallydesignedtoappealtothatsetofcustomersthatneedtorunaraiseandsequencingtogether.That'snotahugepartoftheoverallmarket,sowedon'tanticipateanydirectcannibalizationthereatall.

Withrespecttothe3000/4000,aswealludedtointhescript,wedothinkthatcustomersingeneralwillprefergettingonthenewerroadmap.Thosewhohavetheabilityandthefundstoupgradefrom--ortochangeout2500sorwhoarebuyingnewinstrumentswilllikelyfavorthe3000andthe4000.

Wealsopricedthe3000version,whichisthesingleflowcellversionrightontopoftheoldpriceoftheHiSeq2500.Thatwasdoneintentionallyforthosecustomerswhomayhavehadgrantsortendersinplaceandwouldbeabletoconvertthefundsthattheyhadallocatedfora2500directlytoa3000.

Sothenetofthatisthatwedoexpectsignificantcannibalizationoverthenextyearofthe2500,butacatalyzingeffectontheolderinstalledbasetotradeouttheolder2000sandearlyversion2500sforthenewertechnology.

ThenaswethinkabouttheimplicationsofdecouplingtheXTenwiththeXFive,youmentionedthatdidn'timplyanyslowdownindemandforXTen,butcouldyouhaveabetteryearinorderswithXFiveandXTencombinedin2015thanyoudidin2014withjusttheXTen?

JayFlat ley(CEO):

Wecertainlycould.Thereasonwedidthisisbecause,asImentioned,wethinkwecangrowtheoverallmarketfaster.DemandforXTencontinues,andsincewemadetheannouncementoftheXFiverecently,ourassumptionstherehavebeenvalidated,sothereisquiteafewcustomersthatwehavetalkedtowhohavebeeninourqueuewhocontinuetopushforwardwithanXTentypepurchase.

WeareprettyconfidentthatmostofthatpipelinewillcontinuetodrivetowardanXTen.SomeofthemwhomightnothavegottenthereforquitesometimemaybeabletojumpinnowsoonerwithanXFiveandthen

upgradetoaTenunitconfigurationovertime.

Sooverall,wethink,wecertainlyaregoingtogrowthemarketfasterthan2015wouldhavebeenonitsownandwehavethepotentialtogrowtheoverallXunitsfasterin2015thanwedidin2014.

Okay.IfIcouldaskonelastquickone.

Canyouquantifythedeclineinarraypricingthatyoucalledout?Areyouassumingthatthere'sanotherlegdownonpricinginarrays?Iknowyoutalkedaboutrevenuesandarraysbeingflatbuthowmuchofthepricingcomedown?

JayFlat ley(CEO):

There'ssomanydifferentarraysinourproductline,Tycho.Iwouldguessnowthereis25or30differentarrayproductsthatweoffer.Thepricesaresodifferentandthemarketsegmentsaresodifferent,itishardforanaveragetomakemuchsensethere.AndIdon'tactuallyhaveanumberatmyfingertips.

Butyoucanexpectarraypricingtocontinuetogodownoverthenextfewyears,particularlyasmorecustomersmigratetowardssequencingandthebusinessthattendstostayonmicroarrayswillbethelessandlesscomplexpartofthemarket.Youwillsee,forexample,ourhighcomplexityarrayslikethe2.5millionandthe5millionarraysbeasmallerandsmallerpartoftheproductlineandthoseareclearlythehighestpricedchips.SoyouwillcontinuetoseetheoverallASPinarraysgodown.

Okay,thankyouverymuch.

Operator:

DougSchenkel,CowenandCompany.

DougSchenkel(Analyst-CowenandCompany):

Heyguys.Goodafternoon.

YoucontinuetodemonstratetheabilitytoinnovateandadvanceusingSBSchemistry,asdemonstratedbytherecentlyannouncednewproductsandsomeoftheadvancementslinkedtopatternflowcells,andclearlythisinnovationputsyouinapositiontogeneraterobustgrowth,maybetolevelsthatexceedwhat'sinconsensusexpectations.

Allthatsaid,theinvestmentcaseformaterialupsidefromcurrentsharelevelsseemstobelargelypredicatedonnotjustthelargeTAMthatexistsforyouguysbutonbuildingconfidenceinyourabilitytocapturethatTAM.

Sowhenwethinkabouttheclinicalopportunity,whatmilestones,specifically,shouldinvestorsmeasureyoubyin2015,including,butgoingbeyond,whatyoutalkedaboutforliquidbiopsyinyourpreparedremarks?

JayFlat ley(CEO):

WhenyouthinkabouttheTAMthatwetalkedaboutayearago,the$20billionnumber,thereisanumberofkeythingsyououghttowatch.Theyareprobablynot--milestone,perhaps,isalittlebitofastrongwordbecausethesearen'tbigdigitalevents,butit'scontinuedprogressinthedevelopmentofkeymarkets.

CertainlyinPOPSEQ,watchingwhathappensthere,wehadtheScottishgenomesprogramthatwe

announcedjustrecently.Weareyettounderstandexactlyhowthose15unitsaregoingtobeused,butearlyindicatorsarethat,thatprogrammayevolvetobesomethingnottoodissimilarfromwhatGeListryingtoaccomplish.ThatwouldbethenumbertwoprojectwewouldputinthePOPSEQprogram.

Clearly,whathappenedintheStateoftheUnionaddressatleastalludedtothepotentialofsomeprecisionmedicineprogramsintheUS,whichwouldbeveryexciting,ofcourse,ifthatwounduphappening.Watchingthatcontinuedprogress,particularlywiththescaleofthoseprojects,willbeimportantannouncementsforinvestorstowatch.

Intheclinicalspace,whatwe'redoingwiththeactualgenomepanelandtherolloutofproductsthere.Theadditionalpharmaceuticalcompaniesthatmaycomeintotheconsortiumwillbeevidenceofcontinuedprogress.Oncewestartdeployingtheactualgenomepanelintothemarket,monitoringtheuptakeofthatpanel,willbeimportantdatatowatch.

Clearly,liquidbiopsiesisabreakthroughopportunityforanybodywhoisworkinginthatarea,andourgoalis,asImentionedinthescript,togetsomeclinicaldata,somereallyimportantclinicaldatadonebytheendof2015soIthinkthatwillbecritical,aswell.

NIPT,IwouldwatchtheexpansionintoEuropeandChina,inparticular.Thenewproductweannouncedthere,theVeriSeqNIPTisgoingtobeakeyingredientofthatexpansiontiedtotheCEmarketingthatweareworkingonintheEU.

Allright.That'sreallyhelpful.

ThenactuallystickingwithNIPT,I'mjustcuriousifyoucangiveusalittlemorecoloronwhatpromptedthealterationinthePMAstrategythere?WasitlargelyafunctionofthenewadditionofMyraqa?Wasinchangesinregulatoryreimbursementorcompetitivedynamics?Weretheretechnicaldevelopments,suchasmaybethechangeintheHiSeqs2500FDAstrategy?

Intermsoftimelines,whatisareasonableexpectationforus,aswethinkaboutgettinganupdatefromyou?

JayFlat ley(CEO):

Iputthestrategychangeintwogeneralbuckets:oneisproductevolutionandIwilltalkspecificallyaboutthat;andthesecond,Icallmarketevolution.Onthetechnologyfront,whatwehavedonewiththe3000andthe4000areveryimportantbreakthroughsthatwehavemadeoverthepastcalendaryear.Wewereworkingonthe2500submissioninparallelwiththat.

Oncewegottothepointwhereweknewweweregoingtolaunchthe3000,4000configurations,ifyouthinkaboutwherethe2500wouldbeatthetimeitwouldcomeoutofthePMAsubmission,forexample18monthsfromnow,whichwouldbethetimeframethatwehadanticipated,thatproductisgoingtobeprettylonginthetooth.Sowethoughtthatitsadoption,approvedorotherwise,beginning1.5yearsfromnowwouldn'tbehigh.

ThesecondpartthattiestothatfromamarketperspectiveisthatwethinktherealgrowthopportunityintheUSmarketisn'tsomuchinthehigh-riskspace,itisintheaverageriskmarket.Sowewerereallyfocusedonhowdowegrowthemarkettoembraceaveragerisk.Todoasubmissiononlyonhigh-risk,wethoughtwasalsolimiting.

Sotherefore,we'vebeenworkingwiththeFDAtodefinewhatdowehavetodotogetanaverage-riskapproval.Withthebreadthofthatmarketplace,wethinktheotherassaymethodthatwehavedeveloped,sothesecondpartofthetechnologyevolution,theVeriSeqNIPTassay,isabettertechnicalsolutiontoabroader,morediversemarket.Thatistrue,certainlyinEurope,andwethinkbythetimewegetthroughPMA

application,itwillbetrueintheUS,aswell.

Thosearetheunderlyingfactors.Nowofcourse,bringingintheMyraqateamgaveustheabilitytostandbackanddoafullanalysisofourentireregulatorystrategyacrosstheCompanyforallproductsandthatgroupwasinstrumentalinhelpingustunethisstrategyandmakesomeimportantchanges.

Thelastpartofthatquestionwasjustintermsoftiming.Isitreasonabletothinkwewillgetmoreofanupdatethisyear,givenalotofthisitsoundslikeitislinkedtoreallytheeffortsthatyou'remakingtogetherwiththeFDA?

JayFlat ley(CEO):

It'sreasonabletothinkthatwewillhaveanideathisyearaboutwhatweneedtoaccomplish.Iwouldn'tnecessarilythinkit'sreasonablethatwewouldhaveasubmissionthisyear.

Okay.Thanks,again.

Operator:

DerikDeBruin,BankofAmerica.

DerikdeBruin(Analyst-BofAMerrillLynch):

Hi,goodafternoon.

JayFlat ley(CEO):

Hi,Derik.

Ihavetwoquickquestion.Oneisjustahousekeepingquestion.

Thestockoptionexpense,Marc,waslowerthanwehadprojectinginQ4.Canyougivesomeguidanceonthe2015numberthere?

Yes.ForQ4,relativetoQ3,Ithinkyou'rereferringtothesequentialdrop?

Yes,exactly.

Q3wasmoretheanomalytherethanQ4.InQ3,wehadanuptickinexpenseratetoourperformanceshareplan,giventheoutperformanceoftheCompany,andthatwaslessmarkedinthefourthquarter.

Intermsof2015,wehaven'tbifurcatedthestockexpensefromtheotherexpenselineitems.Itisembeddedinourguidance,butit'sprobablynotfarofffromthecurrentfourth-quarterrate.

Perfect.AndthenbackontheNIPTmarket,IbelievewearewaitingforapprovalfortheChinaSFDA.Whendoesthathappen?AndsomethoughtsonusingarraysforNIPT?

JayFlat ley(CEO):

TheCFDAisablackbox,sowedon'thavemuchvisibilityintowhenthesubmissionmaycomeouttheotherend.We'rehopingitismonthsaway,notmateriallylongerthanthat,butthefactofthematteriswejustdon'tknow.Sowe'rewatchingthatveryclosely.

Withrespecttoarrays,Iwouldsay,wecontinuetobelieveverystronglythatsequencingisasuperiormethodologyfordoingNIPT.Itismuchmoreflexible,youcanaddtests,wethink,particularlyonturnaroundtime,thisnewNextSeqmethodisaone-dayturnaroundtimeonthesequencer,soit'sextremelyefficient,48samplesinparallel,verycost-effective.SoweareextremelyconfidentinsequencingbeingthemostimportantplatformfordoingNIPTtesting.

Thanks.

Operator:

DanArias,Citigroup.

DanArias (Analyst-Citibank):

Afternoonguys,thanks.

Wantedtoaskmaybeabiggerpicturequestiononsequencinginstrumentation.Jay,Ithinkawhilebackyouareaskedoryoumadeacommentaboutsequencing[installs]relativetothenumberofPCRsystemsthattherewereoutthereasaninstalledbase.

Asyouguyshavebroadenedtheportfolioandstartedtogoaftersomeofthesenewmarkets,doyouhaveabitofanupdatedviewonthetotalnumberofsequencersthatyouthinkcouldbeinthemarketin,say,fiveyears?

JayFlat ley(CEO):

Wecouldcreateonehere.Noonehasaskedmethequestionrecently.Ithinkweusedtotalkaboutthecapillarynumberbeinginthe10,000to15,000asonemetrictouse,thatifyouthoughtaboutPCR,thereisabout50,000researchlabsworldwide,vastlymoreifyouconsideredalltheclinicallabs,andit'sraretofindoneofthoselabswithoutaPCRmachine.SothePCRinstalledbaseisaprettyhighnumberandmanylabshavelargenumbersofPCRmachines,sothat'saverylargeinstalledbase.

Settingoursightsoversayafive-yeartimeframeofbeinginthe10,000to15,000numberofNexGensequencerswouldbeconservative.Wefeellike,aswecontinuetobroadentheportfolioanddiversifymarketsegments,aswetakethetechnologyintoappliedmarkets,thattheinstalledbasenumbersbetweenusandtheothersupplierswillcertainlyblowthroughthoserangesinfiveyears.

Okay,great.Thatishelpful.

Marc,maybeaquestionwithabitmoreofatangibleanswer.Dothenewinstrumentshaveanyimpactontheabilitytomaxoutthemanufacturingabsorptionandreallycatchthegrossmarginatthetopendorshouldanyproductionchangestherebeprettyseamless?

Anyproductionchangeswouldbeprettyseamless,giventhetypeoftechnologythatisinherentinthe3000and4000.TheXFiveisthesameastheXTeninstrumentobviously.It'ssimilartothecommentsImadelastquarter,thatmanufacturingcapabilitytendstocomeinstepfunction,soyoubuildoutanewfacilityandforwhileitisunder-absorbedandthenyouabsorbitandyoukeepgoinglikethat.Weareataprettystablepointrightnowwiththeabsorptionandthenewinstrumentsshouldjusthelptocontinuetodrivethat.

Okay,thanksverymuch.

Operator:

RossMuken,EvercoreISI.

RossMuken(Analyst-EvercoreISI):

Goodafternoon,gentlemen.

JayFlat ley(CEO):

Hi,Ross.

Iwascurious,Iwantedtojustdiginonacoupleofbigpictureeventsthathappenedoverthelastfewweeksandgetyourthoughts.Becauseitseemslikewearebuildinguptowheresomeofthethingsyouhavebeentalkingaboutintheclinicalmarketarestartingtobecomemoremainstream,soobviouslythePresidentoftheStateoftheUnioncalledouttheprecisionmedicineinitiative.Youhighlightedit.

ButitseemslikethattomeisarecognitionofwherethemarketisgoingandwewillhavetoseewhatthedetailsbehindbutI'mcuriousastowhatsignalyouthinkthatsends?AndthenobviouslyRochealsolargepharmacompany,[JP]paidquiteaheftypriceforsomeoneyoulikelyserveintheoncologyspaceandsoitisanotherpharmarecognizingthevalueofwheresequencingisgoing.

Howdoyouthinkaboutthosethingsintermsofthesemarketswehavebeentalkingaboutforalongtimegettingclosertoamorelarge-scalereality?

JayFlat ley(CEO):

I'dsayat30,000feet,theyareclearlyverystrongsignalsandprobably,Iwouldsay,indicatethingshappeningperhapsevenfasterthanwehadanticipated.I'vetalkedtoalotofinvestorsaboutwhatishappeninginpopulationsequencing,andourexpectationoverthenextfewyearsthattherewillbeanumberofcountriesthatjumpintothisinaveryseriousway.

WefranklythoughttheUSwasbehindintermsofitswillingnesstoconsiderthis.Obviously,itisstillnotanapprovedprojecthereandthereislotsthathastohappentoactuallyfigureoutwhatthisprojectisandwhethertheappropriationgetsapprovedtofundthisproject.

Butthesignalsthatarebeinggivenandhowrapidlytheyhavecome,Ifindextraordinarilyencouragingandvalidatingoftheoverallvaluethatsequencingcanprovideinunderstandinghumanhealthandinmakingdramaticimprovementsinhealthcare,bothintreatmentandineconomics.

Withrespecttopharma,IhavebeenapessimistoverthelastfiveyearsaboutPharmabeginningtoreadoptsequencinginalargeway.Ofcourse,theydidthat15or20yearsagowiththeirverylargesequencinglabs

withtheprior-generationtechnology,andasweallknow,notmuchcameoutofthoseefforts.Myexpectationwasthatpharmawasgoingtobeprettymuchinthebackroominsofaraslarge-scalesequencing,onlyoutsourcingitwhenneededonaspecificproject,butofcourseusingitinday-to-dayresearchintheirlaboratories.

Whatwe'veseenoverthepast18to24monthsbeginstoindicateotherwise.WesawdeCODEbeingpurchasedbyAmgen,wesawRegeneron'sannouncementoftheirplantosequence100,000exomes,wehavenowseenRocheplantoputtheirclinicalpatientsthrough,atleastwhatwebelieve,toputthosethroughtheFoundationMedicinemethod.

Sowearebeginningtoseepharmacomeintothismarketinaveryrobustwayandwearebeginningtoadjustourownexpectationsthatthismaybeaveryrichmarket.Genentechistheotherexample.TherecentannouncementofGenentechdoingsequencingprojectswithHLI.Obviously,veryimportantdevelopmentsandallbodeswellforadoptionofsequencinginthepharmaindustry.

Great.

MaybejustonNIPT,whereareweinthehigh-riskadoption[curve]?Ithinkyousaidingeneral,volumeswereup30%,whichseemslikesequentiallystillaverybignumber.Sohelpusunderstandwhereweareinthat?AndthenwhatarethediscussionslikewithFDAandothersontheaverage-riskpopulation?

JayFlat ley(CEO):

WehavetoseparatebygeographiestotalkaboutNIPTinthatway.IntheUS,Iwouldsayweare--theadoptionissignificantlymorethan50%now,it'sprobablynot75%,soit'sprobablyinbetween.Growthcontinues,morelabsarejumpingintothespace,sowecontinuetobuildoverallvolumeandmomentuminthehigh-riskgroup.

Aswe'vetalkedaboutbefore,average-riskisamuchlargermarket;eventhoughASPswillbelower,thenumberspfsamplesaredramaticallyhigher.Rightnow,thatitisveryclearthat,atleasttheevidencethatwehavepresentedpubliclyinthepaperwepublished,thattheutilityofthismethodisthesameinanaverage-riskpopulation,althoughthefrequencyismuchless.

Soourconclusionfromthat,andIbelievetheFDA'sconclusionwillbethatthistestwillgetusedinaverage-riskanditisforthatreasonthatwewanttoworkverycloselywiththemtomakesurewhateverproductwegetapproved,cansupportwithdataandevidenceandapproval,useofthismethodinaverage-riskpopulation.

Wedon'tknowthetimingofthatandso,asIsaidbefore,weareworkingwiththeFDAtounderstandwhatdoesthatclinicaltrialneedtolooklikeandhowbigarethedatasetsandwhattypeofdatadoweneedtogather,butthatisallwellunderway.

Quitedifferentinothermarkets.IwouldsayintheEU,thepenetrationisvastlyless.Itvariescountrytocountry.Inaggregate,Iwouldguessweareinthe5%range,itmaybeevenless.China,lessthanthat,buthugepotentialandprobablyamarketthatwillcomeonveryquicklyasproductsgetapprovedinChina.Theaverage-riskmarketwillcomeonveryquicklyinChinaandmoreslowlyintheEU.

That'ssuperhelpful,andthankyouagain,andcongrats,Rebeccaandguys.

JayFlat ley(CEO):

Thanks,Ross.

Operator:

AmandaMurphy,WilliamBlair.

AmandaMurphy(Analyst-WilliamBlairandCompany):

Aquestiononpopulationsequencing,again,ifImay?

JayFlat ley(CEO):

Obviously,therehasbeenalotoftalkaboutit,butI'mjustcurious,ifyouthinkabouttheinstalledbaseyouhavewiththeXTen,andobviously,nowwiththeXFive.Howdowethinkaboutthatopportunityintermsofincrementalinstrumentdemand?

Obviouslythereisalotofcapacityouttherewithwholegenomesandthere'sclearlyabenefitfromtheconsumablesside.Butisthereawaytothinkaboutpopulationsequencingintermsofincrementaldemandfromtheinstrumentsideversuswhatyouhavealreadyinthebacklog?

JayFlat ley(CEO):

Amanda,Iwouldsay,aswegoforward,particularlyifwe'reoutayearortwo,theusageofanXTenwillgetalittleblurry,intermsofwhatisdoneonapopulationsequencingbasisandwhatisdoneotherwise.

Rightnowwethinkofpopulationsequencingprogramsasonesthataresponsoredbythegovernmentandarereallydirectedtounderstandingthediversityofthepopulation,insomecountriesunderstandingareferencegenomethatislikelyunderrepresentedinareferenceworkthathasbeendonepreviouslyandthenunderstandingthevariationintheirlocalpopulationandtryingtolearnenoughaboutthosevariations,medically,tobeabletoinfluencewhatishappeningclinicallyinthatcountry.

ThatishowwethinkaboutPOPSEQ.IntheUS,thereislotsofsaleswehavemadeofXTensthatarenotthat,butinothercountriestherearesomethatarecertainlyborrowingsamplestreamsfromtheclinicalworkthatisgoingoninthecountry;Garvinbeinganexample.Ifyouthinkaboutthat,couldGarvinbecomeaPOPSEQprojectinthenextfiveyears?Maybetheywill.

Sidraisanotherexample,whereweareinstallinganXTenandthere'sthepossibilitythat,thatmorphsintoapopulationsequencingproject.Ithinkthelinesaregoingtogetalittlebitblurry,butprobablyinthenextyearortwo,wethinkofthesePOPSEQprojectsasdigitallyincrementaltowhatwearedoinginthebaseXTenbusiness.

Gotit.Okay,thanks.

Intermsofthe--afollow-uptoTycho'squestionearlierontheHiSeq4000,3000demand,ifyouwill.Obviously,thereisabenefittogettingthe3000versusthe2500,buthaveyoudoneenough--Iknowitisearly--butenoughmarketresearchatthispointtoassesswhetherthe4000willdriveanincrementalproductcycle?

Obviously,ifyouhavea--you'reincentedtobuythe3000vis-a-visthe2500,butdoyouthinkthattherewillbeadecentamountofHiSeq2000sor2500sthatwillupgradetothe4000,giventheincrementalbenefits?

JayFlat ley(CEO):

Wearetryingtobecautiousaboutthewordsweusethere,becauseIthinkIknowhowyouareusingthewordupgradeandwegetthatconfusedalittleinternally,too.Justtobecleartoeveryone,youcan'ttakea2500andtrulyupgradeitthewaywethinkaboutupgradinganinstruments.Inasense,youhavetobuyanewone,butitiswhethertheoldonegetslargelyturnedoff.Andsothatisachangeout,andweprobablyneedtocomeupwithabetterwordtodescribeit.

Wedothinkthatwillhappenandthatthe4000and3000incombinationwillbeabigincentivetothat.Wetalkedaboutthatabitwhenweannouncedthe1Tkit,thatthesystemsthatwerecapableofdoing1Twouldcausetheolder2000sinthefieldtobegintoupgradetothenewerversionsofthe2500.Forthosewhodidn'tdothat,they'llskiprightoverthe2500andgotoatleastthe3000ifnotthe4000.

IwouldsaythatIdon'tthinkthe3000/4000createanewcustomersegment.It'snotadifferenttypeofuser,it'sjustvastlybettereconomics.Itisonanewroadmapwithpatternedflowcellsandnewertechnologiesandsototheextentanycustomercangetthemoneytogettoa3000or4000,theywillopttodoit.

Haveyouguysquantifiedwhatthe1Terabaseupgradeoranewproductcyclewasfromahardwareperspective?Iknowyouobviouslyhadthesoftwareupgrade,butdidyou--whatistheupgradecyclefroma2000tothenewTerabasefromahardwareperspective?Didyoueverquantifythat?

JayFlat ley(CEO):

There'sonly--youmeanintermsofnumbersofinstalledbase?

Yes,justcurious.Iknowobviouslyeveryone--ifyoucouldgetthesoftwareupgrade,youwould,butjustintermsofwhoboughtanew2500togettheTerabasereagentkitvis-a-vistheoldinstrumentthatcouldn't(multiplespeakers)?

JayFlat ley(CEO):

Wehaveneverparsedthosenumbersout.Therehasbeenacoupleofanalystswhohavemadeestimatesaboutwhatfractionofourinstalledbaseof2000sand2500scouldnotrunthe1Tkit.Thoseestimateshavebeenmadebutwehaveneversaidwhatthatnumberwas.

Okay.Thanks,guys.

Operator:

BillQuirk,PiperJaffray.

BillQuirk(Analyst-PiperJaffray):

Great,thanks,goodafternoon,everybody.

Firstquestion,Jay,youmentionedinyourpreparedcommentsthatabout30%,Ibelievewasthenumber,oftheinstrumentsinthisquarterwenttoclinicalcustomers.SoI'mcurious,withthenewNGScodesthatwentliveinearlyJanuary,anyfeedbackintermsofthesmoothingorperhaps[less-than-smooth]reimbursementthatsomeofthesecustomersareseeing?Andmaybeyoucouldjusttalktousalittlebitabouthowyouguysarethinkingthatplayingouthereovertheyear?Thanks.

JayFlat ley(CEO):

Iwouldsayit'salittleearlyforustohaveanyactualevidenceoftheimpactofthecodes.Ihaven'tfromourteamsgottenanydatayetoranydirectfeedbackfromcustomersonbehaviorchangesorchangesinreimbursement,sowedon'treallyhaveanydata.

Obviously,wethinkit'sgoingtobehelpfulandPalmettojustdidanapprovalofanNGScodeaswell,whichwethinkwillbehelpful,buttooearlyforustoknowwhattheimpactisgoingtobeandwhetheritisadirecteffectonvolumesorusageorlabeconomicsyet.

Gotit.

ThenanotheroneonNIPT,[hot]topictoday.Ifwearethinkingaboutadoptiontotheaverage-riskpopulation,obviouslysocietiesendorsingthatisgoingtohelpoutinaprettymeaningfulwayandthere'scertainlysomeestimateskickingaroundwhenACOG[munchupin]andendorsedaverage-risk.Areyouguysexpectingtoseethatthisyear?WehavehearddatesassoonasperhapsApril,May,orroughlyinconjunctionwiththeannualmeeting?

JayFlat ley(CEO):

Wehaveheardthat,aswell.WearenotcountingonthatsoIwouldsayourinternalplansindicateorassumethatitwouldlikelyhappensometimein2016,notin2015.Havingsaidthat,it'spossiblethatitcouldcomeearlier.WeweresurprisedwhenACOGadoptedthehigh-risktestsearlierthanweexpected,sowe'vebeenonaconservativeendofthatcurve,butthat'sthesafeplaceforustobeintermsofourowninternalmodeling,sowe'reassumingsometimein2016.

Gotit,thanks,guys.

Operator:

DanLeonard,Leerink.

DanLeonard(Analyst-LeerinkSwann):

Great,thankyou.WhatisyourassessmentoftheIPlandscapeinliquidbiopsy?IsIPameaningfulfactorsasyouthinkaboutgettingaproductthere?

JayFlat ley(CEO):

It's,fromwhatwehaveseensofar,amuchmorestraightforwardIPlandscapethanwhatwe'veseeninalotofothermarkets,particularlyinNIPT.ClearlytherewillbecompanieswhoclaimtheysomefundamentalIParoundthisashappensalmostineveryapplicationarea.

Whenitallgetssortedout,theseassaymethodsareprettystandard.There'snotalotofrawinventionintheassaymethods,justbeingusedtosequencebloodinaslightlydifferentway,sowethinkit'sarelativelyopenfieldfromanintellectualpropertyperspective.

DanLeonard(Analyst-LeerinkSwann):

Gotit,thankyou.

Operator:

IsaacRo,GoldmanSachs.

IsaacRo (Analyst-GoldmanSachs):

Thanks.

Justwanttofollowuponliquidbiopsy.Lookingpastthe[ITPs],alsocurioushowyou'relookingatthecompetitivelandscape.Asyoulookatthecompaniesthathaveself-identifiedinthismarket,therearefewthatseemtobemoreorlesspiggybackingyourownNGStechnologyandthenthereareafewothersthathavesomesortofaproprietarychemistry.Doyoufeelthatyouhavemostoftheassetsyouneedtobesuccessful[onago]standalonebasis,inliquidbiopsy?

JayFlat ley(CEO):

Firstoff,I'dsaywearenotplanningtodothisonastandalonebasis.ManyofthecompaniesthathaveannouncedprojectsandbeginningtoshowsomeclinicaldatainNIPT,mostofthemusesequencingastheirunderlyingmethod.Thereareafewotheralternatives,butmostofthemusesequencing,andmostofthemuseourplatform.

Wewillcontinuetoencouragethat.Thosearegoingtobegreatcustomersforusbecauseremember,intheUS,eventhoughwearedevelopingourownmethod,wedon'thavetheabilitytogoouttothelabsandtoteachthoselabshowtousethatmethodbecauseofthehomebrewrule.

SointheUS,wewillgothroughtheFDAandtrytogetanimprovedtest,wewillrunanLDTasnecessarytogatherdatatobuildclinicalevidence,andencouragetheoverallmarkettogrowwithlotsofdifferentmethodshere.

It'sgoingtobeadiversesetofmethods,webelieve,forNIPT--forliquidbiopsy.There'sanumberofdifferentwaystogoaboutit.Therewillbesomecompanieswhochoosetohaveverytargetedteststhathavelimitedindications.Therewillbeothersthatgoaftermuchmoreuniversalmethods.Ouroptionthatwehavechosenistogotowardthemoreuniversaltest,eventhoughwewillmarchthroughsomemoretargetedcollectionsofvarianceontheway.

Gotit.Thatmakesense.Thanks.

Thenjustontheforensicsplatform,that'samarketwhereIthinkofthecustomersasbeinginmanycaseseithergovernment-fundedorcrimelabsandthelike,sojustmaybeifyoucouldhelpusunderstandyourgo-to-marketstrategythere,whoyourinitialtargetcustomersareandwhatkindofchannelinvestmentyouwouldmake?Thanksabunch.

JayFlat ley(CEO):

Francis,youwanttotakethat?

FrancisdeSouza (President):

Sure,youareright.Ourapproachactuallyfromacommercialperspectiveistotakewhatwebelieveisasignificantlysuperiorofferinginthismarketthroughourspecialistchannelthatoverlaysonoursalesforceandtargetsexactlythekindoflabsthatyouweretalkingabout.Wemadetheannouncementacoupleofweeksagoandweexpecttobeoutinthefieldthisquarterandthroughtherestoftheyear,targetingthoselabs.

Thanks.

Operator:

SteveBeuchaw.

SteveBeuchaw(Analyst-MorganStanley):

Hi,goodafternoon,andthanksfortakingthequestions.

Iwonder,Jay,ifyoucouldtaketheapproachthatyouhavebeenusinginNIPTwiththereviewthatMyraqahasgivenoftheapproachandmaybegiveusthatsamelensonyourapproachinclinicalandoncology.WhathasyourworkwithMyraqataughtyouabouthowtoapproachthatmarket?

JayFlat ley(CEO):

I'dsaythere'sacoupleofthings.OneisthatwewillbegoingforCEapprovalinEuropefasterthanwemighthaveotherwise.That'sacriticalstepforustotakeandit'sonethatisvastlyeasiertotakethanaFDAapproval.Soyouwillseeusdothatmuchmoreaggressivelythanperhapswehavedonehistorically.

ThesecondthingIthinkyou'llseeusdothatisabitofashiftiswewillgofor,intheUS,foropenplatformapprovalfirst.Thatwillallowotherstoputtheirassaymethodsonourplatformsbeforewegetaspecificassaymethodofourownapproved.SothosearetwostrategicchangesthatcameoutofthereviewbyMyraqathatapplyacrosstheboard.

TheotherthingI'daddis,look,wearereallyexcitedabouttheworkgoingonintheActionableGenomeConsortium,intermsofsettingthestandardsforthesampleandtargetprepforthereporting,theinformatics,andwehaveregulatorybodiesthataresittinginasinterestedobserversintheAGCprocessandarelookingatwhattheAGCwillpublish.Welikethewaythatprocessisplayingoutandyoucanexpectustocontinuetodomoreofthatkindofactivity.

Asyouputitalltogether,howdoyouthinkaboutthegrowthintheoncologybusinessforward,fromaverystrong2014?

JayFlat ley(CEO):

Wearequiteoptimisticaboutit.EvenwithoutActionableGenomeandliquidbiopsy,ourcoreoncologybusinessisgrowingverynicely,atleasttheCorporategrowthrateifnotabithigher.Sotherecontinuestobeverystrongdemand.IfyoulookatafractionofNextSeqswearesellingintooncology,itishigh.

Sothere'sjustgeneralpullnowintothesetypesofapplicationsincreasinglybroadly,soit'snotjustthebigcancercentersanymore.Andthenyoulayerontopofthatthestep-functionswethinkwecouldprovidewiththeActionableGenomepanelandwithasuccessfulliquidbiopsyproduct,thatputsinflectionpointsinthecurve,butthoseinflectionpointsarestillawaysout.

Perfect,thankssomuch,everyone.

Operator:

JackMeehan,Barclays.

Youcanmoveon.

Operator:

JeffElliott,Baird.

Jef f Ellio t t (Analyst-RobertW.BairdandCompany):

Thanksforthequestion.

Jay,I'mwondering,sinceit'sbeenaboutayearsinceyoulaunchedtheXTen,canyoureflectontheexperienceyourcustomershavehadinthingslikegatheringsamples,sampleprep,managingthedata?Andthenasafollow-on,anychangeinthoughtonopeninguptoothersamplesbesideswholehumangenomesontheXTen?

JayFlat ley(CEO):

There'sacoupleofobservationsthere.Onethatwehavehighlightedpreviouslyisthat,clearly,wearesellingthistechnologymuchmorebroadlythanouroriginalassumptions,andasaresultofthat,wehaveagreaterfractionofourcustomersofXTensthatneedtobringupnewcapabilitiesthatperhapstheydidn'thavebefore.

It'sonethingifyouareTheBroadandyouknowhowtosequencemassivenumbersofsamplesandyouhavepipelinesinplace,informaticsinplaceand400,000samplesinthefreezer.ThatisoneextremeandclearlytheycameuptospeedontheXTenextraordinarilyfast.

Buttherearelotsofothercustomersthatneedtobuildoutbrandnewsamplepreppipelinesandthattakessometime.Informaticsisachallengeandthatpartisachallengeforeverybody,evenincludingTheBroad,tobeabletoanalyzethevastnumberofsamplesthatcanbecreatedbytheXTen.

ButclearlynoonewouldworkonthatproblemunlesswehadtheXTeninthemarket,soit'sveryimportantthatwedeliveredthistechnologyandthat'sreallycatalyzingtheworldtobegintoworkontheproblemsofhowyouanalyzetensofthousandsofwholegenomesatonetime.

Theinformaticswillkeepup,althoughittendstolag.Thereisalwaysaconcern,andIreflectbackthatwhenwelaunchedourfirst300kgenotypingchip,everybodywassoworriedaboutthechallengeofanalyzingallthatdata.Nowthat'sapittancecomparedtowhatwecandoonanXTen.SothatcountsforthespectrumofadoptionratesorusageratesonXTen.

SowedohavetheabilitynowtoanalyzeinternallywhatfractionofthetimeeachoftheseinstrumentsisusedbytheXTencustomersandthatfallsacrossaverybroadspectrumandit'sfortheexactreasonsthatwehavejustdiscussed.

I'msorry--youhadasecondparttoyourquestion?

The[locations]openingupforotherapplications?

JayFlat ley(CEO):

Rightnow,wehavenoplantoopentheapplications.Today,youshouldthinkoftheXtechnologyasbeing

wholehumangenome.Atsomepointinthefuture,wemayreconsiderthatdecision,butasoftoday,it'sawholegenomesequencingbox.

Jef f Ellio t t (Analyst-RobertW.BairdandCompany):

Great,thankyou.

Operator:

BryanBrokmeier,MaximGroup.

BryanBrokmeier(Analyst-MaximGroup):

Thanksfortakingthequestions.YoupreviouslyalludedtoapaceofPMAsubmissionsthattheFDAhasneverseenbeforefromtheentiremarketasawhole.HaveyouhaddiscussionswiththeFDAandwhatistheirfeedbackthenonyourplansandtheirabilitytohandleit?

JayFlat ley(CEO):

Iamsorry.Idon'tunderstandthefirstpartofthat.ThatwasthesheernumberofPMAsthattheFDAdealswith?

Backaboutafewquartersago,youtalkedabouttheFDA,andtheyusuallyonlyapprovetwoorthreePMAsperyearandyouareplanningtobringmoresubmissionstothemthantheyhaveseenintheentiremarket.SoIwaswonderingiftheyhavehadanyfeedbackontheirabilitytohandlethat?

JayFlat ley(CEO):

Yes.Idon'tthinkthat'sgoingtobeaconstraintattheFDA.Thedatasetsthatweareprovidinghere,theyknowhowtoreviewthemprocedurally,soIdon'tthinkthere'snecessarilyachallengearoundthat.Thebiggerchallengehereistheintellectualleapeveryoneismakingtoanewgenerationofapprovedproduct,onewherethereisnotaone-to-onecorrelationanymorebetweenwhatcomesinandwhatpossibleresultyoucouldconcludefromthedataset.

AndthatisthebigleapthatneedstobemadeandwhereweandtheFDAneedtoworktogethertofigurehowdoyouactuallyvalidatethesenewproducts.Theytrulyareadifferentclassthanhaveeverbeenapprovedbefore,andgettingoverthathurdleandunderstandingandperhapsevolvingwhateverwedecidetodocollectivelythere,iswherethebigchallengesis,asopposedtojusthandlingthesheernumberofsubmissions.

Thanks,Jay.

ThesecondquestionisforMarc.Grossmarginshaverecentlybenefitedbythehighermarginsontheinstrumentsyou'veintroducedinthelastyear.Arethemarginsontheinstrumentsyoujustrecentlyannouncedatsimilarlevelsastheinstrumentslastyear?Andwhatimpactwilltheprogram--thetrade-inprogramthatyoutalkedabouttodayhaveongrossmargins?

Theimpactofthetrade-inprogramyouhaveseenmarginallyinthefourthquarter.We'llunwindthatthroughQ1andQ2asthatprogramwrapsupinthefirsthalf.

Onthenewinstruments,Iwouldthinkofthoseasbeingsimilargrossmarginstotheinstrumentsthatwecurrentlyhave,withtheexceptionofobviouslytheXFiveisahigherpriceperunitthantheXTen,soobviouslythereisaslightlybettergrossmarginontheXFive.

Okay,thanksalot.

Operator:

IwouldnowliketoturnthecallovertoRebeccaChambersforanyclosingremarks.

Thankyou.

Asreminder,areplayofthiscallwillbeavailableasawebcastintheInvestorssectionofourWebsite,aswellasthroughthedial-ininstructionscontainedintoday'searningsrelease.Thankyouforjoiningustoday.Thisconcludesourcall,andwelookforwardtoournextupdatefollowingthecloseofthefirstfiscalquarter.

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