Good day, ladies and gentlemen, and welcome to the Illumina First Quarter 2021 Earnings Conference Call. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference call, Ms. Juliet Cunningham, VP, Illumina, Investor Relations. Please go ahead, Ms.
Cunningham.
Good afternoon, everyone, and welcome to our earnings call for the Q1 of 2021. 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'll host a question and answer session. If you've not had a chance to review the earnings release, it can be found in the Investor Relations section of our website at illumina.com. Participating for Illumina today will be Francis D'Souza, President and Chief Executive Officer and Sam Samad, Chief Financial Officer. Francis will provide an update on the state of Illumina's business and Sam will review our financial results.
This call is being recorded and the audio portion will be available on the Investors section of our website. It's 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 ks. With that, I will now turn the call over to Francis.
Thank you, and good afternoon, everyone. As we shared in our pre announcement, Illumina had a very strong start to 2021, with the 1st $1,000,000,000 quarter in Illumina's history. We achieved 1st quarter revenue of $1,093,000,000 Growing 27% compared to the prior year and 15% from the last quarter. Sequencing revenue was especially strong, up 29% compared to the prior year, driven primarily by accelerating growth in our core business, With both clinical and research customers exceeding pre COVID activity levels. In addition, we're seeing global investment and the creation of a genomic epidemiology infrastructure to combat COVID-nineteen as well as monitor for future pathogen outbreaks.
I'd like to share some additional Q1 highlights by platform. Beginning with our high throughput platforms, NovaSeq drove a significant share of the exceptional performance, achieving its highest first quarter placements on record, which is remarkable As it enters its 5th year since launch. We continue to see the positive impact of our version 1.5 reagents, Enabling both new high throughput customers as well as continued conversions from our existing HiSeq customer base. Our mid throughput platforms drove additional growth with a 23% increase in consumables revenue compared to last year. We saw continued success for NexSeq 1000 and 2000 as well as strong performance from NexSeq 550.
Notably, we saw an increase in customers upgrading from their existing Illumina benchtop sequencers to NextSeq 1,000 and 2,000. Clinical customers continue to drive new NextSeq 550 placements with NextSeq Dx recording its highest shipment quarter to date. In China, where the instrument received NMPA approval in Q4, we're seeing strong adoption in the hospital setting As we work with IVD Development Partners like Burning Rock, BioSan and MatrixDx to provide comprehensive clinical solutions. Additionally, Working with our strategic partner, R Pharm, NextSeqDx received medical device registration in Russia in March, Low throughput portfolio revenue had another strong quarter, growing 33% year over year with robust growth in both sequencing consumables And instrument shipments in Q1. MiSeq, MiniSeq and iSeq all generated year over year and sequential growth in consumables as well as instrument placements.
Our low throughput platforms continue to be a compelling entry point for new to NGS customers with an ever increasing number of use cases. One interesting customer example is Blue And the development of cell cultured seafood to support sustainability and oceanic diversity. Additionally, These instruments play a critical role in catalyzing localized COVID surveillance programs across the globe. Turning to our Clinical and Research and Applied segments. Total sequencing consumables revenue of $695,000,000 was up 26% year over year, demonstrating strong demand for sequencing across both clinical and research segments.
More than 44% of our sequencing consumable shipments in the Q1 of 2021 were to clinical customers. Clinical testing showed significant growth with consumables up 35% year over year. These results do not include COVID surveillance, which is reported in our Research and Academic segment. Oncology testing exceeded our overall clinical growth rate and is our largest and fastest growing clinical segment. This growth was driven by our customers benefiting from expanded access to reimbursement for NGS based testing, particularly in comprehensive genomic profiling or CGP for therapy selection and some of the first reimbursement for sequencing based monitoring tests.
TruSight Oncology 500, our RUO comprehensive genomic profiling assay continued its success this quarter, adding over 20 new customers. In February, the Belgian Society of Medical Oncology announced that they will use TSO500 For a national pilot to evaluate the use of CGP for patients with advanced metastatic cancer. As a leading distributable CGP assay, PSO-five hundred continues to offer a compelling choice for our pharmaceutical partners. We announced last week an exciting new partnership with Cartos Therapeutics to develop a TP53 companion diagnostic, expanding the TruSight Oncology offering into blood cancers. Beyond CGP, we've seen promising developments in the use of whole genome sequencing in cancer treatment this quarter.
Most notably, a paper in the New England Journal of Medicine published by our partners at Washington University, St. Louis showed that for AML and MDS patients studied, Whole genome sequencing using Illumina technology produced more accurate results in less time and at a similar cost compared to standard techniques Like fish or karyotyping. In reproductive health, the cascading effect of the ACOG guidance on increasing coverage of NIPT for all pregnancies drove the 3rd consecutive quarter of both year over year and sequential growth. In the U. S, 2 large payers, Anthem and Blue Cross Blue Shield of Minnesota expanded their coverage criteria to include twin pregnancies just last month.
And in March, we reported out on the results of our groundbreaking risk sharing real world study with Harvard Pilgrim, demonstrating the The cost effectiveness of offering NIPT to all pregnant women. These studies add to the building momentum for broader access to NIPT. International support for NIPT coverage also continues to grow, fueling the continued rapid adoption of our CE IVD Mark NIPT kit. For example, there was positive news from Italy and Sweden where new coverage requirements were approved during the Q1 of 2021. Moving to genetic disease testing, customers are choosing Illumina's highly accurate and scalable sequencers, And our growth rate in this segment exceeded the company's growth rate in Q1.
We also continue to see new favorable coverage decisions being issued. This quarter, 2 major health insurers in Germany announced that they will cover the cost of whole genome and whole exome sequencing For rare disease, there are over 10,000,000 members. And Geisinger in the U. S. Expanded coverage to include epilepsy and cerebral palsy.
Research continues to demonstrate a 40% to 68% diagnostic yield for children suspected of having a genetic disease and whole genome sequencing is used as a 1st year The increasing coverage of these tests will provide more patients with faster diagnoses and better care. Turning to our Research and Academics segment, we saw strong growth in the quarter compared to the prior year period as the majority of research and academic customers have returned to the lab. The pandemic and emerging variants of concern have raised awareness within governments around the world about the essential role That genomic pathogen surveillance plays in the fight against infectious disease. We're seeing investment globally in the creation of a pathogen surveillance infrastructure To manage outbreaks and improve health outcomes, including sequencing capabilities to determine the spread of pathogens, The emergence of variant strains and emerging drug or vaccine resistance. In the U.
S, the American Rescue Plan Act Includes $1,700,000,000 in funding for the CDC to improve sequencing capacity to identify mutation and circulation of viruses. In Europe, the EC announced €123,000,000 commitment to combat COVID variants. In India, The government launched the Indian SARS CoV-two Genomic Consortia with a plan to sequence 120,000 viral genomes over the next 4 months. This investment in sequencing for national genomic surveillance activities drove approximately $55,000,000 of incremental revenue in the Q1, comprising of $35,000,000 in instrument placements and $20,000,000 in sequencing consumables. As countries around the world battle the pandemic, We expect continued investment in genomic pathogen surveillance to expand national genomic epidemiology capabilities.
While the initial focus of this infrastructure is COVID surveillance, there are durable longer term needs, including tracking future emerging natural pathogens, bioterrorism, Antimicrobial Drug Resistance and Hospital Acquired Infections and determining how host genetics can impact the risk in severity of infectious disease. While the pandemic has certainly fueled demand for our sequencing, we also believe it has established a new baseline of awareness And infrastructure build out that will support sustained activity. As we work through the COVID-nineteen pandemic, We're also seeing acceleration in several population genomics programs, expanding our presence in national health systems around the world. In the U. S, all of us ramped up sample volumes in Q1 to a level that we expect to continue throughout 2021.
In Japan, the Tohoku Medical Mega Bank Organization chose Illumina Sequencing for a 40,000 sample multi generational study to take place this year. In February, Egypt announced the 1st population genomics program in Africa with the launch of their Egyptian genome project. This project is focused on establishing a map of the Egyptian human genome with the goal of ushering the country into the world of precision medicine. Large population health initiatives serve as one good example of our focus on improving the health of patients, communities and our planet. Earlier this month, we published our 2nd annual CSR report, outlining our specific commitments to help improve our world.
This 2021 report is available on our website and notable highlights include expanded transparency on U. S. Diversity demographics, Climate resilience planning, disclosure on Trade Group membership and data assurance on energy and emissions. We look forward to continued investor feedback on the evolution of our environmental, social and governance programs. Our commitment to the advancement of human health is an Illumina core tenant, which brings me to Grail.
We are pleased with the progress GRAIL is making and remain committed to pursue the completion of the GRAIL acquisition. GRAIL recently presented affirmative data from its CCGA3 study at the American Association For Cancer Research Annual Meeting and is expecting to launch GALRI, It's breakthrough multi cancer early detection screening test in Q2. One of the many reasons we decided to acquire GRAIL was to accelerate patient access to breakthrough multi cancer early detection blood tests, which could save tens of thousands of lives. We are committed to supporting all our customers and strongly believe that our acquisition of Grail is pro competitive. We expect the acquisition to accelerate the early detection of cancer market as a whole.
We saw a similar dynamic Play out in the non invasive prenatal testing market, where after Illumina's entry, the market grew and prices decreased, Making these important tests accessible to a much larger population of pregnant women. And now, I'll turn
it over to Sam. As Francis outlined, 1st quarter revenue grew by 27% year over year to $1,093,000,000 to the 1st $1,000,000,000 quarter in the company's history. Total sequencing revenue reached a new high With 1st quarter revenue of $979,000,000 growing 16% sequentially and representing 90% of total revenue. Sequencing consumables revenue grew 26% compared to the prior year period, driven by strong growth in clinical testing And demand for NovaSeq version 1.5 flow cells. Most clinical and research customers are running above pre COVID activity levels, as Francis highlighted.
COVID-nineteen surveillance initiatives contributed approximately $20,000,000 in sequencing consumables revenue during the Q1. Sequencing consumables also benefited by approximately $20,000,000 from the timing of customer purchases during the Q1. Sequencing Instruments revenue grew 123% year over year with revenue of $176,000,000 in the 1st quarter, reflecting strong performance across all instrument categories. The Q1 marked another consecutive quarter of record mid throughput shipments, driven by strong adoption of NextSeq 1,000 and 2000. COVID surveillance initiatives resulted Approximately $35,000,000 of incremental instrument revenue due to some customers building additional capacity for genomic epidemiology.
As expected, sequencing service and other revenue was down 16% year over year due to IBD partnership revenue recognized in the prior year period. Sequencing service and other was roughly flat sequentially. Moving to regional results. The Americas delivered revenue of 5 $62,000,000 with 18% growth compared to the prior year period. Revenue growth in the region was driven by strength in sequencing product revenue These items were partially offset by lower IVD Partnership revenue as expected.
EMEA delivered revenue of $305,000,000 representing 38% growth year over year. EMEA's performance was driven by strong sequencing demand Including initiatives for COVID surveillance and genomic epidemiology. Greater China revenue was $127,000,000 representing growth of 51% year over year and 32% sequentially due to continued strength in sequencing revenue Driven by clinical expansion in the region and growing demand in hospitals, including the successful launch of NextSeq 550dx. Finally, APJ revenue of $99,000,000 grew 29% both year over year and sequentially, driven by sequencing consumables revenue growth in clinical applications such as oncology, reproductive health and genetic disease testing, as well as end of fiscal year purchases. Moving to gross margin and operating expenses, I will highlight non GAAP results, which include stock based compensation.
I encourage you to review the GAAP reconciliation of these non GAAP measures, which can be found in today's release and the supplementary data available on our website. Non GAAP gross margin of 70.5 percent improved sequentially by 360 basis points due to increased fixed cost leverage on higher volumes and a one time inventory write down in the Q4 of 2020. On a year over year basis, non GAAP Gross margin decreased 2 50 basis points due to IBD Partnership revenue in the year ago quarter, higher freight costs attributable to the COVID-nineteen pandemic And product mix partially offset by fixed cost leverage on higher volumes. Non GAAP operating expenses of $420,000,000 We're up $81,000,000 year over year in line with expectations due to increased performance based compensation expenses, headcount growth and increased project spend during the quarter. Non GAAP operating expenses were slightly down sequentially, driven by an additional week in Q4 2020, partially offset by higher variable compensation expenses in Q1.
Non GAAP operating margin was 32.1%, up from 20.9% in the Q4 of 2020. The sequential improvement was better than expected due to higher revenues, gross margin and resulting increased fixed cost absorption in the quarter. Non GAAP other expense of $3,000,000 was $23,000,000 lower sequentially as expected. This was due to 4th quarter gains on short term investments that we sold as we repositioned our investment portfolio for the anticipated funding of the Grail acquisition. In addition, we had lower interest income in the Q1.
The non GAAP tax rate of 20.3% was up from last quarter due to tax expense on certain foreign subsidiary earnings that are no longer indefinitely reinvested, partly due to the capital requirements associated with funding the anticipated Grail acquisition. For the Q1 of 2021, GAAP net income was $147,000,000 or $1 per diluted share And non GAAP net income was $278,000,000 or $1.89 per diluted share. Moving to cash flow and balance sheet items. Cash flow from operations was $282,000,000 DSO of 43 days compared to 50 days last quarter driven by revenue linearity. 1st quarter 2021 capital expenditures We did not repurchase any common stock in the Q1.
We ended the year with approximately $4,600,000,000 in cash, cash equivalents and short term investments. During the Q1, we received approximately $1,000,000,000 in proceeds from bond issuances to fund the anticipated Grail acquisition. Our weighted average diluted share count for the quarter was approximately 147,000,000. Moving now to 2021 guidance. We expect full year 2021 revenue to grow in the range of 25% to 28% or $4,050,000,000 To $4,150,000,000 At the midpoint of our guidance, this represents an increase of approximately $858,000,000 and a significant increase from our expectations earlier this year.
For the full year 2021, at the midpoint of our revenue guidance range, we now expect Sequencing revenue to grow approximately 29% year over year, driven by strong orders and instrument placements. This includes sequencing consumable growth of approximately 30% compared to 2020, driven by strong demand for NovaSeq version 1.5 reagents and Growth in Clinical Markets. We expect sequencing system revenue to grow approximately 50% year over year, Driven by NovaSeq placements to new to high throughput customers and continued HiSeq conversion in addition to mid throughput demand across our NextSeq platform. NovaSeq pull through to be towards the high end of our initial guidance range of $1,100,000 to $1,200,000 are raised to grow approximately increased leverage on higher volumes, partially offset by product mix and IVD Partnership revenue in the Q1 of 2020. We now expect 2021 non GAAP operating margin to be approximately 26.5%, reflecting our higher revenue expectations and our ongoing commitment to investments in research and development.
We continue to maintain our Focus on improving our core business operating margin leverage over time. We expect non GAAP other income to be about $60,000,000 lower than 2020 Due to the gains realized in the Q4 of 2020, lower interest income on shorter duration investments in anticipation of the close of the Grail acquisition And interest expense from our recent bond issuances. We expect non GAAP earnings per share in the range of $5.80 to $6.05 and GAAP earnings per share to be in the range of $4.72 to $4.97 And we expect diluted shares outstanding in 2021 to be approximately 148,000,000. Moving to the Q2 of 2021, we expect revenue to be up approximately 60% year over year due to the broader economic recovery and strength in our core business. We expect a year over year increase in non GAAP gross margin due to the higher volumes and resulting leverage.
Non GAAP gross margins are expected to be down modestly on a sequential basis due to mix and additional investments to support The higher than expected volume growth. Non GAAP operating expenses did increase significantly on a year over year and sequential basis Due to investments supporting the growth of the business and research and development as well as compensation related expenses. Non GAAP other expense to be modestly unfavorable on a sequential basis compared to the Q1. Non GAAP tax rate to be slightly lower on a year over year basis. As a result, we expect non GAAP earnings per share in the range of $1.30 to $1.35 for the quarter and GAAP earnings per share in the range of $1.21 to $1.26 I'll hand the call back over to Francis for his final remarks.
Thank you, Sam. Illumina is off to a very strong start to 2021, and it's clear that momentum is building across our customers globally. We witnessed the diversity and strength of our growing community in our 1st Annual Customer Conference over the last couple of days. About 8,500 people registered to hear from the world's leading genomic and healthcare pioneers, including Jennifer Doudna, Francis Collins, Bill Gates, Francis Arnold and Dansu Hill. The topics included the critical role of genomics in fighting the pandemic, making genomics a foundational element of a national From battling cancer to genetic disease diagnosis to fighting the pandemic, the transformative impact genomics will have on human health is accelerating.
And we at Illumina are proud of the key role that our customers, partners and employees are playing in making it happen. Now, I'll invite the operator to open for Q and A.
And your first question comes from Puneet Sohra with SVB Leerink.
Yes. Hi, Francis. Thanks for the questions. The first one is really, What are you baking in for COVID surveillance here in the 25% to 28% guide for the year? I mean, I think the question really is the COVID surveillance opportunity and the cadence of that as you build out this epidemiological What's the cadence of that?
And I appreciate that COVID is still raging in Different parts of the world, U. S. Vaccinations are ramping and administration is investing $1,000,000,000 plus in sequencing. So just wondering how much of that is baked into this year and how what sort of a tail should we see Longer term there. And then my second one is just on GRAIL.
What does the process look like next for both FTC and the And Commissioned Directory General. What are the steps? And obviously, you're implying a second half close here. So just wondering, what are some of the next steps? Thank you.
Very well, thanks for your questions, Puneet. I'll start by saying that it is It's exciting to see how the world is sort of moving forward with putting out a surveillance infrastructure for pathogens. It's something as you know Puneet, we've been talking about from the beginning of last year and talking about the fact that in addition to testing, What we really need is this genomic epidemiology infrastructure. So it's encouraging to see that play out Around the world and to see the big commitments here made in the U. S.
Now to get to your question, in terms of what we're building into this year, The vast majority of the growth in that 25% to 28% is coming from our core business. So the way we've modeled this year is we said, look, we expect small contributions from the surveillance infrastructure over the course of the whole year. We saw some investment in Q1. And so we saw a bolus of $35,000,000 in instrument purchases That we got in Q1 to lay out some of that infrastructure and we saw some consumables infrastructure. So in terms of our model, We continue to model some consumable purchases over the course of the rest of the year, but not a lot in terms of additional infrastructure investment.
Now the way we expect it to play out is, we are seeing the bid commitment made even in the U. S. Around the American Rescue Plan, And we expect some of that investment to be released towards the tail end of this year and start to play out more sort of next year. And what's interesting is that this infrastructure, while it will be very helpful in fighting the pandemic, is really a durable plan by the nations that are rolling it out. And what they are thinking about is a long term creation of a genomics based pathogen surveillance infrastructure To help fight this pandemic and prepare us next for the next outbreak, whether it's a natural outbreak or bioterrorism or emerging antimicrobial resistance Our hospital acquired infections.
And so we do expect, as you point out, some tail on this. It's not a story of this year. In fact, we've modeled in very little this But it really is a story that plays out into next year and going forward. And so that's how we're thinking about it in terms of model. Obviously, As more details come out, we'll make sure to share them with you.
In terms of GRAIL, as I said, we are committed to pursuing the acquisition of GRAIL in the U. S. That means We are taking sort of our case into district court and we're also working with the European Commission on their review of the Grail acquisition. We continue to feel that the facts are on our side, the law is on our side, And we continue to expect that the deal will close and will close in the second half of this year.
And your next question comes from Doug Schenkel with Cowen.
Hey, good afternoon and thank you for taking my questions. I want to ask about antitrust and Strategy and then also kind of guidance philosophy. So on antitrust As you know, over the last couple of years, Illumina has run into challenges with regulators on The now abandoned acquisition of PacBio and the plan to acquire GRAIL and recognizing everything you said in your prepared remarks as well as in your response to Pete's question on Braille. I am wondering, 1, how is your criteria for strategic opportunities evolving in light of these developments? And 2, what changes you're making in process?
You obviously felt adequate in terms of how you're approaching these deals, but both proved to be A lot more challenging than you expected. So presumably, you are making changes accordingly. I think it would be helpful to hear about those. And then on guidance philosophy, how would you describe confidence in your targets for this year at this point? I mean, your targets make a lot of sense Even though the growth numbers are really big.
And you did talk about, I think it was $1,400,000,000 in backlog entering Q2. Yes. That said, the world is still uncertain, as we all know, coming out of 2020. And then if we go back to 2019, it was a tough year for Illumina relative Self imposed targets. So with those things in mind, I'm just I think it would be helpful to hear about the philosophy you're applying guidance this year and if you still think you're skewing towards the more conservative side of things.
Thank you.
Great. Hey, Doug. So let me take both parts of your questions. I'll talk first about our acquisition strategy, specifically touching Any impact from our experience with the FTC and how it changes our philosophy going forward. And then I'll talk about guidance for the rest of the And Sam may contribute then too.
So I'll start by saying, if you look at our acquisitions over the last couple of years, We have we attempted the PacBio acquisition, I think, sort of 3 years ago initiated that and we obviously didn't get that through the FTC. But we were successful in closing the Edico acquisition, which was a huge success in terms of billing in the Dragon technology into our sequencers and has been Super well received by our customers and really create a positive momentum on the informatics We also completed, for example, the Inancio acquisition and brought lossless data compression Technologies and capabilities into our sequencers as well. And so what we're seeing is we've had success in terms of buying innovative technologies That we can build into our sequencers and take to market, but we're also seeing that given how popular our sequencers are in Our core market that we have work to do in terms of some of these bigger acquisitions. And so, one, I think we're going to continue to And I'll scan the marketplace and look for acquisitions that make sense both technology tuck ins as well as from time to time larger acquisitions that We continue to believe that vertical acquisitions are well within bounds and that's why we're going to go to court On the GRAIL acquisition.
And we also recognize that given the scale we are and given our position in the market, We will have to do more work in terms of educating the regulators about our business and making sure they are up to speed on our business Even before we do an acquisition. So that's another takeaway over the last couple of years. Strategically though, I'd say we're still Continuing to focus on making sure that we are looking for places where we can allocate capital both internally and externally that deliver maximum shareholder And that focus hasn't changed at all. In terms of our guidance philosophy for the year, I think you touched on a couple of important points. It's a balanced point of view we feel that on the one hand Recognizes that we're coming into the year and we're coming off the quarter with a huge amount of momentum in our core business.
So if you look at both Clinical side of the business and the research side of the business, we're seeing real strength and that's showing up in terms of the revenue numbers that we had in Q4, but obviously also in Q1, it's showing up in the orders numbers, it's showing up in the instrument, a huge instrument growth rate we saw Year on year in Q1 and so huge amount of momentum in our core business. You add to that, we're seeing very positive signs From the COVID surveillance add on business. So on the one hand, there's a huge amount of momentum going into the rest of the year. As you point out, there's still uncertainty because we're still dealing with the pandemic. And so we're still watching to see how the pandemic plays Countries are grappling with a 3rd wave and a 4th wave and that could have impact on people's ability to go into The labs or run their clinical sequencing that they need.
And We're balancing those 2 and the numbers we put out, although they're big numbers, we have confidence in and we think it strikes that appropriate balance. I don't know, Sam, if you have anything else to add. Yes.
I think you hit it, Francis. I mean, just to be very brief and add maybe a couple of comments. One is, we have a A high degree of confidence about our guidance range. It is a balanced outlook for the year. What gives us a lot of that confidence, Doug, is the strength of the core business.
We are enjoying tremendous strength in the core business and that adds to the confidence that we have. I think the only potential headwind that I Call out or risk is the uncertainty related to the pandemic, as Francis mentioned.
And your next question comes from Tycho Peterson with JPMorgan.
Hey, thanks. A couple of quick ones here. On the instrument strength, Francis, I'm just curious as labs are getting back up and running, how much of what you're seeing is kind of catch up Spending from last year's delays. Obviously, you're guiding above the streak for the full year. So maybe it isn't any sort of pull forward.
But I'm wondering if you can comment on that. And then on the COVID work, I think last quarter you said you were winning over 70% of those projects. Can you maybe just talk to the competitive And then as we think about your instrument fleet, which of the platforms you think are going to be most suitable for kind of the ongoing surveillance applications? And then One question on competition. There's kind of a 3rd wave of sequencing companies coming, a singular element on the I'm just curious And then last one for Sam, FX contribution, I didn't hear that in Q3,
if you break that out in the quarter. Thanks. Great. Thanks, Sai Ku. All right.
I had a bunch of questions in there, so let me make sure I captured them all. I will so first, you asked us about The strength we're seeing from the instrument portfolio, let's comment on what's driving that. Then you asked about COVID surveillance and said, look, we talked about We represent about 70% of the surveillance testing that was done and how is that playing out since we last talked about the numbers, Which instruments play best for that? And then sort of a commentary on the competitive landscape. Okay.
So let me start with instrument strength. Yes, we talked about the fact that we had enormous instrument strength in Q1, so more than doubling year over year in terms of the revenue in Q1 that we got from sequencing instruments, It's a huge amount of strength. And what's driving that is the strength in the core businesses, both the clinical side and the research side. We talked about the strength that we saw on the clinical side in oncology testing, that oncology testing as a segment is now not only our largest clinical Segment, but it's actually our fastest growing segment. And there's lots of drivers behind the strength in the oncology segment, right, and more broadly in the clinical segment.
One of the big drivers is We saw a very significant step forward in reimbursement across a number of clinical segments last year, Genetic disease testing, oncology, NIPT. And so what's happening is that the addressable market in terms of people who have access to the tests in a reimbursed way has And so that's driving increased business for our customers in the clinic and that's driving their purchases. Other dynamics that are playing out The strength of the clinical business in China, for example, and the clearance we received from the NMPA Around NexSeq and that's driving instrument growth. And so it's not catch up, it's just the market continues to build, right? So with more reimbursement, The addressable market expands with more cleared products.
The addressable market expands in terms Our ability to place instruments into hospitals, for example, in China. And that's really what's driving the instrument strength. And obviously, that's hugely exciting because That talks well about future consumable spend from all the instruments that we placed in Q1. In terms of COVID And what we talked about is, if you look at GISTADE or NCBI, you can track in terms of the number of genomes that are Deposited the platforms they've been run on. And so I think there was a helpful blog that came out in the last couple of days and Keith Robinson did the omics omics blog And he sort of did an analysis and it's pretty close to what we did too, which says that our share there is about it's gone up to about 79 Percent now of all genomes in Gisades have been done on Illumina platform.
I think the next highest is ONT It was about 17%, I believe, and then it sort of tapers off after that. And so similar, but maybe a little bit better than what we talked about last In terms of the instruments, there's a broad range of instruments that are being used for surveillance. Obviously, NovaSeq is a very popular instrument And the high volume shops, but we're seeing a lot of NextSeq's and MiSeq's being used as well. And so it's sort of the blend, if you like, that are playing really well. In terms of competition, so there's always competition
in the market. And as you
can imagine, a market that's this Early and growing this quickly is going to continue to attract investment dollars. So like you, we're looking at some emerging players that are going to be launching In the next year or 2, I think you listed some of them. There are clearly players that are in the market right now too that we compete with. But that's been true every year. So I'd say every year we face sort of a new wave of venture funded competitors.
And it's up to us to continue to
Yes. With regards to FX, Tycho, so for Q1, I would say, compared Q1 of 2020, FX benefit contributed approximately 3% in terms of benefit year over year and that was driven mostly by the euro And the RMB, so appreciation of those currencies. If we look at the full year, we're expecting that benefit to moderate as we look So definitely more of the benefit in the first half versus the second half. And we're expecting for the full year approximately, I would say, 2% in terms of overall benefit from currency
And your next question comes from Suji Stump with BTIG.
Hi, thanks for taking the question. Francis, could you talk about oncology testing,
obviously, a lot of
strength there and you kind of Obviously, a lot of strength there and you kind of attributed that to better reimbursement and other kind of favorable Just kind of curious about given the visibility you guys have across all the diagnostic companies out there, what If you're seeing any kind of catch up from all the delays to screening and cancer diagnosis last year, we would love to kind of hear your thoughts there and your visibility into that?
Yes. So, as you pointed out, obviously, we work Very closely with our customers and the terrific customers like FMI and Gardens and so on in oncology testing. And our Perspective is that they if you were in the liquid biopsy space, so if you offered a blood based test, You were actually more durable through the pandemic than many other types of clinical testing. And so Some of our customers found very innovative ways in terms of mobile phlebotomy units or having home based access to the test even for some patients. And that's possible if you have a blood test.
And so in oncology testing, I think one of the stories of the pandemic is going to be That there was an acceleration of the acceptance of liquid biopsy. And I think that's a durable trend. I think we Come out of the pandemic and you continue to see the growth in liquid biopsy, because people realize that not only can you get high quality results, But it's a much more patient friendly way to do the test than a tissue based test. So I think if possible, You'll see liquid biopsy being a preferred way to go. Now, what that means is there isn't really a whole lot of catch up to do Because you saw the durability of liquid biopsies.
And so far and away, I think the biggest driver of the strength in oncology Are things like 1, expanded reimbursement for things like CGP. 2, the continued Emergence of new therapeutics that leverage genomic biomarkers and that's also showing up in terms of the companion diagnostic relationships that we're Signing up for TSO500 and then the availability of products like TSO500 from aisles, From our partners that create products that make it easier for labs to stand up those steps. And so I think all of those factors are driving
And your next question comes from Max Michigy with Canaccord Genuity.
Hi. Thanks for taking the questions and congrats on a great start to the year. So piggybacking on a prior question, The language in the FTC's challenge of the GRAIL acquisition seems to be narrowly focused on blood based multi cancer screening, which is just one of the several emerging clinical applications within a broader lipid biopsy landscape, Which does seek to serve a wide range of cancer types. So
with this
in mind, while the graft is under FTC review, Is it reasonable to expect that you'll continue to be active on the M and A front? And if the deal is blocked, Is it reasonable to expect that any future M and A activity would target companies that are developing a clinical liquid biopsy applications targeted Just one or a small number of cancer types versus sort of the home run opportunity in multi cancer.
Yes, I think that's a good observation in terms of the fact that liquid biopsy or blood based tests are used for various types So one type as you point out is multi count cancer early detection, which is what GRAYO does as well as other Another area that liquid biopsy is used is for therapy selection. So helping match Cancer patients who were already diagnosed with the right therapies for them. We already have a product, a kit that So our TSO500 product is used for therapy selection, a completely different part of the market, requires a different technology, looks And so liquid biopsy can be used for many things, but they're very different segments. And all of them are different and require sort of different technologies as part of a liquid biopsy approach. The answer is we are going to continue to look at M and A going forward.
It's going to be both technology tuck ins that help us advance our mission and our strategic priorities, and that could be a range of things. It could be technology tuck ins, it could look for capabilities that expand the offerings as part of our sequencing offerings. And so we're going to continue to do that.
And next question comes from Tejas Savic with Morgan
Stanley. Hey, guys. Good evening and thanks for the time. Francis, a 3 part of for you, 1 on COVID, 1 on arrays and 1 on sequencing services. So On COVID, you mentioned the surveillance efforts in India, both earlier during the pandemic and your prepared remarks this afternoon.
I I think you said about 125,000 viral genomes in the next few months here. And obviously, you have the funding coming through in the U. S. And Europe as well. Why is it that you're not expecting this kind of work to contribute a little more in the near term of that $20,000,000 consumables So that's my first question.
2nd on sequencing services, and this is more for Sam. Outside of the $25,000,000 milestone in the year over year comp, quarterly growth was essentially flattish. Are there any Offsets that we should be thinking about in terms of this quarter. And then finally on arrays, the business, I mean, both From a services and consumables standpoint, actually grew year over year after quite a while. Is it fair to think of the business finally having buffened here outside of the usual seasonality that
Okay. So you got a few parts there. So I'll start and we'll talk a little bit about COVID and the question is why not more, right? Because clearly There's now a very recognized value in terms of using sequencing for genomic pathogen based surveillance, both for COVID and as a recognition That this infrastructure is going to be valuable for many, many, many years to come. So the question is why not more?
The second question you had is with the raise, have we bottomed out? Okay. So let's go to the first one. We absolutely sort of believe that we are laying an infrastructure That's durable. That is going to be an important part of all national health systems going forward.
We absolutely believe that this infrastructure is going to be valuable not just to protect the public health, but also from a national defense So we expect this is going to play out over a decade plus, right? And we are going to have In most countries, some kind of genomic pathogen based surveillance going forward. In terms of how we thought about it this year, so the way we thought about As we said, you see some bolus of instrument buying in Q1. And we expect that was the bulk of the instrument buying we should expect This year and we've talked about the fact that many countries now, we engaged with them last year, they bought some sequencing. And so for the rest of this year, we expect to continue to see consumable buying.
But our expectation is what you saw about the Instrument buying for what's going to happen this year already happened. It is possible that more happens and the things that would drive that are Obviously, the American Rescue Plan Act talks about some very big numbers. Our expectations are that it's going to take a while And so while you'll see consumables being purchased over the course of the year, it won't really be towards the end of the year. We expect That you will start to see people talking about, okay, where are these six centers of excellence? How much sequencing infrastructure do they already have?
How much additional hardware So it's going to be a story of the tail end of this year going into next year and beyond from an instruments So that's how we thought about it. We'll keep you up to date if any of that accelerates over the course of this year. In terms of arrays, we did see some growth year over year, and there are different parts to that business. There is the direct Consumer part and then there is sort of ag and maybe Sam will talk a little bit about how those parts play out.
Yes. So I think the way you characterize the Tejas is correct in the sense that the business is stabilizing and We're seeing less of a negative definitely not a negative impact to Mireille's. We actually saw them grow in Q1. The fact of the matter is DTC is now a very small Part of our business is somewhere between 2% and 3% of our overall revenues. Back in 2018, DPC was a much bigger contributor to our overall revenue.
Even though we're very pleased to see arrays growing in Q1, BTC specifically is less of a contributor and we still see the mature A raise that we have, the mature business, whether it's agrigenomics or other applications, continuing to grow as well and has continued to grow over time. Maybe to go to the last question that you had with regards to sequencing services and other. So let me explain the dynamics there, Tejas. Q1 over Q1 of last year, we do have a negative headwind related to a $25,000,000 IBD licensing fee that we had in Q1 of 2020 that we didn't see in Q1 of this year. So that was a negative.
And as you saw, sequencing and other were down for the quarter by 16%. As we look for the year, what our guidance assumes is no material licensing fees or IBD fees with regards to any Significant transactions or partnerships, I should say, for the year. So we're expecting mostly sequencing service and other to be flattish for the year quarter over quarter. And that's consistent with our original guidance that we have back in January.
And our next question comes from Derik De Bruin with Bank of America.
Hi, good afternoon. Hey, a few questions. So I guess the first one is just looking at your revenue guidance, just a couple of questions and also just the results. First question How much of your HiSeq fleet still needs to be upgraded? And how much of the strength you saw in the Q1 was due to basically People that were planning upgrades last year never did them.
Just trying to get a sense of once again, I think there's a lot of questions on terms of the instrument strength. And also just sort of looking at the guide, you're just it looks like roughly that the roughly $1,000,000,000 each In Q2, Q3, Q4 is sort of the way acknowledging you probably have some conservatism built in there. So I'm just wondering, as you look at that second half, it's like Why would it sort of be flattish given historical trends? And then just one other question on can you Walk us through sort of like the full stock comp numbers this year and sort of like how those flow in and how those flow into 'twenty two, just so we can get a better sense on how to model? Thanks.
Yes.
So thanks, Derek. So couple of I guess, 3 questions. 1 around HiSeq, the second one about our guide and then the third about stock based comp. So I'll start HiSeq and then I'll turn it over to Sam to talk about the other 2. So in terms of the HiSeq, Well, when we first started the NovaSeq upgrade path, as you know, we talked about the fact there were 850 HiSeq customers that over time we expected the majority, the vast majority of them would move to NovaSeq.
So between 2017 and then at the till the end of Last year, we went from 850 that had to upgrade and then we refreshed the numbers and shared with you that we were now left with 320 that had And so that upgrade continued in Q1. I don't think there was a bolus or
a catch up. I think
it was more of a Steady sort of course of upgrade as we've continued to see and we expect to continue to see that play forward over the quarters of this year And going into future years. So there was definitely continued upgrading, but there wasn't really a giant bolus or a catch up that happened. So then I'll turn it over to you, Sam.
Yes. With regards to your other two questions there. So first, let me talk about the linearity, which is I think what you're referring to with regards to the approximately $1,000,000,000 So, first of all, let's keep in mind, for Q1, we did have a couple of, I would say, items that Benefit of Q1. 1 was with regards to the $35,000,000 of instrument purchases with regards to COVID surveillance. We believe that was A one timer in terms of building the infrastructure, we don't expect material instrument placements going forward with regards to COVID, At least that's in our assumptions, in our guidance assumptions.
The other one is we called it out, which was a $20,000,000 roughly consumable Purchases, what we're calling catch up purchases in Q1, because of the fact that their customers were maybe running a little bit lower on inventory and purchase By approximately $20,000,000 higher than they would usually do, not a material amount, but some elements of that. So that's What elevates Q1, that's why Q2 is sequentially a step down. That's why the year in the second half is also not higher than the first The other contributor to the second half not being higher than the first half is the UK Biobank, which we expect to complete their sequencing In the second half, so actually towards Q3, they will wrap up that project. So those are the contributions and that's why I would say our Linearity is flattish this year. With regards to stock based compensation, I called out at the beginning of the year roughly Over a $50,000,000 year over year impact from stock based comp.
That is now higher actually from an expense standpoint because also driven by our performance, our Stock based accruals, stock based compensation accruals are actually higher. So we're expecting higher stock based comp overall. So from a year over year standpoint, it's actually north of that $50,000,000 We haven't called out 2022. It's still early to talk about 2022 for stock based comp. But That impact that negative impact obviously moderates in 2022 versus 2021.
Yes. And thanks, Sam. And maybe Derek, I'll give you some more color on NovaSeq Because the reality is we're seeing a huge amount of momentum in the NovaSeq business. So we talked about the fact that in Q4, we saw our highest order quarter for NovaSeq Since we first launched the product in Q1 of 2017, which is really impressive because we're entering the 5th year of NovaSeq, right. So we had huge amount of momentum in Q4, Record quarters, again, second only to when we launched.
And then in Q1, we again had a huge amount of momentum. Just talked about the fact that it was our Strongest placement order for Q1 of any year since we launched NovaSeq. So you're absolutely right, we're seeing this huge amount of momentum. Now what's driving that? I talked about the fact that it wasn't We kind of catch up in terms of upgrades.
And what's interesting and we called this out before and it's continued is that we're seeing a huge amount of strength from new to Illumina, new to And that's something we didn't expect when we launched NovaSeq because about half of those were going to come from labs That were fundamentally enabled by the democratization of sequencing that InfoSeq represents and that continued the launch of version 1.5. And so what we're hearing from the market is 1.5 really catalyzed the elasticity of demand and was the And
And our final question comes from Patrick Donnelly with Citi.
Great. Thanks for taking the questions, guys. Maybe first one for you, Sam, just on the profitability side, pretty nice profitability improvement Last guidance, 3 months ago, longer view. Can you just talk about kind of the recovery towards the old normal a year or 2 ago, given recent headwinds, obviously, COVID inventory write downs, price adjustments, what the path looks like to get back to that kind of old normal Illumina? And then as well, just on the mid throughput instrument side, can you just talk through the pull through there?
I guess, what's the right way to think about NexSeq maybe this year going forward? Any color you could give on that Yes, sure, Patrick. Thanks for the question. So with regards to profitability, I mean, As you saw in terms of both our guidance and also results in Q1, obviously, we've made pretty significant strides here in terms of improving the profitability or building on And that goes with our as we mentioned all along that as the volumes start to ramp and we We saw significant strength in the business in terms of the core business and some contribution from COVID. We're seeing leverage improve.
We saw in Q1 that operating margins were north of 30%. We're expecting approximately 26.5% for the year and we're expecting that to improve as we look forward over time. What are some of the things that are Maybe the contributors to that and the ingredients to that, obviously gross margins, which have improved since our last guidance And we'll continue to improve as we get past some of the COVID aspects related to higher freight expenses, for instance. Obviously, as volumes have ramped, we're seeing improvements in gross margin. We are making investments, though I want to mention, in the business, both in terms of manufacturing capacity And in terms of OpEx investments, I mean the growth that we're seeing in the business far exceeds our expectations and we're incredibly encouraged by that.
And we have to catch up in terms of making some investments in the infrastructure to catch up with some of the demand that we're seeing, both as I said in terms of manufacturing And in terms of OpEx, which is why we are committed to that. But as we look forward, we're also committed to improving leverage over time And getting back to historical levels and we're still on that path. We made good strides in just 1 quarter, but we're still on that path. With regards to mid throughput, Was it mid throughput or low throughput? That was the question, sorry.
Mid throughput. So with regards to mid throughput, We're not at the stage yet where we can share what the expectations are for pull through in terms of NextSeq 2000, NextSeq 1000. Suffice it to say, and I know you're asking more about consumables, but I can tell you the level that we're seeing in terms of placements on mid throughput For 2000 and 1000 as well as 550BX and 550 is incredibly encouraging. We're seeing record placements every quarter. We're expecting to continue at that level going forward and to improve on those levels going forward.
And so when you're having still when you're early stage of the launch of this instrument and you're seeing this growth, it's really hard now to put a level of Consumable pull through range at this stage. So we have to still give it a few quarters before we can do that.
Now I will hand the call back over to Juliet Cunningham.
All right. Thanks everyone for joining us. We appreciate your interest and your time. As a reminder, the replay of this Call. Call will be available on our website as soon as possible.
And this concludes our call. We look forward to updating you for our 2nd fiscal quarter of 2021. Thank you.
This concludes today's conference call. You may now disconnect.