Good afternoon, everyone, and welcome to our earnings call for the first quarter 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 deSouza, 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 uncertainty. Actual events or results may differ materially from those projected or discussed. All forward-looking statements are based upon current available information, and Illumina assumes no obligation to update these statements. To better understand the risks and uncertainties that could cause actual results to differ, we refer you to the documents that Illumina files with the Securities and Exchange Commission, including Illumina's most recent Forms 10-Q and 10-K. With that, I will now turn the call over to Francis.

Thank you, and good afternoon, everyone. As we shared in our pre-announcement, Illumina had a very strong start to 2021, with the first $1 billion quarter in Illumina's history. We achieved first quarter revenue of $1.093 billion, 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 in the creation of a genomic epidemiology infrastructure to combat COVID-19, as well as monitor for future pathogen outbreaks. I'd like to share some additional first quarter 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 fifth 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 NextSeq 1000 and 2000, as well as strong performance from NextSeq 550. Notably, we saw an increase in customers upgrading from their existing Illumina benchtop sequencers to NextSeq 1000 and 2000. 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 MatriDx, to provide comprehensive clinical solutions. Additionally, working with our strategic partner, R-Pharm, NextSeq Dx received medical device registration in Russia in March, enabling the clinical use of next-generation sequencing for more patients across Russia. Our 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 HiSeq 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 & Blue, a startup using our technology in 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 million 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 first quarter 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 TSO 500 for a national pilot to evaluate the use of CGP for patients with advanced metastatic cancer. As a leading distributable CGP assay, TSO 500 continues to offer a compelling choice for our pharmaceutical partners. We announced last week an exciting new partnership with Kartos Therapeutics, to develop a TP 53 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 ACON guidance on increasing coverage of NIPT for all pregnancies drove the third consecutive quarter of both year-over-year and sequential growth. In the U.S., two 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 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 marked NIPT kit. For example, there was positive news from Italy and Sweden, where new coverage requirements were approved during the first quarter 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, two major health insurers in Germany announced that they will cover the cost of whole genome and whole exome sequencing for rare disease for their over 10 million 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 first-tier test. The increasing coverage of these tests will provide more patients with faster diagnoses and better care. Turning to our research and academic 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 $1.7 billion in funding for the CDC to improve sequencing capacity to identify mutation and circulation of viruses. In Europe, the EC announced €123 million commitment to combat COVID variants. In India, the government launched the Indian SARS-CoV-2, Genomic Consortia, with a plan to sequence 120,000 viral genomes over the next four months. This investment in sequencing for national genomic surveillance activities drove approximately $55 million of incremental revenue in the first quarter, comprising of $35 million in instrument placements and $20 million 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 and 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 buildout that will support sustained activity. As we work through the COVID-19 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 Megabank Organization chose Illumina sequencing for a 40,000-sample multigenerational study to take place this year. In February, Egypt announced the first 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 second 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 tenet, 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 CCGA 3 study at the American Association for Cancer Research Annual Meeting, and is expecting to launch Gallery, its 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 noninvasive 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, first quarter revenue grew by 27% year-over-year to $1.093 billion, driven by 29% growth in sequencing and 15% growth in microarrays. Record revenue across all regions contributed to the first $1 billion quarter in the company's history. Total sequencing revenue reached a new high, with first quarter revenue of $979 million, 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-19 surveillance initiatives contributed approximately $20 million in sequencing consumables revenue during the first quarter. Sequencing consumables also benefited by approximately $20 million from the timing of customer purchases during the first quarter. Sequencing instruments revenue grew 123% year-over-year, with revenue of $176 million in the first quarter, reflecting strong performance across all instrument categories. The first quarter marked another consecutive quarter of record mid throughput shipments, driven by strong adoption of NextSeq 1000 and 2000. COVID surveillance initiatives resulted in approximately $35 million 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 IVD partnership revenue recognized in the prior year period. Sequencing service and other revenue was roughly flat sequentially. Moving to regional results, the Americas delivered revenue of $562 million with 18% growth, compared to the prior year period. Revenue growth in the region was driven by strength in sequencing product revenue from clinical customers in oncology, reproductive health and genetic disease testing, and contributions from genomic epidemiology initiatives related to COVID surveillance. These items were partially offset by lower IVD partnership revenue as expected. EMEA delivered revenue of $305 million, representing 38% growth year-over-year. EMEA's performance was driven by strong sequencing demand for clinical testing applications that resulted in higher-than-expected sequencing consumables revenue in the first quarter and instrument demand by research customers, including initiatives for COVID surveillance and genomic epidemiology. Greater China revenue was $127 million, 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 million 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% improved sequentially by 360 basis points due to increased fixed cost leverage on higher volumes and a one-time inventory write-down in the fourth quarter of 2020. On a year-over-year basis, non-GAAP gross margin decreased 250 basis points due to IVD partnership revenue in the year-ago quarter, higher freight costs attributable to the COVID-19 pandemic and product mix, partially offset by fixed cost leverage on higher volumes. Non-GAAP operating expenses of $420 million were up $81 million 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 fourth quarter 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 million was $23 million lower sequentially as expected. This was due to fourth 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 first quarter. 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 first quarter of 2021, GAAP net income was $147 million or $1 per diluted share, and non-GAAP net income was $278 million or $1.89 per diluted share. Moving to cash flow and balance sheet items. Cash flow from operations was $282 million, DSO of 43 days compared to 50 days last quarter, driven by revenue linearity. First quarter 2021 capital expenditures were $42 million, and free cash flow was $240 million. We did not repurchase any common stock in the first quarter. We ended the year with approximately $4.6 billion in cash, cash equivalents and short-term investments. During the first quarter, we received approximately $1 billion in proceeds from bond issuances to fund the anticipated GRAIL acquisition. Our weighted average diluted share count for the quarter was approximately 147 million. Moving now to 2021 guidance. We expect full-year 2021 revenue to grow in the range of 25% to 28% or $4.05 billion to $4.15 billion. At the midpoint of our guidance, this represents an increase of approximately $858 million 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 NovaSeq version 1.5 Reagent 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 platforms. NovaSeq pull-through to be towards the high end of our initial guidance range of $1.1 million to $1.2 million. Our view is to grow approximately 5% compared to 2020. We expect full-year non-GAAP gross margin to improve from 2020 levels, reflecting increased leverage on higher volumes, partially offset by product mix and IVD partnership revenue in the first quarter 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 investment 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 million lower than 2020, due to the gains realized in the fourth quarter 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 million. Moving to the second quarter 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 first quarter. 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 first 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, Frances Arnold, and James Suhail. The topics included the critical role of genomics in fighting the pandemic, making genomics a foundational element of a national standard of care, integrating multiomic readouts, and harnessing the power of AI and machine learning in oncology, among others. From battling cancer to genetic disease diagnosis, defining 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&A.

As a reminder, please ask only one question so that we can accommodate as many analysts as possible. Your first question comes from Puneet Souda with SVB Leerink.

Yes. Hi, Francis. Thank you for your questions. The first one is about what you are incorporating for COVID surveillance in the 25% to 28% guidance for the year. The question is really about the COVID surveillance opportunity and its timeline as you expand the epidemiological infrastructure. How is that progressing? It's important to note that COVID is still prevalent in various parts of the world, U.S. vaccinations are increasing, and the administration is investing over $1 billion in sequencing. I’m curious about how much of that is included in this year's projections, and what kind of long-term impact we should expect. Secondly, regarding GRAIL, what does the next process look like for both the FTC and the European Commission Directorate General? What are the steps involved? You seem to be suggesting a potential close in the second half of the year, so I would like to know more about the next steps. Thank you.

Great. Well, thanks for your questions, Puneet. I'll start by saying that it is 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 million 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 big 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 next year. And what's interesting is that this infrastructure, while it'll 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 for the next outbreak, whether it's a natural outbreak, or bioterrorism, or emerging antimicrobial resistance, or 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 year, but it really is a story that plays out into next year and going forward. And so that's how 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 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.

Good afternoon, and I appreciate the chance to ask my questions. I would like to discuss antitrust issues and strategy, as well as your approach to guidance. Regarding antitrust and strategy, Illumina has faced regulatory challenges recently with the abandoned acquisition of PacBio and the ongoing plans for GRAIL. Considering your previous comments and responses about GRAIL, I would like to know how your criteria for evaluating strategic opportunities is changing in response to these events. Additionally, what adjustments are you making to your processes? You clearly believed your approach to these deals was sound, yet both turned out to be more complicated than anticipated. It would be insightful to hear about the changes you're implementing. Moving on to guidance philosophy, how confident are you in meeting your targets for this year? Your targets seem reasonable to me, despite the significant growth expectations, and you mentioned a $1.4 billion backlog entering Q2. Nevertheless, the global environment remains uncertain as we transition from 2020. Moreover, reflecting on 2019, it was a difficult year for Illumina regarding self-imposed targets. Given these considerations, I think it would be useful to understand the guiding principles you are applying to your forecasts this year and if you believe your outlook is still leaning towards being more conservative. Thank you.

Great. Doug, let me address both parts of your question. First, I'll discuss our acquisition strategy, particularly how our experience with the FTC has influenced our approach moving forward. Then, I'll provide guidance for the remainder of the year, with Sam possibly adding his input as well. Looking at our acquisitions from the past few years, we attempted the PacBio acquisition about three years ago, which was not approved by the FTC. However, we successfully closed the Edico acquisition, which significantly enhanced our sequencers by integrating DRAGEN technology and has been well-received by our customers, generating positive momentum in informatics. We also completed the Enancio acquisition, which brought lossless data compression capabilities to our sequencers. Overall, we've succeeded in acquiring innovative technologies that we can incorporate into our sequencers for market delivery. However, given the popularity of our sequencers in the core market, we recognize that we have more work to do regarding larger acquisitions. We plan to continue exploring the marketplace for reasonable technology tuck-ins and, occasionally, larger acquisitions. We maintain that vertical acquisitions are appropriate, and we will pursue the GRAIL acquisition. Additionally, considering our market position and scale, we need to do more to educate regulators about our business prior to acquisitions, which is a key takeaway from our recent experience. Strategically, we're committed to identifying opportunities to invest capital, both internally and externally, that maximize shareholder value, a focus that remains unchanged. Regarding our guidance philosophy for the year, we believe it is balanced. While we are entering the year with significant momentum in our core business, demonstrated by strong performance on both the clinical and research sides, there's also ongoing uncertainty related to the pandemic. We are observing how the pandemic evolves, particularly with the potential for new waves, which could impact lab operations and clinical sequencing. Therefore, while we are confident in the substantial numbers we provided, we acknowledge the need to balance this optimism with the uncertainties ahead. Sam, do you have anything 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 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 would 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 street 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 dynamics there? 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 third wave of sequencing companies common single element on them. I'm just curious, as you look out the next couple of years, how you think about the competitive landscape evolving? And then last one for Sam, FX contribution. I didn't hear that, and curious if you could break that out in the quarter. Thanks.

Thank you, Tycho. We had several questions, so I’ll ensure I address each one. First, regarding the strength we’re seeing from our instrument portfolio, let’s discuss what’s driving that. You also inquired about COVID surveillance, mentioning that we represent about 70% of the surveillance testing and how that has progressed since our last update, including which instruments are performing best in that area. Additionally, there was a request for comments on the competitive landscape. To start with the strength of our instruments, we noted significant growth in Q1, with revenue from sequencing instruments more than doubling year-over-year. This strong performance stems from our core business segments, both clinical and research. On the clinical side, we observed notable growth in oncology testing, which is now our largest and fastest-growing clinical segment. Various factors contribute to this growth, including a substantial improvement in reimbursement across several clinical areas last year, such as genetic disease testing, oncology, and NIPT. This enhancement has broadened the addressable market, permitting more patients to access these tests through insurance coverage, which in turn boosts business for our clinical customers and drives their equipment purchases. Additionally, the clinical business has been thriving in China, particularly following our NMPA clearance for the NextSeq, which is also facilitating instrument growth. The market is not merely catching up; it is consistently expanding. Increased reimbursement and a greater number of cleared products are facilitating our ability to place instruments in hospitals, especially in China—these factors collectively drive the strength of our instruments. This is incredibly promising for future consumable spending related to the instruments we deployed in Q1. Regarding COVID, if you review platforms like GISAID or NCBI, you can observe the number of genomes deposited and the platforms utilized for these analyses. Recently, a helpful blog by Keith Robinson provided insights suggesting that our market share has risen to approximately 79%, meaning that a significant portion of genomes in GISAID is processed using Illumina platforms, while the next highest competitor holds around 17%, with their numbers declining thereafter. Our instruments, including NovaSeq, NextSeq, and MiSeq, are all being effectively utilized for surveillance, demonstrating a strong performance across various models. Concerning competition, the market is bound to attract investment as it continues to grow rapidly. We do face emerging players entering the landscape, as you noted, and existing competitors. This dynamic has been a reality each year. We consistently encounter new venture-backed competitors, and it remains essential for us to keep innovating and providing greater value to our customers.

Yes. With regards to FX, Tycho. So for Q1, I would say, compared to 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 forward, 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 currencies versus 2020.

Okay. Thank you.

You're welcome.

And your next question comes from Sung Ji Nam with BTIG.

Hi, thanks for taking the question. Francis, could you discuss oncology testing? There's clearly a lot of strength in that area, which you've linked to improved reimbursement and other positive trends. I'm interested to know if, given your insights across all the diagnostic companies, you've noticed any resurgence from the delays in screening and cancer diagnosis that occurred last year. I'd love to hear your perspectives on this and your visibility into the situation.

Yes, we collaborate closely with our customers, including notable ones like FMI and Gardens in the oncology testing space. From our perspective, businesses offering blood-based tests in the liquid biopsy category were more resilient during the pandemic compared to other clinical testing types. Many of our customers found creative solutions such as mobile phlebotomy units and home-based access to testing for patients. This has been feasible thanks to blood tests. One significant trend from the pandemic is the increased acceptance of liquid biopsy, which I believe will continue. As we move forward, I expect the growth of liquid biopsy to persist because people understand that it provides high-quality results while being more patient-friendly than tissue-based tests. Therefore, liquid biopsy may become the preferred option. Regarding any potential catch-up in Q1, it seems there isn't much required because liquid biopsies have proven durable. The main factors contributing to oncology's strength include expanded reimbursement for comprehensive genomic profiling, the ongoing development of new therapeutics utilizing genomic biomarkers, and the partnerships we are forming for companion diagnostics like TSO 500. Additionally, the availability of products like TSO 500 facilitates labs in adopting these tests. Overall, these elements are sustaining strong levels in oncology testing, and while there might be slight catch-up, it hasn't been significant in my view.

And your next question comes from Max Masucci 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 liquid biopsy landscape, which does seek to serve a wide range of cancer types. So with this in mind, while the GRAIL acquisition is under FTC review, is it reasonable to expect that you'll continue to be active on the M&A front? And if the deal is blocked, is it reasonable to expect that any future M&A activity would target companies that are developing clinical liquid biopsy applications targeted for 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 of testing in oncology. So one type, as you point out, is multi-cancer early detection, which is what GRAIL does as well as other players that are looking to do that in the market. 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 serves that space. So our TSO 500 product is used for therapy selection. A completely different part of the market requires a different technology, looks for different things in the blood. 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&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 extend the offerings as part of our sequencing offerings. And so we're going to continue to do that.

And our next question comes from Tejas Savant with Morgan Stanley.

Hey, guys. Good evening and thanks for the time. Francis, a three-parter for you: one on COVID, one on arrays and one on sequencing services. So on COVID, you mentioned the surveillance efforts in India, both earlier during the pandemic in your prepared remarks this afternoon. 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 that, that you're not expecting this kind of work to contribute a little more in the near term of that $20 million consumables contribution in the first quarter? So that's my first question. Second, on sequencing services, and this is more for Sam. Outside of the $25 million 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 bottomed here outside of the usual seasonality that you'll see in 2Q and beyond?

Okay. So you have a couple of components to address. Let's start with COVID. The question is, why isn't there more progress? It's clear that sequencing has established significant value for genomic pathogen-based surveillance, particularly for COVID, and this infrastructure will remain useful for many years ahead. So again, why isn't there more? The second question is about arrays and whether we've reached a bottom. Regarding the first point, we firmly believe that we are establishing a sustainable infrastructure that will be crucial for major national health systems going forward. We are confident that this infrastructure will not only support public health but also enhance national defense strategies. We anticipate this development will unfold over the next decade. In most countries, some form of genomic pathogen-based surveillance will be in place moving forward. This year, we observed a spike in instrument purchases in the first quarter, which we believe represents the majority of expected instrument sales for the year. Many countries we engaged with last year made some sequencing purchases. Therefore, for the remainder of this year, we expect to see continued buy-in of consumables. However, we believe that the bulk of the instrument purchasing for this year has already taken place. There is a possibility for additional purchases, influenced by the American Rescue Plan with its substantial funding. We anticipate it will take some time to work through the details. Hence, you'll see consumable sales throughout the year, but concrete discussions regarding the 6 Centers of Excellence, their existing sequencing infrastructure, and the need for more hardware are likely to emerge more towards the end of the year. So, this narrative will carry into next year and beyond concerning instruments. We'll keep you informed if there are any significant changes this year. As for arrays, we did witness year-over-year growth with various segments in the business, including the direct-to-consumer side, which Sam may elaborate on.

Yes, I think your characterization of the stay house is accurate in that the business is stabilizing, and we’re experiencing less of a negative impact from arrays. In fact, we saw growth in Q1. Currently, DTC represents a very small portion of our business, accounting for about 2% to 3% of overall revenues. In 2018, DTC was a much larger contributor to our total revenue. While we are pleased to see arrays growing in Q1, DTC specifically has become less significant, and we observe that our mature arrays, whether in agrigenomics or other applications, continue to grow over time. Regarding your last question on sequencing services and others, we experienced a negative headwind compared to Q1 of last year due to a $25 million IVD licensing fee from Q1 of 2020 that was not present this year. As we look ahead for the year, our guidance does not anticipate any material licensing fees or IVD fees from significant transactions or partnerships. We expect sequencing services and other to remain relatively flat for the year, consistent with the guidance we provided in January.

And your next question comes from Derik de Bruin with Bank of America.

Hi, good afternoon. I have a few questions. First, regarding your revenue guidance, how many of your HiSeq suite instruments still require upgrades? Additionally, how much of the strength you observed in the first quarter was due to customers who planned upgrades last year but did not proceed? I'm attempting to understand the instrument strength better. Also, in looking at your guidance, it appears that you expect roughly $1 billion in Q2, Q3, and Q4, acknowledging some conservatism embedded in those figures. As we consider the second half, why does it seem flat compared to historical trends? Lastly, could you provide an overview of the stock compensation numbers this year and how they will affect your modeling for 2022? Thank you.

Thanks, Derik. I have a few questions: one regarding HiSeq, another about our guidance, and a third concerning stock-based compensation. I’ll start with HiSeq and then hand it over to Sam for the other topics. Regarding HiSeqs, when we began the NovaSeq upgrade path, we mentioned that there were 850 HiSeq customers, and we anticipated that most of them would eventually transition to NovaSeq. From 2017 until the end of last year, we updated the numbers and now have 320 customers remaining who still need to upgrade. The upgrade process continued in Q1 without any major spikes or backlogs; it has been a steady progression, and we expect this trend to carry on through the rest of this year and into future years. There has certainly been ongoing upgrading, but it hasn't involved any significant bolus or catch-up. Now, I’ll pass it to you, Sam.

Yes. With regards to your other two questions, Derik, so first, let me talk about the linearity, which is I think what you're referring to with regards to the approximately $1 billion quarter. So first of all, let's keep in mind, for Q1, we did have a couple of, I would say, items that benefited Q1, one was with regards to the $35 million 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 million roughly consumable purchases, what we're calling catch-up purchases in Q1. And because of the fact that the customers were maybe running a little bit lower on inventory and purchased by approximately $20 million 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 and the second half is also not higher than the first half. 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 just over $50 million 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 million. 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 thank you, Sam. Derik, I’ll provide some additional insights on NovaSeq. We are experiencing significant momentum in the NovaSeq business. In Q4, we recorded the highest number of orders for NovaSeq since its launch in Q1 2017, which is impressive as we approach the fifth year of NovaSeq. Q4 showed remarkable momentum with record orders, second only to our initial launch. In Q1, we also saw significant momentum, noting it was our strongest placement order for the first quarter of any year since NovaSeq's launch. There's no doubt we're witnessing substantial growth. This growth is not just a result of a catch-up in upgrades. Interestingly, as we have mentioned before and it continues to hold true, we’re seeing strong demand from new-to-Illumina and new-to-high throughput customers. This was not something we anticipated at NovaSeq's launch. About half are coming from labs that have been fundamentally enabled by the democratization of sequencing that NovaSeq represents, and this continues with the launch of version 1.5. Feedback from the market indicates that version 1.5 has really sparked increased demand and contributed to the strong number of NovaSeq orders in Q4 and the placements we observed in Q1.

And your 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 from the last guidance three months ago. Longer view, can you just talk about kind of the recovery towards the old normal a year or two ago, given recent headwind as COVID, inventory write-downs, price adjustment, 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 NextSeq, maybe this year going forward? Any color you could give on that front would be helpful.

Yes. In terms of profitability, as you saw from our guidance and Q1 results, we’ve made significant progress in improving the profitability of our business. As we mentioned previously, as volumes ramp up, we experienced considerable strength in our core business along with some contribution from COVID, which is aiding our leverage improvement. In Q1, our operating margins exceeded 30%, and we anticipate around 26.5% for the year, expecting further improvements over time. Key contributors to this include improved gross margins since our last guidance, which we anticipate will continue to increase as we move past the higher freight costs associated with COVID. As volumes grow, we are seeing enhancements in gross margins. It’s important to note that we are investing in the business, particularly in manufacturing capacity and operational expenditures. The growth we are experiencing far exceeds our expectations, and we feel very positive about that. We need to invest in infrastructure to meet the demand we're seeing in both manufacturing and operational areas, which is why we’re dedicated to these investments. Looking ahead, we are also focused on improving leverage over time and returning to historical levels. We made significant strides in just one quarter, and we remain committed to this path. Concerning throughput, we are not yet in a position to share specific expectations for consumables related to the NextSeq 2000 and 1000. However, the placements for mid-throughput models like the 2000 and 1000, as well as the 550 DX and 550, are very promising. We are seeing record placements each quarter and expect to maintain and improve upon these levels going forward. Since we are still in the early stages of launching this instrument, it’s difficult to predict the consumable pull-through range at this moment, and we will need a few more quarters to provide that information.

All right. Thanks, everyone, for joining us. We appreciate your interest and your time. As a reminder, the replay of this call will be available on our website as soon as possible. And this concludes our call. We look forward to updating you for our second fiscal quarter of 2021. Thank you.

This concludes today's conference call. You may now disconnect.