Illumina Inc (ILMN) 2004 Q4 法說會逐字稿

Good day, and welcome to the Illumina Incorporated fourth quarter fiscal year 2004 earnings conference call. This call is being recorded.

At this time, I would like to turn the conference over to Mr. Bill Craumer with Illumina. Please go ahead, sir.

Good afternoon. My name is Bill Craumer, Director of Corporate and Marketing Communications here at Illumina. Welcome to Illumina's first ever conference call.

After the close of market today, we released our financial results for the fourth quarter and fiscal year 2004. During this call, we will review our results and provide financial guidance for 2005, following which we'll host a question and answer session.

Presenting for Illumina today will be Jay Flatley, our President and CEO; and Tim Kish, our Chief Financial Officer; also joining us is Alan Kersey, President and CEO of CyVera Corporation.

During the call, we will be providing guidance and discussing plans for future commercial activity. These statements involve risks and uncertainties that may cause actual events or results to differ materially.

All forward-looking statements are based upon current information available, and we assume no obligation to update these statements. To better understand these risk factors, we refer you to the reports that Illumina files with the Securities and Exchange Commission, including Forms 10-K and 10-Q.

With that said, I'll now turn the call over to Jay.

Thanks, Bill and good afternoon, everyone. Let me add my own welcome to all of you. It's a real pleasure to be here today to conduct our first conference call and to talk with you about the state of our business here at Illumina.

I am going to begin by highlighting some of our key 2004 and early 2005 accomplishments, and then turn the call over to Tim for a more detailed financial review and guidance for 2005. I'll then come back with some additional comments and background behind some of our projected 2005 numbers.

By almost any measure, Illumina had a terrific year in 2004. In terms of financial performance, we had a very strong fourth quarter and fiscal year, achieving nearly $15 million in fourth quarter revenue and over $50 million for the entire year. We enjoyed solid growth in all our revenue sources, including systems, arrays, reagents, oligos, and genotyping services.

We set five specific investor milestones for 2004. The first of those related to cash where we set a cash burn goal of less than $15 million. We are quite pleased to report that we reduced our operating cash burn for the year to approximately $12 million and ended the year with $67 million in cash.

We targeted booking 20 genotyping service contracts in 2004 and dramatically exceeded this number by booking 52 agreements. Some of these projects were quite sizable, exceeding tens of millions of genotypes. This is consistent with an important trend we are seeing where researchers are forming consortiums to combine their individual sample cores to create much larger collections. The resulting studies have greater statistical power and increased the chances of discovering key disease associations.

Our third milestone related to systems sales. We targeted shipment of 20 systems in 2004 including our Benchtop BeadStations and our production-scale BeadLabs. We executed well above target, shipping a total of 42 BeadStations and three BeadLabs resulting in a year-end installed base of 49.

We now offer additionally a complete upgrade path that allows customers to begin with a BeadStation purchase and over time add all the automation, limbs and other components that are necessary to build their system up to a complete BeadLab. Our systems are capable of supporting our entire growing list of applications in of course all of our array and complexity formats, thereby satisfying a broad range of research demands.

Our fourth milestone was HapMap related. As most of you probably know, Illumina has been a significant contributor to the International HapMap project. In fact, we have the largest portion of the project of any US investigator in the phase that its about to be completed. We were charged with developing assays in approximately 15% of the human genome. We are gratified that over 60% of the assays in the entire project have been genotyped between us, and our partners using Illumina technology.

Our 2004 milestone for assay development on our platform was 400,000 assays. What we actually developed and screened along with our HapMap partners was over 600,000 assays, most of which can be deployed on Illumina's BeadStations and BeadLabs. The initial scope of the HapMap project is drawing to a close and the effort over the next few months will be focused on completing the data analysis to identify so-called tag snips that will have the highest value in performing genome-wide scans and disease associations.

As we look forward to 2005, the true importance of the HapMap will become apparent as we take these tag snips that have been developed using our assay methods and deploy them on high content whole genome genotyping arrays. This will enable efficient economical study of much larger sample collections that will begin making meaningful associations of human variation with disease, metabolism and other molecular mechanisms, in other words, the correlations that really matter in our ongoing efforts to personalize medicine.

Our final 2004 milestone was to ship our Sentrix whole genome expression BeadChips. There are initially two companion products in this product line. The first can analyze six samples on a chip against 48,000 transcripts and the second analyzes 24,000 RefSeq transcript, eight samples at a time. While we are disappointed that we did not achieve the original shipment target for these products, our current test data looks exceptional and we plan to begin shipments before the end of Q1.

I want to mention also a significant collaboration that we announced in December. Our partnership with Invitrogen for oligo synthesis and distribution, which is a great strategic fit for both parties. Under the terms of this deal, Invitrogen will invest $3.4 million in Illumina's Oligator DNA Synthesis facility to extend our capabilities to process two-based oligos, the segment that's four times larger than the plate-sized segment that we currently serve. Illumina will turn over all oligo sales and marketing to Invitrogen, which has approximately 350 salespeople around the world and offices in more than 70 countries. Profits from this collaboration will be split equally between the two companies.

We set a target for the collaboration to achieve annual revenue of $100 million in a few years. This level is far beyond where the two companies could have achieved without a collaborative effort. Beyond being a strategic fit, this deal allows Illumina to focus our future commercial investments predominantly in building out our sales and marketing for our systems, arrays, and reagents.

One final piece of very exciting news today, after the close of market, we announced that we have signed a definitive agreement to acquire CyVera, a Connecticut-based company developing a digital microbead platform, using holographic imprinting. CyVera's technology complements our microarray offerings and gives us a terrific platform advantage for lower multiplex assays in the range of 10 to 1000 targets, ideal for the emerging markets in biomarker discovery, clinical research and molecular diagnostics.

I'll give you more detail later about what this acquisition means to Illumina going forward. Tim is going to now take a minute to provide some details behind our financials.

Thanks, Jay. Good afternoon everyone, and thanks for joining us today. As Jay mentioned, 2004 was an exciting year for Illumina, particularly, because we put in place the key building block that will drive high revenue growth for years to come.

This was the first year in which we shipped both of our system platforms, the production-scale BeadLab and the moderate throughput BeadStation. The BeadStation launch was especially critical because this scale of system addresses a much larger market than our BeadLabs do. One is in excess of 1,000 labs, and we, therefore - it will, therefore, ultimately generate the majority of our ongoing revenues.

It was also the first year that we shipped our new BeadChips, which were introduced in a new market segment for us, targeting focused gene expression. These chips will serve, as the foundation for our soon-to-be shipped whole genome products that we expect will drive significant consumable revenues in the coming years.

In addition, we expanded our internal genotyping services capabilities because it's clear that there's a growing use of genotyping within the research community and it's also clear that there's a large need in that group for our outsourced services. And last but not least, we had substantial growth in the oligo business, as we continue to take share in that market due to our quality and cost advantages and we look forward to even faster growth, as a result of our recently announced partnership with Invitrogen.

These and other items drove Q4 to be our 14th consecutive quarter of sequential revenue gain and generated an 80% full year revenue increase. In addition, we substantially reduced our operating loss to the point that excluding a favorable legal settlement recorded in Q4, we were almost breakeven for the first time and had a cash positive quarter from operations. So all in all, we believe a solid financial performance for the company for both the quarter and the full year.

Now, let me begin with a review of Q4 and full-year 2004 results. And I will then summarize some of our financial expectations for 2005, before turning it back over to Jay. For the fourth quarter, we had revenues of $14.8 million, which is an increase of 38% over Q4 2003 revenues of $10.7 million. Earnings per share for the quarter were nine cents basic and eight cents on a fully diluted basis, compared to a loss of 12 cents per share in the fourth quarter of 2003.

For the full year, total revenue was $50.6 million, as compared to $28 million for the year 2003. Net loss per share in 2004 was 17 cents, compared to a loss of 85 cents per share in 2003. For the quarter, we had strong growth in both our product and service revenues. And let me just remind you that product revenue includes system sales, arace, reagents, and third party oligo's sales. Service revenues include the revenue from our internal genotyping service facility, which includes all the work that we do for the HapMap project.

Fourth quarter product revenue increased 34% to $10.4 million, as compared to $7.8 million in 2003. This is primarily due to higher consumable sales for both our BeadLab systems and for BeadStations as well, which we began selling earlier this year. Services revenue increased 92% as both our HapMap efforts and our third-party contract work nearly doubled for the quarter, as compared to last year.

For the full year, product revenue more than doubled, increasing to $45.8 million from $18.4 million last year. Again the largest driver was consumable sales, which were more than three times the full-year 2003 amount. We saw very robust sales gains in both system sales, where we shipped 42 BeadStations and three BeadLabs in 2004, as well as for oligos. In addition, we saw strong growth in our services business, where total revenue for the year 2004 was up nearly 25% to $8.1 million.

And just to add some color to the revenue numbers, we remain very well balanced geographically. In both 2003 and 2004, about 50% of the revenue was derived outside the United States, and so we had consistent revenue growth across all of our geographic markets during 2004. Cost of product revenue which includes costs for both product and service revenues was $3.9 million for the fourth quarter, resulting in a very healthy gross margin of about 74%, compared to 68% for the fourth quarter of 2003. This increase in margin performance was due to strong growth in both our consumable sales and service revenues, as compared to last year. For the full year, cost of revenues was about -- was $13.3 million, also a gross margin of 74% compared to the full year 2003 margin of 64%. And again, this was primarily driven by the large increase in consumable sales.

Moving to the expense side of the P&L, R&D expense for the fourth quarter was $5.3 million and that was $21.1 million for the full year. Both of these amounts were essentially flat with the amounts reported in the comparable prior year periods. SG&A expense for the fourth quarter was $5.8 million, compared to $5.1 million in 2003. As we compare ourselves to the fourth quarter of 2003, we have doubled our sales, marketing, and customer support staff and the increase that resulted from that was partially offset by lower than normal legal fees incurred during this quarter, as compared to the fourth quarter of 2003.

For the full year, our SG&A expenses increased from $19.0 million to $25.1 million. And the majority of this increase is due to the buildup in our sales and marketing efforts over the last year to support the new products and broaden our markets. Another key component of our expenses relates to litigation. For the fourth quarter, we reported an expense reduction of $3.3 million, which we -- which reflects the reversal of a previously recorded legal accrual, related to a wrongful termination suit. The full year reduction amount shown as $4.2 million reflects an additional $1.5 million reversal of a liability relating to the ABI settlement that occurred in the third quarter.

On to the balance sheet, we ended the year with $67 million in cash. This is about $1.5 million higher than the ending Q3 balance, so we were cash positive for the quarter. You should note, however, that we made a $5.9 million cash payment in January following fiscal yearend, which related to the wrongful termination case, I just mentioned. We believe, we're well positioned from a cash standpoint to be able to fund operations without the need to raise additional cash, and we remained debt free, as of the end of the year.

I'd like to now shift to a discussion of our financial expectations for 2005, but before we talk about specifics, I would like to make a couple of other comments to put the numbers in perspective. The guidance that we'll provide today will incorporate our best guess as to the ongoing operating results of CyVera.

However the -- our analysis of the accounting treatment of the merger is still ongoing, and therefore, we don't know the full extent of accounting adjustments that we may need to make, as a result of the merger.

For example, we believe that given the early development status to CyVera's products, there will be a substantial in process R&D charge recorded as of the closing of the merger. However, we don't know the amount of that charge whether there will be any non-cash type charges related to the merger that we'll have to record going forward.

The guidance numbers also do not include any estimation of the impact of expensing stock options under revised statement of financial accounting standards number 123, which we'll start doing in the third quarter. So when we understand all of the impacts of these two issues, we will update you with additional information. So with those qualifications, I would like to discuss our financial guidance for the first quarter and full year 2005.

For the full year, we expect our total revenue to increase between 48% and 62%, which equates to $75 million to $82 million in topline revenues. We anticipate as part of that our system sales will nearly double, which in turn is expected to drive a substantial increase in consumable sales. We also expect that our revenue growth will be fairly back-end loaded as a significant portion of our revenue target is related to shipments of our whole genome chips and in addition is affected by normal order patterns in the industry, which are typically biased towards the last half of the year.

Now the new genome expression products are expected to start shipping by the end of the first quarter and a 100 case net genotyping chip should ship before the end of the second quarter. We are not assuming any significant revenue from CyVera in 2005. We expect that the first quarter 2005 revenues will be in the range from $13 million to $15 million, and this -- part of this range is potentially lower than Q4 2004 due to the completion of the HapMap Project, most of which was completed in 2004 and seasonality of order patterns.

For the full year, we expect gross margins to remain relatively strong in the low 70% range. And on the expense side, we expect R&D expense to be in the range of $28 million to $30 million, which includes costs for CyVera. SG&A expenses should be in the range of $31 million to $33 million. Earnings per share for the year are expected to range from minus 14 cents to minus one cent. The CyVera acquisition will likely delay consolidated profitability by two to three quarters. As a result, we project Q4 2005 to be the first quarter we show a profit from operations and 2006 as our first full-year profitability.

Finally, we would expect Q1 2005 EPS to range from minus 8 cents to minus 4 cents. The full-year EPS amounts are based on an assumed share base of approximately 40 million, which includes about 1.5 million shares that we'll issue for the CyVera merger. We expect cash burn for the year to be in the range of $15 to $18 million, inclusive of the wrongful termination payment of 5.9 million, I mentioned earlier and an approximate $8 million impact related to the CyVera merger.

Now I'll turn back the call to Jay for closing comments.

Thank you, Tim. I want to recap about two important pieces of news that we announced in January. Our 10th production scale BeadLab was purchased by the Mayo Clinic and is expected to be installed in March. The Mayo Clinic plans to focus initially on the study of cancer and other complex diseases, but they have many ideas about how to expand the use of this platform over time. When installed, the BeadLab will be able to perform over 1 million assays per day with just a handful of technicians. We're quite delighted to add an institution of the caliber of Mayo to our growing list of systems customers.

Also in January, we introduced our DASL assay, a powerful new approach for generating gene expression profiles from partially degraded RNA samples such as those that are found in paraffin-embedded samples. An estimated 400 million paraffin-embedded samples exist in North America for cancer alone. Many of these samples represent known clinical outcomes, a potential gold mine of information when linked with the underlying gene expression profiles and an exciting prospect for the validation and testing with biomarkers associated with cancer or with other complex diseases. To date, degraded RNA samples have been reliably assayed only with expensive, low multiplex qPCR approaches and Illumina's DASL assay opens up what we think is a new avenue for RNA profiling at high multiplex and low cost per sample.

A number of the 2004 system sales had associated agreements that provided rights to biomarkers that were discovered and validated with our technology. One such agreement is with a Genizon BioSciences a Canadian firm from which we have licensed osteoarthritis related diagnostic rights. A second was with Genomics a Connecticut-based company studying the causes of obesity and metabolic syndrome. You can expect over time to see an increased focus by Illumina on gaining access to intellectual property rights to biomarker. These agreements are the beginning of a commercial strategy that Illumina will be executing to take advantage of the emerging markets and biomarker discovery, clinical research, and diagnostic testing. Today we took another critical step in that direction with our definitive agreement and plan of merger with CyVera Corporation.

I want to talk briefly about CyVera's technology, product development activity, and integration into our BeadArray technology platform, but first let me share with you some of the details of the transaction. The aggregate consideration for the transaction is $17.5 million, consisting of approximately 1.5 million shares of Illumina common stock and the payment of approximately $2.3 million of CyVera's liabilities at the closing. The exact number of shares will be based on the average price of Illumina's outstanding shares before closing, subject to a 10% collar around the 10-day average price per shares on the date of the agreement. Illumina will also assume outstanding stock options at an exchange ratio determined by the closing price. The closing is subject to customary conditions and is expected to be completed by the end of March.

CyVera is a company of 24 people today, focused and the development of a digital microbead platform that we think is highly complementary to Illumina's. CyVera's beads are imprinted with a holographic element that when scanned produces a digital address which can be used like a bar code to read a bead's identity. The process to manufacture these rod-shaped beads is highly automated and inherently inexpensive. Each bead is a potential site for a biological assays and like Illumina's beads, CyVera's beads can support both nucleic acid and protein-probe content. Assays are typically performed in solution and then read on a scanning system that acts as a virtual meter. After an assay would reaction the beads are transferred from a standard microtiter plate to a cell where they self-align into randomly ordered arrays for readout. Depending on multiplex level, up to 120 samples per hour can be assayed on the system.

The technologies being developed with the intent of enabling easy assay customization, high sample throughput, reliable performance, and low manufacturing costs. CyVera bead technology is ideally suited to lower multiplex levels in the range of 10 to its highest of 1,000 targets. Illumina's beads indicating process on the other hand are optimized for dense, high throughput applications with multiplex levels of currently ranging from 384 to over 200,000 targets per sample. The two approaches we think are highly complementary. CyVera beads assay will be integrated into an expanded portfolio of high performance solutions based on BeadArray technology and leverage the extensive application development activities using the Golden Gate, Infinium, DASL, and emerging protein assay protocols. As a result, Illumina will be in a position to offer a comprehensive approach to the biomarker R&D and in-vitro in molecular diagnostic markets including those that require low complexity as well as high complexity testing. The first products based on the CyVera technology are expected to be available in the second half of 2006.

The emerging molecular diagnostic market is a very exciting opportunity, and we think it has great potential. To participate successfully will require an extensive infrastructure and significant base of related resources. As a result, Illumina intends to expand its activities to seek diagnostic collaborators and partners.

While we're very excited about the future activity in the diagnostic markets, we derive all of our current revenue from the research market and that's where I'd like to focus the balance of my remark this is afternoon.

In 2004, we began shipping our bench top BeadStation and have gotten good traction in the marketplace. We expect to expand significantly our installed base in 2005 driven principally by new array products and powerful new assay methods. The first of this is the Sentrix whole genome expression product, the Human-6 and the HumanRef-8 BeadChip that I mentioned earlier. These products are being sold into an $800 million existing market.

We believe our products will be differentiated by their superior performance and market transforming price point. Last week we began to accept orders for these chips and will begin shipping them before the end of next month.

In the second quarter this year, we plan to launch a new Sentrix BeadChip that will be able to genotype over 100,000 SNP loci on a single chip. Integral to the product is the new Infinium assay; a powerful and proprietary protocol that allows virtually unconstrained locus selection at multiplex levels that are limited only by the number of beads present on the BeadChip. This product will be Exon-centric containing over 30,000 of the 100,000 markers in or very near genes. The product is ideally suited for large-scale disease association studies.

Going forward, we believe that our ability to offer the specific SNP content of highest value will help differentiate our products from those of our competitors. This approach will resonate strongly with researchers, who are concerned about being increasingly inundated with large volumes of data, not all of which has high experimental value. The Infinium assay and its future improvements will be used to deploy new SNP content and high value markers identified as part of the HapMap project.

Our BeadChip technology has significant headroom in terms with ability to host increasingly complex content and as a result, we will very soon announce our strategy for moving beyond the 100K chip.

In 2005, we'll also be introducing a series of focused content genotyping products including two HLA panels and next generation linkage panel. Researchers will be able to take advantage of Illumina's array of array formats to generate high sample throughput and analysis for each of these offerings.

Finally in 2005, we'll be introducing additional chip format, additional application, and new limbs and automation options that help our customers get even more mileage from the BeadArray technology.

Beside financial measures, one of our most important measures of success and, in fact a hallmark of the Illumina brand is the relationships that we build with our customers. We're highly focused and building collaborative interactions and doing so in the context with helping scientists to generate compelling results.

Gene is on bioscience; the Canadian customer doing breakthrough research on the genetic basis of disease was featured in a recent February issue of "BioITWorld." President John Hooper was profiled in the article and made the following comment from which I call. "As for Illumina, I believe it is the group of the future. Their technology is outstanding, their accuracy and precision is superb and the customer service is incredibly responsive." We're gratified to hear this type of comment from our customers and it makes us all feel very pleased about the value that we are delivering to the marketplace.

In closing, I would like to provide an update on our search for the CFO, as previously announced, Tim will be, unfortunately, leaving us to return to the East Coast in the second quarter. We have retained Spencer Stuart to conduct a search for a placement and we're actively screening candidates.

We're very optimistic about the future of Illumina in 2005 and beyond. Our markets are large and growing fast, and our entry into the largest segments, namely the fixed content, expression, and genotyping is right around the corner.

Although our markets are highly competitive, we feel confident that our technology in human resources are up to the task. I think we're now ready to take some questions.

Operator, will you please explain to our listeners the procedure for queuing up.

The question and answer session will be conducted electronically. To ask a question, please press the "star" key followed by the digit "one" on your touchtone telephone.

To ensure that everyone has the opportunity to ask the question, we ask that you limit yourself to one question and one follow-up question. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, to ask a question, please press "star" "one" at this time.

And we'll have our first question from Aaron Geist, Robert W Baird.

Good afternoon, gentlemen. Congratulations on the acquisition and congratulations on holding your first conference call.

Thank you.

You're welcome. Can you provide a little bit more color for us on revenues? I know that you -- I don't prefer to breakout the revenues between consumables and instrumentation, but given that the HapMap project ended a little earlier than anticipated and you are forecasting a backend load into next year, if you could give us a little bit more color, it would be helpful for a modeling perspective.

Hi, Aaron. It's Tim. One thing that might be useful from that standpoint is to give you an estimation of the total impact of the HapMap project on our revenue base for 2004, which includes not only our internal genotyping work, but our estimate of what our customers, our BeadLab customers purchase from us that was related to HapMap, and we currently believe that about 30% of our 2004 revenue was derived from purchases that were one way or another funded through the HapMap project. But you're right. We have typically not -- other than that, provided data at this point for breaking out consumables versus products.

Tim, could you talk a little bit more maybe about the fourth quarter given that there was a higher spend as people sort of worked through the last remaining orders for assays?

Actually the -- our best guess is that most of -- we had a higher amount of HapMap consumables purchased by customers in the third quarter than we did in the fourth quarter. Probably by a million or so dollars. I will say that our genotyping services business, the amount that you saw there for Q4 was substantially driven, a good chunk of that was driven by the HapMap project as opposed to say Q3 or any previous quarters. So Q4 was our largest quarter for our own internal work representing a good chunk of that $4 million that you saw there.

Aaron, I might add that the project actually was not completed in Q4. We still are doing a significant amount of work in Q1, although we're just about finished with that. There was quite a rush to get the project completed very early in the February time frame, and so we continued to have a material amount of business both from our portion of the grant and from our collaborators in Q1.

Jay, there's been a lot of discussion about follow on funding, about funding to those customers that have instrumentation. You spent a little bit of time talking on the call today about them going back now and doing some data analysis and data mining. Can you talk a little bit more quantitatively on what customer base looks like, the customer base in terms of who has funding, how much of a gap we're going to see in terms of time until they continue to ramp consumable usage for 2005.

I assume what you are talking about is the four BeadLab who were involved in the HapMap project.

Exactly what I'm talking about.

And that's over installed base of 49 system, there were four systems -- there were four of them that were involved in the HapMap project. So I think on the one hand, that's a very small fraction now of our installed base and represented diminishing impact even in the worst case. But having said that, I can say that all of those existing customers before that were involved in the HapMap project are all very active in doing other disease association studies and linkage analysis using our standard products and our custom services and so I think that while the HapMap part will decrease, it will be made up by other activities that they're working on.

And we'll have our next question from Adam Chazan, Pacific Growth Equities.

Hey, guy. Let me pass on my congratulation. Was hoping you might be able to give us a little more flavor on the installed base of instruments as it now stands on the BeadStation side. How are things going through the quarter related to the expression versus genotyping systems and what does the installed base look like currently in terms of pent-up demand for fixed content arrays as they start to roll out of there in the next quarter or two?

I would say that virtually all of the installed base to date is in terms of materiality is doing genotyping. So there's almost no impact yet from our expression products. We expect that to begin to change materially next quarter. We do have quite a number of customers that already have BeadStations and or BeadLabs installed that are very anxious to try out our expression chips and so we'll begin shipping those chips to them very shortly. And in fact, we think that we have some pent-up demand for new BeadStation for customers who are primarily focused on expression who's not placed the orders yet because the chips haven't been available. So we expect the sort of ratio of genotyping to expression in the installed base to begin to shift closer to an even mix over the next year.

Okay. And then just a follow-up in terms of the focus of the sales force, can you speak to that a little bit? Some of the folks who were dedicated to the oligo sales will ultimately shift. And can you talk some about the increased focus on the bulk of the business?

Sure. As part of the Invitrogen agreement, the six people we had dedicated to selling oligos, a portion of them at least will be moving over to become employees of Invitrogen, so they will in effect be removed from our company and our expense line. In terms of the remaining part the sales force, our plan is to continue to make investments in 2005 in building our customer facing operations. In 2004, we nearly doubled overall that collective group, and in 2005 we expect it to grow somewhere on the order of 50% if not a bit more.

Great. I'll jump back in the queue. Thanks.

And if you would like to ask a question, just a reminder, it is "star" "one." We'll go next to Eric Schmidt, SG Cowen.

Good afternoon. I'm honored to be asking a question on your first ever conference call.

Thanks, Eric.

Let's see. Are you going to be giving out any 2005 milestones in terms of product placements, system placements, as you've done in the past?

We don't expect to do that this year.

Okay. In terms of understanding the service side, Jay, you mentioned the HapMap winding down, but also that you're seeing a lot of incremental interest from consortium in conducting disease-specific studies. Do you expect services in terms of absolute dollars to grow in 2005 versus 2004 or to shrink?

If you are looking at the service line on the income statement, it would be different than if you were looking at just third party contracts because we'll have to take the HapMap portion out. But let's talk specifically about third-party contract. We do expect that part of the business to grow. We've been very, very pleased at how well our sales team has continued to deliver there. And the fact that that continues to be a very robust market in terms of groups that want to outsource genotyping. So, we expect our third party service business to continue to have strong growth.

And including HapMap then?

Well, we won't have any HapMap after first quarter. So it -- you really have to talk about it apples to apples as third party.

Okay. And the last question on CyVera, you mentioned that the potential product launch in '06. Would that be a molecular diagnostic product? If so, can you give us more flavor for what type of molecular diagnostics you are looking at? And obviously this is a brand new market for Illumina. Can you talk a little bit about how you approach the market versus the typical research market?

Sure. Instrumentation platform and, of course, the beads are generic in the sense that they can work for research applications as well as diagnostic applications. So, we will be working across a very broad front in terms of what applications that we put on the platform and, certainly, one of the things we'll look at early on after the close is how we take some of the existing Illumina assay capability and explore deploying that onto the CyVera platform.

And of course the platform itself will not be ready, as I said, until the second half of 2006. But the first one to come out of the shoot is a bit unpredictable at this point. It really will depend on which assays we decide to focus on, and it also will be influenced to some extent by what partnerships we form. So to be responsive to the second part of the question, in the diagnostic and biomarker areas, we do expect to be much more focus and working through partner.

And, in fact, they may drive the specific assays or the specific content that we put on the beads. And so it's a little difficult at this point to be specific about which application might come out first.

That's helpful. Thanks a lot.

We'll have our next question, a follow-up from Aaron Geist, Robert W. Baird.

Can you talk a little bit about the FDA path for regulatory approval for your instrument that you plan on building in 2005 and 2006?

It is a little early to be very specific about that, Aaron. But we are certainly beginning to look at that process. And now that the path through the FDA has been cleared somewhat, we think the technology itself certainly is passable through the FDA and in terms of the timing of that, it will depend on when we think we have the right collection of assay technology to go along with the platform to begin to put that through the process.

Two additional questions. Can you talk about the oligo business, vis-…-vis the guidance you gave, and does that include or exclude the impact from Invitrogen. And secondly, is there a backlog for the Sentrix chips that you recently began taking orders for?

On the oligos beads, yes, the guidance does include substantial increment over 2004 amounts that we expect the Invitrogen collaboration to contribute. So that is baked in. Chips, the orders are -- we're starting to build a nice backlog for those, both by the way, gene expression and genotyping. So we're very pleased to see the interest out there and for customers lining up.

Thank you.

And we'll go next to Bill Baker, GARP Research.

Thanks. And most of my questions were answered, but I just made the tone of the CyVera product that sounds like you are leaning more towards an FDA approved instrument for use in hospital central labs and just want to confirm that that's the case. And if so, would you also consider partnering with firms that might help you distribute the instrument as well as come up with the assays?

We certainly would. So we'll be looking both for content slash assays and potential distribution, but having said, that I guess, I wouldn't characterize it as being totally focused on a diagnostic segment. So, we believe that this product has significant research applications as well. And so, we will be looking at deploying assays for the research market and selling that either through partners which is a potential there or through our direct sales force and clearly one of the areas that this technology may enable is protein-based application where the multiplex levels tend to be lower than the 384 that we currently are implementing on our Sentrix technology.

Would that include an antibody-based test then?

Could, sure.

Thank you.

And just a reminder, if you would like to ask a question at this time, you may do so by pressing star "one". And at this time we have no further questions in our queue. I'll turn the conference back over to our speakers for any additional or closing remarks.

Thank you very much, everybody, for attending our first conference call. We thought it was very productive and as we get additional information about the CyVera acquisition accounting treatment or as we get additional information about how we will approach the expensing of stock options, we will intend to give you some updates on our guidance. Thank you, all, very much.

Right. That does conclude today's Illumina Incorporated fourth quarter fiscal year 2004 earnings conference call.

You may disconnect at this time. We do appreciate your participation.