Illumina Inc (ILMN) 2005 Q4 法說會逐字稿

Good afternoon and welcome to Illumina's fourth quarter earnings conference.

[OPERATOR INSTRUCTIONS]

At this time I would like to turn the conference over to Bill Craumer, Director of Corporate and Marketing Communications at Illumina.

Please go ahead, sir.

Good afternoon everyone and welcome to our conference call. After the close of market today we released our financial results for the fourth quarter and fiscal year 2005.

During this call we will review our results, issue financial guidance for fiscal 2006 and provide commentary on commercial activity after which we will host a Q & A session.

Presenting for Illumina today will be Jay Flatley our President and Chief Executive Officer, and Christian Henry, our Vice President and Chief Financial Officer. The call is being recorded and the audio will be archived on our web site at www.Illumina.com.

During the call, we will be providing guidance and discussing plans for future activity. Our intent is for these forward-looking statements to 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 information available and Illumina assumes no obligation to update these statements.

To better understand risk factors we refer you to the documents that Illumina files with the Securities and Exchange Commission including forms 10K and 10Q.

I will now turn the call over to Christian.

Thanks, Bill, good afternoon everyone and thanks for joining us today.

I hope that you've all had a chance to review our financial results that we released after the close of the market.

I would first like to walk you through our operating results for the quarter and year ended January 1, 2006, and then follow with a detailed discussion of our financial guidance for fiscal 2006 and finally I will turn the call over to Jay for an update on the Company's accomplishments in 2005, progress in the fourth quarter and to highlight some of our key objectives as we move into 2006.

For the fourth quarter we were pleased to report our second consecutive quarter of more than 15% sequential revenue growth. This continues our trend of 18 consecutive quarters of increasing revenues. For the quarter total revenues were $23.0 million which represents a year-over-year growth of 56%.

On a year-over-year basis Q4 product and services related revenue grew 55% to $22.4 million. This growth was driven primarily by significant increases in consumables, instrumentation, and services revenue over Q4 2004 levels.

During the quarter we shipped a record 24 BeadStations. Of the 24 BeadStations shipped six were shipped to customers under our rental program which enables these customers to significantly increase their capacity to run our arrays.

We ended 2005 with an install base of 126 BeadStation and BeadLab scanners.

Services and other revenue increased 42% for the quarter to $5.7 million, compared to $4.0 million in Q4 of last year. Services and other revenue included revenue from our genotyping services business, milestone revenue achieved under the Invitrogen collaboration as well as revenue from instrument maintenance contracts.

In the fourth quarter the Company completed and delivered 18 genotyping services contracts including a significant project under our arrangement with GSK.

In addition the Company achieved a milestone under its collaboration with Invitrogen and consequently recorded a $1.1 million milestone in this quarter. Research revenue was $600,000 for the quarter and was related to revenue generated under government grant. We expect research revenue to fluctuate from quarter to quarter based on the timing of R&D activities under these grants.

For the year total revenue grew by more than 45% to $73.5 million. Product and services revenue grew 48% to $71.7 million. Revenue growth was driven by the launch of several important products including the Human-1 Genotyping BeadChip, human and mouse expression products and the launch of the DASL application, as well as there was significant organic growth in our instrumentation, custom genotyping and services businesses.

The geographical breakdown of revenue in 2005 was approximately 67% North America, 24% Europe and 9% Asia. For the full year academic revenue represented approximately 80% of total revenue and revenue from industrial customers represented approximately 20% of the total.

Cost of products and services revenue was $7.2 million for the quarter, compared to $ 3.9 million in Q4 of 2004. This represents a products and services gross margin of 67.6% compared to 65.3% last quarter and 73.2% in the fourth quarter of 2004.

As we indicated on our last conference call gross margins will fluctuate based primarily on product mix. In the fourth quarter revenue was more heavily weighted towards consumables which had a favorable impact on gross margins. In addition we recorded the milestone related to the Invitrogen collaboration which favorably impacted gross margin by approximately 165 basis points.

For the year, cost of products and services revenue was $23.2 million compared to $13.3 million in 2004. Products and services gross margin was 67.7% for the year compared to 72.7% in 2004.

Research & development expenses increased by $2.2 million in the quarter to $7.5 million, compared to $5.3 million in the fourth quarter of 2004. The increase in R&D spending was largely driven by the inclusion of Cyvera's research & development expenses in 2005.

For 2005 total research & development expenses were $27.7 million compared to $21.1 million in 2004. Again the inclusion of Cyvera R&D was the key contributor to our expense growth in this area.

SG&A expenses were $8.2 million for the quarter compared to $5.8 million in the fourth quarter of 2004. For the year SG&A expenses were $28.0 million compared to $25.0 million in 2004.

The increase for the quarter and for the year is primarily related to the expansion of commercial activities required to support our revenue growth and increased spending related to litigation.

Finally for the fourth quarter we reported a net income of $326,000, or $0.01 per basic and diluted share. This compared to a net income of $3.2 million, or $0.09 per basic share and $0.08 per diluted share in the fourth quarter of 2004.

It should be noted that the financial results in the fourth quarter of 2004 included a one time gain of $3.3 million associated with the reduction of damages awarded previously in a wrongful termination lawsuit. Excluding this item, the Q4 2004 loss per share would have been approximately break even.

For the year we reported a net loss of $20.9 million or $0.52 per basic share. This includes a one time charge of $15.8 million recorded in the second quarter of 2005 related to acquired in process R&D. Excluding this item our net loss for the year was $5.1 million, or $0.13 per basic share.

Moving to the balance sheet. I'm pleased to report that we are cash flow positive during the quarter. We ended the fourth quarter with $50.8 million in cash compared to $50.2 million at the end of the third quarter.

During the quarter we generated cash of approximately $1.9 million from operating activities and $1.0 million from financing activities. This was offset by capital spending of approximately $2.3 million.

Accounts Receivable, Day Sales Outstanding saw significant improvement during the quarter. DSO was approximately 70 days at the end of the fourth quarter compared to 81 days at the end of the third quarter.

While we are pleased with our progress in the quarter in this area we expect DSO to continue to fluctuate from quarter to quarter based on the geographic mix of revenue and we continue to maintain our internal goal at around 75 days.

Inventory grew by 3.1 million during the quarter from 7.2 million at the end of the third quarter to 10.3 million at year end. The increase in inventory was primarily related to the capitalization of the BeadPool related to our HumanHap map 300 product which began commercial shipments in early January.

Before discussing our guidance for 2006 I would like to highlight an important change in the way we will account for the expense associated with stock options. Beginning with the first quarter we will include the expense associated with stock options in accordance with our implementation of FAS 123 R.

Consistent with the majority of companies we will not be restating our historical financials for the impact of expensing these options. Rather we will report pro forma results which exclude the impact of expensing stock options along with our GAAP results throughout 2006 so that investors will be able to make meaningful comparisons between 2006 and 2005.

For fiscal 2006 we expect revenues to grow in the range of 55% to 70% which would yield total revenue between $115 and $125 million. We expect strong revenue growth from products and services related to our Whole-Genome Genotyping business.

Products and services gross margins will vary from the mid to high 60s based on the product mix in any particular quarter. Research & Development expense is expected to range between $30 and $34 million for the year, while SG&A expenses will range between $38 and $43 million.

Excluding the impact of expense associated with stock options we expect to be profitable in each quarter of 2006 with total annual net income between $5 and $13 million. On a primary basis this would yield earnings per share of $0.12 to $0.31 assuming weighted-average shares of approximately 42 million shares.

On a fully diluted basis we are forecasting total weighted shares of 45 million which would result in earnings per share of $0.11 to $0.29. The impact of stock compensation expense is expected to range from $0.20 to $0.27 per diluted share.

For the year we expect net cash flow to range from a use of up to $5 million to being slightly cash flow positive. Working capital requirements and spending on capacity expansion will be the key drivers of cash flow in 2006.

In the first quarter we expect total revenue to range between $22 and $24 million. Excluding the impact of the expense associated with stock options, net income per share should range between break even and $0.02 per diluted share.

At this point I will turn the call over to Jay for additional comments before we begin the Q&A. Jay?

Thanks, Christian, and good afternoon everyone.

By any measure 2005 was a landmark year for Illumina. We grew revenues over 45%, more than doubled our install base, significantly increased our manufacturing capacity and achieved our first profitable quarter from operations. In addition order rates in the fourth quarter were at record levels and we enter the first quarter of 2006 with another record backlog.

From a product perspective we launched our first products to serve the explosive Whole-Genome Genotyping market, The Human-1 Genotyping BeadChip which we launched in the third quarter and the recent launch of the HumanHap 300.

We believe the HumanHap 300 is the most powerful commercially available array for whole-genome genotyping on the market today. This product sets the standard by which all other whole-genome genotyping chips will be measured.

In order to develop this product we formed a content advisory committee made up of HapMap participants and statistical geneticist from seven leading research institutions.

Enabled by our Infinium Assay , the committee was able to select tag snips from virtually anywhere on the genome. Tag snips are proxies, the larger groups of snips called haplotypes that are inherited together. This approach allowed to us about develop a product that will genotype the entire human genome very comprehensively with a highly targeted set of snips.

Originally our goal was to produce a chip with approximately 250,000 markers. But due to the effectiveness of our development program the HumanHap 300 BeadChip contains over 317,000 markers. This combination of the quantity and quality of the snips on the HumanHap 300 has resulted in what we believe is the most comprehensive genomic coverage of any chip in the market today.

In terms of performance our customers are routinely achieving call rates greater than 99% with accuracy rates that approach 100% This kind of performance is achieved due to the high quality of the array and robustness of our assay.

Since the commencement of commercial shipments we've already announced three significant studies that we used the HumanHap 300. The Center for Inherited Disease Research or CIDR for short, already owns and Illumina BeadLab and is using the HumanHap 300 for a 2,500 sample pilot study of type 2 diabetes.

We also announced a large purchase of HumanHap 300 chips for an NIH research consortium looking to identify genetic variance that increase susceptibility to Crohn's Disease, a widespread inflammatory bowel disorder.

Another important agreement was entered into at Genizon Biosciences, a commercial Canadian company, that's been using Illumina technology since 2004 to support fine mapping programs as a follow up to genome wide association studies.

Based on the power of our whole-genome genotyping chips Genizon has decided to convert all of it's whole-genome disease research to Illumina. Genizon plans to genotype up to 16,000 samples over the next 12 to 18 months in nearly 20 disease areas.

In addition in order to increase their throughput Genizon has been purchased six additional BeadStations. We expect to have Genizon infrastructure fully up and operational in about 30 days.

These agreements underscore the strength of our market opportunity. Over the next few years we believe there will be a significant number of large scale whole-genome association studies, in each case researchers will demand the best performing chips to optimize their investments in these ground breaking experiments.

To enable these large studies, Illumina has extended the automation technology that we originally developed as part of our BeadLab to support the BeadStation configuration for whole-genome genotyping. As a reminder we've offered full automation for custom genotyping as part of our BeadLab system since 2003.

These solutions include full robotic support and limb software to enable failsafe sample tracking.

While genotyping's been a key part of our growth story in 2005 it certainly has not been our only focus. Early in the year we launched a new line of gene expression products including the industries first multi-sample chips for both human and mouse.

We also launched exciting new applications such as our DASL assay which has enabled researchers to perform gene expression experiments on samples with degraded R&A such as tumor tissue imbedded in paraffin blocks. Order rates on expression products continue to grow nicely with approximately a 50% growth in Q4 orders over Q3 results. We expect these products will experience continued significant growth in 2006 and beyond.

Additionally in 2005 we made great progress in our collaboration of Invitrogen. In the first half of the year we focused on building the infrastructure required to support the manufacturer and delivery of two bit oligos.

In the third quarter we began shipping the initial version of these oligos under the collaboration and in January we assumed manufacturing responsibility for the type of oligo.

Our fourth generation synthesis technology enables us to produce oligos on an unprecedented scale and a cost which provide the collaboration with significant competitive advantage. We expect to see a significant increase in volume and resulting revenue from the collaboration in 2006.

Looking forward to 2006 I would like to discuss a few of our goals in the new year. On the product front we have several important milestones in the near term. In particular before the end of the second quarter we plan to launch a whole genome geno-typing BeadChip with 500,000 snips on a single array.

Product development is well underway and we expect that this product will have similar performance characteristics to our HumanHap 300 products.

As an intermediate step we will also launch a supplement to the HumanHap 300 chip which will contain approximately 230,000 snips. This product will enable users of the current 300K array to run a second array on their samples to obtain genomic coverage equivalent to what they would get on a HumanHap 500.

In gene expression we plan on launching the multi-sample rat genome project in the first half of this year. This product will be particularly valuable as a tool to penetrate toxicology markets.

In the second half of the year we plan to launch our new Cyvera platform. We believe that this platform will provide us with a unique competitive advantage and low to mid multiplex applications in the molecular diagnostics and research market.

Development is in the late stages without the units being built and undergoing extensive testing.

Operationally our objectives in 2006 are focused on continuously improving our execution across the organization and to address our exciting market opportunity. For example, we are continuing our program to expand array manufacturing capacity. As I've discussed previously we are aggressively working to more than triple our array manufacturing capacity from our Q2 2005 levels. We expect to have this project completed before the end of the first quarter with a total capital of investment of less than $5 million.

We believe that this capacity level is sufficient to achieve the revenue guidance we provided today. However, given the opportunities in front of us over the next several years we are prepared to double our capacity from these increased levels over the course of 2006.

Fortunately the space required to meet this goal is already in place in our San Diego facility, requiring us to simply continue to build the imaging systems to support this larger capacity.

A key goal for 2006 is to continue building our international infrastructure. As our business gross outside the U.S., we plan to build out our European logistics and administrative capabilities largely completing this activity in the first half of the year.

Additionally, we will add sales and support personnel in all of our territories both domestically and internationally as the number of customers and products that we support continues to grow.

In fact this morning we announced the appointment of Matt Posard to the position of VP of Marketing. Matt brings more than 13 years of marketing sales and service experience in the health care field with particular expertise in the diagnostic industry.

In summary, 2005 was a break through year for the Company. We achieved key milestones including our first quarter of operational profitability. We expect our financial performance in 2006 to continue to improve as a result of a rich pipeline of innovative new products and a strong commercial infrastructure.

But perhaps most exciting is the opportunity at our door step to assist scientists worldwide to understand the genetic basis of disease.

I think we are now ready to take questions. [CALLER INSTRUCTIONS]

[OPERATOR INSTRUCTIONS]

We'll take our first question today from Eric Schmidt with SG Cowen.

Good afternoon, congratulations on a great finish to a good year. Jay, well let me start maybe with Christian, are you expecting to record any tax expense in 2006?

We will have some tax expense. We do have a lot of NOLs that we'll be starting to work through so we expect our tax rate to kind of be in the 5% to 7% range, mostly from international exposures.

Okay, and then, Jay, in terms of some of the collaborative deals you've signed in terms of whole-genome genotyping studies, I guess there's some concern out there maybe put forth by one of your competitors that it takes some time to gear up these large products and I know you've been doing it maybe a little bit longer internally and you mentioned the robotics [inaudible]. How much time does it take from the time we see a press release to getting going in full speed if you are adopting the Illumina technology?

In most of these deals we've been shipping chips within weeks of the time that we get the order. A few of them we booked a little bit ahead of when the product was fully available, but now that the products are fully available we are shipping almost immediately.

The infrastructure comes up quite rapidly. In fact Genizon is going to have an infrastructure, for example, that has a total eight scanners, a whole series of robots full genotyping lens capability and we will put all that in place in 30 days or so. So we can get people up to speed very, very quick.

That's great. My last question is on the Q1 guidance, you mentioned that you have had 18 straight quarters now of revenue growth and you are exiting the fourth quarter with a record backlog and we obviously know to expect a nice uptick from the 3,000 K chip, I'm sorry, 300 K chip. Are you being very conservative here or why might we see a flattish quarter-over-quarter?

Well, in our industry as I think you know, Eric, the order rates in Q1 are historically lower than they are in the other quarters of the year so we've taken that certainly into account. Our success in the past, what we've seen is the fact that our organic growth rate has sort of masked any reduction in order receipts in Q1 and we certainly hope that's going to be the case here again. But we wanted to ensure that we had that covered. So, I think our guidance is reasonable.

Is it conservative? Maybe, but we are going to work hard to achieve these numbers.

Great, congratulations, again.

Thanks.

And for our next question today we will go to Quentin Lai with Robert Baird.

Good afternoon. Congratulations on a nice quarter. With respect to your 2006 guidance should we, as we look at product, service and research, will it break out about the same percentage as we saw in 2005?

Research will not increase very much. So in terms of additional grants, it's growing very little if at all. So it will become almost a diminimus part of our revenue going forward. In terms of break down between products and services, at a first level approximation, I would expect the ratios to be similar.

Of the contracts you completed in 2005 what about those customers? Are you seeing them come back to renew their contracts? Are you seeing new, them just saying, hey, I want a new BeadStation and I will do my own work?

We are seeing both effects. So there are many customers that we've done a whole series of contracts for. There are several that we are probably on our fourth or fifth contract. So sometimes when institutes don't ever want to own the capital equipment they will just continue to run service contracts with us.

We also see the other phenomena where they run a few service contracts and then they would like to own the technology, bring the capability inhouse.

We are right now of course implementing our Infinium services, so since we've announced the Infinium products, that's now come up in our services operation as well and very often what we find are consortia that want to get their studies done quite quickly, so one motivation to use the service is to take advantage of our capacity and ability to respond quickly and that sometimes is a motivator to use the service initially and maybe they'd order a BeadStation or several BeadStations to do follow up.

In 2005 you broke out that revenues 80% went to academic and 20% to industrial. Is there any reason to think that industrial might start to pick up a little bit more in 2006 or are you seeing most of the genotyping work still in the academic arena?

I think a lot of the very large studies are happening in the academic arena and through projects that are funded by foundations or other governments. We do expect sort of underlying that trend, an increasing penetration into the commercial markets. And if you look at the types of people that we were hiring in our commercial organization they tend to have increased background in both the pharmaceutical and bio-tech industry, selling into those types of customers, as well as into the diagnostics industry in addition.

So I think you will see us focus more in that area. We also expect that the pharmaceutical companies will begin to bring genotyping increasingly inhouse as more is understood about the right snips to genotype.

I think one of the transfer outsourcing in the pharmaceutical industry has been the fact that the technology was changing pretty quickly and there was no definitive set of snips, and so as that becomes more solid we do expect an increasing purchase trend by the pharmaceutical companies and that will help increase our penetration. The other factor of course is our growth in the expression product line. That is largely sold into the commercial environment.

I guess the last question that leads to the last question is that of your 2006 guidance are you, could you kind of break out what you think that, what percentage of revenues are going to be coming from the new categories, gene expression and Cyvera?

We haven't broken down our revenue mix by product so we will leave that to you to estimate.

For our next question today we will go to May-Kin Ho with Goldman Sachs.

Hi, Jay, congratulations. Can you talk a little bit more about what you are thinking about international expansion, if that involves acquisitions?

It could potentially involve acquisitions although that wasn't the basis of my remark. It really related to growth in our international sales and support organization. For example, we have decided to go direct in China.

We have our first two people on the ground in China and we will continue to expand that operations through the year. We are adding more resources in both our Japanese and Singapore offices and we are continuing to see great strengths in the European market and so we are adding technical services, marketing, and sales support.

The other thing we are doing is adding an administrative office in Holland. And so that will become sort of the central focus of our European distribution organization and we will be doing importation of goods through that office, and setting up our logistics center there, and we just hired somebody who actually I believe started today who is going to head up that operation for us in and around Amsterdam.

What about backlog in instruments, can you talk a little bit about that?

Well, we don't give specifics on the backlog number but our backlog is at a record and we are feeling very strong about the business ahead of us and we have good visibility as to the business in the backlog. Not all of our backlog is shippable in this quarter because some of the backlog spans across very large service projects that will go beyond Q1. But it's well distributed across the product lines. Certainly a lot of it is in whole-genome genotyping chips but it spreads across all the products.

I know your manufacturing capacity is not a quantum jump in terms of things that you are improving, it's more in kind of small steps. Can you give us an update in terms of for example [inaudible] systems and also if you kind of think about the risk for 2006 in reaching your target what is the major risk for the revenues?

We are building more decoding systems as we speak and we add them on line almost every week. They typically cost us somewhere a little over $100,000 to bring in the infrastructure related to a new decoding imaging system.

At the end of the second quarter where we talked about capacity we had 10or 11 systems on line and we will roughly triple that by the end of the first quarter. So that will give us a huge increase in array production capability.

I also said in my remarks that we've sort of layered in a plan that would allow to us double that yet again. We have not pushed all the buttons to execute that plan and because we do have the ability to add it in small increments even when we do we will probably do it in pieces and we will use to it make sure we stay ahead of the demand curve if you will.

When you triple it does it mean that the composite is tripled?

For BeadChips, that's right, it's not for ray-matrix it's just for the BeadChips we are talking about here.

For our next question, we'll go to Edward Tenthoff with Piper Jaffray.

Great, thanks so much for taking the call. Quick question with respect to how we should be looking for the revenues from Invitrogen partnership. Are they currently buried in the product sales number and if that starts to get big enough, is that something you and your partner would be willing to break out?

The revenue from Invitrogen is included in product revenue right now, both the actual revenue we get as we ship product and then the collaboration profits included in product revenue. As the numbers get larger, we may consider it, at this point we are not considering it, but down the road we may consider breaking it out in a little more detail.

Okay, good, that's helpful, thank you.

We will go next to Allister McKay with Garp Research and Security.

Hi, Jay, could you talk a little bit about the consumable revenue stream that comes on a per BeadLab and per BeadStation basis?

I can give you some ranges and they are consistent I think with what we have given historically. Our BeadLabs will typically be in the range of $1 to $3 million of consumables on a system.

What we are seeing now, however, is that some of the BeadLab users are augmenting the initial installation of the BeadLab with a series of additional scanners which will drive that capacity way beyond $3 million of consumables so it's very conceivable that someone could do $10 or $15 million of consumable revenue on a single BeadLab with additional scanners running. And the infrastructure of the lab itself doesn't change much, you just add scanners right into the existing software architecture.

On BeadStations the range is about 50,000 on the low end to about 400,000 or 500,000 on the high-end.

Are you leasing any BeadLabs or is the leasing program only for BeadStations at this point?

Right now, we would lease labs in the U.S., but the demand has really been around BeadStations. And remember that the leasing is really done through a third party so it's really transparent from a revenue recognition perspective.

My last question, Jay, could you talk a little bit about the regulatory plans that you have for the Cyvera launch both with the FDA and in Europe if that's applicable.

Our goal is to have the facility regulatory approved by the end of calendar 2006 so that would allow us at that point to take the instrument in conjunction with an assay and submit it to the FDA. Now the assay part of that may come from us or may come from our partners that we formed in the diagnostics market. So the timing of the approval through the FDA will vary sort of on a product by product basis but the factory itself and the process will be approved by the end of 2006.

Okay, thank you.

[OPERATOR INSTRUCTIONS]

We'll go next to Charles Nguyen with Goldman Sachs.

Can you hear me? Can you explain the slight delay in the rat gene expression launch? I thought it was supposed to be launched at the end of last year?

It is slightly delayed. We've had a couple of technical issues where the Bead Pools did not perform to the level that our expectations are, so we have very high performance standards for these chips. If you look at the kind of data we are getting from our human and mouse chips in the market it's superlative data and we didn't feel like the Bead Pool we generated the first time around on rat was good enough so we are going to do it again.

We will go next to Skip Klein with Gauss Capital.

What does a blue bird cost and what does it do for your capacity?

What does a what cost?

What does a blue bird cost and what does it do for your capacity?

You mean a big bird? A big bird, for those of you that may not know is a name that we use -- we are going to need [inaudible], technical difficulties. The other part of it is on that make on that machine about 13,000 oligos in one run, pretty high throughput, and it allows us to both support the Invitrogen-2 business, the existing plate business that we had plus the uptick in the plate business we've varianced through the partnership as well as all our internal consumption needs for making our arrays and our oligo pools.

What's the cycle time on the 13,000 going to run?

It would depend on the length. A certain timing per base addition so the rotor on this goes around once per base addition and if you are going to make a 30 MIR it takes almost half the time it would take to make a 60 MIR. You can think of a run being a fraction of a day, somewhere between 12 hours and 20 hours depending on the length of the oligo.

Great, thanks a lot.

For our next question we'll go to Karen Sterling with Atlantis Investment Company.

Hello and thanks for taking my question. You had mentioned in your financial statements that they were a potential, about a potential 20 sites for BeadLabs and you so far have placed 11. Are you actively marketing to the other sites that you perceive as potential and if so when do you expect the remaining BeadLabs to be placed?

Our estimate of 20 worldwide sites was really based on our view of how the market would evolve over time. That doesn't necessarily mean that we had 20 exact customers in the queue. We are continuing to market that system and we think we will continue to sell them, probably at a pace of two or three per year.

Interestingly what's tending to go happen now is that we have many of our BeadStation customers who are opting to upgrade their BeadStations to achieve the--essentially the same throughput capacity as a BeadLab. Genizon is a great example of that.

They didn't ever buy a BeadLab but they have many more scanners than we'd ever shipped with a BeadStation and at least as many robots as well as the laboratory information management software.

The only pieces they didn't buy from us are centrifuges and PCR machines that we include and bundle in a full BeadLab.

The way we start to talk about this is that we think the distinction between a BeadStation and an upgraded BeadStation and a BeadLab is going to get increasingly blurry over the next few years. We will probably start minimizing that distinction over time.

What would the difference in margin be between placing a BeadLab versus several BeadStations in the upgrade cycle?

The gross margin percentage would be higher on a non-BeadLab, on a multiple BeadStation order and the reason is that we don't pass through as much third party equipment. The beauty of the BeadLab solution for some customers is that we provide virtually everything they need. So all they give us is empty lab space and we basically set them up from scratch including things like computers and data bases and all of the infrastructure they need.

So for groups that want to do a full turn key operation or say for a new lab that gets funded where they built a new building and they want to instantly come up in a genotyping capability, we make millions of genotypes a day and it's hard for them to do on their own, so that's the beauty of the BeadLab configuration but their percentage gross margin is a little lower. Our gross margin can be reasonable because of the sale price is so high.

Thank you.

[OPERATOR INSTRUCTIONS]

We'll go now to Isaac Ro with Leerink Swann.

Hi, guys, thanks for taking my call. A couple of quick questions, first could you maybe comment on the pricing environment for your genotyping versus your gene expression arrays and whether you are seeing a difference there?

Yes, in genotyping it's a competitive market. We believe that we are priced about where the market is. The deals are large and so therefore they tend to be competitive and so anybody who's competing for that business tends to offer some discounts off of the list pricing that is typically driven by the volume of chips that the customer is going to consume over time so we and other vendors into this marketplace tend to give volume discounts based on the level of consumption.

In expression it's somewhat different. There we sell pretty much at a fixed price and as we've said previously our price for human whole-genome expression is $160 per sample and we stay basically at that price and we think that's lower than anyone else in the marketplace today, substantially lower.

Great, thanks. Secondly, could you maybe talk about how important you think the install base of [inaudible] will be going forward in the genotyping market versus what you've seen in the gene expression area?

We certainly are excited about the fact that we can continue to grow our install base very nicely and we have every reason to believe that that should continue for the foreseeable future.

We think that most of the very large projects that are out there where the customer is bringing the technology inhouse, the fact of whether they have an installed scanner or not is a less relevant factor and the reason is that the dollars in the project tend to be relatively large.

So if they have to buy some capital equipment to support a multi-million dollar consumable purchase they are more than happy to do that. And so I think that puts us in a very strong competitive position in the market because in some cases we have a smaller install base and than some of our competitors might.

That does conclude our question and answer session today. I will turn the conference back to our speakers for any closing remarks you may have.

If there are no other questions just a reminder everyone that the call will be archived on our website at www.Illumina .com starting probably in a couple hours or so. Thanks again everyone for joining us and we look forward to speaking with you next quarter.

This does conclude our conference, ladies and gentlemen. We appreciate your participation.