Illumina Inc (ILMN) 2007 Q4 法說會逐字稿

Good afternoon ladies and gentlemen, and welcome to the fourth quarter 2007 Illumina Incorporated earnings conference call.

My name is Melanie.

I will be your coordinator today.

At this time all participants are in a listen-only mode.

We will conduct a question-and-answer session at the end.

(OPERATOR INSTRUCTIONS) As a reminder, this call is being recorded.

I would now like to turn the call over to Mr.

Peter Fromen, Senior Director of Investor Relations.

Please proceed, sir.

Thank you, operator.

Good afternoon, everyone, and welcome to our fourth quarter and 2007 earnings call.

During the call, we will review our financial results released at the close of today's market, offer a commentary on our commercial activity and provide financial guidance for first quarter and fiscal 2008; after which we will host a Q and A session.

If you have not had a chance to review the release, it can be accessed in the investor relation section of our website at Illumina.com.

Presenting today is Jay Flatley, President and Chief Executive Officer and Christian Henry our Senior Vice-President and Chief Financial Officer.

This call is being recorded and the audio portion will be archived in the investor section of the web site.

We will be discussing our financial guidance and plan 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 made during this call are subject to risks and uncertainties.

Actual events or results may differ materially from those projected or discussed.

All forward-looking statements are based upon current information available and Illumina assumes no obligation to update these statements.

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

Before I turn the call over to Christian, I wanted to remind you of the investment conferences in which we will be participating in, over the next couple of months.

On February 6, we will present at the Merrill Lynch Global Pharmaceutical Bio-technology and Medical Device Conference in New York.

On February 14th, we will participate at the Deutsche Bank's Mid-Cap Growth Conference in Naples, On February 6, we will present at the Merrill Lynch Global Pharmaceutical Bio-technology and Medical Device Conference in New York.

On February 14th, we will participate at the Deutsche Bank's Mid-Cap Growth Conference in Naples, On February 6, we will present at the Merrill Lynch Global Pharmaceutical Bio-technology and Medical Device Conference in New York.

On February 14th, we will participate at the Deutsche Bank's Mid-Cap Growth Conference in Naples, Florida.

February 6, we will present at the Merrill Lynch Global Pharmaceutical Bio-technology and Medical Device Conference in New York.

On February 14th, we will participate at the Deutsche Bank's Mid-Cap Growth Conference in Naples, Florida.

On March 13, we will present at the Bear Stearn's Health Care Conference in London and then following week in March we will present at both the SG Cowen Health Care Conference in Boston and the Lehman Brothers Health Care Conference in Miami.

For those of you unable to attend we encourage you to listen to the web cast presentation which will be available through the investor relation section of our web site.

With that I will turn the call over to With that I will turn the call over to Christian.

Good afternoon.

Thank you for joining us today.

I hope you have had a chance to review the earnings release that we issued after the close of market.

During the call I would review the fourth quarter and 2007 financial results and outline our guidance for the first quarter and fiscal 2008.

Jay will then discuss our commercial progress and provide an update on the state of our business and the markets.

We had a fantastic fourth quarter, we recorded our 26th sequential quarter of sequential revenue growth with total revenues of $112.6 million.

This represents 86% growth over the fourth quarter of last year, and approximately 15% of growth over last quarter.

This was our tenth consecutive quarter of sequential revenue growth greater than 10%.

Product revenue was $101.1 million growing 105% over the fourth quarter of last year and 12% sequentially.

The largest contributors to our sequential growth were the growth and revenues related to instrumentation, services revenue and sequencing reagents.

Within product revenues we generated, $56.2 million of consumables revenue for the quarter compared to $32.5 million in the fourth quarter of '06 and $52.

7 million in the third quarter of 2007.

This represents year-over-year growth of 73% and sequential growth of 6%.

Consumables were driven by strong demand across the family of Infinium arrays as well as the pull through of sequencing consumables from the Genome Analyzer.

Instrument revenues show significant growth sequentially and over the prior year period driven by the rapid uptake by the Genome Analyzer.

Total instrument revenue was $41.8 million in the quarter compared to $13.2 million in the fourth quarter of last year, and $34.1 million in the third quarter.

This represented year-over-year growth of 216% and sequential growth of 23% respectively.

It should be noted that we had a record, that we had record orders and shipments of the BeadStaion as well during the quarter.

Services and other revenue which includes revenue earned under our genotyping and sequencing servicing as well as are revenue related to instrument maintenance contracts and amounts earned under research agreements with government grants was $11.5 million compared to $11.2 million in the fourth quarter last year and $7.5 million in the third quarter of this year or 3% year-over-year and 53% sequentially.

As we have mentioned on prior calls our services revenue can fluctuate from quarter to quarter based on the timing of completion of contracts and it is best assessed on a moving average basis.

Before discussing our gross margin and operating expenses for the quarter I would like to describe the effect of FAS 123 R which requires us to record the expense associated with stock options in our income statement.

The total impact of stock based compensation under FAS 123 R for the quarter was a pre tax amount of approximately $9.6 million over a tax adjusted amount of approximately $0.10 per diluted share.

As prescribed by the standard, the expense is allocated to each P&L line item with the amounts attributable to each expense category separately identified in the financial tables accompanying today's earnings release.

In the discussion that follows I will highlight our GAAP expenses which includes the affect of 123 R and the corresponding non-GAAP figures.

I encourage you to review the GAAP reconciliation of our non-GAAP measures which is also included in today's earnings release.

Cost of products and services revenue was $40.1 million in the quarter compared to $20.1 million in the fourth quarter of '06.

Q4 to 07 cost include compensation expense of $1.2 million compared to $.5 million in the comparable period of 2006.

Our non-GAAP gross margin which excludes both stock compensation expense and acquisition related expense of $700,000 was 65.5% for the quarter compared to 63.1% last quarter and 67.5% in the fourth quarter of 2006.

The year-over-year decline in gross margin was driven by the shift in product mix toward instruments.

In the fourth quarter instruments which generally carry lower gross margin represented approximately 37% of total revenue compared to 22% in the prior year quarter and 35% in the third quarter of 2007.

When compared to the third quarter however, gross margins improved by over 240 basis points despite a higher mix of instruments.

This was due to our ability to absorb a greater percentage over overhead and fixed cost in the sequencing manufacturing operations as well as the fact we are beginning to see the benefits related to the optimization of the sequencing manufacturing processes.

Gross margins in the array business of 69% were approximately equal to that of the third quarter.

Research and development expenses were $20.1 million in the quarter compared to $8.8 million in the fourth quarter of 2006 including $3.0 million and $1.1 million respectively in stock compensation expense.

The absolute increase in R&D dollars compared to the fourth quarter of 2006 was primarily attributable to the inclusion of Solexa's R&D expense.

Excluding stock compensation R&D expenses were $17.1 million or 15.2% of revenue compared to $7.7 million or 12.8% of revenue in the prior year period.

SG&A expenses were $30 million dollars in the quarter compared to $14.9 million in the fourth quarter of '06 including stock compensation of $5.4 million and $2.5 million, respectively.

Excluding the impact of FAS 123 R related stock compensation expenses, SG&A was $24.6 million or 21.9% of revenue compared to $12.4 million or 20.5% of revenues in the prior year period.

Growth in SG&A dollars can be attributed to year-over-year inclusion of Solexa, but also to the significant and ongoing investments that we are making in our commercial infrastructure to support our rapidly growing install base.

Despite the incremental operating cost associated with the integration of the Solexa business our non-GAAP operating profit for the quarter was over 28% or $32.1 million, which exceeded our long-term operating model.

This compares with the prior year period of 34% of revenue or $20.7 million.

We continue to make great progress with the integration of the two businesses and are demonstrating our ability to leverage the combined resources and infrastructure of the merged Company.

On a GAAP basis, we reported a net loss of $4.1 million for the fourth quarter of $0.07 per basic and diluted share, compared to GAP net income of $17.1 million or $0.34 per diluted share in the prior year period.

The GAAP net loss was attributable to the recognition of $54 million of a $90 million payment to settle all on going legal disputes between Affymetrix and Illumina.

This payment was partially offset by a net tax benefit in the amount of $25.3 million primarily attributable to the reversal of the Company's valuation allowance against the deferred tax asset.

Excluding the impact of the settlement, stock compensation expense, certain tax benefits and acquisition related charges, we are pleased to report non-GAAP net income of $22.5 million or $0.38 per diluted share compared to $21.2 million or $0.42 per diluted share in the fourth quarter of '06.

Looking at the cash flow statement and the balance sheet, we have generated $11.6 million in cash flow from operations compared to $8.8 million in the prior year.

Accounts receivable DSO improved during the quarter to 67 days from 75 and going forward, we continue to expect DSO to fluctuate from quarter to quarter based on our mix of revenue from geographic and product perspective.

inventory turns improved slightly over Q3 from 3.2 to 2.9, as the total inventory increased by $8.7 million.

We used approximately $9.1 million in cash for cap-ex during the quarter primarily related to the expansion of BeadChip manufacturing capacity.

Depreciation and amortization were approximately 4 million-dollar.

I will now take a minute to update our financial guidance for the first quarter and for fiscal 2008.

Consistent the following guidance excluding the impact of non-cash charges including the amortization of intangibles, the legal settlement payment and the impact of stock based compensation related to FAS 123 R.

For additional details refer to the table in our earnings release that reconciles the non-GAAP to the related GAAP figures.

We expect fiscal 2008 revenues to be between $500 million and $525 million representing growth between 36% and 43% which is at or above the high end of the long-term operating model.

We expect gross margins for the year to range in the mid-60s and may be variable quarter to quarter due to product mix.

We expect non-GAAP earnings per share to range from $1.45 to $1.60 with the pro forma fully diluted shares out standing to be approximately $62 million.

Going forward, we will provide a pro forma of fully diluted share number that will exclude the double dilution associated with the accounting treatment of our convertible debt out standing and the corresponding call option overlay.

As a reminder the call option that Illumina owns offsets all dilution associated with the net share settlement of the note over its conversation price of $43.66.

We will include the on going economic impact associated with the net share settlement of the convert as it relates to the warrants that were issued in conjunction with the overlay which have a strike price of $62.87.

The fourth quarter number is included in the reconciliation to GAAP figures that accompanies today's press release.

Please feel free to follow up with myself or with Peter following the call today so we can walk through any details of the calculation.

In the first quarter we expect revenues between $110 and $115 million which represents year-over-year growth of 52% to 59% well above the long-term models.

Excluding the impact of stock comp expense and the amortization of intangibles assets related to the settlement with Affymetrix and the acquisition of Solexa.

We expect fist quarter non-GAAP to range from $0.33 to $0.36 assuming pro forma of approximately $60 million.

We anticipate a non-GAAP annualized tax rate of approximately 36% for 2008.

We expect the tax rate to be higher in the first and second quarter and lower in the third and fourth quarters as we begin to ship product from our Singapore site in the fourth quarter.

As more income is generated from international locations and as we complete the build-out of Singapore, we expect our long-term tax rate to decline over the next couple of years.

We expect annual stock compensation expense to be approximately $40 million or $0.65 per fully diluted share.

As we have emphasized in the past, the expense is highly dependent on the underlying stock price.

As I mentioned earlier, in the fourth quarter we recognized as a litigation settlement expense, $54 million of the total $90 million paid to Affymetrixs.

The remainder of the payment has been capitalized as an intangible asset and will be amortized over the life of the patents involved.

In 2008 we expect to amortize approximately $4.5 million of the intangibles assets on a routable basis.

At this point I would like to turn the call over to Jay for some remarks on the commercial activity during the quarter before we begin our Q and A session.

Jay.

Good afternoon, everyone.

I am pleased to report to you today that Illumina had another break-out year.

We generated 99% top line growth, driven by the on going strength in our core genotyping market, as well as remarkable uptake of Genome Analyzer.

We announced last month we shipped over 200 Genome Analyzer's representing a sales trajectory that exceeded even our best case forecast for 2007.

The ramp of the Genome Analyser is directly attributable to the success that we have with integration of the Solexa product and their team into Illumina.

The core assets of the companies have now been combined to form one of the leading product portfolios in our industry.

Over the course of the year in the array business we launched 14 new products, highlighting our ability to innovate at a market leading pace.

In addition to rapid new product introduction we have made major break throughs in our core array manufacturing processes, increasing sample capacity by 170% and data point capacity by 350% all with modest capital investment.

In the fourth quarter we grew sequential revenue for the 26th consecutive quarter with impressive growth across the business.

In the array business we continue to see very rapid product cycles with the products we launched in the last two quarters representing the greatest contribution to total BeadChip growth.

Our Human 1M-D chip which began shipping at the end of the second quarter, became our largest revenue generating array in Q4, followed by the Hap 550 Duo which began shipping in Q3.

In addition to the success of the whole genome products our iSelect platform had another impressive quarter and became our third largest revenue generating array product.

As a remainder the iSelect is our BeadChip format that enables researchers to integrate over 60,000 SNPs of their choice across 12 samples.

The rapid uptake of these products demonstrates the strong demand for the highest performance genotyping technology provided by Illumina's Bead array platform.

We began shipment of iSelect at the beginning of the first quarter of last year and expanded the platform to include several targeted panels developed with a number of customer consortia.

Just recently, we launched the CVD SNP 55with in collaboration with researchers from the University of Pennsylvania, the Broad Institute, and the Care Consortium to target SNPs in candidate genes associated with cardiovascular diseases such as myocardial infarction, hard failure and stroke.

We also recently announced three animal focused panels.

The first is the Bovine SNP 50 which was developed with collaboration with the U.S.

Department of Agriculture, The University of Missouri and the University of Alberta.

It includes over 50,000 SNPs for selective breeding of traits-- desirable traits among cattle populations.

The Bovine SNP 50 is a great example of the power of Illumina's integrated product portfolio.

We used our sequencing services to discover approximately 23,000 novel bovine SNPs added them to the 30,000 previously known SNPS and then rapidly introduced a multi sample custom array.

This is a strength and capability unique to Illumina.

Second animal panel is the K9 SNP 20 developed in collaboration with the Broad Institute with data from the Dog Genome Sequencing Project.

The third panel which was announced at the Plant and Animal Genomics Conference held recently is the Equine SNP 50 which is currently under development with researchers from University Minnesota and the Morris Consortium.

Both of these products are intended for veterinary and breeding applications.

early in 2008 we launched-- announced the launch of our Infinium HD BeadChip family which is the most significant new development in Illumina's micro array be business since the introduction of our original BeadChip.

Infinium HD or high density is a brand new family of chips that more than doubles the number of data points per chip.

Infinium HD also supports an improved assay offering customers higher sensitivity and the lowest DNA sample requirements in the industry.

The first product launched in the family is the HumanHap 610-Quad which combines the content from our HumanHap550-Duo and the CNV 12 arrays and doubles the through put capability per run.

This product will ship during the first quarter.

The second product launch that we announced is the Human 1M Duo.

This chip uses the same substrait as the 610 Quad with a different gasket configuration to deliver the content of our flagship Human1MB chip in a two sample format We have also enhanced the content of the 1 M Duo to include recently identified disease associated SNPs and high density SNPs in coding regions of the genome.

The Infinium HD family also increases capacity in our manufacturing process.

With record orders in Q4 and a record backlog entering 2008 we are currently running at 100% capacity.

As Infinium HD becomes a larger percentage of our total BeadChip volume we will recognize significant manufacturing capacity gains.

We are extremely excited about continued improvements our teams have made in the Infinium HD product lines and the flexibility the new chip format will provide.

We believe the unparallel quality and performance of Infinium HD product family will fuel robust growth in the genotyping market in the next few years for genome wide association and for target studies.

In fact just over a week ago we announced that the Erasmus Medical Center has purchased 610 Quad BeadChips to whole genome analysis of 10,000 samples to identify environmental and genetic contributors to development from birth to young adult hood.

Illumina technologies enable researchers such as those at Erasmus to accelerate their discovery efforts at an unprecedented pace.

In 2007, our BeadChip technology was utilized for research in over 50 journal publications for genome wide association, CNV and methylation studies compared to 25 in 2006.

For genome wide association studies alone we saw over 35 publications compared to just three in 2006.

These examples are representative of the remarkable dynamics we are seeing in the genotyping market all of course fueled by the increditable pace of innovation.

The market side continues to grow robustly as improved economics are passed on to customers.

Supporting this view of market elasticity, our year-over-year BeadChip sample volume grew 340% to over 530,000 samples.

Turning to the sequencing business now; after the end of the quarter we announced we shipped over 200 Genome Analyzers to date including the 14 that were shipped in advance of the Solexa acquisition.

This represents what we believe to be the beginning of a significant change in the dynamics of the sequencing market.

For the first time individual researchers can rapidly and affordably conduct projects that once required substantial instrumental expense, large operational budgets and years of human capital.

Individual researchers with one genome are generating high quality data in single runs which previously took large teams of researchers running dozens of instruments, months to produce.

In Q4 we continue to see this democratization of sequencing as 2/3 of our business is outside of the major genome centers and broadly distributed geographically.

In addition to our diversified and growing customer base,we have also seen a wide range of applications being run on the Genome Analyzer.

Last quarter we launched a Chip-C kit that enables researchers to run optimized protocols to the analysis of protein DNA interactions on a genome wide scale.

This product adds to the digital gene expression kits we launched in Q3 for MRNA tag profiling and small RNA discovery.

e have received positive feedback on these protocols and see the excitement around migrating specific applications to sequencing that is have traditionally been run on microarrays.

Just this past quarter we saw that over 60% of new end code grant recipients would use next gen sequencing platforms including the Genome Analyzer for applications such as chromatin immuno precipitation, digital gene expression and DNA methylation.

The raw through put and scalable economics of next generation sequencing is now allowing researchers to tackle projects that they previously thought unthinkable.

Two weeks ago an international consortium of genome centers announced the Thousand Genome Project which will sequence the genomes of at least a thousand people to better understand genetic variation to human health.

The Genome Analyzer will be among the next generation platforms that will enable this project and the deeper understanding of the human genome that will come from it.

While we are enthusiastic about the market opportunities in front of us, we have been relentless in pushing the technology forward as well.

We announced last month that we are consistently generating internal sequencing runs of over 3G of high quality data.

More importantly we have a very clear internal development road map to drive through put, lower costs and broaden the scope of applications on the platform.

This week at the 2008 AGBT meeting which is widely regarded as the most important sequencing conference in the industry, we expect to hear Beta site customers to present data from their experience with paired end runs on the Genome Analyzer.

As I mentioned before, this technology provides much longer range information than individual sequence reads and is key to detecting insertions, deletions and structural variation in genome.

Many of you likely saw the press release last month announcing the reorganization of our operating structure into two distinct business units.

This change will address a number of key priorities for Illumina as we manage our rapid growth.

First the creation of a Life Sciences Business Unit will include our Genome Analyzer and Bead Array Reader and Bead Express platform which will more actively exploit the natural synergy between sequencing and genotyping.

Second the creation of a Diagnostics Business Unit will focus our diagnostics strategy and provide the leadership required for Illumina to realize the value from our discovery and validation platforms And third, this new operating structure will serve as a scalable foundation to support our next stage of growth.

We have hired general managers to run both of these businesses.

These new leaders are transitioning from their current roles but both will be on board by April 1.

We will issue detailed press releases when they join the Company.

Last quarter we press released that John West , former CEO of Solexa announced his resignation from the Company.

Last Friday was John's last day at Illumina.

We thank John for his stewardship of Solexa integration into Illumina and for his tremendous contributions in cultivating the new generation sequencing market.

We wish John the best of luck in his new endeavors.

We also announced John Stuelpnagel will move to part time status effective April 1st after having spent ten years building and leading Illumina from its inception.

We look forward to continue to benefit from John's experience as you will advice the company as an Illumina.

conclude we are delighted with operating results and we continue be highly optimistic about the strength of our markets.

2008 will be another exciting year for the Company, a year that holds significant challenges and opportunities for Illumina.

We believe we have the team and technology in place to deliver on our commitments to our customers and to our investors.

Thank you for time and we will now open the lines for

[OPERATOR INSTRUCTIONS] Our first call comes from the line of Ross Muken with Deutsche Bank.

Good afternoon, gentlemen.

Congratulations.

Great quarter.

Thank you.

On the consumable pull through for the BeadStations, can you talk about, now that obviously the HD product is coming to market, what does that do on an annual basis, you know in terms of consumable through put per instrument?

Should we see that likely trend up, stay constant, trend down?

What sort of trajectory is there that piece of the business?

he consumable for BeadStation, Ross, as you know has been running sort of in the range of $600,000 per year per installed unit, and we will continue to run in that range.

Probably what you will see with the new chips is somewhat of an up tick that number, over the next few quarters and then sort of consistent with the previous discussion, it will probably drift down after that as we continue to install BeadStations more broadly in the market and the average utilization rate across the entire install base goes down some.

The second consideration is also the fact we are running right now at 100% capacity in the production of BeadChips and so we probably could ship more BeadChips from a demand perspective than we have on the supply side.

Although we are working hard to keep up with the market and getting better at that over the next couple of quarters.

And on the sequencing side of the business, can you talk a bit about sort of customer adoption and ordering habits based on the different groupings whether it is genome centers, core labs, the ag bio guys, any for of bio tech; sort of what you have seen in terms of the initial round?

Have we seen customers come back and do multiple orders, just set the landscape for how it is develop with in in the different customer groups?

Yes, let me start that off, Christian may have something to add to it.

I would say overall that the customers that have had these units in their labs now for more than a quarter are beginning to put them into true production environments and we are beginning to see the genome center customers take these from sort of the situation where they are exploring the range of applications and different technologies with the system and pushing them into true production environment.

We have began to see strong repeat orders from these customers--n the consumables side It is a little early to know exactly where the consumables per system is going to shake out.

We continue to feel pretty good about our estimates it is in the $150 to $200,000 dollars range as we begin to be able to more that more consistently.

On a new unit placement basis, you know, 2/3 of instruments are going to outside of the genome center.

The fourth quarter was no exception quite frankly.

What we are seeing is with we are seeing a broad up tale if all of the geographical territories with kind of the smaller mid size customers as well as the genome centers.

This truly is in our view, it is a very broad adoption.

would say that we, that this, this broad of an adoption probably surprised us a little bit if you go back to the beginning of the year and thinking of how this is going to roll out.

So we are pleasantly surprised.

And it is really due to the breath of applications, the fact we have protocols that you can buy kits right off the shelf and as Jay pointed to, the consumable ramp really started helping this quarter, so, that kind of gives you a general picture of what's going on in the sequencing side of the world.

And lastly, on sort of the SG&A and head count front, the growth trajectory here sort of continues to be a rate we have never seen before from any company in this space.

Can you talk a bit about the challenges around expanding head count and being able to keep up with sort of this hypernormal, top line growth and does that pose challenges down the line from customer service perspective?

Well, we are aggressively adding people as you know, and you saw us make some significant progress in that in the fourth quarter,so you saw particularly in the sales and marketing side that we were able to bring more people in the fourth quarter to get closer to our plan.

Going forward we need to add more people particularly in the sales and marketing side.

But we are optimistic about our ability to do that.

We are starting to get better at training people internally.

We are setting up what we call Illumina University to allow us to do that more effectively.

What that permits us to do, is to hire people that are some what less experienced and start to grow our own people in the sales and marketing side of the business and tech support as well.

So that's beginning to help enormously.

A lot of the challenges is to help as an organization we keep our hiring standards high, that's the senior management is very focused on to ensure we don't compromise in the types of employees we hire into the Company.

Thanks, guys, congratulations again.

Thanks, Ross.

Our next question comes from the line of Quintin Lai with Robert W.

Baird.

Hi, good afternoon.

Congratulations on a nice quarter and another good year.

Thanks, Quintin.

You are at the forefront of two of the fastest growing dynamic markets both genotyping and next gen sequencing.

Could you give us a little bit of perspective on how those two are mimicking each other with respect to the development.

Because you kind of made comments in the prepared remarks that genotyping has seen a lot of product evolution and pick up in let's say less than two quarters.

Could next general sequencing go through that similar type of evolution?

Could next gen sequencing go through that similar type of evolution?

What we see in the genotyping side, Quintin, is a very rapid evolution of the chips.

So the instrumentation has not evolved all that quickly.

But we continue to figure out ways of packing more information on chips and broadening the application base.

In that sense it is some what analogous to sequencing, we are continuing to figure out ways to improve the performance of the system.

When we acquired Solexa earlier in the year, the instrument was capable of a 1G through put and now we are constantly getting 3G throughput.

We broadened the applications we run on the system, so that makes it appeal to much larger audience of potential customers.

I guess, in that way we do see some parallels is happening in genotyping and in sequencing.

There's to doubt the pace of innovation in both of these markets is going to continue to be very rapid.

In genotyping primarily you compete with another major competitor and if you would, give us a little update there.

But then in next gen sequencing not only do you compete with several people but then you also have all of these other new potential players trying to enter the market.

Could you kind of compare and contrast at the competitive landscapes for both right now?

Yes, I think on the genotyping side, we have continued to make great progress there, our competitive position is very strong.

We continue to have the ability to command premium prices because of the sort of the breath of the product line and the quality of the chips.

So not a lot of change in the competitive products.

We feel real good about the future of our technology there.

On the sequencing side, you are right in the long run there's going to be more competitors but today we are really competing against one or two companies.

And what we need to do as on organization is continue to innovate very rapidly so we can be the company that's still ahead two or three years from now.

t is clear if you just do it in a small base count that we are leading in the next generation sequencing market right now.

But the imperative is to ensure that we have that position a couple of years from now.

We are very focused on that.

In fact one reason we put together the sequencing unit is to bring more clarity to how we do that and get these technologies really revved up to make sure a couple of years from now we are the leading company.

Thanks for that: one quick question and I will get back in the queue.

Christian, did you stay stock base comp in '08 is going to be $40 million expense and $0.65 of EPS?

Was that pre tax?

Yes, actually the difference--it is pretax but there's not going to be a huge difference between pre tax and after tax on that line because we flipped our valuation allowance in the fourth quarter and therefore, it changes the way you think about the accounting on a tax, from a tax perspective of the stock comp expense.

We did just over $33 million in stock comp this year, something like that and we are adding roughly $7 million or so as for the full year effective all of the people we hired.

If you think about it, we ended the year with over one thousand employees.

We added almost 500 employees in 2007.

We will probably add similar kinds of numbers if not a little more in 2008.

We have, we have moved and changed our stock option granting practices.

We have actually eliminated many of the different level that is get stock options.

We have moved a restricted stock.

We are working to mitigate that expense some what by lowering the amounts and changing the nature of the grants.

But the reality is when you are growing as fast as we are, you know, it is an important incentive.

We are going to need to keep doing that.

Thanks.

Our next question comes from the line of Tycho Peterson with J.P Morgan Chase.

Hi, good afternoon.

Hey, Tycho.

Actually, Christian, maybe just following up on the last comment you made about the head count addition, just trying to think--I know you backed off from giving SG&A guidance specifically, but can you give us a sense as to it was a little high in the fourth quarter.

Is that predominantly from head count or were there legal things we should think about getting backed out and going forward?

Yes.

there was some legal as well.

We did add a lot of head count in customer support and sales and marketing.

I would say legal was a contributor, contributing factor in terms of external legal expenses.

Which I am happy to report that number should be getting lower as time goes on here, but there was a bigger contributing factor of head count in the number.

Okay.

We actually had to do a catch up from Q3, behind in Q4 3-and more successful in Q4.

Maybe just broadly can you give us a sense of where your hiring, new geographic reps?

Are they adding new capabilities in house?

It is actually.

We are hiring a lot of folks internationally in terms of sales and customer support.

If you look at 2008 we are also opening our plant in Singapore, so we are adding head count there.

Jay, do you have anything to add there on that one?

No.

I would say we are biased a little more heavily in '08 toward strengthening in Europe and Asia.

That's right.

Our business very strong in North America.

We have a great team on the ground here.

If anything we are a little lighter in Europe and Asia.

So it is a little biased in that direction.

Okay.

With the Infinium products you talked about, Jay, earlier-- Can you give us a sense, you talked about the initial work and targeted study, how longer term, are there other markets opened up here and how do we think about where you see the demand going?

Well, we continue to discover as do our customers new ways of using these array technologies, if you think about it, the whole area of copy number variation is now a very important area of study and a couple of years ago, nobody even talked about copy number variation.

e have the ability now to implement methylation on chips, and we have announced a couple of products, one Infinium based, one GoldenGate's using methylation.

So we think that's a very important market going forward.

And in the study of cancer it could drive a very large opportunity there, still early to tell how large it is going to be but we are pretty optimistic about it.

As we learn about the genome in these efforts, it is going to spawn many new and interesting way to use chips as we discover more about the content and the structure of the genome, and have the ability to build out that content in a more defined way on arrays.

So that's again a way that sequencing and chips are going to work together in the future.

Okay.

And then one last one for Christian on the tax rate.

Can you give us a sense when you think that starts to come down?

Is it really '09, the Singapore ramp?

I think the the tax rate in the second half of the year will be better than the first.

So technically I think, in the back half it will get better but we won't get the full benefit of Singapore for a full year here.

So yes, '09 is when you should come in, and it really of course it is dependent on how much we manufacture over there, how much of your income is kept and consequently how much income is kept offshore.

Because that is what is driving the tax rate down.

So it will also be dependent on growing X U.S.

revenues which one of the reasons you see us hiring a lot of people in Europe and Asia is because we see such a large opportunity in front of us there.

Okay.

And given kind of the head count addition, you laid out pretty clear kind of three-year pro forma operating targets.

Have there been any change to your view on that kind of 20% to 28% operating margin longer term?

Not at this point.

I mean, we have done, we are performing inside those changes if not slightly better than the midpoints for the most part.

You know, we are obviously trying to do the best we can, build the best business we can.

But I think here in 2008, we need to make sure we are investing so that in 2010, 11, 12, we have got truly a global leading Life Science Business.

Terrific.

Thank you very much.

I have one more comment on your first question on the comment on the growth of arrays.

e thing I didn't mention, what we think going to be very non human application.

So the emergence of the ag market as we can develop chips that are very inexpensive for sample.

It opens up large scale screening applications in the ag states, and the use of the sequencer to do discovery in other organisms that haven't been sequenced before opens up brand new opportunities to use dedicated chips to use screening.

And then lastly we have talked a lot about the emergence of the consumer genotyping market and we think that is going to be a huge growth area in the next few years as well.

Can you comment on how that's going?

I know they have launched in Europe and Canada as well.

It is going well.

We are not announced specific volumes but the up tick is good, and the lab is busy.

They have broadened as you indicated.

They began, really only in the United States and have now launched this internationally.

It is early but we are optimistic.

Okay.

Thank you.

Our next question come cans from the line of Doug Schenkel with Cowen and Company.

Go head.

Hi, good afternoon, and thanks for taking my questions.

Sure.

Maybe I will I will start with a follow up to one of Tycho's questions.

At your Analyst Day in September, I believe you talked about a three year tax rate of 28% to 32%.

Given your guiding 36% this year, does this guidance still apply?

Clearly, I am just trying to get at a potential tax savings number associated with the Singapore expansion.

Yes, I don't think there's any significant changes.

I mean we flipped our valuation.

We had a lot of things going on in the tax and, tax in the fourth quarter of course and 2007 was kind of lumpy for a lot of different reasons.

But, when you look at 2008 we were considering possibly having the Singapore plant on line sooner which would have created a lower tax rate but we feel comfortable when we are launching but I don't think it impacts 2009, 2010.

It really just impacts this is current year.

Okay.

Quarterly updates from your and some of your competitors suggests that genotyping demand remains pretty robust and in fact that gene expression demand may be rebounding, although that's probably pretty modest?

Given you talked about chip production at capacity, you have been close to this, this rate of capacity for a little while.

How are you actively or proactively managing the risk of losing share and are you comfortable others aren't gaining share at your expense due to capacity constraints?

We are pretty that convinced our capacity share is staying stable at the worst, and the business is very robust.

We are working on the capacity constraints actively.

We are adding new systems into manufacturing almost everyday to build capacity.

ne major change we are going to have, I alluded to in my remarks, is that the Infinium HD product line going to a Quad base for the 610 and a Duo based chip for the 1M will radically improve i our capacity in terms of the number of the chips we can produce.

So that is going to be a huge help as those products come on line in the next three or four months.

And that gives a step function change in capacity.

So we are pretty comfortable with where we are going to be in is second quarter.

With respect to expression.

Yes, our expression business has been very good and grew nearly 100% year-over-year.

Hey, Doug, one thing I did make in my remarks, the biggest component of cap-ex this quarter was manufacturing equipment for BeadChips.

We are adding capacity.

We have add you might be aware, we make our own manufacturing equipment and we have a production line that's going that is one of the actually, the competitive advantages we have, is that the cost of the equipment is pretty modest and our ability to modulate capacity is pretty good within say kind of a two to three month window here.

We are adding capacity every month right now.

Okay.

That's great.

I was going to ask.

The the investment you guys have made and are making there, you know puts you in a position where even advance to Singapore it is fair to assume you can be expanding within one to two quarters; correct based on what you just described?

Yes we are expanding continuously.

Okay.

And just sorry go ahead.

Well, Doug, just to reiterate what Jay said, when all the sudden you can put four samples on one chip versus two samples, that dramatically increases our capacity.

Right.

As Jay said, it is truly a step function.

And so as we start shipping those chips late they are quarter we are going to see some major relief there.

Okay.

That makes sense.

Can I just ask one more on sequencing?

You know, now that we are almost a year into the next gen roll out, especially given you talked about 2/3 of recent placements being made outside of the large labs, can you talk about any challenges more specific to these labs and do you have any plans to go further into facilitating data processing and data managed as a competitive differentiator with this part of the market?

Yes, yes, we will, Doug.

Select think the biggest challenges in the small labs are in the pneuphonatic side, having both the compute infrastructure number one and also the ability to sort of run the software and do the data analysis.

We are working very hard on the back end of the product line which is making the analysis software package more and more shrink wrapped for that market if you will.

We are making good progress there.

It is not fully available yet but it will be.

We are also doing things like, defining very clear computer configurations to those customers.

We have a program underway that's going to help dramatically reduce the amount of data that actually comes off the system.

That new capability will come to the market fairly quickly and provide a great relief for not only the single use customers but also the GM centers.

Great.

Thanks for taking my questions.

I will get back in the queue.

Our next question comes from the line of Derik DeBruin with UBS.

Go ahead.

Good afternoon.

Hi.

Hi.

So, when you look at the launches and what is going on, iSelect mean you shipped 200 of them, could we potentially be looking at a situation where you have a bolus of launches in 2008 and then things potentially trickle off a bit?

I am just trying to get a since for what is real think potential run rate for DNA sequencer placement in the size of the market.

Bolus and launches,you mean other players coming into the market?

I mean you are shipping a lot out this year or shipping a lot out, are you guys going to have a massive initial uptake and then things trick trickle off.

I am wondering how you see instrument placements of the 1G going forward.

We don't think that's howl the market is going to roll out.

We see very broad demand, lots of people putting in for significant funding to participate in this market the emergence of very large programs like the Thousand Genome Program and many more like it, that are of scale that no one has talked about before.

And the sequencing demand in the marketplace, we characterize it as insatiable for ten years.

If you look at all of the researchers in human and all the organisms, all the cancers and if you snap all of that out, we can't produce capacity enough sequencing capacity.

It really comes down to the level of funding that's available and we believe that's going to be very robust the next years.

Okay.

So you wouldn't think that something of a 200 system placement run rate on annual basis is unusual?

Nope.

Okay.

I guess looking at your R&D expense, are you still comfortable with the idea of something in the 15% to 17% range going forward?

Sure.

Very comfortable with that.

Okay.

And when you look at the DNA sequencers, do you have any good idea yet what the consumable poultry is going to be for instrument?

We are start to go get early indicators but they're not, these early data points are going to be along a curve that's going to get us to more of the steady state, and our best estimates that we had previously, we think is still our best estimate, that's 150 to 200,000 per installed instrument.

I'd say two quarters from now, enough points on the curve to really know what the number is, but it is too early to say we know the numbers.

Okay.

And just a housekeeping question, so the, I might have missed it-- the cap-ex guidance.

We didn't give explicit guidance for cap-ex.

But it is going to be, it is we are going have a big year of cap-ex because we have a lot of facilities expansion projects going on.

It will probably be just north of $40 million or so in total cap-ex, somewhere north of that.

I will keep you up dated on that as we move along but we have our Singapore expansion, we have an expansion here in--we have actually two expansion projects in San Diego, one reagent manufacturing, two, an expansion our to our corporate head quarters.

And we also have an expansion project in the U.K..

where we are going to be adding another 40,000 square foot building to support our European base of operations.

That building actually substitutes for the space we have so it is not incremental to the space it is just a new building.

Yes, but there will be cap-ex associated with building it out.

That's right.

Okay.

It is a big year.

We did $24 million or this so this year.

It will be, you know, our biggest year in cap-ex at least since I have been with the company in 2005.

Okay.

And just one final question going back to the--I am getting a lot of questions from investors on the stock option guidance.

So you were saying that essentially the pre tax and after tax are essentially the same level?

Yes.

They pretty close.

That's right.

Thank you.

Thanks.

Our next question comes from the line of Jon Groberg with Merrill Lynch.

Go ahead.

Hi.

Good afternoon and good luck with all your conferences you have coming up.

Thanks.

Quite a number.

My question is going to maybe tie in a number of thing that is have been brought up but the biggest as you talk with investors the biggest concern I think everyone has is that.

everyone thinks that many this space a company like yours is destined to collapse as every one do at some point.

They hear the story of you predicting very strong revenue growth, but saying things like, the very rapid product cycles which theoretically could allow competitors to also take share in those cycle.

They hear things like 2/3 outside the genome centers but are you having challenges in the genome centers, not with standing what you just said about sequencing.

They hear about the expansion into Singapore and there was a very well known competitor of yours that went through this process of expanding to Singapore, they didn't match capacity with revenue growth.

So, I guess it's a fairly nuance question but what gives you the confidence in the revenue growth numbers you have put out there and then two; how are you, can you maybe describe how you are moving to Singapore, is it also staged in the sense how you expand your production there in California?

Or how do you insure you don't have excess capacity in the case the revenues don't materialize as you expect?

Okay.

There were a lot of questions embedded in there.

Let me give it a shot.

To answer the question mostly, I think all of the concerns you began with relate to sort of the quality of execution.

As a Company, we have been very focused historically and going forward, how well we execute, how good our systems are, how well our processes work, how rapidly we can develop product, how efficiently we can do that.

And we have no reason to believe we are going to get any worse in that as we scale up.

One of the challenges that many companies have is they do grow rapidly, and if they don't have the infrastructure in place as they enter those rapid growth curves, the infrastructure falls apart because they don't have the process in place as reported.

As a Company we have invested heavily historically in those processes and they're working.

I guess at 30,000 feet, that's what initially gives us a fair amount of confidence.

If you look specifically at the revenue ramp, we measure our pipeline in lots of different ways, we have a very strong backlog.

We have a very strong pipeline of business that we expect to come our way.

We measure that on a statistical basis, so we assign probabilities to all of the deals we have in the pipeline as they move through pipeline and we have a rich family of new products coming to the market in the next 12 to 18 months.

All of those things combined with what we see happening on the demand side from the market make us feel confident about our guidance.

In the case of Singapore, one of the reasons we decided to slow that and do it in Q4 instead of Q3 was to make sure we can do it very, very smoothly.

As we talked earlier our capacity increments are pretty small.

We have the ability to move over five or ten decoders into Singapore and begin to shake those out without having any impact on the capacity here in San Diego--get it ramped up, get the process all established and ship the next ten over to Singapore.

So we can do this in a gradual way, if it goes well, we can do it faster, issues we can do it slower.

It is a manageable process.

The lease is done on the building, so all of that is in this place we are look at the hiring side of it.

We are confident we can pull it out too big of a hiccup.

The other thing, John is we still have space in San Diego to increase capacity.

We be build out all of our capacity in San Diego.

Our intent is to really use Singapore as our incremental capacity.

So that's another key reason why we think that, maybe we can do it in a different way than others have.

One thing I can say is that as Jay pointed out system wise, we have better visibility into our pipelines than any company I have ever been at.

And I think that gives us a, gives us a sense of knowing or at least understanding where the opportunities are.

Sure, with any plan there's always risks and execution challenges but if you look at what we have done the past three or four years, it would be difficult to argue that we have not been able to execute.

So as we scale, you know, we are just keeping our heads down, focusing on what's important.

That's driving this opportunity.

Okay.

Great.

Thanks a million for your explaining that.

A couple of questions about competition or market share.

Jay, I think you mentioned on the array side you thought your share was stable and thinking about genotyping specifically.

Have you noted, you think I think before it was much better than stable at worse.

You were gaining quite a bit of share there.

Have you noticed a change in dynamics there.

I think you mentioned your gross margin were steady, so I assume ASPs for the chips themselves were steady but talk about the dynamics there.

And also obviously you have a big competitor who has launched on the sequencing side and ,maybe you can discuss the competitive environment you are seeing on that side as well.

Sure.

In general it is a competitive space, we have grat competitors in both the array and sequencing business.

We think on the array side, the competitive landscape has been pretty stable.

We have seen huge growth in our multisample products particularly the iSelect 12x1and that's area we really don't have competition and that part is growing substantially.

I think the whole genome side we continue to do extremely well there in addition.

So I feel comfortable with going on in the array part of the business.

In the sequencing side, you are right, there is very a large competitor we have in that space who has been the largest player by far the sequencing side and they will be with in this market.

The question is what are the relative market sharing going to be going forward, and we keep working hard to improve the system at a rate that keeps us ahead of the competition.

There's no doubt this is a competitive market with that competitor and others in the future.

Great.

And last question, just a quick question.

On another call, the company that bought USB mentioned that they were a supplier to some of their competitors and they were going to re-evaluate or analyze that.

USB a supplier to you guys?

I don't think we have any risk there that with we know of.

Okay.

Thanks.

Our next question comes from the line of Bill Quirk with Piper Jaffray.

Go ahead.

Great.

Thanks, good afternoon.

Jay, can you give us a quick update on the genome manufacturing capacity?

You have commented in the past about expansions here.

I am trying to figure out, should we be thinking about more of an on going improvement to expand capacity or is this situation obviously with very strong demand, where we need to add more lines or more shifts et cetera.

On the sequencing side?

Correct.

Yes.

We are doing really well on the sequencing side in terms of capacity growth.

We don't need right now at least to add more shifts but we have the ability to do that if we have to.

The product is at a point where it is beginning to go become very stable in terms of the design changes going into the product.

We are going to get more efficient as we go forward and allow us to produce more instruments per unit of labor than we put in.

We are feeling overall really good about what the team in Hayward has been able to do on the manufacturing side.

Okay.

Great.

Then Christian just to flush out an early questions, can you give us an idea of what the legal spend was related to Affy during the entirety of fiscal '07.

Actually, you know what, we haven't disclosed it.

It is probably not appropriate to disclose it here.

Just last quick housekeeping question, Jay, the internal data where you are generating three gigs consistently, presumably this is with (inaudible).

Yes.

okay.

Thank you.

Our next question comes from the line of Un Kwon-Casada with Pacific Growth Equities.

Go ahead.

Hi, good afternoon.

Hi, Un.

I was wondering, you had indicated you had record BeadStation sales in the quarter, can you give us an idea of where these are placed, internationally or current customers adding additional capacity.

All of the above.

So we continue to get additional orders from existing customers who want to do more and do it faster.

We are seeing broadening of the market as the applications broaden.

Customers buying units for a particular new application on the system.

And the geographic distribution is pretty much along the normal lines of our business overall.

So no strong bias one way tor other geographically.

Okay.

Thanks.

And just secondly, can you talk about ASP trends for your BeadChips, especially as I iSelect and your multi sample chips become a larger component of your revenue, do you see ASP going up for your product and gross margin expansion along with that or do you see it stable?

ell, an sample basis over time we expect the ASPs to continue to decline, and that's what has driven the growth of the genotyping market is we and others continue to drive down the price to analyze a single sample for the customer.

On top of that is of course our multi sample strategy which allows us to take the, to take the overall price per BeadChip and once we do a doubling, we get more value per single chip.

That has a digital component on it that overlays the per sample basis in the marketplace.

If you look at sort of what's happening right now, the price per chip is relatively stable and it will probably drift up the next couple of quarters as we launch the new products and then gradually drift down as we introduce new products and go back up.

Okay.

Great.

Thanks very much.

Thanks.

Our next question comes from the line of May-Kin Ho with Goldman Sachs.

Go ahead.

Hi, most of my questions have been answered, but in terms of the Life Sciences versus the Diagnostic Businesses, can you talk a little bit about what the three top priorities could be for these Diagnostic Business in the coming year?

Let me give you the top priority and stop after the top one too make sure that we have a very well defined articulated and executable strategy in place for diagnostics.

As you know, it is a market with lots of opportunity and lots of competitors.

We have initial work we are doing in the things we talked about publicly such as the relationship with decode and what we are doing on the Bead Express platform, and it goes to go beyond that in clearly understanding where we can have competitive advantage and take advantage of the other technologies we have to build that competitor advantage.

That's what we are focused on the next six to 12 months is get that strategy defined and underway, to get it done.

And do you think you would need a partner on the instruments side?

Not likely.

So be Bead Express is a very capable instrument for doing low multiplex genotyping, expression, methylation and other applications and so we think we have that covered, and clearly there is going to be a large and emerging market for sequencing diagnostics as well.

We have the platform to do that.

It may not be the existing version of the instrument.

We would not need a partner to help develop that.

Where we may look to partner if the future would have to do more with potential content acquisition or maybe in some cases selected distribution.

And on the Genome Analyzer, if you look at the way that the genome centers versus the non genome centers, how they use the instruments or the technology, can one think about different amount of consumables that they will be using per instrument?

You mean versus a non genome center?

Right.

What you are likely going to see is a some what lower utilization in non genome but most of the customers who buy these, there's so many exciting things to do with them it will keep them busy we expect.

It is not going to be the case that someone will buy an instrument and use it 20% of the time.

That's true because when you,-- the runs aren't a half hour long like they are scanning some of the rays.

You turn on an instrument and it takes three days to five days to complete a run, so what that means is the overall utilization probably across the entire base is going to be more level than perhaps you would see on a Beadchip scale.

Okay.

And then lastly just how is the impression on the revenues this past quarter?

Was any currency impact?

No, May-Kin we are booking most of our revenue in U.S.

dollars, we really didn't have any currency impact in the quarter.

Okay.

Thank you.

Thanks.

Ladies and gentlemen, that does conclude the time that we have available for questions tonight.

I would like to turn the call back over to Mr.

Fromen for any closing remarks.

Please proceed, sir.

Thanks, operator.

As a remainder, a replay of this call will be available in webcast format in the investor section of our website as well as for the dial-in instructions contained in today's earnings release.

Thanks for joining us today.

This concludes our call.

We look guard to our next update following the close of the first quarter.

Ladies and gentlemen, thank you for your participation.

That does conclude the presentation.

You may disconnect.

Have a wonderful day.