Illumina Inc (ILMN) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2008 Illumina, Inc.

earnings conference call.

My name is Krista and I will be your coordinator for today.

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

We will conduct a question-and-answer session towards the end of this conference.

(Operator Instructions).

As a reminder, this conference is being recorded for replay services.

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 third quarter 2008 earnings call.

During the call, we will review our financial results released today after the close of the market, offer commentary on our commercial activities, and provide financial guidance for the fourth quarter in fiscal 2008, after which we will host a question-and-answer session.

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

Presenting for Illumina today will be Jay Flatley, President and Chief Executive Officer, and Christian Henry, Senior Vice President, Chief Financial Officer, and acting General Manager of the Sequencing business.

This call is being recorded in the audio portion of the archive in the Investor section of our website.

During the call, we will be discussing our financial guidance and 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 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 factors, we refer you to the documents that 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 that Illumina will be holding an Analyst Day on November 6 at our new headquarters in San Diego.

Additionally, we will be participating in the Piper Jaffray Health Care Conference in New York on December 2, and the Deutsche Bank Med Tools Technology Investor Day in Boston on December 3.

For those of you unable to attend the Analyst Day or any of the upcoming conferences, we encourage you to listen to the webcast presentations, which will be available through the Investor section of our website.

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

Good afternoon, everyone, and thank you for joining us today.

During today's call, I will review our third quarter financial results and provide guidance for the fourth quarter and its effect on 2008.

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

Q3 was another strong quarter for the Company.

We reported our 29th consecutive quarter of revenue growth with total revenues of $150 million.

This represents 54% year-over-year growth and approximately 7% sequential growth.

Product revenue was $140 million and grew 56% over Q3 of last year and 9% sequentially.

Our revenue growth was driven by nearly equal contributions from our microarray and sequencing product lines.

Consumables revenue totaled $90 million for the quarter, compared to $53 million in the third quarter of 2007 and $82 million last quarter.

This represents growth of 71% year-over-year and 10% sequentially.

In dollar terms, consumable growth continues to be driven by strong demand for the Infinium HD products.

During the quarter, we not only shipped more whole genome Infinium samples compared to last quarter, but recorded higher ASPs on both a per-sample and a per-chip basis.

Sequencing consumables delivered another strong quarter, growing 28% sequentially, driven by the growing installed base of Genome Analyzers and the progression of customer labs ramping up to production scale.

Q3 instrument revenue was $47 million compared to $34 million in the prior year period and $43 million last quarter.

This represents year-over-year growth of 37% and 8% sequentially.

During the quarter, revenue from Genome Analyzer sales was up 66% over the third quarter of last year, as we recognized revenue on a record number of Genome Analyzers.

Additionally, we continue to see strong demand for the system as we head into the fourth quarter.

Services and other revenue, which includes genotyping and sequencing services as well as instrument maintenance contracts, was $10 million compared to $7 million in Q3 of last year and $12 million last quarter.

Revenue in our service business is highly dependent on the timing of customer contracts, as we do not recognize any revenue until we have achieved specified milestones in the specific contract.

As we have mentioned in the past, we continue to expect services and other revenue to fluctuate from quarter-to-quarter as a result of this factor.

Before discussing our gross margins and operating expenses for the quarter, I'd like to highlight that we recorded a pretax amount of $13 million related to non-cash stock compensation.

This impacted our EPS by a tax-adjusted amount of $0.07 per share.

In my discussion of operating expenses, I will highlight both our GAAP expenses, which includes stock compensation expense, and the corresponding non-GAAP figures.

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

Total cost of revenue for the quarter was $57 million compared to $38 million in Q3 of 2007.

The Q3 2008 cost includes stock-based compensation expense of $1.2 million compared to $1.1 million in the prior year period.

Excluding this expense and $2.7 million associated with the amortization of intangibles, non-GAAP gross margin was 64.6%.

This compares to 65% last quarter and 63.1% in the third quarter of 2007.

The sequential decrease in gross margin was attributable to a lower mix of fast track service revenue, as well as one-time charges for incremental inventory reserves of approximately $2 million.

During the quarter, we launched a new sequencing kit that provides better performance at substantially lower cost.

As a result, some of the components required to make the old kit were deemed to be obsolete, which required us to record the inventory reserve.

On a year-over-year basis, the increase in gross margin was led by the strong uptake of Infinium HD chips, but also by significant improvements made in our sequencing consumables gross margins.

Given that we began shipment of our new sequencing kits towards the end of the quarter, and the related one-time gross margin impact of inventory reserves associated with the transaction, we anticipate sequencing consumable gross margins to improve into the fourth quarter.

Research and development expenses were $28 million in the quarter, compared to $20 million in the third quarter of 2007, including $4 million and $3 million, respectively, in non-cash stock compensation expense.

Excluding stock compensation expense and $0.6 million of accrued contingent compensation associated with Avantome this quarter, research and development expenses were $23 million or 16% of revenue compared to $17 million or 18% of revenue in the prior year period, and $20 million or 14% of revenue in the second quarter.

The sequential growth in R&D spending was due primarily to the ramping costs associated with our Singapore manufacturing facility and the absorption of Avantome's R&D expenses.

On a year-over-year basis, the increase in R&D spend was primarily attributable to the increased headcount.

SG&A expenses were $39 million compared to $24 million in the third quarter of 2007, including stock compensation expense of $8 million and $5 million, respectively.

Excluding these non-cash expenses, SG&A was $31 million or 21% of revenue, compared to $19 million or 20% of revenue in the prior year period, and $28 million or 20% in the second quarter of this year.

The sequential increase in SG&A as a percentage of revenue was largely the result of the timing of certain commercial expenses, as well as increased headcount.

I'd like to now take a minute and discuss our accounting for the acquisition of Avantome, which was completed on August 1, 2008.

As a reminder, we paid $25.8 million in cash upfront, including transaction costs, and we may pay up to an additional $35 million in cash, based on the achievement of milestones.

Upon the completion of the transaction, we recorded a one-time charge of $24.7 million related to the acquired in-process research and development expenses.

Additionally, we [include] compensation expense of $0.6 million associated with contingent consideration based on employment milestones.

This amount is included in research and development expense.

Going forward, we expect to record additional compensation expense associated with the contingent consideration of approximately $0.9 million on a quarterly basis for the next 12 quarters, until the employment milestone is achieved.

Our non-GAAP operating profit for the quarter was $42 million or 28% of revenue compared to $25 million or 26% of revenue in the third quarter of last year.

This represents year-over-year operating profit growth of 69%.

Interest and other income was $2.4 million for the quarter compared to $4 million in the comparable quarter of 2007.

Although we received $343 million in net proceeds from our secondary offering in August, interest income was lower, due to the mix of investments in our portfolio.

Given the current environment in the financial markets, the majority of our portfolio is invested in treasury and agency-backed securities.

This has had a negative impact on our anticipated yield of the portfolio, but has provided both safety and liquidity, the two most critical drivers of our investment policy.

On a GAAP basis for the third quarter, we reported a net loss of $7.3 million or $0.06 per basic share compared to a net income of 14.5 million or $0.12 per diluted share in the prior year period.

The GAAP net loss for the quarter was directly related to the in-process research and development charge associated with the purchase accounting treatment of the Avantome acquisition.

Excluding this charge as well as the impact of non-cash stock compensation expense, the amortization of intangibles, the accrual of contingent compensation related to Avantome, and net of certain tax benefits, non-GAAP net income was $28.6 million or $0.22 per diluted share compared to $19.9 million or $0.17 per diluted share in the third quarter of '07.

Reviewing the cash flow statement and the balance sheet, we generated $27 million in cash flow from operations during the quarter, compared to $5 million in the comparable period of the prior year and $37 million in Q2.

Backing out approximately $15 million for CapEx during the quarter, we generated $12 million or $0.09 per pro forma diluted share, compared to third quarter of last year, when we were free cash flow breakeven.

Accounts Receivable DSO was 75 days during the quarter, which is consistent with that of the third quarter of last year.

Depreciation and amortization expenses for the quarter were approximately $7 million.

And we ended Q3 with approximately $701 million in cash and investments.

$52 million of our investment portfolio is held in auction rate securities, which we reclassified as long-term in the first quarter.

UBS has recently offered to guarantee the repurchase of these securities over a two-year period beginning June, 2010.

I will now update our financial guidance for the fourth quarter in fiscal 2008.

Consistent with our previous calls, the following guidance excludes the impact of certain non-cash charges, including the amortization of intangibles, the write-off of manufacturing equipment, charges incurred in connection with the acquisition of Avantome, and the impact of stock-based compensation related to FAS 123R.

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

We expect 2008 revenue to be between $564 million and $568 million, representing growth between 54% and 55% over the 2007 results.

This is an increase of $11 million over the mid-range of the 2008 guidance that we provided just last quarter.

We continue to expect gross margins for the year to range in the mid-60s.

We expect non-GAAP earnings per share between $0.84 and $0.87, and this assumes pro forma, fully diluted weighted average shares outstanding of approximately 130 million shares.

As a reminder, the pro forma diluted share calculation excludes the accounting impact of our convertible debt outstanding.

The Q3 number is included in the reconciliation to GAAP figures that accompanies today's press release.

For the fourth quarter, we expect revenue to range between $152 million to $156 million, which represents year-over-year growth of 35% to 39%.

We expect gross margin in the fourth quarter to exceed 65.5%.

Excluding the impact of stock compensation expense and the amortization of intangible assets, we expect fourth quarter non-GAAP earnings per share to range from $0.22 to $0.24.

This assumes pro forma fully diluted weighted average shares of approximately 134 million.

We anticipate non-GAAP annualized tax rate of approximately 36% for 2008, and we expect pretax annual stock comp expense to be approximately $50 million or $0.25 per tax adjusted pro forma, fully diluted share.

And as we have emphasized in the past, this expense is highly dependent upon our underlying stock price.

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

Jay?

Good afternoon, everyone.

I'm pleased to report another strong quarterly performance for Q3.

We grew the top line by 7% over Q2 and 54% over the third quarter of last year, which has put us in a position to deliver another outstanding result for the full fiscal year.

The new products that we launched in the first half of the year were responsible for the majority of our growth and have continued to drive substantial new orders.

Another strong order quarter resulted in an ending backlog consistent with the record we reported last quarter.

We delivered operating profit of over $42 million, growing 69% over the third quarter of last year, demonstrating favorable operating leverage.

While our year-over-year performance was notable, our sequential operating margins declined slightly, due to several one-time reserves related to product transitions and the start-up costs in Singapore that are reflected in our R&D expenses.

I'm delighted to report that we're now shipping BeadChips to customers from our Singapore factory, and we expect to supply over 25% of our Q4 Infinium chips from this new facility.

Our strong top line performance resulted from continued strength in the core markets we serve.

I expect some of you will have global questions surrounding the recent economic and market turbulence, and any impact that might be expected on Illumina's business, so let me attempt to address these questions upfront.

In terms of overall funding, we've continued to see positive allocations toward next generation sequencing and genetic analysis research from economies around the world.

It's difficult to predict what will happen to the NIH budget under a new administration, although both candidates have indicated a desire to increase it, at least prior to the recent $700 billion bailout.

We do not believe that a flat to modest decline in NIH spending would materially impact our business, given that funding allocations will continue to favor innovative technologies and the novel methods, such as ours.

And since our commercial business represents less than 20% of our overall revenue, our exposure from this sector is also minimal.

As I've mentioned in past quarters, a critical product transition this year was the launch of our Infinium HD BeadChips.

The first product in this family, the Human610-Quad, began shipping at the end of the first quarter; and now, through the end of the third quarter, we've shipped more Infinium HD revenue than the entire Company generated in all of fiscal 2005, representing what has been the most successful product launch in Illumina's history.

In Q3, the 610-Quad was our leading BeadChip product, followed by the Human1M-Duo and then our 12-sample iSelect line of custom and focused content arrays.

I've often spoken about the flexibility that our iSelect product offers and the opportunity for its application in the applied markets.

I've used our BovineSNP50 as an example, citing the value that we can deliver to our customers through integration of novel content discovered using our Sequencing Technology.

As a reminder, approximately half the content on the Bovine chip was generated using the Genome Analyzer.

Just this quarter, we received orders for over 53,000 bovine samples, representing the second quarter in a row with order value in excess of $6 million.

Our bovine chip is our first of a family of focused content products launched into the ag/bio markets.

At the end of the first quarter, we launched the iScan System, the scanner that replaced the BeadStation.

As a reminder, iScan enables researchers to scan their BeadChips six times faster than the BeadStation.

We've been very pleased with the order rate for iScans, but expect to see somewhat fewer instrument placements due to the higher scan rate.

Of course, this is expected to have an upward impact on average consumable rates.

We've been delighted with this trend, and have had two consecutive quarters with annualized consumable revenue per installed system exceeding $700,000, and I should note that this average is across all BeadStations and iScans combined.

Continuing with the array business, we're steadily growing the installed base of the BeadExpress Reader, our system for low to mid-multiplex genotyping, gene expression, and protein analysis.

Demand for the platform is growing across a wide range of customer types from high throughput screening labs to ag/bio and pharmaceutical customers.

Admittedly, we had initial challenges in scaling manufacturing, which limited our ability to deliver.

These scale challenges are behind us, and I'm happy to report that we're routinely delivering the systems and the reagents on schedule.

In fact, in the third quarter, we shipped more VeraCode reagents than we had collectively since the launch of the product.

This system will be an important ingredient in our diagnostic strategy.

Moving to the sequencing business, we once again shipped a record number of Genome Analyzers.

Customers have been very pleased with the performance and reliability improvements that we've made with the launch earlier this year of a GA2.

90% of the installed base of the original Genome Analyzers have now either taken shipment or ordered a GA2 upgrade to their systems.

This quarter, we began commercial shipment of our new sequencing reagent kits, which have simplified our customers' work flow, improved our manufacturing process, and significantly improved our gross margins.

Additionally, in beta tests, we have a new formulation that enables customers to generate significantly longer read length.

Customers have already reported read lengths exceeding 100 base pairs on each side of a paired end run.

As this improvement rolls out to customers this quarter, we believe applications such as de novo sequencing, that have previously sacrificed cost for read length on other technologies, will begin to migrate to the Genome Analyzer.

This migration will enhance what is already a broad collection of commercial and homebrew applications available to researchers on the GA.

In terms of overall throughput, customers are routinely generating sequence runs of over 7G or 7 billion bases, with some generating throughput of 15G or greater on a single flow cell.

Our internal sequencing projects have been able to generate runs well beyond 15G, and have demonstrated the substantial headroom in the overall architecture.

This represents a throughput improvement of 15 times just this year -- 15x -- a trend which we expect to continue into the foreseeable future, providing the technology, scalability to drive down the cost of sequencing.

Greater throughput, combined with long, high quality read lengths, ease of use, and a broad base of applications have enabled the widespread adoption of the Genome Analyzer, both inside and outside of major genome centers.

In Q3, over 90% of our systems were shipped to non-genome centers compared to a total installed base of over 70% of GA's outside the genome centers.

We believe that our installed base of revenue systems is at least equal to that of the other three suppliers in this market in combination, providing the engine for our future consumable growth.

Following the close of the quarter we announced the commercial launch of our mRNA-Seq kit for full-length cDNA sequencing for digital gene expression.

MRNA-Seq is one of numerous digital counting applications made possible by next generation sequencing, that enables researchers to gather a comprehensive view of the entire transcriptome.

This differs significantly from array-based methods, in which expression targets must be known a priority and are detected via a relative analog measurement.

This kit will allow researchers to perform a hypothesis-free approach to the analysis of gene expression and its role in various diseases.

When coupled with our multi-sample indexing protocol that is soon to be commercialized, mRNA-Seq is rapidly becoming price-competitive with traditional array-based expression, while offering a perspective of the transcriptome that has never been seen before.

Performance improvements that we've made to the Genome Analyzer and the growing library of applications is generating increasingly large and complex data sets.

In order to simplify the management and analysis of this data, as well as to integrate data from our BeadChips, last week we announced the launch of GenomeStudio.

This software platform enables the simultaneous analysis of over 100 million sequence reads in addition to microarray data, all within the same project work flow paradigm.

The added functionality the GenomeStudio brings to Next Gen sequencing and applications like mRNA-Seq will help to further streamline sequence-based discovery projects that make it easier to manage and analyze large, high-complexity data sets.

Having reviewed these details of our progress on product launches, performance improvements, and new applications, it is important to stand back and recognize that Illumina is a leader in both the array and next generation sequencing markets.

Our leadership is the result of our consistent ability to innovate, to meet the needs of these rapidly changing markets.

I want to take a moment to welcome the Avantome team to Illumina, and particularly, Dr.

Mostafa Ronaghi, as the newest member of our executive team.

Mostafa joins us from Avantome, which we acquired in August, and will serve as our Senior Vice President and Chief Technology Officer.

Mostafa has extensive experience as an entrepreneur in life sciences, having founded four start-ups, including Avantome, NextBio, Pyrosequencing AB, and ParAllele BioScience.

Most recently, Mostafa was also a principal investigator and Senior Research Associate at the Stanford Genome Technology Center.

Mostafa will be responsible for leading the technology development effort at Illumina, including the Avantome technology, which is a low-cost, long-read sequencing technique that complements our current sequencing technologies.

I would also like to congratulate Jorge Valarde, Jr.

on his promotion to VP of Business Development.

Jorge has been with Illumina for over seven years and has been a key contributor to the success of the Company.

To conclude, we're very happy with the results we generated in the third quarter and are encouraged by customer demand for our new products.

The cost of several major product transitions and our Singapore start-up are behind us, and should yield increased operational leverage over the next several quarters.

We have embarked on the initial execution phase of our molecular diagnostic strategy and will provide greater visibility into that strategy at our Analyst Day on November 6.

We hope to see many of you at our new facility in San Diego for that event.

The investment that we've made in capacity in our product portfolio and in our infrastructure have put us in a great position to deliver on our commitments for 2008, and enter 2009 in the strongest position in the Company's history.

Thank you for the time and we'll now open up the lines for questions.

(Operator Instructions).

Ross Muken, Deutsche Bank.

So, Jay, you talked about some of the impressive advancements on the GA2 and obviously the growth sort of speaks for itself.

Your competitors made a lot of noise with sort of a third generation take on their product.

Any sort of real-time in the field, kind of commentary around how you think your product is stacking up from a market share perspective?

Or at least has there been any sort of dislocation in your sales channel relative to their launch?

Or is it sort of business as usual?

We certainly haven't seen anything that I'd classify as a dislocation.

We've said all along that we certainly expect this market to be competitive and it is going to be competitive.

I stated in my remarks that we believe that our installed base of revenue systems is at least as great as the combination of the other three players in the market.

So I think in terms of market share, we're clearly the leading player here.

We continue to have what we think are very substantial advantages over the competition in terms of the breadth of our applications; the long read lengths are going to be very important, as we move from what were just six months ago 35 base reads to reads over 100 bases now, that are going to fully enable de novo sequencing on our system.

And we continue to add dramatic ease-of-use advantages over all of the competitors in the field, as well as throughput advantages, if you measure that per unit time.

So, on a throughput per day basis, we continue to be well ahead of the competition.

So we're feeling really good about our competitive position, and certainly, we continue to invest very heavily in R&D internally to continue to move the platform forward.

Great.

And you know, there's a lot of talk obviously from your end relative to the Ag/Bio opportunity.

There's been a bit of sort of turbulence in that end market.

Any sort of updated thoughts on if that's had any impact on your business?

Has it changed your view of that opportunity whatsoever?

Or is the technology advancement so game-changing that it's something they're still looking to potentially move into?

I don't think it's changed the opportunity at all; and if anything, it may in some ways advance the opportunity.

One of the characteristics that these companies are all looking for is the ability to screen up into the millions of samples at very low price points.

And that's something they can't do using existing technology.

And so that's exactly the market segment we are headed toward with our iSelect and some future versions of that, that will continue to drive those price points down.

And that will, in fact, enable these companies to be much more effective increasing crops, to do that more cheaply and to create crops that are more disease-resistant and certainly help to solve the world's food problem.

So if anything, I think the tightness around the economy is putting more emphasis on investments in this area.

And lastly, Christian, any sort of updated thoughts on a cash flow -- cash deployment?

Obviously, you guys raised a significant amount of money.

Invitrogen announced an acquisition today on their call of a single molecule technology.

Any sort of updated thoughts on either focus areas or other places in the portfolio where you think there's opportunity to look -- to add?

No, I mean, I think, Ross, that our position hasn't changed; that one of the things, one of the reasons why we raised the money is to be opportunistic and look for opportunities across our market.

And if think about fundamentally how we do that, it's technologies or products or businesses that would be complementary to what we're doing, have some sort of synergy with the strategy of the Company going forward.

And I think our position hasn't changed.

In fact, with the markets and the ability for companies to finance themselves is probably more challenging now than it was even when we raised the money.

I suspect there's probably more opportunity for us to look at assets at better valuations.

But we'll fill you in as those things come to fruition.

Great.

Thanks, guys.

Congratulations on a phenomenal quarter.

Doug Schenkel, Cowen and Company.

Good afternoon and thanks for taking my questions.

I was hoping that you guys might be willing to spend a minute or so just talking about, I guess in general, the pricing environment in sequencing.

And specifically, if you could talk about whether or not an increasingly tough pricing environment maybe impacted gross margins in Q3.

And then I guess lastly on this topic, could you described how you intend to counter situations where some of your competition is willing to essentially give instruments away at large labs?

The sequencing business that we saw prices for the Genome Analyzer be very stable this quarter, so we didn't see any degradation in prices.

We have seen our competitors being willing to give away systems, to be willing to giveaway reagents, and to do this in not just in genome centers but outside genome centers.

So, sort of startling degree of freebies being offered out in the marketplace.

But despite that, we've held our prices and done very well competitively.

In terms of the overall cost of sequencing a genome, part of our objective, of course, is to continue to drive that down.

And that's true for all the Next Gen sequencing companies.

And certainly that price has now been driven down through $100,000 and will continue to drive down toward $10,000 as the next major milestone.

And certainly increasing the throughput of our systems is a key ingredient to making that happen.

And we're very committed to making that happen here over the next several quarters to a year or two.

I think one other thing to add there is that you have to be very careful in asking, in terms of cost of sequence at genome, there's a lot of different dynamics out there in terms of what people are including in or out.

We would like -- we try to think about what the all-in cost is, because if we try to sit in the PI's shoes, as they look at these projects.

Understood.

Thank you for that.

That's helpful.

One thing we've heard from our recent checks is that at 125 base pair reads, Genome Analyzer will be extremely competitive with 454 and I guess 3730xl for all applications, including de novo sequencing.

I'd be curious to hear if you'd agree with that number in terms of read length -- if that is an important threshold.

And if so, given that you've improved from 35 base pair reads earlier this year to now about 100 base pairs, is it fair to assume that 125 basis is attainable on a commercial basis at some point early next year?

Well, Doug, we actually think that between 75 and 100 basis is more than enough to do de novo sequencing.

And that is being demonstrated right now by customers that are running those reads and using de novo assemblers to put together the sequence.

And so we're absolutely convinced that the technology is already at the place where it can do de novo sequencing.

And through the rest of this quarter, we'll be deploying this new formulation of our kit to enable our customers to be doing that much more broadly.

And certainly as you get to 125, it's a no-brainer and clearly, the technology has headroom out to 125.

There's just no question about that.

So, this system is imminently going to be fully capable of doing de novo sequencing.

Okay.

And last question.

It's a housekeeping one.

Recognizing you guys only provide GAAP results and results that exclude the impact of stock comp expense, the reality is that that consensus expectations typically do include the impact of stock comp.

I saw one news service after you put out your press release say that your EPS number was $0.13 on the basis of including stock comp expense.

And that seemed a bit lower than what I was coming up with.

I was just wondering if you could help us out and help us out to understand what the right number is here?

Yes.

I think it's actually right in the press release.

So I'm just going to pull that out and I'm going to get it.

Okay.

Yes.

It's -- that's right.

$0.07 after tax adjusted.

The value of the stock compensation (multiple speakers) -- the difference.

So you (multiple speakers) -- FAS 123 impact is $0.07 a share, tax adjusted.

That's right.

Great.

Thank you.

Quintin Lai, Robert W.

Baird.

When you were talking about the $2 million inventory charge that you took for the chemistry change in the sequencing, was that excluded as part of your pro forma or was that included as an expense in your pro forma?

No, that's included, Quintin.

(multiple speakers) You know, the story behind that is that the new kits are so much better performing at such better gross margins, it made sense for us to take that charge rather than buy incremental components for the old kits and sell kits at a lower gross margin.

And so we made the decision in the sequencing world to take that charge and then move forward with the higher gross margin kits.

Okay.

And so you said that is one-time in nature, though?

That's correct.

All right.

Because if I exclude that out, I get an extra penny, which would -- it's onto the EPS.

Having a little trouble hearing you, Quintin, if you could --

Yes.

So if I exclude that, it adds about a penny to the EPS?

That's about right.

Okay.

And then you made a comment, Christian, that the HD -- you're seeing not only ASPs really good on a chip level but on a per-sample level.

Could you kind of elaborate on that?

Do you mean that you're getting a per-sample number better than when you were doing only one sample per chip?

Yes.

That's right, Quentin, but it's -- that per-sample change is largely due to mix.

So we now have probably 10 different products in our Infinium chip line.

And the mix of chips is what shifted the per-sample ASP up.

But clearly, on a per BeadChip basis, even within any of the individual products we continued because we're putting more samples on a chip, the overall trend is increasing ASP's per BeadChip.

Well, I guess to kind of follow up on Doug's question then, because now you've more and more HDs going out, one would assume that more chemistries are being run for -- as more GA2's are coming up to speed.

Could you talk a little bit about the gross margin?

And even excluding the $2 million one-time charge, why wasn't it a little higher from the Q2 levels?

Was it just the number of instruments sold in Q3?

Well, we had that effect and we also had a smaller contribution of revenue from our services in Q3, and services is a high margin business for us.

And so that, if you compare quarter-to-quarter, services were down in Q2 to Q3.

Okay.

All right.

And then as you turn Singapore on and you said that you're going to be starting the service, what?

About 25% of your BeadChip demand from Singapore?

How should that -- when does that start impacting your tax rate?

We just recently started shipping.

So, this fourth quarter will have -- you'll see some impact.

Actually the fourth quarter tax rate will be impacted by two things -- one will be Singapore; two will be the R&D tax credit, which was passed.

And so we'll get to take the benefit of that this quarter.

So what are you kind of implying with the guidance you gave, Christian, for tax rate?

Well, we didn't give specific guidance on the tax rate, but we say we're going to be at 36% for the year; you can probably pencil out the math that it's going to be significantly below that in this fourth quarter.

That won't be the run rate going forward because of the R&D tax credit, but (multiple speakers) you can imagine it's going to be significantly below 36% this quarter.

Okay.

All right.

Thank you.

Bill Quirk, Piper Jaffray.

First question, Christian, I realize the election and obviously the next administration's reaction to the economy are obviously still up in the air, but as we think about the budget for '09, how are you putting that together?

What assumptions are you making?

Well, I mean, I think it's a pretty broad question and I (multiple speakers) --

I'm specifically referring to, I guess, NIH spending.

Well, I think our assumption, as Jay pointed out, is that NIH spending, even if you assumed it was going to be flat, the opportunity for us to grow in our markets is still right in front of us.

If you'd look at the progress we've made on both sides of the business, with respect to the products that we've launched this year and the uptake of those products, we expect -- we look for growth in 2009.

And it's too early for us to give any guidance on that, but in our view, NIH -- there won't be enough change at the NIH to negatively impact our view on 2009 from what we can see at this point.

Okay, fair enough.

And then, Jay, just to build off a question that Ross asked earlier concerning M&A.

As we think about, you know, you guys reviewing deals, should we be, I guess, more biased towards -- call it smaller content, like plays to help bolster the diagnostics effort?

Or should we also be thinking about you guys taking a look at perhaps larger platform plays as well?

Yes, in general, you should expect to see looking at the smaller type of companies that could either be content or in fact, could be platforms as well, but platforms that are very early in their development cycle.

And Avantome certainly was one of those.

And the kind of things we might look at might even be earlier than Avantome.

And we're clearly going to be very selective about these.

So, no one should take away the impression that we're going to go on an acquisition binge; that certainly isn't our business model at the Company.

But the times in some sense are unprecedented in terms of the view we have into small technology companies, because of the challenges that they have right now in getting funded.

Their recognition that we are a company that can do acquisitions -- we have the resources to do them, if they make sense -- means that we're very often given the opportunity to take a look.

And so, we have a lot of things to look at, but we're going to do very few of them, is the way to be thinking about it.

Okay.

Fair enough.

And then last question for me -- and you've talked a little bit about the additional headroom that you have with chemistry on the sequencing side in terms of base pairs.

Can you -- are you willing to take a stab at -- I guess if we look out 12 months from now or even six months from now, where we could be thinking about in terms of throughput per run?

Well, we don't pre-announce that beyond what we've sort of officially done.

The way to think about it is that we've improved that throughput by a factor of 15 times so far this year.

We will sort of year-to-year, I guess, is the way to think about that.

And we're nowhere near done.

So there's lots of dimensions of functionality in the system that will allow us to continue to make progress.

And that includes continued improvements in the chemistry, continued improvements in read length, overall increase in the speed of imaging, software to do better deconvolution of the features.

There's just a broad array of ways to approach the problem to continue to improve the throughput.

And we're working on all of those.

So, I guess the take-away there is that we're a long way from being done.

Fair enough.

Thanks very much.

John Sullivan, Leerink Swann.

You guys mentioned briefly your soon-to-be-launched solution for multi-sample processing and sequencing.

Can you give us just a little bit more color on it?

And do you expect it to accelerate the shift from microarrays to sequencing in gene expression analysis?

Yes, you know, I think the acceleration is already happening, John.

The mRNA-Seq kit that we just launched doesn't use indexing yet; these kits will in the future, as indexing does come online.

And we're working very hard on that and we'll have it available in the not-very-distant future.

But even with the kit that we just announced, you can get vastly better data than you could ever get off an array for prices in the range of about $800.

You could get analysis of 10 million transcripts for that.

You would determine the full distribution and the relative quantification of all those transcripts.

You get information on spliced junctions and spliced variance, and you catalog all the coding SNPs in those regions.

And you do this fully digitally.

And so for $800, you're getting vastly better information than you can get off a microarray today.

And that's without indexing.

So you can begin to see how this will over time begin to penetrate the traditional array-based expression market.

That's very helpful.

Thanks.

And then my only other question is -- what do you sense the sensitivities are of the new user in the research setting that you're seeking to sell product to today?

Is it more ease of use as you move to labs that are away from whole genome centers?

Is paired-end read sensitivity more important?

Or is it a desire to multiplex?

I think paired-end reads is pretty much a given now in the market, even though it's not that old.

Everybody sort of expects paired-end reads to be there and they are.

Certainly things like breadth of application is important, because particularly smaller users want to do lots of different things with the system and they're often used by different researchers.

So, that coupled with ease of use of the system are very important.

And of course, cost is also a factor.

So all of those enter into it, but unless you have a system that's easy to use and data that's easy to analyze, it's a pretty tough sell.

So that's critically important.

Thanks very much.

Tycho Peterson, JPMorgan.

Thanks for taking the call.

The international markets seem to be doing pretty well for you guys.

Can you just talk a little bit about where you think we are in the demand curve?

And where you are, maybe, from an infrastructure standpoint in terms of service for some of these markets, in particular, Asia?

Yes.

We actually had a very strong quarter internationally with a mix now that, sort of for the quarter just completed, we were about 55% North America, about 35% Europe, and about 10% rest-of-world.

So that ex-US contribution was higher than we've seen in previous quarters.

And I think that's reflective of one trend we're seeing, and that's adoption of sequencing in smaller labs in Europe and Asia; where previously, it was sort of the genome centers that started in those countries and we were seeing the broadness in the US.

Now that broadening to small users is happening outside the US.

So that's certainly a very important trend that we're seeing internationally.

So I think those markets will be very important.

They are reasonably well-funded as well.

Infrastructure-wise, I'd say we're almost the same internationally now as we are in the US.

So we have regional offices in all the important sites in the world.

We're direct in countries like China, obviously, in Japan and Australia.

We still use distributors in India because that's a challenging place to do business for lots of reasons.

But in terms of overall headcount, proportionate to the business opportunity and the degree to which we have support, it's pretty close to being equivalent to the US.

Okay.

And as we think about kind of R&D investment for you going forward, I mean you obviously talked a lot about the ag markets being a near-term growth opportunity and then molecular diagnostics as well.

Where do we think about kind of the R&D spend being allocated maybe in the next six to 12 months?

Are you stepping up your ag spending, given the growth you're seeing?

And then obviously, how should we be thinking about the molecular diagnostic spend over the next year?

We certainly are ramping up the spending in the ag part of the market in R&D.

But really what that involves is continuing to evolve the format of the chips to allow them to do more samples at lower plex and to look at ways of simplifying the assays, so that they can -- the assays can be run in shorter amounts of time.

So, the incremental R&D investment to go into ag is not enormous, but it's really just sort of tuning the product line to fit better the needs of the users in that market space.

More broadly, we are going to be putting increasing amount of investment into diagnostics, but that's all certainly within our guidance.

So you're not going to see some new announcement from us about major incremental investment in diagnostics.

And it will be -- we don't want to give out exact proportions of R&D spending there, but certainly diagnostics for the next couple of years will continue to be less than what we're spending in sequencing and arrays.

Okay.

And then just one last one -- on the competitive landscape, I guess there's obviously a little bit of noise with the complete genomics announcement.

Can you just talk about maybe what you think the opportunity, irregardless of their technology platform, but what you think the opportunity is going to be for clinical trial work and maybe service-based businesses going forward?

We don't see clinical trials as being a market opportunity at all in the near-term.

I mean, you might imagine that 10 years from now, but pharma companies are not even really doing genotyping at large scale in clinical trials.

And they're certainly not going to be doing sequencing any time soon in our view.

In terms of services, there's going to be a market for sequencing services.

We have a service offering in sequencing as well.

But I don't think that's going to be the bulk of the market.

So, certainly there will be a slice of it.

But if you look at our revenue breakdown between systems and services, it's very heavily weighted towards systems.

And that's because of the fact that customers really are doing exploratory discovery in sequencing for the most part.

And they want to have their hands on the system, they want to run lots of different applications, and essentially explore the broad space of the digital homing applications provide.

Okay.

Thank you very much.

Zarak Khurshid, Caris & Company.

Thanks for taking my questions.

How do you guys envision the Singapore facility accounting for total chip volume over time?

I think you said 25% next quarter.

Is there a target level?

Yes.

25% will actually be in Q4, so the quarter we're in now.

And our sort of first benchmark is to probably get that up to 50% in fairly short order.

And then once we get to 50%, we're going to just sort of determine what to do from there.

We have plenty of space in Singapore and so we can continue to move more decoding machines over to Singapore from our factory in San Diego.

But we're going to look at the mix, we're going to look at the international demand, look at the actual impact on tax rates, look at what our gross margins look like in Singapore versus San Diego -- meaning what the cost structure really is once you get fully ramped up.

And once we get that data set, we'll determine whether we want to go beyond 50%.

Probably by middle of next year, we will begin to evaluate as well whether it makes sense to make any other part of our product line other than BeadChips over in Singapore.

And that's an open question for us right now.

Great.

That's helpful.

And then a quick follow-up.

You talked about digital gene expression being poised to kind of take a greater share in the future.

But I'm curious today, what are you seeing in your own array-based expression business?

Is it still growing?

And what are the challenges that you are seeing in the marketplace?

Thank you.

Yes.

It continues to be a growing business.

It doesn't necessarily grow every quarter sequentially to the next quarter, so it bounces around a little bit.

But it's still a very healthy business for us.

We launched a new product in that space called the HT-12 just recently.

And that product has been very -- very widely accepted.

And so that product is really targeting the lower end of the expression market, where there's a desire to do lots and lots of samples at low price points for screening type applications.

The sequencer is going to be targeted for getting very rich data sets with broad dynamic range and extraordinary levels of sensitivity, that you can only get with sequencing.

And so these products are going to continue to work to some extent hand-in-hand.

But what it will mean is that over time, that this sort of more complex and richer expression applications will migrate to sequencing.

Un Kwon-Casado, Pacific Growth Equities.

I was wondering, would you be able to estimate what percentage of your Genome Analyzer sales have gone to customers who already have a microarray system versus, I guess, like brand-new de novo genetic analysis researchers?

I'm not sure we've ever done that calculation on --

And also, Un, the tough part about that question is that one university most likely has a BeadStation or an iScan and they probably have a Genome Analyzer, so.

But they're in different labs; they're the same university.

(multiple speakers) So they're --

They're -- exactly.

So, it's more appropriate to kind of think of it on a lab-by-lab basis, and we don't have that data right at our fingertips.

Okay, fair enough.

Then I guess with respect to -- would you be able to sort of give us a glance as to what your content strategy is for your next generation genotyping chips, as more and more content is now getting generated from all the sequencing activity?

Do you consolidate that -- the data that's being generated and come up with the next version with updated content?

Yes.

And we're constantly looking at when the right time is to rev the content on the chips.

And we're watching what's happening across a number of fronts.

Certainly one is directly the result of the whole genome association studies.

So, as those studies discover key markers for disease, we're backfilling those markers onto the chips.

And very exciting new project that is now being started called the 1000 Genome Project, is targeted to pull out the rare variance as well as the common variance; so trying to get from -- for the 5% [minor leo] frequency down to 1% or below is going to create dramatic new content opportunities for us.

In effect, the internal sequencing that Illumina has done is we have discovered [a million tips] in the work that he's done.

So the content richness I think is going to increase dramatically over the next year or so.

And what we will do is mine that content and take off any of the markers that we found that are not particularly useful on the existing chips and add in ones that are more useful going forward.

And so, I think over the next few years, as we sequence more and more, you will find the chips getting better and better.

Got it.

Okay.

And then just lastly, you had talked about your longer read length with the Genome Analyzer later this year.

Could you talk a little bit about what the error profile looks like on that read, as you go longer out on your read length?

Yes.

The quality of the data is really the ultimate constraint in read length.

And so we could certainly read beyond where we are today; where we cut it off is where we stop meeting our quality threshold.

So the numbers that we quote are numbers that meet our -- what we call passing filters; so, our quality threshold percentages.

And right now, in our hands, we're up over 100 base read lengths as are quite a number of our customers.

And that will continue to get longer; and as we improve the chemistry, the quality of the data out further will improve, and that will allow people to go longer and longer.

Marshall Urist, Morgan Stanley.

I was wondering with the reception that you guys have seen with the multi-sample format chips now for a couple of quarters, can you talk about how much of that you think is market growth versus market share gains?

It's certainly a combination.

So we've got quite a number of new large accounts.

And that's probably been at least a 10% market share change at a minimum.

And then, in the customers that were already ones that used Illumina technology, in many cases, they're running more samples now because they can do it more easily.

They can do faster.

If they have an iScan, for example, they can run a project in a month or two that might have taken a year before.

So, we're increasing the appetite of the existing customer base as well as improving the penetration across the customer base.

Okay.

Got you.

And then on the $700,000 per installed unit that you guys talked about, and it's obviously been increasing nicely.

So to what extent has that been -- has that been sort of the big getting bigger?

And so, have you seen a widening in the difference between the mean and your median customer in that business?

Well, certainly one of the recent impacts that have continued to push that number up is a handful of brand new customers were [high two per] customers.

So that certainly helped a lot.

If you look out at the tail of the curve and the other side of it, I suspect we still have lots of customers who are now at 50,000 or 100,000.

So what's happened to the profile of that curve is that we've added a number of users at the high end, which is probably the single biggest impact on the average.

Okay, got you.

And then --

Over time, iScan will certainly have an impact; although we don't think the number of iScans we've placed so far is going to have changed that number a lot.

But if you look out a year, iScans will begin to have an impact on the number on the upward direction.

Okay.

That makes sense.

And then there's been a lot of talk recently about sequence capture as a -- different sequence capture technologies.

So I'm curious if you guys see that as an interesting sort of incremental sequencing consumable opportunity?

Or are you sort of hesitant on the technical challenges?

I assume by that you mean targeted sequencing?

Yes, absolutely.

Yes, yes.

Yes, we think that's a very important application and we've looked at quite a number of different targeting technologies.

And we've done obviously a lot of work internally in the area.

And I think all of the approaches have advantages and disadvantages; none of them are yet perfect in terms of how well they capture the region of interest and exclude the regions that are not of interest.

So I do think that it's going to be an important area.

Certainly we will [have] products that address targeted sequencing in the not-very-distant future.

They will become less important over time as the cost of sequencing drops.

And so when sequencing is $100,000 a genome, targeting is very important; when it's $10,000, it's a little less important; when it's $2,000, it may not be important at all.

Okay, fair enough.

And then last question -- that $150,000 to $200,000 consumable range you guys have talked about -- is that still -- are you guys still comfortable with that?

Has that been creeping up over time even within that range?

And how should we be thinking about that going forward?

Yes, we have pretty solid data on it now.

And I'd say it's definitely in the range and it's sort of toward the higher end of the range, maybe two-thirds of the way up, without giving you an exact number.

And it will move around a little bit quarter-to-quarter.

But more systems are getting put into production.

And the systems that we're shipping are coming up more quickly in customer hands as well.

Where a year ago, a customer would get the system and there was maybe three or four or five months of experimentation and trying to decide exactly what applications to run and how to optimize input sample concentration and things like that.

Those features are much more robust now, so customers can be up and running in production mode quite quickly.

Okay, great.

And actually just one more.

As the Genome Analyzer becomes a bigger part of the business and as it becomes a little bit more instrument-heavy in terms of mix, is it reasonable to think that you guys could see a little bit more of a 4Q effect going forward, like some other companies in the business do, since you're a little bit more dependent on instruments?

By a 4Q effect, do you mean an increase of orders?

Yes, exactly.

(multiple speakers) -- the quarter?

Well, we might.

I mean, Q4 has historically been a strong quarter for us.

Q3 has been the strongest one, if you look over some period of years, because of the expiration of NIH budgets at the end of September.

Q3 has historically been the biggest quarter for us.

For companies that have a higher concentration of sales in the commercial markets, Q4 tends to be a little bit higher because most companies' budgets in the commercial side expire at the end of the year.

And so, our order of goodness of quarters has been Q3 has always been the strongest; and then Q4, then Q2, then Q1.

Okay, great.

Thanks, guys.

Tony Butler, Barclays Capital.

Thanks very much, Jay.

I'll be quick.

Is the principal driver for your diagnostics endeavors to develop content through -- as you alluded to, backfilling some of your existing chips with some of the programs that are ongoing with your customers today?

Or is there an evolution of a different source to develop that content internally?

Well, I think in terms of how we're going to see content into the arrays, we'll use all sources for that.

So, clearly, what's happening in our customer base and data that's being put into public domain, data from the 1000 Genome Project, data that we generate internally, will all be used to try to mine the best set of content for the arrays going forward.

So I'd say we're going to get data from lots of different sources there.

And as you know, we've already sequenced a handful of genomes ourselves.

And in doing that analysis, we've discover lots of model SNPs.

Now, what we don't know about those SNPs yet is how important are they in broader populations?

And so that's the work that's still ahead of us and the whole industry, in fact.

And then secondly, a slight housekeeping question, Christian.

You alluded to the non-cash compensation of $0.07, but I'm curious, what would have been the tax rate under a non-GAAP basis?

The non-GAAP tax rate was about, what?

37%.

In the back of the release, if you look in the back tables of the release (multiple speakers) --

I didn't see the back table, sorry.

(multiple speakers) Perfect.

Thank you very much.

35.9.

It's actually 35.9 for the --

35.9?

Okay.

Yes.

May-Kin Ho, Goldman Sachs.

This is Davis Bu for May-Kin Ho.

She had to step out; her apologies.

Can you hear me?

Yes.

Please go ahead.

Okay.

Great.

Thanks.

Just a couple of quick questions; most of my questions have been asked.

First, looking at your international sales, so I believe you're currently using a dollar pricing strategy and gradually shifting over to a local currency.

I was wondering, how that's going?

How the changes in the strength of the dollar is affecting that?

And what hedging strategies you might be thinking about as you make that shift?

Sure.

In the third quarter, we did introduce the opportunity for customers to purchase products in their local currencies.

The truth [of] the matter is that there wasn't significant uptake in it from that in the third quarter.

I suspect over time, that will increase.

And what we're doing is we're monitoring that.

And as that exposure becomes more material to the business, we will implement a hedging program that will try to offset some of that exposure.

But so far, we haven't seen a dramatic shift in the way we do business with respect to currency.

And does the strengthening of the dollar affect the price competitiveness of your products out there?

Well, no, it hasn't because we give the customers flexibility to purchase in whichever currency they desire.

Okay, great.

And then just really quick on digital gene expression and the price competitiveness of the array versus array-based technologies.

I was wondering could you give us a little bit color on where -- on how you see the pace of that progressing in the future?

Well, I'd say that as we begin to introduce indexing into the system and as you see the overall price of sequencing go down, the price of doing the expression will go down proportionately.

So, if you went from $100,000 genome to a $25,000 genome, roughly, that ratio of price savings will be translated over into expressions.

It's not going to be exactly linear, but you can think about from -- at a macro level to be approximately that way.

Great.

Thanks.

Most samples, for example, now are run in a single lane of a flow cell, so you can think about what's the cost of running one single lane of a flow cell.

And to the system, it doesn't matter whether you're doing expression application in that lane or a sequencing application.

Derik De Bruin, UBS.

Most of my questions have been answered.

I guess, I just was wondering, when you look at the competitive landscape as of now, I guess, do you feel that you have the right technology portfolio?

It goes back, I guess, to some of the earlier questions on the M&A.

I mean, do you see anything on the horizon that is what you consider a real potential threat to the existing businesses?

I'm sorry, a real potential threat to what?

To -- I guess to your existing business.

Kind of how you're rolling out things in the short-term.

This margin has been one of unprecedented technological advancement, and I get -- one of the questions I continually get from investors is, is there something out there on the horizon that's going to sneak up and does somebody do to you what you have done to some of your competitors?

Well, I mean, we're clearly always on the look-out for that.

In the array part of the market, there's not that many known ways to make high density arrays.

And high density arrays are pretty mature in terms of their evolution and performance, and sort of the market standards you would need to meet to be a significant player there, in terms of breadth of applications, varieties of chips and formats, and assay methods.

And so I suspect that if there were anybody coming out of the woodwork, we would know long before they actually competed against us very broadly.

In sequencing, there are lots of new companies being funded to do our research and next generation sequencing.

And whether you call it second generation or third (technical difficulty) a lot of work being done in that area, and it's incumbent upon us to make sure we're doing our work as well.

And that we have very aggressive internal development programs to make sure our sequencing technology is moving rapidly, and that we have the ability to acquire, if we need to, at some time in the future.

There are some exciting technologies on the horizon at some point in time.

And certainly, we plan to be a player when any of those technologies make it to market.

Okay, great.

As I said, most of my stuff was answered, so, thanks.

Jonathan Groberg, Merrill Lynch.

Good evening.

Thanks for taking the call.

Just a few quick questions as well, as we get to the end here.

I guess I'm -- maybe I'm a little slow, but, Jay, can you explain again how is it that on a per sample basis, you have -- I don't remember if you said it was the highest or higher ASPs on a per sample basis?

You said I think both on a per sample and a per chip basis.

And someone asked, but I wasn't really sure you attributed it to mix.

And I'm just trying to understand why people would be willing to pay more on a per sample basis for some of these -- some of the advancements that you're making on a chip basis.

It has to do with the mix of what kinds of chips we were selling.

So, if you average the price that we got per sample across all of the different types of Infinium chips that we were selling, what it means is that sequentially, more chips were bought that carry a higher ASP per sample than last quarter.

And so, let's say we had a chip that sold at X price last quarter per sample, and some other chip that sold at 0.5 X of that same price; what happened in this quarter is that we sold much more of the kind of chip that's price X rather than 0.5 X.

This is a sequential increase and this maybe had to do with, as you mentioned, you shipped a ton of these 610-Quads, which was your best-selling BeadChip in the quarter.

And my guess is that had a higher average sales price?

Absolutely.

Yes, absolutely.

Okay.

And then another question is, as we kind think about it, you exclude a number of things and trying things for this -- it seems to me, I don't remember if it was last quarter or the quarter before, I think you made some advancements in your decoding technology.

And so you had kind of a charge associated with getting rid of some of the inventory -- or some of the instruments, I can't remember if instruments or inventory that you had there.

And you had this one with the new reagent kit as well.

And I'm just wondering -- I mean, are there so many advancements happening so fast, that are these inventory adjustments just going to be kind of a norm, because you're making so many advancements, things become obsolete very quickly?

Well, we certainly hope not.

These are some challenging product transitions we've gone through and we've done, I think, a reasonable job managing through them.

But we've charged the organization to do better on this.

And as reagent transition, in some ways, you have to hedge your bets when you're working on a new kit, and buy enough of the old reagents to supply through a certain point of time under this set of assumptions you have to make about, when the new one will actually be viable and through beta testing, and ready to begin shipping.

And so what really mattered in this particular case is that the cost of the new ones are so much less than the old ones, that as soon as the new ones started working, it didn't make sense to go back and use the old ones anymore.

And you don't have that many product transitions where that's the case.

In fact, it's pretty rare.

And so we don't expect this to be a recurring event.

Yes.

The other thing, John, I wanted to point out is that what you're really pointing out are two separate, completely different events.

The first event last quarter was in our array manufacturing.

And we wrote off the manufacturing equipment because we made a technological change to our manufacturing process.

Those changes are not that rapid, and we expect to run on our new manufacturing platform for arrays for the next several years.

The reagents, as Jay pointed out, it was [so good] for us to use the new kit as opposed to buying the components to fill out the old kit, we just -- we took the write-off and we're moving forward.

But very different events.

Sure, and I understand that.

I just -- it seems like the breakneck speed at which the advancements are being made, you made -- anyway, I appreciate the color there.

And this just follows up on that as well, my last question.

I think this last quarter, you said internally, you were at about 10 gigabases per run, I think you said?

Now, you're about 15 gigabases per run internally?

And --

Over 15.

Over 15.

And again, so this incredible level of speed with which the technology is advancing.

I'm wondering, are you seeing any impact to your legacy array business?

I know you've talked a lot about the expression business, but how do you expect that to play out?

I mean, at some point, even for your high density SNP arrays, I'm supposing at some point, people would just prefer to sequence and to find out things that maybe -- you know, maybe they're -- it's not just SNPs, and there are other things that they care about in terms of the genome.

Well, I mean, ultimately, that's probably the case.

But we believe that day is a long way away, because as rapidly as sequencing is coming down in price, we're driving down the cost of genotyping as well.

And so, if you know what you're looking for, it is always going to be radically cheaper to do genotyping.

And as we do more and more sequencing, we're going to understand more about what never changes and what sometimes changes.

And so there's going to continue to be a very strong market for genotyping.

And you can imagine some day where sequencing costs $500 but running a chip costs $5.

And there will be a market for both, even at that point.

Okay, great.

Appreciate it.

Thanks.

Matthew Scalo, Canaccord Adams.

Sir, please limit your question to two.

That's all I've got here.

First question, are we going to get a detailed update or insight into the Avantome technology at the Analyst Day?

Or development time lines?

That's the first one.

The second one is, just kind of looking at fourth quarter guidance, I'm just trying to figure out the single-digit sequential growth in revenue.

Should we be looking for sluggishness on the service side?

Is it the impact from iScan and fewer box sales maybe versus the year prior here, where we saw a nice uptick, obviously, with incremental platform launches?

Yes, on the Avantome front, we don't expect to be talking about Avantome at the Analyst Day other than reiterating what we've already said publicly about it.

We're going to wait until that product is closer to being ready to launch before we talk about the specs or the details of pricing.

So that's out into the future, so you shouldn't expect to hear anything in November about that.

Yes, and with respect to the -- you know, you look at the growth, first of all, the guidance for the fourth quarter represents nearly 40% year-over-year growth.

So, it's a very, very significant growth on a year-over-year basis.

On a sequential basis, the numbers are a lot larger, of course, than they used to be; but when you look at the fourth quarter, it's typically a little bit shorter quarter because of the holidays.

And if we're able to achieve this kind of guidance, we'll have revenues in the range of $564 million to $568 million for the year, which would be 54% to 55% total growth, so.

I think we're excited about the markets and it's absolutely a robust time for us.

And we just have to keep executing and delivering to our customers.

One other thing I might mention there, I guess we wouldn't use the word sluggish, but we have fully absorbed the Avantome acquisition inside our guidance.

And so that represents another technology with a whole another development team, a substantial development team, that we'll be putting in place.

And we've continued to guide to the bottom line, at least where we were, and continued growth, obviously, on the top line.

Yes, that is a good point.

But there were comments about seeing strong demand for the Genome Analyzer system into fourth quarter?

Sure.

That's right.

Yes.

Okay.

Terrific, guys.

Thank you.

Christian Henry.

Thank you.

Operator, that should wrap up the call queue.

Hello?

Yes, sir.

At this time, there are no further questions.

Thank you, Operator.

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

Thanks for joining us today.

This concludes our call, and we look forward to our next update following the close of the fourth quarter in fiscal 2008.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.