Illumina Inc (ILMN) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2009 Illumina, Inc.

earnings conference call.

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

(Operator Instructions).

I would now like to turn the presentation over to your host for today's call, Mr.

Peter Fromen, Senior Director of Investor Relations.

Please proceed sir.

Good afternoon everyone and welcome to our first quarter 2009 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 second quarter and fiscal 2009, 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 and Chief Financial Officer.

This call is being recorded, and the audio portion will be archived in the Investor section of our website.

It is our intent that all forward-looking statements regarding financial guidance and commercial activity made during today's call be protected under the Private Securities Litigation Reform Act of 1995.

Forward-looking statements are subject to risks and uncertainties and 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-K and 10-Q.

Before I turn the call over to Christian, I want to let you know that we will be presenting at the Bear 2009 Growth Stock Conference in Chicago on May 13, the Deutsche Bank Healthcare Conference in Boston on May 18, and the Goldman Sachs Healthcare Conference in New York, which is being held June 9 through June 11.

For those of you unable to attend any of the upcoming conferences, we encourage you to listen to the webcast presentations, which will be available through the Investor relations 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 Q1 financial results and provide guidance for the second quarter and full year of fiscal 2009.

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

We are off to a great start in 2009.

In the first quarter we recorded total revenue of $166 million, which represented 36% year-over-year growth.

Product revenue was $156 million and grew 41% over Q1 of last year, with significant growth in both our sequencing and microarray productlines.

We generated $103 million in consumable revenue, achieving our first $100 million quarter.

This compares to $63 million in Q1 of '08 and $99 million in the fourth quarter, and represents year-over-year growth of 63%.

While BeadChips led the year on a year-over-year growth in absolute dollars, Sequencing consumables drove the sequential increase over Q4.

The growing installed base of Genome Analyzers and increased use in production environments pushed sequencing consumable revenue to record levels, growing 44% sequentially.

Instrument revenue for the quarter was just over $50 million compared to $44 million in the prior period, and $51 million last quarter, which represents year-over-year growth of 13%.

We shipped a record number of Genome Analyzers during the quarter, which drove our year-over-year instrument growth.

Services and other revenue, which includes genotyping and sequencing services, as well as instrument maintenance contracts, was $10 million compared to $11 million in Q1 of last year, and $8 million last quarter.

Services revenue are not expected to grow in line with the product businesses, as more of our genotyping service revenue is migrating to our CSPro certified customers.

We are relatively indifferent to the shift as our product gross margins are similar to our internal service business.

Before discussing our gross margins and operating expenses for the quarter, I would like to note that we recorded a pretax amount of $15 million related to the noncash stock-based compensation.

This impacted our EPS by a tax adjusted amount of $0.08 per pro forma diluted share for the quarter.

In my discussion of operating expenses, I will highlight both our GAAP expenses, which includes stock compensation expense and other noncash charges, 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 $56 million compared to $48 million in Q1 of 2008.

The Q1 '09 costs include stock-based compensation expense of $1.4 million, approximately equal to the expense in the prior year period.

Excluding this expense and $1.7 million associated with the amortization of intangibles, non-GAAP gross margin was 68.3%.

This compares to 66.7% last quarter and 63.3% in the first quarter of '08, a year-over-year improvement of 5 percentage points.

Both sequential and year-over-year gross margin gain resulted from improved sequencing and microarray consumable margins, as well as the overall product mix.

We have successfully scaled our sequencing reagent manufacturing capability in order to meet the increasing demand.

As a result, we are seeing better overhead utilization, which is positively impacting sequencing consumable gross margins.

Additionally, the reformulated sequencing kits that were launched near the end of Q3 are materially less expensive to produce.

During Q1 the annualized consumable pull-through on the Genome Analyzer was over $200,000 per instrument, and has improved by 40% from Q1 of last year.

This is the result of our ability to quickly install new systems and rapidly bring customers to production status.

In our microarray business pricing in the genotyping marking market has remained stable.

In fact, per chip ASPs on our Infineon Genotyping BeadChips and our whole-genome gene expression arrays exceeded the positive trend that we reported in the fourth quarter.

During the quarter annualized consumable pull-through was over $600,000 per installed instrument, higher than Q1 of last year, but lower than the fourth quarter.

Instrument ASPs were also stable across all platforms during the quarter.

Research and development expenses were $33 million in the quarter compared to $21 million in the first quarter of 2008, including $4.6 million and $3.3 million, respectively, in noncash stock compensation expense.

Excluding stock compensation expense of $2 million related to -- and $2 million related to acquired research and development, and $0.9 million of accrued contingent compensation associated with Avantome, R&D expenses were $25 million or 15% of revenue compared to $17 million or 14% of revenue in the prior year period, and $24 million or 15% of revenue in Q4.

The increase in sequential and year-over-year research and development spending was primarily attributed to increased headcount and increased project activity.

SG&A expenses were $43 million compared to $34 million in the first quarter of 2008.

This includes stock compensation expenses of $8.8 million and $6.1 million, respectively.

Excluding these noncash expenses, SG&A was $34 million or 20.5% of revenue, compared to $28 million or 22.7% of revenue in the prior year period, and $32 million or 20.1% in the fourth quarter of last year.

The sequential increase in SG&A spend was primarily attributable to litigation expense during the quarter.

And the year-over-year increase as a result of added headcount.

GAAP operating profit for Q1 was $35 million.

That includes noncash expenses that I just outlined.

Excluding these expenses, our non-GAAP operating profit for the quarter was $54 million or 32.6% of revenue compared to $32 million or 26.5% of revenue in the first quarter of last year.

This represents year-over-year operating profit growth of 67% versus topline growth of 36%, indicative of the significant leverage the business generated during the quarter.

GAAP interest expense in the first quarter reflected our adoption of FSP APB 14-1, Accounting for Convertible Debt, which caused us to recognize approximately $4.7 million in noncash interest expense associated with our convertible notes, and $0.8 million of gain upon the extinguishment of a portion of those notes.

Excluding this amount, pro forma interest income was offset primarily by a loss of $3 million due to the foreign currency revaluation of monetary assets outside the United States.

This resulted in approximately $0.015 of FX related losses.

Following the end of the quarter we began implementation of a hedging program to mitigate the FX impact to monetary balance sheet assets in our major functional currencies.

Our non-GAAP tax rate for the quarter was 32.8% compared to 28.4% last quarter.

As a reminder, last quarter we recognized the retroactive R&D tax credit for the full year, which reduced our tax rate by approximately 4 percentage points.

We continued the successful ramp of BeadChip production in Singapore this quarter, and recognizing the corresponding tax benefit from the net income generated by that site.

Quality and yields were again comparable to that of our San Diego factory.

On a GAAP basis for the fourth quarter we reported net income of $19 million or $0.14 per diluted share compared to $11 million or $0.08 per diluted share in the prior year period.

Excluding the impact of noncash stock compensation expense, noncash interest expense associated with the adoption of FSP APB 14-1 and the other items identified on our press release and net of pro forma tax expense, non-GAAP net income was $35 million or $0.28 per pro forma diluted share compared to $22 million or $0.19 per pro forma diluted share in the first quarter of 2008.

This represents 58% growth in net income on a year-over-year basis.

Reviewing the cash flow statement and the balance sheet we generated $51 million in cash flow from operations during the quarter.

We had capital expenditures of roughly $13 million in the quarter, resulting in free cash flow of $38 million or $0.30 per pro forma fully diluted share.

This compares to the first quarter of last year when we generated $0.17 of non-GAAP free cash flow per share.

Accounts Receivable DSO were 74 days during the quarter, which is up from the first quarter of last year due to a higher percentage of sales outside the US, but down from the fourth quarter, as we improved our cash collection activities.

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

We ended the quarter with approximately $728 million in cash and investments.

Now we will move forward and discuss the financial guidance for the second quarter and full year of fiscal 2009.

As I mentioned last quarter, we will exclude the charges associated with the adoption of FSP APB 14-1, which requires us to record incremental noncash interest expense related to our convertible debt outstanding.

Consistent with our previous calls, guidance will exclude certain noncash charges, including stock compensation expense related to FAS 123R, the amortization of intangibles, and acquisition related charges.

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

Based on our performance in the first quarter we are raising the lower end of our original annual revenue guidance by $10 million to $700 million.

We therefore believe total revenue for 2009 will range between $700 million and $720 million.

This represents growth at the midpoint of approximately 24%.

We expect gross margins for the full year to range from the mid to the upper 60s.

We expect non-GAAP earnings per share to be between $1.13 and $1.23.

This assumes pro forma fully diluted weighted average shares outstanding of approximately 133 million.

We expect noncash stock compensation expense for the year to be approximately $64 million or $0.32 per tax adjusted pro forma diluted share.

As a reminder, the pro forma diluted shares calculation excludes the double dilution resulting from the accounting impact of our convertible debt outstanding.

The Q1 impact on shares is included in the reconciliation to the GAAP figures that accompany today's press release.

For the second quarter we expect revenues to range between $168 million and $173 million, which represents year-over-year growth between 20% and 23%.

We expecting second-quarter non-GAAP earnings per share to range between $0.27 and $0.30, assuming pro forma fully diluted weighted average shares of approximately 131 million.

We expect noncash stock compensation expense for the quarter to be approximately $16 million or $0.08 per tax adjusted pro forma diluted share.

We anticipate a non-GAAP annualized tax rate of approximately 33% for 2009.

However, our actual tax rate will be highly dependent on the shipments made out of our Singapore manufacturing facility to international locations.

We expect capital expenditures for the full year to be approximately $50 million.

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

Good afternoon everyone.

As Christian described, we are off to a great start for 2009.

We exceeded all of our financial targets and extended our leadership position across our core markets.

Our order results for the first quarter were right on plan and our order pipeline is very rich.

The strength of our product portfolio continues to drive revenue.

And I'm happy to report our 31st consecutive quarter of revenue growth.

I'm particularly pleased that we improved our gross margins over the first quarter of 2008 by 5 percentage points to more than 68%.

Gross margin progress, combined with a disciplined expense management, were directly responsible for driving our operating margins above 32%, and as a result we generated over $50 million in cash flow from operations, which resulted in $30 million in free cash flow.

In our microarray business we saw strong growth in consumables compared to the first quarter of 2008.

Our whole-genome BeadChips continued to constitute the majority of array revenue, and were again led by the Human610-Quad.

Following the 610-Quad, was the 660W-Quad that we launched last quarter, which added additional copy number content to our existing Hap550 + BeadChip.

Infineon BeadChip ASPs increased from the fourth quarter and helped drive record gross margins in the array business to well over 70%.

Our custom and targeted content array products also provided a significant contribution to consumable growth during the quarter.

As a reminder, last quarter we moved to our iSelect custom product onto the InfiniumHD platform, enabling researchers to interrogate up to 200,000 custom markers across 12 samples on a single BeadChip.

In addition to iSelectHD, we launched the Universal 32 BeadChip, which will transition GoldenGate genotyping customers from our Array Matrix to the BeadChip format, with the ability to run 32 samples on a chip.

Not only will this give our customers more flexibility, it simplifies our manufacturing processes as we will have one standard array format.

In combination with BeadXpress, customers now have the ability to customize content from 1 to 200,000 markers per sample.

We are seeing encouraging uptake in the lower complexity market, as we achieved our third consecutive quarter of growth in VeraCode reagents shipments for the BeadXpress system.

Annualized consumable revenue per installed instrument was approximately $100,000 in Q1, which is at the top end of our forecasted range of $50,000 to $100,000.

The flexibility of our custom product portfolio will allow us to push deeper into fine mapping and target validation, as well as retain screening applications in the AgBio market.

Although the genotyping applications have been the key growth driver of array revenue, we continue to make progress with our array-based expression products.

This product area grew 16% sequentially and 23% year-over-year, as many customers began to migrate to our Human HT 12 expression array.

This product gives researchers the ability to perform whole-genome expression on 12 samples per BeadChip at $75 per sample.

In the fourth quarter of last year we launched our Cyto SNP-12 BeadChip, a 12 sample chip that targets approximately 300,000 markers known to be associated with cytogenetic abnormalities.

In conjunction with this year's American College of Medical Genetics meeting, we announced that researchers at Baylor College of Medicine's medical genetics laboratories will use Illumina's InfiniumHD arrays to study a broad range of cytogenetic disorders.

The meeting provider provided further evidence that this market is rapidly moving toward arrays for both research and clinical applications, as over 60% of the cytogenetic posters and over 85% of the presentations involve microarray-based approaches.

We view this rapidly growing $200 million market to be a significant future opportunity.

While we saw strong performance in array consumables during the quarter, shipments of our iScan system were below plan.

Since its launch, we have indicated that we expected to ship fewer units of iScans relative to our legacy BeadStations, because of its significant increase in throughput.

And we saw this effect in the first quarter.

This throughput improves the value proposition for our customers by allowing scale of their laboratories with fewer scanners, and result in a material increase in the theoretical consumables revenue per system.

Array consumable revenue per installed system was over $600,000 in the quarter, which is higher than the year ago quarter, but less than the fourth quarter.

We do believe this figure will vary based on the timing of projects at customer sites.

Moving on to sequencing.

Demand for the Genome Analyzer continued to be very strong in the first quarter.

In February we participated in the AGBT conference in Marco Island, Florida.

At the meeting we laid out our roadmap for system enhancements over the course of 2009.

Relying largely on improvements to the chemistry and analysis software, we now believe we will be able to achieve up to 95 gigabases of data per run by the end of this year.

When we achieve this goal we will have increased the throughput by nearly 100-fold since the beginning of 2008.

Clearly the result of these improvements is dramatically lower cost of sequencing and a commensurate expansion of the market.

We remain optimistic that we can push the technology well beyond even these projected levels, putting us in a very favorable position with respect to the forecast for new platforms that might be brought to the market in the next few years.

During the quarter we announced an improvement to the GA instrument as well, offering an upgrade to what we now call the Genome Analyzer 2X.

The GA-2X allows capture of 20% more image area and provides for greater reagent volume, enabling lock-away automation for read lengths to at least 100 base pairs.

Response to this upgrade has been tremendous.

We have already received well over 100 orders for the upgrade kit.

In addition to the throughput map that I just outlined, we are working broadly to improve the usability and the versatility of our system.

This will include software improvements, longer read lengths, simplification of the workflow, reduction of runtimes and improved sample indexing.

In combination, these improvements will place us in an excellent position to continue our leadership of the next-generation sequencing market.

During the quarter we saw several major genome centers place new orders to increase their total capacity.

In February the Genome Center at Washington University in St.

Louis agreed to acquire 21 additional GAs, taking their total to 35.

Toward the end of the quarter Beijing Genome Institute ordered another 12 systems, bringing its total installed base to 29.

Just last week we announced that the Broad Institute added another 22 systems to increase its installed base to 47 units.

While we received a large number of orders from major genome centers during the quarter, over 80% of Q1 shipments went to non-genome centers, continuing to demonstrate the broad market adoption of the platform and demand for sequence data.

In fact, we once again shipped a record number of GAs during the quarter, with the annualized consumable throughput exceeding the upper bound of our forecasted range of $150,000 to $200,000.

Stepping back to take a broader view of our markets, we do expect a slowdown in the growth rate of genome-wide association studies over the next few quarters, as researchers await new content from sequencing projects, such as the 1,000 Genomes Project to be incorporated onto microarrays.

We expect the slowdown to be temporary, as this content will drive a whole new round of rich genome-wide association studies based on rare variant content.

In addition, we believe the trajectory of growth in our sequencing business will more than offset any slowing of growth in whole-genome association studies.

Finally, we continue to see significant opportunities in the agricultural markets, particularly as more species are sequenced, and the content moves toward array-based screening.

Now I would like to share our current view on the economic stimulus program, and the incremental funding to be allocated to NIH over the next couple of years.

We have been actively working with customers to help navigate the various types of grants and sources of funding that will become available in the near future so they can determine how to best achieve their project goals.

We have also implemented promotional packages that match the guidelines set out in some of the NIH grant programs, and are already seeing a significant quote activity across all of our platforms.

At this point it is still too early to determine what the incremental impact of this stimulus will be to our markets, and when that opportunity will be realized.

To date there have been over 250 publications generated using the Genome Analyzer.

And coupled with the performance improvements that we have implemented, we think the GA is in the sweet spot of where we anticipate incremental demand.

To conclude, our financial results demonstrate our ability to execute both commercially and in our research and development programs.

We significantly improved gross margins sequentially and year-over-year, and generated record cash flow from operations.

Our Singapore facility is firing on all cylinders and helping to lower our tax rate and provide opportunities for future capacity expansion.

Our markets remain robust as we still do not see any material impact from the broader economic environment, and demand for sequencing continues to accelerate.

Our product pipeline is the richest it has ever been, enabling us to continue our record of innovation and providing great growth opportunities over the next few years.

Thank you for your time, and we will now open the lines for your questions.

(Operator Instructions).

Ross Muken, Deutsche Bank.

I wanted to dig in a little bit to your comment about the slowing in whole-genome studies and sort of the offset in sequencing.

Can you talk a bit about the dynamics there between, one, obviously the need for content, but also is part of this is the fact that some of the types of work, or some of the work is moving onto just direct to sequencing?

Or you are seeing some of the types of studies and the designs of studies change so that the applicability is more so done on a sequencer than on a microarray-based platform?

Sure.

Just to be clear, we have seen tremendous growth in the microarray business over the last few years.

And the point we were making is that we think the growth rate in that market is going to slow down.

The market isn't going to shrink.

So what we expect is that customers are going to be finishing up existing projects, and maybe out of phase with each other holding up the starting of the next one until some of these new chip versions come out.

That is going to start to happen over the next few quarters.

We do think this is a temporary phenomenon.

With respect to movement over to sequencing, we are seeing great progress in expression applications moving over to sequencing.

In fact, we have seen very high consumable rates and good increases in the consumables onto the sequencer.

We are certainly seeing things like methylation and ChIP-Seq moving over to sequencing applications.

But we don't see in any timeframe we can imagine genotyping moving to sequencing as a replacement technology.

We feel until sequencing gets to be well below $1,000 that the customers will remain focused on doing genotyping when the content is known and the target they are trying to interrogate is very well known.

I guess there was just an article I had read in the New England Journal of Medicine, which sort of suggested that similar to what you had said, that certainly there is quite a bit of array work to be done, but it seems like a lot of the newer projects that are coming along, or the types of studies people are designing, there is a lot more interest, given the high level of success on your platform, that a lot of the new focus is shifting towards the sequencing side.

There is certainly no question that the sequencing -- next gen sequencing market is the fastest growing segment that we know of.

So clearly dollars are flowing into next gen sequencing in a big way.

Maybe you could theorize that temporarily some of the dollars are going to be diverted from arrays into more sequencing projects, but we certainly don't see, at least as it pertains to genotyping, that if you looked out in a timeframe greater than six months that that is really going to be the case.

Of course, in some sense we are indifferent to this shift, because we are the only company that has both technologies.

Right.

That makes total sense.

Relative to the stimulus, the comments you made around quote activity, etc.

-- I have looked at the website you guys have put up.

It is quite different, I think, than some of the approach your peers have taken.

It seems like you are being far more proactive.

Is there anyway you can quantify at all, even on a relative basis, the increase in activity or the increase in inquiries or quotes, or website hits, whatever, kind of the most relevant thing is to give us a sense for the activity shift change, and what the average bench scientist is thinking about now today with this stimulus in his back pocket relevant to maybe what we had seen at activity in the fourth quarter?

I guess we are a little reluctant to quantify it only because we really don't know exactly yet how much is going to come our way, and when it is going to come.

But I can say qualitatively that once the package was put out there, and there was a little bit of specificity around what kinds of grants and what the buckets were going to look like, that our code activity went up dramatically.

And we have seen this across the normal types of what you might call everyday projects and instrument acquisitions that you might expect.

But the other thing we have seen are proposals for very bold projects that people probably couldn't have conceived of six months ago, just because they never thought they could get a bolus of money of that magnitude.

So I do think there are going to be some very large projects financed.

We just don't know exactly what they're going to look like right now.

We are a little reluctant to quantify it.

In fact, we saw in Q1 the stimulus package actually hurt our order rate, we think, because they were definitely some customers who decided not to place orders in Q1, with the hope that they would get stimulus money in Q2, and use that money as opposed to some other pot of funds.

So I think in some ways the stimulus was a bit negative for us in the first quarter.

Great.

Thank you very much.

And congratulations on another strong quarter.

Doug Schenkel, Cowen and Company.

Good afternoon and thanks for taking my questions.

My first question is a little bit of a lead-in, so let me start by just asking you to be patient with me.

On April 16, the Broad order for 22 new Genome Analyzers was announced.

On the 20th you announced the 12 instrument BGI order.

Simple math, that gets you to 33 instruments announced in the quarter.

My understanding is that more than half of the Wash U order is going to be shipped in Q2.

So this takes you north of 40, maybe even 45 instruments that could be revenue recognized in the second quarter.

If that were the case it would seem like your Q2 revenue guidance should be higher.

If the disconnect is simply a function of revenue recognition timing, that is fine, but if it isn't, it would be helpful to understand what other dynamics are in play.

Specifically, are you expecting any change in the pace of placements outside major genome centers over the next couple of quarters, or is there anything that you are doing differently when it comes to pricing?

No, it is Christian.

The orders -- some of these orders -- some of the orders were shipped a little bit into Q1.

Some -- the majority will be shipped in Q2.

But it is really the revenue recognition.

And so you're going to let this spread over the next few quarters with respect to these particular orders.

So I wouldn't take that we put these press release out in tight succession as any indication of the timing of when we are going to recognize the revenues.

Typically we don't talk about the revenue recognition on any particular deal.

But you will see the revenue rollout, a little bit rolled into the first quarter, some will roll in the second, and some will probably roll in the third as well.

That is very helpful.

Let me turn to iScan.

You said that iScan placements were -- and I don't want to put words in your mouth -- but I think you said disappointing.

You attributed this to improved scan time and also to the fact that there is some new content coming off of the 1,000 Genome Study, which will probably slow down GWAS studies.

I just want to make sure there were new no new competitive dynamics that came into play during the quarter that would have resulted in iScan placement slowing, or utilization slowing for that matter.

There is no new competitive dynamic.

What we said precisely was that the iScan number was under plan for the quarter.

Interestingly, we saw exactly the same thing in Q1 of '08.

So exactly the same pattern.

We may have a planning process revision we need to do here, because historically Q1 is always the slowest order quarter in the life sciences industry.

And that is consistent across all companies, and consistent in our business for years.

I think we just over-planned iScans in Q1.

Our pipeline for iScans going forward looks great.

Last question, and then I will get back in the queue.

Anything regarding stimulus funding that is in your guidance at this point?

I know before there wasn't anything in guidance.

We haven't put in anything specific for stimulus.

As I mentioned, there are some large projects, and we certainly haven't put any of those in.

As we begin to look forward in our pipeline -- the way we do guidance is we look at what is in our Salesforce.com pipeline, and we measure that out two to three quarters.

I think a quarter from now we will begin to have some of those orders and prospects actually into that pipeline.

So it will become intrinsic in the guidance in our view of what the business might look like in Q3 and Q4, but there is nothing explicitly in our guidance now.

Thanks a lot for taking my question.

Tycho Peterson, JPMorgan.

Maybe just following up on the question on some of these large orders that you talked about, I am just trying to get a sense as to whether you are seeing this as kind of a natural step up in the buildout of the genome centers, or are they stockpiling ahead of some of these sequencing dollars, or is there kind of a competitive dynamic, maybe they think they are losing researchers to the smaller labs.

I'm just trying to get comfortable with the timing, given that the sequencing dollars haven't really started to flow.

This is with respect to the comments I made about potential large projects?

Yes.

And also the Broad order and Wash U.

Yes, those orders were not related to my comment.

My comment really relates to tackling projects that might not have been even conceived of being possible before, because there is potentially very large pots of money that could become available in stimulus.

You could think of these as being things like maybe we should go sequence 5,000 people.

That is not something that would have not normally been fundable under the standard NIH budget, but might be under stimulus.

So those are the kinds of things that are over and above the baseline business.

And so none of the orders that we have talked about with any of the genome centers or the planned scale up of those genome centers is related to those projects.

The projects would be incremental.

I think the simple fact is that the genome centers are running at full capacity, and they needed more capacity to satisfy the demand for sequencing.

So that is why you saw Wash U.

early in the quarter, BGI and Broad at the end of the quarter.

And I think our expectation is that the demand for sequencing is continuing to accelerate here, even independent of the stimulus.

So we would like to take advantage of that.

That is helpful.

Can you just comment, Christian, on the margin improvement?

I don't know if you can give any other color as to how much of that was a function of mix versus the new kits, versus Singapore?

And then any additional color you can give there would be helpful.

Sure.

Obviously the mix has -- the mix is always important.

On a sequential basis if you look at it, effectively instruments were flat, so the revenue growth came from consumables which are higher gross margin.

But if you look in the gross margin of the consumables, we are seeing meaningful improvements in gross margin and sequencing consumables.

One, because of the reformulated kits have really taken off and been broadly adopted by our customers.

And, two, we are scaling up so quickly that we are really starting to effectively absorb our capacity in our overhead, so you're seeing a nice benefit from that.

The other overarching thing that Jay pointed out, or maybe I did as well in the comments, was pricing has been very stable in both markets.

And really for the array side of the world instruments as well as the sequencing side, both instruments and the sequencing kits.

So we have had good pricing -- a nice pricing environment, and we continue to make significant progress in manufacturing.

In Singapore our costs are lower and we are getting some benefit there.

But it is not so dramatic that it is the key driver of the margin improvement.

But it is definitely something I think you will see us continue to evaluate whether or not we move more products over there over the course of the year and probably into next year as well.

We have also continued to make progress in improving the gross margins of the GA itself.

And that is driven both by continued improved overhead absorption, because we are using the same factory to make more units, but also the fact that we are just reducing the material costs.

And that is through purchase price variance and value engineering on the system.

So we are just continuing to get better in our ability to manufacture the system.

It is more stable from an engineering change perspective, and that allows you to really focus on cost.

Then I guess as we think ahead, you talked about semi-ordered arrays and some of these product improvements, and then obviously Harmonia looks like it potentially has a nice consumable pull-through, is it fair to assume there is enough headroom or a lot of headroom on the margin side going forward?

On the consumables?

Yes.

Yes, I think we have more room on the consumables.

And we are going to keep working on the cost side, and the purchase price to get better as the volume goes up.

So all of those factors will help us.

We are going to continue to engineer the instrument as well.

So we are going to keep working it.

The only flip side argument is that sequencing will become a higher percentage of our business, probably over the next few quarters.

And sequencing is doing great, but not quite at the margin levels of the array business.

Yes, you might have a macro mix factor as sequencing becomes a greater proportion that would be a counterbalance to some of the improvements we make it.

That we have guided -- in this call we have guided to gross budgets in the mid-to upper 60s.

So clearly we are doing better on the margin side.

Which is a change -- obviously a change to where we have been historically.

Just one last one on the ag markets.

Any sort of economic sensitivity there?

Or what are you seeing from a macro perspective in terms of the drivers for the ag business?

It still looks very positive.

Haven't seen any direct economic effects at all.

In fact, our Bovine chip was the fourth highest revenue chip in our lineup during the quarter, so it is generating significant revenue for us.

You said BeadXpress was pretty positive for the ag screening as well?

Yes, the consumables on BeadXpress were terrific, and they continue to grow nicely.

We have really started to really turn the corner in our ability to scale up production, scale up the instrument production, as well as the consumables.

And we are seeing quite a bit of demand out there for the product.

So I think that is an exciting part of the portfolio for us right now.

Marshall Urist, Morgan Stanley.

First question, I was wondering if you could help us a little bit better understand the sequential dynamics around iScan's consumables pull-through?

I know you made some comments, but if you could just help us understand there what happened from 4Q into 1Q.

And then also, what is contemplated in guidance on that front?

And do you think we are stable around where you are right now?

I think the single biggest impact is just the overall seasonality in order rates.

Q4 tends to be a very strong order quarter.

And particularly for arrays customers have money they want to spend in the fourth quarter.

So it is a strong order quarter for us.

Q1 has classically been sequentially a drop in orders, as far back as I can remember for us and even in my prior company.

So no surprise that the order rate would have gone down.

I think that is the primary effect that you saw in the first quarter.

I think the secondary effect might be the fact that there are some people that are beginning to wait a little while to do the next version of the genome-wide association study until the next generation of chips come in.

That was what was the behind my comment that I think the growth rate might slow a little bit in the array business for whole-genome association, not for the other parts of the business, but just for whole-genome association.

Then for the assumption in guidance around that, is it around where it is today?

Yes, I think in roughly the ranges we have been is where we ought to model it.

We are in me the same ranges as our history, so it is not -- it is not really any different than what we have seen.

We have had some -- we had a few -- like last quarter was a really high consumable quarter, as Jay pointed out, in the fourth quarter.

And it was -- also if you look at it, it was significantly higher than Q1 of last year.

So from our perspective we see the consumable part of the array market as being strong.

And, yes, the growth might be slowing for a period of time here, but we feel confident in it.

Great.

And then next question was just again around your comments about people waiting to do the next round of genome-wide association studies.

Can we just walk through what from your perspective in terms of product introductions might be?

Are we waiting for 1000 genomes output before those then get validated and rolled into a new product?

And what kind of timelines might that happen on for you guys?

The first comment I would like to make there is that everybody should realize that these projects are continuing in scale, so it is not that everybody is going to sit and wait beginning in Q1.

They are out of phase with each other.

There are very large projects continuing.

This is just at the margins that we are seeing some people decide to wait.

What they will wait for, we think, is the content to begin to emerge from the 1000 Genomes Project.

That content is already emerging, however, so we are already getting public information put into the databases from the 1000 Genomes Project, and that will continue at a very high rate here over the next quarter.

And I think through the course of this year you will begin to see products begin to contain incrementally more information from what is going on in the 1000 Genomes Project.

So is that a back half event from a new product flow right now?

We are not going to get any more specific about it than that.

But there won't be -- don't think of this either as a digital event, where one day you didn't have it and the next day you did.

Because there'll be chips that will come out that will have increasing percentage of content that comes from these rare variation projects.

The penultimate chip might be two years away.

By the time people really get done discovering all these and screening them there be significant products that contain increasing amounts of rare variant information.

Great.

Got it.

Thanks guys.

Good quarter.

Quintin Lai, Robert W.

Baird.

Jay, I remember several years ago and several hundred million dollars of revenue ago, when we were -- actually we were talking about what happens after HapMap1.

And you made the same comment then, is that as content comes on then new projects start to come out.

Is this analogous to what you think will go forward?

Yes, it is exactly what happened in -- what was it, four years ago -- when we did a project called the HapMap and nobody was doing whole-genome association, because we didn't have great content to do it.

In the last couple of years we have done round one of genome-wide association.

I think the hopes were high that project would produce all the great answers to disease association, and it didn't quite do that.

I think we continue to realize that the biology is more complicated.

And what is happening now is the second phase of that.

So we are discovering more SNPs and it is logical to believe, and I think scientists generally do, that rarer variation is going to be critically important in making these associations.

That is the phase we are entering into now.

So we predict, and we are very confident that there is going to be another broad round of genome-wide association with next-generation chips.

Then with respect to this last quarter, it sounds like the GA was really strong, the instrument placements 80% outside the genome centers.

Are you seeing any commercial big pharma, big biotech interest, or is it still mainly the academic and government side?

There is definitely commercial interest.

As we have stated before, we think if you're going to be a player in molecular biology going forward, you have to have access to next gen sequencing.

It is going to become a pervasive tool in any research lab that is doing molecular biology.

So I think that pertains as much to the commercial customers as it does to the academics.

So we certainly see pharma buying these machines.

We see the ag companies buying these machines.

We see discovery companies buying the machines.

What you are not quick to see is large-scale discovery programs ramp up in pharma.

We just don't think, compared to what happened in the 90s, that we are going to get an order for 30 sequencers from a large pharmaceutical company.

What will happen is that every lab in those companies will have one or two sequencers, we think.

Christian, with respect to hedging, you mentioned this quarter was, what, a $3 million FX impact on the XUS money?

Is that right?

That's right.

That is incremental, or I guess new to your guidance.

You weren't expecting that, were you?

We were expecting some, but it turned out to be a little bit bigger than what we were expecting.

Primarily due to the fact that more and more of our customers have converted to local pricing, and pricing in local currencies.

If you remember, the middle part of last year we implemented local pricing to give customers some flexibility.

And quite frankly, not that many customers adopted it in the middle part of the year.

Towards the end of the year more and more did, and now in the first quarter even more have.

So the exposure was created basically really the Accounts Receivable in euros and yen in particular.

So now we've got enough experience that we can implement an effective hedging program.

So in April actually we started our first hedges of our monetary exposures.

And we will be monitoring it and forecasting.

So, yes, this was a little bit more than what we would have expected.

But it is impossible to predict what the currencies are going to do.

And now I think our customers have settled in on local pricing, so now it is something that I can predict and we can manage as a business going forward.

Got it.

So then the guidance that you gave, the revised guidance, includes an additional cost now for hedging?

That's right.

So it absorbs those costs.

Absolutely.

Bill Quirk, Piper Jaffray.

I just wanted to follow up on Clinton's question, Christian.

What was the topline impact from Forex, given that you are now doing deals in local currencies?

It really wasn't that -- it really wasn't super significant.

It was really hitting us on the AR side basically the realized.

Because our functional currencies in all of these territories are US-based, and so I didn't pencil out the specific dollar impact of the topline.

We are really focused on the balance sheet and the monetary aspects here.

Understood.

Then I guess, Jay, going back to you, I guess rehash one more NIH question.

When do you guys expect to see the impact of that?

Obviously, you think you saw the negative impact in the first quarter, but what about the positive impact?

I think Q3 we may begin to see the first dribbles of it.

Certainly we expect to see some in Q4, and then hopefully a material impact in 2010.

So we are going to wait and see and track what our pipeline looks like.

And we will have some early warnings in our pipeline as we begin to get confident that these quotes are going to turn into real orders.

Turning the question around a little bit, Jay, if we saw an impact from folks holding off in the first, how confident are you that as you guys think about guidance, that we have appropriately modeled that for 2Q?

I think we are very confident.

Our quote pipeline looks great.

The kinds of things that we are measuring for Q2 do not depend heavily on decisions that people will make with respect to stimulus.

We think some of the orders that were postponed in Q1 will come in in Q2.

And because it is so close in, we don't think it is particularly that big a risk for us.

So we are real comfortable with Q2.

Understood.

Then also, if we think about some of the longer-term implications of the new market discovery from sequencing, and we think about that in the context of your array R&D, it sounds like new markers are coming in at a pace that you can absorb them pretty readily into R&D.

We shouldn't expect to see any shocks to that line in the near term?

That's right.

Yes, we don't have any plans to boost R&D in some significant way that would be unanticipated by you or by us.

That even includes our diagnostic work, which is folded into the guidance we have given as well.

That is a great segue to the last question.

And that is, can you give us an update just on the timing for Harmonia and the CLIA Lab and then also ovarian cancer?

yes, let me give you sort of a broad update there.

So we have been working real hard on the CLIA Lab and we are making great progress.

We expect to have an update for you that is more specific, probably in the next quarter or so on the CLIA Lab status.

We are also making good progress toward our 510-K filing on BeadExpress, and so we think we will have some updates for you there as well.

In terms of sequencing for the cancers, acquisition of the samples has been a little slower than we might have anticipated, but we now have samples ready for sequencing.

And we are beginning that part of the project in earnest now.

So we will begin to actually pump out sequences pretty quickly here in the next quarter or so.

With respect to Harmonia, I guess what I can tell you today is on track.

So we continue to expect that product to be available roughly year-end.

Derik De Bruin, UBS.

A lot of my questions have been answered, so I will bat cleanup on some other stuff.

Christian, could you walk through the interest expense line again and what went on?

I was a little bit -- I got distracted, unfortunately, and didn't catch all of it during the presentation.

Sure.

The simple way to think about it is that we had to take $4.7 million of expense associated with the convertible debt.

And then we had $3 million of currency loss.

And that $3 million of currency loss effectively offset -- basically offset our interest income.

And then we also had the normal interest expense of, what, roughly $900,000 or so associated with the convertible debt.

Thank you.

I just want to make sure I got all the bits and pieces in that.

I guess, you put out a press release the other day talking about your relationship with Agilent and the targeted re-sequencing.

I guess, how does this product compare with some of the things that Roche and NimbleGen have been doing?

I guess, could you just talk about the whole debate on targeted re-sequencing versus full re-sequencing, and what you know -- I guess, where is the market leaning towards right now?

We continue to believe that targeted re-sequencing is going to be a huge opportunity.

The technology for doing targeted re-sequencing isn't perfect yet in anyone's product.

We think what we are doing at Agilent is the best there is today and it is working quite well, but it could always get better.

So based on our evaluation, and we have done a broad evaluation both internally and with our customers, our judgment is that the Agilent product is the best.

And that is why we did a comarketing agreement with them.

Do you have -- do you see expanding collaborations along with other players in this area that might have some upfront sample prep?

I am thinking of RainDance, [Fluidyme], or some other companies that are out there?

We always continue to evaluate those technologies, and we have.

And obviously we are continuing to do a lot of work internally on front-end sample prep to make it easier for customers, more user friendly, more versatile for the different applications.

We are continuing to invest internally.

And we watch all of the potential new technologies out there.

As you have probably seen from us in the past, we are not adverse to working with others where that technology might be better than what we have in-house.

So we will keep an eye on it.

I guess, how sustainable is the high 60s gross margin number?

Do you think that -- could we potentially see a lot of fluctuation with that quarter to quarter, Christian?

It is obviously dependent upon the mix and the pricing environment.

Assuming a stable pricing environment and similar mix, I do think we have the pieces in place to -- in our guidance we said mid to upper 60s.

And if those assumptions continue to hold, there is no reason why we can't continue to operate at these kinds of levels where we achieved this quarter.

But once again it depends on the mix and the pricing environment.

With the lower iScan than planned, was that beneficial to the gross margin this quarter?

Yes, that would help a little bit, of course, because the instruments are typically lower than the consumables.

But even so, even if it was equivalent to last quarter, we are seeing fundamental improvements in the gross margins, in particular in the sequencing business.

And I think that is giving us opportunities to create leverage.

One thing we have talked a lot about is that we do believe that there is opportunities to improve our leverage on that gross margin line over the course of 2009.

The first quarter was really the first example of that.

And we had a very strong performance there.

One final question.

You said he had about 100 orders for upgrade kits.

How much of that is -- how much of your installed base has upgraded?

We actually said well over 100, so we didn't give the number.

And at this point virtually none of our installed base is upgraded.

We will be doing those upgrades over the course of the second and third quarter.

How much do you expect to -- how many of your customers do you expect to upgrade?

We think that if you were to look out sort of toward year-end that it would be in the 80% to 90% range.

There is such a dramatic performance enhancement from this upgrade that we think virtually everybody will adopt it, unless for some reason they can't get the funds to do it.

When you look at the roadmap you presented to expanding the GA at AGBT, how do you -- will this upgrade basically be enough to get you to some of those targets that you're talking about towards year-end, or will there have to be an upgrade of this upgrade to get to the 100 G pull-through?

This is one piece of the roadmap, but it is the only piece that is related to hardware.

So everything else has to do with software, chemistry and density on the flow cells.

Isaac Ro, Leerink Swann.

First off, regarding the development of semi-ordered arrays in Harmonia, can you maybe detail a little bit what you think the key hurdles are for you guys either technically speaking, or maybe operationally, between now and the end of -- now and launch time?

And then secondly, what kind of interest are you getting at either of those platforms?

Semi-ordered arrays we are not actually offering to customers yet, so there is no demand for that, other than the theoretical demand that people would have for it.

The key technical hurdle in semi-ordered arrays, first, is to pick the optimal method.

There is lots of ways of doing it, and we are exploring a number of different options.

And working to make sure we pick the best one and the one that is easiest for customers to use, and keeps the workflow very simple.

That is really the focus.

We want to make sure that we had the ability to push this as far as possible over even beyond what we have committed to by the end of this year.

With respect to Harmonia, there is not much invention involved in Harmonia, it is really implementation.

And it is just an engineering project to create a Fluidic module that interfaces into the iScan imaging platform, and then making the changes in the iScan system to deal with the introduction of Fluidic s and how the software has to work in iScan.

So it is not really a project that has technical risk.

It is really one where we just have to work through it.

Then just on Harmonia, have you had any customers actually voice interest in it?

That is what I was getting at before.

Yes, absolutely.

Because it is out a little ways in terms of its availability, not many customers are ready to place orders yet, but there is a tremendous interest, we think.

And as we get closer and closer to launching the product, we think that is going to ramp up significantly.

We are as bullish as ever about this configuration.

We think it is going to be a great transition in products for customers using arrays, for those who want to do targeted sequencing after genome-wide association.

And also for customers who want to do applications like expression and methylation.

Just in terms of diagnostics, I know you mentioned your progress that you're working on for the ovarian side, but over the last year or so there has obviously been a lot of speculation that you guys would be a potential acquirer of other assets.

Would it be fair to say that the prices -- is it somewhere you are perhaps seeing that prices are still too high for your liking, or you see a lack of compelling assets out there?

Any reason why you guys haven't been more active on acquisition of diagnostic assets?

We have continued to look, and we have been resented with lots of different opportunities there.

You have the classic problem of the ones that are inexpensive are the ones that are aren't that valuable to us and aren't going to help us that much.

And the really great companies with great business models are doing well.

So that is a classic tension in any acquisition situation.

We also want to be very cautious about anything we do do, because we are a Company that has a high growth rate, and we are very profitable, and we need to be careful about what any combination would mean to our financials.

And how rapidly we could work through any dilution that would come with an acquisition.

So we are being very cautious here.

We want to make sure that whatever we do, if we do do something, it is strategically very consistent with the direction that we are moving and can advance our diagnostics program in a significant way.

We don't want to be impatient about this and make a mistake, so we would rather be patient and get it right.

Then lastly, Christian, I just wondering on tax rate volatility, how much could we see throughout the course of the year, depending upon that ramp in Singapore?

Do you have a range on tax rate?

I don't think it is really going to be that volatile from where we are today.

We are talking about 33% in the guidance.

And one thing about tax rates is that you've got to predict where you're going to be for the whole year, and then book it in each quarter.

I don't expect it to be dramatically viable -- or dramatically volatile over the course of the year quite frankly.

Just lastly on pricing, I know you said that in arrays you haven't seen much at all, but Affy obvious, just to name a competitor, has been working on GeneTitan and trying to get more adoptions for that.

Do you have any concern or are you saying seeing in the marketplace any pressure from customers who might be getting better pricing on that because of that type of product?

GeneTitan is not yet available for genotyping, as far as we know, so it is only available for expressions.

I think that is a market that we compete in very effectively now with our HT-12 product, which is very aggressively priced.

And I think we are doing great there.

I don't think we have seen any pressure.

Obviously, they are a strong competitor and we are going to watch very closely what they do in the genotyping space, and do everything we can to remain very, very competitive when they do that.

Zarak Khurshid, Caris & Co.

Thanks for taking my questions, the majority of which have been answered.

Speaking of expression, more broadly what are you guys seen in that space currently?

We said in the script that we have seen very strong growth in expression year-over-year and sequentially in the array business.

So something like 23% -- year-over-year growth of 23%.

We continue to do quite well on the array side.

We are also seeing lots of customers using our kits for doing expression on sequencers.

And if you look at the state of consumables year-over-year Q1 to Q1 on the sequencers the numbers are up by about a factor of 3 in terms of how many kits are being ordered for doing expression on the sequencer.

We continue to be really optimistic about the potential of expression using sequencing, because you can get so much information that you could never get from an array.

And so we are going to continue to push over the next few years to advance that technology and drive the cost of doing it down.

And that is largely going to be done by indexing.

Once we do that, we think half the market or more will move over to sequencing.

It sounds swell.

Then just as a quick follow-up, could you talk to us a little bit about your current headcount and what the growth plans are there for this year?

We are about 1,550 people.

Roughly.

And we mentioned in the call last quarter that we expect to add somewhere in the range of 400 people to the Company during the year.

We have been disciplined in terms of our expenses in Q1 and so we are running significantly behind that pace right now.

We are going to continue to monitor that and decide as we go forward how many we will actually add.

That is what sort of what budget range look like.

Matthew Scalo, Canaccord Adams.

On the GA-2X upgrade, is that a physical replacement of the system or is it come, as you mentioned, a kit and therefore kind of an installation tweaking process?

It is a field upgrade that is very straightforward.

It does involve some small pieces of hardware.

We are changing a manifold on the system.

And we are placing a little box that stores the reagents and chills the reagents.

It is done by a service technician in the field.

So it is very straightforward to do.

So the system can hold a higher level of replacement for -- excuse me -- reagents.

Is that fair enough walk away time increases.

Right.

When the system was originally designed, we have made such great progress in read lengths that we had never anticipated we would be pushing up to 100 and potentially 150 in read length.

So we didn't design it to hold enough volume of reagents to support that long a read.

So what this does is it allows customers to put in more reagents so they don't have to top those off turning the run.

The manifold change is really a very simple engineering change that simply increases the amount of imagable area by changing the physical relationship with some parts so that the objective lens can actually move over and scan more of the flow cell than it does today.

It is just a simple change in how one part is designed.

Could you do those well over 100 orders, could you install those in say the second, third quarter here, or are we talking about it will be spaced over time throughout 2009?

We certainly could do 100 over two quarters.

We won't get 100 done in Q2.

Just a macro level question about the larger genome centers and the press releases that you have had on the sequencing side.

Are you seeing that these large centers are hitching their wagon to one horse on the sequencing platforms or is it a reflection more of volume and activity level?

I guess we would say is we feel really good about our market share and competitive position in the genome centers.

There is a number of them that have committed exclusively to our platform.

And most of them are using Illumina as their principal platform.

There is a few that are using alternative technologies.

But we feel like we have a very strong market share in the genome centers.

Davis Bu, Goldman Sachs.

If I could actually follow up on the last one first.

Can you give us some color on what your market share or order wins are outside of the genome center?

I know you have given us some color in terms of what percent of your placements has been there.

And I am asking this in the context of the stimulus package and maybe new customers coming online, and what we might be able to expect there in terms of your share.

We have given some information out that we think our market share is more than the combination of all the other competitors, and we continue to believe that.

It is a little hard to give specific numbers, particularly if you're trying to judge revenue systems versus nonrevenue systems, things that are placed for evaluation around contingency.

But we do think that our market share is 50% or higher, and we intend to keep it there or grow it.

Great.

Then two follow-up questions from previous questions.

The first is, with the upgrade kits, first, is it safe to assume that the GA-2 upgrade kits are complete, distinct from the GA-2X upgrade kits?

And similarly for the BeadArray upgrades.

And related to that, are these being -- do you plan on booking these as instruments sales or consumables sales?

If I understood your question correctly, the GA-2s that are in the field are all upgradable to GA-2Xs through this upgrade kit that customers order.

We will begin to ship -- most of the Q2 shipments out of the factory will already be GA-2X's, and so those won't require upgrades.

I was thinking about the previous upgrade kits and the trade-ins, actually I was thinking of for the iScan trade-ins and the genome analyzer to operates from the Genome Analyzer Classic.

Is it safe to assume that those are all completed?

Yes.

For the most part.

There are probably some old GA-1s out in the field, but there are very, very few.

And with respect to iScans versus BeadStations, which I think was the other part of your question, the BeadStations are great machines for a lot of the installed base.

And they continue to run just fine for a lot of customers.

So we think the transition to iScans will take a long time there, because anybody that is buying new systems, of course, buys an iScan, but not everybody needs six times the throughput of the prior system.

So that will be a gradual turnover of the installed base.

Jon Groberg, McCoury Macquarie.

If Derek thought he was batting cleanup then I guess I am in the pitcher's spot here.

I hear you are a strong right-hander, so that is good.

People might get confused.

I am on Australian time or something too.

Just a quick clarification and then a question or two.

But are these Avantome -- are these accrued compensation charges with Avantome, are those cash charges over three years or are those noncash charges?

Those will be -- those are cash charges over three years.

So just out of curiosity, why do you exclude those -- just because they are associated with the acquisition and they are going to go away over after three years, that is the view?

Yes, they are effectively -- they are basically contingent (inaudible) -- well, actually not -- that part is not contingent, but it is baked in.

What we did is we had to just take the whole purchase price of the transaction, and it is just the way we allocated the dollars.

There is a cash component and a noncash component.

It is just how we decided to allocate between the different elements of the transaction.

But it is not like you have already paid the entire cash component and you're just amortizing, there actually is kind of a small -- there is a piece of it that is cash over the next three years?

Just so that I am clear.

That is exact -- that is right.

Then I just wanted to talk about some of your margins, because everyone started talking so much about comments around iScan or whatever, but the margins were so impressive.

I guess on the one hand you seem to be saying things that seem a little counterintuitive to me.

You are saying that you are still, I think, over 85% of your wins are outside of the genome centers, but your utilization rates seem extremely high.

You said you are over the $200,000 per instrument annually on the consumables.

And I think when we used to talk before the view was always as more of these went outside of genome centers, or maybe they are not running them 24x7, that would come down.

I am just curious what dynamic you are seeing there, given that so many of these are going outside of the genome centers, that allow you to keep that number so high?

I think a couple of things.

One, is that we have become much more efficient in installing these systems quickly and getting them up and running.

So if you look at last year when we shipped a system, it might not be installed and fully operational for six or eight weeks or sometimes longer, once the customers got trained.

Now that goes much faster, because we are better at it, number one.

We have staffed appropriately to do those installations, number two.

The other thing is that there is many of these systems that are now the second or third system that a customer has purchased.

So if they already have one, the training they need to install and get the second one into production is very small.

So the startup phase is going much more smoothly and more efficiently than it would have before.

The second thing is that all the genome centers are putting them into full production.

So last year there was still a lot of experimenting going on with a reasonable fraction of the systems that they had installed.

They were exploring new applications.

If you think they had six or eight systems, half of them might be in what they call tech dev, and that wouldn't be in full production.

And now all the incremental systems they are buying go right into full production.

So there is just no delay.

And those are the factors.

Do you think that number is sustainable or do you think that number will come down?

Before you used to think it would come down as more and more of these went outside of the genome centers.

It is hard to know.

There is not too many customers who are going to buy these instruments and let them sit around for very long.

So we do think the utilization rates will be pretty high.

So there is -- we could create arguments that would say could stay at this level, or maybe drift back down to 150.

It is hard to know.

But we think the general pressure is towards the upper side.

So we're feeling pretty good about where we are at right now.

Dan Leonard, First Analysis.

I just want to clarify the currency aspect and its impact on your P&L.

Was there a $3 million a quarter hit for currency in the guidance you provided in February?

No, there was not.

We didn't know we are going to have this big of an exposure in our guidance for February.

Christian, do you look at the exposure going forward as being about the same $3 million -- is that a $3 million a quarter number?

I think we are implementing the hedging program, so my expectation is that the exposure will be minimized from here.

But there is no question that our business is scaling in currencies outside of the US dollar, and we are going to have currency exposures up and down.

They are difficult to predict on a given quarter, of course, but we are implementing a hedging program to try to minimize that exposure.

To summarize your thoughts, you would expect there would be an exposure in forward quarters, but it would be south of $3 million?

That would be my hope, because a hedging program would be effective, yes.

That is all the time we have for questions today.

Thank you very much for attending the call.

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

Thank you for joining us today.

This concludes our call.

And we look forward to our next update in July following the close of the second quarter.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.