Illumina Inc (ILMN) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2010 Illumina, Inc.

earnings conference call.

(Operator instructions) I would now like to turn the call over to your host for today, Mr.

Peter Fromen, Senior Director of Investor Relations.

Please proceed.

Thank you, operator.

Good afternoon, everyone, and welcome to our first quarter 2010 earnings call.

During the call, we will review our financial results issued today and offer commentary on our commercial activity, 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 found in the Investor Relations section of our web site at Illumina.com.

Presenting for Illumina today will be Jay Flatley, President and Chief Executive Officer, and Christian Henry, Senior Vice President and General Manager of Life Sciences, 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 our expected financial results 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.

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 the risks and the uncertainties to cause results to differ, we refer you to the documents that Illumina filed with the securities and exchange commission including forms 10-Q and 10-K.

Before I turn the call over to Christian, I want to let you know that we will participate in the Deutsche Bank Healthcare Conference during the week of May 3, the [Bair] (inaudible) conference in Chicago the week of May 17, and the Goldman Sachs healthcare conference in Los Angeles the week of June 14.

For those of you unable to attend any of the upcoming conferences, we encourage you to listen to the webcast presentation which will be available through the Investor Relations section of our web site.

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

In the first quarter, we recorded 192 million of total revenue.

This represents growth of 16% over Q1 of last year.

Product revenue was 174 million, growing 11% over the prior year period, and was led by significant growth in our sequencing products.

While our microarray business declined relative to Q1 2009, revenue was up sequentially for the second consecutive quarter, and we now believe our array business has stabilized.

Consumables revenue for the quarter was $114 million, compared to $103 million in Q1 of 2009.

This represents year-over-year growth of 11% and was driven by strong growth in sequencing consumables offset by a decline in total microarray consumables.

Annualized sequencing consumable pullthrough on the Genome Analyzer was above our projected range of $150,000 to $200,000 per system.

Despite lower revenue on a year-over-year business, microarray consumables still represent more than half of our total consumables revenue.

The decline relative to last year was primarily attributable to lower sales of whole-genome genome-typing arrays, but was partially offset by growth in focused content arrays.

Annualized microarray consumable pull-through on the install base of array readers was in our targeted range of 400,000 to 500,000 per system.

Total instrument revenue for the quarter was $57 million, up 13% compared to $is 50 million in Q1 of last year, and was based largely on the growth of the sale of sequencing systems.

Instrument revenue declined sequentially as we began to transition the HiSeq 2000 into our sequencing portfolio.

Initial demand for the HiSeq has been strong; however, as we communicated last quarter, our manufacturing capacity was constrained in Q1, resulting in a limited number of shipments.

We expect to be manufacturing the HiSeq system at significant volumes by the end of the second quarter.

The sequential decline in sequencing instrument revenue was slightly offset by microarray instrument revenue which grew both sequentially and on a year-over-year basis.

Services and other revenue which includes genotyping and sequencing services as well as instrument maintenance contracts, was $18 million, compared to $9 million in Q1 of last year.

The primary driver of year-over-year growth was the increase in service maintenance contracts also,associated with our growing install base of sequencing systems.

However, we alSo, had a particularly strong quarter in our Fast-Track Services business due to the completion of a few large contracts.

Before discussing our gross margins and operating expenses for the quarter, I would like to note that we recorded a pretax amount of 17 million related to noncash stock-based compensation.

This impacted our EPS by a tax adjusted amount of $0.09 per pro forma diluted share for the quarter.

I want to remind you that going forward, we will include this expense in our presentation of pro forma net income and earnings per share; however, in our discussion of gross margin, operating expenses and operating margin, 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 our non-GAAP measures included in today's earnings release.

Total cost of revenue for the quarter was $60 million, compared to $56 million in Q1 of 2009.

The Q1 2010 costs include stock-based compensation expense of 1.3 million, compared to 1.4 million in the prior year period.

Excluding this expense and 1.6 million associated, with the amortization of intangibles, non-GAAP gross margin was 70.3%.

This compares to 71.2% last quarter, and 68.3 in the first quarter of 2009 a year-over-year improvement of 200 basis points attributed to the reduced cost and beneficial mix of sequencing consumables.

From a sequential perspective, gross margins declined only slightly from the fourth quarter, primarily due to a lower mix of Genome Analyzers within our total instrument revenue.

As we indicated at our R&D Day in January, many factors are forecasted to influence our 2010 gross margin.

For example, the lower initial margin on the HiSeq compared to the GAII will depress total instrument margins So,somewhat as HiSeq becomes a greater proportion of total instrument revenue.

Additionally, our GAII to HiSeq trade-in programs will lower margins in the back half of the year as we deliver on the trade-in transactions.

On the positive side, the increasing proportion of revenue that is generated by our consumables will favorably impact gross margins.

Pricing in our markets continue to be relatively stable.

Overall ASPs for BeadChips increased as an increase in ASPs for whole genome arrays was slightly offset by lower ASPs in our focus content chips due to a number of large sample volume purchase orders that incurred higher discounts.

Moving to operating expenses, research and development expenses were $44 million, compared to $33 million in the comparable period of 2009, and included $5.9 million and $4.6 million, respectively, in noncash stock compensation expense.

Excluding stock comp expense and $0.9 million of accrued contingent compensation in both periods, and $2 million of acquired research and development in Q1 2009, R&D expenses were $37 million, or 19.2% of revenue, compared to $25 million or 15.2% of revenue in the prior year period.

Relative to fourth quarter of 2009, non-GAAP R&D expense grew approximately $3 million.

Approximately half of this increase was related to nonrecurring project expenses and the remainer was associated with increased benefit rates and hiring.

SG&A expenses were $50 million, compared to $43 million in the first quarter of 2009, including, stock compensation expense of $9.8 million and $8.8 million, respectively.

Excluding these noncash expenses, SG&A was $40 million, or 21.1% of revenue, compared to $34 million or 20.5% of revenue in the prior year period.

This increase is primarily due to increased head count.

Relative to the fourth quarter, non-GAAP SG&A expense increased by less than 1 million, largely attributable to new benefit rates.

GAAP operating profit for the first quarter was $38 million.

Excluding noncash expenses outlined earlier, our non-GAAP operating profit for the quarter was $58 million or 30.1% of revenue, compared to $54 million or 32.6% of revenue in the first quarter of last year.

GAAP interest and other expense in the first quarter included approximately $5.1 million in noncash interest expense associated with our outstanding convertible debt.

Excluding this amount, pro forma interest and other income was $0.2 million, which includes approximately $1.1 million of negative foreign currency effect due to the revaluation of monetary assets outside the United States.

Our non-GAAP tax rate for the quarter was 35.1%, compared to 33.4% last quarter.

Our Q1 tax rate was higher than the expected annualized tax rate, given that the US R&D tax credit has not yet passed for fiscal 2010.

We continue to expect this measure to be passed and retroactively applied at So,me point this year.

We reported GAAP net income of $21 million or $0.16 per diluted share, compared to net income of $19 million or $0.14 per diluted share in the prior year period.

Excluding noncash interest expense and the other items identified in our press release and net of pro forma and tax expense, non-GAAP net income was $27 million or $0.21 per pro forma diluted share, compared to $25 million or $0.20 per pro forma diluted share in the first quarter of 2009.

During the the first quarter, we generated $55 million in cash flow from operations.

We used approximately $10 million for capital expenditures resulting in $45 million in free cash flow.

This compares to $38 million in the first quarter of last year.

Q1 free cash flow benefited from strong collections during the quarter which alSo, helped to lower our DSo, to 74 days, down from 80 days in the fourth quarter and 94 days in the third quarter of last year.

Inventory balances increased to approximately $101 million, related primarily to the scale-up of instrument manufacturing.

Depreciation and amortization expenses for the quarter were approximately $9 million.

We ended the quarter with approximately $748 million in cash and investments.

As you are aware, we have elected to move away from providing quarterly guidance and now only provide annual guidance.

Consistent with that approach, we are not providing an update to guidance today.

Going forward, we will update guidance periodically, which may not be every quarter.

And at this point, I would like to turn the call over to Jay for So,me remarks on our commercial activity during the quarter, before we begin our Q&A session.

Jay?

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

We are off to a strong start in 2010, growing revenues 16% year-over-year, and showing growth across nearly all aspects of our business.

In what has historically been a seasonably soft quarter, our backlog increased by 12% excluding the BGI deal, which means backlog continues to be at all-time record levels.

The growth was led primarily by strength in our sequencing business.

In addition to strong order and revenue results, we alSo, expanded non-GAAP gross margins by 200 basis points year-over-year and delivered non-GAAP operating margins above 30%, exceeding the high-end of our long-term operating model.

Total Q1 revenue in our microarray business grew sequentially for the second consecutive quarter, but declined off a difficult comp in the first quarter of 2009.

The array shipments were led by the Omni-1 Quad with the 660W-Quad in second position.

While the Omni-1 Quad had its strongest quarter since its launch last June, our total Whole-Genome, or GWAS, microarray revenue declined sequentially and year-over-year as compared to strong results in both prior periods.

Despite these declines, we're encouraged by the fact that orders for whole-genome arrays grown sequentially for the past two quarters.

Our projections for a return to growth in GWAS are largely predicated on the introduction of rare variant content from the 1000 Genomes Project.

This year, we expect to launch the Omni 2.5 and Omni 5 BeadChips, the next products in our Whole-genome product portfolio.

The development of the rare variant content to the Omni 2.5 is complete and the preliminary data indicates that the Omni 2.5 will increase genomic coverage by over 50% from the 660W-Quad, and nearly 40% from the Omni1-Quad.

This increase in coverage indicates that there's a tremendous amount of genetic variation that simply was not represented during the first round of GWAS due to the limited [snip] content available from the HapMap Project.

We believe that the increased coverage of the Omni 2.5 and the Omni 5 will provide a very strong drive for customers to conduct rich GWAS to pursue the missing heritability in common disease.

Early in the quarter we launched the OmniXpress BeadChip, a 12-sample microarray with over 700,000 markers per sample.

Later in the quarter, we enhanced the OmniXpress by incorporating the flexibility from our HiScan select technology, creating the OmniXpress Plus.

This new eight-sample product delivers the same high quality whole-genome content of the OmniXpress, but allows customers to add up to an additional 200,000 markers to create a semi-custom array with over 900,000 markers per sample.

The OmniXpress Plus builds on the third generation of our arrays, offering unparalleled flexibility at a competitive price point.

Total microarray instrument revenue grew both sequentially and year-over-year, primarily due to strong HiScan shipments.

During the quarter, we showcased our new HiScan product at the annual ABRF conference.

HiScan is a new microarray scanner that incorporates innovation in optics and imaging that were developed as part of the HiSeq program.

By leveraging these improvements, we scaled the sequencing throughput to 50g per run when used with the SQ module.

The combined system, which we call the HiScan SQ, is what we used to refer to as Harmonia and is the first system capable of performing microarray and sequencing applications on the same instrument.

The HiScan SQ system began shipping last week and will be priced at approximately $400,000, including the cost of the cBot for sequencing sample prep.

The express platform saw strong demand from agrigenomics customers this quarter which led to sequential and year-over-year growth in orders and shipments for our VeraCode reagents.

In our effort, to further build the product and applications portfolio for BeadXpress, following the close of the quarter we launched our VeraCode ADME Core Panel designed to help researchers understand the genetic variability associated with drug response and predisposition.

This panel contains 184 key ADME biomarkers across 34 genes, facilitating low cost, rapid screening, and thousands of samples to predict adverse drug effects, ultimately reducing the cost of drug development and enabling more targeted therapies for personalized medicine.

Turning now to our sequencing business, we had another strong quarter as demand for next-generation sequencing continues to outpace our expectations.

As most of you are aware, in January we launched the HiSeq 2000, the next generation of Illuminas sequencing technology.

This platform utilizes the same SBS chemistry used in our market-leading Genome AnalyzerIIx with a completely redesigned instrument, which can now generate 200 gigabases of data per run.

We are seeing So,me exciting throughput results in the hands of our customers, with runs generating well over 200g with error rates equal to or better than the Genome Analyzer.

In addition to customer data, we have publicly presented internal runs where HiSeq has generated 350g of dater per run.

This level of throughput equates to nearly four whole human genomes in a single run, or approximately 45g of sequence data per day.

Initial demand for HiSeq has exceeded our expectations.

We shipped and recognized revenue on our first production systems in Q1 and have entered Q2 with by far the largest instrument backlog in the company's history, even excluding BGI.

We're quickly ramping our manufacturing capacity for HiSeq and believe that we will exit the second quarter at scale with the ability to meet customer demand with reasonable ship schedules.

As we have mentioned before, we expected demand for HiSeq to impact demand for the Genome Analyzer, predominantly at high throughput customers.

Eighty-five percent of Q1 HiSeq orders came from outside the major genome centers, highlighting the wide adoption of Illumina's SBS chemistry and the simplicity of HiSeq's user interface workflow.

While HiSeq did have an impact, we continue to see strong demand for the Genome Analyzer.

In fact, Q1 GA shipments were nearly comparable to the first quarter of 2009 and enabled us to grow total sequencing instrument shipments substantially year over year.

We expect to see demand continue for the Genome Analyzer in those labs that may not have the budgets for a HiSeq.

We are continuing to support and develop the Genome Analyzer and are nearing completion of the early access program on our 95g kits.

We are extremely encouraged by the data that our early access customers are generating.

Not only are they achieving higher throughputs and reads up to 150 bases but they've achieved significantly higher data quality than with our previous kits and software.

With these five kits and software, customers have been able to generate runs out to 100 bases with average raw read accuracy across an entire run of nearly 99.8%.

Importantly, all of these improvements are extensible to the HiSeq platform.

This industry-leading raw read accuracy is extremely important as it enables customers to perform a wide variety of applications for which they are is no strong reference template available, such as de novo sequencing or capturing the large structural rearrangements and somatic mutations that are inherent in complex cancer sequencing.

For this reason, we believe that SBS chemistry, whether run on the GA or on the HiSeq, is the premier tool for sequence-based discovery in emerging medical applications.

In summary, Q1 was off to a great start.

We grew revenue year-over-year and sequentially despite a strong Q4 and a Q1 that's typically a seasonally soft quarter.

We generated non-GAAP gross margins over 70% for the second quarter in a row.

Operating margin was at the high end of our long-term operating model, and we generated 45 million or $0.35 per share in free cash flow.

We now believe that our array business is stabilized and that we have the industry-leading portfolio and pipeline to capitalize on the array opportunities over the foreseeable future.

We are engaged in the most exciting product launch in the company's history, with the shipment of our first HiSeq unit and see a market with no signs of slowing.

Initial demand has exceeded our expectations and we are scaling the manufacturing of the system accordingly.

Lastly, we continue to build on our already record backlog levels which we expect to enhance our visibility for the remainder of 2010.

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

(Operator instructions) Your first question comes from the line of Ross Muken with Deutsche Bank.

Please proceed.

Good afternoon, and congrats on a great quarter.

Thank you.

So, as you embarked on this product stratification strategy and you launched the HiSeq, versus your initial expectations in terms of ordering patterns and type of customers, it seems like everything has gone better than planned.

What was the biggest surprise in all of this?

And what do you think caused the customer base to really gravitate to this instrument versus what the buying pattern was before and has that changed your expectation for what percent of go-forward orders that HiSeq comprises versus the other two boxes?

I think probably the single biggest surprise was the percentage initially right out of the box of customers that wanted to move over to HiSeq from the Genome Analyzer.

That was reflected in what we saw as a response to our trade-in programs and also, the percentage of new orders that were focused on HiSeq.

Despite that, we think we did pretty well on GA orders as well and we were able to maintain momentum through the quarter on the Genome Analyzer.

As we look forward, I think the real reason that people are drawn to HiSeq is a combination of its key features.

The high throughput and the potential for more upside, even from where we are today.

The ease of use that this system represents for customers in terms of how they load know flow cells and how the software works and how the reagents are delivered are all appealing to customers that want to minimize the labor content of sequencing in their laboratories.

As we look out towards the rest of the year, I think as we get through the next couple of quarters we probably expect, compared to our original models, a somewhat higher percentage of HiSeq orders versus GAs.

And the part that is probably the biggest surprise is that the smaller labs are moving to HiSeqs where we might have expected them to stay with the Genome Analyzers.

Great.

Thank you very much.

Your next question comes from the line of Marshall Urist with Morgan Stanley.

Please proceed.

Hey, guys.

Good afternoon.

Question on the array business.

Maybe if you could talk about what you're seeing on the Whole Genome studies from an order, and from a shipment perspective.

What types of studies are those?

And your level of confidence in them going from here to using the supplemental content on the two and a half and ultimately the five?

And is that what's driving better confidence around the pace of a pickup from rich GWAS?

I guess we would characterize it now, as we tried to in the script.

We think the business is stabilized.

The type of studies that the customers are doing are, from a disease perspective, similar to what they were doing previously, but they are migrating now towards our two families that are beginning to have components of rare variant content.

We think the roadmap that we put out there that allows customers to sort of get started before the 2.5 and the 5 are available, is helping them encourage customers to get started with the Omni product line, because of their ability to subsequently add content and get all the way up to the 5 million content if and when they choose to, and to do that economically.

So, I think that's the motivation for the business now stabilizing, and it's our expectation as we get into the back half and the 2.5 comes into the market and later the 5 comes into the market , that we are going to start to see renewed growth in the overall

Okay.

And then just one follow-up on your updated thoughts around pricing for rich GWAS chips.

Given varying opinions on study size, do you think that -- should we be thinking per sample, ASPs should be -- should be stable or could we see ASPs come down, but that offset by volume?

Well, the pricing we will have on a per sample basis as we get into the 2.5 and the 5 will be higher than what you have traditionally seen on a per sample basis, at least over last year or so, because of the richness of the content, So, we will be able to have prices somewhat higher.

We to be a bit cautious about pricing them too high because, you are right, our customers do need to, in general, run larger sample sizes here and they will be limited by their total budgets for the study.

So, as we get closer to launching these products, we will be looking at those tradeoffs to make sure that we encourage customers to start the studies and really get aggressive in executing them.

But also that we've maximized our revenue in terms of the combination of volume times price.

Great.

Thanks a lot.

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

Please proceed.

Thanks, good afternoon.

Nice quarter, guys.

Thank you.

Hey, Jay, I want to real quickly to just clarify something.

You mentioned the backlog was at 12%.

Was that a sequential or year-over-year number?

That's a sequential number.

Sequential number -- okay.

And had we not had the supply constraints in HiSeq, is it reasonable to assume that the product growth would have been up in a somewhat similar manner, i.e.,

Similar to the backlog increase?

Yes.

Well, the instrument numbers would have been up materially, let me leave it at that.

Had we not been supply constrained.

The orders came in pretty strong during the quarter.

We were really pleased with our overall order rate.

In fact, our orders were a record if you discount the BGI order that we had last quarter.

We are pleased with the overall order rate in the business.

Great.

Thanks much.

Thank you.

Your next question comes from the line of Doug Schenkel with Cowen & Company.

Please proceed.

Hey, good afternoon, guys.

Hi, Doug.

So, recognizing your new policy on guidance, would you be willing to talk a little bit about how Q1 came together relative to expectations?

Obviously, we didn't know what you guys were guiding to in the first quarter, but it's probably fair to assume that numbers were a bit better than what you expected heading into the quarter?

Well, we've characterized it a bit.

I would say that our orders exceeded our internal plans.

And as a result of that, our shipments were a bit over internal plans as well, and we therefore have a backlog, sort of in the range that we might have expected.

Gross margins were in the range of what we had guided and I think we were pleased with that gross margin result, and that's probably all we're probably willing to say about it.

Okay.

And then I guess the second question, on HiSeq, the demand is strong and yet it sounds like you actually had a really strong GA quarter.

Are there instances where GAs are being sold as a bridge until a HiSeq is available?

And if so, how broadly is this occurring?

Just trying to get a gauge on basically how stackable the GA trends are with the clearly strong demand for HiSeq.

Yes, we put some programs in place that do allow customers to bridge, where they essentially buy the GA and the HiSeq as a package deal and that allows them to get started on the GAs and obviously get the consumable flow going for us, and then they take delivery of HiSeq later on in the year.

And that was a very positive reason and a very positive program that we had that helped the GA shipments during the first quarter.

Okay.

Thanks a lot for taking my questions.

Sure.

Your next question comes from the line of Dan Leonard with First Analysis.

Please proceed.

Thank you.

How are you thinking about the growth in your service revenue going forward?

Yes, we've commented very consistently about that, that our service revenue bounces around dramatically quarter to quarter and it depends on the flow of contracts and those can be sometimes quite large.

And if we happen to finish a contract in the quarter and deliver it, the revenue can be substantial, and that's certainly what happened in the first quarter.

And other quarters where we don't, and then the revenue can be lower.

So, expect that number to bounce around.

I do want to add, though, Dan, that the core maintenance contract revenue is continuing to grow off a steady base.

You know, we had a very strong year last year, as everyone knows, in selling Genome Analyzers and as those come off their first year warranty, we have been pretty successful at getting extended warranties.

And so you see significant portion of the growth, when you look at it this quarter, was, in fact, related to those extended maintenance contracts, and that's a nice recurring revenue stream that a reasonable margin.

Okay, thank you.

And do you have any commentary you could offer on early feedback on the GA IIE?

A little too early to tell.

Okay.

Thank you.

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

Baird.

Please proceed.

Thanks.

Good afternoon, guys, this is actually Matt in for Quintin.

Hi.

First question, just building off of what Ross asked, as the percentage of customers moving over from the GA to the HiSeq has increased, can you update us on how you are thinking about the trade-in program and how that will evolve over the near term?

Well, the trade-in programs -- there's a couple of variants of the trade-in programs depending upon when the customers took delivery of their GAs.

And so, those programs have definitive expiration dates.

So, you shouldn't expect those programs to go on indefinitely.

They definitely have a fixed time period associated with them, within that period only can a customer trade in an old GAII.

Thanks for that.

And then just secondly, Jay, there's been a lot of attention on the bracket issues going on in the courts.

Just kind of wondering at a high level what sort of implications, as that unfolds, you know, as you think about your business that could have?

Thanks.

Sure.

Yes, our oncology program -- discovery program is proceeding very nicely in our labs and we finished sequencing all of our ovarian samples and we're now into the data analysis phase.

We are watching the Myriad case with great interest and obviously nobody knows what the ultimate outcome is going to be of that, but I think that the underlying strategy for us is unchanged, that we will continue to pursue what we are doing in our discovery programs, and we believe that Illumina can be very successful regardless of the outcome of that Myriad case.

But it's something that I think is of great interest in the industry and something that we are watching very closely.

Your next question comes from the line of Jon Groberg with Macquarie Capital.

Please proceed.

Thanks for taking the question.

I was just curious, if you think about kind of flow through the second and the third quarter as HiSeq continues to ramp, can you maybe just talk about the impact to gross margins as that kind of flows throughout the year?

Well, I think what we said in general is that you can expect -- we talked in the script about a couple of influences on gross margins, that you can expect the net of those to represent a decreasing gross margin to some extent through the year, as we get through this trade-in window.

And we think that will largely be taken care of by the end of the year, and we'll be looking again at gross margins as we get toward the end of the year and recasting those for 2011.

But, I think the net influence will be somewhat down in gross margins from where we reported in Q1.

Yes, I think, Jon, you have to remember -- part of that will always depend on how quickly people ramp up on the consumables because the consumable pullthrough on the HiSeq system is -- is going to be higher.

We expect it to be higher than the GA and so that helps thinking about offsetting any of the trade-in activity.

And then, of course, finally the fact that when we take a trade-in for a GA, we will turn around and refurbish that and sell it again and that will be a -- we expect that to be a high gross margin sale, but obviously there's a timing gap.

And so it will be difficult to game out how that all plays itself out from any particular quarter.

Okay.

And then, I know you talked about some of what happens, your variance sequentially in the GWAS market, but any view at all in terms of projects that are stacking up in terms of visibility for the second half?

Or is that still kind of the status quo in terms of your expectations that once there's more content, those will proceed, or if you have any more concrete evidence of what will happen there?

I guess it's not concrete at this point, but we certainly have developing customer interests as we get closer to the launch of the 2.5 program, and we definitely have some seminal studies that are already on the books and committed to use these next families of chips that we're developing, and it's just a matter of getting those into the market and beginning to ship them.

And once the initial data comes out, I think then we'll really begin to build momentum for additional follow-on projects.

So, not a lot more specificity, but growing level of interest is how I characterized it.

And just a quick follow-up as I think about arrays and your launch of the HiScan, talking to some people as they think about that, what's your view of the customer that may show interest in that?

Advances are being made so quickly in sequencing that I guess sometimes we are just trying to figure out exactly how or why they might buy that instrument now.

I'm sure you have a different view as well.

I'm trying to understand who you think the key customer is for that.

That product will appeal mostly to midmarket customers, and a great example is someone running a core lab that has both demands to do arrays and sequencing and where that demand can go one way or the other.

You know, it's a little bit difficult to forecast.

It also is going to be great for customers that want to begin to transition from doing ray-based work into sequencing work or use sequencing as a follow-up.

So, expression is a great example where a customer may be doing a ray-based expression and wants to begin to transition that over to sequencing, and wants to have both of those capabilities operate simultaneously.

Also, it's great for customers who want to do follow-up dense sequencing in examining hits that come out of an initial GWAS program.

So that is the rough set of an application set.

In terms of the performance of system, as you all know, we delayed it a little bit because we wanted to incorporate the optical advancements that we made as part of the HiSeq development and we were successful in doing that and that's why we changed the name to HiScan.

And when you put the module next to that, the throughput of the system at 50G is equivalent to what the vast majority installed base can do today even on the Genome Analyzer, because they are not yet migrated to the 5G Kit.

So, that level of throughput is quite impressive and with multiplexing and indexing capabilities that we have, the customers will be able to do lots of samples through that system And we think it has got a broad market appeal.

Your next question comes from the line of Steven Lichtman with JMP Securities.

Please proceed.

Hello, can hear me?

Yes.

Oh, sorry.

On the HiScan SQ, what should we assume consumable pullthrough per placement there?

You know, it's a little bit hard to predict in advance because it's going to be a blended consumable pullthrough of arrays and sequencing and until we get some out there and begin to understand what the mix is, it will be a little bit hard to predict that.

So, the presumption probably ought to be, take the -- for somebody that orders a combined instrument up front, probably the best guess would be to average the sequencing and the array pullthrough and then we'll see how it actually comes out.

Okay, great.

And then just on the follow-up, in terms of BGI placements, were there any in the quarter?

And if so,, can you quantify that?

We shipped the initial set of systems to BGI and they were qualified in their laboratory.

So, they are up and running on their initial systems.

However, because of the way the revenue is recognized on that sale, the actual revenue contribution in Q1 was insignificant.

Okay.

All right.

Great.

Thanks, Jay.

Your next question comes from the line of Derik De Bruin with UBS.

Please proceed.

Hi, good afternoon.

Hi, Derik.

Hi.

When we look at the R&D rate, the R&D levels for this quarter, is that a pretty good go forward number for the next few quarters?

Well, I think that we are going to continue to see some increase in the absolute number over the course of the year as we add some resources.

We did have some one-time expenses that hit us in Q1, but we have, as we model out our revenue through the course of the year we continue to believe that there's a percentage of revenue that we can drive that down somewhat through the back half of year.

Okay.

On the GWAS, can you just give a little color on -- are you saying that orders are up in arrays?

Are these old customers redoing studies they have already done?

Are these new customers that have never done chips never done arrays before and they are coming in because of new content?

Or are these customers that might have used one of your competitor's platforms and now they are switching to Illumina?

I guess I wouldn't say that we have a rash of brand new customers jumping into the array business.

I would characterize most of the orders from existing customers.

There's probably a few customers that we have gained from our competitor, but, you know, I think in terms of market share it's probably relatively stable since our share is pretty high to begin with.

Fair enough.

You know, one of the questions I've had a lot lately from people is the question about the size of the DNA sequencing market and the opportunities for growth in there and, how many instruments can be placed before you kind of reach saturation.

I'm just wondering, can you step back and give us your view on -- once you get through the initial placement of the HiSeq and you have all the diversified platforms out there - what is the right number of instruments?

Does it kind of mimic where the CE market went?

I'm wondering -- this seems to be the bulk of my incoming calls.

Yes, I guess the way we characterize that is that of the install base of capillary instruments, there's the in the range of 15,000 of those.

We think the overall market opportunity for systems, if you were to stay in the full performance range of that capillary install base, is probably somewhat larger because sequencing today compared to where it was three or four years ago is a more powerful set of tools that can do a broader set of applications.

I think the overall opportunity is somewhat larger there.

The market segment we have served largely to date, though, has been just the high throughput segment of that.

If you looked at the proportion at 15,000, that's in the high throughput segment, you might guess that to be some number of thousands -- 3,000, 5,000 -- no one knows what that is going to turn out to be.

And so, what you have begun to see us do is begin to stratify our product offerings to put systems of different levels of performance and price point into the market and I think you will continue to see us do that over time.

And I guess in aggregate, we continue to see very robust growth in this market, as far out as we can model at least, and then as the price point continues to come down, brand new market segments open that weren't available to capillary systems.

And a great example of that is cancer sequencing which we think over the next three to five years is going to be a fantastic market opportunity.

Great.

Thanks a lot, Jay.

Your next question comes from the line of Tycho Peterson with JPMorgan.

Please proceed.

Hi, this is Sangi sitting in for Tycho.

Thanks for taking the questions.

Jay, you talked about the type of customers interested in HiSeq versus Genome Analyzer.

I was wondering if you could provide more color around -- if you could characterize the type of customers in terms of -- by geography?

Are they new, next end sequencing users versus existing users and if you could give us more color around that?

And also, your take on how this might impact the upgrade cycle with the 95G for Genome AnalyzerIIx?

Yes.

I guess geographically, at least to my knowledge, we haven't seen any unique characterization of the customer base that's purely related to geography.

I think the cleanest cut on how the customer segment here is based on funding.

If customers have enough money to buy a HiSeq, they will more than likely buy a HiSeq, because it offers so many next generation capabilities in terms of the user experience and the way the software works and the ability to control it remotely.

And so, I think that's probably the easiest way to draw the distinction.

You know, in terms of the 95G upgrade, I think almost all of the customers in the install base of Genome Analyzers will migrate to the 95G kits simply because it's going to be a more economical kit for them to run.

They will get more throughput for a price that's not very different.

So, the overall cost per genome will go down.

I think you will see everybody do that conversion and there's no hardware change necessary for them to do it.

So, there's no incremental cost for them to make that change.

And, we'll probably have a little more color in the next quarter or two about the projection we have ultimately of how many existing GA customers will trade in their G As for HiSeqs, but even with those trade-ins, it's currently our expectation that we will be able to resell the GAs that come back to markets that can't afford to buy HiSeqs.

Great.

That was helpful.

And my follow-up is, could you give us an update on your [Cleo] lab and your efforts around developing the sequencing-based HLA testing service?

Yes, the Cleo lab is up and running and that's where we run our consumer-based sequencing program.

We don't today -- we're not really prepared to give an update on the development of the HLA product.

It's in the development process right now.

With the express, if you are asking about the regulatory environment, we are in the 510k approval process with the express and we think we are in the very, very late stages of that approval and expect it relatively soon.

Great.

Thank you so much.

(Operator instructions) Your next question comes from the line of the Zarak Khurshid with Wedbush Securities.

Please proceed.

Good afternoon, thanks for taking the question, guys.

I think you mentioned at the GA consumable pullthrough was above the prior range.

Can you quantify how much above the range it was and what the key driver of that uptick was?

And if you could, I know it's early days for HiSeq, but how should we be thinking about the consumable pullthrough on that system?

Yes, I guess the way to characterize it is that it was -- it was slightly above the range, is sort of the way to think about that.

We still believe that that range is a good one to have in our minds in terms of how we modeled the business.

In terms the drivers, I think what's happened here, of course, is that we had a challenging quarter or two where we had the reagent quality issue and we successfully rebounded from that and came back to what we think might represent a little bit more of a steady state on overall reagent pullthrough.

From a HiSeq perspective, the system has the capacity to run essentially twice the reagent pullthrough that a GA has.

We don't have, obviously enough installed yet to have any empirical data on what the actual run rate will be.

We will probably have a little bit of that data on the next call, but it's too early to know what the customers will actually do with it.

Sounds good.

A follow-up question for Christian, if I may.

It sounds like the CapEx came down significantly in the quarter.

How should we be thinking about that for the remainder of the year?

Thanks.

Well, I think CapEx in general, we have completed most of our major building programs but, you know, I think we are kind of at a run rate basis at this point in time.

We have projects that go up and go down, but, you know, we are kind of in the run rate range at this point.

Your next question comes from the line of Doug Schenkel with Cowen & Company.

Please proceed.

Hey, guys.

I may have missed it, but did you comment on the stimulus contributions in the quarter and whether or not that had any impact on the strong instrument revenue number?

We didn't comment on it, but we can.

To our best ability to estimate it, we think we had somewhere in the range of $20 million or $21 million of orders in Q1 that came in.

You know, we're probably going to get increasingly cautious about giving that number because the challenge, of course, is always to figure out had there been no stimulus, what would it have been otherwise?

And that question is a very difficult one to answer.

As we get further into the year, it will become increasingly confounded with what would have been the base business.

While we think that's about the right number, it will probably get more and more difficult to calculate it with any precision.

Okay.

And then just a quick follow-up.

Any chance you would talk about whether it was more on the sequencing or the microarray side, and is it fair to assume it's more instruments than consumables in the early going?

Yes, I don't think we are prepared to comment on how that actually applied and what we shipped against it at this point.

Okay.

Well, I appreciate you taking the question and that color is really helpful.

Okay.

At this time, there are no further questions.

I would now like to turn the conference over to your host for today, Mr.

Peter Fromen.

Please proceed.

Thanks, operator.

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

Thanks for joining us today.

This concludes our call and we look forward to our next update in July following a close of our second quarter.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

Have a great day.