Illumina Inc (ILMN) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2010 Illumina Incorporated earnings conference call.

My name is Yvette, and I will be your operator for today.

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

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

(Operator Instructions).

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

Peter Fromen, Senior Director of Investor Relations.

Please proceed, sir.

Thank you, operator.

Good afternoon, everyone, and welcome to our fourth quarter 2010 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 2011, 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 website at illumina.com.

Presenting for Illumina today will be Jay Flatley, President and Chief Executive Officer and Christian Henry, who is our Senior Vice President and General Manager of Life Sciences, as well as our 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 will 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 uncertainties that could cause the results to differ, we refer you to the documents that Illumina filed with the Securities and Exchanges 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 Cowen Healthcare conference in Boston the week of March 7 and the Barclays Global Healthcare conference the week of March 14 in Miami.

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 of our website.

With that, I'll 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 fourth quarter financial results and discuss our financial guidance for 2011.

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

In the fourth quarter, we recorded $261 million in total revenue.

This represents growth of 45% over the fourth quarter of last year.

Product revenue was $246 million, representing 47% growth over the same period in 2009.

Our revenue growth was driven primarily by our sequencing products, but also by solid year-over-year growth in our micro array business.

We generated total consumable revenue of $132 million in Q4, which was up 26% on a year-over-year basis.

This growth was largely the result of our expanded install base of sequencers which generated annualized consumable revenue per system at the high ends of our range at $150,000 to $200,000 per system.

On the HiSeq system, consumable shipments in Q4 were over $350,000 per system on a annualized basis.

The significant pull through of the HiSeq was largely offset by decreases on the genome analyzer as customers transitioned to the new platform.

As HiSeq becomes a greater percentage of our install base, we expect the aggregate consumable pull through to increase accordingly.

On a sequential basis, consumable revenue was roughly flat as growth in sequencing was offset by a decrease in array consumables.

Annualized consumable pull through across our install base of micro array scanners was at the high end of our targeted range of $400,000 to $500,000 per system.

But, due to timing of shipments, revenue was down sequentially.

However, orders for micro array consumables were at record levels in the fourth quarter.

Instrument revenue for the quarter was $110 million, up 81% over the fourth quarter of last year and 25% over last quarter.

In both cases, the growth in instrument revenue was largely due to success of the HiSeq 2000.

Increased production of the HiSeq in Q4 allowed us to ship a record number of systems.

With our scale up now complete, we will significantly reduce delivery times over the first half of 2011.

An additional outcome of this scale up was our ability to produce and ship 29 HiScan FQ systems in Q4.

HiScan shares many of the same components with HiSeq, and the combined demand created challenges in delivering on the HiScan SQ orders.

Breaking this bottleneck resulted in revenue growth from micro instruments of over 100% year-over-year and over 80% sequentially.

Services and other revenue, which includes genotyping and sequencing services, as well as instrument maintenance contracts was $16 million, compared to $13 million in Q4 of last year.

The primary driver of year-over-year growth was the increase in maintenance contracts for our growing install base of sequencing systems.

Before discussing our gross margins and operating expenses for the quarter, I'd like to note that we recorded a pretax amount of $20 million associated with non-cash stock based compensation.

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

As a reminder, we now 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 include stock comp expense, and other non-cash 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 $95 million, compared to $55 million in the fourth quarter of 2009.

The Q4 2010 comps include stock based compensation expense of $1.6 million, compared to $1.3 million in the prior year period.

Excluding this expense and $2.3 million associated with the amortization of intangibles, non-GAAP gross margin was 65.1%.

This compares to 67.8% last quarter and 71.2% in the fourth quarter of 2009.

There are two key factors that contributed to the sequential decline in gross margin in the quarter.

First, the mix of revenues was much more weighted towards instruments compared to the prior quarter.

As you may realize, instrument gross margins are generally lower than consumable gross margins.

Second, the gross margin of instrument revenue was, as anticipated, significantly lower than the prior quarter, due to a greater number of HiSeq shipments associated with the genome analyzer trade in program.

Shipments of HiSeq systems under these trade in programs were approximately 75% complete at the end of Q4 2010 and as such, we expect dilutive impact of these trade ins to decrease substantially in the first quarter 2011 and be a non-factor beyond the first quarter.

R&D expenses for Q4 were $46 million compared to $40 million in the comparable period of 2009.

These numbers include $7 million and $5.6 million respectively in non-cash stock compensation expense.

Excluding this expense, and $900,000 of accrued contingent compensation in both periods, R&D expenses were $38 million, or 14.4% of revenue compared to the prior year R&D expenses of $34 million, or 18.8% of revenue.

SG&A expenses were $62 million, compared to $49 million in the fourth quarter of 2009, including stock compensation expense of $11.3 million and $9.6 million respectively.

Excluding stock comp expense, SG&A was $51 million, or 19.4% of revenue, compared to $40 million or 22.1% of revenue in the prior year period.

GAAP operating profit for the quarter was $69 million.

Excluding the expenses outlined earlier and a gain recorded for the change in fair value of contingent consideration related to a prior acquisition of $10 million, our non-GAAP operating profit for the quarter was $81 million, or 31.3% of revenue, compared to $55 million, or 30.3% of revenue in the fourth quarter of last year.

GAAP interest and other expense in the fourth quarter included a $13.2 million impairment charge related to a cost method investment.

This charge is related to an investment in a entity unrelated to our sequencing business.

Although we continue to believe in the value of the underlying investment and our associated research collaboration, uncertainty regarding future funding of this entity required us to impair this investment as of the end of the fourth quarter.

Additionally, the GAAP figures include a $5.4 million non-cash interest expense charge associated with our outstanding convertible debt.

Excluding the impairment and non-cash interest expense, pro forma interest and other income was $0.7 million.

Foreign currency exchange rates did not have a material impact on our business during the quarter.

Our non-GAAP tax rate for the quarter was 34.3%, compared to 35.5% in the last quarter.

The decrease was primarily due to a benefit from the retroactive extension of the US R&D tax credits recorded in Q4, partially offset by costs associated with IP restructuring that had a negative impact on the Q4 tax rate.We believe this restructuring will have a positive impact on our future tax rate.

We reported GAAP net income of $38 million, or $0.25 per diluted share compared to net income of $12 million, or $0.09 per diluted share in the prior year period.

Excluding the items identified in our press release and net of pro forma tax expense, non-GAAP net income was $41 million, or $0.29 per pro forma diluted share compared to $27 million, or $0.21 per pro forma diluted share in the fourth quarter of 2009.

I would like to note that our GAAP and our non-GAAP net income per share were negatively impacted by approximately $0.02 due to increased stock based compensation and share count from the Q4 rise in our stock price.

During the fourth quarter, we generated $81 million in cash flow from operations.

We used approximately $12 million for capital expenditures.

This resulted in free cash flow of $69 million.

This compares to $55 million of free cash flow in the fourth quarter of last year.

Free cash flow benefited from another strong quarter of collections which yielded a DSO of 58 days as compared to 81 days in Q4 of last year and 65 days last quarter.

In addition, we used $28 million to repurchase our common stock.

As a result, we ended the quarter with approximately $894 million in cash and short-term investments.

Inventory increased approximately $12 million in the quarter, primarily due to the scale up of the HiSeq 2000 instrument manufacturing line.

Depreciation and amortization expenses for the quarter were also approximately $12 million.

Before we discuss specific annual financial guidance for 2011, I'd like to expand on the financial impact of the lease of our new corporate headquarters.

Due to the downturn in the real estate market, we were presented with a unique opportunity to relocate our corporate headquarters to a campus in San Diego with significant expansion flexibility.

In December, we completed a transaction that enabled us to meet our long-term expansion needs and is expected to be approximately cash flow neutral with respect to our existing and planned lease obligations at our current location.

We expect to transition to the new facility beginning in the fourth quarter.

Coupled with this transaction, we expect to record a one time non-cash charge of approximately $30 million related to our remaining lease obligations.

In addition, we expect to incur additional expenses associated with the accelerated depreciation and a brief period of double rent.

We intend to exclude the items from our pro forma results.

All of this was accounted for in the preliminary guidance that we provided in January.

I will now provide our financial guidance for 2011.

Our guidance includes the integration of the acquisition of Epicentre Biotechnologies which closed last month and excludes certain charges associated with the move of the Company's corporate headquarters, incremental interest expense associated with the Company's convertible debt, the amortization of intangibles and acquisition related charges.

As a reminder, we now include non-cash stock based compensation expense in our earnings per share guidance, in addition to our discussion of net income and the corresponding per share amounts.

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

We expect revenue growth for the full year of 2011 of approximately 20% from 2010 revenues of $903 million.

We expect gross margin to improve over the course of the year to 70% for the full year.

We anticipate non-GAAP earnings per share to grow more than 30% from 2010 non-GAAP earnings per share of $1.06, and we expect to incur stock compensation expense of approximately $101 million, or tax adjusted amount of $0.49 per pro forma share.

We expect full year weighted average diluted shares outstanding for the measurement of pro forma amounts to be approximately 145 million shares.

At this point, I'd like to turn the call over the Jay for some 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.

I'm pleased with our operational and financial results for the fourth quarter.

We delivered strong revenue growth as we continued to scale the production of our sequencing instruments and consumables.

This enabled us to reduce lead times for the HiSeq instruments and clear the backlog of most of the launch promotions, paving the way for gross margin improvement in 2011.

The market for the HiSeq system continues to be robust, and as a result, Q4 orders were at record levels.

Excluding the BGI order recorded in Q4 2009, total revenue grew 45%, year-over-year, and we exited the year with the largest backlog in the Company's history.In the field, the HiSeq transition continues to go extremely well.

Customers are consistently generating runs yielding throughput well above our product specifications.

To meet demand, we increased HiSeq manufacturing capacity by approximately 30 % over Q3 and now believe we're in a position to materially reduce customer lead times.

As Christian mentioned earlier, we're seeing encouraging uptake in HiSeq consumables, as more customers place instruments in production in increased utilization.

In fact, in the fourth quarter, the incoming order rate for HiSeq consumables was equivalent to that of the genome analyzer.

Total Q4 micro array revenue grew sequentially and year-over-year, led by strong results in array instrumentation, partially offset by a sequential decline in array consumable shipments.

Total consumable orders and shipments were particularly strong in the third quarter, given the end of the NIH fiscal year, and consumable orders continued to grow in Q4, adding to the array backlog.

GWAS shipments in Q3 were strong as a result of the first full quarter of Omni 2.5 availability, but down sequentially in Q4, as these customers focused on execution of their rare variant pilot projects.

We expect to see results from these studies around mid year and believe that some customers are waiting for results before commencing studies on our rare variant arrays such as Omni 2.5 and the upcoming Omni 5.

Looking into 2011, we anticipate that positive results from rare variant pilot studies will renew demand for GWAS.

Overall, orders for total array consumables grew 7% sequentially and 14% year-over-year.

We're in development of the Omni 5, which is expected to increase genomic coverage and incorporate additional rare variant content from the 1000 Genomes Project.

We plan to ship the Omni 5 this summer.

Early January, we enhanced our iSelect custom array product line, introducing three new formats that allow complexity up to 1 million custom markers.

In addition to increased complexity, customers have the option to augment their content at any time after they design the initial chip.

We feel this is a highly compelling offering for researchers who want to add new content to association studies produced by ongoing sequencing projects.

We generated record revenue in micro array instrumentation in Q4, as we were able to reduce our backlog of HiScan and HiScan SQ systems.

In fact, array instrument revenue more than doubled from Q4 last year and nearly doubled from last quarter.

Orders for HiScan and HiScan SQ also grew sequentially as customers showed continued demand for the platform's flexibility to perform sequencing and array applications on a single instrument.

As most of you know, last summer, we announced the acquisition of Helixis and at the same time, launched the Eco real time PCR system.

In Q4, Eco orders tripled and shipments nearly tripled over the third quarter.

We received positive customer feedback on the system's high performance and attractive price point and continue to focus on scaling Eco manufacturing with the expectation of matching market demand by the middle of 2011.

We're in the process of moving Eco manufacturing to Singapore and expect to place it under GMP by the end of 2011 in anticipation of increasing diagnostic applications.

Turning now to our sequencing business, we had another outstanding quarter.

Total sequencing revenue grew by over 70% from the fourth quarter of last year and continues to be supported by broad adoption of the HiSeq 2000.

Excluding genome centers, over 75% of the HiSeq shipments included genome analyzer trade ins.

This mix of shipments was the primary contributor to lower gross margins compared to Q3.

Looking to 2011, we expect the impact of the genome analyzer trade ins on gross margins to taper off beginning in the first quarter.

The breadth of the market opportunity for HiSeq has continued to exceed our expectations.

Notably, this week we passed through 1,400 peer review publications citing SDS chemistry.

Nearly 90% of Q4 HiSeq orders came from outside of major genome centers.

By simplifying the sequencing workflow, increasing accuracy and dramatically lowering the cost per genome, HiSeq is truly redefining the trajectory of sequencing and expanding the market.

In addition to expanding the market, we believe we grew our relative share of this market in Q4.

In fact, just recently we received a significant order from a major genome center that had not previously scaled on Illumina technology.

Part of this market expansion also includes whole human genome sequencing through the Illumina genome network.

Our partner based model allows us to flexibly leverage sequencing capacity across the network in addition to our internal capacity.

We recently received a multi-hundred genome order from a major pharmaceutical company through this service and have over 1,000 genomes in backlog from a wide range of customer types.

Early in January at the JPMorgan conference, we shared several improvements that we've made to our TruSeq SBS chemistry.

One result of these improvements was the demonstration of multiple sequence runs which have generated over a terabyte of data per run, or 1 trillion bases of genetic information.

By our estimates, we believe that one run of HiSeq at these levels generates more sequence data than the entire world generated in 2007.

With these system improvements, we've been able to increase throughputs of factor of 1,000 from 1G to over 1T of data per run in just four years.

These 1T runs took approximately 14 days and utilized 2 by 150 base paired end reads.

We plan to commercialize the underlying improvements through a series of software and reagent releases beginning this spring.

The first of these is a 2 by 100 base pair kit which is currently running at early access customer sites.

We expect this kit to enable the entire HiSeq install base to generate about 600G of throughput per run with no increasing current run times and no upgrade to the hardware.

Through new [Inaudible] in these kits, we have been able to increase cluster density while simultaneously improving accuracy.

Customers will now be able to sequence five genomes per run, which will drive down the reaging cost per genome well below $5,000.

Much of our development work in sequencing has been focused on increasing throughput.

As we've done that, we've also brought down chemistry cycle times to keep overall run times in check.

We've recently made major improvements that have allowed us to bring our chemistry cycle times by a factor of five.

And, last month, we debuted the benefits of this breakthrough in our new MiSeq personal sequencing system.

MiSeq is an easy to use, low cost sequencing system with a compact footprint, just two feet square.

The beauty of MiSeq is that it utilizes the same TruSeq SBS chemistry that powers the HiSeq and the genome analyzer and supports complete work flows from sample to data in less than eight hours.

The sequency capabilities of the platform are entirely flexible and can perform single 36 based pair reads, all the way up to 2 by 150 based pair reads, yielding as much as 1.5G of data, depending on the application.

This represents more than 10 times the data generated by comparably priced systems.

HiSeq will be priced below $125,000 all in.

An additional breakthrough of MiSeq is that it does not require any peripherals to support sample prep or analysis.

The cluster generation step of the TruSeq workflow is performed on the system and eliminates the need for a CBOT instrument.

MiSeq has an onboard computer powerful enough to handle control of the instrument base calling and secondary analysis.

MiSeq is also capable of cloud connectivity, so sequence data and analytical reports can be uploaded and shared easily between teams.

We took the human interaction concepts pioneered on the HiSeq platform to the next level on MiSeq to facilitate broad market adoption.

The reagents for MiSeq are premixed and packaged into a simple, single reagent cartridge that includes an RFID chip for limbs tracking.

The customer simply pipettes their sample into the cartridge and places it in the system, loads their flow cell, which is also RFID enabled, and they are ready to sequence.

We expect total per run prices to range from about $400 to $750 per run.

Along with the introduction of MiSeq, we also announced the acquisition of Madison Wisconsin based EpiCentre Biotechnologies.

EpiCentre is a leading innovator in next generation sequencing sample prep technology, and has also developed a broad portfolio with specialty enzymes.

I'm happy to welcome the entire EpiCentre team to Illumina and look forward to great contributions to our product evolution.

The leading product in EpiCentre portfolio is the next tera assay that enables a radical reduction in library prep time across all of our sequencers.

In the eight hour MiSeq workflow I mentioned previously, cycle time reduction is a key driver, but the new Next Era library kit is as well.

The Next Era kit allows ultra-low sample input and can generate sequencer ready libraries in less than two hours.

We're extremely excited about the future possibilities that we see with Epicentre to further improve and simplify the workflow across our product lines.

The initial feedback we've received on MiSeq has been extremely positive.

Last week at HEBT, customers commented on numerous applications where they believe MiSeq will offer distinct advantages such as targeted resequencing, small holtum sequencing, clinical and screening applications and [HiSeq] quantification for high throughput labs.

Interestingly, several of our larger customers commented on how they would use the system to rapidly and cost efficiently develop new applications which could then be ported over to the high throughput HiSeq system.

We will begin taking orders for MiSeq in April and plan to ship early access units by the middle of the year with volume production in Q4.

In respects, Q4 was our best quarter of 2010.

We generated very strong year-over-year sequential revenue growth, we successfully transitioned a significant number of customers to the HiSeq platform and were able to maintain gross margins within our long-term model.

Through disciplined expense management, we delivered operating margins over 31% and generated a record $81 million of operating cash flow, resulting in free cash flow of $69 million, or $0.49 per share.

Our array business is stable and continues to demonstrate a valuable and complimentary relationship to our sequencing portfolio across multiple markets.

Together, the two technologies are a powerful combination unique to Illumina and validated by the strong uptake of the HiScan SQ platform.

We continue to believe that rare variant base discovery will renewal GWAS growth in the back half of the year as we see the results of ongoing proof of principal studies and launch the Omni 5.

Looking back on 2010, it was a transformational year for the Company.

We grew total revenue by 35% and generated $223 million in free cash flow, or $1.66 per share.

We managed through the launch of the most successful product in the Company's history and generated over $1 billion in orders, ending the year with a record backlog of approximately $300 million.

In 2011, we see no signs that the demand for sequencing will slow down.

The global funding environment for our markets remains stable, the continued improvements in TruSeq chemistry will enable whole genome costs on HiSeq below $5,000, opening new markets, enabling much larger sequencing studies.

And, finally, the introduction of MiSeq has rounded out our portfolio nicely to deliver TruSeq chemistry and next generation sequencing to a broader market, including exciting clinical applications.

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 Marshall Urist with Morgan Stanley.

Please proceed, sir.

Thanks, hello guys, good afternoon.

So first question, Jay, if you might talk about the --how you are thinking about the MiSeq market opportunity, both the relative size of the opportunity selling to the current install base then how you see starting to transition to new customers, be it either or didn't academic side or clinical and maybe how the timing of those two markets might play out?

I certainly think the low hanging fruit will be to sell in to the existing install base.

These are customers that we call on every day, are already familiar with the SES chemistry in the way our data is analyzed.

And we think in the high throughput labs, they'll be using MiSeq for doing income quality control, they will be using it for application development and in many cases, as a way to deploy targeted applications either for targeted sequencing, amplicon sequencing or emerging clinical applications.

I think in parallel, we are going to begin selling to the broader market as well.

The easiest orders, of course, will come from the install customers.

But we think that there is a very ripe and large opportunity to begin to go after the remaining portions of the CE capillary market.

Not all of those are going to be accessible, because some of them are very sticky markets, like forensics and some of the food and water testing markets.

But certainly, much of that market, it's used for doing amplicon resequencing, as an example, will be accessible very quickly to the MiSeq technology and be able to be done at a much lower price.

So, we think -- we are going to open up that academic base quite broadly and very quickly.

We think if the long run, clinical applications are going to become very important in MiSeq.

And the consistency of SBS chemistry is important there, the accuracy of the data, ease of use, all the factors we've talked about are important.

And the feedback we've gotten already is that this system really hits the sweet spot of performance and throughput that clinical customers are looking for.

Obviously, it's going to take a long time, some number of years to develop a large number of applications in the clinic, but this will enable that application involvement to start right away.

Okay.

Perfect.

And then Christian, just one follow up on the gross margin guidance, I wanted to clarify, is that 70% a GAAP number?

And then we think about the cadence over the year, where should we be thinking about exiting the year from a gross margin perspective as the trade ins are done and as you start to get pull through on the consumable side for HiSeq?

Yes, so Marshall, the 70% is a non-GAAP number.

But if you look at our stock comp expense and other expenses that fall in to that gross margin line, they're really insignificant.

It's really the stock comp expense and the intangibles.

So, it's likely we would be above it, both on a GAAP and a non-GAAP basis.

As far as the cadence goes, it's really going to be, as we said in the first quarter, we have some more of the HiSeq trade in, or GA2x trade in programs, we have more of those units to get through.

So, that will have some impact on the first quarter, and then as you get into the year, the install base is becoming big enough on HiSeq, as we said, in terms of consumable pull through.

You should really start to see the consumables continue to move, and that will help the gross margin as you get into second, third and fourth quarter.

And then is that going to be ratable over the year so we could be exiting the year on a low 70s number?

Well, we haven't made any comments with respect to that.

I think at this point, we are just talking about how do we get to 70% for the year.

And then obviously, in the first half is lower, the other half is going to be higher.

But we are not ready to talk about any specific quarter yet.

Okay, great, thanks for taking the questions.

Your next question comes from the line of Ross Muken with Deutsche Bank, please proceed.

Good afternoon, guys, and congrats on a great quarter.

Thanks, Ross.

As we think about the HEBT meeting, obviously lots of posters, lots of presentations, lots of great buzz on the HiSeq.

If you had to distill from a scientific perspective from an advancement on the box perspective, the few things you kind of walked away from and thought, wow, that was really a powerful kind of example of what the technology can do and how eventually this is going to be used in more practical applications, is there anything, one or two things you kind of point us to that you would say, for you, that stood out?

Ross, it's Christian, I will start.

One of the things that struck me was when David was -- David Bentley, our Chief Scientist was giving a presentation and was in one of the sessions with all of the different companies.

And what really struck me was a collaboration -- he was talking about collaborations in cancer where we taken the technologies far enough along now where we are really working on the science and the clinical applications of the technology where some others are still so focused on the technology itself.

And in particular, David presented some very interesting work in cancer, and I think it kind of shows where all of this is really going in terms of developing systems that are easy enough for people to use to get really meaningful clinical data and make discoveries that are going to affect patients.

To me, that was the most interesting part of the conference.

Jay, do you have anything to add there?

Yes, from technology perspective, what struck me was how routine is it is to sequence complete human genomes now and to do all exomes.

I think over the next couple of years, the all exome market is going to be growing quite quickly.

And our kit is enabling to that from a price and performance perspective.

But if you look back a couple of years at how difficult it was to sequence a human genome and you compare that now, it's been a radical shift, and people are talking about doing very large collections of human genomes and not worrying about that.

The advancements obviously are huge across the platform technologies.

I think you've' seen great advancements in sample prep, like what we've talked about with Nextera, and obviously our competitors are making their sets of advancements.

I think the other thing that stands out is the challenge that we have to face in the back end bioinformatics.

And we and many others are focused on working hard with collaborators to figure out how to speed up the back end data analysis and how to do a better job of extracting the biological relevance out of these very large data sets that we're now creating.

And maybe Jay, you talked about a lot of applications for the MiSeq and potential areas where you guys can address.

It's a bit of a different customer base and different sales approach than some of the traditional research markets with some of these new applied applications.

How do you think about building out the commercial organization on the sales and support side?

And how is it different than maybe some of the other challenges that you face with the existing business that you've built out over the last five years?

Yes, I think we are going to continue to grow the sales force, of course, and that would have happened with or without MiSeq in some ways.

But I think you would be surprised at how similar the customer base is.

Our customers have been pushing us very hard in the last couple of years into the clinical research market.

And that's on array technologies and cytogenetics.

We have so many customers using HiSeq now to do research into clinical applications, and what we've done now is provided the platform to deploy those applications very cost effectively and very broadly.

So, I do think that the initial customer base is not that different.

Now, if you look down the road a few years, we may be selling much more to hospitals and markets like that who are actually deploying these clinical applications in a large way, and I think we will have to do some evolution of the sales force as we get towards those markets.

I think, Ross, the one other thing that was really interesting was really, and we said this in the prepared comments, was how interested our large customers were in MiSeq because it's such a rapid turnaround system and because it's got the same chemistry with the same high accuracy that they can develop their own applications much faster than they could ever do on the HiSeq system.

That actually surprised me a little bit, of how excited they were about the product.

Thanks, guys

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

Please proceed, sir.

Sir, is your line muted?

Why don't we move on to next call.

Sure.

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

Please proceed.

Hello, good afternoon.

Jay, I want to make sure I understand your comments on the array business.

I think you talked a little bit about strong orders, but then you talked about customers taking time to analyze rare variant work off the new Omni 2.5?

And how do we think about the cadence of array sales throughout this year?

You'll have the Omni 5 later on, so are you a little bit more conservative on the first half of the year for arrays and then it picks up in the back half of the year?

Yes, I think overall, that's probably right.

What we are seeing is the market subdivide and sub segment in a couple of different ways.

We are seeing the camp of researchers that believe strongly in the rare variant hypothesis.

They are the ones that are buying the 2.5, and they're now immersed in doing these initial proof of principal studies.

And then we have a lot of people on the sidelines waiting to see what happens out of those studies.

And so I think there is going to be, as we get into the middle of the year, Q3, an inflection point here based on what happens in these initial studies.

So, that part of the market, I think, will start growing in the back half, presuming the kind of data come out of these projects that we and others expect.

Then you have the camp of researchers who are still very focused on the more common variant hypothesis.

And what we are seeing there is a greater use of the Omni Express than we might have thought, continued use of the Omni Express, but with very large sample sizes.

And the goal there is to get greater statistical power out of their studies by increasing the sample size or in some cases, doing secondary populations to the ones they had done previously.

And so there is high sample numbers there, but of course those chips are at lower ASP's than what we have in the higher end Omni 2.5 category.

And then of course, we have the third segment of our array business, which is in the focused and custom, which continues to grow very, very nicely.

But when you add all those segments together, we are probably a little more conservative in the front half of the year.

And presuming things go the way we expect, stronger in the back half.

Okay, that's helpful.

And then as we think about the performance enhancement on HiSeq, obviously great throughput getting to a terabase.

In terms of the steps you've laid out, going to 2 by 150 relays and things like that, will it be a series of iterations throughout the course of the year, after you introduce the 600 gig improvements?

Or will it be a batch product released later in the year that gets customers ultimately to a terabase.

Well, we group these together because customers don't want to make too many changes all at one time, and often these production shops need to revalidate any particular change we make.

So, we do try to couple them together.

And if you think about it, the 600g performance level is essentially the same as the 1T in many ways, because the 1T was a 2 by 150 run, and the kit we're going to release is the 2 by 100 kit.

So, you have a -- essentially a 50% difference just made up by the read length.

In our best judgment, based on how customers are actually using systems in the field is that most customers don't want to go out to 150 bases and extend the run times.

And so the kit we are actually going to release is the 150 -- or excuse me , the 2 by 100 kit, which gets them roughly to the 600G number.

And with that, they have most of the same capability that we use to get to the

Okay.

Now, if you think beyond that, we have lots of other things in the works and lots of dimensions of scalability remaining in our system across all the fronts that we've moved before.

Software, better image analysis, higher cluster density, faster cycle times, larger flow cells, all the things we have done in the past.

Better entomology, are all still in front of us and as I said at the JPMorgan conference, we don't see the end of the runway for SBS chemistry anytime soon.

The one other thing to point out on the new chemistry that's going to be launched with the 600G kit is the dramatic improvement in reduction in bias.

I think that's actually -- not only do we get increased cluster density, but we also get better -- lower error rates and significant reduction in bias.

And so using this kit for potentially covering genomes with a little bit less coverage is also a possibility down the road.

Okay.

And then just last one on Epicentre, can you talk about the opportunity to leverage that business across the existing portfolio today?

And ultimately, is there an opportunity to on board that sample prep onto the platform as well?

Well, there is many ways we're going to use the basic technology that Epicentre brings.

And the obvious first thing to do is this Nextera kit, which works beautifully for library prep.

We will deploy that with MiSeq, but it of course works across the full range of our sequencing product line.

And in fact, many of our existing HiSeq customers have already been using this Nextera kit.

We are going to continue to evolve that kit, and there will be multiple versions of it.

And there was a poster at HGBT about a PCR free version of the Nextera kit, will be an even better performing kit in terms of sample input and freeing up from any biases that come from the PCR reaction.

In addition to that, the core enzymes that Nextera can be incorporated in other places in our product line.

In fact, we are currently a licensee of several of their other enzymes that we use in the array business.

So obviously, now we will have the ability to use those enzymes at cost rather than price.

And we have enzymes that we currently buy from other third parties that we think we can begin to transition over to using enzymes that Epicentre will provide.

So, we have a broad way to utilize the set of technologies, and then we will take their development team and really focus them on the sample prep methods of the future.

On boarding the sample prep, that's -- there is always tradeoffs in doing that.

It's technically possible, but it's something that we will have to look at and study in terms of how we map out the product road map.

And then just one last quick on HiSeq versus MiSeq.

Do you envision any customers evaluating between the two platforms?

In other words, are customers going to be looking at MiSeq and ultimately saying, we have higher throughput needs and will naturally migrate to HiSeq.

I don't think in a serious way.

Somebody who didn't know the product line at all, and they take a look across the board at all the products.

But they are very different in terms of the usage of the system.

One is a high throughput production system and the other is good for targeted work on smaller genomes and clinical apps.

So, I don't think we will really have anybody making a tradeoff decision.

Okay.

Thank you.

Your next question comes from the line of Isaac Ro with Goldman Sachs.

Please proceed.

Hello guys, thanks for taking the question.

First off, on informatics, I know that's a key pain point that's emerging for customers.

So, I would be interested in knowing how you think your approach there will differ between the HiSeq versus MiSeq customer base going forward.

Well, it won't really be very different at all.

These systems are intended to work hand in glove, and the chemistry is the same, the data format is the same, the informatics channel is the same.

We do think that the market that MiSeq will sell to will probably be one that would want to do less computing on site.

And so we are working to make sure MiSeq is cloud enabled so you don't have to have computers to run a MiSeq whatsoever and the data can be run up in the cloud -- or moved up to the cloud and then the compute done up in the cloud.

That's -- whatever we do to implement that on MiSeq would also apply to HiSeq, so the implementation wouldn't be different.

It's just that the customer base for MiSeq would probably gravitate more towards that solution than having in house compute infrastructures.

That makes sense.

And just secondly on -- sort of philosophically as we think about the various technologies that are out there, given the big decreases in costs that you guys are enabling on HiSeq and therefore, the ability to do some really deep coverage.

Could you maybe give us a sense of the percentage of sequencing applications that you think really necessitate long reads exclusively.

And as a result, how important is that capability down the road for you?

By long reads, do you mean in excess of a 1,000 bases?

That kind of long read?

Sure, that's the right number, yes.

Yes, we think there is some applications where long reads can be helpful, but they are actually few and far between, and we think it's a pretty small segment of the market.

The vast majority of applications where that's necessary we can get at using our paired in technology.

Currently, we support paired 150 base reads, and the utility of that paired in technology increases as we have the ability to put longer inserts in.

And so we're continuing to work, and we'll be working with Nextera to figure out ways of putting longer inserts between the fragments that we read, and that will take even a greater share of the potential long read market.

Probably the one area that we're working on importantly to try to get at is this idea of long range haplotyping, and so we want to get at that as well.

But we think the current technology we have is going to get at most all of what can happen in long reads, and that there'll be uniquely very few applications that we can't do.

Great, and last one for me would be as we think about all the new instrumentation platforms you guys have put over the past year and half, you have a pretty wide range of offerings at every price point.

Is there white space left on the board at this point for instrumentation offerings that you think you could offer the market that they need that they don't have today?

We think we have most of the market covered with what we have today.

Obviously, on our drawing boards, we have five year evolution of all these technologies and how they may go and migrate in the future.

And obviously, technology like Oxford Nanopore is a component of that.

We have multiple internal development programs, both in research and product development, that are looking at fundamental ways to improve sequencing.

And that has to do with everything from the chemistry to the hardware to the imaging to the sample preps of the bioinformatics.

Great, thanks very much.

Your next question comes from the line of Amanda Murphy with William Blair.

Please proceed.

Hi, thanks.

I just had a follow up to a previous question.

If you think about your focus on expanding the sequencing market beyond the current next gen install base, could you talk to the opportunity from a HiSeq standpoint?

You talked about the MiSeq a little bit, but just curious how users might leverage the HiSeq that don't currently use platforms today.

Sorry, leverage them for what?

I'm sorry, how users that don't have an instrument today might utilize the HiSeq.

Yes.

If you look at our install base of HiSeqs, the vast majority of customers own one.

And so what that points to is the fact that we have been able to expand the market greatly with first the genome analyzer and now HiSeq, and we think we're going to be able to continue to do that for research groups who can find the funds.

Because one, HiSeq allows them to do such phenomenal science that was virtually impossible just two years ago.

And so we think the market will continue to expand in that dimension.

And clearly, we think that the customers that already own one are going to continue to buy their second, third, fourth and fifth.

So, as we plot out the demand curve for HiSeq, we don't see any reduction in the sort of baseline demand.

Now clearly, if you look at 2010, there are two components to the demand side for HiSeq.

There was the upgrade portion, which is not going to be recurring, and then there's the steady state portion, which is the organic market growth.

And we don't see any slowdown in that organic market growth whatsoever as we look forward.

Okay, and then just another one on the HiSeq in terms of the consumable or the reagents for usage, I think you mentioned it was trending around $350,000 annually.

Just curious how to think about that over the next year, and are any of the upgrades that you are going roll out, did they impact that number at all?

They don't impact it materially.

So, we will continue to monitor that number.

This is the first quarter where we had enough instruments in the field to be able to get a handle on the number initially.

And it's likely it will bounce around a little bit for the next few quarters as we increase the install base that's actually utilized in production.

And it's a little too early to forecast where it could go, so we're going to stick with the 350 to 400 number for now until we have better information.

Okay, thanks a lot.

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

Please proceed.

Hello guys, thanks for taking the questions.

Hello, Doug.

So, as you guys have talked about a bunch over the last several quarters, you've really scaled up your HiSeq manufacturing, I think again, you said today by a factor of 10 over the last year.

Presumably, this is going to allow you to work through backlog over the next few quarters.

Is the broader thinking here that you are going to work through the backlog sufficiently enough to address demand and then shift production capacity to MiSeq?

Or are you thinking at this point that you might actually have to increase capacity again to address both parts of the business?

I think you hit the nail on the head there, Doug.

The plan is that we will -- I think we are at a peak of HiSeq production now, and we will be operating at this level for another quarter or two bringing down the backlog.

And the we will begin to transition both facilities and our employees over to manufacturing MiSeqs.

MiSeq is going to be much easier to manufacture because it's a vastly simpler instrument, and the test time is one day rather than seven days.

So, we're going to be able to make those in much higher volume in smaller space with fewer people.

But Christian has laid this plan out beautifully where we have this ability to -- we haven't overshot on HiSeq because we're going to take that capacity and move it right onto MiSeq.

Okay, and -- go ahead, sorry.

Doug, we just opened up basically a new space up in Hayward, so where we can manufacture HiSeqs and MiSeqs and also, the HiScan and HiScan SQ side by side.

So, we can really leverage our people resources.

One of the key things that Jay continues to push on us in operations is commonalty of components and this and that, so we have a lot of commonality, at least between the HiScan SQ and the HiSeq system.

So, we get leverage out of that as well.

But there's still going to be very high production levels of the HiSeq system for the next several quarters.

So, we are still going to be busy, that's for sure.

Yes, I was going to say, just to be clear on that, you are clearly not factoring in a dropoff in utilization ,given what you talked about in terms of how you are going to track to gross margins this year, is that correct?

No.

I think we are going to be -- if you think about overhead utilization, things like that, I think we are going be very well utilized, if not over utilized.

We'll probably use a combination of overtime and multiple shifts to try to -- to make sure we make the demand.

One of the reasons why -- our goal is to be shipping the MiSeq system at volume in fourth quarter, which means we have to be capable of producing reasonable numbers of it in the third quarter as well.

So, the operations team has a lot of work cut out for them in the first half of the year here to get ready for that.

Okay, And maybe sticking with gross margins for one more, I think you guys talked about a target, three year or five year gross margin range of 65% to 70% at last year's analyst meeting, yet your guidance for this year is to get up to 70%.

Is there any reason to think that you can't bust through the high end of this guidance as the consumables continue to ramp on these new instruments?

Lots of factors that could push us above 70%.

If you looked at formulas for reagent growth and the margins we get on reagents.

What we expect to happen in the next -- in 2011, 2012.

But there is factors that drive it the other way as well, and so we are always leery about what could happen in -- array overhead is one area that we were very conscious of all the time because as we continue to put more samples on a chip, our array efficiency is just unbelievable.

And so we need to be able to continue to absorb that overhead, and so we moderate all the downside factors as well.

It's the combination of those things that resulted in the guidance that we gave for the year.

Yes, but I do think we are pushing -- we are definitely pushing to maximize our opportunity in terms of growing the gross margin.

Another reason why we try to be a little bit conservative here is also for our internal programs because we want -- really, gross margin drives how we think about all of our spend programs and growth associated with our expenses.

And so we look at the whole consolidated, a holistic model, so to speak, of what the business should look like.

But as Jay pointed out, there is factors on both sides of the ledger that could push us well above it or be in line with it.

Okay.

And maybe sneaking in one last one, your guidance seems to incorporate the assumption that you get some pretty good leverage at the operating line far beyond the gross margin improvements.

Any chance you'd say whether you expect to get more leverage, the R&D or SG&A this year?

I think the percentage as you saw us deliver in Q4 were pretty darn good.

And so I don't think we are going to do material better than those percentages are.

Okay.

Thanks again for taking the questions.

Thanks, Doug.

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

Please proceed.

Hi, thanks a million for taking the question.

Two quick questions.

One, Jay, I was wondering if you would be willing to characterize how you feel your commercial capabilities right now are set up in some of the more emerging geographies around the world and maybe what you think you do or don't need to do in some of those geographies?

And then the second question is related to GWAS.

Given the delays that you seem to be seeing with respect to other demand or developments like the 5m, when do you stop investing in GWAS technology and focus your R&D dollars in other areas of the array market that maybe will grow more?

In particular, you see the development that's happening so quickly with sequencing, as you just alluded to with what was happening with HiSeq.

Thanks.

First on the commercial side of the ledger, we have all of the world's materially large markets covered very well with our commercial team.

We have quite a number of people on the ground in China now, so we think we have the vast majority of what we need to be covering of the key accounts in China covered.

The other large geography where we are not direct is India.

But to be honest, with our kinds of products, we think that's a pretty small market, and so we deal with India through a distributer.

The most recent addition we made there is opening office in Latin America, and that's a small sales office really focused on three countries, Brazil, Argentina and Mexico.

And we think that takes the bulk of what we are going to be selling into South America in our types of products, at least.

I guess the other segment of the market that needs a lower price distribution is the Eco product, and that one, in international markets at least, we are dealing largely through distributors.

Because that is a market segment where our current sales force doesn't largely call on that set of customers, and we need more feet on the street.

So, in that segment, we will use distributors.

With respect to GWAS, we are at a bit of a -- at the very high end here in the 2.5 and the 5m.

We are waiting to see what happens with these proof of principal studies.

As we get to the back half of the year, I think depending upon what we see, we may alter our investments in R&D.

And I would say that we in fact have been doing that over the past few years.

If you look at what our investments were in 2007 or 2008 in sequencing versus arrays, the investment equation has swung pretty substantially in our overall R&D resources towards sequencing, and I think that will probably continue.

We do have lots of great ideas in ways to continue advancing the array market, but we may or may not need to implement those on a fast time frame.

Thanks a million.

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

Baird.

Please proceed.

Good afternoon.

So, you guys finished 2010 really strongly, sequencing hitting on all cylinders.

But as I look at the 2011 guidance for 20% top line, maybe could you dive a little bit deeper?

And so what part of the business is going to -- is it tougher comps as you said Jay, kind of the upgrade cycle, or is it just instrument tougher comp coming up?

Well, our top line guidance, Quinton, is clearly off a much larger number in this year than what we had last year.

It's the equivalent guidance we gave at the top line coming into 2010.

And we always take into account a wide variety of factors having to do with our new product launches, their timeliness, what we think the competitors might do.

And we do have a bit of caution on the array part of the business coming into the year, and we want to make sure that we are adequately cautious with respect to what is going on in the array business.

We do continue to be very bullish on sequencing, no doubt about that, but is a competitive space.

And we have lots of companies out there that are trying to grab pieces of the sequencing market.

And then, so kind of going to the micro array, you had a really good instrument quarter, sounded like, in the fourth quarter.

Was that just upgrades to existing, or are you seeing new entrants as well?

It was new instruments and very strong demand for HiScan SQ.

We had built up a bit of a backlog on HiScan SQ.

As I mentioned in my prepared remarks, because it uses common components with HiSeq, we were biasing most of the shipments towards HiSeqs because they have higher reagent consumption.

And so we were building up more of a backlog of HiScan SQs, and we were able to ship out a material part of the backlog during the fourth quarter.

Increment order rate was still strong, so we didn't exhaust the backlog.

But that was certainly one factor in what happened in array instruments.

And then just a quick follow up.

The tax rate, I know that you moved some micro array manufacturing up to Singapore.

Given the strength in sequencing kind of dovetailing off the R&D towards sequencing, any thoughts of more tax strategies to moving maybe some manufacturing to that area?

Yes Quinton, this is Christian.

So in the fourth quarter, you saw our tax rate was improved a little bit, but quite frankly, it should have been even lower because of the passage of the US R&D tax credit, the retroactive adjustment.

But we took advantage of that opportunity by transferring some more intellectual property -- sequencing intellectual properties in Singapore, so that will set us up for a lower tax rate in the future.

So, that's on the tax rate side on the structuring.

So, now we've also set our corporate goals to be manufacturing a significant amount of our sequencing consumables in Singapore by year end this year.

And so Jay is going to old me accountable to that, I think.

And so we're going to work really diligently to move sequencing consumables production out of San Diego or portions of it out of San Diego at least, and expand into Singapore.

We took down some more space there and actually, the space will be built out in a couple of months, and we will start qualifying reagents and hopefully by the back half of the year, we'll be able to report that we are producing a significant amount of our sequencing consumables out of Singapore.

And that's exactly right, Quinton, that's going to help our tax rate.

It will probably take a year or two for us to get the full benefit of it, but the activities are starting this year.

We're also beginning for the first time to move instruments over there.

So, our easier to manufacture and more mature instruments are moving over Eco because it's relatively easy to manufacture and be expressed because it's a relatively mature product.

And the iScan under DX.

Super, thanks.Congrats on a great year.

Thank you.

Your next question comes from the line of Dan Leonard with Leerink Swann.

Please proceed.

Thanks, just two, and I'll try to make them quick.

So on your trade in program for the GA, it sounds like you are concluding your trade in offers at the end of the first quarter.

Is that the correct read, that you will no longer offer any compensation for trade ins past Q1 2011?

No, that's not quite right.

We will be offering, because we think it's really in our best interest and the customers' best interest to get them to HiScans if they can get the money, that we will continue to offer some incremental discount for customers to convert over to HiScans.

Again, only on a one for one basis if they turn in their genome analyzer.

What has gone away are the deep discounts that we put in place for customers that had just purchased genome analyzers.

And you'll recall, we launched this in January of last year, and the deepest discount was for customers who had just taken the system maybe a month before.

And so they effectively got a full trade in credit for their genome analyzer.

And then we extended that back through customers that had taken genome analyzers in the third quarter of 2009.

So, it was really those two quarters where we had the deep discounts because of the unique situation where we had to treat the commerce well to help migrate them to new technology because they'd just bought the prior technology.

Okay.

And then my follow up, Jay, do you view the funding for GWAS 2.0 if those pilot studies are successful?

Is that work going to compete with sequencing for funds, or are these separate funding buckets in your mind?

There will be some competition for funds, but we don't think that much.

There still is a fair amount of money that's out there and on hold waiting to see what happens in GWAS.

So we do think there will be a bolus of funds that will come that direction in these studies prove out to be extremely useful.

And obviously, we are confident in that, but we have to wait and see the data.

Okay.

Thank you.

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

Please proceed.

Yes, thanks, good afternoon.

A couple quick ones for me as well.

Jay, in terms of the new order from the specific large genome center, did that by chance represent the majority of the genome center orders in the quarter?

It was after the quarter.

The order was received after the quarter.

It was after the quarter, excuse me.

I misheard you.

Okay, got it.

And then secondly, just thinking about everything that's going on at HGBT.

Can you talk a little bit about customer reception to the TruSeq exome capture products?

Obviously, that was a pretty significant topic of discussion, at least I'd argue it was over the past week as well.

Yes, I think the reception has been fantastic.

It's being tested quite broadly now by many customers, some of the large genome centers have tried it.

It offers big advantages, we think in cost certainly, and in performance that is at least as good or better than the existing kits on the market.

And we are also going to sort of morph that technology into the custom version of that kit.

So, you will be able to use very similar kinds of work flows with the custom targeted product that we're going to launch right at the time we launch MiSeq.

So, as customers buy into the collection of products that we have, they'll be able to do fully custom if they want or all exome or whole genome, and they'll be able to use some of the Nextera technologies throughout that pipeline of products.

Thank you.

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

Please proceed

Hi, good afternoon.

Hi, Derik.

You mentioned that you took a large number of whole genome orders from some customers.

I'm wondering, you've got a backlog, what's the ASP right now for the whole genome sequence?

And then on a follow-up on that one, I want to ask a question, there is a lot of debate at HGBT about whole genome analysis versus the continued use of whole exome analysis.

What do you think is the significant point in terms of pricing to get more people to do whole genomes versus exomes?

We don't give out the specific pricing because it varies based on volume and the particular situation in the account and what else we are doing with the account.

But I can say in almost all cases, the prices are $10,000 or somewhat lower than that.

And obviously, those prices go down with volume on the order.

The second part of the question was (inaudible).I certainly think as whole genome sequencing gets down to the $2,000 range, you are going to start having fewer all exomes done.

Some people have already wanted to do all exomes and they've moved to complete genomes today.

I don't think the majority of people have done that.

But as you get down to a couple of thousand dollars for a whole genome, maybe half the market will be whole genome and half will be exome.

Okay, follow-up question.

So, you've got all these GAs you've taken as trade ins.

Where are they going, and what's the economics on the resales?

Right now Derik, what we are doing on the GAs is we bring them in, we refurbish them and we are moving them into markets.

Like we talked about, we're opening up Latin America for example.

So, the GAs are still delivering 95G of high quality data.

And so in some markets that are extremely price sensitive, we are moving some of those instruments there.

We are leveraging some of those instruments in various different types of collaborations.

And then we are also -- some of the instruments, quite frankly, we will use for spare parts and kind of to support our service programs over time.

So, we don't expect to resell every genome analyzer that comes back in the door, but in 2011, we expect to move a pretty reasonable number of these back out into the field to be generating consumable pull.

The cost basis on the first bolus isn't zero, but it's low.

So, it gives us a lot of flexibility in terms of how we market them and opens up the opportunities for doing creative deals for particular kinds of customers oriented towards things like reagent rentals which we might not otherwise do when the capital equipment's expensive.

And just because this is a question I get everyday from investors, could you give us a little bit of clarity on amount of your sales that are slipped between sequencing and arrays?

We haven't really broken that out.

I guess all we can say now is that sequencing is bigger than arrays.

Okay, thank you.

Bye-bye.

Your next question comes from the line of [Mendeita Kosho] with Barclays Capital.

Please proceed.

Hi, thanks for taking the questions.

My first question is, what is this thinking on regulated approval for clinical use of the HiSeq and the MiSeq, and have you started conversations with the FDA?

We have.

We've had broad conversations with the FDA, and our customers are moving us, asking us really, across the product line to begin to push our products toward achieving regulatory approval.

And we are certainly seeing this in the array business driven.

It's driven largely by the side of genetics market.

And so we've -- are working on the iScan to get it approved as the array scan.

We've already done the express, and we're right now evaluating what we do first in sequencing.

Clearly, MiSeq is a product that will wind up being in the sweet spot of clinical applications, so I think that's a no brainer.

We are also looking at doing HiSeq, and we'll probably make the final decision on how and when we would do that in the next month or so.

Okay.

And then, where are we in terms of shipments on BGI order, and do you know how the consumables might ramp up on that?

The reason I ask this is, I was wondering if the consumables manufacturing capacity and the quality control resources that you need are enough to satisfy the demand from this expanded HiSeq install base that's coming on line.

Yes, this is Christian.

We have probably about 30% left to ship under the BGI order.

But if you remember, the revenue recognition is over a period of three years, and it's a ratable recognition process.

They continue to scale up and operate it full capacity, and we have been able to keep up with them, although at times it's been challenging.

But we have been able to keep up with their demand, and I don't see any roadblocks to keeping up with them as we install the rest of these systems.

I think on the reagent side, Christian and the operations team has done a great job of scaling our reagents.

And we are continuing to meet demand with few exceptions where we sometimes have a hiccup here and there as you do when you are scaling rapidly.

But overall, I think we are doing pretty well there.

Okay, that's helpful, thank you.

Your next question comes from the line of Amit Bhalla with Citi.

Please proceed.

Hi, good afternoon.

Question in terms of MiSeq and the supply side of the raw materials.

Can you talk a minute about how they are similar or differences between MiSeq and HiSeq on the supply side?

There is actually not a lot of commonalty of components between MiSeq and HiSeq.

MiSeq was a ground up redesign targeted for different market, much simpler implementation.

It's a single channel in the flow cells.

So, the way the actions in motion work is totally different, the photoanalytics are totally different and the optics are totally different.

So there is very few parts that are going to be common between HiSeq and MiSeq.

So, along that line then, can you expand in terms of the number of suppliers you have on the MiSeq side?

And is that all squared away in right in time for a 4Q big scale up?

Most of the -- I don't know exactly how many suppliers offhand, but most of the key elements of the system have already been fleshed out in terms of the suppliers and the supply chain.

As I said earlier in the call, it's going to be -- in order for us to manufacture at significant scale in Q4, we have to be operating at reasonable scale in Q3, which means that we are in the process of scaling up a lot of these suppliers between now and say June.

So, from -- we learned a lot on the scale up of the HiSeq system.

I think the demand exceeded our expectations.

One of the benefits of having announced the product earlier than starting commercial shipment is that we can actually anticipate the demand a little bit better, scale our vendors, work on our quality control systems, et cetera.

Jay also pointed out a very, very important part of this is that the QC time frame, or the FIT -- our functional testing is only a day, so we can rapidly turn these systems around.

And the engineers have done an amazing job of creating a system that's very manufacturable.

So, from a scale up perspective, we really are focused on the supply chain, the operations itself and then making sure that each system goes out at the appropriate level of quality.

So, a lot of work to do, but we are looking forward to tackling this challenge.

Christian, what were the stimulus revenues in the quarter?

We didn't disclose that, actually.

Okay, thanks.

Your next question comes from the line of Zarak Kurshid with Wedbush Securities.

Please proceed.

Hello guys, good afternoon.

Thanks for taking the questions.

I just had a question on Epicentre.

Any detail as to what you paid for it, what is it doing in revenue, and are you going to be selling the technology to third parties going forward?

We haven't disclosed any of the financial elements of the transaction.

We are -- they have a very broad product line of products that we'll break into two categories.

One category will be those that work directly with Illumina Systems, and those will largely rebrand in Illumina packaging and Illumina colors.

But then we'll continue to sell Epicentre products under the Epicentre brand, and we expect to continue that for the most part.

We're certainly going through a portfolio review to look broadly across all those products and make sure they all make sense to continue, because some of them may not be enough in revenue to continue to market for us.

But we will have that evaluation done in the next couple of months.

And clearly, from an R&D perspective, the forward going focus is going to be on reagents that work with Illumina Systems.

Got you.

And then as a follow up, I was curious, you mentioned the all exome sequencing opportunity and how that's growing.

Could you talk a little more broadly about RNAC, chip seek, any of the nichier sub markets and how large those are and how fast they are growing relative to sequencing and resequencing?

Most of our customers run multiple types of applications, so it is sometimes as bit hard for us to pull it apart.

But our best estimate is that about half of our customers run RNA based applications.

And some of those also run sequencing applications.

So, it's a pretty broad usage in the RNA space, and I think you are beginning to see an acceleration of the transition from expression based arrays onto sequencing because of the cost and the quality of the data and all the reasons that we've spoken about before.

So, we continue to believe that the RNA side is fantastic opportunity.

And in fact, we haven't mentioned this directly, but Epicentre has some really good kits that work with RNA as well, and those will become Illumina branded and sold with our RNA sequencing portfolio.

Interesting, thank you.

Your next question comes from the line of [Fungi Na] with Gleacher & Company.

Please proceed.

Thanks for taking the questions.

Just two quick ones.

First one, in terms of your expectations for HiSeq 1000 versus 2000, do you anticipate meaningful demand for 1000?

And is there really a clear segmentation in terms of the market there?

The market segmentation between those products is largely driven by funding.

So, our view is that anybody who can afford a HiSeq 2000 would buy that, as opposed to a 1000.

But there are certain customers who can't get enough money, maybe they're putting together money from a couple of groups.

And because is 1000 is upgradable to 2000, if they can only get enough money to buy it, it's a great way for them to get this to the pipeline of our products and to not constrain themselves in the future because they can always do the upgrade.

So that's really the market for the 1000.

We don't think it's distinct in terms of having a separate throughput category that somehow is different from a 2000.

Okay, great.

And then in terms of -- giving your current portfolio of products including MiSeq now, do you anticipate your strategy for Beadxpress to change going forward?

In terms of your partnerships and things like that.

No, Beadxpress is really targeted for different kinds of applications.

There we do proteins and genotyping, it's intended for multiplexing levels that are in the low end of the market.

Sort of in the 20 to 300 plex range, and then below 20 is where Eco is the right technology platform.

Go we think Beadxpress fills a good niche in the product lineup, and it's important for us to continue to focus on it.

Great, thank you.

Your next question comes from the line of Peter Lawson with Mizuho Securities.

Please proceed, sir.

Good afternoon, and thanks for taking my questions.

Jay, just on the funding environment, what's the outlook for NIH spending from you and the benefit you saw in the quarter?

And then secondarily, academic spending in Europe.

Yes, I guess we characterized the overall spending, when you integrate all the things that are happening around the world as stable.

I think the best guess is in the US is that the NIH budget would be flattish.

Could bump up a little bit, but we think assumption of a flat budget is probably the safest one.

Obviously, we would love the budget to go up more.

But the advantage of where we find ourselves, that we have the technology that is in the highest demand, so we see money coming from other sources and being reallocated from other types of equipment and other projects, different agencies like the National Cancer Institute starting to dedicate more funding towards sequencing.

So, it's really the strength of the technology and the market we are in that makes the funding differences a little less relevant than it might otherwise be.

And just on kind of the rare variant project, how much of that do you think is actually migrating straight over the sequencing, or are we too early for that?

Little to none.

We really continue to believe that unless you are looking for Mendelian diseases that -- rare Mendelian diseases, then sequencing isn't going to be answer for a long, long, long time.

Arrays are way cheaper, way faster and frankly, more accurate than any sequencer that's out there.

So, we continue to believe that as long as the science supports the complexity that you have on the arrays, in other words, that there is confidence that the content of the array can deliver the right scientific result, that arrays will be the way the GWAS is done, not sequencing.

Perfect, thanks so much.

Your next question comes from the line of Paul Knight with CLSA, please proceed.

Hi, Jay.

What do you think the growth rate in the sequencing market will be for the five year period ahead of us?

It's a tough question, but somewhere in the 20% to 35% range (inaudible).

And then the other is on tax rate, you talked about Singapore.

What do you think a normal -- what's your goal on a tax rate?

Our goal is to get sub 30, but we haven't given a specific time horizon.

I do think it's achievable, but we've got to take -- we've got to move our manufacturing, we've got to continue to migrate our IP, particularly from the UK actually.

A lot of our sequencing IP is based in the UK, and we need to continue to migrate that to Singapore.

So, our goal is to get to sub 30.

And I believe it's achievable, but we won't give a time horizon yet on this call.

Sure.

And then Jay, last, the two bottlenecks we get comments on would be on the back end.

Is data analysis a bottleneck you worry about and on the front end, is sample prep a bottleneck?

Let me take the last part first.

I think we anticipated a potential bottleneck in sample prep because (inaudible) systems is going up to such a large degree that now you need to prep man, many samples where before, one sample was plenty because it took a long time to sequence one sample.

And the progress we've made there is incredible in terms of reducing the time, increasing the indexing so you can multiplex samples together.

And we're going to continue to move that front forward very fast in the next couple of years.

So, we don't think front end sample prep is going to be remaining issue.

There is going to be a need to put more limb systems around the front end of sequencers because now you have enough samples that you really do need automated ways of keeping track of them where a couple of years ago, you didn't because there were so few samples going through.

On the back end, I think we've done a great job of handling the analysis up through what we classify as secondary analysis, and that can always get better.

But what we are doing in the cloud environment now and being able to move data there and taking advantage of the elasticity of computing you get is going to be a huge advantage.

We do think that the potential bottleneck that we all need to worry about next is figuring out how to utilize the data sets to extract the relevance of the underlying data to human biology, and that's a tougher problem because nobody knows exactly how to do that yet.

The one thing that works in our favor is that in some ironic way, the larger the data set is, the easier it is to get statistical meaning from the data.

And so while it's difficult to figure out how the manage 10 genomes, if you had 1,000, the statistics pop out a lot easier if you have the ability to manage them in your computer system.

So, in that -- dealing with that problem is one that we don't think Illumina needs to be directly involved in necessarily, but it's certainly something we need to enable through partnerships, through collaborations, through investing in startups.

And I think there is a great opportunity to advance the state of the art there, both in the commercial side, but also through taking advantage of what's going on in academia.

Thanks very much.

Sure.

With no further questions in the queue, I would now like to turn the call back over to Mr.

Peter Fromen for closing remarks.

You may proceed, sir.

Thanks, operator.

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

Thanks for joining us today, and this concludes our call.

We look forward to our next update in April following the close of the first quarter.

Thank you for your participation in today's conference.

This concludes the presentation, you may now disconnect.

Have a great day.