Illumina Inc (ILMN) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2011Illumina, Incorporated earnings conference call.

My name is Jonathan, and I'll be your Operator for today.

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

We will be holding a question-and-answer session after the prepared remarks.

(Operator Instructions) As a reminder, this conference call is being recorded for replay purposes.

At this time, I'd like to hand the call off to Mr.

Peter Fromen, Senior Director of Investor Relations.

You may proceed, sir.

Thank you, Operator.

Good afternoon, everyone, and welcome to our earnings call for the first quarter of 2011.

During the call we will review our financial results released today after the close of the market 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 website at illumina.com.

Presenting for Illumina today will be Jay Flatley, President and Chief Executive Officer, and Christian Henry, 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 risk 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 risk and uncertainties that could 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 Health Care conference in Boston the week of May 2, the Baird Growth Stock conference in Chicago the week of May 9, the Goldman Sachs Global Health Care conference in Las Angeles the week of June 6 and the William Blair conference in Chicago the week of June 13.

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

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

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

Before we get started, I'd like to announce that Kevin Williams, our new Senior Director of Investor Relations, is joining us today.

Kevin is an MD by training and has spent 10 years in the investment community as a buy side analyst.

Over the next quarter, Peter Fromen will be transitioning his investor relations responsibilities to Kevin.

I'd like to thank Peter for his efforts in building our investor relations function over the past four years and I look forward to his continued success in his new role as Senior Director of Applications Marketing here at Illumina.

Now, I'll review our first quarter financial results and then Jay will provide an update on our commercial progress and the state of our business and markets.

It should be noted that we completed the acquisition of Epicentre Biotechnologies in early January, and as a result, our first quarter financial statement include 12 weeks of Epicentre revenue and expenses.

In the first quarter we recorded $283 million in total revenue.

This represents growth of 47% over Q1 of last year.

Product revenue was $267 million, representing 54% growth over the same period in 2010 and was driven by continued success in our Sequencing business.

Consumable revenue for the quarter was $148 million compared to $114 million in Q1 of 2010 and $132 million in the fourth quarter of 2010.

The year over year and sequential growth was primarily the result of our expanded installed base of sequencers which generated annualized consumable revenue per system slightly above our range of $150,000 to $200,000 per system.

Annualized pull through on the HiSeq was within our projected range of $300,000 to $400,000 but was down slightly from last quarter as we believe customers drew down inventory in anticipation of the release of their new -- of our new version 3 kits.

These kits began initial shipments last week and deliver approximately 600G in output per run.

We expect aggregate sequencing consumable pull through to increase throughout the year as the HiSeq becomes a greater percentage of our installed base.

Annualized consumable pull through across our installed base of microarray scanners was within our targeted range of $400,000 to $500,000 per system.

Instrument revenue for the quarter was $114 million, up 100% over Q1 last year largely due to the HiSeq 2000 shipments.

Since we launched HiSeq in January 2010, we've scaled our capacity each quarter in an effort to meet the significant demand for the system.

We continue to scale in the first quarter and as a result, we've reduced the instrument backlog to a more desirable level.

This enables us now to ship HiSeq systems within commercially reasonable lead times which will in turn result in a generation of more consumable revenue.

In the quarter we also saw strong demand for our HiScan and HiScan SQ systems, which help contribute to the strong instrument revenue.

In fact, Q1 was the second highest quarter we've had in array instrumentation following Q4's record performance.

Services and other revenue, which includes genotyping and sequencing services as well as instrument maintenance contracts, was $16 million compared to $18 million in the first quarter of last year.

The decrease was primarily due to a multi-million dollar service contract that we delivered in Q1 2010.

As we've indicated in the past, we would expect this revenue line item to fluctuate based on the timing of the completion of specific services projects.

Before discussing our gross margins and operating expenses for the quarter, I'd like to note that we recorded a pre-tax amount of $22 million related to non-cash stock-based compensation.

This impacted our earnings per share by a tax adjusted amount of $0.10 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 margins, operating expenses and operating margin, I will highlight both our GAAP expenses, which includes stock compensation expense and other non-cash charges, and the corresponding non-GAAP figures.

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

Total cost of revenue for the quarter was $94.5 million compared to $60 million in Q1 of 2010.

The Q1 2011 costs included stock-based compensation expense of $1.7 million compared to $1.3 million in the prior-year period.

Excluding this expense and $3 million associated with the amortization of intangibles, non-GAAP gross margin was 68.2%.

This compares to 65.1% last quarter and 70.3% in the first quarter of 2010.

The sequential gross margin improvement was primarily driven by an increased mix of sequencing consumables revenue associated with the growing installed base of HiSeqs.

Also contributed was a reduction in the number of HiSeq shipments associated with the Genome Analyzer trade-in program, resulting in 20% increase in HiSeq ASPs.

Systems of -- shipments of HiSeq systems under these trade-in programs are nearly complete, and we expect the dilutive impact of these trade-ins to be insignificant going forward.

R&D expenses for Q1 were $50 million compared to $44 million in the comparable period of 2010.

These numbers include non-cash stock compensation expense of $7.7 million and $5.9 million respectively, and contingent compensation expense of $1.4 million and $0.9 million respectively.

Excluding these costs, R&D expenses were $41 million, or 14.5% of revenue, compared to the prior year R&D expense of $37 million, or 19.2% of revenue.

SG&A expenses were $66 million compared to $50 million in the first quarter of 2010 and including stock compensation expense of $12.6 million and $9.8 million respectively.

SG&A expenses in the first quarter of 2011 also included contingent compensation expense of $1 million.

Excluding these costs, SG&A was $52 million, or 18.5% of revenue compared to $40 million, or 21.1% of revenue in the prior-year period.

GAAP operating profit for Q1 was $69 million.

Excluding these expenses outlined earlier and $2.5 million of expenses related to our upcoming relocation of our corporate headquarters, our non-GAAP operating profit for the quarter was $99 million, or 35.2% of revenue, compared to $58 million, or 30.1% of revenue in the first quarter of last year.

Our non-GAAP tax rate for the quarter was 35.2% compared to 35.3% in the fourth quarter.

At the end of last year, we licensed additional intellectual property in Singapore consistent with our manufacturing plan.

As we scale up manufacturing in Singapore throughout 2011, we expect to realize a tax benefit going forward beginning in 2012.

We reported GAAP net income of $24 million, or $0.16 per diluted share compared to net income of $21 million, or $0.16 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 $50 million or $0.35 per pro forma diluted share compared to $27 million, or $0.21 per pro forma diluted share in the first quarter of 2010.

During the first quarter, we generated $89 million in cash flow from operations.

We used approximately $12 million for capital expenditures which resulted in $76 million in free cash flow.

This compares to the $48 million in free cash flow in the first quarter of last year, or 59% growth.

Free cash flow was favorably impacted by another strong quarter of collections which yielded DSO of 59 days compared to 74 days in the first quarter of last year and 58 days last quarter.

We ended the quarter with approximately $1.1 billion in cash and short-term investments.

Inventory increased approximately $8 million during the quarter, but our turns remained nearly flat at 2.4 times.

Depreciation and amortization expenses for the quarter were approximately $15.8 million.

In March, we successfully completed an $800 million senior convertible notes offerings with a 0.25% coupon.

Net proceeds from the offering were $786 million.

We used approximately $314 million to repurchase 4.9 million shares of our common stock.

In addition, today, approximately $336 million of the proceeds have been allocated to fund conversions of our convertible notes offered in 2007 of which $390 million of principle remained outstanding at the end of 2010.

The remaining net proceeds will be used for additional conversions of our 2007 convertible notes, and other general corporate purposes, which may include acquisitions and additional purchases of our common stock.

Last week, pursuant to an option granted to the initial purchasers of the notes, we issued an additional $120 million of principle amount, which generated net proceeds of $117.9 million.

During the quarter, we also repurchased approximately 350,000 shares of our common stock for $24 million under our 10b5-1 share repurchase program.

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

Jay?

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

I'd like to extend my thanks to Peter as well for the fantastic job that he's done in building our investor relations function over the last four years.

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

We grew revenue by nearly 50% over Q1 of last year and delivered one of the strongest operating margins in the Company's history.

During the quarter we worked through the majority of the remaining promotion-related HiSeqs from our backlog and recognized the corresponding benefit to gross margin.

The rapidly growing number of HiSeq systems in the field led to a higher mix of consumable revenue in Q1, which also helped gross margin, a trend we expect to continue for the rest of 2011.

Through a combination of revenue growth, margin expansion and disciplined expense control, we generated excellent leverage on the operating line and produced 72% growth in earnings per share over last year.

Total Q1 revenue in our microarray business was down slightly compared to Q4 in what's typically a seasonally soft first quarter.

However, Q1 microarray revenue grew year over year led by strong results in array instrumentation due to shipments of the HiScan and HiScan SQ systems.

This growth was partially offset by a difficult comp in our fast-track services business due to a large single contract delivered in Q1 of last year.

Total microarray consumables revenue also grew over Q1 last year due to significant growth in our focused content in methylation arrays as well as growth within our Whole Genome Genotyping products.

This quarter we began shipment of our new Infinium FFPE product, formalin-fixed paraffin-embedded samples represent an enormous resource, particularly for cancer research.

FFPE samples are often highly degraded but our new product allows these samples to be restored yielding high-quality data on our OmniXpress and CytoSNP arrays.

This offers tremendous potential for our customers to access a wealth of banked and often well -- annotated samples that can be used for structural variation analysis or to supplement an association study.

Earlier today, we launched a new eight sample format of the Omni2.5 BeadChip.

This new version has the same rare variant content as the existing four sample Omni2.5 but is now offered in a more efficient and economical format.

The launch of the Omni 2.5-8 represents a doubling of capacity on a sub straight to over 20 million genetic variants.

GTo give you a sense of the magnitude of this increase, on one array you could now incorporate nearly the entire known catalog of Human SNPs.

Overall, our outlook for the GWAS market remains positive.

Customers that have run the Omni2.5 have provided direct feedback that it's the best performing microarray that we've produced to date.

Many of these customers are conducting rare variant proof of principal studies on the Omni2.5 and we expect to see the results of these projects later this year.

We continue to believe that novel findings with this rare variant content will renew demand for Genome-Wide association studies and new rare variant products like the Omni5, which is on track to ship this summer.

Demand for our Eco Real-Time PCR instrument is continuing to build nicely.

We experienced some initial challenges in ramping manufacturing that we believe are now behind us.

We're significantly scaling Eco production and expect to deliver the product with standard lead times by the end of this quarter.

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

Total Sequencing revenue grew 80% from Q1 of last year and continues to be supported by broad adoption of the HiSeq 2000.

75% of HiSeq shipments and approximately 90% of orders were to customers outside the major Genome centers.

The rapid increase in the installed base of HiSeqs is driving significant growth in Sequencing reagents.

Total Sequencing consumables grew over 70% compared to Q1 of last year, largely the result of the increase in HiSeq reagents, which for the first time exceeded reagent revenue from the installed base of the Genome Analyzers.

This growth favorably impacted our product mix and was the primary driver of our gross margin improvement in Q1 compared to last quarter.

Offsetting some of the margin expansion in Q1 was the remainder of the HiSeq shipments related to the Genome Analyzer trade-ins.

Approximately 50% of non-Genome center shipments included trade-in related promotions compared to approximately 75% last quarter.

We've nearly completed shipment of all trade-in related HiSeqs and expect minimal impact to gross margins from these units going forward.

Our demand outlook for next generation Sequencing continues to be very robust.

We've received positive customer feedback on the improvements we've made to our HiSeq flow cells, TruSeq reagent kits and imaging software that we launched earlier this year.

These improvements will triple the throughput of the HiSeq to 600G per run and reduce the reagent cost of Sequencing Human Genome to well below $5000.

As Christian mentioned, we've began initial shipments of these kits.

We've also significantly scaled our Whole Genome Sequencing service capability this quarter to support the growth of our Illumina Genome network.

Compared to last quarter, we more than tripled the total number of genomes completed under IGN.

The improvements to HiSeq throughput will help to substantially increase our capacity to meet our demand going forward.

Last quarter we debuted our new MiSeq platform.

MiSeq is a compact, easy to use, low cost sequencing system that can generate up to 1.5G per run and complete work flows from sample to answer in under eight hours.

The beauty of MiSeq is that it uses the same TruSeq SBS chemistry that's enabled researchers to generate over 1500 publications on HiSeq and the Genome Analyzer.

This allows Illumina and our customers to move many of the chemistry and software advances made on HiSeq directly to MiSeq.

This is powerful in the growing body of applications that don't require the output levels of HiSeq.

Nowhere is this relationship more compelling than in clinical research and ultimately molecular diagnostics for clinical applications developed and validated on HiSeq can be deployed in the field on a low-cost MiSeq instrument .

Additionally the fast run times of MiSeq will make it a potent application development platform.

The common chemistry between these two platforms will allow rapid development on MiSeq with ultimate deployment of high throughput applications on HiSeq.

We believe this is a powerful competitive advantage.

The market's initial response to MiSeq has been extremely positive.

Customers have already identified numerous applications where they believe MiSeq will offer distinct advantages such as targeted resequencing, small Whole Genome Sequencing, clinical and screening applications and QC and quantification for high throughput labs.

We officially begin taking orders for MiSeq this month and have already built a healthy order book.

We're on track to meet our plan to ship initial MiSeq units in Q3 and ramp to high-volume shipments in Q4.

I look forward to updating you on our progress later in the year.

Early last quarter we announced the acquisition of Epicentre Biotechnologies.

I'm pleased to report that the integration of the Epicentre team is going very well, and that we've already seen nice organic growth from Epicentre's Nextera product.

In fact in the first quarter, Nextera kits generated nearly as much revenue as they did in all of 2010.

As a reminder, the Nextera assay enables 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 workflow across our product lines.

In general, we believe our funding environment is stable, we're no longer directly tracking stimulus-related funds as they become more challenging to parse out, but believe that that funding should benefit our customers through the end of next year.

Recently the 2011 NIH budget was passed with about a 1% reduction in spending from 2010 levels, avoiding the worst-case scenarios brought up in Congressional negotiations and remaining in line with our expectations.

Overall, we believe that the allocation within the NIH budget will continue to favor genetic analysis tools, and in particular, next generation sequencing.

No discussion of the quarter would be complete without acknowledging the devastating earthquake and resulting tsunami that occurred in Japan.

Our deepest sympathies go out to the people of Japan and the families of all our employees and colleagues.

Fortunately no Illumina employees were injured in the events nor did our regional sales office sustain material damage.

We've assessed the potential impact on our vendors and do not anticipate any significant disruption to our supply chain at this time.

We do anticipate some softness in our Japanese business over the next few quarters, but do not expect it to materially impact our results.

Overall Q1 was an exceptional start to the year.

We accelerated our revenue growth from Q4, we're up 47% year over year while expanding gross margins by more than 300 basis points from Q4.

We achieved a key goal we set this quarter to virtually clear out the backlog of HiSeq launch-related trade-ins.

This will allow us to drive toward the gross margin targets that we've set for the full year and guided to in January.

We controlled operating expenses through disciplined management and increased operating margins by approximately 400 basis points from last quarter and by over 500 basis points from Q1 of 2010.

We generated $89 million in operating cash flow and free cash flow of $76 million, or $0.54 per share.

Our new 600G kits are shipping and delivering on the scalability of HiSeq to drive down the cost of Sequencing and further unlock the elasticity of the market.

We're on track to begin shipments of MiSeq in the third quarter and are excited about the new opportunities that that system will create in the existing capillary sequencing space as well as in the clinical markets.

Thank you for your time, and we'll now open the lines for

(Operator Instructions) Marshall Urist with Morgan Stanley.

You may proceed, sir.

Yes, hi, guys, thanks for taking the questions.

Congrats on the quarter.

So first question is just on underlying HiSeq demand.

If you can kind of talk about how that's trending, I appreciate the comments on backlog, but what you're seeing there to start the year?

And then related to that, just pricing on the 600 G kit relative to the initial kit for the HiSeq.

Yes, I'd say we're experiencing a demand curve on HiSeq that is representative of what we thought the underlying demand curve looked like during the trade-in window.

Q1 is always a seasonally weak order quarter, it's the typically softest quarter that we ever have in orders, and that's been the case for us really since inception of the Company.

But we feel really positive about the pipeline for HiSeqs and optimistic about the trend that we're going to continue to place significant systems.

With respect to the 600 G kits, we've increased the pricing on those kits, so the customers get roughly 3 times the output that they got on the previous version of the kits, and we've bumped up the pricing to some extent to capture some of that incremental value for us.

Okay, great.

And then just a follow up on the GWAS market, and how are you guys thinking about that over the next few quarters?

Just as we get through -- as we start to annualize the 2.5 launch, granted the 5M launch is coming up, but as you start to annualize that and before we get the initial, kind of initial data from the initial 2.5 studies, which you pointed to later this year, kind of how will that trend over the next couple of quarters particularly through 3Q when you'll get the initial launch from the 2.5?

Yes, I would expect that what we'll see is relatively flat performance of the 2.5 over the next couple of quarters as customers wait to get results from the studies that are underway right now.

We do expect to get a pop from the initial launch of the Omni5, and it's hard to know exactly what that magnitude will look like, but we think there clearly is some pent-up demand for people to begin running that array.

We'll probably also get some initial demand for the supplemental chip that will move some of the initial customers that have used the 2.5 up to the full 5M level of content.

So we'll certainly see that pop through Q3 and Q4, and then as we get into 2012, it's a bit of a wait and see because we'll start getting actual results from these initial 2.5 studies.

We expect probably to get the first bit of data in Q3, and then around ASHG in Q4, we'll see some very significant results we hope.

Doug Schenkel with Cowen and Company.

You may proceed, sir.

Hi guys, good afternoon.

Looking at the operating lines, there's a decent amount of operating leverage at the R&D line, which as you'd expect increased in dollar terms, but again declined as a percentage of sales.

How should we model out R&D moving forward?

And behind that, operationally, what's driving this moderation in growth?

Is it really moving towards the late innings of the MiSeq launch, how should we think about that?

The R&D spending does have some lumpiness in it of course and part of that has to do with some of the tuck-in acquisitions that we do and so it could pop up if we do one of those as we potentially by an R&D team.

We also have significant project expenses associated with the launches of major platforms, and those tend to be a bit aperiodic in the R&D numbers.

I think what you can expect going forward is an increasing absolute expense level in R&D, but that we think that overall 14.5% of revenue which is where we wound up this quarter is a pretty good percentage and we were really pleased with that number.

So we have, as you know, haven't guided to where we expect to be for the rest of the year, but certainly you should model it as an increasing absolute dollar number.

The other factor of course is that we're continuing our investment in diagnostics and as we get closer to something we think could be an important diagnostic product, we'll begin to invest in validation studies and potentially clinical trials.

Would you-- is it fair to think about R&D as being a more likely source of operating leverage over the balance of the year relative to sales and marketing, given the potential for you guys to need to build out the sales and marketing infrastructure a bit in support of the MiSeq launch?

Well I guess what we'd say is that we are really happy with the percentages in both those categories that we achieved this quarter, and we grew revenue so substantially on a year-over-year basis that we probably got a little bit ahead of where the R&D investments and the sales and marketing investments were.

So those percentages are fantastic, and we are not prepared to guide to any additional leverage over those kinds of percentages that we've just presented today.

Ross Muken with Deutsche Bank.

You may proceed, sir.

Good afternoon.

So there's been a lot of talk in sort of the clinical community about opportunities of using next-gen sequencing for all sorts of different applications, for a lot of various dates, we've obviously talked about cancer, there's been a lot on AML and a number of recent other papers in nature, et cetera, I mean as you're having discussions with users and researchers, what are sort of the key areas you're seeing the greatest level of interest and you see the greatest applicability for both the HiSeq and the MiSeq on kind of a 1 year or 2-year basis?

Well certainly, I think if you were to pick 1 category Ross, it would be cancer.

Certainly there's an enormous amount of discovery work being done in cancer now using the HiSeq platform.

Obviously some of that within Illumina, but most of it outside of Illumina.

I suspect that most of the end applications that come out of that cancer research would be more suited for deployment on a MiSeq platform.

So you would typically expect an actual diagnostic panel to be some number of genes that you'd sequence through probably somewhere between 40 and a few hundred would be sort of the range we'd expect perfect application for a MiSeq platform.

MiSeq is getting very broad attention in many other diagnostic circles from sequencing elements of immune systems to sequencing viruses and bacteria.

And very broad potential applicability across all sorts of diagnostic type markets.

Now clearly, in the diagnostic space where the genome is not highly variant, then arrays are going to remain an important component in those types of diagnostic applications.

But sequencing is becoming cheap enough and versatile enough that I think more and more customers are looking to apply next-gen sequencing to these types of applications.

> Great, and on the free cash flow side, you had another great quarter.

I mean as you sort of think about the cash generation, obviously we saw the convert and in turn the buyback issuance, as you think about your ability to continue to convert kind of the net income line into cash, and the sort of potential uses there, I mean have you had to preference sort of buybacks versus sort of technology tuck-ins today, what's sort of the relative preference?

And on the M&A side, where is the greatest interest from your front in terms of where you're spending time, is it on the research side, is it on the sample prep, is it on the backend analysis or is it on sort of diagnostics?

Yes, Ross, we-- we're actually -- when you look at the preference, it's really as we've been saying for years from a technology perspective, we're agnostic.

And so the preference is to put the money into work in the business, and so when we see opportunities for technology tuck-ins in really all of those areas that you mentioned, focused on the front end as well is the back end, as well as new kinds of Sequencing technologies that could be out there, we're going to be investing in all of those.

But we'll also at opportune times we will buy back stock, and as you've seen us do that over the last few years, and we'll continue to have that profile.

Tycho Peterson with JPMorgan.

You may proceed.

Hello, thanks for taking the question.

Just following up on the earlier question on arrays, I appreciate the additional color on GWAS, but I guess as we think about the broader array market, with some of the early attraction you're seeing with HiScan, can you just talk to whether that's a decent leading indicator for kind of how we should be thinking about growth in the overall array market and are you a little bit more I guess optimistic given some of the early traction with HiScan?

Well certainly the positive indicators we've had in growing the instrument base is a big help.

We continue to see very positive growth in the focus part of our business.

We have a new methylation array that's doing extremely well and we're very bullish about the evolution in the methylation market over the next few years.

In aggregate, we've talked about growth in the array market sort of being in the mid-to high single digits, and I think for now we're sticking with that range of overall growth.

And what's going to happen in 2012 will depend a lot on what happens in these GWAS studies in the back half of the year.

And so we're optimistic about that but we have to show the results and deliver the revenue.

Okay, and then on MiSeq, as we think about the potential market opportunity, obviously a big opportunity to go after the capillary market.

Can you just talk to maybe what the early interest looks like, and obviously it's early days you haven't launched yet, but in terms of the early interest from customers, how much is coming from existing capillary customers versus new markets or HiSeq customers that want to kind of complement their portfolio?

Yes, well the backlog is building nicely as I said on the MiSeq.

The initial bolus of orders that we're getting are tending to come from mostly customers who already have HiSeqs or Genome Analyzers, and a number of them from the large centers.

So these tend to be institutions that are well-funded, they're already familiar with what we're doing in Sequencing, they already know how to run SBS chemistry, and that's what the front end bolus of orders looks like.

If you go deeper into the pipeline however, what we're seeing is tremendous interest from customers who traditionally done capillary-based sequencing in order to reduce the cost of doing amplicon sequencing to drive their equation down and their throughput up.

And both customers have to go through technology transition.

So our expectation is that they'll be a little slower to make the change than customers who are already familiar with next-gen sequencing.

And clearly, MiSeq is a product that's ideally suited for as emerging clinical applications, so we are seeing core labs, particularly core labs that are in hospital clinical research type settings are very very interested in MiSeq as a platform to deploy.

Derik De Bruin with UBS.

Go ahead, sir.

Hello, good afternoon.

Hi Derik.

Hi, Derik.

Most of the controversy I think around the quarter was people worrying about what happens as the backlog comes off, and instrument shipments slow potentially and like that, I guess could you just-- just to kind of avoid another round of these incessant phone calls on the numbers, can you kind of talk about how you see instrument numbers rolling out, and how we should kind of like think about this for the rest of the year?

But as HiSeq comes down and some of the backlog comes off, it just helps some of this middle-market and before MiSeq rolls out, could you just give us a little more color on how you see the rest of the year rolling out?

Well we haven't quantitated that of course.

But I guess what I can say qualitatively is that what we've done is gotten our backlog back into sort of the reasonable range.

I mean this is more the kind of range that we would expect to operate it on an ongoing basis.

And that's important for couple reasons.

One is that customers want to get their product.

They don't want to wait 4 or 5 months to get a Sequencer that's not commercially viable lead time for too long.

I mean right at the initial launch of a product, you can get away with that but you can't after the product's been in the market for some time.

So that's a necessity for us.

The second thing is that as we're holding the systems in backlog, they're not consuming many reagents.

And let this jet go by.

And so it's critically important that we get these instruments in the hands of customers so that the systems can begin to consume reagents and improve the overall flow of that consumable business for us.

So I guess what I'd characterize overall is that we are now where we would like to be in terms of having the backlog going forward.

Okay.

And, Christian, just a housekeeping question, what's your expectation for net interest income expense for the year?

It's relatively flat.

I mean obviously the new convert is accretive, but you can think we're modeling it on interest income 3 quarters of 1% to 1% interest income, but we still have some interest expense and so you'll see that.

In the quarter this time you saw we had a charge, a $27 million charge that was extinguishment of debt, so basically as it converts-- converted, we had the non-cash accounting charge that we took.

But for the most part, the new convert is slightly accretive, but we're not really generating a ton of interest income on our cash.

Isaac Ro with Goldman Sachs.

Go--

Hi guys, thanks for doing the question.

Christian, could you maybe touch on the reallocation process for the Corporate Headquarters over the next few months.

As you kind of go through the process, what are some of the key milestones you need to go through as you look to the next couple quarters?

Sure.

So as you know, we signed the lease in December, we're in the planning phases of the move right now.

So we spent the first quarter planning out the new facility, figuring out where people were going to sit, and now we're finalizing those plans, getting the permits, et cetera.

When we get into the end of this quarter, first part of next quarter, we'll be doing all of the internal construction that needs to be done, and then in November we'll start moving people across, assuming we are on schedule, and right now we are.

As a matter fact, we're just a little bit ahead of schedule.

And then by the end of the year, we should have most of the headquarters staff completely moved over to the new facility.

We'll have all of the San Diego manufacturing that's done here in our headquarters facility, that actually won't move until the first quarter, so that'll be the last thing to move as we move out of San Diego, or out of our Corporate campus in San Diego.

From a financial perspective, we're accelerating some of the depreciation of our leasehold improvements here, and that's why you see an incremental line on our P&L this quarter.

And on that line, we'll have that accelerated depreciation, we'll also have a non-cash CCU loss that we talked about last quarter and that charge will likely hit us in the fourth quarter.

We'll also have all of our moving expenses.

And just to remind people, that charge is kind of in the $30 million, $35 million range, but it's a completely non-cash charge, and I can talk people through the specific accounting off-line if you want to talk about that.

But most of the charges that hit that line will be absolutely non-cash charges, and you'll see it rollout over the remainder of the year.

So hopefully that's helpful, Isaac.

That's great, thanks.

And just secondly on the new products, could you maybe talk about broadly speaking at least what kind of technical hurdles you think you need to kind of go through for Nextera and then certainty MiSeq ahead of the launch later this year, kind of where we are in the product development process?

And then lastly, as we look towards sort of the big picture downstream, kind of on informatics, do you have an updated thought on how you see that market evolving and how you need it to be a bigger participant perhaps in informatics?

Well with respect to Nextera, that product is on the market today, and it was on the market prior to the acquisition of Epicentre, and as I commented, we had great revenue performance from that product in the first quarter.

What we're doing now is focusing on what the future versions of that kit will look like, and there's several types of improvements we'd like to make to it to improve its sensitivity, to improve the amount of sample that you need for the kit , to look at using less cycles of amplification, there's a number of different dimensions we're exploring.

And those are products that will rollout over the next quarters into 2012.

With respect to MiSeq, I'd say we're over virtually all the technical hurdles, we're doing the integration of the system is how I'd probably best characterize it.

And what that means is that we're optimizing recipes, we're looking at all the performance parameters of the technology, we're making improvements in software to improve the overall accuracy level of the system, we're titrating the reagent components so that we consume the smallest amount of reagents that we can consistent with very high performance, and we're doing extensive testing of the hardware, software and reagents in combination.

With the volume we expect on this system, we think it's critically important that we go through an extensive test cycle to make sure that when we began shipping these that they're very robust out in the field.

So I'd say MiSeq is looking very promising, and as I mentioned in the remarks, we are on schedule to do the initial shipments in the third quarter.

In terms of informatics, I talked previously about the investments that we've made in improving our base caller and our structural variant caller.

We're continuing to make improvements there.

I'd say one of the next big areas of focus for us is particularly because of the launch of the MiSeq system, is how do we make that software increasingly automated, increasingly user friendly, require less compute infrastructure, and much of that drives you toward cloud type implementations for our technology.

So we already have pieces of our software running up in the cloud, and you can expect over the next 6 to 12 months for us to begin to allow customers to migrate data and compute capabilities up to the cloud in sort of an Illumina centric environment.

We've also been working on a product that we've talked a bit about previously that allows customers to very graphically and easily build complex workflows.

One of the challenges that existing customers have is the need to understand Linux and how to pipe together multiple complex programs to get the specific results that they would like, and interface third-party programs into that workflow.

And this product that we're working on is one that allows you to graphically build that workflow, and you don't have to understand any programming language to use it.

So that would be an increasingly important component as the install base broadens and the users become sort of less compute centric, if

Quintin Lai with Robert W.

Baird.

Please proceed, sir.

Good afternoon, thanks for taking the questions.

It's actually Matt in for Quintin.

First wanted to extend congratulations to both Peter and Kevin on their new roles.

And just kind of moving into-- obviously there's been a lot of success with the trade-in program, just kind of wondering if there are any updated thoughts on how the refurbished GAs are rolling out, and kind of those thoughts going forward?

Yes, so on the refurbs-- so first of all with respect to the trade-ins, the trade-ins specifically were the units that were really associated with the launch, so instruments sold in Q3, Q4, Q1 of last year that had large promotional discounts in order to get those customers to convert readily.

We still have a very significant install base of GAs out there that are further trade-in opportunities that we'll see rollout over the next year or two.

With respect to the units that have come back, we are seeing a pretty steady demand for those unit each quarter, either through all kinds of different programs, either through outright sale, potential-- a few reagent rental programs that we've seen, et cetera.

So we have been able to find homes and see a consistent level of demand for those refurb units so far.

I guess one additional comment I'd make is that the trade-ins that we'll do going forward from here offer very modest discounts to bring back the GA, so they're nowhere near the magnitude of the ones we did in the promotional window of Q3 2009 through Q1 of 2010.

Great, thanks for that color.

And then just kind of wanted to ask I mean given the strength of Q1, any revised thoughts on top and bottom line guidance for 2011?

Thanks.

Yes, no we're not updating our guidance today, so nothing further to say about that.

Amanda Murphy with William Blair.

You may proceed.

Hi, thanks.

I just had a couple follow ups.

Just the first one, even though it's pretty early, it seems like the competitive landscape for these sort of lower cost rapid turnaround machines is evolving very quickly, I'm curious you talked a little bit about the CE market and the opportunity, but can you speak to sort of how you see the MiSeq as a differentiator in the CE market, so for customers who do not have a next-gen platform for example?

There's a number of ways that MiSeq is differentiated.

And I guess the first thing I'd say is that we do think that this is going to be a rapidly evolving market and one that's going to grow quite quickly.

The existing capillary market is-- remains it to be a relatively large opportunity, and it's one we think that's right for conversion in the next-gen sequencing because of the output levels that these new types of systems offer.

Certainly MiSeq is distinguished in it's overall output level, I mean 1.5 G is well beyond what anybody else is talking about here, at least is available.

The system is going to be extremely high performance in terms of its overall accuracy.

It will take advantage of all the applications that have been previously developed on HiSeq and on the Genome Analyzer, it has very rapid turnaround time.

And in particular, we focused on ease of use.

And our customers will be able to use the Nextera kit to do very rapid sample prep and library preparation on the system.

The run times for most applications will be in the range of a shift, and we're very optimistic about how this product is going to compete in the overall market.

In terms of capital acquisition cost, we think this is priced about where the other competing systems are if you look at everything that's required to run them.

And the running costs are going to be vastly less than what people experience today on the capillary base system and so they'll be we think a huge incentive for the capillary market to begin to transfer over to next-gen sequencing.

And do you think that that's something that could happen meaningfully sort of next year or is that a 2013 event?

Just trying to get a sense of one that market might come online.

Well there's always the limitation of funding in any of these markets.

If you pulled most of the capillary customers a year from now, probably you'd get most of them wanting to convert immediately to next-gen sequencing, the limit will become how many of them can get funded to make the change over.

And we'll begin to see that as we enter 2012.

We're pretty optimistic that the market will begin to shift pretty quickly because the order of magnitude change in cost is certainly modeled by what happened with the original introduction of the Genome Analyzer where we reduced the cost by over a factor of 100 and those kinds of step changes in cost and improvement in throughput often cause markets to shift pretty quickly.

Bill Quirk with Piper Jaffray.

You may proceed, sir.

Thanks, good afternoon.

Say at the risk of beating a dead horse here just in thinking about the array expectations ahead of the 5M launch as well as the taming of the Sequencing backlog, is there any reason to think as that the underlying demand for Sequencing isn't strong enough to get us to the next couple of quarters without seeing any type of sequential blips shall we say?

Yes, Bill, we're not going to roll these things out on a quarter-to-quarter basis here.

As Jay pointed out, we're not really giving any guidance going forward at this point in time.

But the reality is that as you've seen, as the Sequencing business continues to grow at a very rapid rate, the more systems we put in the field we get better -- more consumables per -- more consumable revenue.

We also see as the mix of HiSeqs continues to become a greater proportion of the total Sequencing mix we should see the consumable pull-through per instrument increase.

So all of those aspects are positive with respect to our demand -- our profile.

And of course then just the general pipeline of Sequencing instrumentation that we have continues to be healthy, and so we continue to see a lot of interest in next-generation sequencing.

Very good.

And then just a quick follow up, thinking about some of the-- rather the very strong demand on the clinical side particularly under-- for cancer, any advice here or rather guidance, guys, in terms of the number of placements that are going into areas outside of your traditional strongholds in academic research?

And by that you mean applied or corporate kinds of environments?

Applied, corporate, as was from the clinical standpoint, exactly.

Yes, our corporate revenue runs 15% to 20% depending upon the quarter.

And we certainly see uptake in ag bio type companies.

Pharma buys these sequencers for doing research they don't buy them for large scale discovery programs at least not to date.

And we don't see any huge change in that dynamic anytime soon.

So I think our percentage of revenue balance between academic and corporate buyers from everything we've modeled out, we expect to stay about the same.

Jon Groberg with Macquarie Capital.

You may proceed, sir.

Thanks for taking a couple questions and also add my congratulations to Kevin and Peter, good luck, we're going to miss you.

Thanks, Jon.

The-- can you quantify what Epicentre added for the 12 weeks, or maybe if you don't want to do that, can you remind us what it was on an annual basis last year?

Yes, we haven't given any numbers on Epicentre, Jon, either before or subsequent to the acquisition.

Okay.

And then I guess, Jay, could you -- I know you have a lot of moving parts but if you assume 600 G at maybe some of your library prep improvements, what would be your estimate of kind of the current cost per Whole Genome for your customers?

The reason we don't talk much about that is that it varies quite widely.

And the reasons are that-- what we do talk about is the reagent component, because that's something that is essentially fixed, it varies only based on the discount level that a given institute receives.

But the parts that are variable, and probably the single biggest part that's variable, includes the overhead that gets applied to a sequencing run.

And we see in some customers that that's as low as 10% and other customers it's as high as 50% or 60%.

And so the difference in what they call their cost of sequencing Human Genome is radically different.

It also depends on the duration of amortization of the instrumentation, so some institutes do it over 3 years, some do it over 4 or 5.

And it also depends on the scale that they run at, in particular the labor components.

If you're running 1 or 2 sequencers, you may have somebody that is almost full-time running those 1 or 2 sequencers, but if you have 20, 1 individual person can probably run 6 or 8 sequencers if they're on scale.

And so the other components vary pretty widely, which is why we don't talk so much about them.

Having said all that, it certainly in most institutes under $10,000 if they're running at 600 G kit.

Dan Leonard with Leerink Swann.

You may proceed.

Hi, thank you.

What are your current HiSeq delivery lead times on average?

Well I mean always said about that is that we've gotten our HiSeq backlog down into what we consider to be commercially reasonable lead times.

I would say typically in our business that's 4 to 8 weeks.

4 to 8, okay, thank you.

And then my follow up, can you give us more some color on the Illumina Genome network?

You mentioned that you increased the number of delivered Genomes, is that all internal, is that partially internal, part clearinghouse, anything on quantification of backlog, anything along those lines?

It's a combination, so it was done by us and by one of our IGN participants in the first quarter.

So we've seen some uptake of the desire to use the network, I would say probably most of the business has come to Illumina.

Amit Bhalla with Citi.

You may proceed, sir.

Hi, good afternoon, just a quick one.

I was hoping you could just talk a little bit about the HiSeq 1000 in terms of demand there and how shipments have been taking place?

Yes, on the 1000, consistent with what we've talked about in the past, the demand for the 1000 comes from customers who can't get enough money to buy a 2000.

There's-- because it uses exactly the same architecture, the same software and just has half the throughput, almost everybody would prefer to get a 2000 if they have the money to do it.

So what we've seen are a number of customers, it's certainly nowhere near the demand for the 2000, but it's a fraction of what we get for the 2000, drop down to the 1000 because they lacked the funds.

And if you look out a couple of quarters, we'll probably begin to see some of those that have installed 1000 skip the money to do the upgrade to the 2000.

Thanks.

Sung Nam from Gleacher & Company.

You may proceed.

Hi, thanks for the question.

So Jay, you talked about 90% orders coming out of the major Genome centers or outside of the major Genome centers, would you be able to comment on going forward, what the HiSeq placement as far as your current existing customers versus new customers might be?

I can give you some qualitative comments about that.

Typically, what we see in any given quarter is the acquisition of somewhere between 25 to 35 new customers.

The vast majority of, if you just counted the number of orders we get for HiSeqs, probably the vast majority of those are for single units.

And then if you subtract out the number of new customers, what you have are many of the customers who ordered 1 initially adding their second one.

And then a handful of the customers who have higher numbers adding a couple more.

So the type of customer who may have 5 or 7 who are bumping up with 2 more HiSeqs.

And so that's sort of a general commentary on the kind of mix that we see in the HiSeq order pattern.

Okay, that's helpful.

And then my second question is would you be able to update, give us an update of your diagnostic program particularly around the ovarian and gastric program that you had some samples that you sequenced and if you continue to expect -- if you expect to continue to carry that on internally or potentially partner out with others?

Yes, so first answer is that we expect to carry this internally unless something surprising happens.

The leading program is the ovarian program and we are in the midst of the validation sequencing for ovarian, and we're a reasonable way through that.

And we expect to get most of the way through that by the end of the third quarter, and then have mostly analysis done by the end of the year.

So I would expect somewhere probably in Q1, we'll know what we have there.

We're excited about the program, in particular the translational elements of the program, trying to see if we can find the presence of ovarian cancer cells in bodily fluids that are shed from the cancer tumor themselves.

And that program uses our technology that we've announced that allows us to do rare cell capture.

And in particular that technology will be deployed initially in our services operation in the second quarter, and so we will implement that through the form of contracts with third parties who will use that rare cell capture technology.

But it's a very important part of this translational work that we're doing in ovarian.

Gastric is probably 3 to 5 months behind where we are, and then colorectal is in the initial sequencing phases now.

Thank you so much.

Zarak Khurshid with Wedbush Securities.

You may proceed.

Hi guys, thanks for taking the questions.

Back to MiSeq, how much room do think there is to improve or scale the system in terms of the samples per run or other variables?

The samples per run depends a lot on what kind of application you're running.

So our-- we have indexing kits now that allow you to put a specific sequence in the sample prep process, so that you can take deconvolve or demulitplex the sample after you finished sequencing.

And overtime that indexing level will continue to go up significantly across our entire product line.

So the number of samples you can run will be quite large if what you want to get out is a smaller portion of genomic information.

So the sample number is sort of a trade-off against the overall output per sample.

Sort of like how arrays work.

You can dissect an array sub straight into lots of samples with lesser content or fewer symbols with more content.

In terms of the overall throughput of MiSeq, I think if investors and others looked at the track record we've had at improving the overall output of our existing Sequencing Technologies, that wouldn't be a bad model to think about in terms of the headroom that we potentially have on MiSeq.

That's helpful.

And then as a follow up, what's happening with Avantome and in general, what are your current views on need for "long read length platforms?" Thanks.

As I think we've mentioned previously the Avantome program morphed into the MiSeq program.

We spent a fair amount of energy working on the specific development program after the acquisition of the company Avantome.

And one of the things that we thought was critically important is that emulsion PCR not ever be deployed as a product because we don't feel like that it as a customer friendly process, and it's too artful and not sufficiently repeatable.

And so right at the point where we made the acquisition of Avantome, we set a design parameter that emulsion PCR was not going to be the sample prep method.

We spent some time working on alternatives, and we made some decent progress there, but at the same time, we continue to make major improvements in the cycle time of SBS chemistry.

And we wound up shifting the program over to what ultimately became MiSeq.

What you'll see in the future from us is some of the technology that came across as part of the Avantome acquisition that we've evolved in our own internal development programs, may wind up being components that get deployed in future sequencing systems.

But there will never be a sequencing product that really is the Avantome product that comes out of Illumina.

I guess the other comment I'd make is that-- we're right now at read lengths of about 300 basis so MiSeq is 2 x 150s and you can line those directly up if you wanted to do 300 base reads.

For the vast majority of applications, that's long enough.

There's very few applications that require read lengths in excess of 300.

We may push it a bit beyond that, but most of our customers preferred the trade-off, the run times and run shorter runs with shorter read lengths.

Even-- we even see this on HiSeq even though HiSeq is capable in the GA we actually deployed a kit out to 150 base read lengths, most customers only going out to 2 x 100s.

Paul Knight with CLSA.

Please go ahead, sir.

Hi, guys this is [Jonathan] in for Paul Knight.

I was wondering if you could just briefly go through the sequential growth in Sequencing and microarrays again?

Okay, we didn't give any specific numbers on sequential growth.

We gave some percentage growth numbers over last year.

And maybe, Jay, could you give us a little bit of color on geographic breakdown?

What you're seeing out of Asia?

Asia we had a very strong revenue quarter.

The -- so in Asia we include Japan, and out of that region we had a record revenue quarter.

In the US we had a record revenue quarter as well.

In Europe, of the 3 regions, was probably the weakest, and on a sequential basis it was roughly flat from Q4.

And then maybe just as one quick follow up, how would you describe the customer base coming out of China, is it primarily academic?

There certainly are a lot of academic customers, but as you're probably aware there's many institutes in China that have some academic roots but are in one way or another connected to government agencies of various sorts.

So it's sometimes hard to know exactly where the funding comes from for example for some of the customers that we sell to in China, in many cases the funding comes from large-scale philanthropy or through various government entities.

Our largest customer there far and away is BGI.

And that institute certainly has some academic components to it, but it's not tied to a university.

Peter Lawson with Mizuho Securities USA.

You may proceed, sir.

Jay, just wondered if you give some further color on the number of Genome Sequence, the turnaround on price into the Genome network?

And then an update on Oxford Nanopore?

Yes, we haven't given a specific number, what we said is that the number tripled, that was off our-- a reasonably small base.

And our capacity now is growing considerably with the implementation of the 600 G kits in our services operation.

We do have a reasonable backlog that we're working down in the Whole Genome area.

We are now under a 90-day turnaround in the services business and so we're very pleased with that, and we're going to continue to drive the turnaround down.

I would also say that every single order that we've ever gotten for Human Genome Sequence through the IGN network has been delivered on time.

With respect to Oxford Nanopore, I guess the news today was that they completed around a funding, $41 million I think is what they put in the press release that came out today, and Illumina participated in that round.

That's about all we have to report today.

They have put some information on their website about their GridION technology, but that's all that's currently public information about the state of their project and the state of their technology.

Great, thanks so much., Jay.

Sure.

Tycho Peterson with JPMorgan.

Please go ahead.

My follow up was on guidance, but it sounds like there's not a lot more to say, so I'm all set.

Thank you.

Thanks, Tycho.

And, ladies and gentlemen, that is all the time we have for questions for today.

I'd like to hand the call off to Mr.

Kevin Williams, Senior Director of Investor Relations, for closing remarks.

Thank you, Operator.

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

Thank you for joining us today.

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

Thank you very much.

Ladies and gentlemen, thank you for your participation in today's call.

The presentation has now ended.

You may now disconnect.

Have a good day.