Illumina Inc (ILMN) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2012 Illumina, Incorporated, earnings conference call.

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

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

Later, we will conduct a question-and-answer session.

(Operator Instructions)

As a reminder, this call is being recorded for replay purposes.

I would now like to hand the call over to your host for today, Mr.

Kevin Williams.

Please proceed.

Thank you very much.

Good afternoon, everyone, and welcome to our earnings call for the first quarter of 2012.

During the call, we will review our financial results released today after the close of 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.

Participating for Illumina today will be Jay Flatley, President and Chief Executive Officer; Marc Stapley, Senior Vice President and Chief Financial Officer; and Christian Henry, Senior Vice President and General Manager of our Genomic Solutions Business.

This call is being recorded, and the audio portion will be archived in the Investors 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 actual results to differ, we refer you to the documents that Illumina files with the Securities and Exchange Commission, including Illumina's most recent forms 10-Q and 10-K.

Before I turn the call over to Marc, I wanted to let you know we will participate in the Baird Growth Conference in Chicago the week of May 7; the Bank of America Healthcare Conference in Las Vegas the week of May 14; the Goldman Sachs Global Healthcare Conference in California the week of June 4; and the William Blair Growth Stock Conference in Chicago the week of June 11.

For those of you unable to attend these conferences, we encourage you to listen to the webcast presentations which will be available through the Investor Relations section of our website.

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

Thanks, Kevin.

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

During this section of today's call, I will review our first-quarter financial results, and our guidance for the remainder of the year.

I will then turn the call back to Jay to provide an update on our commercial progress and the state of our business and markets.

We have gotten off to a really strong start in 2012.

In Q1, we had record orders for both MiSeq instruments and for sequencing consumables.

All three geographic regions beat their order forecast, and we built backlog for the third consecutive quarter.

First quarter 2012 revenue of $273 million increased 9% sequentially, due to another successful quarter of MiSeq shipments, microarray growth, and growth in sequencing consumables.

Revenue for the quarter decreased 3% compared to Q1 2011, as the year-ago quarter included a significant number of HiSeq shipments associated with our Genome Analyzer trade-in program.

Instrument revenue for the first quarter was $80 million, essentially flat sequentially and down 30% year-over-year, again due to the Genome Analyzer trade-in program, and a decrease in microarray instrumentation.

Consumable revenue for the quarter was $173 million, up 20% sequentially and up 17% compared to the first quarter of 2011.

We are very pleased with sequencing consumable revenue in the quarter, the result of both the larger installed base and a sequentially-improved average annualized [fall-through] on HiSeq.

MiSeq consumables, while still only in their second full quarter of shipments, are also beginning to ramp up.

In addition, increased shipments from our Infinium microarrays, most notably our Exome family of products, contributed to Consumable revenue growth.

Services and other revenue, which includes genotyping and sequencing services, as well as instrument maintenance contracts, was $17 million for the quarter compared to $16 million in Q1 of last year.

In our discussion of gross margin and operating expenses, I will highlight our adjusted non-GAAP results, which exclude non-cash, stock compensation expense, restructuring charges and other non-cash items.

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

Our adjusted gross margin for the first quarter was 69%.

This compares to 70.2% last quarter, and 68.2% in the first quarter of 2011.

The sequential decline was attributable to the one-time catch-up benefit mentioned last quarter, which resulted from improvements in HiSeq reliability.

The year-over-year gross margin increase was driven by a favorable mix of Consumable versus Instrument revenue, and higher ASPs on the HiSeq 2000 as the Genome Analyzer trade-in program negatively impacted the ASPs in Q1 2011.

Adjusted research and development expenses for the quarter were $41 million, or 14.9% of revenue compared to 15% of revenue in the fourth quarter and 14.5% of revenue in the first quarter of 2011.

Adjusted SG&A expenses were $52 million, or 18.9% of revenue in the quarter, compared to 20.1% of revenue in the fourth quarter and 18.5% of revenue in the first quarter of 2011.

Our non-GAAP tax rate for the quarter was 34%, which reflects a higher rate than we expected for the year, as the R&D tax credit legislation has not yet been passed for 2012.

This compares to 35.2% in the first quarter of last year.

We anticipate this current tax rate will continue until passage of the R&D tax credit legislation by Congress, probably later this year.

If passed, we expect our non-GAAP tax rate will drop accordingly, as the full effect of the credit is applied at that time for the entire year.

Non-GAAP net income was $48 million for the quarter, and non-GAAP EPS was $0.36.

This compares to non-GAAP net income and EPS of $50 million and $0.35, respectively, in the first quarter of 2011.

We reported GAAP net income of $26 million or $0.20 per diluted share in the quarter, compared to $24 million or $0.16 per diluted share in the prior-year period.

During the fourth quarter, we generated cash flow from operations of $65 million.

We used approximately $13 million for capital expenditures, resulting in $52 million of free cash flow.

This compares to $81 million of free cash flow in the fourth quarter of last year, and $76 million in the prior year.

DSO increased slightly to 67 days, compared to 63 days last quarter and 59 days last year, due to the timing of shipments in the quarter as well as the greater proportion of revenue outside of the US.

Our over-90-day balances remain negligible.

We ended the quarter with approximately $1.3 billion in cash and short-term investments.

Given our significant cash balance and our confidence in the Business, our Board of Directors was authorized the repurchase of up to $250 million of outstanding shares, which we will effect there a combination of 10b5-1 and discretionary share repurchase program.

Overall we are pleased with our financial performance in Q1.

While some uncertainty exists with respect to academic and research funding in the second half of the year, we have built backlog for the third consecutive quarter; and our full-year outlook is generally as we anticipated.

Accordingly, we are reaffirming our 2012 guidance.

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

Thanks, Marc.

We are very pleased with our Q1 results, particularly given the potential distraction of the Roche tender offer.

I would like to thank our shareholders for their continuing strong support and reaffirm our commitment to generation of shareholder value.

The positive trends we saw in Q4 continued in the first quarter as both microarray and sequencing revenue grew sequentially, and we grew EPS both sequentially and year-over-year.

Overall, we feel the current global funding environment is stable.

We're seeing more traditional buying patterns in the US; Europe is growing; and Asia is particularly strong, with Japan exhibiting a funding in business resurgence.

As we look toward the potential US-funding issues in the second half of the year, we remain cautious.

While there's no clarity on sequestration and the NIH budget for 2013 remains uncertain, we continue to expect that a dramatic 8% reduction is an unlikely scenario.

We've considered the range of potential budget outcomes in formulating our annual guidance, and we believe the overall funding dynamics this year are considerably more favorable than last year.

Remind you, last year the uncertainty in academic spending was broader geographically and potentially affected both fiscal year 2012 and 2013, while we believe US researchers currently anticipate funding uncertainty over only a three- or four-month period until a budget deal can be reached after the US elections.

Our top US genome centers are not facing additional budget cuts as they did in Q3 last year.

And given that they're at the beginning of their four-year budget cycle, we do not expect these customers to be appreciably impacted in the back half.

Additionally, a new large genome center is expected to start taking shipments later this year.

And finally some customers, in order to avoid a recent sequencing consumable price increase, have placed orders for consumables to be shipped throughout the year, improving our forecasting and allowing greater manufacturing efficiency.

With our growing backlog, improved forecast visibility and fewer funding dynamics at play, we believe that we are in a considerably more favorable position this year relative to last.

Let me turn now to the specific results of the quarter.

Q1 was another great quarter for orders, with a book-to-bill ratio of approximately 1.1, and all regions exceeding their order forecast.

From a shipment perspective, all three geographic regions were up sequentially, with the strongest growth in Asia Pac, up more than 20%.

For the first time in our history, Asia finished with higher revenues than Europe, with notable strength in Japan.

We had record sequencing orders driven by MiSeq, core consumables and sample preps.

In the array business, total microarray revenue was down slightly year-over-year, primarily as a result of lower instrumentation shipments.

This quarter marked the highest number of Infinium samples we have ever shipped.

We received orders for approximately 300,000 more Exome samples, bringing total samples ordered to date to approximately 1.3 million, by far the highest number of samples for any content collection in the Company's history.

In addition, Q1 marked record samples ordered for our Infinium Cyto SNP array and record shipments of our methylation arrays.

Turning to our sequencing business, total sequencing revenue in Q1 grew double-digits sequentially, attributable to growing sequencing consumables and a significant number of MiSeq shipments.

Total sequencing consumable revenue grew 20% compared to Q1 of last year.

Both HiSeq and GA consumable shipments and average pull-through increased sequentially.

Given our installed base, sequencing consumable shipments have now become the largest source of sequencing revenue for the Company.

[ReSeq] sample prep shipments were at a record level, and grew 17% sequentially and 35% over the prior year, demonstrating our focus on back-integrating in the sample prep.

Average annualized consumable utilization of HiSeqs increased to $299,000 in Q1 from $273,000 in Q4.

And we have several reasons to believe this trend can continue.

We will be benefiting from a nominal price increase in early Q2.

HiSeq utilization trends in the US and Asia-Pacific are positive.

Sequencing consumable orders grew 33% sequentially over Q4, which itself was a record quarter, and our TruSeq Exome Enrichment pricing will continue to improve utilization.

Earlier this year we announced the HiSeq 2500 and 1500 multi-mode instrument.

In rapid mode, the HiSeq 2500 is capable of running a genome in a day, up to 20 exomes in a day, or up to 30 RNA Seq samples in 5 hours.

We've been pleased with the orders received to date both for upgrades of existing HiSeqs and orders for the new instrument.

We remain on track for launch in the second half of 2012.

We're also very pleased with the market penetration of MiSeq in its second full quarter of shipments.

Customer feedback continues to be very positive, as this instrument fits nicely into academic research labs as well as diagnostic, applied, commercial, and clinical settings.

We believe we achieved leading market share in the desktop sequencing market in Q1.

In addition, we have seen no material impact from recent competitive announcements.

We remain on track to ship the upgraded version of MiSeq this summer with both higher and lower throughput kits.

This new version of MiSeq can achieve up to 7G per run, and is ideally suited for running deep coverage, targeted cancer panels, such as the recently announced TruSeq-Amplicon Cancer Panel, a highly multiplex product allowing accurate sequencing of hundreds of the most relevant cancer loci, even in difficult samples, such as formalin-fixed paraffin-embedded tumors.

With the ability to detect mutations below 5% frequency, the TruSeq-Amplicon assay provides the market's highest-quality data across many samples all in one experiment.

We've been in active discussions with approximately 100 clinical customers interested in using MiSeq for diagnostic applications.

Greater than half the orders for MiSeq are now from non-academics, unlike HiSeq, which is predominantly ordered by academic customers.

Finally, we remain on track to submit the MiSeq platform to the FDA for 510(k) approval before year-end.

In our fast-track services Business, we are pleased the Broad Institute joined the Illumina Genome Network to offer its proprietary sample-prep process for challenging low input and FFPE samples.

Starting this quarter, IGN will begin to offer several premium service products using the fast turnaround capability of the HiSeq 2500, coupled with enhanced sample prep and new informatic software.

IGN has also launched a new cancer analysis service, which leverages the high accuracy of Illumina technologies to provide cancer researchers with the most accurate data while using the lowest sample input of any commercial, whole genome sequencing service.

This new service uses a new variant caller, which, after mapping the tumor in normal sample to the references, uniquely combines the data sets to better model somatic variants even with varying levels of tumor purity.

IGN's combined calling method recovers 97% of known single nucleotide variants, compared to 77% in competing services.

In addition to our cancer analysis services, we're working with leading data analysis and visualization companies, including Diagnomics, Ingenuity, and [Nomee], to provide optimized software tools for downstream filtering and interrogation of IGN data sets, with the goal of delivering biologically relevant and actionable results.

These data sets can also be integrated with the results of follow-on sequencing, genotyping and RNA-Seq studies, performed to help researchers better understand cancer and the associated biological pathways.

We believe clinical sequencing is nearing an inflection point.

Accordingly, we've been working diligently to accelerate and automate the complete end-to-end workflow required for clinical customers.

In sample prep, new methods like FFPE low input and our PCR-free protocols, increase the breadth of sequenceable sample types and the quality of resulting data.

We've accelerated analysis.

We've developed a new software [liner] called Isaac, which offers a four- to six-times speed increase while reducing the compute requirements from a Linux cluster to a single server.

At the same time we've nearly completed an annotation project which aggregates information from multiple public databases like DB SNP, Ensemble, and others, to offer a simple, pushbutton analysis for variant detection and efficient clinical interpretation.

Providing this with the HiSeq 2500 yields a full work flow, allowing clinical genomes to be prepped, sequenced, and interpreted in less than three days.

In the coming weeks, we're going to have some very exciting announcements about BaseSpace, Illumina's cloud-computing environment.

Currently BaseSpace is supporting a significant part of our growing MiSeq installed base.

And as previously announced, we're working to integrate HiSeq into BaseSpace by late summer.

This will allow researchers to quickly and cost-effectively analyze the human genome, ultimately increasing HiSeq sales and growing the BaseSpace community.

And finally, I'm excited to announce today the availability of our MyGenome iPad application in the Apple App Store at a price point of $0.99.

This version of the app allows consumers to explore a demo human genome, learn about possible health implications, and view reports about important genetic variance.

We will shortly release a version that links to our website, allowing customers to download and view their own genome once they have been sequenced via Illumina's physician-mediated, individual genome sequencing service.

In conclusion, we're very excited about our product lineup for 2012.

We had a strong Q1 and good visibility into the second half of the year, given our backlog and product pipeline.

We have a focus on strong operational execution, and continuous innovation to maintain our technology lead.

The clinical market is emerging very rapidly, and will be a key story for 2012.

And we continue to believe that the overall sequencing market has enormous potential, and that we have the technology, people, and infrastructure to capitalize on these unique opportunities and to continue to lead this market.

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

(Operator Instructions) Tycho Peterson, JPMorgan.

Thanks for taking my question.

Maybe just first one on HiSeq consumables.

You got back to around $300,000 per year.

Is this the right run rate to think about it going forward?

And can you talk a little bit about how much of this is being driven by the commercial partners and how much of it is kind of on a standing order basis as well?

Well, we're cautiously optimistic that we're going to be able to continue to push that rate up.

We're certainly not committing to forward-looking models at higher than, say, $300,000.

But as I mentioned in the script, the trend lines are looking pretty good, Tycho.

And so, we're pretty optimistic about our ability to continue to push this.

Particularly in places like Asia, we're seeing great uptake for consumables.

The overall trends from quarter to quarter look very promising.

When you talked about partners, you were referring to who?

Which partners in that question?

To [Sequenom] and Genomincalpin], some of the commercial partners.

I see.

Sure.

In the clinical markets that are clearly emerging now, we think that those customers will have overall very high utilization rates as they get the products into clinical applications, and sequencing is leading the pack there.

Obviously, the sequencers that they've purchased from us, their goal would be to utilize them at as high a rate as they possibly can; and so on average, that type of customer will have higher utilization and push the averages up.

And are you able to talk about the percentage of customers that are on kind of standing orders, I guess?

We've had some questions with the price increase to the extent that maybe demand was pulled forward, if you could address that, that would be helpful.

Yes.

What we did there, Tycho, is we had a price increase and we gave customers two ways to reduce the impact of that potential price increase on them.

The first was if they agreed to place the orders through our e-commerce system, they were able to get about a 50% cut from the number -- from the total increase of the price to them.

And if they put a standing order in place that was essentially non-cancelable through the rest of the year, then they were able to avoid the price increase altogether.

I can't tell you exactly how many customers took advantage of that.

Certainly it was a reasonable number, I guess I'd qualitatively characterize it as a reasonable part of the install base, but none of those orders counted as revenue in Q1, so there was no impact on what we reported in our $273 million for the quarter.

So those orders went into backlog, not into revenue.

I think the one other thing I'd point out, Jay, is that the shelf life of the reagents makes it such that you don't ship any customer a year's worth of demand in front of a price increase.

And so, as Jay pointed out, getting people on routine schedules of deliveries will help me a lot in the operations area to make sure that we hit our forecast and push that gross margin up.

And both those attempts that we made there were to try to improve the overall organizational efficiency.

Clearly on the ordering side, for e-commerce, so we don't have to send salespeople in every time we want to get a consumable order, and our ability to forecast through the year, in the case of customers putting in standing orders gives us a much better ability to order raw material and to produce the correct amount of reagents in a given quarter.

Okay.

And then last one, can you just touch on Japan, what really drove the strength there and how do we think about the sustainability of that trend?

Thanks.

Japan was very, very strong in the quarter.

And part of it was, I think, a return to significant, incremental funding.

So they had a large funding increase last year.

I think their projections for this year forward are about 6% incremental funding.

So the trend lines in Japan are very positive there.

There's probably some one-time tsunami funding that came in to try to, in particular, reinvigorate the economy.

And I think there's an overall resurgence in the general focus on genomic research in Japan that we're seeing as well.

I'm going to also comment that I think organizationally we're doing very well in Japan.

We have strong leadership there and a very solid sales team, so our execution in Japan's been excellent.

Jay, one other point, it was the end of the fiscal year, this first quarter in Japan, for many of the customers.

That's right, yes.

So where the NIH ends at the end of September, the Japanese fiscal year ends at the end of Q1.

Thank you.

Doug Schenkel, Cowen and Company.

Hi, good afternoon, and thanks for taking the questions.

You guys had a very strong MiSeq and sequencing consumable quarter, as you noted in your prepared remarks.

Our checks suggests that not all customers could actually get the instruments in the sequencing kits they wanted as quickly as they might have hoped.

This is clearly a high-class problem for the Company right now, but not one that you would want to last all that long.

Can you just talk about how capacity is tracking relative to demand and the progress you expect to make relative to that in the second quarter specifically?

I'll take the instrument side of that, and I'll let Christian talk about the reagents, Doug.

As we entered the quarter, we had still a remaining large backlog of instruments.

And the manufacturing team has done a great job of ramping up our instrument manufacturing.

And we delivered quite a few of those in Q1.

And so now I think we characterize exiting Q1 that we're getting very close to commercially acceptable lead times.

And we generally characterize that as about four to six weeks.

So the customer could place an order and expect to be running in their laboratory with that instrument in that window of, say, four to six week timeframe.

So you want to touch on the reagents, Christian?

Sure.

On the reagents side, the first quarter we actually had stronger demand than we were originally anticipating, and so as we got through the quarter, we shipped most of our safety stock.

And we get into the second quarter, the first part of the second quarter here, we've been rebuilding the safety stock, so that slowed some of the shipments in the first week or two, but really doesn't have an impact on the overall second quarter.

One thing that's important to note is the sample prep, as Jay pointed out in his remarks, our sample prep volumes have gone up dramatically in the last quarter or so.

And so the complexity of the number of reagents we're making and consumables that we are shipping has increased, and that's also pushed some of the lead times for people to get sample prep reagents out a little bit.

But at the end of the day as you pointed out, Doug, it's a pretty high-class problem to have, because we're capturing market share in the sample prep side that we couldn't before.

And on the generic reagents side, we're seeing pull-through higher than we originally anticipated, which I think bodes well for the year.

Great.

So there was a study released in Nature Biotech overnight.

Nick Loman was the lead author, and this study compared the performance of various bench top, next generation sequencers.

One metric where the MiSeq was much better than the Roche 454 GS Flex Junior, and the Ion Torrent platform was homopolymers.

How important do you think this issue is in the clinical end market?

Are there instances with customers where you know you're getting competitive wins specifically because of this issue?

And given that one of your key competitors has been arguing that SbF chemistry has a more material homopolymer issue, what's the importance in your view of a study like this being published in a peer-reviewed journal, such as Nature Biotech?

Yes, I haven't actually had a chance to read that yet, Doug.

But with respect to homopolymers, SbF performs beautifully in homopolymers because we had a single base at a time.

So whether there's a 3 base run or a 23 base run, largely doesn't matter to SbF's chemistry.

In many of the competing chemistries, after you get out to three or four bases of the same type, the quality of the accuracy of the calls drops precipitously.

And so I think we have a significant advantage there.

And in some of the core clinical applications, that's exactly what you want to measure is how long is the repeat.

And it's particularly informative in particular types of clinical diagnostic tests.

So I think that is a major advantage of the platform.

Okay.

And last question, anything you can say specific about the trading programs relative to basically the impact it had on the quarter specifically for PGMs and for Roche boxes?

Thank you.

Yes, we had traded in a number of instruments, and the number of customers that are in the evaluation queue, I would say, of the trade-in potential is growing considerably, so I think as we look forward over the next couple of quarters, we expect that number to grow.

Next question, please.

Amanda Murphy, William Blair.

Hi, thanks, I actually had some questions on the array side of the business, if I may.

You talked to microarray revenue growth.

It sounds like the exome array was a big part of that, so I'm curious if that's true.

And then just at a high level, how should we be thinking about the array business at this point in terms of growth potential and sort of the dynamics between instrument and consumable sales?

The exome was certainly a significant part of the growth in the quarter, but we also saw in our methylation arrays good growth there.

So I would say within the family of arrays, we're seeing some strong growth in some, and not much in others.

I think the way to think about the array business is on the consumables side, sort of single-digit type growth rates, and probably the instrument's flattish to maybe slightly down over the next year on a quarter-to-quarter basis.

Do we have any more visibility into rare variant [in queue off] at this point?

Yes, I can make some comments about that.

I think that our conclusion now is that what was generally referred to as the rare variant hypothesis, which the large-scale GWAS chips were going after, particularly the Omni 5, what's been shown there is that statistically, we're going to require a much larger number of samples to make the discoveries that we had hoped to make on products like the Omni 5.

And while that might be disappointing for that particular chip, it again speaks to the complexity of human biology, and in the long run plays right into the strength of our business, because what it means is that you need to bring higher horsepower technologies to make the discoveries.

And we suspect that's largely going to be low pass sequencing.

And so we think over the next couple of years, you're going to see a transition of what's traditionally been done on array base GWAS over to low pass sequencing, which will have the ability to multiplex lots of samples together and efficiently conduct the equivalent of a GWAS study, but have the ability to look at every single variant in the sample as opposed to only those that you preselect and put on an array.

Got it.

And then just last one for me, switching topics a little bit, just thinking about sequestration and potential NIH cuts, trying to understand how specifically funding cuts would impact your P&L.

Thinking about it in conjunction with normal product cycles, specifically thinking about the HiSeq, would it impact instrument sales, consumables?

Just trying to think about those other two dynamics over the long-term.

We really think about the upcoming concern about funding is really a short-term issue as opposed to a long-term issue, because I think it's going to largely be flushed out of the system sometime in Q1 of next year.

And maybe sooner if there is some type of budget agreement that occurs in Q3 or Q4.

And so we really do think it's a bump in the road here that we have to deal with.

As we said in the script, we've tried to incorporate as much of the potential range of variation in that outcome as we could in our guidance.

I suspect if you were looking at the months of September, October and November, it might have a bigger impact on instruments than it would on consumables; that customers would tend to buy consumables more to run the existing instruments as opposed to buying new ones, if I were to try to pick a directional way that funding might get allocated.

As we've continued to mention, we think that [minus 8] is an unlikely outcome.

I think probably most people are aware that the initial budget that Obama submitted calls for a flat NIH budget which would be a fantastic outcome for us if it wound up being flat over 2011.

Or 2012, sorry.

Okay.

Thanks for the help.

s

Derik De Bruin, Bank of America.

So when you look at your MiSeqs, how many labs are you selling these into that also have PGM?

Or are you not run into them in competitive landscape?

And I guess are you doing bake-offs in this sense, anything like that?

I'm just curious how many people are buying multiple bench top systems to test-drive them.

We don't have statistics on that in front of us, so what I'm going to give you is a guess about what it might look like.

I would say that maybe 25% at most of the customers, maybe a little higher, have both platforms.

In most of the cases where we're doing head-to-head competition, we feel very strongly about our win rate in those circumstances.

I think our challenge is to make sure that we can penetrate more broadly into the market to get at customers that we are not seen, which is where I think there is some significant wins for PGM.

How do we think about the MiSeq reagent pull-through?

It's one of the biggest variables in my model.

Can you give us any guidance on how to think about that?

Yes, I can.

We're not ready to give our exact estimate yet.

And the reason is that the way our math works, it tends in the first couple quarters of a new product shipment to overestimate the number.

And so we don't want to give that number out for fear that people might lock in to that number.

We continue to think that $50,000 per year is probably the right number to start with; and I think we're probably one-quarter away from being ready to actually say what we think is going to be in the longer run.

Okay.

And in the cytogenetics market, you'd mentioned some good strengths there.

Are you going head-to-head against some of your competitors in that and taking share?

There's two other major players in the array market going after that market, which seems to be a big growth opportunity.

Can you talk about the competitive dynamics in cyto?

Yes, it certainly is a competitive space.

We do have two competitors there both with quality product.

So I think we're just competing effectively in those markets, and winning more than our share.

We are, as we have mentioned historically, taking our product through the FDA, so we're in the process of conducting the clinical trials now, and we expect to have that submitted to the FDA before year end.

So I think that is a market that's probably more competitive than the other parts of our array business, but we continue to do okay there.

Finally, do we get an R&D day anytime soon?

Well, I wouldn't say it's anytime soon.

I think the earliest we would do it would be sometime in the fall.

We will be thinking about when the best time is to do it and obviously it will depend upon market factors, competitive factors and what's happening with our own platforms.

But it's certainly unlikely it would happen before fall.

Thanks.

I'll get back in the queue.

Daniel Brennan, Morgan Stanley.

(Audio difficulties) The Company is pushing into the diagnostics market, can you provide an update on how Illumina's set up today regarding salespeople and field specialists to go after this market and what types of investment you'll need to make successfully commercializing in the diagnostic setting?

Be happy to.

You have to almost think of the diagnostics market in a couple of different pieces.

One of those pieces certainly is the parts of the market where we are partnering.

And we are very effective at selling directly into those markets, particularly now with our new TCG business unit, that we have a team of people that's focused on the top [clear] labs in the US and outside the US.

It is where the sales effort for companies like a Sequenom or a Genomic Health would be focused.

And we have the ability to work those accounts.

They're large OEM opportunities.

A partnerships like Siemens would fall into that group as well.

So I think that segment, we're very well set up today.

I think the area where we would need to develop a further infrastructure is when we bring products that are IVD products, where we have our own proprietary content.

We suspect that we'll be giving you some more information about what we call our Apollo program, which is our cancer sequencing program, sometime in the next three to six months.

And we'll be talking more about what product we expect to come from that effort.

And in that case, this would be selling much more broadly in to oncologists and physicians.

And in that case, we would need to supplement our distribution; and that could be done either by building it ourselves, or potentially through an acquisition.

Great.

And then there's a follow-up.

Switch gears.

I wanted to ask you a question about emerging markets.

Can you just provide some color about your business in China today, maybe across emerging markets.

What's a realistic growth rate going forward in EM versus developed markets for Illumina?

Any specific color on China would be great.

Growth rates in developing markets overall?

Yes.

Like emerging markets, growth rates for Illumina going forward, say, versus developed markets, if you think about it that way, or maybe just specifically kind of your business in China kind of what that business is growing at and kind of what we can expect it to grow at?

I don't have the specific growth rates of China in front of me, but they are pretty reasonable.

Obviously one of our customers, BGI, is based in China.

But we have many, many more customers and significant emerging opportunities there as we begin to push into the clinical market.

So we are quite optimistic about China as a growth territory over the next couple of years.

We've also had many entities who have come to talk to us about actually partnering [to attack] particular segments of the Chinese market, and so I believe you'll probably see us embark on some partnerships in China.

In other developing markets like India, I'd say India's not a strong geography for us now.

That could change over the next couple of years with lower priced product and again a greater focus on clinical applications, but there I think the lack of ability to buy capital equipment is a particular challenge.

In other parts of Asia, I'd say the growth rates are doing pretty well.

But off a smaller base.

If you look at places like Vietnam, Thailand, Malaysia, we're doing okay in those geographies.

We deal largely through distributors there.

And those markets are beginning to put more and more funding into genomic research.

Great.

Thank you.

Isaac Ro, Goldman Sachs.

Good afternoon.

Thanks for taking the question and I love the name of your new liner software.

Named after you.

We were thinking about you.

I'm sure.

That was too easy.

Anyways, on the product pipeline, I was wondering if maybe you could offer any color around when we might know a little bit more about chemistry A and B.

And then remind us on PCR reagents, how you look at your channel strategy there and how you're going to define success?

Yes, with respect to chemistry A and chemistry B, we're not prepared to give any more details today.

I think, should we do an R&D day in the fall, that would be a great time to give you a specific update on the performance of those chemistries and how we expect them to be ultimately brought to fruition.

I don't think you'll hear a lot of detail about those chemistries until we're relatively close to actually including them in a product of one sort or another.

And depending upon how fast the research goes in those various areas will determine when we're ready to bring a product to market that embodies each of those chemistries.

With respect to PCR, we will expect to begin to market those reagents around the end of Q2, early Q3.

Our focus now in the US is to also bring on some distribution partners, and we are in discussions with distributors about working with us both on the instrument and on reagents in the US, and internationally, we're already well set up with a distribution network for both instruments and reagents.

Great.

And then maybe just a big quick picture question, you mentioned the funding environment and the range of potential outcomes there.

If you could maybe offer some color on how you think your customers, particularly those in the smaller labs in the US and in Europe, have evolved their planning and helped you improve your visibility after the disruption we've seen in the last year, that might be helpful.

I think our customers are a bit more sophisticated about this year than last, as we all sort of look back on last year.

Because there was so much uncertainty coming from so many directions, many of our customers just stopped doing anything for a month or two, tried to figure out what was going on.

They were writing grants.

They were trying to deal with stimulus issues, and I don't think that's what we're going to see this year.

I think customers are going to meter-out their funds more regularly.

They've probably already anticipated some potential challenges in Q3, Q4, and so they're probably spending at an appropriate rate that will get them through that window much more smoothly, part of the reason that we don't anticipate anywhere near the impact this year as we saw last year.

Great.

And just one housekeeping item from me on the service revenues.

It looked like they slowed down a little bit on an easy comp.

Anything specific in there related to timing or pricing that we should note for the model going forward?

It's not pricing.

It really relates to just timing of completion of contracts.

As we've always said, it wouldn't actually put it explicitly in this script, but usually we say there's broad variation in that number, because of the large contracts that we tend to deal with and availability of samples and timing of particular contract completion is the biggest factor in the timing of recognition of those revenues.

Got it.

Thanks a bunch.

Bill Quirk, Piper Jaffray.

It's actually Dave Clair here for Bill.

First question from me, when will you reached the $1,000 genome on the HiSeq 2500?

What do you expect will be the associated IT costs?

Associated IT costs?

IT, yes.

Yes, IT.

Well, I guess part of it depends on whether what you're projecting is $1,000 is inclusive of IT or not inclusive of IT.

Many people who talk about the $1,000 genome today are going to have to add IT on top.

And I presume that's how you structured your question.

Yes.

And if it is, I suspect you're talking about somewhere in the range of $500 to $750 to do what we call secondary and tertiary analysis.

That doesn't include -- I guess probably in some ways doesn't include all of tertiary analysis because it wouldn't include trying to understand the fundamental biology of the result or how it compares against potentially hundreds of other samples.

That IT cost is focused on storing and analyzing a single genome's worth of data.

Okay.

Thank you.

And you mentioned that customers choosing standing orders for sequencing consumables, they avoid the price increase that you're passing through.

This year.

Yes, Oh, for this year.

So the beginning of next year, the price will increase for them as well?

That's right.

Okay.

And last one for me, what's next for you and Roche?

We have no idea.

So as I think everyone's aware, at the shareholder meeting we had last week, the vote went in our direction, and so we are pleased with that outcome.

And as we've said all along, we're stewards of shareholder value, and should an offer come to us either publicly or privately, we have a responsibility and an obligation to evaluate that as fairly as we can in light of our other opportunities, and we'll continue to do that.

Thank you.

Nandita Koshal, Barclays Capital.

Thank you.

Good evening.

Could you, Jay, maybe start by commenting on the instrument pricing dynamic?

You gave us some good color on the consumables side especially when it comes to ASPs on MiSeq placements in Q1.

Could you talk about those a little bit?

On MiSeq, the pricing held beautifully so actually our ASP was slightly higher than our list price, which is interesting; and that's all because of international sales and distributor pricing in some of our international geographies, we actually have a markup built into the list price.

So fantastic pricing of security, I guess, around MiSeq.

I'd say on the HiSeq systems, not bad either.

It's staying pretty flat here over the last couple of quarters.

I do suspect over the next few quarters it may drift down a little bit.

That's helpful.

And the drift down includes both the MiSeq and the HiSeq?

Or when you reference -- (multiple speakers)

I'm speaking largely around the HiSeq.

MiSeq may change a little bit, but not a lot.

Okay.

And in terms of the opportunities size, you've often sized the MiSeq market as 6,000-odd, relatively high, throughput CE instruments.

Have you seen meaningful conversions there of CE instrument yet?

Or not?

We've seen some.

Many of the CE applications are what we call turn-the-crank applications where there is specific high-volume usage where it's very dedicated to a particular market; and applied markets is a great example of that.

And so those will take a little while to displace, but in areas like Amplicon sequencing, which is a customized sequencing application, we are beginning to see that conversion, particularly with the launch of our new Amplicon kit.

Is that 6,000 a good size to think about, Jay?

Yes, it's a pretty good number.

Okay.

And then I guess my last question would be on the HiSeq consumables.

How do you see the path to better utilization on the HiSeq?

In the past you've talked about $300,000 per annum consumables pull-through.

How do we get to a higher number?

And of course, Q3 last year we've seen a dynamic where there weren't enough samples in the system.

Has that pretty much resolved itself?

Or is that still a continuing issue?

Well, we think that's largely flushed out of the system.

I think there's a couple of factors that influence utilization.

One is the overall funding environment.

And that will dictate how many projects particular customers have.

If you're an owner of five HiSeqs and you get X amount of money, you may be at 50% utilization.

If you get 1.4 times, you might be pushed up to 80% utilization.

So that's a very important factor in the overall utilization rate.

The second is the mix of customers.

If you look at the [instant] installation of HiSeq, in general it would be a lower utilization customer as a general rule.

That's offset, we think, at least partially, if not completely, by the fact that some of our clinical customers will be very high utilizers of these instruments.

And we talked about that a little earlier in the call.

And I think as we continue to push HiSeqs into those types of applications, that that's going to offset some of the other impacts of decreased utilization.

Okay.

Great.

Thank you.

Dan Arias, UBS.

Jay, in your remarks you referenced some of the newer things that were shown down at Marco Island.

Anything you can offer on commercialization timelines for, say, the PCR free workflow solutions or maybe even the 400 base reads that you highlighted down there?

I realize you still need to get the 2 by 250s into the market, but I'm just sort of curious where some of these longer range types of incremental technology enhancements stand here.

Yes, well, a couple of those are things that are going on in our research organization where we haven't actually made a definitive decision about how to productize them.

So we wouldn't have specific dates on those.

Christian, do you want to talk about the sample prep -- (multiple speakers)

Well, on the PCR free, we're actually starting to use that in our services group right now, and so we'll do some extensive testing of that through our services organization, and then create a plan to launch that.

Some of the more complicated, perhaps such as the FFPE, and there's protocols out there, but what we really want to do is create kits that make the workflow a lot simpler.

And so you can expect to see those realistically over the first half of next year, start to find their way into the market.

As far as longer reads go and things like that, those are really just pushing the basic technology forward; and whenever we show those, we try to show how much headroom SbF's chemistry has both in read length, in cycle time, in accuracy, all of the key dimensions.

When we think about going to longer read lengths, let's say, such as the 400 base pairs, those would probably be in lock step with a new kit that comes out that's the core sample or the core sequencing reagents SbFs and clustering reagents.

For example, the upgrade on the MiSeq system that will occur a little bit later this summer will give you the capability to do 250 base pair reads whereas before we couldn't do that.

So we very often would couple an increase in read length with an improvement in cycle time, because typically, our customers wouldn't want to increase the overall time that the instrument runs.

If it was marginally, it would be one thing, but if it's significant, we would want to couple it with an improvement in the individual base cycle time so that the runtime (audio difficulty) [stays approximate].

That's a good point.

Got it.

Okay.

And then I guess how are you guys thinking about M&A right now?

Are there areas where you think you need or would like to have a particular technology or solution and you're out there looking for the right one or is it more just a matter of evaluating things as they come to you?

Well, last couple of years we've been quite active in the M&A front and we have an organization that focuses expressly in this area.

And such at any given time we're looking at five to ten potential opportunities, very few of which actually ever wind up getting executed, but in an average year, at our size now, we would probably do two to five transactions, most of them on the small side.

There are a couple of key areas where we're seeking technologies that would enhance our overall, end-to-end solution in areas, like sample prep in particular, we have been quite public about our interest in, at the right time, doing a diagnostic transaction if it'd help accelerate our penetration into the market, either with products or distribution, reimbursement or all of the above.

Okay.

Thanks.

And then just one quick one for Marc.

Marc, do you see the buyback being paste over 12 months or so or could you maybe get more aggressive in the near term there?

Yes, we're not giving any guidance at this point on when we're going to do the buybacks.

We're going to take a look at how we do it and when we do it.

And we'll roll some of it in, over time.

But the discretionary element, we'll be opportunistic about when we do that.

Very good.

Thanks.

Dan Leonard, Leerink Swann.

Jay or Marc, can you give me a sense of how much of the strength in the quarter compared to plan was due to an improved run rate of the business as opposed to perhaps pulling some revenue forward from future quarters?

I don't think we really pulled much revenue forward at all.

We had a book-to-bill ratio, as I mentioned, that was approximately 1.1.

We continued to ship in the first week of the second quarter.

We continued to ship significant product out the door.

So I don't think there was any intentional effort to try to pull things forward from Q2 into Q1.

Okay.

But, Jay, on the book-to-bill ratio, is there any way you could talk about normalized number there?

The reason I could use a little help is, I'm uncertain how much of the booking strength was due to maybe pricing mechanics and people placing standing orders for a full year in consumables, and that gets booked into bookings in the first quarter, and makes that number look higher than it might have otherwise looked.

Yes.

Well, you're right.

There's probably a little bit of that in that number, but the other thing to think about is that our book-to-bill has been over one for three consecutive quarters.

And so this isn't just a one-quarter event.

We been building backlog now for three quarters in a row.

And I think that speaks to the underlying run rate of the business.

And if you look at sequencing revenue dollars, it's a run rate phenomenon, it's not a bookings or pull forward phenomenon.

And if you look at the MiSeq demand, the MiSeq demand on a quarterly basis has been growing nicely in each of the three quarters of our ramp, so you see that as kind of a foundation that we're building both on the instrument side and on the consumable-pull side.

Okay.

Thank you.

Jon Groberg, Macquarie Capital.

Congratulations on being a standing entity and the support that you receive from your shareholders.

Thank you.

Thank you.

Thank you, Jon.

Just two questions for me if I can, the first is the strength is impressive on the consumables side obviously on sequencing.

But I guess it's a little surprising to me and some people is kind of asking some questions is why the gross margins would be down sequentially when your consumables were up $30 million or so.

Can you maybe just talk about that?

Yes, Marc, you want to take that?

Yes, I mean, sequentially if you recall what we said on our call last quarter was that we had a one-time catch-up adjustment due to the reliability of HiSeq; and that's one of the key drivers of the sequential change quarter-over-quarter.

When you look at the year-over-year, you see the strength of the sequencing consumable mix driving the growth year-over-year.

Okay.

And then, Jay -- (multiple speakers)

The other thing that probably affected it a bit was we shipped a considerable number of MiSeqs out in the quarter and that's still a product that's very young in the manufacturing cycle, so we don't have the margin, gross margins, in that product up to where they're ultimately going to be or where our typical instruments would be after, say, 18 months of shipments.

That's true.

(multiple speakers)

Okay.

And then -- sorry, maybe just following up then on the MiSeq.

I think you made a comment that you thought you took the market share lead in the desktop sequencers; and I just wondered if you could maybe clarify what you meant by that statement.

And then kind of in conjunction with that, you said, Christian was saying, in the third quarter here you're still seeing some good growth in MiSeq orders and deliveries.

Maybe just, do you think, is this going to be growing sequentially through -- should we think of this as a sequential growth through four, five, six, seven quarters or sometimes you kind of hit a peak, and then it slows down.

Maybe just how you're thinking about the MiSeq orders?

Well, I think if you look at the revenue shipments -- and obviously we don't know what our comparison is, so that's why we said we believe, but I think our revenue number on MiSeq was of a magnitude that we believe on a revenue basis, instrument plus consumables, that we'll have number 1 market share for Q1.

I think if you look forward, we won't necessarily over the next quarter or two grow revenue sequentially.

We think we'll grow orders sequentially and part of that is because we are in a catch-up mode in Q1, and looking back to Q4, to catch up from the initial bolus of instrument order.

That will be partially offset by the ramp on the reagents, and so it will depend on how fast the reagents come up to speed, and we'll be watching that very closely.

Okay.

Just to clarify, you've had kind of a traditional pace of instruments.

And I'm just curious, as you have experienced and kind of when you're out with customers with MiSeq, and I know it should have -- its application, I guess, should be a bit broader than maybe some of your more academic products, as you alluded to.

So is this the type of product that you expect to have longer legs in terms of that respect?

Or do you think you will plateau at some point in terms of the instruments that you're shipping each quarter?

Well, every product plateaus at some point.

The question is when.

I think this type of product is helped to some extent by the fact that it will be pulled into clinical applications that don't switch out very quickly, so even if we came out with whatever the next version of MiSeq was two to three years from now, a derivative of MiSeq, let's say, many of the clinical customers would continue to use the older instrument and continue to buy versions of the older instrument, because they're embedded in their process and they've been through some FDA approval.

So I do think in that respect, this product will probably have a longer tail than non-FDA product would.

Thanks.

That's very helpful.

If I could just one more, Jay, the cost associated with the Roche takeover, I think I remember from your filings, is it six quarters that those go on for that you have to pay Goldman Sachs and Bank of America?

I think that's right.

Yes.

Yes.

Quintin Lai, Robert W.

Baird.

With respect to guidance, the revenue performance in Q1 out-did what you had expected when you gave Q1 guidance, and yet you reaffirm the full-year number.

Listening to the call, Jay, it sounds like you're still pretty upbeat about the end markets.

Are you just being conservative just for conservative's sake or is there something else we need to be thinking about?

Well, two comments there, Quintin.

One is that the range of guidance on the revenue side is pretty large.

And so there's a big difference between the 1.1 and 1.175.

And we are being -- I wouldn't use the word conservative.

I'd use the word cautious about what's going to happen in the back half.

I think as we indicated in the script in the commentary we have lots of reasons to believe it's going to be a lot better than it was last year.

But we're trying to be careful about that.

And it's a time when we don't want to miss our numbers, and so for that reason, we're going into the rest of the year with that cautionary tone, and we'll take a hard look again after Q2.

We'll have I think some considerable increased visibility as to what's going to happen in Q3 and Q4.

And with respect to the issue that you had with the hostile takeover, I imagine that you and the Board had a lot of introspection about the Company and its potential.

Jay, have there been any changes or maybe thought of accelerating some of your strategies in order to demonstrate that Illumina's worth is more than the $51 a share offer that came from Roche?

Well, Quintin, we're pretty aggressive in general.

And so accelerating what we're doing is not an easy thing to do.

We can't just all of a sudden decide to go faster and make that happen.

I think one thing that obviously we had talked about and considered is, do we disclose more about where we're headed over time, and give shareholders more confidence than what the road map looks like?

And it turned out for reasons I think that are clearer now that we didn't need to do that.

And so I think anytime we disclose more directionally than makes prudent commercial sense, that we create risks in our business that under normal circumstances we wouldn't want to create, and that's why we think an R&D day now is likely to be in the fall as opposed to anytime sooner.

Great.

Thanks.

Sung Ji Nam, Cantor Fitzgerald.

Jay, you talked about MiSeq that you guys expected MiSeq to see clearance in the second half.

Could you talk about what kind of conversation you're having with the FDA, what kind of feedback you might be getting?

And will there be applications or assays associated with that and also would you be getting approval for your upgrade to the MiSeq platform?

Yes, just to be clear initially, what we're planning to do is to submit it by year-end, so it won't be approved by year-end.

And yes, we will have an assay method on it, and we may have more than one.

One of the projects that we're working on quite aggressively is the partnership project with Siemens with an HIV assay.

And we've already submitted a [PIDE] to the FDA on that product, and we're working to move that forward as quickly as we can and get that submitted before the end of the year.

And we're also working on some internal assays that we'll put on the machine as well.

With respect to follow-on versions, if we make an upgrade to the MiSeq as we're planning to increase the output, anybody who uses a prior generation of MiSeq would have to go back to the FDA and prove substantially equivalence of the new box to the old box.

And that does create a slower rate of change in the clinical market, and we're anticipating that some customers may want to embrace the newer technologies, but if they do, they have to go back through the substantially equivalent validation, which is significantly less, by the way, than an initial validation would be.

Great.

And then for your sequencing customers interested in buying additional HiSeq platforms, or purchasing it for the first time, do you have a sense of what the split might be of 2000 versus 2500, given the $100,000 price differential I think that you guys talked about?

It seems pretty modest, so just kind of curious as to how you guys are modeling that.

We think most of the new orders are going to come in for 2500.

It's got great new capabilities, the genome in a day capability, and the [vossy] of running exomes and RNA Seq through it, I think create new dimensions of applicability of the system and we therefore think that at least 60%, if not more, of the new incoming orders will be for the 2500.

Okay.

And quickly finally, what was the split between core labs and genome centers versus clinical lab customers for your sequencing platforms this quarter?

We don't have the exact numbers for clinical that we're going to report today, but as we've seen over the past probably two years now, over 90% of our placements were outside of genome centers.

Okay.

Great.

Thank you so much.

And this concludes the question-and-answer portion for today's call, and I would now like to hand the call back over to Management for closing remarks.

Thank you.

As a reminder, a replay of this call will be available as a webcast in the Investor 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 the second quarter.

Thank you.

Ladies and gentlemen, this does conclude today's conference.

Thank you for your participation.

You may now disconnect.

Have a wonderful day.