Illumina Inc (ILMN) 2012 Q2 法說會逐字稿

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

My name is Melanie and I will be your coordinator today.

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

We will accept your questions at the end of today's conference.

(Operator Instructions)

As a reminder, today's call will be recorded.

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

Please proceed.

Thank you.

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

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.

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 GM of our Genomics Solutions business.

This call is being recorded and the audio portion will be archived in the investor section of our Web site.

It is our intent that all forward-looking 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 want to let you know that we will participate in the Morgan Stanley Global Health Care Conference in New York the week of September 10.

And, the UBS Global Life Sciences Conference also in New York the week of September 17.

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 second quarter financial results and our guidance for the remainder of the year.

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

We have continued our positive revenue and earnings momentum with our third consecutive quarter of sequential growth in both revenue and earnings per share.

In Q2, we had record operating margins and record orders for both the MiSeq instrument and MiSeq sequencing consumables.

Second quarter 2012 revenue increased 3% sequentially to $281 million, due to another successful quarter of MiSeq shipments, higher service revenue, and continued growth in sequencing consumables.

Revenue for the quarter decreased 2% compared to Q2 2011, as last year's quarter included a greater number of HiSeq sales.

Instrument revenues for the second quarter was $72 million, compared to Q2 2011, instrument revenue was down 32%, again primarily due to a decrease in sequencing and micro array instrumentation.

Consumable revenue for the quarter was $184 million, up 6% sequentially, and up 16% compared to the second quarter of 2011.

Consumable revenue now represents 65% of our total revenue compared to 55% this time last year.

We are very pleased with this trend, which results from a larger installed base of both HiSeq and MiSeq, and a sequentially improved average annualized pull-through on HiSeq.

In particular, record shipments of our sample prep products, including TruSeq and Nextera, contributed to the sequential growth of consumable revenues.

Services and other revenue which includes Genotyping and sequencing services as well as instrument maintenance contracts was $22 million for the quarter compared to $18 million in Q2 of last year.

This growth is also encouraging.

In our discussion of gross margin and operating expenses, I will highlight our adjusted non-GAAP results which exclude noncash stock compensation expense, restructuring charges, and in-process R&D charge and other noncash 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 second quarter was 70.9%.

This compares to 69% in both last quarter and the second quarter of 2011.

The sequential improvement was attributable primarily to a favorable mix of consumable versus instrument revenue and improved absorption.

The year-over-year gross margin increase was also driven by a favorable product mix.

We continue to expect gross margins of approximately 70% for the full year as improvements in consumable mix are somewhat offset by expected MiSeq (inaudible) reductions as our training program continues to gain traction and by increasing FastTrack services revenue.

Adjusted research and development expenses for the quarter were $41 million, or 14.7% of revenue, compared to 14.9% of revenue in the first quarter, and 14.1% of revenue in the second quarter of 2011.

Adjusted SG&A expenses were $55 million, or 19.4% of revenue, compared to 18.9% of revenue in the first quarter, and 19.1% of revenue in the second quarter of 2011.

Adjusted operating margins were a record 36.7% of revenue, in the quarter, compared to 35.8% of revenue in the second quarter of 2011, as we gain leverage from the improved gross margin performance.

Our non-GAAP tax rate for the quarter was 33.8%, compared to 34.7% in the second quarter of last year.

This quarter's tax rate was higher than the expected annualized rate as a result of the delay in the passage of the US R&D tax credit.

We anticipate the non-GAAP tax rate to continue to be approximately 34%, until the R&D tax credit is passed, and retroactively applied at some point this year.

Non-GAAP net income was $53 million for the quarter, and non-GAAP earnings per share was $0.40.

This compares to non-GAAP net income and EPS of $52 million and $0.38 respectively in the second quarter of 2011.

We reported GAAP net income of $23 million, or $0.18 per diluted share, in the second quarter, compared to $31 million, or $0.22 per diluted share in the prior-year period.

This includes an impairment charge this quarter of $21.4 million related to a technology asset acquired in 2010, and $6.7 million of ongoing unsolicited tender offer expenses.

During the second quarter, we generated cash flow from operations of $96 million.

We used approximately $21 million for cash capital expenditures, resulting in $75 million of free cash flow.

This compares to $55 million of free cash flow in the second quarter of last year, and $52 million in Q1 of this year.

DSO decreased to 61 days compared to 67 days last quarter, and 61 days last year.

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

During the quarter, we repurchased approximately a 100,000 shares for $32 million.

With these purchases we have slightly over $200 million remaining in our authorized share buyback program.

We are pleased with our financial performance for the first half of 2012.

While some uncertainty exists with respect to academic and research funding in the second half of the year, our outlook is generally as we anticipated.

Accordingly, we are reaffirming our 2012 revenue guidance and increasing our non-GAAP earnings per fully diluted share expectations from $1.40 to $1.50 to now be between $1.50 and $1.60.

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 second quarter results.

The positive trends that began after Q3 2011 have continued through the first half of 2012.

We had sequential revenue and EPS growth with record operating margins, and we believe we positioned the company well in light of the macro uncertainty expected in the second half of the year.

While there is no clarity on sequestration and the NIH budget for 2013 remains uncertain, we continue to believe that the worst case 8% funding reduction is an unlikely scenario.

The Obama administration has proposed a flat NIH budget for 2013 while last month the Senate Appropriations Committee approved a $100 million increase to the NIH budget for next year.

More recently, the House Committee on Appropriations released their fiscal year 2013 Labor, Health, and Human Services funding bill which proposed roughly flat NIH funding year-over-year.

While these are all positive indicators, we don't expect any budget clarity until a few months after the election.

We also believe that our US academic customers are better prepared than last year for budget challenges, and are planning accordingly.

In light of that, it is our view that the overall funding dynamics this year are considerable more favorable than last year.

And, we've considered a range of potential budget outcomes in formulating our annual guidance.

We remind investors that in Q1, 2012, our core sequencing consumable revenue was for the first time ever greater than instrument revenue.

And, this continued in Q2.

The greater mix of consumable to instrument revenue provides more inherent visibility on our business.

To improve this visibility even further, as we discussed in our Q1 earnings call, we proactively work with some of our customers to project our consumable demand for the rest of the calendar year.

By agreeing up front to take periodic non-cancelable consumable shipments, these customers avoided our Q2 price increase.

Tremendous growth in our sample prep products also improve this visibility given their highly recurring use in our customer's work flow.

We are also seeing a continuing evolution of our customer mix to a more commercial, clinical, and applied accounts reducing our exposure to academic funding.

To further enhance our portfolio and product diversity we announced a number of new offerings during the quarter including Nextera XT DNA Sample Prep kits, the BaseSpace app store, the iSAAC genome alignment tool, and our RapidTrack whole genome sequencing service.

Additionally, we have numerous products that will begin shipment in the near term including the HiSeq 2500, the associated HiSeq 2000 upgrades, enhanced MiSeq, and 2 x 250 base pair MiSeq sequencing kit and lower throughput kit, new PCR consumables, and new sample prep products like Nextera Exome and custom enrichment kit.

While our overall view on the second half of the year remains cautious, with improved forecast visibility, new product and services launches, a change in customer mix, improved customer planning, and fewer funding dynamics at play, we believe that we are in a considerably more favorable position this year relative to last year.

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

Shipments during the quarter to the Americas were healthy with US shipments up 18%, Canadian shipments up 15%, and Brazil shipments up over 100% year-over-year.

Since opening an office in Sao Paulo in Q1 2011, Brazil has moved up to be a top 12 country as measured by ex-US shipment.

With regard to Europe, we've not seen a material change and our business there remains stable overall.

Shipments to Spain and Italy actually increased sequentially during the quarter.

Shipments to Asia, while down sequentially, grew year-over-year, and remain healthy.

This sequential decrease was expected as Q1 is the end of the Japanese fiscal year.

Notable strength was seen in China where shipments grew 50% year-over-year.

In the array business, total micro array revenue was roughly flat sequentially.

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

We received orders for approximately 250,000 more Exome samples bringing total samples ordered to date to approximately 1.6 million.

By far, the highest number of samples for any content collection in the company's history.

New unit orders for iScan and HiScan micro array instrumentation were the highest since Q2 2011.

In addition, Q2 saw market sequential order strength in our OmniXpress, as well as our AG arrays including both INLD, PorcineSNP60, and MazeSNP50.

Our CytoSNP array shipments had their second best quarter ever.

And, we remain on track for submission of our iScan with CytoSNP for FDA 510(K) approval later this year.

Yesterday, we launched our realtime PCR reagent portfolio.

Including a novel, pro-based chemistry for Gene expression analysis that we call a NuPCR.

In addition to the NuPCR reagents we announced qPCR DNA binding assays for expression and qPCR high resolution melt assays for Genotyping studies.

These provides researchers with a trio of high quality, budget friendly options in the qPCR reagent mark.

This reagent portfolio will be sold through our worldwide distribution network.

Availability of NuPCR in the United States will be announced in the near future.

NuPCR is a novel pro-based technology that doesn't rely on exonuclease activity to generate the signal.

Instead, the catalytic activity is inherent in a three-part oligo probe resulting in higher sensitivity experiments that consistently detect targets earlier in the cycle count than competing realtime PCR probes and at reduced costs.

This collection of new assays is compatible with any realtime PCR platform offering researchers a wider range of choices.

Additionally, all the assays are custom designed using Design Studio, a personalized web-based design tool available to Illumina customers.

This unique, easy to use software delivers bioinformaticlly optimized assays ensuring high PCR efficiencies and assays that work the first time without tedious trial and error optimization while also enabling simplified multiplexing.

Turning now to our sequencing business.

Total sequencing revenue in Q2 grew mid-single digits sequentially attributable primarily to growing sequencing consumables as well as growing service revenue for maintenance contracts on our larger install base.

Total sequencing consumable revenue grew over 35% compared to Q2 of last year.

We had record HiSeq and MiSeq consumable shipments during the quarter.

And, the average pull-through on HiSeq, again, increased sequentially.

TruSeq and Nextera sample prep revenue year to date has grown 57% year-over-year demonstrating our focus on back integrating into sample prep.

We expect continued growth here as researchers convert from home brew methods, we continue to gain competitive market share, we launch new sample prep products, and our install base grows.

Average annualized consumable utilization of HiSeq increased to $338,000 in Q2, from $299,000 in Q1.

And, we have several reasons to feel confident that this level of utilization can continue as the effect of the consumable price increase announced in April should be more greatly reflected in future quarters.

Additionally, in Q4, we will begin to see the impact of the rapid run mode of the HiSeq 2500, which yields greater revenue per genome.

And, we expect to see sample prep revenue continue to grow.

During the quarter, we introduced the Nextera XT DNA Sample Prep kit.

The easiest way for researchers to prepare and sequence low input, small genomes TCR amplicons, and plasmids.

When paired with MiSeq, Nextera XT provides the fastest time to result of any next generation sequencing technology enabling researchers to go from genomics DNA to analyzed data in less than eight hours.

Nextera XT will also be available for HiSeq allowing for up to 1,536 samples per HiSeq 2000 run and up to 384 samples per HiSeq 2500 in rapid run mode.

Last week, we introduced Nextera Exome and custom enrichment kit.

Leveraging the speed of Nextera technology in supporting the industries lowest DNA sample input requirements, the new kits enable researchers to quickly and economically perform a wide range of studies, from small focused Gene panels to full human Exomes.

They also enable researchers to study small samples while retaining sufficient material for future analysis.

And, offer the ability to look at large samples without investing in automation systems.

Sequencing instrumentation revenue was down sequentially primarily as a result of reduced MiSeq shipments as the backlog of MiSeq orders from 2011 was mostly cleared in Q1.

MiSeq ASPs were also down slightly during the quarter, largely a function of our continuing successful trade-in program.

For the first time since the second half of 2010, HiSeq 2000 orders and shipments increased sequentially.

ASPs of HiSeq 2000 shipped in Q2 also rose sequentially.

Through Q2, approximately 75% of new HiSeq 2000 orders have included an upgrade package.

And, as we begin to ship the new HiSeq 2500s in early Q4, the promotional upgrade price for the install base of HiSeqs will end, rising in price from $50,000 to $125,000.

With the shipment of the 2500 we will provide the ability for all HiSeqs to stream data to BaseSpace removing the requirement for local IT and bioinformatic capability.

We continue to be very pleased with the market penetration of MiSeq.

Customer feedback continues to be very positive.

And, the independent researchers have demonstrated, in peer reviewed publications, the superiority of MiSeq over other desk top sequencers, with regard to data quality, ease of use, and en- to-end work flow.

We're also pleased with the success of our trade-in program.

With such orders doubling sequentially, from Q1.

During the quarter, customers placed record orders for both MiSeq instruments and consumables.

And, MiSeq consumable shipments grew almost 60% sequentially.

The average annualized pull-through in Q2 on MiSeq was approximately $55,000.

The upgraded version of MiSeq will begin shipping from our factories within the next two weeks, and the field upgrade program is about to begin.

The initial test upgrades have gone extremely well.

One of our early access customers has seen runs with throughput of approximately 10G, with the data quality our customers have come to expect.

With the new 2 x 250 base pair kits available on MiSeq, we expect to aggressively market against longer read desk top machines and convert those users to MiSeq.

More than half the orders for MiSeq continue to come from non-academic customers.

Finally, we main on track to submit both the MiSeq platform and our own proprietary assay to the FDA for 510(k) approval before year end.

In our FastTrack services business we had record orders in Q2, resulting from booking approximately 3,500 genomes, as well as a large micro array service contract.

We expect our success in genome bookings to continue in Q3.

During the quarter, we launched the RapidTrack full genome sequencing service, a new offering that will deliver a whole human genome in less than two weeks.

This premium service offers the fastest sample to data turn-around time of any whole genome sequencing service available today.

Currently, we expect this service to be interesting to those research groups that need samples analyzed quickly to meet project deadlines, or to submit grants and proof of principle studies.

We've received several orders testing our RUO process with an eye towards qualifying this service under CLIA before the end of the year.

During the quarter, we introduced BaseSpace app, the dedicated application store for BaseSpace, our genomics cloud computing platform.

Informatic solutions available through BaseSpace apps will allow customers to leverage a growing community of academic, commercial, and open source tool providers who are building applications around Illumina data to dramatically simplify and accelerate genomic data analysis.

Initially, 14 early access vendors are developing apps for BaseSpace, with more than 20 other vendors working to deploy in BaseSpace soon as the developer portal and API are released publicly later this quarter.

This morning we announced our BaseSpace pricing for both data storage and downstream analysis.

This is a first in the NGS market.

Where customers will have the opportunity to receive free data storage and analysis on all Illumina data, and have the ability to augment their account with flexible storage and app purchases.

Our demonstrated leadership in informatics enables us to provide effective solutions for those lacking informatic's infrastructure or expertise.

And, allows us to open new market opportunity.

This informatic ecosystem will greatly simplify data analysis during and after a researcher's data has been generated.

The data is always accessible and secure, no matter where the research is located.

And, the app store allows a wide range of bioinformatic tools and applications.

By greatly simplifying the management analysis of data, researchers can focus on the main task, understanding the biology.

We are also excited to announce the growing adoption of BaseSpace among our MiSeq users with the vast majority of MiSeq systems now connected to BaseSpace, and roughly half of those actively uploading data.

Demonstrating that our architecture is resonating in the market.

This fall, Illumina will hold a company-sponsored symposium that we're calling understand your genome to explore the best practices for deploying next generation sequencing in a clinical setting.

Illumina plans to sequence and analyze the genomes of approximately 60 participants as a multi-step process to engage experts in the field around whole genome sequencing.

The first day will feature presentations on clinical laboratory, ethical, legal, and social issues around WGS.

The second day, participants will receive their genome data on an iPad and learn under the guidance of a medical geneticist how to analyze the results using the MyGenome map.

Through this program and related efforts, we're laying the ground work for routine, clinical use of whole genome sequencing, clearly the wave of the future.

In conclusion, we're very pleased with the our execution in the first half of 2012.

And, we're excited about our product lineup for the remainder of the year.

We have sequential revenue and EPS growth and record operating margins resulting from our focus on strong operational execution and continuous innovation to maintain our technological lead.

And, we continue to believe that the overall sequencing market has enormous potential.

And, that we have the technology, people, and infrastructure to maintain our market leadership and capitalize on these unique opportunities.

Thank you for your time.

We will now open the lines for questions.

(Operator Instructions)

Tycho Peterson, JP Morgan.

Hey, good afternoon.

Maybe just, first question, on the PCR announcement last night.

And, I noticed in there, you talked about disruptive pricing.

So, I'm wondering if you're able to talk at all about your pricing strategy there?

And, should we expect a US distribution partner for that business in the back half of the year?

And lastly, can you talk a little bit about do you need to expand the instrument lineup for your own business beyond Eco?

There is three different assays, Tycho, that we announced.

The principal one that we think will have the biggest market impact is the pro-base assays that we call the NuPCR.

And, those we are pricing at a disruptive level.

So, they will be priced at about 50% of what the traditional PCR assays would be priced at in the overall mark.

It is a little bit complicated because there are a couple of different components.

There is a master mix part that gets amortized over how many samples you run.

But, the pro-based part will be priced very aggressively.

So, we think that has a great opportunity.

And, the fact that it runs across any installed PCR instrument we think will be a big help.

In terms of distribution, we are working on our US distribution strategy.

We have some interesting progress there.

But, nothing yet to announce today.

So, hopefully in the back half of the year, we certainly plan to have some announcements about the US distribution strategy.

With respect to instrumentation, we are continuing to focus on this as a business unit.

And, we certainly are looking at ways to continue to evolve the existing instrument, as we do with most of our platforms.

And, also, clearly exploring what other new instruments we might put into the PCR space.

And then, turning to MiSeq.

Are you able to talk about system reliability in the field?

There were some valve issues which, obviously, I think you've worked through.

But, are you able to talk about more broadly the downtime on MiSeq today?

And, I think Marc had made some comments earlier about discounts in instrumenting continuing.

I'm wondering if there is anything more there in terms of pricing slippage or is that just reflective of the trade-in program?

We have been pleased with the overall reliability, Tycho.

But, we have had one valve problem.

It's the selector valve in the MiSeq.

We've identified the root cause of that problem.

It had to do with particulates in the valve that was coming from our vendor.

There is a couple of things we've done there.

The vendor now goes through an extensive wash protocol before they ship the valves to us.

And, these new valves are incorporated in all new shipments and have been for about a month, I think, now.

We also introduced a wash protocol so that anybody who has an instrument already, whenever the instrument runs or when it completes a run, we wash the valve out.

So, that any particulates that were in the valve don't remain, because they essentially create nucleation sites for particulates.

And, that was what was freezing up the valves.

As we go and do these MiSeq upgrades in the field to the enhanced version of the MiSeq, we are going to change out any of the old valves and make sure all of the instruments have brand new valves.

So, we think that field issue is totally taken care of.

With respect to pricing, what we mentioned in the script really didn't have to do with discounting.

The reduction in the ASP had to do with the trade-in program.

I guess you could call that a discount in some way.

But, it is specifically around the trade-in program.

So, we have trade-ins for competitive instruments.

In some cases we have taken some trade-ins for GAs as well.

And, in those cases we have offered a credit off of the list price of MiSeq back to the customers.

But, other than that trade-in program, if you take that out of the numbers, the pricing for MiSeq is holding quite well.

Okay, last one for me.

Any color you can provide on orders or book to bill?

We're getting the question, as you can imagine, from investors.

So, just wondering if you're willing to comment on either of those?

We don't want to get into a regular pattern of reporting book to bill.

That hasn't been our typical pattern.

We did talk about it at the last two quarters because we were in the middle of the ROE situation.

And, there was a question about whether we were pulling in revenue.

And, we felt that we had to disclose book to bill as a result.

What I can say, is that we are very pleased with our incoming order rate.

That we exceeded our forecast.

And, we're very happy with the business.

And, as I indicated in the script, we're not seeing, at least as yet, any impact of funding concerns, but we remain cautious about the back half.

Okay, thank you.

Doug Schenkel, Cowen and Company.

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

So, the increase in HiSeq annualized utilization to $338,000, I believe you said, is quite impressive.

Does that revenue -- does that number include revenue associated with Nextera and more broadly your efforts to capture front end revenue on sequencers?

And, I guess what I'm trying to get at is how much of this increase is that versus price hikes, versus actual year-over-year increases in sequencing utilization?

It does include the sample prep reagents, Doug.

So, that is included in the numbers.

If you turn the clock back a year, our sample prep revenue was a much smaller fraction.

So, it was less significant last year.

So, it is a component of that growth.

Which we think is fine.

We will take it however we can get it.

But, it certainly, also, I think, is an indication of the overall increased utilization rate, and a little bit of price increase.

So, most of the price impacts, I think, you're going to start seeing next quarter.

There is probably some in Q2 as well.

But, you will probably see the full impact of the price increase in Q3.

But, if you didn't have that initiative to get more of the front end spend, would the utilization still be ticking up quarter by quarter?

Yes, it would.

But, not as dramatically.

Okay.

You kept operating spend about flat in dollar terms relative to Q1.

Your guidance doesn't seem to incorporate a material increase in operating spend in dollar terms for the second half relative to the first half.

You have a series of new products launching, as you mentioned in your prepared remarks.

I would expect you are going to be rolling out new products over the balance of the year.

Have you aspirations in diagnostics amongst other areas.

How long can you keep the spend at these levels, especially keeping in mind the street is looking for 8% growth in '12 and '13?

And, clearly folks would like more.

I mean, we definitely are planning some expense increases in the second half of the year.

So, I think the assumption that the expenses would be flat on dollar terms isn't right.

Obviously, I think we will try to keep them in the range as a percentage of revenue that we've been running in.

But, in dollar terms, we do expect to increase those expenses.

We were really pleased with our gross margin performance this quarter.

So, 70.9% is not as high as we have hit historically, we've hit a little bit higher than that.

But, it is pretty close to our historical all-time high.

And, we're feeling pretty positive about our ability to continue to push on the margin line.

So, I think from that perspective, we're feeling pretty comfortable about being able to increase expenses next year, and hit the revised EPS that we put out there.

And Jay, I think you said you're going to have the MiSeq and the proprietary assay at the FDA by year end.

Could you provide any more detail on what that assay is going to be?

We can't as yet, Doug.

We haven't disclosed what it is going to be.

But, I would describe it as an assay that will be unique to us in there, but it doesn't have proprietary content.

So, this is not content that we have unique intellectual property around.

Let's be clear about that.

Okay.

And, maybe if I can sneak in one very last one.

How has your outlook for HiSeq placements evolved over the last couple of quarters given that it sounds like you had, actually, a pretty good HiSeq quarter for placements?

We did.

We have been really pleased with the impact that the 2500 has had on the HiSeq trends.

As we mentioned, about 75% of the incoming orders include the upgrade.

So, this idea that there is not money for capital is really not playing out here.

Because it costs a significant amount more for customers to get that upgrade when they place the order.

So, I think that that has helped our outlook on the overall trend line for HiSeq.

We're actually seeing surprisingly good performance in the 1000 and 1500 as well.

We're probably doing a little better there than we might have forecast a year ago.

So, we're not ready to talk about extensive growth in the instrument number yet on HiSeq.

But, we grew sequentially and we're really pleased with that.

And, we're obviously going to keep trying to move it up.

Okay.

Thanks, very much, Jay.

Amanda Murphy, William Blair.

Hi, thanks.

I actually had a follow-up question on guidance.

Just looking at the revenue guidance that you have reaffirmed, and just given the visibility that you have, relative to last year in terms of the consumable usage, can you help us frame out how to think about the range in growth in the back half?

Is that primarily funding driven or is there anything else that is key there?

Amanda, it's Marc Stapley here.

We got quite a broad range still for the second half, given the uncertainty that Jay referred to in his prepared remarks.

So, we're thinking about -- there is a number of scenarios, obviously that bottom end of that range would represent a fairly flat revenue scenario in the second half.

And, the top end of the range is obviously some fairly substantial growth.

So, we've modeled out those varies scenarios.

It clearly is funding driven.

As we say, we haven't seen any effect on our international order rate at this point.

But, we still remain cautious there.

And, on the US funding, we put no more certainty than we've had with respect to that in the first half.

So, that is really how we're thinking about it.

And, our outlooks have been trending fairly well so far.

Got it.

And then, just thinking about HiSeq consumable usage, just putting the price increase aside for a second, can you just help us think about how the usage is trending across the major user buckets?

Or as you think about BGI versus the core labs versus genome centers?

Just trying to get a sense of how that number can trend over the next few years.

And, how much is this coming from the smaller labs increasing usage, if you think about BaseSpace and some of the sample prep improvements and how important are they to the $338,000 number going up over time?

I would say in our largest customers, so BGI and the genomics centers, that they still have some excess capacity.

They dropped back considerably during the 3Q challenges of last year, when the NIH funding was up for grabs.

They have come back from that level for sure.

But, they still, we think, have some excess capacity.

One of the things that is growing the number, we think, is that most of the incremental HiSeq orders we're getting, at this point, are from customers who already have a HiSeq.

And, what that implies is that they've maxed out capacity on the one that they have or the two or three that they have.

And, they're ordering some incremental units.

And, when that happens, typically the overall utilization goes up.

Because these people are in production.

Those customers are in production.

So, I think that is one very positive trend.

Obviously, the pricing helps.

The increased market share in sample prep helps.

All those factors, I think, are potentially things you could argue might be able to nudge that number up a little bit.

But, because of the funding issues overall and the experience of last year, we're certainly not projecting it to go up, because there could be some funding challenges in the back half.

So, those are the factors to consider when you try to model out where it might go.

Okay.

And then, just switching to the MiSeq, and the trade-in program that you talked about.

Just curious if you can provide a perspective on how many -- I don't know if it is boxes or sales, or I guess boxes more, but were trade-ins, and how long you anticipate running that program for?

It is open-ended.

So, we don't have a defined end date to it.

We may put one on there at some point in time.

But, we don't have one now.

I can say the quarter was in the range of 20%ish trade-ins overall.

Across a mix of competitive instruments, and a couple of our older GAs as well where we gave some trade-in credit.

The pipeline, as we look forward, for potential additional trade-ins is pretty rich.

So, we're -- we will see what happens in Q3.

But, the potential is for the number to be at least that high, or maybe higher.

I also think that the performance of the MiSeq and the upgrades, as Jay pointed out, the early access customers have been getting higher through-put than maybe we advertise.

That might also create new demand -- incremental demand for upgrades.

One other thing we might mention that we didn't include in the script is that all MiSeqs that ship out of the factory in Q3 and later will be the enhanced MiSeq.

So, we finished shipping all of the prior generation MiSeqs at the end of Q2.

Got it.

Thanks, guys.

Derik De Bruin, Bank of America.

Hi, good afternoon.

Hi, Derik.

So, the array business looks like it had a little bit of resurgence this quarter.

Could you talk about it, is this just a pickup in the studies?

Is the share gains, can you just put a little bit more color on the array market?

And also, put it in themes in what you've seen in terms of converting expression arrays to RNASeq and how that fits into the whole Exome analysis.

There are a lot of factors at work here.

We would characterize the array business overall as relatively flat.

We had a positive trend on the instruments side during the quarter in the array business.

In terms of the sub pockets of that business, I think whole genome association type chips are trending downward.

But, that is made up for by the positive trend lines in the Exome chip where we continue to have tremendous success.

And, we don't put that in the whole genome category.

We put that in our focus category.

Got you.

And, we've had really positive trend lines on some of the AG chips as well, and the custom business continues to do well.

So, I think you can think of those factors roughly as netting out in Q2.

Okay, and, talking about your services business in 3500 genomes.

What is the pricing looking like in that?

And, how do we think about the order book for that?

Are you seeing more outsourcing?

Are you picking up more contracts?

Can you talk about this, particularly as you launch new products and they're giving you faster turn-around?

Well, we're seeing a lot of those genomes come in that are cancer genomes.

And, actually, a fair high percentage are from cancer sites.

And, many of these are nontraditional sequencing centers.

So, they are places that you wouldn't typically expect to have large -- installations of 5 or 10 HiSeqs.

The other kind of deal we see are ones that want relatively fast turn-around and don't have an existing infrastructure.

So, they don't want to buy instruments and take six months to set up a sequencing factory.

They want to get all of their samples in and turned around in 3 or 4 months.

And, I think that is driving it in part.

In terms of pricing, it is probably down a little built in overall, ASP, from what we saw over the past couple of quarters.

But, I think it is beginning to flatten out some.

Okay.

And, just want to clarify, on the -- just want a little bit more color on the MiSeq business.

So, you're [ansing] the 2 X 250 sample kit coming in for MiSeq.

So, I guess is that for the version 2 system, the version 1 systems?

I'm just -- and what is the turn-around time inclusive of sample prep for running that?

Yes, it runs on the version 2 system.

The overall run time of the sequencer, Christian, do you know what that number is?

It is just over 24 hours, I think.

It's about 20 --?

It is not 20.

We don't know exactly.

We're getting the signal that it is 40 hours.

We get the 2500 at 27 hours and the upgraded MiSeq at 40 hours.

We've increased the cycle times on the MiSeq 2, so it goes, per cycle it goes faster but there are a lot more cycles here.

So --.

250, right.

And, I guess also on the MiSeq, you said that some of the instrumentation slowdown -- the instrumentation revenue decrease sequentially was due to the backlog coming off there.

Can you quantify that?

Well, I can qualify it.

I'm not sure I can quantify it for you.

What happened is, obviously, we were taking orders for a couple of quarters before we began shipping.

And, as we were ramping the manufacturing lines, we began to whittle down that backlog.

But, in the first quarter we started shipping it, the incoming order rate was about equal to what we shipped.

So, we actually didn't actually make a lot of progress on getting the backlog reduced.

And, over the subsequent two quarters, we did that.

And, in Q1, we came out of the quarter with a normalized backlog, and had just a normal Q2 in terms of what we would expect.

Where the shipments about matched the incoming order rate.

But, we actually had a great order quarter for the MiSeqs as well.

So, it is continuing to grow.

And, we're now in a place where we can deliver MiSeqs in the time frame that our customers expect.

And, as we said, during the time with the HiSeqs, the customers don't want to wait 2 1/2 months to get these instruments.

So, we want to deliver them in four weeks or so, sometimes a little less if we can.

I think the key metric is increasing MiSeq orders each quarter.

That's the key metric.

Great.

Thank you, guys.

Yes.

Ross Muken, ISI Group.

Thanks, guys.

So, I wanted to walk through, Jay, your initial comments on the sequester and the state of funding in the US.

I think the growing view, at least on the Wall Street side of things, and I think on the political side of things, is there a high probability, at least, the sequester will come into some place Jan 1 starting next year.

The question is more the length of period of time at which it is actually in place.

And then, readjusted to a new normal of budgetary environment.

Assuming that that is a scenario, how do you think customers start to respond from a purchasing perspective in the back half of the year?

And, what is the differential in terms of how you would expect a large versus a small customer to swallow the potential temporary change in the environment?

Well, what we think is going to happen is we're going to come out of this year, fiscal year, so beginning of October, with a continuing resolution into Q4.

Because the chances of us having any real budget is close to zero, I think.

And so, there is going to be some continuing resolution that is probably going to have a negative number in it.

And, what that is, is anybody's guess.

But, there will probably be some controlled spending in that continuing resolution through Q4.

And, probably nothing is going to happen until after the election.

And so, that will continue through that time frame.

And then, depending upon who gets elected, we will have some budget resolution, we think, in the first month or two of Q1 -- of calendar Q1 2013.

What happens between January 1 and when we actually get a budget, I don't know.

I mean, I guess there is a chance it could go to the 8% sequestration, but I would be surprised.

I would guess that whatever the continuing resolution is, it will continue all the way through to the point where we have a real budget.

Maybe it is a nuance, but I think the difference between the actual core budget and the sequester are two separate entity, right?

So, to the degree the sequester occurs, that is on top of whatever happens with the budget.

And so, that is an automatic cut, until the Congress does something to relieve it.

And so, I guess what I'm trying to say, let's just assume that that would be the magnitude, how do you think customers start to react?

Do you think your customers would preference certain types of types of research?

Because it only affects new grant cycles, correct?

It wouldn't obviously affect the legacy grants?

I'm just trying to get a sense of, from a risk profile perspective, what do you think the order of operation is for a lab manager of one of your typical customers in terms of having to adjust to an environment that could be strained even for a small period of time?

Well, I think they would get a little more conservative during that window.

Because they would be worried that even though they're working off existing grants, they would be worried about how much future money they're going to get.

And, would be thinking about potentially stretching it out.

We think that is already happening to some extent.

Okay.

And, our customers are thinking about that issue today.

Not all of them.

But, quite a number of them are.

And, metering out the dollars in anticipation of a little bit of disruption in the back half.

Okay, and, just on the backlog commentary, I know you don't want to give too much, but just so I understand, at least, from a MiSeq modeling perspective, the way to think about it is what happened with HiSeq, we've now gone through most of the backlog, we're getting now to the new normal level of placement.

And then, to Christian's comment, the key to watch will be the sequential improvement in order rates, which will now drive the instrument growth sequentially, is that the right way to think about it?

Well, yes, that certainly, but also the increasing reagents because of the growth in the install base will be --.

Right.

I'm just thinking from a capital equipment perspective.

So, we've gotten to the new normal.

And, now we have got to grow sequentially vis-a-vis orders versus there being a significant backlog in effect.

That's right.

And, the one thing to think about there, we didn't include it in any of our prepared remarks, but if you look at the mix of MiSeq orders to date, the vast majority of these are single unit orders.

I mean very, very high percentage.

And, what that means is that we have lots of customers who are developing assays, developing clinical tests, setting up research protocols on these units.

And, what we expect to see are the beginnings of repeat orders from those customers, as they begin to fill up MiSeq number one and move on to MiSeq number two or three.

So, the need to continue to find new customers is not quite as high to continue to grow that number.

Because of that beginnings of the repeat business which we think is still ahead of us.

Great, thanks, Jay.

Bill Clerk, Piper Jaffray.

Great, thanks.

Good afternoon, everybody.

Hi, Bill.

First question, Jay, at the risk of beating a dead horse here on spending, I want to, I guess, elaborate a little bit on the comment regarding not seeing a lot of pressure here.

Can you talk at all whether you're seeing any re-priortization, in other words reemphasizing consumables versus say new instrumentation at all?

No, we haven't.

You know, I ping our sales EP every week now on this, looking for any early warning signals in changes in customer's behavior.

And, we're just not seeing it yet.

Maybe it is too early, because I think we feel probably pretty good with respect to what is going to happen through the end of Q3 -- or the end of Q4, I mean.

Q4 fiscal.

So, our Q3.

And, there might be a little bit more effect in Q4.

But, so far, we're just not seeing any changes in the customer behavior.

We're certainly on the lookout for it.

Understood.

Of course, the way we look at our sales funnel, it is based on the current funding opportunities.

And, when you look at a product like MiSeq, the funnel is very strong.

And then, just thinking a little bit about the MiSeqs that are going outside of academia, do we have enough data points at this stage to talk about what the utilization looks like within this customer base as compared to, say, your core academic group?

I don't think it would be very meaningful yet.

And, the reason is that many of those are going into clinical accounts.

Where they're in the stage where they're doing the clinical research work.

They're not actually running them in a production environment yet.

And so, I don't think that -- I don't have those numbers at my fingertips, but even if I did, I don't think they would be necessarily indicative of that what segment will get to say a year from now.

Understood, and then, just last quick one for me.

Regarding the comment around the customers that you have signed on to receiving periodic orders on the consumable side, so as to avoid the price increase, can you talk at all to what extent that will influence the back half of the year?

To what extent that you have been able to say communicate that as a percentage of what your overall consumables expectations will be?

Well, I would say of the total consumables for the next six months, it is not a significant fraction of that total.

But, it is something that helps us forecast.

And, it also tends to be something that occurred obviously more with our larger customers.

So, it gives us visibility on the behavior of those bigger customers.

And, that's quite useful.

And, they're the ones that perhaps were the most interested in avoiding this price increase.

Got it.

Thanks, guys.

Daniel Brennen, Morgan Stanley.

Hi, thanks for taking the question.

Just a question starting with HiSeq.

I believe in the past you talked about maybe 25% to 30% of the HiSeq user base expected to be upgrading to the 2500.

Is that still the case?

And, it looks like certainly on the new orders you're seeing a very high percentage of those take the option to upgrade.

Just wanted to get a sense of how we should think about the user base upgrading and over what time frame it is reasonable?

Thanks.

Yes, the numbers that we have given previously were more speculative.

And, had to do with what we thought might happen without many data points.

And, we now have some data points that look like they're falling about on that line.

So, I think this idea of 25% to 30%, call it in the next year, is probably about the right number.

As I did mention, once we start shipping the 2500, then the price increase, or to up grade is going to go up.

And, it is going to go up pretty significantly.

So, we could have a situation where we get some -- a rush of upgrade orders before that price increase, and then the upgrades slow down afterwards.

Okay.

And then, in terms of the pull-through, I know you mentioned on the prepared remarks how the pull-through on the 2500 would be greater than what you're currently generating on the 2000.

What's the appropriate guidepost to think about on the 2500 pull-through on an annualized basis?

Well, that is pretty hard to know right now, I guess, because there is -- people will use the 2500 in different ways.

If they run it all out, in rapid mode, versus what they would do traditionally, you might think of it being about 20% higher.

But, that may not be how people use them.

Because, particularly in the large centers, they will have some mix of 2500s and 2000s.

And so, they may run all of the fast stuff through the 2500, and then leave it idle.

And, run the big stuff, the longer runs on the 2000, to make sure they're free, if they get a hot sample in that they have to run.

And so, it is hard for us to figure out in advance what that equation might look like.

Okay, great.

And, maybe one more quick one.

Just on your ovarian sequencing program.

When we're out to meet with the -- Christian and Marc, earlier in the spring, we asked what is the timing for an update on that program.

Just wanted to see if there is any more clarity on when you expect to provide investors information on that program?

We think the next check-in point on that will probably be in the fall.

Okay.

All right.

Great.

Thank you.

Nandita Koshal, Barclays.

Good afternoon.

Thanks for taking my questions.

Jay, firstly, I was wondering if you've seen a meaningful step up in your services business associated with the faster turn around due to the 2500?

Well, I would say not yet.

And, a couple of reasons for that.

One, it is a little early since we announced it pretty recently.

The second reason is that when we announced it, we announced a limited capacity, because we didn't want to load up our services lab with a lot of 2500s until we understand what the market demand is.

So, I don't recall exactly what the number is, but I think we announced 5 a week.

5 to 10 a week.

5 to 10 a week is the maximum we could do.

And so, that is the most we would book.

So, it is not a high percentage deal for all samples.

And, we're going to use that here for the first couple of months to get an assessment of how big the market demand is on the RUO side.

And, we will launch this into CLIA and then we will start adding 2500s to track the market demands.

So, for those reasons I think it is too early to really understand what the total demand will look like.

Okay.

Is that your expectation that the CLIA part of it will really drive demand in that business, not really the RUO side?

I think the CLIA will become more important, yes.

Okay.

Those are the types of genomes where there is a medical reason for it to be rushed through.

There are a great many cases for RUO genomes as well, but I think they are fewer than the clinical cases.

Okay.

Because just going back to Ross' earlier point about how customers might be thinking about dealing with the uncertainty in the back half.

Could they be thinking about service as a more viable option given the faster turn-around now versus actually buying instruments and consumables?

Would that be an option to deal with --.

Well, it could.

But, the faster turn-around costs them more per genome.

So, there the economics aren't in their favor there.

I mean, it is variable costs.

So, they don't have to put out the capital.

But, it overall spends more money with -- per genome with Illumina.

So, I would be surprised that too many customers make that decision.

Some might.

Also, Jay, the product offering is a lot more narrow relative to what customers are doing.

So, on the rapid turn-around, it is really just whole genome sequencing.

Human only.

And, human only.

So, if you look at what the majority of our customers are doing with their sequencers, it is everything from Exome -- it is some whole genome, but I wouldn't say that is the dominant application right now.

It is Exome, RNA, small -- other smaller types of projects are the key drivers of consumable pull.

Yes.

Okay, thanks, Christian.

And, if you could also comment on the competitive landscape that you are expecting in the second half, and early 2013.

Obviously, some new product launches coming up from competitors as well.

Could you talk about those assumptions on your end?

And then, R&D priorities for Illumina, just what we can look forward to by the new product launches, apart from the ones that you already announced?

Well, I guess we haven't seen a lot of change in the competitive dynamics, maybe a little less competition on the services side.

The products that have been pre-announced are not in the marketplace yet, really.

And so, there is no real change in what we expected there.

So, we continue to believe we're going to be very competitive.

Particularly as you start looking at a MiSeq performing at the kind of levels that we talked about with the ease of sample prep and ease of use and the BaseSpace attached to it.

We think that is going to be a very competitive product in the overall market.

In terms of new products, we obviously don't talk specifically about those.

But, we are working across the board, and you've seen us do a lot of innovative things in the in the informatics side, you will continue to see that.

We're clearly working very hard across the set of platforms that we have to enhance those.

We're working on new generation technologies of various sorts.

And, we've had great success in our program to back integrated into sample prep.

And, I think you will continue to see us do that in a very aggressive way.

And, over time, the sample prep will become increasingly integrated with the system, particularly as we drive these products into clinical markets, where ease of use and push button operation is more and more important.

And then, Nadita, there is just one comment on the competitive landscape.

I mean our current outlook reflects the known competitive situation.

So, everything we get back from our sales team that feeds through the funnel reflects what they know about, what we know about and what has currently been announced.

Okay.

That is very helpful.

Thank you, gentlemen.

Isaac Ro, Goldman Sachs.

Hey, guys.

Thanks for taking the question.

I just want to first off try to address that question of visibility a little bit more directly.

And, wonder if you could simply say that book to bill was in fact greater or less than one there quarter?

We're not going to disclose it this quarter, Isaac.

And, you shouldn't read anything into that.

Really, it's just that we don't want to get into a pattern where it is expected that we disclose book to bill every quarter.

We've done it twice.

And, we don't want to be in the habit of feeling like we have to do that.

We do report our backlog at the end of the year.

So, you will see that in our K at the end of the year.

And so, you can make a year-to-year comparison about book to bill when we publish that.

Got you, fair enough.

And then, secondly, on PCR, just wondering if you can maybe try and frame on the long term how you're going to measure success?

On the one hand, the technology you have is obviously priced aggressively and applicable to a very large install base of systems.

The flip side is the incumbent is very well established.

So, if you could maybe put a time line on how long you're looking at measuring success, and what those terms might look like?

I think we need to look at this as a long term investment on our part.

So, we will measure success over a period of a couple of years.

It is going to take some changes in our distribution channel, which we have implemented internationally, and have yet to do at the level we would like in the US.

But, I think we're close to getting that done.

And so, I think we're going to need to give that distribution channel some time to ramp up.

It is not going to be as quick as our direct distribution channels typically would be for a new product.

And so, I think we will measure success over probably the next two years.

And, we need to have good reach to sell these products, because they're sold in high volumes into lots of labs.

And, not typically the places that where all direct sales people would have called otherwise.

And, that is why the distribution model works well here, hopefully will work well, as well as having lower ASPs where you can't justify direct sales.

Sure.

Last question for me.

The big picture one on MiSeq.

It has been in the market almost a year now.

And, just wondering if you can give us an updated view on how you frame the long term market opportunity for that product cycle.

And, the reason I ask is that, I think, most of us have tried to ballpark it as being somewhere between the HiSeq market opportunity and then the PCR market.

Obviously, that is a very wide range.

So, if you have an updated way that you're looking at the framework for the market there, that would be super helpful.

Well, I can say that we're very bullish on MiSeq.

And, its future incarnations and derivatives of that platform.

We have made great technological progress going from a HiSeq to a MiSeq.

And, we are going to continue to drive all aspects of the chemistry and the optical performance of the system.

So, we think that if you think about the overall market opportunity here, over some period of years, in this category of desktop instruments it is certainly in the range of 10,000 plus.

Whether it is 20,000, we could argue about.

But, we think it is certainly in that 10,000 range at a minimum.

Fair enough.

Thanks a bunch.

Thanks, Isaac.

Dan Leonard, Leerink Swann.

Thank you.

How are you thinking about the impact of foreign currency on your business in the second half of the year?

Dan, it is Marc here.

Obviously, we don't forecast what we think is going to happen with the FX rate.

We do have a fairly natural hedge when you take into account where our cost structure is.

Particularly with the UK, R&D, and presence in the Singapore manufacturing.

But, when you look across our P&L, it nets out pretty nicely.

The currencies move in the direction they have lately.

But, we just don't know where it's going to go in the future.

And, we have a fairly tried and tested hedging strategy, which is pretty basic.

Pretty simple.

It's not overly sophisticated, but it has been working for us lately.

The effect in the past, in the last couple of quarters, has been pretty immaterial for us, both to revenue and to bottom line.

So, I can't tell you what it is going to look like going forward.

But, we will continue to track it the way we are.

And, see if we can offset, mitigate some of the impact.

Okay, thanks.

Marc, can you comment on the technology right now?

And, if that was in any way related to chemistry A or chemistry B?

No, it wasn't.

The technology write down was an asset that we acquired a couple of years.

And, it is not related to the DNA sequencing space.

Okay, and then, my final question.

What do you think your attach rate looks like in the sample prep business?

So, what proportion of your sequencing, or incremental sequencing installs are using your enrichment products as opposed to competitors?

I think our estimates now are somewhere in the 40% to 50% range of the client sample prep.

Little hard to know exactly, but we think that's the range.

And, part of the problem is that there is some home brew stuff going on as well as stuff supplied by other competitors.

And, our goal clearly is to continue to take market share there.

One thing I might add on the prior question as well is that what happened with this technology write down is that we go through every year, multiple times when we look at our product portfolio, and our research portfolio and decide how to prioritize products in that collection of opportunities.

And, in this particular technology, we decided to lower the priority enough that we decided that we needed to impair the asset.

Because it has less clear visibility for getting to the market.

And, that's the reason impaired it.

Just to punctuate that, we're not abandoning that asset.

We're just re-prioritizing our focus.

Okay.

Thank you, for the color.

Dan Arias, UBS.

Yes, hi, thanks a lot.

I guess just getting into the MiSeq opportunity a bit further, Jay, can you give us a sense for the level of the replacement that you're dealing with the MiSeq at this point?

I don't actually have those numbers at my finger tips.

So, I would say anecdotally, maybe a little less than we thought, but our amplicon product is starting to pick up steam.

And, that is really the market that -- or the sample prep methodology that goes after the biggest part of the CE market.

So, we continue to think that over time, those are going to get largely displaced in other than the sticky applied markets.

But, they're are customers that are slow to change.

They've got a process that has been working for them for a while.

And, we just need to show them why this is so much more economical and so much easier to use than CE.

We're doing okay there but probably a little less than we might have anticipated.

Okay, thanks.

And, I guess are you able to talk a little bit about the launch plan for the targeted panels that you're looking to offer for MiSeq?

How often might customers be looking at new products?

And, maybe what are the key focused areas there, from either a disease perspective or genome region perspective?

Well, let me talk about that in general terms, that we have quite a number of -- well, we have a number of panels that we think we will have on the market by the end of this year.

And, those will be marked through our TCG group to existing CLIA laboratories for the most part.

And, these will be enabling panels that will allow these CLIA labs to go after specific disease areas.

In some cases, they could add their own content to the panels.

But, you think of enabling for our customers.

The other kinds of panels are the ones that come out of our [Gregs] pure diagnostics businesses where there are actually products that we'll run ourselves.

And, that's where we're putting the MiSeqs through the FDA with our own panel that Illumina will market directly.

Okay.

And then, maybe, if I can sneak in just one more higher level question.

I guess, as clinical usage gets going, how do you get to the industry standard for reporting in quality on the assays that will be run?

Is that something that you think is a key hurdle?

And, is there something that you can do there to help that process along?

You mean to actually achieve the quality that is necessary?

Or to convince people that the quality is where it needs to be?

Just in terms of getting the customer base comfortable with the reproducibility of results and the standardization of what they're getting off of the machine.

Well, I guess the first thing we're going through a number of clinical trials on MiSeq.

And, that certainly is going to help as we publish the results of those clinical trials.

It is going to certainly help with the ability to put publications in front of customers that show that reproducibility.

We are putting them in front of the FDA as well.

So, the FDA, hopefully, will put their stamp of approval on this system, as analytically producing reliable and repeatable results.

And then, for the specific assays we put on them that those assays have clinical utility.

We're working with the FDA across a broad front here to make sure that sequencing gets moved forward quickly.

And, I think the FDA is very on board with this idea.

And, that they want to have sequencers approved.

And, to demonstrate that these machines are reliable.

That these are pretty accurate results in many cases.

More accurate results than any of the existing technologies do.

And, I think as we get through that point at the end of the year, it is going to become pretty clear that these platforms are clinically ready.

Got it.

Thanks, very much.

Peter Lawson, Mizuho.

Jay, the strong service revenue, what is behind that?

Is that whole genome sequencing or arrays?

Can you break that out in any way?

It is a combination of whole genome sequencing which was good during the quarter, some array contracts, and also a result of our growing install base in the services revenue that we get from the maintenance contracts.

And then, across the customer base, are you seeing a resurgence in whole Exome sequencing versus whole genome sequencing?

I am not sure I would characterize it as a resurgence.

It certainly has been a strong growing market segment and I think it continues to grow.

If you look at the trade-off between Exome and whole genome, you will find people in both camps.

And, it is largely an economics question.

And, a question around the power of the type of study that they want to conduct.

So, if you're looking for certain characteristics or certain types of discoveries, you can do a whole lot more samples with Exome.

And, that may be the better study design.

If you want a pure hypothesis free study and you want to look everywhere, the whole genome is the only way to go.

But, it will cost you per sample, and therefore, your study will be less well-powered from a sample perspective.

So, I think over time, as we've said over and over, that we think the Exome market is a good one.

But, will become less and less of a factor if you look out two, three, four years because the sample prep will become more of a dominant cost on the front end for Exome sequencing compared to whole genome.

And, therefore, the economic gap will shrink.

And, do you find at the moment there is any difference in profitability between whole Exome sequences and whole genome sequences in the sense of downtime and the difference in the front end prep?

In terms of our profitability?

Yes.

I don't think so.

We probably -- let's see.

I have to think about that.

So, in the Exome case, we have a little more sample prep revenue because if they're using our Exome prep kit.

But, the per sample cost on the sequencer is less because you can multiplex so many of them together.

So, we would have to work that out to see what the relatively profitability is between the two.

I can't do that math in my head.

Okay.

Thanks for the initial start.

Amit Bhalla, Citi.

Hi, this is Adam in for Amit.

I just had a question on the 2500 rollout strategy.

How should we be thinking about that to the top accounts and what is the latest details you can give us?

We expect to begin shipping it in Q4.

And, we also expect to start putting out the upgrade kits probably around the end of Q4.

So, the upgrades to the installed base.

And, as we mentioned, many of the -- or most of the incoming orders are for 2500s or 2000s with upgrade kits.

So, we will start shipping those new units the at the early part of Q4.

Okay.

And then, I know you commented on your end market mix changing, becoming more commercial, and that was lending better visibility for you.

Can you quantitate that, or quantify that more?

Or give more detail on where those trends are going?

We're working hard to get a better database on this.

So, that we can do a better job of knowing exactly where these systems are going.

In some cases, for example, in distributor sales, we don't have as good information as we might like.

Historically, if you lock back a year or two, we talked about it being about 80% in the academic mark.

And, 20% into commercial and non-academic sorts of sites.

We think that is probably down to 70% now, maybe trending a little bit lower than that.

But, we are doing a little bit more analysis now, to make sure we have those numbers right.

Certainly, the incoming order rate is biasing more and more toward non-academic accounts.

So, our overall exposure there is being reduced.

Okay.

That's very helpful, thank you.

Zarak Khurshik, Wedbush.

Good afternoon, guys.

Thanks for taking the questions.

Just stepping back a little built.

How much of your total consumable sales would you say are going into the clinical end marks today?

And, how fast would you say that stream is growing?

Let's see, what would I say?

I would guess it -- I don't have those numbers specifically so this is an estimate.

If you want the actual number, you can call us back later, and we'll do the math.

But, I would guess it's about 10%, going into clinical markets.

And, we have a couple of very rapidly growing customers who have fully commercial tests in the market that now have a large install base of HiSeqs.

If you look across the T-21 testing market, there's five companies all using our platform.

A number of these are commercially running tests every day now.

So, it is growing quite quickly.

And, I would say at a much faster rate than the research consumables are growing.

But, I'm not sure we had actually calculated it in that segment.

Got it.

So, would you say half of that 10% is attributed to some of those prenatal companies?

Yes, I don't think we would give a specific number on that.

And, I don't know what the number is.

But, all I can say is that segment is starting to grow.

I mean, the orders are clearly coming in there.

And, those companies are ramping.

Great.

And, just to clarify, just a last question, Jay, so the breakdown of current MiSeq orders is -- there is an over representation of non-academic accounts?

Is that fair?

That's right.

Okay.

Great.

Thanks.

Thanks.

Jon Groberg, Macquarie.

John, are you there?

Okay, operator, let's move on, please.

Stand by.

Paul Knight, BLSA.

Hi, good evening.

Could you talk about your international exposure and when would we expect that tax rate to finally drop?

International exposure with respect to overall orders or are you thinking about with respect to the tax rate?

Well, Jay, it appears as they have grown their Asian operations, for example, tax rates have dropped.

Would you expect that?

Yes, we would.

So, Asia has been particularly strong for us over the past few quarters.

Europe has been okay.

Americas, over the last two quarters, at least, have grown pretty nicely.

So, on a relative revenue basis, I would say, at least in Q2, the Americas was a higher proportion of the revenue.

But, certainly as that mix shifts toward Asia, or if it shifts toward Asia, we would have an improved tax rate.

Marc, you want to talk about our expectation of how it will reduce over time?

Yes, Paul, we have, as you pointed out, we have been growing our operations in Asia, in Singapore in particular, we have been moving manufacturing there, at a reasonable rate.

And, particularly focused around our consumable manufacturing.

And so, that is helping us to improve our tax structure.

And, we are going to continue down that path.

We are looking at not only that but obviously every other tax opportunity that we might have.

And, that is absolutely one of the levers we can pull.

And, we will continue to pull it in the future.

I wouldn't try to give any guidance around what the tax rate might look like.

But, I would expect declines going forward.

Is this going to help your margin expansion or is it just implied?

I think, yes, I mean a little bit, yes.

Yes, it should.

Thank you.

And, ladies and gentlemen, that does conclude the time that we have available for questions.

I would like to turn the call back over to management for any 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 October, following the close of the third quarter.

Thank you.

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

That does conclude the presentation.

You may disconnect.

Have a wonderful day.