Illumina, Inc. (ILMN) Q1 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the First Quarter 2011 Illumina Inc. Earnings Conference Call. My name is Jonathan, and I will be your operator for today. [Operator Instructions] As a reminder, this conference call is being recorded for replay purposes. At this time, I would like to hand the call off to Mr. Peter Fromen, Senior Director of Investor Relations. You may proceed, sir.

Thank you, operator. Good afternoon, everyone, and welcome to our earning call for the first quarter of 2011. During the call, we will review our financial results released today after the close of the market and offer commentary on our commercial activity. After which, we will host a question-and-answer session. If you have not had a chance to review the earnings release, it can be found in the Investor Relations section of our website at illumina.com. Presenting for Illumina today will be Jay Flatley, President and Chief Executive Officer; and Christian Henry, our Senior Vice President and General Manager of Life Sciences, as well as our Chief Financial Officer. This call is being recorded, and the audio portion will be archived in the Investor section of our website. It is our intent that all forward-looking statements regarding our expected financial results and commercial activity made during today’s call will be protected under the Private Securities Litigation Reform Act of 1995. The 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 results to differ, we refer you to the documents that Illumina files with the Securities and Exchange Commission, including Forms 10-Q and 10-K. Before I turn the call over to Christian, I want to let you know that we will participate in the Deutsche Bank Healthcare Conference in Boston the week of May 2, the Baird Growth Stock Conference in Chicago the week of May 9, the Goldman Sachs Global Healthcare Conference in Los Angeles the week of June 6, and the William Blair Conference in Chicago the week of June 13. To those of you unable to attend any of the upcoming conferences, we encourage you to listen to the webcast presentations, which will be available thru the Investor Relations section of our website. With that, I will now turn the call over to Christian.

Good afternoon, everyone, and thank you for joining us today. Before we get started, I'd like to announce that Kevin Williams, our new Senior Director of Investor Relations, is joining us today. Kevin is an M.D. by training and has spent 10 years in the investment community as a buy-side analyst. Over the next quarter, Peter Fromen will be transitioning his Investor Relations responsibility to Kevin. I'd like to thank Peter for his efforts in building our Investor Relations function over the past 4 years. And I look forward to his continued success in his new role as Senior Director of Applications Marketing here at Illumina. Now I will review our first quarter financial results, and then Jay will provide an update on our commercial progress and the state of our business and markets. It should be noted that we completed the acquisition of Epicentre Biotechnologies in early January. And as a result, our first quarter financial statements include 12 weeks of EPICENTRE revenues and expenses. In the first quarter, we recorded $283 million in total revenue. This represents growth of 47% over Q1 of last year. Product revenue was $267 million, representing 54% growth over the same period in 2010, and was driven by continued success in our sequencing business. Consumable revenue for the quarter was $148 million compared to $114 million in Q1 of 2010, and $132 million in the fourth quarter of 2010. The year-over-year in sequential growth was primarily the result of our expanded info base of sequencers, which generated annualized consumable revenue per systems slightly above our range of $150,000 to $200,000 per system. Annualized pull-through on the HiSeq was within our projected range of $300,000 to $400,000, but was down slightly from last quarter as we believe customers drew down inventory in anticipation of the release of our new version 3 kits. These kits began initial shipments last week and delivered approximately 600 G in output per run. We expect aggregate sequencing consumable pull-through to increase throughout the year, as the HiSeq becomes a greater percentage of our install base. Annualized consumable pull-through of proper installed base of microarray scanners was within our target range of $400,000 to $500,000 per system. Instrument revenue for the quarter was $114 million, up 100% over Q1 last year, largely due to the HiSeq 2000 shipments. Since we launched HiSeq in January 2010, we've scaled our capacity each quarter in an effort to meet the significant demand for the system. We continued this scale in the first quarter. And as a result, we have reduced the instrument backlog to a more desirable level. This enables us now to ship HiSeq systems within commercially reasonable lead times, which will in turn result in the generation of more consumable revenue. In the quarter, we also saw a strong demand for our HiScan and HiScanSQ systems, which helped contribute to the strong instrument revenue. In fact, Q1 was the second-highest quarter we've had in array instrumentation, following Q4's record performance. Services and other revenue, which includes genotyping and sequencing services, as well as instrument maintenance contracts, was $16 million dollars compared to $18 million in the first quarter last year. The decrease was primarily due to a multimillion dollar service contract that we delivered in Q1 2010. As we've indicated in the past, we would expect this revenue line item to fluctuate based on the timing of the completion of specific services projects. Before discussing our gross margins and operating expenses for the quarter, I'd like to note that we recorded a pretax amount of $22 million related to non-cash stock-based compensation. This impacted our earnings per share by a tax adjusted amount of $0.10 per pro forma diluted share for the quarter. As a reminder, we now include this expense in our presentation of pro forma net income and earnings per share. However, in our discussion of gross margin, operating expenses and operating margin and we'll highlight both our GAAP expenses, which includes stock compensation expense and other non-cash charges and the corresponding non-GAAP figures. I encourage you to review the GAAP reconciliation of non-GAAP measures that's included in today's earnings release. Total cost of revenue for the quarter was $94.5 million compared to $60 million in Q1 of 2010. The Q1 2011 costs included stock-based compensation expense of $1.7 million compared to $1.3 million in the prior year period. Excluding this expense and $3 million associated with the amortization of intangibles, non-GAAP gross margin was 68.2%. This compares to 65.1% last quarter and 70.3% in the first quarter of 2010. The sequential gross margin improvement was primarily driven by an increased mix of sequencing consumables revenue associated with the growing installed base of HiSeq. Also contributed was a reduction in the number of HiSeq shipments associated with the Genome Analyzer trade-in program, resulting in 20% increase in HiSeq ASPs. Systems of HiSeq -- Shipments of HiSeq systems under these trade-in programs are nearly complete, and we expect the diluted impact of these trade-ins to be insignificant going forward. R&D expenses for Q1 were $50 million compared to $44 million in the comparable period of 2010. These numbers include non-cash stock compensation expense of $7.7 million and $5.9 million, respectively, and contingent compensation expense of $1.4 million and $0.9 million, respectively. Excluding these costs, R&D expenses were $41 million or 14.5% of revenue compared to the prior year R&D expense of $37 million or 19.2% of revenue. SG&A expenses were $66 million compared to $50 million in the first quarter of 2010, and including stock compensation expense of $12.6 million and $9.8 million, respectively. SG&A expenses in the first quarter of 2011, also included contingent compensation expense of $1 million. Excluding these costs, SG&A was $52 million or 18.5% of revenue compared to $40 million or 21.1% of revenue in the prior year period. GAAP operating profit for Q1 was $69 million. Excluding these expenses outlined earlier and $2.5 million of expenses related to our upcoming relocation of our corporate headquarters, our non-GAAP operating profit for the quarter was $99 million or 35.2% of revenue compared to $58 million or 30.1% of revenue in the first quarter of last year. Our non-GAAP tax rate for the quarter was 35.2% compared to 35.3% in the fourth quarter. At the end of last year, we licensed additional intellectual property in Singapore consistent with our manufacturing plan. As we scale up manufacturing in Singapore throughout 2011, we expect to realize a tax benefit going forward beginning in 2012. We reported GAAP net income of $24 million or $0.16 per diluted share compared to net income of $21 million or $0.16 per diluted share in the prior year period. Excluding the items identified in our press release and net of pro forma tax expense, non-GAAP net income was $50 million or $0.35 per pro forma diluted share compared to $27 million or $0.21 per pro forma diluted share in the first quarter of 2010. During the first quarter, we generated $89 million in cash flow from operations. We used approximately $12 million for capital expenditures, which resulted in $76 million in free cash flow. This compares to the $48 million in free cash flow in the first quarter of last year, or 59% growth. Free cash flow was favorably impacted by another strong quarter of collections, which yielded DSO of 59 days compared to 74 days in the first quarter of last year and 58 days last quarter. We ended the quarter with approximately $1.1 billion in cash and short-term investments. Inventory increased approximately $8 million during the quarter, but our turns remains nearly flat at 2.4x. Depreciation and amortization expenses for the quarter were approximately $15.8 million. In March, we successfully completed an $800 million senior convertible notes offering with a 0.25% coupon. Net proceeds from the offering were $786 million. We used approximately $314 million to repurchase 4.9 million shares of our common stock. In addition, to date, approximately $336 million of the proceeds have been allocated to funds conversions of our convertible notes offered in 2007, of which, $390 million of principal remained outstanding at the end of 2010. The remaining net proceeds will be used for additional conversions of our 2007 convertible notes and other general corporate purposes, which may include acquisitions and additional purchases of our common stock. Last week, pursuant to an option granted to the initial purchasers of the notes, we issued an additional $120 million of principal amount, which generated net proceeds of $117.9 million. During the quarter, we also repurchased approximately 350,000 shares of our common stock for $24 million under our 10b5-1 share repurchase program. Now at this point, I'll turn the call over to Jay for some remarks on our commercial activity during the quarter before we begin the Q&A session. Jay?

Good afternoon, everyone, and thank you for joining us today. I'd like to extend my thanks to Peter as well for the fantastic job that he's done in building our Investor Relations function over the last 4 years. I'm very pleased with our operational and financial results for the first quarter. We grew revenue by nearly 50% over Q1 of last year and delivered one of the strongest operating margins in the company's history. During the quarter, we worked through the majority of the remaining promotion-related HiSeq from our backlog and recognized the corresponding benefit to gross margin. The rapidly growing number of HiSeq systems in the field led to a higher mix of consumable revenue in Q1, which also helped gross margin, a trend we expect to continue for the rest of 2011. Through a combination of revenue growth, margin expansion and disciplined expense control, we generated excellent leverage on the operating line and produced 72% growth in earnings per share over the last year. Total Q1 revenue in our microarray business was down slightly compared to Q4 in what's typically a seasonally soft first quarter. However, Q1 microarray revenue grew year-over-year led by strong results in array instrumentation due to shipments of the HiScan and HiScanSQ systems. This growth was partially offset by a difficult comp in our FastTtrack Services business due to a large single contract delivered in Q1 of last year. Total microarray consumables revenue also grew over Q1 last year due to a significant growth in our focused content in methylation arrays, as well as growth within our whole-genome genotyping products. This quarter, we've began shipment of our new Infinium FFPE product, formalin-fixed, paraffin-embedded samples represent an enormous resource, particularly for cancer research. FFPE samples are often highly degraded, but our new product allows these samples to be restored, yielding high-quality data on our OmniExpress in situ [ph] SNP arrays. This offers tremendous potential for our customers to access a wealth, a bank and often related annotated samples that can be used for structural variation analysis or supplement in association study. Earlier today, we launched a new 8-sample format of the Omni2.5 BeadChip. This new version has the same rare variant content as the existing 4-sample on the 2.5, but is now offered in a more efficient and economical format. The launch of the Omni2.5 8 represent a doubling of capacity on the substrate to over 20 million genetic variants. To give you a sense of the magnitude of this increase, on 1 array, you could now incorporate nearly the entire known catalog of human SNPs. Overall, our outlook for the GWAS market remained positive. Customers that have run the Omni2.5 have provided direct feedback that it's the best performing mircoarray we've produced to date. Many of these customers are conducting rare variant proof of principle studies on the Omni2.5, and we expect to see the results of these projects later this year. We continue to believe that novel findings with this rare variant content will renew demand for genome-wide association studies and new rare variant products like the Omni5, which is on track to ship this summer. Demand for our Eco Real-Time PCR instrument is continuing to build nicely. We experienced some initial challenges in ramping manufacturing that we believe are now behind us. We're significantly scaling Eco production and expect to deliver the product at standard lead times by the end of this quarter. Turning now to our Sequencing business, we had another outstanding quarter. Total Sequencing revenue grew 80% from Q1 of last year and continues to be supported by broad adoption of the HiSeq 2000. 75% of HiSeq shipments and approximately 90% of orders were to customers outside the major genome centers. The rapid increase in the installed base of HiSeqs is driving significant growth in sequencing reagents. Total sequencing consumables grew over 70% compared to Q1 of last year, largely the result of the increase in HiSeq reagents, which for the first time, exceeded reagent revenue from the installed base of the Genome Analyzers. This growth favorably impacted our product mix and was the primary driver of our gross margin improvement in Q1 compared to last quarter. Offsetting some of the margin expansion in Q1 was the remainder of the HiSeq shipments related to the Genome Analyzer trade-ins. Approximately 50% of non-Genome Center shipments included trade-in related promotions compared to approximately 75% last quarter. We've nearly complete shipment of all trade-in related HiSeqs and expect minimal impact to gross margins from these units going forward. Our demand outlook for next-generation sequencing continues to be very robust. We received positive customer feedback on the improvements we've made to our HiSeq flow cells, TruSeq reagent kits and imaging software that we've launched earlier this year. These improvements will triple the throughput of the HiSeq to 600 G per run and reduced the reagent cost the sequence of human genome to well below $5,000. As Christian mentioned, we've begun initial shipment of these kits. We've also significantly scaled our whole genome sequencing service capability this quarter to support the growth of our Illumina genome network. Compared to last quarter, we more than tripled the total number of genomes completed under IGN. Improvements to HiSeq throughput will help to substantially increase our capacity to meet our demand going forward. Last quarter, we debuted our new MiSeq platform. MiSeq is a compact, easy-to-use low-cost sequencing system that can generate up to 1.5 G per run and complete work flows from sample to answer in under 8 hours. The beauty of MiSeq is that it uses the same TruSeq SBS chemistry that enables researchers to generate over 1,500 publications on HiSeq and the Genome Analyzer. This allows Illumina and our customers to move many of the chemistry and software advances made on HiSeq directly to MiSeq. This is powerful in the growing body of application that don't require the output levels of HiSeq. Nowhere is this relationship more compelling than in clinical research and ultimately molecular diagnostics for clinical applications developed and validated on HiSeq can be deployed in the field on a low-cost MiSeq instrument. Additionally, the fast runtimes of MiSeq will make it a potent application development platform. The common chemistry between these 2 platforms will allow rapid development on MiSeq with ultimate deployment of high throughput applications on HiSeq. We believe this is a powerful competitive advantage. The market's initial response to MiSeq has been extremely positive. Customers have already identified numerous applications where they believe MiSeq will offer distinct advantages such as targeted resequencing, small whole-genome sequencing, clinical and screening applications and QC and quantification for high throughput labs. We officially began taking orders for MiSeq this month and have already built a healthy order book. We are on track to meet our plan to ship initial MiSeq units in Q3 and ramp to high-volume shipments in Q4. I look forward to updating you on our progress later in the year. Early last quarter, we announced the acquisition of EPICENTRE Biotechnologies. I'm pleased to report that the integration of the EPICENTRE team is going very well, and that we've already seen nice organic growth from EPICENTRE's Nextera products. In fact, in the first quarter, Nextera kits generated nearly as much revenue as they did in all of 2010. As a reminder, the Nextera assay enables ultra low sample input and can generate sequence of array libraries in less than 2 hours. We're extremely excited about the future possibilities that we see with EPICENTRE to further improve and simplify workflow across our product lines. In general, we believe our funding environment is stable. We're no longer directly tracking stimulus-related funds as they become more challenging to parse out but believe that, that funding should benefit our customers through the end of next year. Recently, the 2011 NIH budget was passed with about a 1% reduction in spending from 2010 levels, but waiting the worst case scenarios product and congressional negotiations, and remaining in line with our expectations. Overall, we believe that the allocation within the NIH budget will continue to favor genetic analysis tool and in particular, next-generation sequencing. No discussion in the quarter would be complete without acknowledging the devastating earthquake and resulting tsunami that occurred in Japan. Our deepest sympathies go out to the people of Japan and the families of all our employees and colleagues. Fortunately, no Illumina employees were injured in the event nor did our regional sales office sustained material damage. We've assessed the potential impact on our vendors and do not anticipate any significant disruption to our supply chain at this time. We do anticipate some softness in our Japanese business over the next few quarters, but do not expect it to materially impact our results. Overall, Q1 was an exceptional start to the year. We accelerated our revenue growth from Q4. We're up 47% year-over-year, while expanding gross margins by more than 300 basis points from Q4. We achieved the key goal we set this quarter to virtually clear out the backlog of HiSeq launch related trade-ins. This will allow us to drive towards the gross margin target that we've set for the full year and guided to in January. We controlled operating expenses through disciplined management and increased operating margins by approximately 400 basis points from last quarter and by over 500 basis points from Q1 of 2010. We generated $89 million in operating cash flow and free cash flow of $76 million or $0.54 per share. Our new 600 G kits are shipping and delivering on the scalability of HiSeq to drive down the cost of sequencing and further unlock the elasticity of the market. We're on track to begin shipment of MiSeq in the third quarter and are excited about the new opportunities that, that system will create in the existing capillary sequencing space, as well as in the clinical markets. Thank you for your time, and we'll now open the lines for your questions.

[Operator Instructions] Your first question is from the line of Marshall Urist with Morgan Stanley.

Thanks for taking my questions. So first question is just on underlying HiSeq demand. If you can kind of talk about how that's trending, I appreciate the comments on the backlog, but what you're seeing there to start the year. And then related to that, just pricing on the 600 G kit relative to the initial kit for the HiSeq?

Yes, I'd say we're experiencing a demand curve on HiSeq that is representative of what we thought the underlying demand curve looked like during the trade-in window. Q1 is always seasonally weak order quarter. It's the typically softest quarter that we ever had in orders, and that's been the case for us really since the inception of the company. But we feel really positive about the pipeline for HiSeqs and optimistic about the trends that we're going to continue to place significant systems. With respect to the 600 G kits, we've increased the pricing on those kits so the customers get roughly 3x the output that they got on the previous versions of the kit. And we bumped up the pricing to some extent to capture some of that incremental value for us.

Okay, great. And then just a follow-up on the GWAS market, and how are you guys thinking about that over the next few quarters? Just as we get through -- as we start to annualize the 2.5 launch, granted the 5M launch is coming up. But as you start to annualize that and before we get the initial, kind of initial data from the initial 2.5 studies, which you pointed to later this year, how will that trend over the next couple of quarters, particularly through 3Q when you'll get the initial launch from the 2.5?

Yes, I would expect that what we'll see is relatively flat performance of the 2.5 over the next couple of quarters as customers wait to get results from the studies that are underway right now. We do expect to get a pop from the initial launch of the Omni 5. And it's hard to know exactly what that magnitude will look like. But we think there clearly is some pent-up demand for people to begin running that array. We'll probably also get some initial demand for the supplemental chip that will move some of the initial customers that have used the 2.5 up to the full 5M level of content. So we certainly see that pop through Q3 and Q4. And then as we get into 2012, it's a bit of a wait-and-see because we'll start getting actual results from these initial 2.5 studies. We expect probably to get the first bit of data in Q3, and then around ASHG in Q4, we'll see some very significant results there.

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

Looking at the operating lines, there's a decent amount of operating leverage at the R&D line, which as you'd expect, increased in dollar terms, but again declined as the percentage of sales. How should we model out R&D moving forward? And behind that, operationally, what's driving this moderation in growth? Is it really moving towards the late innings of the MiSeq launch? How should we think about that?

The R&D spending does have some lumpiness in it of course and part of that has to do with some of the tuck-in acquisitions that we do. So you can pop up, if you do want to go and since we potentially by an R&D team. We also have significant project expenses associated with the launches of major platforms. And those tend to be very periodic in the R&D numbers. I think what you can expect going forward is an increasing absolute expense level in R&D. But we think that overall, 14.5% of revenues which is what we wanted this quarter is a pretty good percentage and we're really pleased with that number. So as you know, we haven't guided to where we expect to be for the rest of the year. But certainly, you should model it as an increasing absolute dollar number. The other factor, of course, is that we're continuing our investment in diagnostics. And as we get closer to something we think could be an important diagnostic product, we'll begin to invest in validation studies and potentially clinical trials.

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

I guess what we'd say, we are really happy with the percentages in those categories that we achieved this quarter. We grew revenue so substantially on a year-over-year basis that we probably got a little ahead of where the R&D investments and sales and marketing investments were. So those percentages are fantastic, and we're not prepared to guide any additional leverage over those kinds of percentages that we just presented today.

Your next question is from the line of Ross Muken with Deutsche Bank.

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

Certainly, I think, if you were to pick 1 category, Ross, it will be cancer. Certainly, there's an enormous amount of discovery work being done in cancer now using the HiSeq platform. Obviously, some of that within Illumina, but most of it outside of Illumina. I suspect that most of the end applications that come out of that cancer research would be more suited for deployment on the MiSeq platform. So you would typically expect an actual diagnostic panel to be some number of genes that you've sequenced through probably somewhere between 40 and a few hundred would be for the range we'd expect perfect application for MiSeq platform. MiSeq is getting very broad attention in many other diagnostic circles from sequencing element of the immune systems, the sequencing viruses and bacteria and very broad potential applicability across all sorts of diagnostic-type market. Now clearly, in the diagnostic space where the genome is not highly variant, then arrays are going to remain an important component in those types of diagnostic applications. But sequencing is becoming cheap enough and versatile enough that I think more and more customers are looking to apply next-gen sequencing to these types of applications.

Great. And on the free cash flow side, you had another great quarter. I mean as you sort of think about the cash generation. Obviously, we saw the convert and in turn the buyback issuance, as you think about your ability to continue to convert kind of the net income line into cash and the sort of potentially uses there. I mean have you had to preference sort of buybacks versus sort of technology tuck-ins today, what's sort of relative preference? And on the M&A side, where is the greatest interest from your front in terms of where you're spending time, is it on the research side, is it on the sample prep? Is it on the back-end analysis, or is it on sort of diagnostics?

Yes, Ross, we're actually -- when you look at the preference, it's really, as we've been saying for years from a technology perspective, we're agnostic. And so the preference is to put the money to work in the business. And so, when we see opportunities for technology tuck-ins and really all of those areas that you mentioned, focused on the front-end, as well as the back-end as well as the new kind of sequencing technologies that could be out there. We're going to be investing in all of those. But we'll also, in opportune times, we will buy back stock. And as you've seen us do that over the last few years, and we'll continue to have that profile.

Your next question is from the line of Tycho Peterson with JPMorgan. Tycho Peterson - JP Morgan Chase & Co: Thanks for taking my question. Just following up on the early question on arrays, I appreciate the additional color on GWAS. But I guess as we think about the broader array market, with some of the early attraction you're seeing with HiScan, can you just talk to whether that's a decent leading indicator for kind of how we should be thinking about growth in the overall array market and are you a little bit more, I guess, optimistic given some of the early traction with HiScan?

Well, certainly, the positive indicators we've had in growing the instrument base is a big help. We continue to see very positive growth in the focus part of our business. We have a new methylation array that's doing extremely well. We're very bullish about the evolution of methylation market over the next few years. In aggregate, we've talked about growth in the array market sort of being in the mid-to high single digits. And I think for now, we're sticking with that range of overall growth. And what's going to happen in 2012 will depend a lot on what happens in these GWAS studies in the back half of the year. So we're optimistic about that, and we have to show the results and deliver the revenue. Tycho Peterson - JP Morgan Chase & Co: Okay, and then on MiSeq, as we think about potential market opportunity, obviously, a big opportunity to go after the capillary market. Can you just talk to maybe what the early interest looks like and obviously, it's early days, you haven't launched it. But in terms of the early interest from customers, how much is coming from existing capillary customers versus new markets or HiSeq customers that want to kind of complement their portfolio?

Well, the backlog is building nicely, as I said, on MiSeq. The initial bulk of orders that we're getting are kind of come from mostly customers who already have HiSeq or Genome Analyzers and a number of them from the large centers. So these tend to be institutions that are well-funded. They're already familiar with what we're doing in sequencing. They already know how to run SBS chemistry. And that's the front end bulk of orders looks like. If you're going to keep them in the pipeline however, what we're seeing is tremendous interest from customers who traditionally been capillary-based sequencing in order to reduce the cost of doing amplicon sequencing to drive their equation down. [Audio Gap]

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

Most of the controversy, I think, around the quarter was people worrying about what happens as the backlog comes off, and instrument shipments slow potentially and like that. I guess could you just to kind of avoid another round of these incessant phone calls on the numbers, can you kind of talk about how you see instrument numbers rolling out and how we should kind of think about this for the rest of year? But as HiSeq comes down and some of the backlog comes off, it just helps some of this middle market and before MiSeq rolls out, could you just give us a little bit more color on how you see the rest of the year rolling out?

Well, we haven't quantitated that of course. Well, I guess, when I can say qualitatively is what we've done is gotten our backlog back into sort of a reasonable range and this is more the kind of range that we would expect to operate in an ongoing basis. And that's important for a couple of reasons: One, is that customers would want to get their product and they don't want to wait for 5 months to get a sequencer that's not commercially viable lead time for too long. I mean right at the initial launch of a product, you can get away with that. But you can't after the product has been in the market for sometime. So that's a necessity for us; the second thing is that as we're holding these systems in backlog, they're not consuming many reagents. And so it's critically important that we get these instruments in the hands of customers so that systems can begin to consume reagents and improve the overall flow of that consumable business for us. So I guess what I characterize overall is that we are now where we would like to be in terms of having the backlog going forward.

Okay, and Christian, just a housekeeping question, what's your expectation for net interest income expense?

It's relatively flat. I mean obviously, the new convert is accretive, but you can think we're modeling it on interest income 0.75% to 1% interest income, but we still have some interest expense and so you'll see that. In the quarter this time, you saw we have a charge of $27 million charge. That was extinguishment of debt. So basically as we converted, we had a non-cash accounting charge that we took. But for the most part, the new convert is slightly accretive, but we're not really generating a kind of interest income on our cash.

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

Thanks for taking my question. Christian, could you maybe touch on the relocation process for the corporate headquarters over the next few months? Can you kind of go through the process? What are some of the key milestones that you need to go through as you look through the next couple of quarters?

Sure. So as you know, we signed a lease in December, we're in the planning phases of the move right now. So we've spent the first quarter planning out the new facility figuring out where people are going to sit. And now, we are finalizing those plans, getting the permits, et cetera. When we get into the end of this quarter, first part of next quarter we'll be doing all the internal construction that needs to be done. And then in November, we'll start moving people across, assuming we are on schedule. And right now, we are. As a matter of fact, we're just a little bit ahead of schedule. And then by the end of the year, we should have most of the headquarters staff completely moved over to the new facility. We'll have all of the San Diego manufacturing that's done here in our headquarters facility, that actually won't move until the first quarter. So that will be the last thing to move as we move out of San Diego or out of our corporate campus in San Diego. From a financial perspective, we're accelerating some of the depreciation of our leasehold improvements here. And that's why you see an incremental line on our P&L this quarter. And on that line, we'll have that accelerated depreciation. We'll also have a non-cash CC slots that we talked about last quarter. That charge will likely hit us in the fourth quarter. We'll also have all of our moving expenses. And just to remind people that, that charge is kind of in the $30 million to $35 million range. But it's a completely non-cash charge. And I can talk to people through this specific accounting offline if you want to talk about that. But most of the charge that hit that line will be absolutely non-cash charges. And you'll see it roll out over the remainder of the year. So hopefully, that's hopeful, Isaac.

Good, that's great, thanks. And then just secondly, on the new products here, can you maybe talk about broadly speaking of these -- what kind of technical hurdle you think you need to kind of go through for next year and then certainly MiSeq ahead of the launch later this year, kind of where we are in the product development process? And then lastly, as we look towards sort of the big picture and downstream kind of in informatics, do you have an updated thoughts on how you see that market evolving and how do you need to be a bigger participant perhaps in informatics?

Well, with respect to Nextara, that product is on the market today. That was in the market prior to the acquisition of EPICENTRE. And in fact, as I commented, we had a great revenue performance from that product in the first quarter. What we're doing now is focusing on what the future versions of that kit would look like. And there's several types of improvements we'd like to make to it to improve its sensitivity, to improve the amount of sample that you need for the kit to look at using the last cycles of amplification. There's a number of different dimensions worth exploring, and those are products that will roll out over the next quarters and into 2012. With respect to MiSeq, I'd say, we're over working all the technical hurdles. We're doing the integration of the systems as how I probably best characterize it. And what that means is that we're optimizing recipes. We're looking at all the performance parameters of the technology. We're making improvements in software to improve the overall accuracy level of the system. We're tight trade-in the reagent components so that we consume the most amount of reagents that we can, consistent with very high-performance. And we're doing extensive testing of the hardware, software and reagents and combination. With the volume we expect on this system, we think it's critically important that we go through an extensive test cycle to make sure that when we begin shipping these, they're very robust out in the field. So I would say MiSeq is looking very promising and as I mentioned in the remarks, we're on schedule to do the initial shipments in the third quarter. In terms of informatics, I talked previously about the investments that we've made in improving our base color and our structure variant color. We continue to make improvements there. I'd say one of the next big areas of focus for us is particularly, because of the launch of the MiSeq system, is how do we make that software increasingly automated, increasing user-friendly, require less compute infrastructure. And much of that drives you toward cloud-type implementation through our technology. So we already have pieces of our software running up in the cloud, and you can expect over the next 6 to 12 months for us to begin to allow customers to migrate data and compute capabilities up for the cloud in a sort of an Illumina-centric environment. We've also been working on the product that we talked a bit about previously that allows customers to very graphically and easily build complex workflows. One of the challenges that we think customers have is the need to understand Linux and how to pipe together multiple complex programs to get the specific results they would like and the interface third-party programs into that workflow. And this product that we're working on is one that allows you to graphically build that workflow, and you don't have to understand any program or language to use it. So it will be an increasingly important component as the installed base broadens and the user base becomes sort of less compute-centric, if you will.

Your next question is from Quintin Lai with Robert W. Baird.

Thanks for taking my question, it's actually Matt in for Quintin. Just kind of moving into -- obviously there's been a lot of success with the trade-in program. Just kind of wondering if there are any updated thoughts on how the refurbished GAs are rolling out and kind of those thoughts going forward?

Yes, on the refurb -- first of all, with respect to the trade-ins, the trade-ins specifically were the units that were really associated with the launch. So the instruments sold in Q3, Q4 and Q1 of last year that had large, large promotional discounts in order to get those customers convert readily. We still have a very significant installed base of GAs out there that are further trade-in opportunities that we'll see rollout over the next year or two. With respect to the units that have come back, we are seeing like a pretty steady demand for those units each quarter, either through all kinds of different programs, either throughout right sale, potential few reagent panel programs that we've seen, et cetera. So we have been able to find homes and see a consistent level of demand for those refurb units so far.

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

Great. Thanks for that color. I just kind of wanted to ask, given the strength of Q1, any revised thoughts on top and bottom line guidance for '11? Thanks.

We're not updating our guidance today so nothing further to say about that.

Your next question is from the line of Amanda Murphy with William Blair. Amanda Murphy - William Blair & Company L.L.C.: I just had a couple of follow-ups. Just the first one, even though it's pretty early, it seems like the competitive landscape for this sort of lower cost rabid turned around machines is evolving very quickly. I'm curious, you talked a little bit about the CE market and the opportunity. But can you speak to sort of how do you see that MiSeq as a differentiator in the CE market so for customers who do not have a next-gen platform for example?

There's a number of ways that MiSeq is differentiated. I guess first thing I'd say that we do think that this is going to be a rapidly evolving market and one that's going to grow quite quickly. The existing capillary market remains to be a relatively large opportunity. And it's one what we think that's right for conversions in next-gen sequencing because of the output levels that these new types of systems offer. Certainly, MiSeq has distinguished its overall output level of 1.5 G is well-beyond what anybody else is talking about here, at least, is available. The system is going to be extremely high performance in terms of its overall accuracy. It will take advantage of all of the applications that had been previously developed on HiSeq and on the Genome Analyzer. It has very rapid turnaround time. And in particular, we focus on ease-of-use, and our customers will be able to use the Nextera kits to do very rapid sample prep and library preparation on the system. The runtimes for most applications will be in the range of a shift. And we're very optimistic about how this product is going to compete in the overall market. From the capital acquisition cost, we think this is priced about where the other competing systems are. If you look at everything that's required to run them and the running costs are going to be vastly less than what people experience today on the capillary-based system. And so, we think there's huge incentive for the capillary market to begin to transfer over the next-gen sequencing. Amanda Murphy - William Blair & Company L.L.C.: And do you think that, that's something that could happen meaningfully sort of next year? Or is that a 2013 event? Just trying to get a sense of when that market might come online.

Well, there's always a limitation of funding in any of these markets. If you polled most of the capillary customers a year from now, probably, you'll get most of them wanting to convert immediately to next-gen sequencing. The limit will become how many of them can you fund to make that changeover, and we'll begin to see that as we enter 2012. We're pretty optimistic that the market will begin to shift pretty quickly. Because the order of magnitude change in cost is certainly modeled by what happened with the original introduction of the Genome Analyzer, where we reduced the cost by over a factor of 100. And those kinds of step changes in cost and improvement in throughput often cause markets to ship pretty quickly.

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

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

Yes, Bill, we're not going to roll these things out on a quarter-to-quarter basis here. As Jay pointed out, we're not really giving any guidance going forward at this point in time. But the reality is as you've seen if the Sequencing business continues to grow at a very rapid rate. The more systems we've put in the field, we get better, more consumables per -- more consumable revenue. We also see a mix of HiSeqs continues to become a greater proportion of the total sequencing mix. We should see the consumable pull through per instrument increase. So all those aspects are positive with respect to our demand -- our profile. And of course, just the general pipeline of sequencing instrumentation that we have continues to be healthy. And so, we continue to see a lot of interest in next-generation sequencing.

Very good. And then just a quick follow up. I'm thinking about some of the very strong demand on the clinical side, particularly for cancer. Any advice here or rather guidance in terms of the number of placement that are going into areas outside of your traditional stronghold in academic research?

And by that, you mean applied or corporate kind of environment?

The applied corporate, as well as from the clinical standpoint, exactly.

The corporate revenue runs 15% to 20% depending upon the quarter and we certainly see uptick in ag, bio type companies. Pharma buys sequencers for doing research. They don't buy them for large-scale discovery programs, at least not to date. And we don't see any huge change in that dynamic anytime soon. So I think our percentage of revenue balance between academic and corporate buyers from everything we've modeled out. We expect to stay about the same.

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

Thanks for taking a couple of questions. Can you quantify what EPICENTRE added for the 12 weeks? Or maybe if you don't want to do that, can you remind us what it was on an annual basis last year?

We haven't given any numbers on EPICENTRE, Jon. Either before or subsequent to the acquisition.

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

The reason we don't talk much about that is that it varies quite widely. And the reasons are that -- we do talk about is the reagent component, because that's something that is essentially fixed. It varies only based on the discount level that a given institute receives. But the parts that are variable, and probably the single biggest part that's variable, includes the overhead that gets applied to a sequencing run. And we see in some customers that's as low as 10%, and another customer is as high as 50% or 60%. And so the difference in what they call their cost of sequencing in the genome is radically different. It also depends on the duration of amortization of the instrumentations. So some institutes do it over 3 years, some do it over 4 for 5. And it also depends on the scales that they run at. In particular, the labor components. If you're running 1 or 2 sequencers, you may have somebody that is almost at the time running those 1 or 2 sequencers. But if you have 20, 1 individual person can probably run 6 or 8 sequencers if they were at scale. And so the other component is very pretty widely, which is why we don't talk so much about them. Having said all that, it's certainly in most institutes under $10,000 if they're running a 600 G kit.

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

Thank you. What are your current HiSeq delivery lead times on average?

Well, I mean all we said about that is that we've gotten our HiSeq backlog down into what we consider the commercially reasonable lead times. And I would say typically in our business, that's 48 weeks.

48, okay, thank you. And then my follow-up, can you give us some more color on the Illumina genome network? You mentioned that you increased the number of delivered genomes. Is that all internal, is that partially internal, part clearinghouse, anything on quantification of backlog, anything along those lines?

It's a combination. So it was done by us and by one of our IGN participants in the first quarter. So we've seen some uptick of the desire to use the network. I would say probably most of the business has come to Illumina.

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

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

Yes, on the 1000, consistent with what we've talked about in the past, the demand for the 1000 comes from customers who can't get enough money to buy a 2000. Because it uses exactly the same architecture, the same software and just has half the throughput, almost everybody would prefer to get a 2000 if they have the money to do it. So what we've seen are a number of customers. It's certainly nowhere near the demand for the 2000, but it's a fraction of what we get for the 2000 drop down to the 1000 because they lacked the funds. And if you look out a couple of quarters, you'll probably begin to see some of those that have installed 1000, skip the money to do the upgrade to the 2000.

Thanks.

Your next question is from the line of Sung Ji Nam from Gleacher & Company. Sung Ji Nam - Gleacher & Company, Inc.: Thanks for the questions. So Jay, you talked about 90% orders coming out of the major Genome centers or outside of the major Genome centers, would you be able to comment on going forward, what the HiSeq placement as far as your current existing customers versus new customers might be?

I can give you some qualitative comments about that. Typically, what we see in any given quarter is the acquisition of somewhere between 25 to 35 new customers. The vast majority of -- if you just counted the number of orders we get for HiSeq, probably the vast majority of those are for single units. And then, if you subtract out the number of new customers, what you have are many of the customers who ordered one initially, adding their second one and then a handful of the customers that have higher numbers adding a couple more. So those types of customers might have 5 or 7 who were bumping up with 2 more HiSeq. So that's sort of a general commentary on the kind of mix that we see in the HiSeq order pattern. Sung Ji Nam - Gleacher & Company, Inc.: Okay, that's helpful. And then my second question is would you be able to update, kind of give us an update on your diagnostic program, particularly around the ovarian and gastric programs that you had some samples that you sequenced and if you continue to expect -- if you expect to continue to carry that on internally or potentially partner out with others?

My first answer is that we expect to carry this internally unless something surprising happens. The leading program is the ovarian program and we are in the midst of the validation sequencing for ovarian. And we're a reasonable way through that. We expect to get most of the way through that by the end of the third quarter and then have most of the analysis done by the end of the year. So I would expect somewhere probably in Q1, we'll know what we have there. We're excited about the program. In particular, the translational elements of the program, trying just to see if we can find the presence of ovarian cancer cells in bodily fluids that are shed from the cancer tumor themselves. And that program uses our technology that we've announced that allows us to do rare cell capture. And in particular, that technology will be deployed initially in our services operation in the second quarter. And so we will implement that through the form of contracts with third parties who will use that rare cell capture technology. But it's a very important part of this translational work that we're doing in ovarian. Gastric is probably 3 to 5 months behind where we are and then colorectal is in the initial sequencing phases now.

Your next question is from the line of Zarak Khurshid with Wedbush Securities.

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

The samples per run depends a lot on what kind of application you're running. So we have indexing kits now that allow you to put a specific sequence in the sample prep process such that you can deconvolve or demultiplex the sample after you're finished sequencing. And over that time, that indexing levels will continue to grow up significantly across our entire product line. So the number of samples that you can run will be quite large if what you want to get out is a smaller portion of genomic information. So the sample numbers is sort of a trade-off against the overall output per sample, sort of like how our arrays work. You can dissect an array substrate into lots of samples with lesser content or fewer samples with more content. In terms of the overall throughput of MiSeq, I think if investors and others look at the track record we have in improving the overall output of our existing sequencing technologies, that wouldn't be a bad model to think about in terms of the head room that we potentially have on MiSeq.

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

As I think we've mentioned previously the Avantome program morphed into the MiSeq program. We've spent a fair amount of energy working on the specific development program after the acquisition of the company Avantome and one of the things that we thought was critically important is that emulsion PCR not ever be deployed as a product because we don't feel like that is a customer-friendly process, and it's too artful and not sufficiently repeatable. So right at the point where we made the acquisition of Avantome, we set a signed parameter that emulsion PCR was not going to be the sample prep method. We've spent some time working on alternatives, and we made some decent progress there. But at the same time, we continue to make major improvements in the cycle time of SBS chemistry. And we wound up shifting the program over to what ultimately became MiSeq. What you'll see in the future from us is some of the technology that came across as part of the Avantome acquisition that we've evolved in our own internal development programs may windup being components that get deployed in future sequencing systems. But there will never be a sequencing product that really is the Avantome product that comes out of the Illumina. I guess the other comment I'd make that right now at read lengths of about 300 basis so MiSeq is 2x150s. And you can line those directly up if you wanted to do 300 base reads. So the vast majority of applications, that's long enough. There's very few applications that require read lengths in excess of 500. We may push it a bit beyond that, but most of our customers preferred trade off the runtimes and run shorter runs with shorter read lengths. We even see this on HiSeq even though HiSeq is capable. And the GA, we actually deploy a kit out to 150 base read lengths, most customers only go up to 2x100.

Your next question is from the line of Paul Knight with CLSA.

This is Jonathan, in for Paul Knight. I was wondering if you could just briefly go through the sequential growth and sequencing and microarrays again.

We didn't give any specific numbers on sequential growth. We gave the percentage growth numbers over the last year.

Maybe, Jay, can you give us a little bit color on the geographic breakdown. What are you seeing out of Asia?

Asia, we have very strong revenue quarter. In Asia, we include Japan and out of that region, we had a record revenue quarter. In the U.S., we had a record revenue quarter as well. In Europe, of the 3 regions, it was probably the weakest and on a sequential basis, it was roughly flat from Q4.

And then maybe just one quick follow-up, how would you describe the customer base coming out of China? Is that primarily academic?

There certainly are a lot of academic customers, but as you're probably aware, there's many institutes in China that have some academic routes but are in one way or another connected to government agencies of various sorts. So it's sometimes hard to know exactly where the funding comes from, for example, for some of the customers that we sell to in China. In many cases, the funding comes from large scale philanthropy or through various government entities. Our largest customer there far and away is BGI. And that institute certainly has some academic components to it, but it's not tied to a university.

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

Jay, I'm just wondering if you give some further color on the number of the Genome sequence, the turnaround on price into the genome network? And then an update on Oxford Nanopore?

Yes, we haven't given a specific number. What we said is the number tripled. That was off of a reasonably small base. And our capacity now is growing considerably with the implementation of the 600 G kits in our services operation. We do have a reasonable backlog that were working down in the whole Genome area. We are now under a 90-day turnaround in the services business. And so, were very pleased with that and will continue to drive that turnaround down. I would also say that every single order that we've ever gotten for Human Genome sequence through the IGN network has been delivered on time. With respect to Oxford Nanopore, I guess, the news today was that it completed around the funding of $41 million, I think, is what they put in the press release. That came out today and Illumina participated in that round. That's about all we have to report today. They have put some information on their website about their [indiscernible] in technology, but that’s all that’s currently public information about the state of their project and the state of their technology.

Your next question is from Tycho Peterson with JPMorgan. Tycho Peterson - JP Morgan Chase & Co: My follow-up is on guidance but it sounds like there's not a lot more to say so I'm all set. Thank you.

Great. Thanks.

Thanks, Tycho.

And ladies and gentlemen, that is all the time we have for questions for today. I would like to hand the call off to Mr. Kevin Williams, Senior Director of Investor Relations for closing remarks.

As reminder, a replay of this call will be available as a webcast in the Investor Relations section of our website, as well to the dialing instructions contained in today's earnings release. Thank you for joining us today. This concludes our call, and we look forward to our next update in July following the close of our second quarter. Thank you very much.

Ladies and gentlemen, thank you for your participation in today's call. The presentation has now ended. You may now disconnect. Have a good day.