Illumina, Inc. (ILMN) Q2 2011 Earnings Report, Transcript and Summary

Welcome to the Second Quarter 2011 Illumina Inc. Earnings Conference Call. My name is Melanie, and I'll be your coordinator today. [Operator Instructions] As a reminder, today's call is being recorded. I would now like to turn the call over to Kevin Williams. Please proceed.

Good afternoon, everyone, and welcome to our Earnings Call for the Second 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. The 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 made during today's call regarding our expected financial results and commercial activity, 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 results to differ, we refer you to the documents that Illumina files with the SEC, including Forms 10-Q and 10-K. Before I turn the call over to Christian, I wanted to let you know we will participate in the Leerink Swann Life Sciences Tools and Diagnostic Conference the week of August 1, the Morgan Stanley Global Healthcare Conference the week of September 12, and the UBS Global Life Sciences Conference, the week of September 19. All 3 conferences are in New York. For those of you unable to attend any of the upcoming conferences, we encourage you to listen to the webcast presentations, which will be available through the Investor Relations section of our website. With that, I will now turn the call over to Christian.

Good afternoon, everyone, and thank you for joining us today. During today's call, I will review our second quarter financial results, and Jay will then provide an update of our commercial progress and the state of our business and markets. Total revenue for the second quarter was $287 million, representing 36% year-over-year growth. Product revenue, which also grew 36% over the same period, was $270 million. Revenue growth was driven by a strong demand for our sequencing products and an overall improvement in our array business. Consumable revenue for the quarter was $159 million compared to $126 million in Q2 of 2010 and $148 million in the prior quarter. The year-over-year and sequential consumable growth was driven by broad-based demand across both sequencing and microarray products. Annualized consumable revenue on the HiSeq was within our projected range of 300,000 to 400,000 per system per year, but was down slightly compared to last quarter. This was largely due to HiSeq customers using their existing inventory of v2 sequencing kits prior to transitioning to the v3 kits, which began shipping in May. We are pleased with the customer uptake of the new v3 kits, and we expect sequencing consumable pull-through to increase throughout the year, as HiSeq becomes a greater percentage of our total install base. On the Array side, annualized consumable pull-through across our install base of microarray scanners was up sequentially, and was within our targeted range of 400,000 to 500,000 per system per year. Both whole genome and custom arrays contributed to this growth. Instrument revenue for the quarter was $107 million, up 53% over the second quarter of last year. This growth was largely due to shipments of HiSeqs and our HiScan and HiScanSQ systems. On a sequential basis, instrument revenue was down 7%. As we discussed last quarter, our successful production ramp enabled us to reduce the HiSeq backlog to more typical levels by the end of the first quarter. As a result, relative to Q1, there were few HiSeq shipments in Q2. ASPs for HiSeq increased during the quarter, which partially offset the decrease in placements. Going forward, we expect HiSeq shipments to closely reflect the incoming order rate, and be composed of standard genome analyzer upgrades, current customers adding additional instruments, new customers and competitive displacements. We believe that all 4 of these segments represent significant opportunities. And overall, we expect HiSeq demand to remain robust. Service and other revenue, which includes genotyping and sequencing services, as well as insert maintenance contracts, was $18 million compared to $13 million in Q2 of last year. The primary driver of the year-over-year growth was the increase in maintenance contracts for our growing install base of sequencing systems. Before discussing our gross margins and operating expenses for the quarter, I'd like to note that we recorded a pretax amount of $24 million related to non-cash stock-based compensation. This impacted our earnings per share in Q2 by a tax-adjusted amount of $0.11 per pro forma diluted share. As a reminder, we now include this expense in our presentation of pro forma net income and earnings per share. However, in our discussion of gross margin, operating expenses and operating margin, I will highlight both our GAAP expenses, which 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 million compared to $66 million in Q2 of 2010. The Q2 2011 cost includes stock-based compensation expense of $1.9 million, compared to $1.4 million in the prior year period. Excluding this expense and $3 million associated with the amortization of intangibles, non-GAAP gross margin was 69%. This compares to 68.2% last quarter and 70.3% in the second quarter of 2010. The sequential gross margin increase was driven by product mix and higher ASPs on HiSeq 2000. Research and development expenses for Q2 were $51 million compared to $44 million in the comparable period of 2010. These numbers include non-cash stock compensation expenses of $8.5 million and $6 million, respectively and contingent compensation expense of $1.9 million and $0.9 million, respectively. Excluding these costs, R&D expenses were $40.5 million or 14.1% of revenue compared to the prior year R&D expenses of $37 million or 17.3% of revenue. SG&A expenses were $69 million compared to $53 million in the second quarter of 2010, including stock compensation expense of $13.3 million and $9.4 million, respectively. SG&A expenses also included contingent compensation of $0.9 million in the second quarter of 2011. Excluding these costs, SG&A was $55 million or 19.2% of revenue compared to $44 million or 20.6% of revenue in the prior year period. In the second half of the year, we do expect some incremental sales and marketing expenses related to the launch of the MiSeq system. GAAP operating profit for the quarter was $66 million. Excluding these expenses outlined earlier and $2.5 million of expenses related to the upcoming relocation of our corporate headquarters, and acquisition related expense of $4.8 million, our non-GAAP operating profit for the quarter was $103 million or 36% of revenue compared to $69 million or 32.4% of revenue in the second quarter of last year. Our non-GAAP tax rate for the quarter was 34.7% compared to 35.2% in Q1. The sequential tax rate improvement resulted from the mix of earnings shifting to lower tax jurisdictions. We are starting to see the benefits from our scale up of manufacturing in Singapore. In fact, our goal is to produce over half of our consumables in Singapore in the fourth quarter. We expect to realize a more significant tax savings beginning in 2012 and beyond. We reported GAAP net income of $31 million or $0.22 per diluted share compared to net income of $30 million or $0.21 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 $53 million or $0.38 per pro forma diluted share compared to $34 million or 26% per pro forma diluted share in the second quarter of 2010. During the second quarter, we generated $71 million in cash flow from operations. We used approximately $16 million for capital expenditures, which results in $55 million of free cash flow. This compares to $64 million of free cash flow in the second quarter of last year. We ended the quarter with approximately $1.2 billion in cash and short-term investments. During the quarter, inventory decreased from $150 million to $142 million, with a slight improvement in turns to 2.5x. Depreciation and amortization expenses for the quarter were approximately $17 million. During the quarter, we also repurchased approximately 394,000 shares of our common stock for $28 million under our 10b5-1 share repurchase program. Lastly, I'd like to update our thoughts on guidance. For the full year 2011, we currently expect revenue growth will be 24% to 26%. Gross margins will be in the range of 69% to 70%. And earnings growth will be in the range of 33% to 36%. At this point, I'd like to 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'm very pleased with our results and our execution in the second quarter. We grew revenue by 36% over Q2 of last year while generating a record operating margin, also at 36%. We grew revenue sequentially, without the benefit of a large HiSeq backlog generated from the Genome Analyzer trade-in program. Year-over-year revenue growth was solid across both sequencing and microarray instrumentation and consumables. Through a combination of revenue growth, gross margin expansion and disciplined expense control, we generated another quarter of excellent leverage, increasing non-GAAP earnings per share by 46% over last year. Total Q2 microarray revenue grew over 10% year-over-year, driven by robust consumable and instrument sales. Sequential growth in total array revenue was driven by healthy consumable demand. Consumable strength was seen across our diverse array offerings, including whole genome, custom content and focus content arrays. In fact, we shipped more samples of GWAS arrays than in any other quarter in our history. Microarray instrumentation, while down sequentially, grew year-over-year due to strong shipments of HiScan and HiScanSQ systems. We recently began shipping the Omni5-Quad, a 4-sample BeadChip with the capacity to genotype up to 5 million markers per sample. The Omni5-Quad contains the industry's largest collection of rare variant content and the most even distribution of snips across the genome. In addition, this array allows the addition of custom content providing researchers the ability to economically fine-tune their array for the specific population or study. Overall, our outlook for the GWAS market remains cautiously positive. We expect to see the results of several proof of principle studies later this year. And we continue to believe that novel findings with rare variant content will renew demand for GWAS. During the quarter, we significantly ramped our manufacturing capacity for the Eco Real-time PCR instrument, more than doubling the number of units shipped. Strong demand for the Eco continues to be driven by the combination of performance features and market disruptive pricing. Turning now to sequencing, we had another outstanding quarter. Total sequencing revenue grew 53% over a year ago largely attributable to broad adoption of the HiSeq 2000. By simplifying the sequencing workflow, increasing accuracy and dramatically lowering cost, HiSeq is driving the global expansion of NexGen sequencing, unlocking new sources of funding from governments, universities and diagnostic labs. In fact, approximately 90% of HiSeq shipments and orders in Q2 were to customers outside the major genome centers. We added approximately 30 to 35 new sequencing customers during the quarter, which is consistent with our historical run rate. Total sequencing consumables grew by more than 50% compared to Q2 of last year. Q2 was a period of transition for sequencing consumables, as customers moved from v2 SBS kits to the latest v3 kits, which offer improved accuracy and a threefold improvement in throughput. Adoption of the v3 kits has been strong and we continue to believe demand for next-generation sequencing is very robust. We also recently launched new TruSeq Custom Enrichment kits that enable researchers to economically design panels that target genomic regions of interest. These kits leverage the same underlying assay design as our TruSeq Exome Enrichment kits and provide researchers with additional flexibility by allowing enrichment after the pooling of multiplex samples, rather than enriching each sample separately. Coupled with our design studio software, customers now have the complete solution for targeted resequencing on their Illumina machines. A component of our broad sequencing portfolio includes research focus, whole human genome sequencing through the Illumina Genome Network, or IGN. We recently announced the addition of the University of Washington to the network and several large contract wins, including an order from CRUK for up to 1,500 samples and 250 sample order for Knome. This market continues to show excellent elasticity. And as a result, we reduced prices to the network to $5,000 per genome for projects of 10 samples or more and $4,000 per projects of 50 samples or more. While IGN strategically serves a niche market, we continue to believe the service research market for whole genome sequencing will represent approximately 10% to 15% of the overall sequencing market over the next 2 years. Our continued technology advancements have allowed us to adjust our pricing for consumer-focused, Individual Genome Sequencing, making this program more broadly accessible. We're now offering a $7,500 program for patients with life-threatening disease for whole genome sequence information may provide their physician with critical tools for diagnosis or treatment. For cancer patients, we provide sequencing of the tumor and match normal control for a total price of $10,000. Typically, these patients had exhausted standard treatments and their physicians recommend sequencing to discover mutation pathways that are targeted by alternative to currently available drugs. This market opportunity is in its infancy and will accelerate as new therapies come to market and the analytical tools improve. I'm very excited to announce that we've began early access shipments of the MiSeq system. Our development program is on track. And we have full confidence that we will meet the design specifications of the system. Our early access program will go throughout August and into September with initial customer feedback expected in the next few weeks. The program is designed to exercise both our consumable and instrument manufacturing capabilities, as well as our commercial infrastructure. As a reminder, MiSeq uses the same SBS chemistry that's enabled researchers to generate over 1,700 publications, allowing HiSeq and MiSeq to complement each other in powerful and unique ways. The response to MiSeq has been extremely positive. We began taking orders in April, and we've now booked more than 135 systems. Customers have identified numerous applications where MiSeq offers distinct advantages, such as targeted resequencing, small whole genome sequencing, clinical and screening applications and QC and quantification for high-throughput labs. It's interesting to note that more than half the orders for MiSeq are from customers that are new to Illumina. From an operations perspective, we are on track to ship in volume in the fourth quarter. However, we expect to carry significant backlog in instruments for the next few quarters as we scale manufacturing to meet demand. During the quarter, we highlighted several applications that compared MiSeq to HiSeq, as well as the competitive platforms. These comparisons have consistently demonstrated MiSeq accuracy, rapid turnaround time and simplified workflow. With regard to funding, the global environment is somewhat uncertain. On one hand, we see some large incremental funding being proposed in Europe, but in the U.S., we have seen some funding discontinuities related to the 2011 continuing resolution, the stimulus program and uncertainty around the 2012 budget. Overall, we continue to believe that the funding allocations globally will further genetic analysis tools, in particular, next-generation sequencing. Our future growth will be fueled by our ability to continue our historic pattern of innovation. Our pipeline remains strong on the heels of some recent exciting product launches, including MiSeq, the v3 SBS kits, the Omni5-Quad and the TruSeq Custom Enrichment kits. In summary, Q2 was yet another strong quarter. We grew revenue 36% year-over-year and grew sequentially, without the benefit of a backlog associated with the Genome Analyzer trade-in program. We expanded gross margin, sequentially, to 69% and had record operating margins of 36%, while generating $71 million of cash flow from operations. Thank you for your time, and we'll now open the lines for questions.

[Operator Instructions] And our first question comes from the line of Tycho Peterson with JPMorgan. Tycho Peterson - JP Morgan Chase & Co: Maybe Jay, first question on GWAS, nice recovery there, you had talked recently about a lot of those dollars being hard to track. Are you seeing the funding for GWAS pick up a little bit and talk about maybe some of the leading indicators there?

We've worked hard on tracking that funding. And we have seen some reasonable-sized allocations into the GWAS market. The difficulty in sort of translating that to specific orders is really figuring out where the funds are going in terms of exactly which labs and how long those labs are holding the funds before they actually place orders. Having said that, as you pointed out, we're really pleased with the trend lines in Q2, and are optimistic about how the market is going to recover into the next few quarters and into next year. Tycho Peterson - JP Morgan Chase & Co: And as we think about MiSeq growing out, I think Christian, you made a comment about additional sales and marketing allocated to MiSeq, can you just talk either quantitatively or qualitatively about what we should be thinking about for additional cost?

I probably won't get into the quantification but what we're looking at is additional field service staff because we do expect a pretty big ramp of the product. We initially expect some additional sales staff as we start to penetrate into different customer segments that we haven’t really penetrated into before, so we'll see some of that in the back half. And then, there's just the typical expenses associated with major new product launch, the marketing expenses, the training expenses associated with not only training the customers on the system but also training our internal folks, so that they can deliver a great experience. So those are really kind of incremental costs that we see kind of rolling into the sales and marketing line over probably later in the third quarter and in the fourth quarter. But quantitatively, that's what we're looking at. Tycho Peterson - JP Morgan Chase & Co: And then last one, you've had Epicentre under your belt for a couple months now, just talk a little bit about how that business has tracked and your ability to kind of leverage it across the portfolio?

Yes, Epicentre has been really strong. There's a lot of excitement along the Nextera technology in particular. We're obviously leveraging their expertise with respect to Nextera and using that extensively in our product development programs. And so, we expect to see new products coming from that. They also had a nice business beforehand, it was pretty reasonably small, but having the Illumina brand kind of behind it has helped them grow. And so from a revenue perspective and operating margin perspective, they've exceeded our expectations. And so, we're quite pleased with how that's going so far.

We also expect some potential cost savings to come from the quarter from some of their enzymes into the portfolio, replacing third-party enzymes that we purchased. That probably won't show up until next year. But there're active development programs that are underway now.

But it should be quite reasonably meaningful. I mean I think those are important things that we're working on.

Our next question comes from the line of Ross Muken with Deutsche Bank.

Can you talk a bit about sort of the pacing of HiSeq placements and how we're supposed to think about sort of the customer trade off of certain demand for HiSeq versus MiSeq as we sort of transition through the end of this year, and obviously in '12 and put that into context of sort of what you've implied in the guidance on the revenue line?

I guess first thing, I'd say is we don't expect much in the way of customers trading off HiSeqs for MiSeqs. On the margin, we may have a bit of that but not enough to move either number materially. In terms of overall HiSeq demand, we continue to be confident in what's happening with the HiSeq product line. We've obviously just significantly increased the throughput of the system again. We now are at the place in Q2 and into Q3 where we've established a new baseline, shipment rate for the product. And that is one that will now begin to grow quarter-to-quarter hopefully, the revenue line in terms of overall instruments. That line can bounce around a little bit quarter-to-quarter. But we've totally flushed out the backlog we had from the Genome Analyzer trade-in program, and we're now down to the basal rate of new demand for HiSeqs. In terms of MiSeq specifically, we're very early. Obviously initial demand has been quite strong. Once we get these units into the field, our expectations that customers are going to be delighted with these units. And we're going to build a very strong business around MiSeq and the associated consumables.

And I guess to my second part, for Christian, how are we thinking about how those sort of assumptions translate into kind of the midpoint of the revenue range? Because obviously, the implication, and I think what concerns some people is it implies a fairly significant deceleration and while obviously the comps are tougher, relative to Jay's comment, it seems like there's a bit of confidence in sort of the ability to sequentially see improvement in sort of the HiSeq placements and obviously, we get MiSeq. So I'm just trying to understand sort of the level of conservatism or what's sort of being reflected at the midpoint from just a base assumption perspective? From just the sequencing business.

Sure. Well, Ross, I mean the first thing to say is we actually raised our guidance off of what we provided back in January. So I think the way we look at the HiSeq business, we continue to see a robust demand curve for that. And the only thing that you think about that could temper that demand curve is that there is some modest concern for funding. I think that as Jay pointed out in his remarks, we still firmly believe that next-generation sequencing, for example, is really at the front of the line in terms of funding allocations and so, but I do think that we are kind of monitoring funding, particularly for 2012 if that budget gets put together in the United States. We see some nice signs in Europe where we are seeing some funding. But at the end of the day, I think HiSeqs are going to be at a pretty steady rate. And the good news is that you continue to build that install base every single quarter and drive the sequencing consumables that have very high gross margins. And that will help that, plus the placements will really help us continue to grow for the rest of this year and even in the next year as well.

In terms of MiSeq, I'd say in the guidance it’s immaterial impact in Q3 and modest contribution in Q4 is what we certainly included in our guidance.

That's right. I think we have every expectation that we're going to have a very successful launch. But as a company, we've historically been pretty conservative and anytime you're launching a new product, you really want to make sure it gets off to a good start.

Okay, that helps. Clear enough for me. And just in terms of some of the early access experience with the MiSeq and how it's kind of comparing on a competitive basis and what types of applications are being used, what are the 1 or 2 kind of areas where you're seeing the most, kind of, interest from the customer base? And what are the sort of specific tactical advantages customers are highlighting on a sort of competitive basis?

The early access program has just begun, Ross. So we don't have yet feedback from the field. Although we do expect to begin to get that in the next few weeks. We have gotten feedback from some customer experiences that they've had with the system inside of Illumina. And that feedback has been incredibly positive about the design of the system, the ease of interface. The system is incredibly easy to set up and run. In fact, as you're just describing how the unit operates, one of our researchers yesterday was interesting, he said to me, we walked our customers through how the basic setup of the system is, and in a matter of minutes, you just told the person that you just set up a run and its ready to go. And the customer didn't even know they were really working through all of that. So that's a very dramatic difference from how, what it takes to set up competitive systems. In terms of applications, I think the amplicon sequencing is certainly one of the very major areas that people are looking at because it's so much less expensive to do that on a product like MiSeq. You can get equivalent turnaround times from compared to the traditional capillary type of technology. Small genome sequencing is going to be a major application for bacterial sequencing. Probably the most exciting area that's brand new is clinical applications of MiSeq. We have a very large number of customers coming to us saying that they want to build targeted clinical panels. And this ties directly to the new Custom Enrichment kit that we've just recently released, which makes it very easy for customers to design and implement these targeted panels on a product like MiSeq. And it's got the ideal throughput range for most of the types of panel that customers want to create.

Another anecdote that we've heard just in the last day or so from customers that they're going to use the MiSeq system in their hospital to do MRSA testing. And they think the turnaround is fast enough, and they can set it up in their hospital to use it. That's a whole different area for a company like Illumina to get into. And I think it actually shows a lot of potential for the system in a number of different applications.

Our next question comes from the line of Doug Schenkel with Cowen.

I've just been playing with the model a little bit, and I'm trying to get at the components of growth that would get you to the second half guidance. The challenge I'm having is if microarrays continue to hold up, if you continue to place microarray instrumentation at level similar to what you've done, at least in the last couple of quarters, it seems like your guidance implies that there's going to be a pretty significant moderation in Q3 relative to Q2 in terms of the number of HiSeq placements. Given that you did talk about having worked through a lot of the backlog in Q1, I just want to make sure that's correct. Is this the quarter where we should be plugging at a much lower HiSeq placement number versus Q2?

Well, we did say in the script that Q2 was down from Q1. There was a little bit of residual backlog carryover but not that much into Q2. So it will clearly be, in this Q2, Q3 range that we'll get to get to the true baseline rate of new HiSeq shipments. And as I said, we expect that, that will pretty directly reflect the incoming order rate for HiSeq.

Okay. And then you talked about that steady rate of underlying demand or consistent placements for HiSeq moving forward. Is there any concern that the pace of that might slow further over the next several quarters given the funding environment, where you are in penetrating the addressable market, services, alternatives or any other dynamics or do you have confidence that this Q3 run rate is probably where you're going to level up for the foreseeable future?

No specific reason to anticipate it going down and in fact, obviously, we're doing everything we can to make the steady-state number increase. One factor to the upside potentially over the next 6 to 12 months is the fact that the NHGRI budgets are coming up for renewal. And those have been really held back here. People have been waiting to know at the genome center level what their allocation is going to be from that pool of funds. And those results should be released over the next quarter or so. And that may release some pent up demand, potential pent up demand from genome centers. In terms of the overall funding environment, we are cautious about it, I guess is the way we would characterize it. There have been some discontinuities in the U.S. in a couple of funds. There is some worry about what's going to happen in 2012. But we really feel strongly that sequencing is getting an increasing mind share from researchers, from the granting agencies. And we continue to be a beneficiary of sort of the disproportionate allocation of those funds. So I think we're feeling good about the HiSeq pattern going forward. Obviously, it could vary a little bit from quarter-to-quarter. But we don't have any sort of lingering worries about it, I'd say.

Okay. And if I can sneak in one more, were there any instances where revenue was delayed or lost specifically relating to the funding environment in Q2?

Well, I don't know of any specific situations like that. I mean researchers are always making their own individual decisions about whether to place the specific orders or whether they hesitate because of funding. And I don't know many specific case like that. Even if it did happen in the second quarter, it probably happened 2Q last year and Q2 year before that as well.

Nothing out of the ordinary, okay.

Nothing that I'm aware of, yes.

Our next question comes from the line of Quintin Lai with Robert W. Baird. Quintin Lai - Robert W. Baird & Co. Incorporated: You've been able to increase the throughput via your kits going from v2 to v3. You've got MiSeq, other competitors have got some of the smaller boxes out there, with respect to kind of your outlook for HiSeq placements, is the assumption that many more of those systems are going to be new customers and competitive takeaways versus current customers expanding capacity given the fact that in a way your kind of expanding the capacity of the existing systems by going from v2 to v3?

Well, we're certainly are doing that, Quintin, but remember there is a very significant elasticity in this market. And the effect of going to v3 is to decrease the cost per sample. And that lets customers run more samples. Our expectation is that they’ll continue to fill up the capacity of the units. And the ultimate limitation becomes how much funding they're able to get to run sequencing. One short-term issue that a few customers have had, of course, is that once we step throughput up so significantly, for some applications, they now have to multiplex samples where they didn't have to before, where they could run one sample per lane, for example, if they were running something less than a human genome. And now there's so much capacity per lane that they have to put multiple samples in the lane, which requires them to alter their sample prep and do some indexing. And the fact that we've pushed that throughput so high has created a bit of a vacuum behind HiSeq, which we expect to fill with MiSeq. And in some ways, we're really creating the demand for these lower throughput and faster turnaround platforms underneath a very high-end HiSeq system. Quintin Lai - Robert W. Baird & Co. Incorporated: Several of us are up here at in ACC in Atlanta. And there continues to be growing exciting over sequencing, clinical sequencing. Given how fast the prices have come down from a services model, Jay, what do you think, now that we're somewhat a few quarters into the services model, do you see clinical sequencing, once it becomes more widespread, being more of a services model or do you anticipate hospitals doing it themselves?

It will be a combination. There will be some applications that will tend to be a bit more centralized. But certainly, we think there will be home-brew kits that are developed and run at individual sites. There will be some of our customers, which deploy their applications broadly on our sequencers. And other customers might buy those. If you look at some of the early examples, there are some that are being mainly run in CLIA lab settings, and so you probably call that a service, I guess. Sequenom is a great example of that. We've put out a couple of announcements with them about their adoption of HiSeq to do Trisomy 21. And that will be implemented, at least over the next few years in a CLIA lab service setting. So it will be a mixture between services and products. For us, it will be largely products. But some of our customers may run it in a service mode.

Our next question comes from the line of Amanda Murphy with William Blair. Amanda Murphy - William Blair & Company L.L.C.: This is actually a follow-up from Quintin's question on the HiSeq. You talked about the 4, sort of buckets that our potential HiSeq customers, I'm just curious, if you look over the next couple of years, is there a way to think about how the HiSeq placement might be allocated between these buckets over the longer term?

Pretty tough for us to model with any elasticity, Amanda. We clearly think that from a competitive perspective, we're in really good shape at the high end. So that gives us high confidence that most new customers coming into high throughput sequencing will select the HiSeq platform, so we feel very good about that segment. We do feel that our existing customers continue to add the incremental HiSeq into their portfolios. As we do jump the throughput up, that may be a little slower than it otherwise would have been had we not jumped up the throughput. But I think the customers will continue to do that, so that would be a significant factor as well. They still a have a fairly large install base of Genome Analyzers. And we expect over the next few years, a material number of those customers to trade in Genome Analyzers for HiSeq but to do that at more normalized pricing than the promotional trade-ins. Not a lot of quantitative guidance there, I realize, but... Amanda Murphy - William Blair & Company L.L.C.: A healthy -- in terms of the Genome Analyzer refurbished market, is there -- would you expect that to be a key part of it, or would you expect those guys to really shift to the HiSeq?

Well, we don't expect that to be a big market. The Genome Analyzer is low enough in throughput compared to the newest versions of HiSeq for most applications customers will either move up to a HiSeq or down to a MiSeq. Amanda Murphy - William Blair & Company L.L.C.: Just last one. I'm looking at the HiSeq consumables, I'm just curious if you look at the average facility across the HiSeq install base, what type of inventory do they maintain from a reagent standpoint? And how should we think about just given the transition to the v3? How should we think about them rebuilding inventory with that new kit over the next couple of quarters?

I think a typical customers run 3 to 6 weeks, some a bit longer than that in inventory. The Genome Centers might have a little bit higher inventory than a smaller lab might just because they have the funding to be able to do that, and they make sure they never run out, so I'd say that's a typical level we'd expect. We had quite a few customers who wanted to burn off a part of the v2 inventory before they start receiving the v3 kits. Well, and there's also another phenomenon occurring, our ability to deliver kits consistently on time has enabled some of customers to reduce their inventories on hand, which quite frankly is a great thing because they get fresher reagents. They don't have any risks of holding inventory when we make transitions, and it makes transitions a lot easier. So we've actually made a lot of improvements to that part of the business in the last, say, 2 or 3 quarters.

Our next question comes from the line of Bill Quirk with Piper Jaffray.

I guess, just building a couple of thematic questions here. Jay, any way to think about you mentioned new customers and new occasions for systems a couple of times during the call. Any way to think about kind of quantify for that matter, what percent of systems has been going out to we'll call it non-traditional or non-academic research clients over the past couple of quarters?

Well, I'd say the trend is slightly toward increasing commercial customers of our system. It's not a huge trend yet. But I think we will continue to see that over the next year or two. And that will be driven by customers like the Sequenoms of the world, other diagnostic laboratories buying the products both HiSeq and MiSeq. So we're roughly 80-20 now, it's a mix. And I think you could see that shift maybe as much as 5 points over the next 12 months, 18 months.

Great. And then, just curious, I was hoping to get an update on TruSeq Exome. It's been out in the market now for over 6 months, and just kind of curious to see what you guys are seeing there.

We're seeing a reasonably good uptake of the kit. There's quite a few customers who have taken deliveries of the initial demonstration kits and are testing out the product. As you know, that is a competitive market segment. So we're not going to have 100% market share in that segment. But it is one where we think the product is highly competitive, very cost effective. And so the adoption rate has been about what we expected I'd say. One of the reasons why customers adopt it is because they tell us that they like to have all of their reagents coming from us to ensure that their runs are of the highest quality. And they -- when a run fails, they can -- we can evaluate all of the elements of the workflow with Illumina rather than trying to parse out one vendor versus another. And I think that helps us because we build the system to be fully integrated with all of our other sequencing reagents.

Our next question comes from the line of Dan Arias with UBS.

Just on the MiSeq launch. I was just wondering whether you can give us a sense of the average size of orders that you see going out the door initially in 3Q, is it 2 or 3 system shipments? Is it more like 5 plus as the Genome Centers build out capacity?

Well, I think, if you look at the mean number per order, it's one. Most of the customers order one system. And that will be the case until they get them in their labs, try them out and understand how exactly the system works and how to best apply it. We've certainly gotten multiple orders for many systems in a single order, but that isn't the typical case. So if you look at that 135, the vast majority of that number would come from single unit orders at this stage.

Okay, and then on your system placement strategy, just wondering if there's any sort of a part of that strategy that involves bundling of system orders, whereby a HiSeq system will allow a MiSeq instrument at a steep discount?

We don't feel any need to discount the MiSeq. It's a premium product. We think it's got great competitive advantages. So our discount schedules are virtually nonexistent so far in that product. And we don't feel the need to have to bundle it in. Having said that, we will certainly co-sell these products. So in many laboratories, it makes tremendous sense to have some HiSeqs and some MiSeqs together. And because of the commonality of the workflow and the chemistry, they work hand in hand, as I described in my prepared remarks. And they do that in ways that we think are competitively very powerful.

Just lastly just going to Christian's comment on MRSA testing in the hospital setting, any updated thoughts on the submission of MiSeq to the FDA?

Yes, well, we are definitely working on that. We think it will be probably mid to later in 2012, but it's something that we're actively working on. We've got to get the product into the field and stabilize. That's one important ingredient of a submission is to make sure the rate of change of the product is very low. And so we need to get some time of this product in the field to make sure that it is very stable and locked down in its configuration, and then we need to put an assay on it and then do the submission. So it will be a 2012 event.

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

Is it fair to think about normalized HiSeq shipments that's in the 350 to 400 a year range? And if you won't comment on that, can you comment on whether normalized shipments are higher or lower or equivalent to normalized shipments during the Genome Analyzer cycle?

Yes, I think the latter half of that. Yes, I feel our expectation is that they would be very similar to what we saw with the Genome Analyzer.

And then my second question, should we expect an initial pop in your microarray business post the Omni5 launch in a similar fashion to what we saw when you launched the Omni2.5 chip? And if not, why not?

I think we see somewhat less of a pop because we don't have quite the pent-up demand for the 5. And the reason is that, that many of the customers who wanted to get this initial first taste of rare variant content did that with the 2.5. And the extra content on the 5 is, of course, meaningful and valuable, but it's not quite as valuable as that initial step was for the Omni2.5. And for that reason, we think there'll be less of an initial pop in comparison of the two.

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

This is actually Dane. I just got a few to run through here. It sounded like the gross margin guidance might have been tampered for the full year. I think you had said 70, and now you're saying like 69 to 70. Is there any reason for that, or is that just kind of a tweak to the guidance?

Yes, it's a tweak to the guidance, and it reflects a couple of things. One is a number of different product transitions that we're going through right now. Obviously, MiSeq launch is one of those. But we're also doing some consolidation of our manufacturing. We're moving a number of products over to Singapore. One prime example was that in the HiSeq product, we made the optics module in San Diego. But the system was made in our Hayward facility, and that's for some historical reasons of where the expertise was. And that was not as efficient as we wanted to be in the long run and so we're moving the optics module up to Hayward. In the nearer term, that means that we've got redundant labor and some redundant facilities in both plants. So there's a number of those types of product transitions that are underway. Also in some parts of our factory, in microarrays in particular, we have some excess capacity. So we could manufacture more microarrays that we are making today, so there is some unabsorbed overhead associated with that. And as we launch new chips that have more samples per chip, that problem gets worse. Because, for example, the Omni5 had that been a 2-sample product, we would have had to make twice as many arrays as we have to now because we've able to make that a 4-sample product the number of arrays we manufacture is 50% as many. So it's those types of factors that cause us to tweak the margin guidance.

I'm sorry if I missed the answer to this. But could you give some color on just the capacity that you expect to have in the fourth quarter for MiSeq production?

We haven't given any specific numbers on that, but we are intending to take advantage of the HiSeq capacity that we had. And we've planned for some time, and the resources we had allocated to HiSeq are largely fungible over to MiSeq. It's the same type of labor, skill set, same factory, same systems. And so, that's going to be a big help in ramping the manufacturing ability and consuming some of that overhead coming off of HiSeq. The part that we'll be -- 2 key challenges in ramping MiSeq extremely quickly. One is ramping the supply chain, and we've been working on that for some time and having announced this product a little earlier gave us conveniently some help in ramping the supply chain, so we could do that quite publicly with our vendors. And the second is to make sure that we don't manufacture so many that would take any risk of any systematic problems. And so it makes sense to manufacture these and somewhat in limited quantities in the first couple of quarters in order to make sure there aren't systematic problems in the system that you have to -- or then cause you to do a field retrofit. One additional factor, of course, is the reagent format for the system is unique. It's in a cartridge, and we had to build new infrastructure in our reagent manufacturing in order to fill in quality control of that cartridge. The fundamental components of the reagents of the SBS chemistry is the same, but the format and the methodology of manufacturing is quite different. So we need to ramp that piece of manufacturing as well.

One last question. Are IGN revenues included in the sequencing line or the service line?

They're in the services line.

Our next question comes from the line of Sung Ji Nam with Gleacher. Sung Ji Nam - Gleacher & Company, Inc.: For Jay, is the v3 the 300G upgrades? Just wanted to clarify.

600G. Sung Ji Nam - Gleacher & Company, Inc.: Or I'm sorry, 600G.

So I expect it was 150 to 200. But most customers were getting 300 even though the spec wasn't at 300. So it's 2x what customers were experiencing, 3x what the spec was. Sung Ji Nam - Gleacher & Company, Inc.: And obviously, you guys continue to have headroom there. And so given where the capacity is out there, next-gen sequencing capacity is out there, is there continuous improvement in terms of throughput, something you guys will continue to pursue going forward?

We think that's critically important. The net effect of us having the ability to increase the throughput per unit time is reducing the cost of doing genome sequencing. And that's what the market wants. It's what it needs. There's enormous elasticity left in this market. And it's what's going to get us all to the $1,000 genome that we think open up massive new sequencing market opportunities, so we are very focused there. And one thing I think that we will do in a more measured way perhaps is, the pace of change has been quite quick in this marketplace as you know. And our customers have given us feedback that in some cases, the pace of change is too fast. So we change the reagents or the software or make slight hardware changes at a pace that's difficult for them to absorb. And so what we probably will do in the future is bundle more of these changes together, and slow -- you have fewer incremental changes and have more larger collections of changes at once. Sung Ji Nam - Gleacher & Company, Inc.: In terms of the MiSeq platform, you talked about 50% of the customers coming from non-Illumina customers. And the other 50%, are they former sequencing -- researchers that are used to sequencing before, or are these kind of new customers? And I guess to that effect, how much impact is MiSeq having in terms of the microarray market, including your microarray business? Is there any cannibalization there or a range with some kind of the current microarray users potentially switching to MiSeq?

Yes, and to be clear, the number we gave was customers that were not previously sequencing customers of ours. So they could have been a customer that was using our microarrays at some point. But that's an impressive number, we think, that are coming in today. I don't have it at my fingertips, the number of them who have never sequenced before, so I don't exactly what that number is. We might have that in some of our databases, but I don't have it at my fingertips. I think in terms of the transition of funding, there certainly is a trend line of funding being pushed more towards sequencing from lots of other technologies, some of that coming from microarrays as well, particularly in the expression side as we've talked about. Because sequencing is fundamentally a superior way to do expression that we think the expression market over next few years will move in a majority way towards sequencing. In fact, it's moving quite quickly towards sequencing. In genotyping, it will move much less slowly. But there will be some movement as well, particularly as whole-exome sequencing and low pass sequencing becomes ever cheaper. There'll be some conversion of microarray dollars over towards sequencing. But the advantage, of course, for us is that we participate in both markets. Sung Ji Nam - Gleacher & Company, Inc.: Great. And one last one for me, in terms of the bioinformatics side of things, how much of a bottleneck is it for further adoption of next-gen sequencing, and what's your strategy in terms of alleviating that bottleneck?

We've made tremendous progress in the bioinformatics area, particularly in reducing the sides of the data streams and improving the automation of doing genome assembly. We have a number of significant programs underway that are going to make that even easier, so that you don't require computer experts to be able to do the post-processing of the genome. So I think that part of the informatics problem in the next 6 to 12 months will be really quite well in hand. I think, the risk maybe you're alluding to here and the one that we're working next on is the ability of the entire community to be able to extract biological relevance from the sequences in that scenario where there's tremendous focus, lots of academics working on the problem, start-up companies being funded and activities that we're working on, some activities in partnership with others to try to increase the rate of the world's ability to understand what the genome means. And that's where any risk of slowing down sequencing would come more in that area than in just the pure data processing part. I might add one additional comment to that is in MiSeq where in general the customers will be less sophisticated, we do think it's very important to even take a bigger step and that is to alleviate their ability to have a competing infrastructure at all. And so, we are working very aggressively on our cloud program to give MiSeq customers the ability to have no local computers whatsoever, and have their data flow up seamlessly into the cloud and be able to be stored and analyzed in a cloud environment.

Our next question comes from the line of Zarak Khurshid with Wedbush.

I was curious with the strength in HiScanSQs, how are those users typically using the instrument? Are they biased one way or another? What kind of consumable pull-through are they drawing versus HiSeq customers?

Our initial thought was that it was largely going to be array customers who are migrating towards sequencing. I think what we're seeing is at least as many customers that come at it from the sequencing side and then do occasional array use. So that part has been a bit of a surprise to us and probably is -- counts in part for the reason for our overperformance there in the last 6 to 9 months in terms of ScanSQs. In terms of the reagent pull-through, I don't have a breakdown of those units separate from the other parts of the install base.

Great. And just following up, how are things going with Helixis and BeadXpress?

Well, Helixis in particular, we basically had a record quarter of shipments, and we've been scaling that up every single quarter. It's a very disruptive box because it sells at a very low price and packs a really big punch in terms of its performance. And so, we're seeing nice uptick of the system, particularly outside of the United States. We've had very strong demand outside the United States. And so we're pretty happy with that. I think the other thing too is that you know it's a -- we're fully integrated as a company. And also Helixis, we're already developing new products for Helixis reagents and boxes and all kinds of different things. And so, they're fully integrated into our R&D programs, our manufacturing operations program. We just started manufacturing Helixis instruments in Singapore at the tail end of June. So we'll start getting some benefit from that in the third quarter from a tax perspective. BeadXpress continues to track along at a more steady-state demand level both on the reagent side and on the instrument side. It has its unique place in the market. But as we continue to see sequencing, it's something like the MiSeq system, I think, there's a lot of excitement around that. It's interesting to see how BeadXpress will continue to track along over next few years.

Sounds great, Christian. I just want to go back to your earlier comment on the MRSA opportunity. So will that be for epidemiological studies, or are people actually thinking about screening or confirmation use in the hospital?

I'm not that close to it. This was an anecdote that one of our folks told me yesterday. And so, I don't have the exact customer, but it was really basically a screening tool where they would screen samples coming in for patients in the ICU. I think, it's early days, but that does just gives you some perspective or visualization on how a system like this could be used in the hospital setting in places where we never even thought of it before. And I think that's what's so amazing about the system, the workflow and the integration of the system. So you have the clustering, the analysis, the -- and as Jay pointed out, we'll have a cloud where you don't even need compute infrastructure. It allows you to put the system in places where you probably couldn't put a sequencing system even just a year or two ago.

That type of application requires an end to end turnaround in a matter of a few hours. And so MiSeq for doing a short sequencing like 36 base reads is perfect because in particular, the ease of the sample prep and how fast you can do the sample prep.

That's really the key, it's end to end from the blood or whatever sample to the answer. I think people forget that sample prep on many systems takes days -- takes days to complete. This is a workflow that gets you within a shift, a complete answer. So it can be used in situations where turnaround is critical.

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

Christian, I wonder if you could break out emerging market growth in particular China. What's your revenue contribution from the geographies, and what's the growth rate?

We don't break it out at the country level. But in general in the second quarter, both Asia and Europe had stronger growth in the U.S. overall for the second quarter.

I will say that we were pleasantly surprised with our performance in Japan. We thought there might be a little bit of risk there, and we did just fine in Japan in the second quarter. And qualitatively in China, we do think it's going to ultimately be a huge opportunity. Our growth there is pretty good. BGI obviously is our largest customer. But outside of that one customer, the opportunities are enormous in China in the long run.

Jay, have you seen any customers move from a rare variant project straightly -- straight over to sequencing?

They haven't moved from rare variants because of some deduction from the rare variant project then gone to sequencing. What we have seen people do is do both in parallel or do them in the alternative. And there are some interesting studies underway now where there's comparisons being done between, say, an Omni2.5 where a variant study and a low pass sequencing project where your sequencing samples, let's say 4x, which obviously drives the costs way down from doing a 30x genome and then taking those 2 data sets and comparing them to understand what the relative value is of those 2 technology approaches. So it's interesting to see how those studies turn out, but there's a number of those underway.

And then have you seen any impact from service based sequencing business models, and what's your backlog like for genomes and turnaround time?

You mean impact on our system sales, is that what you're asking?

Yes.

We haven't really seen anything there that we know of where we've lost a system sale because of services. And certainly, there are some accounts that are evaluating those 2 options. And there will be some customers who decide to go one way or the other. We do think services is going to be a niche market but, one, we need to participate in and have participated in for years. In terms of the progression of that business, we announced a couple of significant deals that happened in the second quarter, so our backlog is healthy. Our turnaround time is running...

Our turnaround, it's under 90 days. And if you look at in the first quarter and early in the second quarter, we went through a pretty significant scale up because we had such a large backlog of genomes. And so coming out of that at the end of the -- at the end of the second quarter, our turnaround times have gotten significantly below 90 days. And I think the beautiful thing about this technology is that the sample prep and the workflow even on the HiSeq system is very short and compact. And so I think we can operate in a quick turnaround mode.

And because we manufacture the sequencers ourselves, it's very easy for us to incrementally scale the capacity if we need to. So if we had a large order or the potential of a large order, we could always add x number of HiSeqs to the manufacturing line or to the services facility quite quickly if we needed to do that. Plus, the other thing is that we can the services lab to test new improvements for higher throughput, better performance, et cetera, et cetera. And so that helps us be very nicely profitable in the services business.

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

I wanted to have you just expand a little bit on the gross margin commentary. Where do you see gross margin as you exit the year, and how is the gross margin expanding over the next 12 to 18 months, maybe we can talk about some of the dynamics?

Yes. Our expectation is that we're going to continue to inch up the gross margins. We feel pretty good about the evolution of the product mix. We think that particularly with the growing install base of HiSeqs that our consumable revenues will increase as a percentage. As we've talked about before, we had a bump in the price of our kits when the v3s were launched. So that will help as the customers all get transitioned over to v3 that will help the actual margin on those kits. I think we're working on some of the capacity issues that I talked about earlier to make sure that we've got that capacity well allocated. And some of the short-term other factors I talked about in these product transitions are all being done because in the long run, we will have more effective and more efficient manufacturing. So those may in the short run be some extra cost, but in the long run, it will be cheaper manufacturing. And that's true also for the products that we're moving to Singapore. We do better from a cost perspective in Singapore than we do when we manufacture in the U.S. So I think all of those factors give us the confidence that we're going to continue to be able to inch the gross margins up over 70%.

And in terms of your comments you just made about Europe. You said Europe was stronger than the U.S., can you just tease that out a little bit? Are there any products in particular that were highlights in Europe this quarter?

No, I don't think there's anything that particularly stood out. But Europe did have a surprisingly strong performance, particularly in the order side in the quarters, so we are pleased with that. And Asia did well as well on a relative basis due. I think one of the reasons on a relative basis they did better is because of some of the funding. These continuities we talked about in the U.S., we did see -- because of the delay in getting the '11 budget approved, we saw researchers that were not exactly sure how much funding they were going to get in the first quarter and into the second quarter. And so they were just delaying their spending a bit. So we have had some of those effects in the U.S. But despite that, we think we did pretty well in Q2.

And just one last question. Just in terms of the revenue guidance for the year, just taking the midpoint of the guidance to second half of the year's revenue is lower than the first half. So is the delta there that the trade-in program has rolled off, or what are the other pieces there leading to the second half slower than the first? Just so I'm clear.

I guess, just to reiterate, we've increased our guidance from what we gave to the street in January. And we've given guidance, and we think is -- represents very makeable numbers for us. We do have some product transitions underway. You know, we're in the very early stages of the MiSeq launch. So how much it contributes in the second half is an uncertain factor. And we are cautious with regard to U.S. funding, and we mentioned that in the script that there have been these factors that are very difficult for us to quantify at this point, and so we're in a bit of a wait and see mode there. And we've directly been, you know, on the conservative side of center in terms of our guidance.

Our next question comes from the line of Paul Knight with Steel. Paul Knight - Credit Agricole Securities (USA) Inc.: Question on the modeling, the share count trending down now, it looks to be in the glass in the quarter just posted.

That was the full impact of the buyback we did in connection with the convertible offering in March, so we got the full quarter benefit of that in Q2. Paul Knight - Credit Agricole Securities (USA) Inc.: And then, Jay, as you see new users move into sequencing, do you think that's the same trend in any geography?

Probably a little bit more in Asia. I mean, Asia has historically lagged behind in new technology launches 6 to 12 months. So I'd say probably Asia will be more new users. I think that in part is -- if you think about the products separately, that will be true. If you think about sequencing in aggregate, the new users on MiSeq are -- the big bowl initially is going to be in the U.S. There is just a tremendous opportunity here on MiSeq for us to go get a bunch of new customers to convert people from doing capillary sequencing and to push very aggressively into these emerging clinical diagnostic segment. Paul Knight - Credit Agricole Securities (USA) Inc.: And then last for genome costs are really decreasing in the major centers this year. Are they turning around and demanding more CapEx to buy sequencers? Still in that...

Well, we hope so. We hope going forward they will. The past couple of quarters have been relatively quiet at the Genome Centers. And we think one of the key reasons has been that the funding cycle is just coming up now, so they have applied for their new grants. There's uncertainty about how many Genome Centers will be funded and at what level would, whether there'll be some new centers funded or not. And if so I think that has cost for the past 6 months some conservatism in additional capital spending. I think, we'll know how that will turn out in the next few months, and the aggregate pie is all there. There's a question about the distribution, which centers get how much money, and that will hopefully then begin to flow through in the form of new purchases.

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

So I just want to spend a minute on the MiSeq cycle. You guys touched on a couple of items regarding investment in the informatics potential and then the cloud side. I'm just wondering when we kind of look at those few items, I think, when is the launch of this product? When do you expect that will leave the markets to be fully available to you, is it sort of at launch based in the third quarter, or is it really sometime in early 2012?

We think fairly quickly. Our informatics work is going on quite aggressively, and I think our cloud will become available in very short orders. So I don't think that's going to be a bottleneck. The sample prep is all very tightly integrated in this system. In terms of available market segments, probably the only one that won't be initially available to us will be the FDA approved market segment because the system won’t yet have gone through a 510(k). One product in particular that was critically important is the Custom Enrichment kit. And we think that is a critical fundamental technology for widespread use of MiSeq because many of the applications here will be targeted genomic sequencing and making it easy for customers to develop, and get those kits manufactured quickly is very important to get adoption in that segment.

Just one other question on informatics, just given what we're seeing on earnings around active funding, are you aware of any sort of maybe more midsize labs who are still doing informatics themselves and making budgetary decisions, whereby they aren't able to take on more sequencing capacity or utilization of the sequences they have because of these [indiscernible] bottlenecks?

Not really. That certainly out there is a theoretical problem that's been much discussed. But I don't know of any specific case where the customer said, we're not going to place the sequencing order because we can't process the data or we can't get computers to do that. We think the risk is higher in a market segment where many of the MiSeq customers will be, which is one of the reasons the cloud initiative is important to make the informatics truly a variable cost for those customers. So there is no CapEx, and there is no on-site management or informatics expertise required.

Ladies and gentlemen, that does conclude the time we have available for questions. I'll turn the call back over to management for any closing remarks.

Great. 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. Thanks 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 very much.

Ladies and gentlemen, thank you for your participation in today's conference. That does conclude the presentation. You may disconnect. Have a wonderful day.