Illumina, Inc. (ILMN) Q1 2010 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the First Quarter 2010 Illumina Inc. Earnings Conference Call. My name is Jasmine, and I will be your operator for today. [Operator Instructions] I would now like to turn the conference over to your host for today, Mr. Peter Fromen, Senior Director of Investor Relations. Please proceed.

Thank you, operator. Good afternoon, everyone, and welcome to our First Quarter 2010 Earnings Call. During the call, we will review our financial results released today and offer commentary on our commercial activity. After which, we will host a question-and-answer session. If you had 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, Senior Vice President and General Manager of Life Sciences and Chief Financial Officer. This call is being recorded, and the audio portion will be archived in the Investors section of our website. It is our intent that all forward-looking statements regarding our expected financial results and commercial activity made during today's call, 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 Securities and Exchange Commission, including Forms 10-Q and 10-K. Before I turn the call over to Christian, I want to let you know that we will participate in the Deutsche Bank Health Care Conference during the week of May 3; the Baird Growth Stock Conference in Chicago, the week of May 17; and the Goldman Sachs Health Care Conference in Los Angeles, the week of June 14. For those of you unable to attend any of the upcoming conferences, we encourage you to listen to the webcast presentation, which will be available through the Investor Relations section of our website. With that, I'll now turn the call over to Christian.

Good afternoon, everyone, and thank you for joining us today. During today's call, I will review our first quarter financial results. And then Jay will discuss our commercial progress, and provide an update on the state of our business and markets. In the first quarter, we recorded $192 million of total revenue. This represents growth of 16% over Q1 of last year. Product revenue was $174 million, growing 11% over the prior-year period, and was led by significant growth in our sequencing products. While our Microarray business declined relative to Q1 2009, revenue was up sequentially for the second consecutive quarter. And we now believe our Array business has stabilized. Consumables revenue for the quarter was $114 million compared to $103 million in Q1 of 2009. This represents a year-over-year growth of 11%, and was driven by strong growth in sequencing consumables, offset by a decline in total microarray consumables. Annualized sequencing consumable pull through on the Genome Analyzer was above our projected range of $150,000 to $200,000 per system. Despite lower revenue on a year-over-year basis, microarray consumables still represent more than half of our total consumables revenue. The decline relative to last year was primarily attributable to lower sales of whole-genome genotyping arrays, but was partially offset by growth in focus content arrays. Annualized microarray consumable pull through on the installed base of array readers was in our targeted range of $400,000 to $500,000 per system. Total instrument revenue for the quarter was $57 million, up 13% compared to $50 million in Q1 of last year, and was based largely on the growth of the sale of sequencing systems. Instrument revenue declined sequentially, as we began to transition the HiSeq 2000 into our sequencing portfolio. Initial demand for the HiSeq has been strong. However, as we communicated last quarter, our manufacturing capacity was constrained in Q1, resulting in a limited number of shipments. We expect to be manufacturing the HiSeq system at significant volumes by the end of the second quarter. The sequential decline in sequencing instrument revenue was slightly offset by microarray instrument revenue, which grew both sequentially and on a year-over-year basis. Services and other revenue, which includes genotyping and sequencing services, as well as instrument maintenance contracts was $18 million compared to $9 million in Q1 of last year. The primary driver of year-over-year growth was the increase in service maintenance contracts associated with our growing installed base of sequencing systems. However, we also had a particularly strong quarter on our FastTrack Services business due to the completion of a few large contracts. Before discussing our gross margins and operating expenses for the quarter, I'd like to note that we recorded a pretax amount of $17 million related to non-cash stock-based compensation. This impacted our EPS by a tax-adjusted amount of $0.09 per pro forma diluted share for the quarter. I want to remind you that going forward, we will 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 our non-GAAP measures included in today's earnings release. Total cost of revenue for the quarter was $60 million compared to $56 million in Q1 of 2009. The Q1 2010 cost includes stock-based compensation expense of $1.3 million, compared to $1.4 million in the prior-year period. Excluding this expense and $1.6 million associated with the amortization of intangibles, non-GAAP gross margin was 70.3%. This compares to 71.2% last quarter and 68.3% in the first quarter of 2009, a year-over-year improvement of 200 basis points, attributed to the reduced cost and beneficial mix of sequencing consumables. From a sequential perspective, gross margins declined only slightly from the fourth quarter, primarily due to a lower mix of Genome Analyzers within our total instrument revenue. As we indicated in our R&D day in January, many factors are forecasted to influence our 2010 gross margin. For example, the lower initial margin on the HiSeq compared to the GA2 will depress total instrument margins somewhat, as HiSeq becomes a greater proportion of total instrument revenue. Additionally, our GA2 to HiSeq trade-in programs will lower margins in the back half of the year, as we deliver on the trade-in transactions. On the positive side, the increasing proportion of revenue that is generated by our consumables will favorably impact gross margins. Pricing at our markets continue to be relatively stable. Overall, ASPs for BeadChips increased, as an increase in ASPs for whole-genome arrays was slightly offset by lower ASPs in our focus content chips, due to a number of large sample volume purchase orders that incurred higher discounts. Moving to operating expenses, research and development expenses were $44 million compared to $33 million in the comparable period of 2009, and included $5.9 million and $4.6 million, respectively, in non-cash stock compensation expense. Excluding stock comp expense and $0.9 million of accrued contingent compensation in both periods and $2 million of acquired research and development in Q1 2009, R&D expenses were $37 million or 19.2% of revenue, compared to $25 million or 15.2% of revenue in the prior-year period. Relative to fourth quarter of 2009, non-GAAP R&D expense grew approximately $3 million. Approximately half of this increase was related to non-recurring project expenses, and the remainder was associated with increased benefit rates and hiring. SG&A expenses were $50 million compared to $43 million in the first quarter of 2009, including stock compensation expense of $9.8 million and $8.8 million, respectively. Excluding these non-cash expenses, SG&A was $40 million or 21.1% of revenue, compared to $34 million or 20.5% of revenue in the prior-year period. This increase is primarily due to increased head count. Relative to the fourth quarter, non-GAAP SG&A expense increased by less than $1 million, largely attributable to new benefit rates. GAAP operating profit for the first quarter was $38 million. Excluding non-cash expenses outlined earlier, our non-GAAP operating profit for the quarter was $58 million or 30.1% of revenue, compared to $54 million or 32.6% of revenue in the first quarter of last year. GAAP interest and other expense in the first quarter included approximately $5.1 million in non-cash interest expense associated with our outstanding convertible debt. Excluding this amount, pro forma interest and other income was $0.2 million, which includes approximately $1.1 million of negative foreign currency effect due to the revaluation of monetary assets outside the United States. Our non-GAAP tax rate for the quarter was 35.1% compared to 33.4% last quarter. Our Q1 tax rate was higher than the expected annualized tax rate, given that the U.S. R&D tax credit has not yet passed for fiscal 2010. We continue to expect this measure to be passed and retroactively applied at some point this year. We reported GAAP net income of $21 million or $0.16 per diluted share, compared to net income of $19 million or $0.14 per diluted share in the prior-year period. Excluding non-cash interest expense and the other items identified in our press release and net of pro forma tax expense, non-GAAP net income was $27 million or $0.21 per pro forma diluted share, compared to $25 million or $0.20 per pro forma diluted share in the first quarter of 2009. During the first quarter, we generated $55 million in cash flow from operations. We used approximately $10 million for capital expenditures, resulting in $45 million in free cash flow. This compares to $38 million in the first quarter of last year. Q1 free cash flow benefited from strong collections during the quarter, which also helped to lower our DSO to 74 days, down from 80 days in the fourth quarter and 94 days in the third quarter of last year. Inventory balances increased to approximately $101 million, related primarily to the scale up of instrument manufacturing. Depreciation and amortization expenses for the quarter were approximately $9 million. We ended the quarter with approximately $748 million in cash and investments. As you are aware, we have elected to move away from providing quarterly guidance and now only provide annual guidance. Consistent with that approach, we are not providing an update to guidance today. Going forward, we will update guidance periodically, which may not be every quarter. And 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 our Q&A session. Jay?

Good afternoon, everyone, and thank you for joining us today. We're off to a strong start in 2010, growing revenues 16% year-over-year and showing growth across nearly all aspects of our business. In what is historically been a seasonably soft quarter, our backlog increased by 12%, excluding the BGI deal, which means backlog continues to be at all-time record levels. The growth was led primarily by strength in our Sequencing business. In addition to strong order and revenue results, we also expanded non-GAAP gross margins by 200 basis points year-over-year, and delivered non-GAAP operating margins above 30%, exceeding the high-end of our long-term operating model. Total Q1 revenue in our Microarray business grew sequentially for the second consecutive quarter, but declined off a difficult comp in the first quarter of 2009. Array shipments were led by the Omni1-Quad, with the 660W-Quad in second position. While the Omni1-Quad had its strongest quarters since its launch last June, our total whole-genome or GWAS microarray revenue declined sequentially and year-over-year, as compared to strong results in both prior periods. Despite these declines, we're encouraged by the fact that orders for both Genome arrays have grown sequentially for the past two quarters. Our projections for a return to growth in GWAS are largely predicated on the introduction of a rare variant content from the 1000 Genomes Project. This year, we expect to launch the Omni2.5 and Omni5 BeadChips, the next product in our whole-genome product portfolio. The development of the rare variant content for the Omni2.5 is complete. And the preliminary data indicates that the Omni2.5 will increase genomic coverage by over 50% from the 660W-Quad, and nearly 40% from the Omni1-Quad. This increase in coverage indicate there's a tremendous amount of genetic variation that simply was not represented during the first round of GWAS, due to the limited SNP content available from the HapMap project. We believe that the increased coverage of the Omni2.5 and the Omni5 will provide a very strong drive for customers to conduct rich GWAS to pursue the missing heritability in common disease. Early in the quarter, we launched the OmniExpress BeadChip, a 12-sample microarray with over 700,000 markers per sample. Later in the quarter, we enhanced the OmniExpress by incorporating the flexibility from our iSelect technology, creating the OmniExpress+. This new eight-sample product delivers the same high-quality, whole-genome content of the OmniExpress, but allows customers to add up to an additional 200,000 markers to create a semi-custom array with over 900,000 markers per sample. The OmniExpress+ is built on the third generation of our arrays, offering unparalleled flexibility at competitive price point. Total microarray instrument revenue grew both sequentially and year-over-year, primarily due to strong iScan shipments. During the quarter, we showcased our new HiScan products at the annual ABRF conference. HiScan is a new microarray scanner that incorporates innovation in optics and imaging that were developed as part of the HiSeq program. By leveraging these improvements, we scaled the sequencing throughput to 50G per run when used with the SQ module. The combined system, which we call the HiScanSQ, is what we use to refer to as Harmonia, and is the first system capable of performing microarray and sequencing applications on the same instrument. The HiScanSQ system began shipping last week and will be priced at approximately $400,000, including the cost of the cBot for sequencing sample prep. The BeadXpress platforms saw a strong demand from average Genome's [ph] customers this quarter, which led to sequential and year-over-year growth in orders and shipments for our VeraCode reagents. In our effort to further build the product and applications portfolio of the BeadXpress, following the close of the quarter, we launched our VeraCode ADME Core Panel, designed to help researchers understand the genetic variability associated with drug response and predisposition. This panel contains 184 key ADME biomarkers across 34 genes, facilitating low-cost, rapid screening of thousands of samples to predict adverse drug effects, ultimately reducing the cost of drug development and enabling more targeted therapies for personalized medicine. Turning now to our Sequencing business. We had another strong quarter as demand for next-generation sequencing continues to outpace our expectations. As most of you are aware, in January, we launched the HiSeq 2000, the next generation of Illumina sequencing technology. This platform utilizes the same SBS chemistry used in our market-leading Genome Analyzer 2X, with a completely redesigned instrument, which can now generate 200 gigabases of data per run. We're seeing some exciting throughput results in the hands of our customers, with runs generating well over 200 G, with error rate equal to or better than the Genome Analyzer. In addition to customer data, we publicly presented internal runs, where HiSeq has generated 350 G of data per run. This level of throughput equates to nearly four whole human genomes in a single run or approximately 45 G of sequence data per day. Initial demand for HiSeq has exceeded our expectations. We shipped and recognized revenue on our first production systems in Q1, and have entered Q2 with, by far, the largest instrument backlog in the company's history, even excluding BGI. We're quickly ramping our manufacturing capacity for HiSeq and believe it will exit the second quarter at scale, with the ability to meet customer demand with reasonable ship schedules. As we've mentioned before, we expect the demand for HiSeq to impact demand for the Genome Analyzer, predominantly at HiSeq customers. 85% of Q1 HiSeq orders came from outside the major Genome Centers, highlighting the wide adoption of Illumina SBS chemistry and the simplicity of HiSeq to user interface workflow. Though HiSeq didn't have an impact, we continue to see strong demand for the Genome Analyzer. In fact, Q1 GA shipments were nearly comparable to the first quarter of 2009, and enabled us to grow total sequencing instrument shipments substantially year-over-year. We expect to see demand continue for the Genome Analyzer in those labs that may not have the budgets for the HiSeq. We're continuing to support and develop the Genome Analyzer and are nearing completion of the early access program on our 95G kits. We're extremely encouraged by the data that our early access customers are generating. Not only are they achieving higher throughputs and reads up to 150 basis, but they've achieved significantly higher data quality than with our previous kits and software. With these B5 [ph] kits and software, customers have been able to generate runs up to 100 basis, with average raw read accuracy across the entire run of nearly 99.8%. Importantly, all of these improvements are accessible for the HiSeq platform. Continuously leading [ph] raw read accuracy is extremely important, as it enables customers to perform a wide variety of applications for which there is no strong reference template available, such as the noble sequencing or capturing a large structural rearrangement and somatic mutations that are inherent in complex cancer sequencing. For this reason, we believe that SBS chemistry, whether run on a GA or on the HiSeq, is the premier tool for sequence-based discovery in emerging medical applications. In summary, Q1 was off to a great start. We grew revenue year-over-year and sequentially, despite a strong Q4 and a Q1 that's typically a seasonally soft quarter. We generated non-GAAP gross margins over 70% for the second quarter in a row. Operating margin was at the high end of our long-term operating model. And we generated $45 million or $0.35 per share in free cash flow. We now believe that our Array business has stabilized, and that we have the industry leading portfolio and pipeline to capitalize on the array opportunities over the foreseeable future. We're engaged in the most exciting product launch in the company's history with the shipment of our first HiSeq unit, and see a market with no signs of slowing. Initial demand exceeded our expectations, and we're scaling manufacturing the system accordingly. Lastly, we continue to build on an already record backlog levels, which we expect to enhance our visibility for the remainder of 2010. Thank you for your time. And we'll now open the lines for your questions.

[Operator Instructions] Your first question comes from the line of Ross Muken with Deutsche Bank.

So as you embarked on sort of this product stratification strategy and you launched the HiSeq, versus sort of your initial expectation in terms of ordering patterns, the type of customers, it seems like everything has kind of gone better than planned. What was sort of the biggest surprise in all of this? And what do you think caused sort of the customer base to really gravitate to this instrument versus sort of what the buying pattern was before? And has that changed sort of your expectation for what percent sort of go forward orders, the HiSeqs sort of comprise versus the other two boxes?

I think, probably the single biggest surprise was the percentage initially right out of the box of customers that wanted to move over to HiSeq from the Genome Analyzer. That was reflected in what we saw as a response to our trade-in program, and also, the percentage in new orders that were focused on HiSeq. Despite that, we think we did pretty well on GA orders as well, and we're able to sort of maintain momentum through the quarter on the Genome Analyzer. As we look forward, I think the real reason that people are drawn to HiSeq is a combination of its key features, the high throughput and the potential for more upside even from where we are today. The ease of use that this system represents for customers, in terms of how they load flow cells and how the software works, how the reagents are delivered, are all highly appealing to customers that want to minimize the labor content of sequencing in their laboratories. So as we look out towards the rest of the year, I think, as we get through the next couple of quarters, we probably expect, compared to our original models, a somewhat higher percentage of HiSeq orders versus GAs. And the part that's probably the biggest surprise is that the smaller labs are even moving to HiSeqs. But we might have expected them to stay with the Genome Analyzers.

Your next question comes from the line of Marshall Urist with Morgan Stanley.

Question on the Array business, maybe if you could talk about what you're seeing on the whole-genome studies from an order and from a sort of shipment perspective? What types of studies are those and your kind of level of confidence in going from here to using the supplemental contents on the 2.5, and ultimately the 5? And is that what's driving better confidence around the pace of a pick up from rich GWAS?

I guess where we characterize it now, as we tried to in the script, is that we think the business has stabilized. The type of studies that customers are doing are, from a disease perspective, similar to what they were doing previously. But they're migrating now towards our Chip families that are beginning to have components of rare variant content. We think that the road map that we put out there that allows customers to sort of get started before the 2.5 and the 5 are available, is helping to encourage customers to get started with the Omni product line because of their ability to subsequently add content and get all the way up to the $5 million content, if and when they choose to and do that economically. So I think that's the motivation for the business now stabilizing. And it's our expectation, as we get into the back half and the 2.5 comes into the market, and later, the 5 comes into the market, that we're going to start to see renewed growth in the overall GWAS business.

And then just one follow up on your updated thoughts around pricing for rich GWAS chips. Given varying opinions on study size, do you think that -- should we be thinking kind of per sample ASP should be stable? Or could we see sort of ASPs come down, but that offset by volume?

Well, the pricing we will have on a per sample basis as we get into the 2.5 and the 5, will be higher than what you have traditionally seen on a per sample basis, at least over the last year or so, because of the richness of the content. So we'll be able to have pricing somewhat higher. We need to be a bit cautious about pricing them too high, because you're right, customers do need to, in general, run larger sample sizes here, and they'll be limited by their total budgets for the study. So as we get closer to launching these products, we'll be looking at those trade-off to make sure that we encourage customers to start the studies and really get aggressive in executing them. But also, that we maximize our revenue in terms of the combination of volume times price.

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

Jay, just want to, real quickly, just clarify something. You mentioned the backlog was at 12%. Was that a sequential or a year-over-year number?

That's a sequential number.

And had we not had the supply constraint in HiSeq, is it reasonable to assume that the product growth would have been up somewhat similar manner, i.e. kind of low double digits?

Customers to the backlog increase?

Yes.

Well, the instrument numbers would have been up materially. Well, we can leave at that as we've gotten supply constraints. The orders came in pretty strong during the quarter. We're really pleased with our overall order rates, in fact our order in the quarter is a record, if you discount the BGI work that we had last quarter. So we're really pleased with the overall order rates.

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

So recognizing your new policy on guidance, would you be willing to talk a little bit about how Q1 came together relative to expectations? Obviously, we didn't know what you guys we're guiding to in the first quarter, but it's probably fair to assume that the numbers were a bit better than what you expected heading into the second quarter?

Well, we've characterized it a bit. So I would say that our orders exceeded our internal plans. And as a result of that, our shipments were a bit over our internal plans as well. And we therefore do backlog, sort of in the range that we might have expected. Gross margins were sort of in the range of what we had guided. And I think we were pleased with that gross margin results. And that's probably all we're probably willing to say about it.

And then second question on HiSeq, demand is strong and yet it sounds like you actually had a really strong GA quarter. Are there instances where GAs are being sold as a bridge until a HiSeq is available? And if so how broadly is this occurring? Just trying to get a gauge on basically how stackable the GA trends are with the clearly strong demand for HiSeq.

Yes. We took the programs in place that do allow customers to bridge, where they essentially buy the GA and the HiSeq as a package deal. And that allows them to get started on the GAs and obviously, get the consumable flow going for us. And then they take delivery of HiSeq later on the year. And that was a very positive reason and a very positive program that we had that helped the GA shipments during the first quarter.

Your next question comes from the line of Dan Leonard with First Analysis.

How are you thinking about the growth in your service revenue going forward?

We've commented very consistently about that, that our service revenue bounces around dramatically quarter-to-quarter. It depends on the flow of the contracts. And those can be sometimes quite large. And if we happen to finish contracting a quarter and deliver it, service revenue can be substantial. And that was certainly what happened in this quarter. In other quarters where we don't, then the revenue can be lower. So expect that number to bounce around.

I do want to add though, Dan, that the core maintenance contract revenue is continuing to grow off a steady base. We had a very strong year last year as everyone knows in selling Genome Analyzers. And as those come off their first year warranty, we've been pretty successful at getting extended warranties, and so you see a nice increase. A matter of fact, a significant portion of the growth when you look at it this quarter was in fact related to those extended maintenance contracts. And so that's a nice recurring revenue stream at a reasonable margin for us.

And do you have any commentary you could offer or early feedback on the GA2e?

A little too early to tell.

Your next question comes from the line of Quintin Lai with Robert W. Baird.

This is actually Matt in for Quin. First question, just kind of building off of what Rob's asked, as the percentage of customers are kind of moving over from the GA to the HiSeq has increased. Can you kind of update us on how you're thinking about the trade-in program and how that will evolve over the near term?

Well, the trade-in programs, there's a couple of variance to the trade-in programs depending upon when customers took delivery of their GAs. And so those programs have definitive expiration dates. So you shouldn't expect those programs to go on indefinitely. They definitely have a fixed time period associated with them, within that period only can a customer trade-in an old GA2e.

Just secondly, Jay, there's been a lot of attention on the bracket issues going on in the courts. So just kind of wandering at a high level, what sort of implications has that unfold as you think about your business that could have?

Yes. Our oncology program, discovery program is proceeding very nicely on our labs. So we finished sequencing all of our ovarian samples, and we're now into the data analysis phase. We're watching the Myriad case with great interest. And obviously, nobody knows what the ultimate outcome is going to be of that. But I think that the underlying strategy for us is unchanged, that we will continue to pursue what we're doing in our discovery program. And we believe that Illumina can be very successful regardless of the outcome of that Myriad case. But it's something I think of great interest in the industry, something we're watching very closely.

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

I was just curious. If you think about kind of the flow-through the second and third quarter as HiSeq continues to ramp, can you maybe just talk about the impact to gross margin? Does that kind of flows throughout the year?

Well, I think what we've said in general is that you can expect -- we talked in the script about a couple of influences on gross margins because you're going to expect the net of those to represent a decreasing gross margin that don't make sense through the year, as we get through this trade-in window. And we think that will largely be taken care of by sort of end of the year. And we'll be looking again at gross margins as we get toward the end of the year and recapping those for 2011. But I think the net influence will be somewhat down in gross margins from where we reported in Q1.

And I think, John, you have to remember the -- part of that will also depend on how quickly people ramp up on the consumables, because the consumable pull-through on the HiSeq system is going to be higher. We expect them to be higher than the GA. And so that helps thinking about offsetting any of the trade-in activity. And then of course, finally, the fact that when we take a trade-in for a GA, we'll turn around and refurbish that and sell it again. And that will be a high gross margin, as we expect it to be a high gross margin sale. But obviously, there's a timing gap. And so it will be difficult to gain out how that all plays itself out from any particular quarter.

And then I know you talked about some of the kind of what happens in your ovarian sequencing and the GWAS market. But any view at all in terms of projects that are stacking up in terms of visibility for the second half? Or is that still kind of the status quo in terms of your expectations that once there is more content, those will proceed or if you have any more concrete, I guess, evidence of what will happen there?

I guess it's not concrete at this point, but we certainly have developing customer interest as we get closer to the launch of the 2.5 program. And we definitely have some seminal studies that are already on the books and committed to use these next families of chips that we're developing. And it's just a matter of getting those into the market and beginning to ship them. And once the initial data comes out, I think then, we'll really begin to build momentum for additional follow-on projects. So it's not a lot more specificity but sort of growing levels of interest is how we characterize it.

If I think about arrays and your launch of the HiScan. Talking to some people as they kind of think about that, I mean, what's your view of the customer that may show interest in that? The advances are being made so quickly in sequencing that -- I guess, just trying to figure out exactly how or why they might buy that instrument now. But I'm sure you have a different view as well. I'm just trying to understand kind of who you think the key customers for that?

That part will appeal mostly to mid-market customers. And a great example is someone running a core lab that has both demand for doing arrays and for doing sequencing. And where that demand can go one way or the other, it will be difficult to forecast. It also is going to be a great time for customers that want to begin to transition from doing array-based work into sequencing work or using sequencing as a follow-up. So expression is a great example, where a customer may be doing array-based expression and wants to begin the transition now over to sequencing. And once they have both those capabilities, operate it on leukemia tool [ph]. Also, it's a great for our customers who want to do follow-up data sequencing in examining hits that come out of an initial GWAS program. So that's the rest [ph] of an application set. In terms of the performance for the systems, as you all know, we delayed it a little bit because we wanted to incorporate the optical advancement that we've made as part of the HiSeq development, and we we're successful doing that. And that's why we changed the name to HiScan. And when you put the SQ Module next to that, the throughput of the system at 50G is equivalent to what the vast majority in installed base can do today even on the Genome Analyzers, because they're not yet migrated to the 95G kits. So that level of throughput is quite impressive. And with multiplexing and indexing capabilities that we have, customers will be able to lock the samples through that system. And we think it's got a broad mid-market appeal.

Your next question comes from the line of Steven Lichtman with JMP Securities.

On the HiScanSQ, what should we assume for the consumable pull-through per placement there?

It's a little bit hard to predict in advance because it's going to be a blended consumable pull-through of arrays and sequencing. And until we get some out there and begin to understand what the mix is, it will be a little hard to predict that. So the presumption probably ought to be, take the -- for somebody that orders the combined instrument upfront, probably the best guess would be to sort of average the sequencing and the array pull-through. And then we'll see where or how it actually comes out.

In terms of BGI placements, were there any in the quarter? And if so, can you quantify that?

We shipped the initial set of systems to BGI, and they were qualified in their laboratories, they were up and running on initial systems. However, because of the way the revenue is recognized on that sale, the actual revenue contribution in Q1 wasn't significant.

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

We kind of look at the R&D rate, the R&D levels this quarter, is that a pretty good go-forward number the next few quarters?

Well, I think that we're going to continue to see some increase in the absolute number over the course of the year as we add some resources. We did have some one-time expenses that hit us in Q1. But we have -- as we model out our revenue through the course of the year, we continue to believe there's a percentage of revenue that we can drive that down somewhat to the back half of the year.

On the GWAS, can you just give a little color on -- you're saying that orders are up in arrays. Are these old customers redoing study they've already done? Are these new customers that have never done chips, that never done arrays before, they're now coming in because of new content? Or are these customers that might have used one of your competitors' platforms and now they're switching to Illumina?

I guess, I wouldn't say that we have a rush of brand-new customers jumping into the array business. So I'd characterize most of the orders from existing customers. There's probably a few customers that we gained from our competitor. But now I think in terms of market share, it's probably relatively stable since our shares are pretty high to begin with.

One of the questions I've had a lot lately from people is the question about the size of the DNA sequencing market and the opportunities for growth in there, and how many instruments can be placed before you kind of reach saturation. I'm just wondering, can you step back a little bit and kind of give us your view on -- once you get through the initial placement of the HiSeq, and you got all the diversified platforms out there, I mean, what is the right number [ph] instrument? Does it kind of mimic where the CE market went? I'm just kind of wondering, how you're going to think this just given that, this seem to be the bulk of my incoming calls.

I guess the way we characterize that is -- of the installed base of capillary instrument, there's in the range of 15,000 of those. We think that the overall market opportunity for systems, if you will stand the full performance range of that capillary-installed base is probably somewhat larger. Because sequencing today, compared to where we were three, four years ago, is a sort of more powerful set of tools that can do a broader set of applications. So I think the overall opportunity is somewhat larger there. The market segment we observed largely to date though has been just the high-throughput segment of data. So if you looked at the proportion at 15,000 that's in the high-throughput segment, you might guess that to be some number of thousands, 3,000, 5,000. No one quite knows yet what that's really going to turn out to be. So what you begin to see us do is begin to stratify our product offerings to put systems of different levels of performance and price points into the market. And I think you'll continue to see us do that over time. And I guess in aggregate, we continue to see very robust growth in this market as far out as we can model at least. And that as the price point continues to come down, brand new market segments opened that weren't available back when the systems, I mean , a great example of that is cancer sequencing that we think over the next three to five years is going to be a fantastic market opportunity.

Your next question comes from the line of Tycho Peterson with JPMorgan.

This is Sung Ji sitting in for Tycho. Jay, you talked about kind of the type of customers interested in HiSeq versus Genome Analyzer. And just I was wondering if you could kind of provide more color around, if you could characterize the type of customers in terms of by geography? Are they new next-gen sequencing users versus existing users, and just if you could give us more color around that. And also kind of your take on how this might impact the upgrade cycle with the 95G for Genome Analyzer 2X?

I guess geographically, at least to my knowledge, we haven't seen any unique characterization of the customer base that's directly related to geography. I think probably the cleanest cut on how the customers spending here is based on funding. If customers have enough money to buy a HiSeq, they'll more than likely buy a HiSeq because it offers so many next-generation capabilities in terms of user experience and the way the software works and the ability to control it remotely. And so I think that's probably the easiest way to draw the distinction. In terms of the 95G upgrade, I think all of the customers in the installed base of Genome Analyzers will migrate to the 95G chips simply because it's going to be a more economical kit for them to run. They're going to get more throughput for prices not very different, and so their overall cost per Genome will go down. So I think you'll see everybody do that conversion, and there's no hardware change necessary for them to do it. So there's no incremental cost for them to make that change. And we'll probably have a little more color in the next quarter or two about the projection we have ultimately of how many existing GA customers will trade-in their GAs for HiSeqs. But even with those trade-ins, it's currently our expectation that we'll be able to resell the GAs that come back to markets that can't afford to buy a HiSeq.

Could you give us an update on your CLIA lab, and your efforts around developing the sequencing-based HLA testing service?

Yes. The CLIA lab is up and running and that's where we -- where our consumer base sequencing program. Today, we're not really prepared to give an update on the development of the HLA product. It is in the development process right now. We are with the express, if you're asking generally about the regulatory environment. We're in the 510(k) approval process with the express. And we think we're in the very late stages of that approval and expect it relatively soon.

[Operator Instructions] Your next question comes from the line of Zarak Khurshid with Wedbush Securities. Zarak Khurshid - Caris & Company: I think you mentioned that the GA consumable pull-through was above the prior range. Can you quantify how much above the range it was and what the key driver of that uptick was? And if you could, I know it's early days for HiSeq, but how should we be thinking about the consumable pull-through on that system?

I guess the way to characterize is that it was slightly above the range, is sort of the way to think about that. We still believe that, that range is a good one to have in our minds in terms of how we model the business. In terms of the drivers, I think what's happening here, of course, is that we had a challenging quarter or two where we had the reagent quality issue. And we successfully rebounded for that to come back to what we think might represent a little bit more of a steady state on overall of the usual pull-through. From a HiSeq perspective, the system has the capacity to run potentially twice the reagent pull-through that a GA has. We don't have obviously enough installed base, we don't have any empirical data on what the actual run rate will be. We're probably have a little bit of that data on the next call, but it's just too early to know what our customers will actually do today. Zarak Khurshid - Caris & Company: And then a follow-up question for Christian, if I may. Sounds like the CapEx came down significantly in the quarter. How should we be thinking about that for the remainder of the year?

Well, I mean, I think CapEx in general, we've completed most of our major building programs. But I think we're at kind of in a run-rate basis at this point in time. We have projects that go up and go down. But we're kind of in a run-rate range at this point.

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

I may have missed it, but did you comment on stimulus contributions in the quarter, and whether or not that had any impact on the strong instrument revenue number?

We didn't comment on it but we can. To our best ability to estimate it, we think we have somewhere in the range of $20 million or $21 million of orders in Q1 that came in. We're probably going to get increasingly cautious about giving that number because the challenge, of course, is always to figure out, have there been no stimulus, what would it have been otherwise? And that question is a very difficult one to answer. And as we get further into the year, it will become increasingly confounded with what would've been the base business. And so while we think that's about the right number, it's probably going to get more and more difficult to calculate it with any precision.

Any chance you would talk about whether it was more on the sequencing or the microarray side? And I guess, is it fair to assume it's more instruments than consumables in the early going?

I don't think we're prepared to comment on how that actually applied and what we shipped against it at this point.

At this time, there are no further questions. I would now like to turn the conference over to your host for today, Mr. Peter Fromen. Please proceed.

Thanks, operator. As a reminder, a replay of this call will be available in webcast format in the Investors section of our website, as well as through the dial-in instruction contained in today's earnings release. Thanks for joining us today. This concludes our call. And we look forward to our next update in July, following the close of the second quarter.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.