Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Peter Fromen - Senior Director IR

Jay Flatley - President and CEO

Christian Henry - SVP and CFO

Analysts

Ross Muken - Deutsche Bank

Tycho Peterson - JPMorgan

Bill Quirk - Piper Jaffray

Doug Schenkel - Cowen & Company

Quintin Lai - Robert W. Baird

John Sullivan - Leerink Swann

Derik De Bruin - UBS

Davis Bu - Goldman Sachs

Jonathan Groberg - Merrill Lynch

Illumina Inc. (ILMN) Q2 2008 Earnings Call July 22, 2008 5:00 PM ET

Operator

Good day ladies and gentlemen and welcome to the second quarter 2008 Illumina Earnings Call. My name is [Carissa] and I'll be your coordinator for today. At this time, all participants are in listen-only-mode. We'll be facilitating a question-and-answer session towards the end of this call. (Operator Instructions)

I would now like to turn the presentation over to your host for today's call, Mr. Peter Fromen, Senior Director of Investor Relations. Please proceed.

Peter Fromen

Thank you, operator. Good afternoon everyone and welcome to our second quarter 2008 earnings call. During the call, we'll review our financial results released today after the close of the market, offer commentary on our commercial activities and provide financial guidance for the third quarter and fiscal 2008, after which we'll host a Q&A session. If you have not had a chance to review the earnings release, it can be accessed in the Investor Relation section of our website at illumina.com

Presenting for Illumina today will be Jay Flatley, our President and Chief Executive Officer and Christian Henry, our Senior Vice President and Chief Financial Officer. This call is being recorded and the audio portion will be archived in the investor section of our website. During the call, we'll be discussing our financial guidance and plans for future activity. Our intent is for these forward-looking statements to be protected under the Private Securities Litigation Reform Act of 1995.

Forward-looking statements made during this call 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 these risk factors, 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 wanted to remind you of the investment conferences in which we'll be participating over the next couple of months. On August 7th in New York, we'll participate in Leerink Swann Roundtable focused on emerging products and applications and life sciences tools.

On September 4th, we'll present at the Thomas Wiesel Healthcare Conference in Boston and during the week of September 22nd we plan to participate in the UBS Healthcare Conference 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.

I also want to announce that we'll be holding this year's Analyst Day on November 6th in our new facility in San Diego. We'll provide more details on this event as they become available.

With that I'll now turn the call over to Christian.

Christian Henry

Good afternoon everyone, and thank you for joining us today. During today's call, I'll review our second quarter financial results and outline our guidance for the third quarter and the remainder of the year. Jay will then discuss our commercial progress and provide an update on the state of our business in the market.

The second quarter was our 28th consecutive quarter of revenue growth with total revenues of $140 million. This represented 66% growth year-over-year and approximately 15% growth sequentially. Product revenue was $129 million and grew 73% over Q2 of last year and 16% sequentially. Growth compared to last year was well balanced, as we saw approximately equal contributions from our sequencing and microarray businesses to the top line performance.

In the second quarter, consumables revenue totaled $82 million compared to $46 million in the second quarter of last year and $63 million last quarter. This represents year-over-year growth of 78% and sequential growth of 29%. Our growth in consumable revenue was driven principally by the rapid up tick of our new Infinium HD product lines. Not only did we ship a record number of samples during the quarter, our ASPs for the quarter were above our expectations. Additionally, I would like to point out that revenue from sequencing consumables grew more than 50% sequentially, which indicates that many of our customers have scaled up their sequencing programs to production levels.

Instrument revenue for the quarter was $43 million compared to $25 million in the first quarter of 2007 representing year-over-year growth of 70%. Instrument revenue growth was driven by continued strong demand for the Genome Analyzer II. Services and other revenue, which includes genotyping and sequencing service, as well as instrument maintenance contracts was $12 million for the quarter, compared to $10 million in Q2 of the prior year and $11 million last year.

Before discussing gross margins and our operating expenses for the quarter, I would like to describe the effect of FAS123R, which requires us to record the non-cash expense associated with stock options in our income statement. The total impact of non-cash stock-based compensation for the quarter was a pretax amount of approximately $12 million or a tax-adjusted amount of approximately $0.12 per pro forma diluted share.

Stock compensation expenses allocated to each P&L line item with the amounts attributable to each expense category, separately identified in the financial table that accompany today's earnings release. In the discussion that follows, I'll highlight both our GAAP expenses, which include the effect of 123R and the corresponding non-GAAP figures. I encourage you to review the GAAP reconciliation of the non-GAAP measures also included in today's release.

Total cost of revenue for the quarter was $51 million compared to $30 million in the second quarter of 2007. The second quarter cost includes stock-based compensation expense of $1.4 million compared to $1 million in the prior year period. Excluding this expense of $4.1 million charge associated with the write-off of manufacturing equipment and a $2.7 million charge associated with the amortization of intangibles. Non-GAAP gross margin was 65%.This compares to 63.3% last quarter and 65.7% in the second quarter of 2007.

The sequential increase in gross margins resulted largely from the strong demand for our new Infinium HD product line and in particular the rapid uptake of the 610 Quad BeadChip. On a per sample basis the 610-Quad is less expensive to produce than prior generations of BeadChip. As we indicated last quarter, as part of the launch of the Infinium HD product line, we have to develop new array manufacturing equipment to replace our existing infrastructure.

As a result of the rapid transition to the Infinium HD products, we now have excess capacity in our prior generation of equipment. Therefore during the quarter we took a charge of $4.1 million to recognize this write-off. The decline in gross margin compared to the prior year quarter was primarily due to the fact that the sequencing business, which generally carries lower gross margin, has become a larger proportion of our total revenue.

Research and development expenses were $24 million in the quarter compared to $18 million in the second quarter of 2007 including $3.4 million and $2.5 million respectively in non-cash stock compensation expense. The increase in R&D spend was primarily attributable to increased headcount as well as expense associates with the build out of our Singapore facility. Excluding stock compensation expense, R&D expenses were $20 million or 14.3% of revenue compared to $16 million or 18.6% of revenue in the prior year period.

SG&A expenses were $36 million compared to $23 million in the second quarter of 2007 including stock compensation expense of $7 million and $4 million respectively. Excluding these non-cash expenses, SG&A was $28 million or 20% of revenue compared to $19 million or 23% of revenue in the prior year period. Sequentially SG&A declined to 20% of revenues compared to 23%. This decrease is largely attributable to the increase in top line revenues.

Our non-GAAP operating profit for the quarter was $43 million or 31% of revenue compared to $21 million or 25% of revenue in the second quarter of last year. This represents year-over-year operating profit growth of 106% or 1.6 times our revenue growth rate.

Before I comment on net income, I wanted to note that sequential decline in net interest and other income. Interest and other income declined by $2.8 million in the quarter to $0.8 million. The decline was due to a $1.1 million sequential swing related to our intercompany foreign exchange translation. The remainder of the decline was associated with both lower interest rates earned on our investment portfolio coupled with a lower cash balance due to the $90 million litigation settlement, which we paid in the first quarter.

We reported GAAP net income of $15 million for the second quarter or $0.23 per diluted share compared to $9 million or $0.16 per diluted share in the prior year period. Excluding the impact of non-cash stock compensation expense, the charges associated with the write-off of our manufacturing equipment, the amortization of intangibles and net of certain tax benefits, we are pleased to report non-GAAP net income of $28 million or $0.44 per diluted share compared to $17 million or $0.29 per diluted share in the second quarter of 2007. This represents year-over-year net income growth of 63%.

Turning to the cash flow statement and balance sheet. We generated $37 million in cash flow from operations during the quarter compared to $25 million in the comparable quarter of the prior year and $28 million in the first quarter.

However, during the second quarter, we used approximately $23 million in cash for capital expenditures. The capital expenditures were primarily facilities related, as we opened our new building on our campus in San Diego. We completed a 50,000 square foot new reagent manufacturing and services facility also based in San Diego, and we completed the facilities improvements associated with our Singapore manufacturing plant. Finally, we continue to add Infinium HD array capacity to our San Diego manufacturing facility.

Depreciation and amortization expenses for the quarter were approximately $6.6 million and on a free cash flow basis, we generated $14 million or $0.23 per diluted share compared to $18 million or $0.31 per diluted share in the second quarter of last year. We ended the second quarter with $356 million in cash and investments.

Before I update you on our guidance, I wanted to mention our announcement today to effect the two-for-one split of our common stock. The split is subject to stockholder approval of a proposed amendment to our certificate of incorporation to increase the number of authorized shares of our common stock from $120 million to $500 million.

We expect that the record date for the stock split will be September 15, 2008 and that the payment date for the split will be September 26, 2008. We believe that the stock split, if effected may place the market price of our common stock in a range that is more attractive to investors, particularly individuals, which may result in a broader market for our stock.

I'll now update our financial guidance for the third quarter and fiscal 2008. Consistent with our previous calls the following guidance excludes the impact of certain non-cash charges including the amortization of intangibles, the write-off of manufacturing equipment, legal settlement payments and the impact of stock-based compensation related to FAS123R. For additional details, please refer to the table in our earnings release that reconciles our non-GAAP guidance to the related GAAP figures.

We expect fiscal 2008 revenues to be between $550 million and $560 million, representing growth between 50% and 53% over the 2007 figures. This is an increase of $30 million over the mid-range of our 2008 guidance that we provided last quarter. We continue to expect gross margins for the year to range in the mid 60 and we expect non-GAAP earnings per share between $1.65 and $1.75, which represents an increase of $0.08 over the midpoint of our previous guidance. This assumed pro forma fully diluted weighted average shares outstanding of approximately $63 million.

And as a reminder, going forward we'll provide a pro forma fully diluted share number that will exclude the double dilution associated with the accounting treatment of our convertible debt outstanding and the corresponding call option overlay. The call option that Illumina owns offset all dilution associated with the net share of settlement of the note, over its conversion price of $43.66.

We'll include the ongoing economic impact associated with the net share settlement of the warrants issued in conjunction with the call option overlay, which have a strike price of $62.87. The Q2 numbers included in the reconciliation to the GAAP figures that accompanies toady's press release. As I mentioned last quarter, please feel free to follow-up with Peter after today's call and he can walk you through the details of the calculation.

For the third quarter, we expect revenues to range between $142 and a $147 million, which represents year-over-year growth of 46% to 51%. Excluding the impact of stock compensation expense and the amortization of intangibles, we expect third quarter non-GAAP earnings to range from $0.42 to $0.45 assuming pro forma fully diluted shares of $64 million.

We anticipate a non-GAAP annualized tax rate of approximately 36% for the year. We expect the tax rate to be lower in the fourth quarter as we have recognized profit from product manufactured and shipped out of our Singapore site. Over the next few years, as we generate more international income and continue to build out the Singapore facility, we expect a further decline in our consolidated corporate tax rate.

We expect pretax annual stock compensation expense to be approximately $49 million or $0.50 for the tax adjusted pro forma fully diluted share. And as we have emphasized in the past this expense is highly dependent on our underlying stock price. It should be noted that earnings per share guidance does not account for our proposed two-for-one stock split, but does include the impact of Avantome's operations on our business.

At this point, I would 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 Flatley

Good afternoon, everyone. By almost any measure, our quarter just completed was the best in the company's history. We have now recorded seven consecutive years of quarterly sequential revenue growth. Our new products, many of which were transitioned only last quarter, drove both revenue growth and gross margin expansion.

This combination coupled with the effective growth management in R&D and SG&A spending enabled us to achieve over 30% operating margins for the quarter. In addition, our markets continue to be very healthy resulting in an incoming order rate, which exceeded our prior record by a wide margin. That success resulted in a very strong backlog exiting Q2. This backlog coupled with our successful scale up of manufacturing capacity gives us the visibility to significantly raise our revenue guidance for the second half of the year.

I would now like to spend some time focusing on each of our business areas. As Christian mentioned, second quarter revenue growth was 66% over last year. The strength in our array business was the key factor in revenues exceeding our expectations. Towards the end of Q1, we began shipping the 610-Quad and it is now become our largest volume product in its first full quarter of shipment.

We also saw a significant uptake of the CNV370-Quad and towards the end of the quarter; we began shipping the Human1M-Duo, our most complex BeadChip to-date. The rapid adoption of these Infinium HD products resulted in a $4.1 million non-cash write-off to retire manufacturing equipment not capable of producing the Infinium HD chips. Over the next several quarters, we'll continue to launch more products using the HD format, which may help us achieve higher gross margins.

iScan, which is our new BeadChip Scanner increases scan times by a factor of six and has already been a significant impact in accelerating customer projects. Incorporating iScan customer workflows will remarkably reduce the time to complete projects or increase the total number of samples that can be run in a given period.

We are pleased with customer reception to the new system and have already seen initial iScan customers place repeat orders. Given the higher throughput of iScan, we expect somewhat fewer instrument placements versus where we night have been with the BeadStation but with higher consumables per installed system.

This quarter, we received orders for Infinium HD BeadChips from researchers funded by the second phase of The Welcome Trust Case Control Consortium to study over 90,000 samples and what collectively will be the world largest genetic research initiative conducted to-date.

In addition to the performance of the Infinium HD assay the availability of iScan makes the economics of our complete system ideal for large scale complex genotyping studies. As more of our chip catalog migrates to the HD technology both we and our customers will enjoy improved performance and economics.

Looking forward, we remain optimistic about the demands in our traditional array markets. Over the next few years, we expect major growth to come from the emergence of applied end consumer market. As a leading indicator in Q2, we generated over $6 million in orders for our BovineSNP50 product, our first fixed content product focused on the Ag market using our 12 sample iSelect format.

Moving on to the sequencing business. Our momentum continues to build as next generation sequencing has truly become now generation. In the quarter, we saw the GA2 gain momentum, as we continue to demonstrate increased throughput, improved robustness and a wider diversity of applications.

It's amazing to note that just a year ago, we are focused on achieving 1G of high quality information and now internally, we are routinely achieving throughput levels greater than 10G per run. Our customers have responded overwhelmingly and we now received upgrade orders from the majority of our installed base and believe that most of the original Genome Analyzers will be upgraded to GA2s by the end of this year.

Another key driver in the sequencing business was our ability to scale up shipments of our Paired End modules. As a reminder, the Paired End module enables protocols that insert specific lengths of DNA into a sample and effectively read the sample from both ends. This protocol is especially useful in whole genome resequencing applications and structural analysis of the genome. During the quarter, we shipped more than a 150 Paired End modules and expected virtually every Genome Analyzer in the field will ultimately included one.

During the quarter, we commercialized our short inset protocol which enables 200 based paired insert and at the end of the summer, we expect to commercialize our long inset protocol, which will enable insert sizes from 2 to 4 kb. Operationally, we are focused on improving the gross margins of our sequencing business. During the quarter, we completed the development of our new sequencing reagent kit. It greatly simplifies customer workflow by reducing the number of tools in a kit from 27 to 9 and significantly improves manufacture ability. In the third quarter, we'll fully commercialize this kit and we expect to see improvements to the sequencing gross margins, as a result.

Improving consumable gross margins is going to be a critical success factor going forward, as we are beginning to see the ramp in our consumables revenue in sequencing. In the second quarter, we saw sequential growth of more than 50% in sequencing consumable revenue. We know have a large enough installed base and sufficient data to feel confident in our range of a 150 to 200,000 of annual consumables per installed system.

The technology advantages of the GA2 continue to drive broadest option of the sequencing platform. In the quarter, two-thirds of our shipments were in non-genome centers. We are seeing an increase in digital accounting applications that continue to expand the market potential behind traditional sequencing applications. As we have mentioned previously, we believe that next generation sequencing will become increasingly cost effective with traditional array based methods for gene expression.

Recently, we have seen a number of customer publications in peer-reviewed journals using the Genome Analyzer for RNA-seq, a method of full transcriptome sequencing. RNA-seq has enabled customers to discover novel gene expression markers not present on existing microarrays at costs that are rapidly becoming competitive with arrays.

During the quarter, our R&D team made significant progress with our internal sequencing initiatives by completing the sequencing of a human African Trio. By leveraging the improvements we have made to the GA2 in a matter of weeks, our scientists generated 14 times sequencing coverage from the mother and the son of the African male that we sequenced last year. Subsequent sequencing of the trio has generated coverage to over thirtyfold.

Sequencing runs during this project routinely generated 7.5G of data and yielded up to 10G of data on the single flow cell using 50 base pair read lengths. Through additional development of our chemistry and software programs during the quarter, we are now able to internally generate 15G of sequenced data per run and included to find a roadmap to reach 20G or beyond by the end of this year.

We continue to believe that demand for sequencing over the next few years will be very robust. Last month, we announced our participation in the 1000 Genome Project, where we'll work with a consortium of sequencing centers to generate the most detailed map of human genetic variation to-date. The project will build on the international HapMap Project, which catalogs human genetic variance at a frequency of 5% or greater.

The 1000 Genome Project will identify variance at a frequency of 1% across the genome and down to 0.5% within genes, opening an exciting new view into the association of rare variation with disease. In addition, the project will generate a comprehensive understanding of structural variation and epigenetic factors in the genome. This project and other sequencing projects like the Cancer Genome Atlas illustrate the application of next generation sequencing as a high power discovery tool.

Over the next few years, we expect sequencing to become increasingly important as the diagnostics tool. And today we announced the acquisition of a privately held company called Avantome Incorporated for $25 million in ca h and up to $35 million in contingent considerations. Avantome is the development stage company working on a low-cost long read sequencing technology. We expect this technology when available as a product they have applicability to both research and diagnostic markets and be complementary to our existing technology. As part of this transaction, Dr. Mostafa Ronaghi will join the company as our Senior Vice President and Chief Technology officer.

Next, I would like to update you on some of the operational initiatives and facilities project that we have underway. First, we have completed the capacity expansion of our array manufacturing at San Diego. We currently have no further plans to add capacity in San Diego other than from general process improvements. Our Singapore facility is on track to meet our fourth quarter projections with approximately 40% additional array capacity online by year end.

The majority of work on our new San Diego site has been completed and we began moving into this building last week. Also, in San Diego, we completed the build out of our [Carol Park] reagent manufacturing facility, where we'll also co-locate our services business.

Leasehold improvement and a solid capital equipment out with these new facilities led to the significant increase in capital expenditures during the quarter as Christian outlined earlier. We have also made significant progress in the quarter in building out our senior management talent. We recently added Fredrick Clerie, as Vice President of Quality Assurance and Regulatory Affairs. Fredrick comes to us most recently from the Diagnostics Division of Bayer HealthCare now Siemens Diagnostics. Fredrick will report to Joel McComb and be responsible for Illumina's quality system strategy supporting both research and diagnostics products.

Earlier this week Dr. Steve Pentoney joined Illumina, as Vice President of Assay and Reagent development. Most recently Steve was Director of Technology Management for the Molecular Diagnostics business at Beckman Coulter. He will report to Joel as well and brings extensive experience in automated DNA sequencing multiplexed assays and clinical diagnostic systems. Finally, we promoted Dr. Steven Barnard to Vice President of Array Development. Steve is the fourth employee of Illumina and work with David Walt at Tufts on the initial invention of Illumina's core technology.

To conclude, we are very pleased with our operational and financial results for the second quarter. We have seen encouraging uptake of the new products that we launched in the first half and received equally encouraging customer feedback. We scaled our infrastructure to support our continued growth and we have made significant progress in crystallizing our molecular diagnostic strategy, which we expect to update you on at our Analyst Meeting in November. Most importantly, our markets continue to grow rapidly and we feel that we are very well positioned to capture that opportunity. Thank you for your time and we'll now open the lines for your questions.

Question-and-Answer

Operator

(Operator Instructions) Our first question comes from the line of Ross Muken. Please proceed.

Ross Muken - Deutsche Bank

Good afternoon gentlemen.

Jay Flatley

Hi, Ross.

Christian Henry

Hi, Ross.

Ross Muken - Deutsche Bank

Congratulations, wonderful quarter. There was a bit of concern coming into the quarter I think in general about slowdown on the array side of the business obviously that is the antithesis of what we saw. Can you talk a bit about aside from sort of the obvious in terms of some of these new studies that are coming along and the size increases? What we are seeing in some of the nontraditional markets for array?

And then sort of compare and contrast, what you are seeing in terms of incremental demand is it from existing customers, new customers? Just help us think about kind of the dynamics there and what's continuing that pretty attractive growth trajectory?

Jay Flatley

Sure. As I mentioned in the script, Ross, I think, as we look forward in the array market, we continue to feel really good about what's happening in Whole-Genome Association Studies as these very large projects come through, we are going to continue to see greater adoption of new versions of our chip particularly as we begin to sequence these very large numbers of samples. We'll to start identifying rare variance and that has the potential to create wholly new versions of our chip that have much richer content. And so, we expect that will pass through the genotyping market to continue.

We do expect very strong growth in what we call the emerging segments in the applied market and in the consumer markets. In the applied side, we now have three different chips that we are shipping, a bovine chip, an equine chip and a canine chip. We are working very broadly with a large number of collaborators in other potential organisms. In fact we have a very large company in the office today talking about a particular crop that they want to sequence and ultimately put onto chips. So, it's a very exciting, I think, long-range and high-growth opportunity.

We also continue to be very bullish about what's going to happen in the consumer space despite the fact that there has been a lot of regulatory noise in this space. We are confident that those issues are going to get resolved over the next six to 18 months or so and that there is going to be a very clear path, where consumers can get access to their genetic information and overtime as those prices comedown, we think the market is very elastic and it will grow significantly.

Ross Muken - Deutsche Bank

And turning to the sequencing business your competitor introduced not too long ago sort of the second generation of their system. Can you comment a bit on sort of what we are seeing real time in the market in terms of incremental demand as you still feel like the metrics are in your box and some of the advantages that you have enjoyed over the last 6 to 12 months continue and just sort of as we see this market grow in such exponential fashion. How you think the combination of these with Invitrogen affects anything in the landscape?

Jay Flatley

Well, I think you can tell from our numbers that we continue to see a very robust market and we expect that to continue. Clearly it's going to be a competitive space and we think that are competitor in this market is going to be very formidable and we are prepared for that.

We think that some of the performance advantages that we have got in our system continue despite the launch of the second version of their system and those include ease of use, ease of sample preparation much smaller upfront sample requirements, much easier backend data processing and much faster runtimes. And so all those advantages we think stay with us in the marketplace.

In terms of throughput, I think there is going to be a back and forth battle on the throughput. The through put numbers continue to increase. You get to 20G and it goes beyond 20G whether somebody's 2 or 4G ahead of the other player in any given month is probably not going to be easy, determining factor for who wins in this marketplace.

In terms of the merger that was announced, I guess our feeling is that combination probably, make some sense in the long-run and we are assuming that they put those companies together well and that they will continue to be very competitive with us.

Ross Muken - Deutsche Bank

And Christian just in terms of housekeeping I think I missed it all the number upfront. What was the instrument versus consumable breakdown?

Christian Henry

Consumables were about 58% of revenue for the quarter. And I'll give you the consumable number give me a second here to pull it up. Consumables revenue was $82 million and instrument revenue was $43 million.

Ross Muken - Deutsche Bank

$43. Okay, perfect. Thanks guys.

Christian Henry

Thank you.

Operator

Our next question comes from the line of Tycho Peterson. Please proceed from JP Morgan.

Tycho Peterson - JPMorgan

Good afternoon.

Jay Flatley

Hi, Tycho.

Tycho Peterson - JPMorgan

Jay I'm just wondering if you can elaborate a little bit on the sequencing technology that you acquired and how you see this fitting in and where you see the competitive advantage of the technology longer term?

Jay Flatley

Yeah. Avantome is a development stage company. So, we are not going to disclose a lot about the underlying technology. What we'll say is that we do think is highly complimentary to the very high end sequencing we have now on GA2 and that this system is targeted for a different part of the market. That really will be optimized for much lower cost, long read sequencing that happens very quickly.

And so that will be a different sector of this market. And we think it hits most squarely of the traditional Sanger sequencing space. And we are very excited about the technology and how we can apply that technology get a product to market and attack different segment perhaps than the high end GA does.

Tycho Peterson - JPMorgan

Okay. Is this the old pyrosequencing technology, I know there is a link there somewhere?

Jay Flatley

Well they have used pyrosequencing technology sequencing in their lab, but what we windup launching is an ultimate product may or may not include pyrosequencing technology. We are not really talking about what the ultimate product might look like.

Tycho Peterson - JPMorgan

Okay. And then with regard to your comments before on the applied markets, as we think about development in ag and particularly are you are starting to see demand for sequencing in those markets? I mean, I know you talked a little bit about the array demand? How do we think about where your array portfolio could go there as well?

Jay Flatley

Yeah. Very often, it actually starts with sequencing technology and because some of these organisms have only rough draft sequences, if any sequence and if they have some, it's only been done on a couple of copies. There is very little known about the genetic variations in these crops or organisms. And so, very often, it starts with the sequencing project to do discovery and then it translates into implementation of those genetic variations onto a chip.

And typically that would be deployed in our 12-by-1 format which allows high throughput and very low-cost. And typically, you are not looking at millions of SNPs in these applications. You are looking at some numbers of tens of thousands. And then the goal ultimately is to continue to reduce that down to the smaller number that really matter and whatever the screening application is that the company is targeting.

Tycho Peterson - JPMorgan

Okay. And then would you be able to give some color internationally as to where you may have seen some strength during the quarter beyond Beijing and some of these other markets?

Jay Flatley

Europe continues to be really strong for us, Tycho. We have built out a lot of infrastructure in Europe in the last year and we are really starting to see the benefit of that. Asia continues to be growing as well. And then the U.S. was strong as well during the quarter. So, Europe's probably leading the pack a little bit. But the reality is, we are seeing strength across the entire set of markets and I think it's due to the fact that we have launched a bunch of new products and that there is pretty significant competitive advantages of those products and so the customers are adopting them pretty quickly.

Tycho Peterson - JPMorgan

Okay. And then I guess just one last one on the Paired End Modules in terms of what's required from the customer side. Can you give us a sense of what the cost is? And then how quickly is the customers are up and running once they get the module attached?

Jay Flatley

So, when we initially launched the Paired End Module we actually offered it with a bundle of consumables. But the pricing on the Paired End Module in the $40,000 range give or take and what they need to get up and running quite frankly as we go out and install it in and they are up and running essentially the same say.

So, there is not a dramatic difference. There is a different kind of kit that you use so you have a different reagent kit that we call up the Paired End Kit. We are very creative with that name. And then you buy that kit and you are up and running. So, the great of that is it all happens in front of the sequencing. Once the flow cell is prepared, it goes straight on to the sequence during the sequence just as if you are doing any other sequencing experiment.

Tycho Peterson - JPMorgan

Great, okay. Thank you very much and congratulations.

Jay Flatley

Thank you.

Christian Henry

Thank you.

Operator

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

Bill Quirk - Piper Jaffray

Great, thanks. Good afternoon. And I'll add my congratulations for the quarter as well. A couple of questions on Avantome. Jay can you help us or Christian can you help us flush out the expected increase or increase in expenses related to this and obviously it's in the guidance but can you [cheese] it out a little bit for us?

Christian Henry

Well we put it in the guidance so that we don't want to really identify the cause of any one particular program that we have ongoing. So, it's baked into the guidance that we provided today.

Bill Quirk - Piper Jaffray

Okay. And understanding that's a still development stage company. Willing to take a stab at when we could expect some type of complimentary product coming out of that?

Jay Flatley

Yeah Bill we are not far enough along yet to be able to predict with any confidence date of the product launch. But we'll as appropriate we'll update you on that and give more color as we get further into development and begin to position this product into the marketplace.

Bill Quirk - Piper Jaffray

Okay, got it. And then obviously you are still working through the numbers in this side. But just qualitatively in terms of installs for GAs, will they flat up down in terms of the quarter sequentially?

Jay Flatley

Bill we don't give that kind of granularity on a quarterly basis.

Bill Quirk - Piper Jaffray

May, I have to give it a shot, right?

Jay Flatley

Good effort.

Bill Quirk - Piper Jaffray

And then lastly guys as you think about the portfolio from a longer-term management standpoint should we still think that Illumina is going to be, looking at deals advantageously in terms of complimentary technology to tuck in and perhaps expand some of the existing applications or do you feel quiet comfortable where we are sitting right now?

Jay Flatley

So, I think the kind of things we would be looking at Bill would include technologies that are highly complimentary to what we are already doing. It will be unlikely that we'll be doing any kind of add on acquisition that say as a separate business to what we currently do that's always theoretically possible. But I don't think very likely.

We have a pretty good set of technologies right now and what we are looking for and as they come across our desks we study our opportunities that really bolster sort of the core capabilities we already have, leverage the distribution. And that's critically important factor in the Avantome transaction is that it's the same distribution channel. So, you don't need a different sales force and it's not going to be a different customer base. And so, those are the types of factors that we evaluate. So, they tend to be smaller and more technology focused.

Bill Quirk - Piper Jaffray

Understood. Thanks very much guys.

Jay Flatley

Thank you.

Operator

Your next question comes from the line of Doug Schenkel from Cowen & Company. Please proceed.

Doug Schenkel - Cowen & Company

Hi, good afternoon. Thanks for taking my questions. I have, as you can imagine, a few Genome Analyzer questions. But before I go there, I was wondering if you could give us an update on BeadXpress. I don't think, you said really anything about that on the call. If you did, I apologize for missing it. But could you give us some update on how that's progressing?

Jay Flatley

Yeah, no, you are right. We didn't give an update on that. And the reason was that it's just a smaller part of our revenue than the other two businesses. And so because of time limits, we decided to not put it into the script. But we are seeing very strong demand for BeadXpress. It's going to be and it's a critical part of our emerging diagnostic strategy. The product is performing well. As we sort of mentioned on prior calls, we did have some startup challenges and really getting our manufacturing ramped up and getting it relocated to San Diego. We believe, we are beyond all those issues now. And so, we are real optimistic about how it's going to continue to rollout into the field.

Doug Schenkel - Cowen & Company

All right, that's helpful. On Genome Analyzer, I know you were not willing to answer the question in terms of sequential growth or lack thereof in terms of placements. But, maybe taking this from a different direction in terms of the longer-term outlook, you have talked about freeing up capacity for genotyping production, if demand for GAs was to increase by say, 10 to 20 per quarter over the balance of the year, are there any capacity concerns that you have that would hinder you from meeting that demand?

Jay Flatley

None, whatsoever. We make it in a separate factory up in the Bay Area and given just a few months of lead time, we can scale capacity pretty significantly there. We have got the space to do it. And really the only constraint would be how rapidly we could bring in the materials. And we tend to plan the long lead items with a little bit of safety stocks and we have the ability to ramp up quickly sort of inside the lead time of the longest part and that just takes a little bit of inventory investment that you might see on our balance sheet to do that.

Christian Henry

I think the other piece there is we have been getting more efficient at manufacturing the GA2, we launched the GA2 in the first quarter pretty early in the quarter. Now, we have had some experience under our belt of manufacturing it. So, we are not only do we have capacity but we are getting more efficient at making the product. So, I think that looking out of many different demand scenarios we would be able to accommodate them.

The other thing I might add to that is, one of the really important factors on our ability to meet customers demand is on the reagent side of the equation and I talked briefly in my script about a project, we just completed, where we reformulated the sequencing kit and part of the reason for that was not only to improve workflow and reduce the number of components in the kit, but to make it amenable to our automated systems here in San Diego.

So, that's now being manufactured in our new San Diego reagent facility and as part of that facility we have very high throughput robotic systems to make the kits and that improves the overall quality because you don't have human intervention in making the tools and it also allows us to scale very, very rapidly if we need to. So, the reagent side is just as important as the hardware side.

Doug Schenkel - Cowen & Company

Okay, I'm jumping around a bit; let me go to the third business Genotyping. Clearly you guys are enthusiast about the growth potential associated with ag bio and the consumer end markets. It's been a little while since I think you provided an update on what do you think the growth rate is for the market as a whole when it comes to Whole Genotyping Arrays. Could you help us understand where you think that is right now for traditional applications and how these new end markets effect overall growth in Genotyping?

Jay Flatley

Yeah. We have given sort of broad ranges of 25% to 40% in Genotyping growth and we are feeling good about that. Obviously the growth rate in some of the newer markets could be way higher than that because they are coming off a small base. So, it depends on where do you looking at growth rate just within the small segment like applied or whether you are sort of averaging that into the overall Genotyping market. But I think about growth rates in that 25%, 30% to 40% you are in the right range.

Doug Schenkel - Cowen & Company

Okay. And one more any color you can provide on what you are doing with the Bead Readers when you swap them out for iScans?

Jay Flatley

Yeah. So, as customers do upgrade we'll bring back the older system will retrofit and then we'll resell them. And so, we think there will be particular markets, where they are more priced sensitive and less throughput sensitive that will be great markets for refurbished BeadStations.

Doug Schenkel - Cowen & Company

Okay. Thanks a lot.

Jay Flatley

Yes.

Operator

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

Quintin Lai - Robert W. Baird

Hi. Good afternoon. Congratulations also from us on a nice quarter.

Jay Flatley

Thanks, Quintin.

Quintin Lai - Robert W. Baird

In this quarter it sounded like that you got an extra push on the microarray side you raised the full year guidance. So, should we be extrapolating that delta for the increased revenue guidance is also more weighted toward the microarray side or is it kind of split between both genotyping and sequencing?

Christian Henry

Hi, Quinn it's Christian. We didn't really break it out sort of that way. Basically we are doing valuation of each business on its own and build up a forecast. And based on the strong backlog we had and exiting the quarter and the visibility we see on both sides of the business quiet frankly that's how we came up with the annual guidance of $550 to $560. I mean, you have heard pretty clearly in the prepared remarks that we see both markets both sequencing and the array markets as being very robust right now. And it's up to us to continue focusing on execution and delivering a great customer experience.

Quintin Lai - Robert W. Baird

And then it sounded like that the ASPs for especially the multi-sample formats are quite favorable, good gross margin, consumable trail, but sequencing increasing. You have got in fact an improved set that you said you talked about launching for consumables versus sequencing in the third quarter. So, should we be thinking that gross margins have an upward bias from where we are here, today? And so, if not, why just reiterate, I guess, mid 60s for gross margins?

Jay Flatley

Well Quinn, we are working real hard on gross margins, as you might expect us to do. And you are right; we have a lot of factors that we are hoping give us an upward bias on the gross margins. We do however have some offsetting factors there and one of those clearly is our refurbishment programs or exchange programs.

And so as we upgrade GAs to GA2s the shipment of those upgrade kits are not high margin shipment. Similarly, we have offered special programs for customers to upgrade from BeadStations to iScans and those are low margin as well. And so, we have some offsetting factors that have caused us to continue to guide into the mid 60s.

Quintin Lai - Robert W. Baird

All right. Thanks for that color. And then just last housekeeping question. What was the impact of FX on your top line? And right now, what you are running kind of as a percent U.S., ex-U.S. sales?

Christian Henry

Yes. So, Quinn on the top line FX doesn't really have a big impact because even in the second quarter, we still bill most of our customers in U.S. dollar. So, we haven't really been able to enjoy any of that benefit as many of our competitors have over the last couple of years or so.

Although we did have an FX hit this quarter from a foreign translation basically we have subsidiary balance sheet that gets translated and we did have an exposure there. We took about a 200K hit on the other income line and that last quarter we actually had a 900K favorable variance there. So, its $1.1 million swing that I referred to in my remarks. And if you look at the split of revenue for the quarter, America's represents about 70% of the business, Europe is about 25% and Japan is about 5% give or take for the quarter.

Quintin Lai - Robert W. Baird

All right.

Jay Flatley

In terms of the geographic split though Quinn it was distorted a little bit by revenue recognition. So, we look at three different numbers there and one is what the order receipt rate look like from an orders basis the sort of Asia market was much stronger, we just didn't just ship all those systems. And from a shipment basis it was pretty strong in Asia as well but not many of those got across the finish lines in terms of revenue recognition and that was often there is FOB termed that mean they have to be received by the customer before we count them in revenues. So, there is three different ways to look at that geographic mix and the one Christian gave you was the revenue recognition view.

Quintin Lai - Robert W. Baird

Thank you.

Christian Henry

Yep.

Operator

Our next question comes from the line of John Sullivan from Leerink Swann. Please proceed.

John Sullivan - Leerink Swann

Hi. guys good afternoon.

Jay Flatley

Hi John, How are you doing?

John Sullivan - Leerink Swann

Doing right. Quick question congratulations on working toward 20 gigs per sequencing run by the end of the year. But I think sample multiplexing is what would be incrementally valuable to many of your customers? What sort of progress are you making or you are seeing made by maybe your partners in improving biochemistry that allows researchers or diagnostics labs to place a large number of samples on a single flow cell. Can you talk about that at all?

Jay Flatley

Yeah, sure. Our customers are doing that relatively routinely now, John. We actually don't have formalized kit on the market yet to do that, but we are working hard on it. And we expect to have that certainly before the end of the year. So, you are right that's an important thrust in the market and tag based application is an area, we are working hard on and customers are already running sort of with the homebrew version.

John Sullivan - Leerink Swann

Okay. And then what sort of feedback you are getting from the market specifically with respect to your sequencing platform replacing microarray based gene expression and can you just kind of speak about maybe the economic hurdles that have to be overcome in order for sequencing to be a credible replacement for microarray based gene expression?

Jay Flatley

There is two parts to that market, as you think about it John one is sort of a direct replacement for arrays, where you are looking at a subset of the genome and what you typically have on your arrays or what we best think of as all the genes. And today if you do that on a sequencer with some enrichment method the cost would be about the same ranges, it would be on a microarray and you get better quality data because you are doing digital counting.

But the real killer out here we think is full transcriptome sequencing where you look without any sort of assumption or hypothesis about what might be expressed in the genome across anything that's transcribed. And so that's the more powerful application where you catch things that arrays would never catch because you don't have the specific content that today is still more expensive then using an array. But we think over the next 12 to 24 months because of the improving throughput, the ability to tagged applications and a general reduction in the sequencing costs that it's going to be approximating array prices for much richer data.

John Sullivan - Leerink Swann

Well, thanks very much and congrats again.

Jay Flatley

Thanks, John.

Operator

Our next question comes from the line of Derik De Bruin from UBS. Please proceed.

Derik De Bruin - UBS

Great, thank you. I have to see if there is anything leftover. So you are building out some of your reagent manufacturing and kit manufacturing. I guess, are you going to start taking over more of your own sequencing reagent manufacturing? I know that Invitrogen OEMs send it out for you?

Jay Flatley

Well, we do most of the kit manufacturing ourselves. What we do get from Invitrogen are some components that go into the kits. But most of the kit work is done by Illumina and it has been done even previously by Solexa.

Derik De Bruin - UBS

Okay. And I guess does the ABI, Invitrogen merger potentially change that interaction?

Jay Flatley

We don't think so.

Derik De Bruin - UBS

Okay. You said that about two-thirds of your Genome Analyzer placements were outside the genome centers. What are you seeing from the pharma and biotech labs? I mean have they started to step up their purchases of equipment or are they still on the sidelines?

Christian Henry

No. We are starting to see that. In the quarter, we had about 10% of our business in sequencing on a revenue basis went to corporate customers. So, that's interesting. And I think, we continue to believe that you are not going to see pharma ramp up to operate like a genome center having 10 or 20 systems.

But anybody now that's doing genomic research almost has to have a system in next-gen technology. And, so our view is that every research center for a pharma company is going to have one or a couple of next-gen sequencers. And so that market will be there, it just won't be a scaled market like it might have been in the early '90s, where those sites were buying 10 or 20 or 30 systems.

Derik De Bruin - UBS

And, I guess, what type of applications, are they buying them for gene expression applications? Are they buying them for, I guess, how they are incorporating into research?

Christian Henry

Yean on the pharma side we don't get a lot of data that what they are doing inside their programs. But in general I can say that a pretty larger number, percentage of our overall customers are they doing expression or tried expression and that number is probably in the range of 50% that run some expression applications on the sequencer.

So, and there is lots of other applications besides just expression. So doing things like methylation is now becoming increasingly important and so the Whole Genome Methylation looking at CNV analysis using sequencing there is lots of emerging opportunities that we think pharma labs and other labs is what we'll be doing.

Derik De Bruin - UBS

So, when you kind of look at, you are doing 10G now in your labs, you are talking about getting to 20G by year end. I mean, when does the 10G become the shipment standard for what you are shipping out of the GA?

Jay Flatley

We are working with our customers now on getting some improved chemistry into their hands and so we would like to get the installed base consistently running up to 10G before year end and moving on beyond that shortly thereafter.

Christian Henry

Yeah. I think one of the things that's interesting Derrick is that the Genome Analyzer has such a diverse set of applications in a diverse customer base relative to any sequencer that's come for. And so, you'll will have some high end customers genome centers doing greater than 10G early this summer and then you'll have some of the lower end customers that may be quite frankly don't need 10G because they are doing expression or other tag based applications probably later in the fall or in the winter kind of achieving those levels.

The key for us is really simplifying the workflow, improving the data analyses capabilities and making the systems robust as we can and I think that if you look at the last nine months that's really what our focus has been and we are starting to see the dividends payoff.

Derik De Bruin - UBS

Great. And then just one question, you had quarter-after-quarter success and the numbers have gone up I guess really its, what keeps you up at night in terms of what you worry about in terms of the most potential thing that could derail the plans you have got going?

Christian Henry

Well I think the focus we have is to continue to innovate at a very fast rate. And so, we are continuing to look at our technology, the technology of the competitors and we need to make sure we are on very steep curves to continue to reduce our cost. And what's contributed largely to our success as we look backward has been our ability to grow the markets because the prices have fallen for customers and we are fortunate to be in this spaces where its highly elastic and we think products like what we are doing with Avantome and that acquisition fit right into that strategy, where we now have the ability to address the lower cost part of this market and take sequencing to yet another level beyond sort of the high end segment that we are concentrating on now. So, I'm not sure that keeps me up at night but it's certainly a very intense focus that we have in the company to make sure that we continue to innovate rapidly.

Jay Flatley

I mean, I think the another thing, we constantly grapple with internally as we get bigger we are becoming increasingly complex and keeping the corporate culture and the spirit around the world 24 hours a day, 7 days a week is something that we spend a lot of time thinking about and I think so far we have done a pretty good job of keeping that. But that's something that keeps me up.

Derik De Bruin - UBS

Great. Thanks.

Operator

Our next question comes from the line of May-Kin Ho from Goldman Sachs. Please proceed.

Davis Bu - Goldman Sachs

Hi. This is Davis Bu, actually. May-Kin apologizes; she had another appointment (inaudible). Can you hear me?

Jay Flatley

Yes.

Davis Bu - Goldman Sachs

Okay, great. So, a couple of things. One, I know it's a small part of your business but the services revenue and because I know that you had certified another couple of companies in Japan and Germany this past quarter. Can you give us some color on what the growth opportunities there are and how that fits in your business?

Jay Flatley

Yeah. If you look at our service business over the past four, five quarters, I guess it's probably best described as sort of flat. But, I think that's not necessarily reflective of what's happened in the market because we have certified now a quite a large number of what we call CSPros and these are customers who go through a qualification process with us and receive our certification to run services. And so, compared to where we were, say, two years ago there are many, many of these entities out there that are providing third-party services and we encourage that.

So, while our own service business has been sort of on the flat side. And we think the overall service business has continued to grow. We are going to become more and more active in the sequencing services just as we did in genotyping and so I think you'll see over the next year the beginnings of add-ons of other applications in our services business, which could kick start the growth that you see from us as well.

Davis Bu - Goldman Sachs

Great. The second question, I just want to make sure I heard you right. For your iScan, because of the higher ASPs, did I hear you right in terms of the effect or if you could just provide a little bit more color on what effect that has on the installed base or the installations and maybe, is it having an effect on their customer mix or any additional color there?

Jay Flatley

I don't think it necessarily impacts customer mix but what the point I was trying to get across there was that because the throughput is so much higher on an iScan if a customer might have bought three BeadStations previously over the course of six months now they might be able to get by with one. And so, there maybe sort of on the margin, somewhat lower number of systems required to meet the market demand.

But on average the consumed per system are going to be higher because the throughput is so much greater on their system. And this also sort of excludes the fact that when we get returns at BeadStations, we are going to resell those as well.

And so, I think that was the trend that I was sort of indicating. I don't think its going to be a measurable difference in our overall number of systems placements. But it might slowdown the growth of our array scanner placements compared to what we would have had, had we still been selling BeadStations.

Davis Bu - Goldman Sachs

Okay. Thanks for the clarification.

Jay Flatley

Yep.

Davis Bu - Goldman Sachs

The next is for your upgrade kits and trade-ins. I was wondering is that having a measurable impact on your top line and I don't know if you could sort of quantify it, what impact that's having?

Christian Henry

Yeah. I can say qualitatively, we are seeing as I think we have mentioned in our remarks a very high percentage of quick conversions from the GA1 to the GA2. So, on the sequencing side, we think everybody is going to upgrade because it's a relatively inexpensive upgrade for a huge jump in capabilities.

It's somewhat different on the array scanner side and there we think the upgrades will be over a much longer period of time. And the reason is that if somebody is operating already with a BeadStation and they are sort of at the right throughput.

Unless the equipment is becoming either obsolete or un-repairable for some reason, there is not a big incentive in the short term to spend a little bit more money to get the higher performance system. And so I think the upgrades you'll see in the scanning side of this will take some number of years.

Davis Bu - Goldman Sachs

I'm sorry. How much were the upgrade kits?

Christian Henry

Well we don't give the pricing specifically. But the way to think about it in the array business we offered upgrades that vary somewhat in price depending upon how recently you brought your scanner. So, someone had just recently taken and installed the BeadStation they had the opportunity to get the upgrade much less expensively than someone who had a three year old unit.

Davis Bu - Goldman Sachs

I see. Okay, that's it. Thank you.

Christian Henry

Thank you.

Operator

Our next question comes from the line of Jonathan Groberg from Merrill Lynch. Please proceed.

Jonathan Groberg - Merrill Lynch

Thanks for taking the call. I was just trying to figure out how to hit the star one faster. So, I just had a few questions. Maybe you can talk about your SG&A spend I know that's one area where you thought that every quarter you say you are below your long term model but as a percentage of sales it seems to keep getting lower. So, maybe you can describe kind of your plans for that line say over the next year or so?

Christian Henry

Sure. We are continuing to invest pretty heavily in SG&A and not so much on the G&A part but on the sales and marketing and support side. We now have almost 90 sales people. We have about a 175 customer support people on the team and so we are having to grow that organization not quiet at the pace of revenue, but not too far off the pace of revenue.

I think why we continue to be lower on the percentage of revenue is mostly a top line factor. I think, we are pretty much sort of doing what we expected to do in terms of the growth and the expense line but we continue to exceed the revenue plan. And part of that is that our teams are doing a great job. Our sales teams are bringing in big orders and they continue to carry very large quotas and be very successful. And so that's why the percentages have been under sort of our long-term guidance.

Jonathan Groberg - Merrill Lynch

But as you are saying in some of your remarks that you are shipping more outside of core genome centers and to potentially smaller labs and even things move out on the applied markets on the array side. I mean, has your view changed as to what the right rate is for just the sales, I guess, the sales part of the equation in terms of as a percentage of sales? What you are going to need to spend? Are you learning anything as you get bigger here?

Christian Henry

Well. I mean, certainly one effect is that we are becoming more efficient and that has to do both with the quality of the system we are producing is much higher than it was a year ago and the systems are much more robust. We have sequencing sites that had bought their first sequencer and it takes almost as much energy of a field support person to support one in a site as it does support two. And as they reorder the second one, the incremental support isn't that high.

And so to be honest, we are still fine tuning those models and we do every quarter to understand what we need to do going forward. But, I guess the bottom line of that is that we need to continue to invest in building that infrastructure. We have just been successful in keeping it slower than revenue growth.

Jonathan Groberg - Merrill Lynch

Okay. And then going back to the notion of where you are at in terms of pricing on some of the sequencing applications and then some of the array applications. Can you just talk about how your own expression array business grew or how it's growing or not growing?

Jay Flatley

Yeah. We did pretty well again in expression particularly on the order side. We had a very strong quarter in orders in gene expression. So, we continue to be a small part of the overall market. But we did introduce a new chip in our HD12 is a very exciting new product in expression that brings the price per sample down under a $100.

And so, I think that we are starting to get significant traction with that new product. And so while we think overall the market overtime is going to shift to sequencing. We are still doing okay in the array business.

Jonathan Groberg - Merrill Lynch

Do you have a [presto] as the customer comes to you to maybe look for a solution and they could either do sequencing or an array? Do you explain to them the costs kind of comparisons? Do you have a preference internally in terms of which one, they do from either a margin or business standpoint internally?

Jay Flatley

I mean it would probably would dependent if they had one of our systems already we probably want them to buy the other one.

Jonathan Groberg - Merrill Lynch

Right. To be honest.

Jay Flatley

But in general I think, we depended a little bit on what their profile was. If they wanted to do broad sets of applications and they wanted to look across the whole transcriptome then the sequencing is the right answer. If what they want to do is a very focused study and they were doing only 100 chips at a time or a 100 samples at a time say in a five or six month period then it might make more sense for them to use chips to do it. And if they only cared about the genes then that's the perfect solution. So, we are seeing sort of segment these customers depending upon their profile.

Jonathan Groberg - Merrill Lynch

But in terms of having an instrument in place there and whether or not they use the chips consumable or the reagent consumable on the sequencing instrument is one better for you from like a margin standpoint?

Jay Flatley

That's a complicated answer because it depends on its kind of core lab and there is other people using the same instrument and what the utilization rate is. So, that's not an easy question to answer. There is too many factors that go into it.

Christian Henry

Yeah. I mean to keep it really simple right we have historically said that the gross margins of the array side of the world are higher than the sequencing side of the world right now. So, if you just want to use that metric. But as Jay said the truth of the matter is it's really that we have the opportunity to help answer the question that customers asking and I think that's the way we have to approach this.

Jonathan Groberg - Merrill Lynch

Okay. And then last question or kind of line of question here. Christian can you just clarify I think in your prepared remarks you said something to the effect that the growth of both sequencing and the microarray business were equal contributors in terms of growth. We are talking about growth rates, absolute dollar I'm just trying to understand what you were saying?

Christian Henry

Yes. That was kind of on a relative basis compared to last year.

Jonathan Groberg - Merrill Lynch

From a growth stand point?

Christian Henry

So, basically in terms of dollar.

Jay Flatley

Year-over-year?

Christian Henry

In terms of dollar year-over-year.

Jonathan Groberg - Merrill Lynch

Okay, got it. And so if I take some of those statements and then take some of the statements around instrument revenues and some of the other ones you gave and if I triangulated it in, was there anything happening with sequencing this quarter in terms of pushback and upgrading to the GA2 or problems of shipping the GA2 or anything happening in the quarter with shipping some of the sequencing instruments?

Jay Flatley

We had a great quarter in shipping the instruments. I mean, I think we were right on target with what we are trying to get done internally and matter of fact we are little bit above those targets and then we had a big component, the out performance out of the stronger than expected array part of the business.

Christian Henry

So, in terms of how we thought about what the sequencing business would do for the quarter, we are very pleased.

Peter Fromen

I think that's all the time we have for questions. Operator, are you there?

Operator

Yes, sir. There are no further questions in queue.

Peter Fromen

Okay. As a reminder, a replay of this call will be available in webcast format 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 following the close of the third quarter.

Operator

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Illumina Inc. Q2 2008 Earnings Call Transcript
This Transcript
All Transcripts