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Q2 2011 Earnings Call
July 26, 2011 4:30 pm ET
Jay Flatley - Chief Executive Officer, President and Director
Christian Henry - Chief Financial Officer, Principal Accounting Officer, Senior Vice President and General Manager of Life Sciences Business Unit
Kevin Williams - CFO
Zarak Khurshid - Wedbush Securities Inc.
William Quirk - Piper Jaffray Companies
Dane Leone - Macquarie Research
Ross Muken - Deutsche Bank AG
Tycho Peterson - JP Morgan Chase & Co
Quintin Lai - Robert W. Baird & Co. Incorporated
Paul Knight - Credit Agricole Securities (USA) Inc.
Daniel Leonard - Leerink Swann LLC
Daniel Arias - UBS Investment Bank
Isaac Ro - Goldman Sachs Group Inc.
Peter Lawson - Mizuho Securities USA Inc.
Sung Ji Nam - Gleacher & Company, Inc.
Doug Schenkel - Cowen and Company, LLC
Amanda Murphy - William Blair & Company L.L.C.
Amit Bhalla - Citigroup Inc
Previous Statements by ILMN
» Illumina's CEO Discusses Q1 2011 Results - Earnings Call Transcript
» Illumina's CEO Discusses Q4 2010 Results - Earnings Call Transcript
» Illumina CEO Discusses Q3 2010 Results - Earnings Call Transcript
Good afternoon, everyone, and welcome to our Earnings Call for the Second Quarter of 2011. During the call, we will review our financial results released today after the close of the market and offer commentary on our commercial activity. After which, we will host a question-and-answer session. If you have not had a chance to review the earnings release, it can be found in the Investor Relations section of our website at Illumina.com.
Presenting for Illumina today will be Jay Flatley, President and Chief Executive Officer; and Christian Henry, our Senior Vice President and General Manager of Life Sciences, as well as our Chief Financial Officer.
The call is being recorded, and the audio portion will be archived in the Investor section of our website. It is our intent that all forward-looking statements made during today's call regarding our expected financial results and commercial activity, will be protected under the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are subject to risks and uncertainties. Actual events or results may differ materially from those projected or discussed. All forward-looking statements are based upon current information available, and Illumina assumes no obligation to update these statements. To better understand the risks and uncertainties that could cause results to differ, we refer you to the documents that Illumina files with the SEC, including Forms 10-Q and 10-K.
Before I turn the call over to Christian, I wanted to let you know we will participate in the Leerink Swann Life Sciences Tools and Diagnostic Conference the week of August 1, the Morgan Stanley Global Healthcare Conference the week of September 12, and the UBS Global Life Sciences Conference, the week of September 19. All 3 conferences are in New York. For those of you unable to attend any of the upcoming conferences, we encourage you to listen to the webcast presentations, which will be available through the Investor Relations section of our website.
With that, I will now turn the call over to Christian.
Good afternoon, everyone, and thank you for joining us today. During today's call, I will review our second quarter financial results, and Jay will then provide an update of our commercial progress and the state of our business and markets. Total revenue for the second quarter was $287 million, representing 36% year-over-year growth. Product revenue, which also grew 36% over the same period, was $270 million.
Revenue growth was driven by a strong demand for our sequencing products and an overall improvement in our array business. Consumable revenue for the quarter was $159 million compared to $126 million in Q2 of 2010 and $148 million in the prior quarter. The year-over-year and sequential consumable growth was driven by broad-based demand across both sequencing and microarray products. Annualized consumable revenue on the HiSeq was within our projected range of 300,000 to 400,000 per system per year, but was down slightly compared to last quarter.
This was largely due to HiSeq customers using their existing inventory of v2 sequencing kits prior to transitioning to the v3 kits, which began shipping in May. We are pleased with the customer uptake of the new v3 kits, and we expect sequencing consumable pull-through to increase throughout the year, as HiSeq becomes a greater percentage of our total installed base.
On the Array side, annualized consumable pull-through across our installed base of microarray scanners was up sequentially, and was within our targeted range of 400,000 to 500,000 per system per year. Both whole genome and custom arrays contributed to this growth.
Instrument revenue for the quarter was $107 million, up 53% over the second quarter of last year. This growth was largely due to shipments of HiSeqs and our HiScan and HiScanSQ systems. On a sequential basis, instrument revenue was down 7%. As we discussed last quarter, our successful production ramp enabled us to reduce the HiSeq backlog to more typical levels by the end of the first quarter. As a result, relative to Q1, there were few HiSeq shipments in Q2.
ASPs for HiSeq increased during the quarter, which partially offset the decrease in placements. Going forward, we expect HiSeq shipments to closely reflect the incoming order rate, and be composed of standard genome analyzer upgrades, current customers adding additional instruments, new customers and competitive displacements. We believe that all 4 of these segments represent significant opportunities. And overall, we expect HiSeq demand to remain robust.
Service and other revenue, which includes genotyping and sequencing services, as well as insert maintenance contracts, was $18 million compared to $13 million in Q2 of last year. The primary driver of the year-over-year growth was the increase in maintenance contracts for our growing installed base of sequencing systems.
Before discussing our gross margins and operating expenses for the quarter, I'd like to note that we recorded a pretax amount of $24 million related to non-cash stock-based compensation. This impacted our earnings per share in Q2 by a tax-adjusted amount of $0.11 per pro forma diluted share.
As a reminder, we now include this expense in our presentation of pro forma net income and earnings per share. However, in our discussion of gross margin, operating expenses and operating margin, I will highlight both our GAAP expenses, which includes stock compensation expense and other non-cash charges and the corresponding non-GAAP figures. I encourage you to review the GAAP reconciliation of non-GAAP measures that's included in today's earnings release.
Total cost of revenue for the quarter was $94 million compared to $66 million in Q2 of 2010. The Q2 2011 cost includes stock-based compensation expense of $1.9 million, compared to $1.4 million in the prior year period. Excluding this expense and $3 million associated with the amortization of intangibles, non-GAAP gross margin was 69%. This compares to 68.2% last quarter and 70.3% in the second quarter of 2010. The sequential gross margin increase was driven by product mix and higher ASPs on HiSeq 2000.