Jan 28, 2013
Executives
Rebecca Chambers Jay T. Flatley - Chief Executive Officer, President and Director Marc Stapley - Chief Financial Officer and Senior Vice President Christian O.
Henry - Senior Vice President and General Manager of Genomic Solutions
Analysts
Tycho W. Peterson - JP Morgan Chase & Co, Research Division Doug Schenkel - Cowen and Company, LLC, Research Division Derik De Bruin - BofA Merrill Lynch, Research Division Amanda Murphy - William Blair & Company L.L.C., Research Division Ross Muken - ISI Group Inc., Research Division William R.
Quirk - Piper Jaffray Companies, Research Division Daniel Brennan - Morgan Stanley, Research Division Isaac Ro - Goldman Sachs Group Inc., Research Division Daniel L. Leonard - Leerink Swann LLC, Research Division Daniel Arias - UBS Investment Bank, Research Division Vamil Divan - Crédit Suisse AG, Research Division Amit Bhalla - Citigroup Inc, Research Division Jonathan P.
Groberg - Macquarie Research Eric Criscuolo - Mizuho Securities USA Inc., Research Division
Operator
Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2012 Illumina Inc. Earnings Conference Call.
My name is Ayiesha, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes.
I would now like to turn the conference over to your host for today, Ms. Rebecca Chambers.
Please proceed.
Rebecca Chambers
Good afternoon, everyone, and welcome to our earnings call for the fourth quarter of fiscal year 2012. During the call today, we will review the financial results released after the close of the market, offer commentary on our commercial activity and provide financial guidance for 2013, 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, illumina.com. Participating for Illumina today will be Jay Flatley, President and Chief Executive Officer; Marc Stapley, Senior Vice President and Chief Financial Officer; and Christian Henry, Senior Vice President and General Manager of our Genomic Solutions business.
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 earnings call 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 actual results to differ, we refer you to the documents that Illumina files with the Securities and Exchange Commission, including Illumina's most recent Forms 10-Q and 10-K.
Before I turn the call over to Jay, I would like to let you know that we will participate in the Cowen Health Care Conference on March 5 and March 6. For those of you unable to attend this conference, 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 Jay.
Jay T. Flatley
Thanks, Rebecca, and good afternoon, everyone. To begin today, I will provide an update on the state of our business and markets before turning to our commercial progress.
Marc will then review our fourth quarter financial results and our guidance for fiscal 2013. Despite uncertainty around sequestration and the general macro environment, our business has continued to accelerate.
Q4 shipments were strong across all geographies, and revenue grew 24% year-over-year to $309 million. Shipments to the Americas grew 20% year-over-year, and European shipments were up 26% over the same period.
Shipments to Asia continue to be strong with year-over-year growth of 12%, including 30% growth in Greater China. While the NIH funding environment remains uncertain in light of a potential sequestration, our customers continue to display stable ordering patterns.
We believe this is due in part to a larger percentage of NIH funds being granted to sequencing-based research. Additionally, the European and Asian funding environments remain stable, and Asia may even improve slightly in light of Japan's recent stimulus announcement.
Despite these positive trends, we remain focused on diversifying our customer base. In fiscal 2012, approximately 30% of revenue came from nonacademic and nongovernment segments, and our goal is to increase this to approximately 50% of revenue over the next 5 years.
We believe this is possible as we accelerate the penetration of our technology into applied markets including the clinical, translational, consumer, forensic and agricultural segments. I'd like to now turn to the specifics of the Q4 results.
Total microarray revenue increased 4% year-over-year due to the impact of BlueGnome, while organic microarray revenue declined slightly. Order volume grew sequentially as a result of demand for the Infinium Omni arrays and significant interest in the recently launched Infinium HumanCore arrays.
In the first 2.5 months since launch, we received orders for 325,000 samples of the HumanCore arrays, which we expect to begin shipping this quarter. As an illustration of the high activity level that remains in the array market, in Q4, we shipped over 1 million samples worth of arrays across all of our array-based product lines, including Infinium, GoldenGate and VeraCode.
Turning now to our sequencing business. Total sequencing revenue grew 35% over the fourth quarter of 2011, driven by strong demand for consumables.
In fact in the fourth quarter, sequencing consumables grew 56% year-over-year due to higher utilization per instrument, as well as growth in both the HiSeq and MiSeq install base. Our Sample Prep business continue to gain share in the quarter and contributed significantly to sequencing consumables growth.
Nextera and Nextera XT Sample Prep kits had a particularly strong quarter, and the TruSeq demand was strong from translational and clinical customers. In addition, we are further expanding our portfolio with a launch of innovative Sample Prep solutions that streamline workflows and decrease turnaround times.
In the first quarter, we expect to launch the Nextera Rapid Capture Exome Kit, which will enable the fastest exome enrichment workflow for use on both the HiSeq and the MiSeq platforms. These kits will make the workflow 70% faster than the current solution.
We also plan to release TruSeq Targeted RNA kits this quarter, targeting the mid-plex real-time PCR market, which we estimate to be a $300 million market today. Finally, I'm pleased to announce that we begun shipping our TruSeq DNA PCR-Free Kit, which provides industry-leading genome coverage, high accuracy in identifying variants and the ability to sequence challenging regions of the genome.
We also continued to deliver dramatic enhancements to our SBS chemistry. Our latest technology innovations demonstrate the scalability of SBS by enhancing cluster density and read lengths.
Our novel ordered array technology overcomes typical statistical limits to significantly increase cluster density and the number of reads per flow cell. This breakthrough development will increase sequencing output, enhance counting applications and reduce turnaround time through more efficient image processing.
We expect to begin field testing this technology in Q3 and have it incorporated in our first kits around year end. We also recently announced the acquisition of Moleculo, which gives us access to a proprietary technology for assembling phased reads of more than 10 Kb at an extremely low error rate of Q50 or better.
Through Sample Prep and bioinformatics, researchers can create a completely phased genome in 4 days with only 30G of incremental sequencing. This will directly benefit approximately 10% of the NGS applications today, as well as a portion of the capillary market.
We plan to launch this in our services business during the second quarter, with kits available toward the end of the year. We will further expand the capability of the HiSeq platform in the second half of this year with the launch of new kits to sequence up to 300G in approximately 60 hours.
This expanded capability will come solely from enhancements to reagents and software. Sequencing instrument revenue increased 6% compared to the fourth quarter of 2011, with MiSeq instrument sales demonstrating significant growth year-over-year.
Additionally, ASPs remain strong despite the ongoing success of our trade-in program. Interest in the MiSeq platform also widened since we laid out the updated product roadmap at ASHG, including a path to 15G of output.
Based on field commentary, our competitive position has strengthened, and we're optimistic that strong ordering patterns will persist. During the fourth quarter, we received more than 300 MiSeq orders, which exceeded our manufacturing capacity.
This strong order trend, along with MiSeq winning head -- 80% to 90% of the head-to-head competitions, provides evidence that we have more than 50% market share this quarter. Customers are choosing MiSeq as it consistently delivers higher output and better data quality along with the easiest workflow.
We believe this end-to-end workflow, including back-end informatics, streamlined data analysis and data sharing features via BaseSpace, offer the most comprehensive solution for desktop sequencing customers. The successful launch of the HiSeq 2500 in October illustrates the tremendous value customers find in the HiSeq platform.
We now expect to upgrade around 35% of the existing HiSeq installed base. It will take us most of 2013 to complete this upgrade program as less than 10% of the installed base was upgraded during the fourth quarter.
The HiSeq platform is now also enabled to stream data to BaseSpace. The breadth of analysis and functionality being delivered by BaseSpace apps is growing every month, and we expect a full e-commerce rollout in the second quarter.
Our FastTrack Services business shipped more than 2,500 genomes in the fourth quarter or close to 3x the number shipped in Q4 of last year. Demand grew consistently through 2012, and in total, the Illumina Genome Network received orders for approximately 13,000 genomes.
Today, interest in sequencing services remains high, including preliminary talks of large hospitals and governments that hope to sequence significant numbers of individuals. To fill the demand for sequencing services, we've added significant new capacity to our San Diego facility and will open a new lab later this quarter in our Hayward location.
This facility, along with improvements to our existing infrastructure, will provide the capacity to sequence approximately 30,000 genomes this year. Moving on to our clinical business.
We recently signed a definitive agreement to acquire Verinata Health, a leading provider of non-invasive prenatal test or NIPT, for the early identification of fetal chromosomal abnormalities. This acquisition will build on our earlier acquisition of BlueGnome, adding another building block to our portfolio and moving us toward our goal of leading the genetic revolution in reproductive health.
These acquisitions, combined with our internal carrier screening and cytogenetics programs, provide us with a solid foundation to accomplish this goal. With this acquisition, Illumina is uniquely positioned to enable the growth of the NIPT market.
We believe Verinata possesses foundational IP and has the most compressive non-invasive prenatal test. Our strategy will be to leverage these strengths by licensing Verinata's intellectual property, and once we compile the necessary data, submitting the test for regulatory approvals.
We believe an IVD test will significantly expand the global market and enable all test providers to be successful in this field. Verinata has signed an exclusive U.S.
distribution agreement with PerkinElmer to drive adoption of the verifi prenatal test. We're excited about this announcement and look forward to participating in this partnership once our acquisition of Verinata has closed.
I'm pleased to report that we also submitted our first 2 sequencing products to the FDA for 510(k) clearance in the fourth quarter: the MiSeqDx system and the cystic fibrosis full gene sequencing assay. We believe the CF assay is differentiated from current test offerings as it will sequence the entire CF gene while also identifying a group of specific CF areas.
We're pleased with our execution in 2012 and our outlook for revenue growth in 2013 and beyond. To ensure this momentum translates into strong long term revenue growth, we will continue to make incremental investments in our core business in addition to investing in Verinata and BlueGnome.
We have focused 2013 organic investments in 3 key areas. First, while the competitive dynamics surrounding our sequencing platforms are strong, today we're not able to match the geographic reach of our competitors.
To improve this position, we plan to add more than 50 additional sales reps over the course of the year. This investment will add to growth in the near term and create significant leverage in the years beyond.
We also plan to invest incrementally more in research and development this year due to the richness of our portfolio opportunities. Our goal is to remain in the leading edge of technology by introducing even a greater number of new products, investigating new chemistries including nanopore and working to provide solutions to customer bioinformatic challenges.
Lastly, we're investing in the necessary infrastructure enhancements to support a $2 billion company. We recently began 2 new projects that are projected to cost approximately $10 million in 2013.
The first multiyear project, being led by Marc Stapley, is focused on improving our global business processes via enhancements to our ERP system, as well as the related systems and processes necessary to support our growth projections. Christian Henry is leading a second project, which is focused specifically on manufacturing, planning and inventory management.
Success of these programs will improve our order fulfillment performance and ultimately our gross margins as we more efficiently meet customer requirements. Part of this infrastructure build will be particularly focused on diagnostic and clinical customers.
While nascent today, the clinical adoption of NGS is set to revolutionize health care. To this point, a number of organizations have recently published guidelines on the use of NGS in the clinic, including the American College of Medical Genetics and Genomics, the Association for Molecular Pathology and the CDC.
These groups have cited the increased rate of clinical adoption of NGS as the catalyst for guidelines in an effort to ensure patients have access to high-quality data and interpretation. We believe that by making these strategic investments, we will accelerate the adoption of sequencing technologies more broadly into all of our end markets and position ourselves for strong long term revenue growth.
I'll now turn the call over to Marc who will provide a detailed overview of the fourth quarter results.
Marc Stapley
Thanks, Jay. During my section of today's call, I will review our fourth quarter financial results before providing commentary on our guidance for 2013.
With respect to Q4, as Jay described, our positive momentum continued, and led not only to the fifth quarter of sequential revenue and EPS growth, but also our strongest quarter ever. Impressive MiSeq instrument sales, as well as demand for sequencing consumables of whole-genome services, generated record revenue of $309 million, an increase of 24% year-over-year.
Our BlueGnome acquisition contributed revenue of approximately $7 million in the quarter, which is higher than our original estimate due to the early success of the ongoing integration. Revenue for 2012 was $1.15 billion, which represents an increase of 9% over 2011, reflecting primarily consumables growth year-over-year.
Instrument revenue for the fourth quarter was $80 million, which is flat compared to the fourth quarter of 2011. HiSeq shipments were down slightly year-over-year, as was the demand for microarray instruments, but this was offset by strong demand for our MiSeq benchtop instrument.
Consumable revenue in the quarter was $196 million, an increase of 36% compared to the fourth quarter of 2011, primarily due to higher demand of sequencing consumables and the impact of BlueGnome. Consumable revenue represented 63% of total revenue, up from 57% in Q4 last year and up slightly sequentially.
As we build out the sequencing installed base, consumable sales continue to climb, and this contributes to the improved mix year-over-year. For the full year, the average consumable pull-through was approximately $320,000 for HiSeq and approximately $50,000 for MiSeq.
Due to the fact that seasonality and the timing of budgeting cycles can cause significant quarterly fluctuations in the pull-through rate, going forward on a quarterly basis, we plan to give qualitative commentary comparing against our projected annualized pull-through levels. These projected ranges are $300,000 to $350,000 for HiSeq and $45,000 to $50,000 for MiSeq.
Services and other revenue, which includes genotyping and sequencing services, as well as instrument maintenance contracts, was $30 million for the quarter, a 54% increase year-over-year. This was driven largely by the significant number of genomes processed in the quarter, as well as the ongoing growth in our extended maintenance contracts associated with the growing instrument installed base.
Turning now to gross margin and operating expenses. I will highlight our adjusted non-GAAP results, which exclude noncash stock compensation expense, headquarter relocation expense and other items.
I encourage you to review the GAAP reconciliation of non-GAAP measures included in today's earnings release. Our adjusted gross margin for the fourth quarter was 68.5%.
This compares to 70.5% in the third quarter of 2012. The sequential decline in gross margin was due to nonrecurring power replacement costs associated with our extended warranty services, inventory reserves, manufacturing variances and a small impact from BlueGnome margin dilution.
Admittedly, we were disappointed with this result but are confident that the programs that we already have in place, that Christian and I are sponsoring, will help to ensure that we see a gradual improvement in gross margin going forward. These programs include the inventory planning and management system, as well as the global business process program that Jay mentioned earlier, in addition to discrete programs focusing on reductions in cost of goods sold.
Adjusted research and development expenses for the quarter were $48 million or 15.4% of revenue, compared to 15.9% in the third quarter and up slightly over the 15% of revenue in the fourth quarter of last year. The sequential increase is primarily due to headcount additions, as well as the impact of BlueGnome.
Adjusted SG&A expenses were $62 million or 19.9% of revenue in the quarter. This is compared to the 19.5% of revenue in the third quarter and a decline from the 20.1% of revenue in the fourth quarter of 2011.
Legal fees associated with the Complete Genomics bid, as well as the Verinata and Moleculo acquisitions contributed to the slight increase over Q3. Adjusted operating margins were 33.1% compared to 35.1% in the third quarter due to lower gross margins as well as higher SG&A expense.
On a year-over-year basis, operating margins contracted somewhat due to lower gross margins as well as higher research and development expense. In the fourth quarter, we recognized approximately $1.6 million of adjusted other income, which included interest income recognized on a recovered loan that was previously impaired.
Our non-GAAP tax rate for the quarter was 28.9% compared to 35.3% in the fourth quarter of last year. The Q4 tax rate benefited from the transition of manufacturing to Singapore exceeding our full year internal expectation, but did not benefit from the 2012 R&D tax credit, which was enacted in January and will therefore be recognized in the current quarter.
Non-GAAP net income was $57 million for the quarter and non-GAAP EPS was $0.42. This compares to non-GAAP net income and EPS of $44 million and $0.35, respectively, in the fourth quarter of 2011.
These results were slightly better than we projected at the time of the JPMorgan conference, with the lower-than-anticipated gross margin being more than offset by the tax rate coming in below our forecast. Those items being updated subsequent to the conference as part of our normal close process.
We recorded GAAP net income of $72 million or $0.53 per diluted share in the fourth quarter compared to $11.7 million or $0.09 per diluted share in the prior year period. Current period results include the sale of our minority investment in deCODE Genetics to Amgen, which resulted in a pretax gain of $48.6 million.
Additionally, we incurred $4 million of ongoing expenses related to Roche's unsolicited tender offer, as well as a $3 million charge associated with the relocation of our headquarters. This charge is primarily due to a delay in the anticipated sublease of our prior headquarters.
During the quarter, we generated cash flow from operations of $79 million. Capital expenditures were approximately $17 million, resulting in $62 million of free cash flow.
DSO decreased to 63 days compared to 69 days last quarter, and we ended the quarter with $1.35 billion in cash and short-term investments. During the quarter, approximately 496,000 shares were repurchased for $25 million under our previously announced repurchase program, leaving slightly more than $165 million of authorization remaining.
Before looking ahead to 2013, I'd like to clarify that all guidance estimates include the impact of the Verinata transaction, which we do expect to close shortly after the satisfaction of regulatory approvals. For fiscal 2013, we are projecting total company revenue growth of approximately 15% and full year non-GAAP EPS of $1.55 to $1.62.
Included in these projections are the following assumptions: Verinata dilution of up to $0.20; 70% gross margin; the impact of the investments Jay mentioned earlier; stock compensation expense of $115 million; assuming the current stock price, full year weighted average non-GAAP diluted shares outstanding of 134 million; and a full year pro forma tax rate of 31%, which includes the benefit of Singapore manufacturing, the 2013 U.S. R&D tax credit, and, in Q1, a catch-up benefit from the 2012 R&D tax credit.
To conclude, we have made significant progress this quarter with our market-leading instruments, and customer interest continues to be strong. Our installed base in both the high throughput and in desktop markets has continued to grow, and our new product introductions have been well received.
In addition, we have furthered our diagnostic strategy with an acquisition in one of the fastest growing clinical segments. We believe that our planned investments are critical to ensure that we efficiently deliver the most innovative and highest-quality solutions to both our existing and new customers, enabling strong revenue growth in 2013 and beyond.
Thank you for your time, and we'll now open the line for questions.
Operator
[Operator Instructions] Your first question comes from the line of Tycho Peterson with JPMorgan.
Tycho W. Peterson - JP Morgan Chase & Co, Research Division
Maybe just first question on the gross margin guidance. Can you maybe talk about some of the gives and takes to get to that 70%?
Obviously, you talked about some of the investments that are being made on the IT front. But can you just talk about where you're going to get some of the leverage?
Marc Stapley
Yes, Tycho. So some of the leverage is going to come from -- we mentioned we had some nonrecurring items in the fourth quarter, so obviously, we're doing a lot to address that as well so that will help us in the first quarter.
The consumable mix will continue to help us. From the headwind standpoint, as I've always said, as our services business grows as well, that's dilutive to margin.
And then the Verinata acquisition itself would be somewhat dilutive in the quarter when that closes. And then the other is pricing.
We think we have leverage there including consumable pricing. Remember the pricing increase that we put in place during 2012.
Some of that was deferred based on standing orders that were placed, and the effect of that will come through in the first quarter in addition to in the second quarter, the new pricing increase -- relatively modest pricing increase that we've talked about previously.
Tycho W. Peterson - JP Morgan Chase & Co, Research Division
And then just a follow-up on Verinata. You talked about, obviously, when you announced at the uncertain IP landscape.
Can you just maybe talk to timelines to which we think you could get some resolution there? And then are you still looking at acquiring additional content to help kind of build that out as you partner with Perkin?
Jay T. Flatley
Intellectual property, as you know, Tycho, is always an area of uncertainty in terms of timing. Our goal, certainly, is to enter into discussions with all the players and all the owners of various intellectual property in the field and see whether there's the potential to sort this out in a way that's rational for everyone.
We're not sure that's the case, but we're hopeful that it is. I suspect we'll have a first shot at that sometime in the next quarter.
If we're not able to do that, then these various litigations will proceed along the traditional legal tracks which often take multiple years. With respect to content, I'm not sure what your question was directed toward exactly.
Tycho W. Peterson - JP Morgan Chase & Co, Research Division
You had talked about maybe adding on Turner syndrome, Triple X, other content that could be kind of bundled with this.
Jay T. Flatley
I see, yes. So the existing Verinata test includes the 3 trisomies, the 18 -- 21, 18 and 13, and it also includes today the typical sex chromosome abnormalities.
And so that's where the test will stay for some time. But you did see a publication shortly after we announced the transaction, I believe it was Thursday of the week of JPMorgan, a publication by scientists at Verinata talking about the ability to use this test to detect some chromosomal abnormalities.
And so that's something to focus on in the future, but nothing we're prepared to comment on specifically as to timelines.
Operator
Your next question comes from the line of Doug Schenkel with Cowen and Company.
Doug Schenkel - Cowen and Company, LLC, Research Division
You guys have been, obviously, pretty active with M&A over the past few months, so I guess just a few related questions. First, would you be willing to break out how much of the growth that you expect in 2013 is organic versus inorganic revenue?
And how much of that is Verinata? I guess the second question would be, mathematically, it seems like you're layering on at least $40 million to $50 million in operating expense onto the P&L via the Verinata transaction.
Is that all Verinata-specific or would you expect some benefit from that spend as you think about, really, broader clinical initiatives that you are targeting over the next few years? And then finally, any update on how discussions are progressing with some of Verinata's competitors that are existing Illumina customers?
Jay T. Flatley
Okay, let me give a shot at those things. So to the first part of the question, we're not going to decompose the revenue any further than we've done during the script, Doug, so we're not going to give a lot of further insights into that.
I think you can, based on some of the guidance we gave about dilution, back into some of the Verinata numbers if you work at that. With respect to the incremental expenses in Verinata, there is going to be some carryover into other parts of the business.
Certainly, one of the things we're going to be doing quite actively this year and next is investing heavily in the clinical trial work necessary to get an IVD product into the market. So that's over and above the traditional headcount expenses that you would inherit, and that's all budgeted into the numbers that we've included for the dilution.
There are some areas where we'll be able to work with them in clin reg and things like that, where it may give us the opportunity to not spend as much as we might have in San Diego. And clearly, the program will be integrated very tightly with what we're doing at BlueGnome, because particularly as we get into subchromosomal analysis, there's a very clear intersection with what we're doing with PGD and with cytogenetics.
So those programs will become more integrated as we move forward. With respect to discussions with the other players, we've obviously met with them, and over the next, I'd say, a month or 2, we'll be in significant discussions with them about the various interest that they each have in this field and working forward to address any concerns they might have about their supply agreements, et cetera.
Doug Schenkel - Cowen and Company, LLC, Research Division
Okay. And one real quick one.
You again acknowledged, really, the commercial reach disadvantage that you say you have in benchtop sequencing, and that's part of the incremental spend that you guys outlined in your prepared remarks today. But do you believe the fact that you received 300 orders for MiSeq in Q4, is it all a sign that this disadvantage is dissipating?
Jay T. Flatley
We do think we've made significant progress already, both in getting word-of-mouth from the first users of MiSeq who love the instrument are talking to others in the market and the rate of publications that's ramping up, so there's a bit of a viral effect that's beginning to take hold with respect to MiSeq. We still remain challenged in some of the more distant geographies.
And by that, I mean, places where you wouldn't normally have a direct sales organization. And so we do plan to beef that up both through addition of some improved distributor networks, but also just adding in people.
And those would go into typical -- or customer sites that we wouldn't normally call on. So I think there's more to be had here and the 50 incremental sales reps that we plan to add, we think will be enough to get us to the next level.
Operator
Your next question comes from the line of Derik De Bruin with Bank of America.
Derik De Bruin - BofA Merrill Lynch, Research Division
Can you just give us a general feel for how many MiSeqs you placed in 2012? And I'm just trying to get a sense for where so we are in the rollout and the market opportunity.
It's like, what do you think is the potential for the penetration of that? And then I also want to sort of flip that over to HiSeq, and I'm just trying to get what's sort of embedded in 2013 for your instrumentation expectation?
Jay T. Flatley
I'm sorry, Derik, I missed the last part of the question.
Derik De Bruin - BofA Merrill Lynch, Research Division
I'm just trying to get a sense, when we look at the 2013 guidance, what should we be thinking about instrument growth versus consumables growth?
Jay T. Flatley
Yes. Well, the last data point that we gave on MiSeq was when we passed through the 1,000-unit number.
And so that's the latest update we've given on the installed base, and you can assume that we're significantly above that now. We did get 300 orders, as we mentioned, in the fourth quarter.
We didn't ship that many because we also stated that, that 300-unit number exceeded our production capacity during the quarter and, obviously, therefore exceeded our forecast in terms of what we expected. So the momentum around HiSeq is really quite good.
And I think you can use that 300 as a benchmark to make your extrapolation on what you think that placement rate might look like through the course of this year. So far, we're continuing to see growth in MiSeqs.
I don't think I would say that every quarter we're going to continue to grow the order rate. At some point, that's going to flatten out some.
And HiSeqs, I think you can, roughly, think about that as being in the ballpark of flattish on a units basis, although varying a little bit quarter-to-quarter.
Christian O. Henry
I think the one thing about HiSeq, though, Derik, is that the 2500 really gives us an opportunity as an upsell because it's typically at a higher ASP than a 2000. And so even though the -- and many customers are buying -- are opting for the 2500 over the 2000.
So on a revenue basis, that really helps us.
Jay T. Flatley
Yes, in fact, we saw it in the fourth quarter, a significant uptick in ASP because of the mix toward the 2500.
Derik De Bruin - BofA Merrill Lynch, Research Division
That's really helpful. So Doug sort of asked the one question on the competition floor Verinata.
I'm going to ask the competition on the services side of the business. With BGI now going to be acquiring Complete Genomics, how do you look at that relationship going forward?
And have you had any indication from customers about what they're thinking about that?
Jay T. Flatley
I think it's a little early to tell because they don't own them yet, so I don't think what we've seen in the marketplace is reflective of any different strategy or new strategy on the part of Complete Genomics. Once the transaction's complete, we'll obviously be watching for that.
Our goal is to continue to make BGI a very successful customer and have a successful relationship with them. Once they complete the transaction, we will be having a series of meetings with them to sort of understand where they want their supply agreement to go with us, and that agreement is up for renewal in the April timeframe.
So it's quite timely, actually, so we will be sitting down with them shortly to go through all that.
Operator
Your next question comes from the line of Amanda Murphy with William Blair.
Amanda Murphy - William Blair & Company L.L.C., Research Division
So I had a question on the ordered arrays you talked about at JPMorgan. You talked about the arrays providing meaningful benefits on the HiSeq.
So I'm curious what exactly that means in terms of performance for customers? And ultimately, could that translate to a bigger benefit on the MiSeq than, perhaps, initially?
Jay T. Flatley
Well, we haven't given out the exact specs yet, Amanda. And the reason we haven't is because we haven't decided exactly how we're going to formulate the kits yet.
So it's not really that we don't have the answer, it's really a marketing question now about how we actually design the particular flow cells that we'll put in these kits. On all of the sequencing products, you'll have a direct linear relationship between the cluster density that we have traditionally extrapolated now to the number of ordered features.
So whatever that increase is, you'll increase that number of tags. And therefore, for counting application such as expression, you'll have that direct relationship.
If there's 1.5x as many tags, you'll have 1.5x as many features, you'll have 1.5x as many tags for expression. With respect to the amount of sequencing output, it's a little more difficult because it will relate to a couple of different factors.
One is to the optical resolution of the particular instrument, which may help dictate the exact pitch or the distance between the ordered features. And that may wind up being different on the different flow cells for the different products.
And it also is also conflated with the read lengths. So if we're changing read lengths on these instruments as well, we have to be a little bit cautious about quoting numbers because some parts of the overall increase in output will come as a result of read lengths versus density increase on the flow cell.
So that's a long-winded answer to basically say you're going to have to wait a little while longer until we actually determine the specific kit configurations that we're going to launch, what the impact is.
Marc Stapley
But I do think the one thing that's really interesting to think about is the quality of the reads today at 150, 250 base pairs is really high. And with the ordered arrays, you may make trade-offs to decide, "Hey, I want to stay at 150 or 250 base pairs and get an improvement in density," or you may want to go out, we may decide to optimize on the longer read length with a wider pitch, so to speak, to keep the performance of the -- whatever that particular flow cell product in a specific range.
So it gives us a lot more flexibility.
Amanda Murphy - William Blair & Company L.L.C., Research Division
Got it. And then the other thing I was going to ask is, I guess, at a high level on -- obviously, you're not going to talk too much about your pipeline.
But one of the takeaways I had, given your recent announcement, is that there's clearly a lot more room on the -- just the SBS chemistry. You're -- you've mentioned some of the read length improvements that you can make, et cetera.
So I'm just curious how to think about that in terms of just the capacity of the industry, where that's at currently and sort of the propensity for customers to adopt technology going forward? Obviously, you're not saying you're going to have any platforms or anything like that, but just thinking about how much more room you have on the SBS chemistry versus sort of new products you may or may not be introducing in the long term?
Jay T. Flatley
Our capacity industry, I presume you meant the market's ability to absorb new technology or greater output?
Amanda Murphy - William Blair & Company L.L.C., Research Division
Exactly, yes.
Jay T. Flatley
Yes, yes. Well, we think, and we thought this for a long time, but that the actual demand for sequencing in any near-term horizon really is an insatiable demand.
I think if you reflect back onto the v3 issues that we had in 2011, what we really did there is we created a temporary discontinuity in the market. Because the market didn't have a channel of samples ready, and they had to change the way they ran the instruments.
And so, partly, that's a reflection of a lesson we learned in terms of how to make sure we introduce these technologies in more piecemeal ways. But I don't think it's reflective of the capacity of the industry.
That capacity is really only governed by how many dollars there are out there allocated toward sequencing. And if we can make greater capacity for the same dollars, that capacity will get absorbed.
And so the goal we've had, always, is to continue to drive down the price of sequencing, because we think it enables new markets and makes the overall dollars that are coming into the market much, much larger as a result of enabling those new segments. And we're going to do that in lots of different ways, and part of it is by segmenting the market more.
So there'll be, over the next few years, potentially more systems that address more targeted segments of the market. You can imagine now that we're involved in the NIPT market more directly, that we have the ability to begin to think about how do we optimize technology for specific kinds of tests.
And ultimately, we'll decide whether that's an economic decision that makes sense, for us to more closely design an instrument for a family of particular test. That test, for example, uses only 25 base reads in most of the applications.
And so it's slightly different than a general-purpose instrument. And so I think the way to think about this is that we will create more variations of the instruments over time that will be more specifically tailored to particular market segments.
Operator
Your next question comes from the line of Ross Muken with ISI Group.
Ross Muken - ISI Group Inc., Research Division
So on the new product side, post JPMorgan, I mean, you guys also have announcements on both sides of the business. Where did you see the most interest in terms of some of the advancements you had, both on HiSeq, MiSeq?
And what was the response to the Moleculo concept?
Jay T. Flatley
Well, I think the people probably expected us to continue to boost the output of the machines. So I think that was very well received.
But in some ways, it's kind of always expected from us. I think that the one thing that we talked about at JPMorgan that got a huge reception was the Moleculo long-read technology.
And in particular, because the PAG meeting, the Plant and Animal Genome meeting, was the next week, and the kinds of customers we have at the PAG meeting are those exact target customers for long read lengths. And so there was tremendous excitement about the ability to begin to address some of these more complex plant genomes, very large and non-diploid genomes using the Moleculo technology.
So I think that was, in the short term, unexpected and of very high interest.
Operator
Your next question comes from the line of Bill Quirk with Piper Jaffray.
William R. Quirk - Piper Jaffray Companies, Research Division
For you, Christian, first question, you guys have been pretty nimble in the past around capacity expansions, and given the strong MiSeq order rate. Can you help us think about plans for expanding the production?
How quickly could you work down the backlog?
Christian O. Henry
Yes, Bill, it's Christian. We will work down the backlog quickly.
We have a very strong rate of production each week, but the demand was so strong in the fourth quarter. We were really limited by some of the raw materials coming in and not so much the capacity of the plant.
And so as a result, we'll -- we've accelerated some of the receipts of raw materials, and we'll get back on track this quarter. That being said, having a bit of a backlog going into a particular quarter and possibly even exiting the first quarter, from a production perspective, isn't a bad thing because it allows you to balance your production between all of the products.
Today, in our Hayward facility, we manufacture the HiSeq 2000, the 2500, the MiSeq. And so we're able to -- with that little bit of backlog we're able to balance the production across all of the product families.
And so we're very fortunate to have higher, more demand than we were expecting. And it was really, at the end of the day, it was the raw materials coming in that precluded us from delivering everything we wanted to get out the door.
William R. Quirk - Piper Jaffray Companies, Research Division
Got it. And then just a couple of quick accounting questions.
What does the guidance assume about sequestration? And then secondly, and maybe this one is specifically for Marc, how do we think about the Verinata accounting?
Is that going to be accrual or cash based, or is it going to be cash and so, obviously, we start rolling up some reimbursement coverage.
Marc Stapley
Yes. So let me take the Verinata one.
I mean, the way we're going to do that is, obviously, we're going to do it on a GAAP basis, is if we think the recoverability is reasonably assured, we take the revenue. But obviously, early on, that's not necessary the case and so we'll take revenue on a -- more of a cash basis.
Jay T. Flatley
With respect to NIH assumptions, sort of the baseline assumption that we have is a 2% to 4% decrease as a result of the sequestration -- or the solution sequestration is probably the better way to say that. I think we've consistently said that if it winds up being a flat budget, that's going to be upside opportunity for us.
If it winds up sticking at the minus 8, that's probably some downside risk. But we think the chances of winding up at minus 8 are very small.
Operator
Your next question comes from the line of Daniel Brennan with Morgan Stanley.
Daniel Brennan - Morgan Stanley, Research Division
So I had just a few questions. Maybe just on the 50-person headcount investment, could you provide some details about the focal point for this increased sales force, maybe end markets, geographies?
And kind of related to that, would this -- I mean, should we consider this as kind of building for maybe a multi-year future, or is this something that -- once you do this in 2014, is this something we should maybe expect as your demand increases in kind of clinical markets you might have to continue to step up the investment?
Jay T. Flatley
Well, I would think about this largely as a 2013 step change. So the 50 is incremental to what we would have done otherwise.
And I think we'll certainly invest heavily in clinical accounts or clinical sales type people in our TCG business. There will be some investments in sales force related to cytogenetics works that BlueGnome is doing.
There will be some investments for going after new markets like forensics, and then there will be a general geographic add-on to try to increase our reach.
Daniel Brennan - Morgan Stanley, Research Division
Great, okay. And then maybe switching over to MiSeq.
I know you -- I believe you gave guidance for pull-through, maybe of kind of $45,000 to $50,000. Could you just comment on -- I mean, it seems a little bit lower than I think, historically, maybe we heard in the past.
And just kind of what you're seeing on kind of MiSeq pull-through? I would think there should be a lot of headroom on the upside.
So what kind of utilization patterns are you seeing from customers?
Jay T. Flatley
Well, that $50,000 number is a number we've always targeted. And that was -- even at the time we first launched it, we said, "Let's plan for $50,000."
And that's about where it's come out. What we see in MiSeq is a very interesting pattern that has to do with the aging of the systems and we'll have to see over maybe the next year how this turns out.
But clearly, as the systems become installed for greater and greater periods of time, the output on that particular system tends to go up. But because we're early in the product launch, we do have a very large number that are at the front end of that curve that are very low consumption because customers are developing assays or really beginning to think about how to deploy the technology.
So we think, as we look forward maybe a year, there's a chance that, that number could begin to move up as more of these get put into production environments as clinical customers begin to use them routinely in labs. But I think for fiscal '13, using a number in that $50,000 range is probably the right place to be until we know otherwise.
Daniel Brennan - Morgan Stanley, Research Division
Great. And then if could, on ovarian and gastric, Jay and Christian, any update there on how we should be thinking about timing for those colorectal?
Jay T. Flatley
Yes, no update today on that.
Operator
Your next question comes from the line of Isaac Ro with Goldman Sachs.
Isaac Ro - Goldman Sachs Group Inc., Research Division
Jay, can you maybe give us a little color on how the economics for Verinata will work. As I understand it, you guys are handling the sales and marketing while Perkin is taking care of the billing.
So just wondering if we can infer that you guys would maybe shoulder a little bit more than half the cost in exchange for more than half of revenue and earnings?
Jay T. Flatley
We can't give you the specifics of the agreement because those are confidential. But what I can say is that the actual sales efforts, at least in the near term, are going to be divided up.
Verinata had a direct sales force. That direct sales force will stay in place.
And PerkinElmer has their own sales force. So PerkinElmer will do sales, marketing into their channel and all the billing and reimbursement.
But Verinata will also -- does have and will continue to have a direct sales operation as well.
Isaac Ro - Goldman Sachs Group Inc., Research Division
Okay, great. That is actually helpful.
And then in terms of the future technology, chemistry A and B, any color you can provide on where those next-gen chemistry stand in development?
Jay T. Flatley
No, not a lot on that. I guess what I can say is that we've begun to work, as I've said publicly, in the area of nanopores.
And so we have diverted some investment over toward nanopores, and we've continued to make unbelievable progress on SBS. And so if you look at sort of the ratio of dollars being spent on alternative chemistries, it's probably shifted a little bit away from A and B just because we're making such great progress on SBS, and we're working on nanopores in addition.
Isaac Ro - Goldman Sachs Group Inc., Research Division
Great, if I can just sneak in one last one on BaseSpace. Maybe comment a little bit on what percentage of the installed base is actively using the technology and what the investment is eventually going to get by the end of this year once you've got the entire platform theoretically enabled?
And just any color on the App Store pull-through and so forth?
Jay T. Flatley
On MiSeq, right now, we have about 70% of the customers connected. And we think that is pretty close to the theoretical number.
I mean, it may inch up a little bit from there. But there's a fraction of the installed base that just does not allow to be connected to the Internet, and so that will never be 100% no matter how well we do.
Of that 70% that are connected, I believe the current number that's uploading data is about half of them. Half of the 70% are actively uploading their actual data runs.
Most all of the 70% are uploading the health information, and so we are being able to use this in very powerful ways now to sort of watch the quality metrics in the field on an aggregate basis and diagnose problems earlier. It's an incredibly powerful tool for us.
On the HiSeq front, it's really too early to know, because it's just began really around December 1 with the shipments of the first 2500s. And as I've said previously, we expect the connection rate of HiSeqs to be slower in the installed base, because everybody who owned the HiSeq previously already has some local IT infrastructure to support it.
And so they either have to give that up or begin to switch over time to the use of BaseSpace. And so that migration in the HiSeq front will be slower.
Operator
Your next question comes from the line of Dan Leonard with Leerink Swan.
Daniel L. Leonard - Leerink Swann LLC, Research Division
On the price increase front, I think Marc mentioned you're going to issue another price increase in the second quarter. So I wanted to confirm that and also and get some color around your thinking around consumables pricing going forward.
Jay T. Flatley
Yes, that's right. We've notified our customers of a small price increase that will take effect on April 1.
And with respect to other price increases, that's -- those are the only ones we've announced. There's nothing more.
Daniel L. Leonard - Leerink Swann LLC, Research Division
And Jay, is this similar to the prior price increase where customers could avoid it by pre-buying our pre-ordering a certain -- committing to a certain volume in advance to that?
Jay T. Flatley
Well, they can in the sense that they can -- if they want to front-load orders in Q1, they can do that. We're not going to prevent them from ordering under the existing pricing, and if they do that before the price increase takes effect, we'll honor that order.
But recall that, that doesn't affect revenue. It only affects orders, because those orders will be shipped out on whatever shipment schedule they put in with the order.
So there's no revenue impact in Q1.
Daniel L. Leonard - Leerink Swann LLC, Research Division
And then lastly, really quick, you mentioned you're rolling out -- the full rollout of your e-commerce channel is going to occur in Q2. Can you qualitatively help us understand what kind of e-commerce contribution you have in your forecast?
Is it still pretty minimal or immaterial at this point, or do you think it will be something more than that?
Jay T. Flatley
Let me clarify my remarks a bit there, because the e-commerce comment I made was with respect only with the BaseSpace. Yes, so this has to do with the fact that we're beginning to put apps up but we put them up initially for free so customers can use them as we bring up the e-commerce infrastructure, which will take effect in Q2.
The answer to the opportunity size there is a hard one. We have very broad models internally about what the app rate usage might look like.
All sorts of assumptions that, frankly, are all over the map, if you will. And so it's hard for us to predict right now what the usage rates are going to be.
And so I think we've decided to just wait and actually see what it is rather than spend too much time trying to predict it at this point.
Christian O. Henry
I think one thing that's exciting, though, is we have, what is it, over 120, or well over 100 developers that are developing software for BaseSpace. So it will be interesting to see how that monetizes itself out over time.
Jay T. Flatley
So that number is the number of people who downloaded the development kit. So it's a little hard to know exactly how -- what fraction of that 125 will actually be producing apps, but it's a good sign.
Operator
Your next question comes from the line of Dan Arias with USB (sic) [UBS].
Daniel Arias - UBS Investment Bank, Research Division
Just following up on sequencing cost. Jay, how important do you think it's going to be to complete on the $1,000 genome price point this year?
Obviously, what you get for a particular price varies between platforms, but I'd love to hear your thoughts on the way that you think customers will look at cost per sample this year as some new products are rolled out.
Jay T. Flatley
I think the $1,000 price point does have a magical ring to it in a lot of people's minds, particularly because it's been talked about so aggressively for so long. I don't think the market's going to get to the $1,000 price point this year if you do the math the way we do the math.
And I just don't think any technology is going to get to the $1,000 price. In '14, I think it's certainly possible.
When we do the calculation, we include reagents, instrument amortization in that by informatic storage and processing of the data through a pipeline that at least gets you the variance. And the only we don't include when we do that math is the overhead, because overhead can vary from institution to institution and be widely affected by other things that, that entity is doing.
So if you add up all those other components, besides overhead, the $1,000 is not going to happen at '13, I don't think.
Daniel Arias - UBS Investment Bank, Research Division
Got it. Okay.
And then just on Verinata, where is production capacity now relative to test uptake? And I guess as you think about taking verifi to a broader audience, is expansion there at all a consideration in the near or maybe midterm?
Jay T. Flatley
We built the laboratory to be very easily expandable. So if you look at any of the workstations and the workflow that they've set up, they can expand very significantly relatively quickly.
And clearly, on the sequencing side, that's not an issue now either because we can presumably close the deal. It's very easy for us to add incremental sequencers when we need to.
So I don't capacity is going to be any challenge for them.
Daniel Arias - UBS Investment Bank, Research Division
Okay. And then quickly, Marc, maybe just one quick one for you.
Did you sort of give a tax rate for '13 that we should think about? And if you didn't, then would you be willing to comment there?
Marc Stapley
Yes, we said we think that the pro forma tax rate for next year being around 31%. And Dan, just to clarify, I mean included in that is the 2012 R&D tax credit that we didn't recognize this -- in 2012 and the prior year, we'll take that in Q1.
Jay T. Flatley
If I should give some kudos to our operations team for all the hard work of moving these products over to Singapore. It's been a couple of years of front-end investment as we move the [indiscernible] property there and made the investments to actually bring up the manufacturing infrastructure.
But now we're starting to see that begin to pay significant dividends and so all that hard work is paying off.
Operator
Your next question comes from the line of Vamil Divan with Credit Suisse.
Vamil Divan - Crédit Suisse AG, Research Division
So just a couple I had here, one in terms of the MiSeq Dx. What's your sense in terms of sort of the internal time line for obtaining FDA clearance there?
And is there anything you can share just in terms of how the discussions are going so far?
Jay T. Flatley
Yes, to my knowledge, we've not gotten back our first response from the FDA. I guess that could have happened the last few days and I don't know about it.
But at least, to my knowledge, we've not heard from them yet. Our default assumption is that would be some time in the second quarter, unless there's some significant issue that pops up.
That will be a typical time line, and we just don't know which month it would happen in the second quarter. I do think we will put out a press release when that occurs, and that will be significant event for us.
And we'll announce it when it happens.
Vamil Divan - Crédit Suisse AG, Research Division
Okay. And then in terms of the clinical customers, obviously, we've talked a lot about oncology and reproductive health.
Are you seeing much use with the MiSeq, so far, in other areas besides those 2? I guess talking about infectious diseases or in some of these other areas, or is it pretty much just limited to those 2 for now?
Jay T. Flatley
I mean, usage is quite broad. It's across -- we're seeing it in microbiology, in virology, certainly in infectious disease.
We think cancer and reproductive health are the biggest short-term and the fastest-growing parts of the market. But I think it will be used quite broadly and into forensics as well.
So...
Christian O. Henry
On the food testing, with the FDA, big order we announced last quarter.
Vamil Divan - Crédit Suisse AG, Research Division
Great. Just one last quick one, if I could.
In terms of the tax rate again, just is there anything -- you mentioned the first quarter, we'll get some of the impact from the R&D tax credit. So is there any number you could assist us with there in terms of what we should think for the first quarter?
Marc Stapley
It'll be something like 50 basis points for the year, set for the year.
Vamil Divan - Crédit Suisse AG, Research Division
So will the Q1 impact be the catch-up from '12?
Marc Stapley
Well, Q1 impact for that fiscal year will be set for about [indiscernible] will probably bring the tax rate down about 300 basis points, I would think, in the first quarter.
Operator
Your next question comes from the line of Amit Bhalla with Citi.
Amit Bhalla - Citigroup Inc, Research Division
Question for Marc. Marc, ERP changes are never typically short-term projects, and you mentioned the $10 million investment in 2013.
Can you talk about the timing of the project going forward and how you're planning on adding additional investments beyond 2013?
Marc Stapley
Yes, just -- there's a couple of things to clarify. The $10 million isn't necessarily related just to the ERP project.
But it's related to the couple of programs that Jay talked about. The time of that project -- so that was the investment for 2013.
But we think of that as a 2- to 3-program overall, the ERP. So I think about from 3 years -- within about 3 years from now, we'll be done with the final implementation of whatever solution we end up deciding to go with.
Jay T. Flatley
And I think the focus in 2013 is largely going to be on defining the business processes, the core business processes, selecting the system and then beginning to plan for implementation there. It's very unlikely we'd actually begin implementation in 2013.
Amit Bhalla - Citigroup Inc, Research Division
Okay. And then just the second...
Marc Stapley
As you get into the implementation, of course, some of your spend is capitalized and there's mix between capitalization and OpEx will change and then it will come back in depreciation over the life of the solution that you've implemented.
Christian O. Henry
Right. One of the things we're trying to do, though, is to the extent as we go through the process exercise, we can find quick wins.
That's a key objective of ours, particularly, as we start to work towards driving gross -- continue to drive gross margin up.
Amit Bhalla - Citigroup Inc, Research Division
And a follow-up question on nanopore. Qualitatively, what's the incremental level of increase in R&D spending you're putting towards nanopores this year, since I can imagine that you're just starting the work in this area, so what's the incremental level of increased R&D?
Jay T. Flatley
Well, we've not disclosed what it was before or what the increment is. And I don't think we'll get to that level of granularity.
But what we can say is that our investment in nanopore technology, really, was focused on our partnership with Oxford Nanopore until that partnership went in a different direction. So we weren't working on it previously, that our focus was on working with Oxford.
Amit Bhalla - Citigroup Inc, Research Division
I wasn't asking for a number. I was just thinking more in terms of, are you doubling it?
Are you tripling it? Just to get a sense of your R&D focus.
Marc Stapley
Yes, we're not going to subdivide it any further.
Operator
Your next question comes from the line of Jon Groberg with Macquarie.
Jonathan P. Groberg - Macquarie Research
Just if I can add a couple of clarifying ones. But actually, I have a technology question that [indiscernible] or something.
But so one is on the share count. Are you assuming a certain amount of buybacks, just because, basically, it looks like you're assuming no dilution for the year, but, obviously, you've been issuing quite a bit of stock comp.
Jay T. Flatley
Yes. Jon, we're just assuming -- there's a couple of things.
Remember, we have about just over $165 million, I think, it is left in the program. We still have the discretionary plan dialed in and that will continue to operate throughout this year.
And then -- no, I'm sorry, the 10b5-1 plan. And we still have the discretionary element, as well, that we could utilize as and when we need to.
That would all be assumed. Anything we plan to do, that would be assumed in our guidance.
Jonathan P. Groberg - Macquarie Research
Okay. And then one more quick one on the guidance.
Are you -- I mean, maybe you can just talk about what your utilization expectations are. And are you anticipating instruments will be up in 2013?
And I guess, Jay, like, normally you've given a wider range of guidance, now you're just kind of saying 15%. But what do you think the kind of the variance around that guidance is, is it 15%, plus or minus 1%, 2%?
Just maybe help us out there.
Jay T. Flatley
Well, we're not going to get any more specific, Jon, than the number we picked. And so we thought long and hard about how to present it best, and this is how we decided to do it.
You could assume some bands around the 15%, and I think that where we're going to stick in terms of any specifics is at the 15% level. So we think that's a great number for us going forward, and we're optimistic that we can wind up in that range.
Jonathan P. Groberg - Macquarie Research
Okay. And just on the instruments, you expect those to be up, and what's your utilization expectations, kind of within that range you've given, is it just the midpoint of those ranges that you gave for your annual ranges that you set, is your expectation the midpoint of that for 2013?
Jay T. Flatley
Well, remember how -- the logical way that we would calculate guidance is to look at all the variables in our business, to map them all out on one end of the scale, map them all out the other way and upside downside and see how broad that range is and then decide what the sort of probabilistic thing is in the middle. And so the growth -- the numbers we gave doesn't assume a single-point assumption on every factor in there.
It assumes a wide range of how any one factor could vary, whether instrument placements or utilization. And we look at that entire model and decide what the right guidance number is.
So it doesn't assume a point number for utilization of instrument consumables.
Jonathan P. Groberg - Macquarie Research
Okay, that's fair. And a quick technology question for you, Jay, is -- I'm pretty fascinated on this -- I think it was a few weeks ago in your release, but you mentioned today, again, on the MiSeq, that you're now doing exome.
Just my conversation with a lot of users previously was that you just didn't have enough reads on the MiSeq, because I think your reads are still around 15 million and you're increasing the read length. But now, I think you said that with 4 to 6G, you're able to do an exome.
So just curious kind of how -- what you've gotten around, or what allows you to do exomes on MiSeq?
Jay T. Flatley
Well, the amount of total output, really, is what determines what you can do in exomes. And it's not as much limited by the number of tags.
It's not a counting application, it's a sequencing output application. And we're pushing MiSeqs in the field, are really running at 8-plus G, and we're moving that up to 15G.
So that's going to have enough output to do exome.
Jonathan P. Groberg - Macquarie Research
Aren't most exomes 100 base pairs -- like 100, 120 base pairs long?
Jay T. Flatley
Well, it depends on what your kit creates when you're done, right? And we do them paired-end, so we read both directions.
And so it's not a counting application.
Jonathan P. Groberg - Macquarie Research
All right. I was just curious, a little different, then, what some of the people have said, but I think that's a big move if you can get some good data there.
Operator
Your next question comes from the line of Peter Lawson with Mizuho.
Eric Criscuolo - Mizuho Securities USA Inc., Research Division
This is Eric Criscuolo filling in for Peter. Just on the -- on your academic customers, have you seen any change in their tone or their outlook, positively or negatively, within the past several months?
Jay T. Flatley
No. We said in the script that our customers had very stable behavior, very stable ordering rates.
And we -- we're surprised, actually, how unaffected they seem to be by any of the macro conditions or the sequestration risk that still hangs out there. Obviously, we've been very pleased by that response.
Eric Criscuolo - Mizuho Securities USA Inc., Research Division
All right. Great.
And then on the gross margins, can we maybe see that just improve sequentially as 2013 goes on? Or is there going to be kind of a year-end improvement more than the first half of the year?
Jay T. Flatley
Well, I mean, our goal, of course, is to continue to make quarter-to-quarter progress on gross margins. That doesn't always happen, because there are onetime things that happen in any given quarter, some of which wash out in the upside and the downside.
But the goal will be to continue to march gross margins up on a regular basis if we can.
Eric Criscuolo - Mizuho Securities USA Inc., Research Division
Okay. And then just lastly, the service gross margins, is there a target that you're looking for, like the steady-state or a full year margin number?
Because that's kind of bouncing around a little and it is dilutive to your overall margins.
Jay T. Flatley
It is, yes, and as the service goes up, there's a fraction of revenue that's, as Marc mentioned, a bit of a downdraft on the quarter gross margins. We don't have a limit to what we think we can do there.
I mean, our -- we're continuing to work to drive them up, and there's no short-term target. But we're working to make them better.
That's on both sides, both on pricing and on the cost side.
Operator
I would now like to turn the call over to Rebecca Chambers for closing remarks.
Rebecca Chambers
Thank you. Just to clarify, before we head to closing remarks, the impact of the 2012 R&D tax credit will be, approximately, 300 basis points to our Q1 tax rate as compared to our 31% full year guidance.
As a reminder, a replay of this call will be available as a webcast in the Investors Section of our website as well as through the dial-in instructions contained in today's earnings release. Thank you for joining us today.
This concludes our call, and we look forward to our next update following the close of the first fiscal quarter.
Operator
Thank you for your participation in today's conference. This concludes your presentation.
You may now disconnect. Have a great day.