Analyst Conference Summary


conference date: April 22, 2014 @ 2:30 PM Pacific Time
for quarter ending: March 31, 2014 (first quarter, Q1)

Forward-looking statements

Overview: Strong revenue growth continues.

Basic data (GAAP):

Revenue was $420.8 million, up 25% sequentially from $335.4 million and up 27% from $331.0 million in the year-earlier quarter.

Net income was $60.0 million, down 26% sequentially from $80.7 million, but reversing a loss of $22.6 million year-earlier.

Diluted EPS was $0.40, down 29% sequentially from $0.56, but well up from negative $0.18 year-earlier.


Full 2014 is increased to estimated 21% to 23% revenue growth with non-GAAP earnings of $2.10 to $2.15.

Conference Highlights:

In the first quarter Illumina had "an exciting uptake of our new products, including the NextSeq 500 and HiSeq X Ten," with overall demand remaining "robust." Revenue greatly exceeded Illumina's internal plan.

In the quarter introduced oncology clinical research support products TruSeq RNA Access Library Prep Kit, TruSight Myeloid Sequencing Panel, and several BaseSpace Core Apps.

HiSeq X Ten clients in the quarter included Novogene, Human Longevity, and WuXi Genome Center. 9 customers to date. There seems to be an insatiable demand for whole genome sequencing. Illumina is actively scaling its manufacturing capability to meet demand; there may be a component bottleneck in 2014. Demand for the entire HiSeq family was strong.

Microarray revenue was up 4% y/y. New lower pricing in Q4 drove higher volumes. Ag business grew 20% y/y. Sequencing in oncology market is gaining traction.

Instrument revenue was up 32% y/y to $116 million. Consumable revenue was $243 million, up 18% y/y.

Product revenue was $362.2 million, up 8% sequentially from $336.4 million and up 22% from $296.2 million year-earlier.

Service and other revenue was $58.6 million, up 15% sequentially from $50.9 million and up 68% from $34.8 million year-earlier.

Non-GAAP numbers: net income $80 million, up 23% sequentially from $65 million, and up 27% from $63 million year-earlier. Diluted EPS was $0.53, up 18% sequentially from $0.45, and up 15% from $0.46 year-earlier. Gross margin was 70.4%, up from 69.2% year-earlier. 34.9% operating margin. Stock-based compensation expense excluded from non-GAAP numbers was $130 million.

GAAP gross margin was 66.1%, down from 66.3% year-earlier.

Cash, equivalents and investment balance was $1.09 billion, down sequentially from $1.17 billion. Cash flow from operations was $37 million. Free cash flow was $18 million. Capital expenditures were $19 million. Accounts receivable increased $54 million to $293 million, while inventories increased by about $10 million. Repurchased $130 million stock in the quarter.

GAAP gross margin was %, up from % year-earlier.

GAAP Cost of revenue was $142.5 million, leaving gross profit of $278.3 million. Operating expenses were $186.2 million, consisting of: $77.0 million for research and development; $109.6 million for selling, general, and administrative; an acquisition related gain of $1.0 million; headquarters relocation $0.6 million. Leaving income from operations of $92.1 million. Other expense was $8.3 million. Income tax provision $23.8 million.

MiSeq orders set a record, partly driven by lower pricing. The DoD ordered 13 units. Follow on orders from existing customers were also strong.

NextSeq product launch went well with 65 instruments shipped. Illumina has over 2500 leads for new customers.

There is an insatiable demand for whole genome sequencing.

Shipments grew in all major regions of the world.


Bringing new panels to oncology market? It is still early. We have consortia in place and are working with regulatory bodies. We hope to have a clearer definition by the end of the year, with regulatory filings in 2015. The TAM for oncology overall is $11 billion.

Pharma business? It has been increasing for discover purposes. There is increasing use for clinical trials, but that will likely be mostly outsourced.

Population sequencing efforts? They will get funded, but are in design phase around the world.

Was there any pause in demand in the quarter? The order rate was extraordinarily strong, but the quarter was backend loaded. But January was reasonable. Some customers are evaluating alternatives among our products, but cannibalization was less than expected.

Did anything lead to higher 2014 guidance besides the strong Q1? The strength of the incoming order rate was a key factor. We are increasingly confident about our ability to actually deliver new product units, even given the patter flow cell issue. Also the lack of cannibalization, if it continues.

Reimbursement for cancer panels, risk to guidance? We incorporated what we think is happening on reimbursement. The trend is favorable, overall, and we are working with the payers to show them NGS is a money-saving proposition.

How much of the sample prep stream are you capturing? 20% to 30% is how we position ourselves for share in that market.

DGI? We don't have any clarity on their complete genomics technology, but they remain a customer.

HiSeq upgrades? There was not a lot in Q1, but it is potential energy for the rest of the year. Our hope is the 1T kit will catalyze an upgrade cycle.

We did have kit price increases in Q1, but this year we did not see an inventory build to avoid in in Q4.

X Ten potential customers? The pipeline is strong; we expect additional orders in Q2. We don't know how much the initial demand might be a bump, followed by a taper.

Guidance on margins, stock-based compensation? The current quarterly rate on compensation is a floor.

Infomatics strategy? The Mission Bay facility will not be completed until this fall. For the next year or so most employees will stay in the south bay. We are building our sales force for infomatics. We are coupling XBio with X Ten flows.

The $99K price point for HiSeq was a magic point. We had no reports of lost orders due to competitors. Most of the HiSeq orders came from new customers and new clinical sites.

The accelerator is strategically important to us. We plan to invest with three companies this year, over a short time frame.

Receivables effect on cash flow? It was the timing of shipments in the quarter, we should collect in Q2. No change in bad debt.

Growing EPS faster than revenue long term? There is no real change in long-term guidance. It is a goal to provide leverage. Dynamics and opportunities have not changed.

Weath impact in U.S. in quarter? Not on our business.

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Disclaimer: My analyst call summaries may include both our condensations of statements made by company representatives and my own analysis. They are not covered by any warranty. I cannot guarantee anything said by company representatives is true. I try not to make errors, but it is possible. Before making or terminating an investment you should always verify any factual basis of your decision.

Copyright 2014 William P. Meyers