Analyst Conference Summary


conference date: July 23, 2014 @ 2:00 PM Pacific Time
for quarter ending: June 30, 2014 (second quarter, Q2)

Forward-looking statements

Overview: Strong revenue growth shows demand for DNA analysis. Increased full year guidance.

Basic data (GAAP):

Revenue was $447.6 million, up 6% sequentially from $420.8 million and 29% from $346.1 million in the year-earlier quarter.

Net income was $46.6 million, down 22% sequentially from $60.0 million, but and up 30% from $35.9 million year-earlier.

Diluted EPS was $0.31, down 22% sequentially from $0.40, but up 19% from $0.26 year-earlier.


For full year 2014 now estimating revenue growth between 25% and 26%. Diluted non-GAAP EPS $2.26 to $2.28.

Conference Highlights:

Illumina is "witnessing tremendous interest in our products, which led to record financial results in the second quarter."

Launched VeriSeq PGS for primplantation genetic screening of embryos. Entered into multiple agreements to provide for non-invasive prenatal testing in Europe.

Illumina acquired Myraqa, a consulting firm in companion diagnostics, during the quarter.

Illumina sold convertible notes fro $1.1 billion and used part of the procedes to repurchase $600 million of 0.25% convertible senior notes due 2016.

Sequencing revenue grew 44% y/y. Population sequencing is beginning in earnest. Oncology adoption is going well.

Microarray revenue was down 10% y/y from a decline in the Infinium genotyping business, in turn due to lower demand from a consumer customer. But market share was stable, estimated at 80%. Now expecting this segment to be down mid to high single digits in 2014; this is included in the new guidance.

Sequencing instrument revenue was up 51% y/y. Demand was strong for all instrument lines. Pattern flow cell product production for HiSeq X Ten improved, removing a bottleneck, so more systems were recorded for revenue. Demand has exceeded assumptions, with 4 new orders since the last earnings call, bringing the customer count to 14. The total systems ordered and backlog is 144.

HiSeq orders improved, as did ASPs (prices) as the demand shifted to the higher-end systems. Customers with older instruments are beginning to upgrade to newer models.

NextSeq has also "hit a sweet spot" resulting in higher order rates. Half of the orders in the quarter came from commercial customers. MySeq orders benefitted from a bundling promotion and follow-on multi-unit orders from existing customers.

Product revenue was $390.8 million, up 8% sequentially from $362.2 million and up 25% from $313.5 million year-earlier. Consumables revenue was 55% of total revenue, down from 58% in Q1. In Q3 consumables revenue is expected to decline due to summer vacations.

Service and other revenue was $56.8 million, down 3% sequentially from $58.6 million and up 74% from $32.6 million year-earlier.

Non-GAAP numbers: net income $85 million, up 6% sequentially from $80 million, and 42% from $60 million year-earlier. Diluted EPS was $0.57, up 7% sequentially from $0.53, and 33% from $0.43 year-earlier. Gross margin was 70.9%, up from 69.5% year-earlier. 34.8% operating margin.

GAAP gross margin was 67.1%, from 64.6% year-earlier.

Cash, equivalents and investment balance was $1.1 billion. Long term debt was $1.3 billion. Cash flow from operations was $178 million. Free cash flow was $155 million. Capital expenditures were $23.3 million. Repurchased $72 million stock in the quarter.

GAAP cost of revenue was $147.0 million, leaving gross profit of $300.5 million. Operating expenses were $200.3 million, consisting of: $83.0 million for research and development; $114.6 million for selling, general, and administrative; headquarters relocation $2.9 million. Leaving income from operations of $100.2 million. Other expense was $39.8 million. Income tax provision $13.9 million.

Stock-based compensation expense was $36.0 million. About $30 million of other expense was for extinguishment of debt.

Illumina is "confident in its technology leadership" and ready to meet the demand for genome sequencing.


Population studies, backlog for? We consider backlog to be orders unshipped. There is no backlog for population sequencing beyond Sidra for HiSeq X Ten and related equipment, but there are prospects in the channel, probably 10 to 15 around the globe.

The market opportunity in China is enourmous, given the birth rate there, where we work with Berry Genomics and are seeking regulatory approval.

NIPT outlook in non-high risk, lower-price market? NextSeq is important in NIPT (non-invasive prenatal testing). In centralized environments the high sample flow and low cost favors HiSeq, but in distributed markets NextSeq would be the perfect product for more moderate sample flows. NextSeq would be suitable for Chinese hospitals.

Is Illumina not content to be just an arms dealer, to move beyond your core markets? There has been no change in our strategy. We are not planning to sell clinical tests to physicians and run them in our own laboratory. We need to run a significant number of products through the regulatory process; the new resources are for that.

NGS standardization details? The consortium consists of a number of working groups, but did not include other sequencing vendors. The standards are to meet the needs of the clinical community. The standards will be made publicly, so other vendors will be able to use them if they wish.

How many more bio banking deals are out there? We see a handfull of biobank projects in the next few years, and they would not move to sequencing any time soon, as that would be too expensive.

X Ten production capacity in 2015? Our capacity is going to be find at this point, though we are catching up on our backlog. By the end of the year production should match demand.

RNAC continues to be one of our most important applications, and is a target of NextSeq. As sample prep kit prices come down it becomes increasingly competitive with PCR.

As far as X Ten, Asia has surpassed our expectations, while Europe has been in line with expectations.

NextSeq sequential growth? We were pleased with the quarter. Most units sold to date were to customers that did not have to go through a grant process. It is really appealing to the oncology segment.

70% of customers are new by MySeq means new to MySeq, they might already be an Illumina customer.

Tax rates? No changes for us. We have been moving some things like consumables to Singapore. Our tax rate drop came from some expenses being higher than we expected. We don't see inversion (moving offshore) as being a primary benefit.

We see the array business as complimentary to the sequencing business, though over time some array applications are moving to sequencing.

Regulatory climate thoughts? The rhetoric is not coming from the FDA, and it is not a new question. Our position is that it is unlikely that all global LDTs would have to be FDA approved. These tests are going to be crucial to the healthcare system. "We don't know where the FDA is going to wind up on it." We will deal with whatever the FDA decides.

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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