Analyst Conference Summary


conference date: October 20, 2014 @ 2:00 PM Pacific Time
for quarter ending: September 30, 2014 (third quarter, Q3)

Forward-looking statements

Overview: Record results. Astonishing EPS growth rate.

Basic data (GAAP):

Revenue was $480.6 million, up 7% sequentially from $447.6 million and up 35% from $356.8 million in the year-earlier quarter.

Net income was $93.5 million, up 100% sequentially from $46.6 million, and up 198% from $31.4 million year-earlier.

Diluted EPS was $0.63, up 103% sequentially from $0.31, and up 186% from $0.22 year-earlier.


Full year 2014 guidance is for revenue growth of 30% y/y and non-GAAP EPS (diluted) between $2.63 and $2.65 (up from $2.26 to $2.28).

Conference Highlights:

Illumina had strong shipments of HiSeq X Ten, NextSeq and MiSeq and associated consumables. Revenue growth was the fastest since Q2 2011.

Non-GAAP numbers: net income $114 million, up 34% sequentially from $85 million, and up 81% from $63 million year-earlier. Diluted EPS was $0.77, up 35% sequentially from $0.57, and up 71% from $0.45 year-earlier. Gross margin was 73.2%, up sequentially from 70.9%, and up from 70.2% year-earlier. 34.8% operating margin.

Sequencing revenue grew 47% y/y. Consumable shipments hit a record at $261 million, up 26% y/y.

HiSeq demand remained strong, including HiSeq X Ten. ASPs improved as mix shifted towards higher-priced models. 4 X orders in the quarter. While backlog is strong, shipments are expected to be down in Q4 from Q3.

NextSeq rollout continues to grow. Illumina is now seeing repeat customers.

MiSeq expected sequential shipment growth through 2015.

Microarray revenue declined 2% y/y. But sales to ag customers grew y/y. Expects it down in Q4, and basically flat in 2015.

Product revenue was $416.2 million, up 6.5% sequentially from $390.8 million.

Service and other revenue was $64.5 million, up 14% sequentially from $56.8 million.

During the quarter Illumina announced a 78 million pound deal with Genomics England to sequence 100,000 human genomes.

Cash, equivalents and investment balance was $1.27 billion. Long term debt was $1.0 billion. Cash flow from operations was $146 million. Free cash flow was $117 million. Capital expenditures were $28.8 million.

GAAP cost of revenue was $146.7 million, leaving gross profit of $333.9 million. Operating expenses were $214.4 million, consisting of: $85.1 million for research and development; $119.9 million for selling, general, and administrative; headquarters relocation $0.9 million; $7.7 legal; $0.9 acquisition related. Leaving income from operations of $119.5 million. Other expense was $7.1 million. Income tax provision $19.0 million.

Stock-based compensation expense was $44.7 million.

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


New kits, importance of? Long read kits will help with some microbial tests, which expands the market. One kit allow for running PCR free, which increases quality. The V2 reagents for NextSeq provide an overall quality improvement, which should also expand its market.

Customers moving to arrays? You can't achieve the same quality with arrays as you can with sequencing. The customer that switched was a small customer for us.

Margins? As we invest in manufacturing capacity, you get a step function, growing into the facilities. We are investing in R&D and SG&A. If you look at the guidance, for Q4 there is still some improvement in margin, which is partly from a better mix in equipment sold.

HiSeq 2500 outlook? It has been stable, bounces a bit from quarter to quarter. The new chemistry should help it have a long life.

Biobank win and ag sector? We expect the business to be about flat next year, but biobanking business could have a resurgence over the next few years. But they use low-complexity arrays, and prices are falling.

X10 customer readiness for samples? We have people at the sites daily working with the instruments. We know exactly where the customers are. We don't want customer to take units that will be idle. We have been working on improved software that will help the less experienced customers get up to speed faster.

On thing helping margins is that NextSeq has scaled up to the point that we have been able to get better prices on the parts for it. But for MiSeq we have decreased prices. The amount of revenue we are generating also helps margins because it corresponds to high factory utilization. Our current cross margins should be roughly.

NextSeq was designed to bring in new customers, and it has largely been purchased by new customers.

A very high utilization for a system would be in the high 80's to maybe 90%.

Clinical market progress vs. plan? Adoption has exceeded our expectations. We need to create the same kinds of catalysts in the oncology market. There is a lot to be done yet to deliver and support clinical customers to the standards they are accustomed to.

In oncology, how are you looking at commercialization? Last quarter we had about $90 million for oncology, and it went up a bit in Q3, but was less than $100 million. The genome consortiums are happy because the work went faster than they thought. We want the panels closely associated with treatments to encourage physician adoption.

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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