Analyst Conference Summary


conference date: January 27, 2015 @ 2:00 PM Pacific Time
for quarter ending: December 31, 2014 (fourth quarter, Q4)

Forward-looking statements

Overview: Record revenue, as usual. Strong profit leverage.

Basic data (GAAP):

Revenue was $512.4 million, up 7% sequentially from $480.6 million and up 32% from $387.3 million in the year-earlier quarter.

Net income was $153.3 million, up 64% sequentially from $93.5 million, and up 90% from $80.7 million year-earlier.

Diluted EPS was $1.03, up 63% sequentially from $0.63, and up 84% from $0.56 year-earlier.


For the full year 2015 Illumina projects a 20% revenue growth rate. Non-GAAP EPS expected between $3.12 and $3.18. Tax rate 28%. Gross margin 73%.

Q1 tax rate estimated at 29%.

Conference Highlights:

Illumina had a record quarter of shipments of HiSeq X Ten, NextSeq and MiSeq and associated consumables. The HiSeq X Ten and NextSeq 500 led growth.

In the quarter Illumina launched the HiSeq X Five system for high-throughput WGS (it will actually ship in Q2). Also introduced NextSeq 550 in Q2 combining microarrays with sequencing. Also MiSeq FGx Forensic Genomics System.

The "order funnel" remains healthy. There are about 1000 aging HiSeq devices in the field that cannot run the newer kits and that are likely to be replaced. NextSeq orders are being driven by demand in the oncology market. MiSeq had over 300 orders and shipments in the quarter, driven by newer customers.

All pending patent infringement claims with Sequenom and Verinata Health and Syntrix Biosystems were settled, and a broad licensing agreement entered into. The settlement was for less than the prior accrual, resulting in a accounting benefit.

$290 million of revenue came from sales of consumables. $62 million was for services.

Non-GAAP numbers: net income $129 million, up 13% sequentially from $114 million, and up 98% from $65 million year-earlier. Diluted EPS was $0.87, up 13% sequentially from $0.77, and up 93% from $0.45 year-earlier. Gross margin was 72.3%, down sequentially from 73.2%, but up from 71.4% year earlier. 37.7% operating margin. Non-GAAP figures exlcuded legal settlement benefits, stock-based compensation, amortization, non-cash interest expense, a tax benefit, and smaller items.

Cash, equivalents and investment balance was $1.34 billion. Long term debt was $1.29 billion. Cash flow from operations was $140.5 million. Free cash flow was $105.7 million. Capital expenditures were $34.8 million. $35 million was used for stock repurchases.

GAAP cost of revenue was $127.4 million, leaving gross profit of $384.9 million. Operating expenses were $182.1 million, consisting of: $142.9 million for research and development; $122.2 million for selling, general, and administrative; headquarters relocation $1.3 million; a $82.0 million legal benefit; and a $2.3 million acquisition related gain. Leaving income from operations of $202.9 million. Other expense was $10.2 million. Income tax provision $38.8 million.

The tax rate declined to 16.2% due to the renewal of the R&D tax credit.

Stock-based compensation expense was $38.5 million.


Cannibalization with NextSeq 550? None anticipated on 550. With respect to 3000 and 4000, we think they will prefer those to cannibalize the 2500, but encouraging the older installed base to trade in for the newer models.

X Ten and X Five orders overall in 2015? We believe most of the pipeline will drive to the X Ten, but some will start with X Five. The market should grow overall.

You can expect array pricing to go down over the next few years. More customers will be moving to sequencing. Only the low-priced business will stay with arrays.

We see continued scaling of human population genome sequencing, like the Scottish program and potentially the U.S. "precision medicine" initiative.

Stock-based compensation going forward is likely to be near the Q4 rate.

For IPT, we are confident sequencing is more efficient and cost effective than arrays.

Margins are not likely to change significantly due to manufacturing utilization.

Our expectation is that over the next few years a number of countries will jump into population sequencing. It is still not clear if this will be funded in the U.S.A. Pharmaceutical companies are also coming around to the importance of sequencing.

30% of instruments to clinical customers, feedback on new reimbursement codes? We don't have feedback yet on changes from the new codes. We are seeing some approval of codes.

IP landscape in liquid biopsy? It is more straightforward than in other markets. There are always companies that claim fundamental IP. We think it is relatively open from an intellectual property perspective.

Growth in oncology going forward? It is growing very nicely, even without actionable genome and liquid biopsy. Demand remains strong, NextSeq proportion into oncology is high. It is not just the big cancer centers any more. A successful liquid biopsy could create an inflection point, but that is a ways out.

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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 2015 William P. Meyers