Analyst Conference Summary


conference date: July 21, 2015 @ 2:00 PM Pacific Time
for quarter ending: June 28, 2015 (second quarter, Q2)

Forward-looking statements

Overview: Revenue growth good, but missed analyst expectations.

Basic data (GAAP):

Revenue was $539.4 million, flat sequentially from $538.6 million and up 21% from $447.6 million in the year-earlier quarter.

Net income was $102.2 million, down 25% sequentially from $136.7 million, and up 119% from $46.6 million year-earlier.

Diluted EPS was $0.69, down 25% sequentially from $0.92, and up 123% from $0.31 year-earlier.


For fiscal 2015 total revenue growth still expected around 20%, but non-GAAP EPS estimate increased to between $3.39 and $3.45.

Conference Highlights:

Orders exceeded expectations in Q2 resulting in a record backlog at the end of the quarter. Earnings grew faster than revenue y/y. HiSeq, MiSeq, and NextSeq all did well.

Revenue was up 25% y/y on a constant-currency basis, so exchange rates had a negative impact of 4%.

In the quarter SeqLab launched to provide HiSeq X systems with a whole human genome integrated solution.

Total sequencing revenue grew 28% y/y driven by strength in consumables and services. Instrument growth was 13% y/y to $155 million. $303 million consumable revenue. Oncology uses up 35% y/y helped drive sales. NIPT (natal) revenue grew over 50% y/y, partly due to China.

Microarray revenue declined 11% y/y, but there was strength in the agriculture sector. New products will launch in the second half.

Non-GAAP numbers: net income $119.7 million, down 11% sequentially from $135 million, and up 41% from $84.6 million year-earlier. Diluted EPS was $0.80 , down 12% sequentially from $0.91, and up 40% from $0.57 year-earlier. Gross margin was 72.4%, up sequentially from 72.2%, and up from 70.9% year earlier. 37.4% operating margin, up sequentially. Non-GAAP figures exclude legal settlement benefits, stock-based compensation, amortization, non-cash interest expense, a tax benefit, and smaller items.

Cash, equivalents and investment balance was $1.51 billion, up sequentially from $1.37 billion. Long term debt was $1 billion. Cash flow from operations was $171.4 million. Free cash flow was $130.1 million. Capital expenditures were $41.4 million. An additional $150 million was authorized for stock repurchases to balance dilution from stock-based compensation.

GAAP cost of revenue was $163.0 million, leaving gross profit of $376.4 million. Operating expenses were $224.4 million, consisting of: $96.2 million for research and development; $124.4 million for selling, general, and administrative; headquarters relocation $1.5 million; and a $2.3 million acquisition related expense. Leaving income from operations of $141.2 million. Other expense was $10.8 million. Income tax provision $38.9 million.

Stock-based compensation expense was $33.0 million.

315 employees were added in the quarter.

Will launch a SAP ERP system next week.

Book to bill was 1.1.


Array market, why is it expected down given the R&D investment? Partly because of difficult y/y comps and price competition. We had a good order quarter, but a lot of that will be in backlog for shipping over the next year.

We continue to service equipment for 5 to 7 years once we stop shipping a model.

Customers like the RapidRun feature on the 2500. We are thinking of adding it to the 4000, but do not have definite plans for that yet.

What was funding availability like in the quarter? Customers always want to buy more sequencers if they had infinite money. Orders were strong, but some labs were not ready to take delivery, so that caused some delays. That is the main reason for the gap between orders and revenue.

Did you contemplate increasing full year guidance? We do have a rich backlog, but we don't know when labs will be ready to take delivery, so timing is uncertain.

HiSeq number of platforms shipped per quarter? 70 to 80 is about the range, we hope the 4000 will give us a lift. The mix shifted away from the 2500 this quarter. We are seeing 2500 customers buying 4000s and some are turning off their 2500s, so at some point we will have to update on the active installed base.

X10 adoption curve? We are in the stable part of the X10 lifetime. Any large scale population sequencing projects could be incremental to the current run rate. Such projects are hard to predict.

What would break us out of the range of equipment sales we have been in for a while? It will come from all the new application areas we are developing, like NIPT and shifting the consumer market to sequencers from arrays.

Reimbursement trends? Reimbursement is a classic challenge in the lab business. That is why we are working to get aqua products approved by the FDA.

Will the ERP implementation then result in reduced spend? Nothing immediately. The main point of ERP for us is to enable us to scale out.

NeoPrep attachment rates? The incoming order rate has been pretty good. It was a complex product to make robust. We are comfortable with the first kit and are close to releasing the second kit. Shipments in Q2 were mainly to test customers, the rate should increase going forward.

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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