Analyst Conference Summary

conference date: February 2, 2016 @ 2:00 PM Pacific Time
for quarter ending: January 3, 2016 (fourth quarter, Q4 2015)

Forward-looking statements

Overview: Rapid revenue growth.

Basic data (GAAP):

Revenue was $591.5 million, up 7.5% sequentially from $550.3 million and up 15% from $512.4 million in the year-earlier quarter.

Net income was $104.5 million, down 12% sequentially from $118.2 million, and down 32% from $153.3 million year-earlier.

Diluted EPS was $0.70, down 11% sequentially from $0.79, and down 32% from $1.03 year-earlier.

Guidance:

For the year 2016 Illumina expects 16% revenue growth and non-GAAP EPS between $3.55 and $3.65 per share.

Q1 revenue will be flat to slightly up sequentially as q4 results were stronger than expected. Operating expenses will be up about $20 million sequentially for ramps of Helix and Grail.

Conference Highlights:

The main reason GAAP EPS and net income fell y/y was that in 2014 there was a benefit from litigation.

In the quarter Illumina announced GRAIL, a company enabling a screening kit for asymptomatic cancers.

MiniSeq system benchtop sequencer priced at $49,500 was launched. Also Infinium XT 96-sample Beadchip. With bioMerieux launched EpiSeq to monitor infections.

Project Firefly platform is expected to be available in second half of 2017. Entered a collaboration with Novogene for reproductive health.

TST15 panel product uptake was good. Amgen is one new customer.

Array revenue was down 2% y/y. ASPs were solid. Array growth in 2016 should be slight.

Sequencer growth was 19% y/y. Clinical oncology customer 40% increase contributed to the strong results. HiSeq sales exceeded expectations but shipments were down y/y. HiSeq X shipments depend on customer readiness, which will result in only about 20 shipped in Q1. Customer count is now . NextSeq sales set a record, driven by NIPT in China. MiSeq sales increased y/y, including record DX orders.

Consumable revenue was $346 million, up 19% y/y and represented 59% of total revenue. Sequencing consumable revenue was $280 million, up 30% y/y.

Services revenue was up 51% y/y to $93.6 million, driven by NIPT service growth.

PGS products were up 25% y/y. NIPT revenue up over 50%.

Exchange rates had a negative impact on revenue compared to year-earlier.

Non-GAAP numbers: net income $121 million, up 1% sequentially from $120 million, and down 6% from $129 million year-earlier. Diluted EPS was $0.81, up 1% sequentially from $0.80, and down 8% from $0.87 year-earlier. Gross margin was 71.7%, down sequentially from 73.2%, and down from 72.3% year earlier. 33.4% operating margin, down sequentially from 36%. 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 $1.39 billion, down sequentially from $1.44 billion. Long term debt was $1.02 billion. Cash flow from operations was $240 million. Free cash flow was $205 million. Capital expenditures were $35 million. $202 million was used to repurchase stock.

GAAP cost of revenue was $181.2 million, leaving gross profit of $410.4 million. Operating expenses were $266.4 million, consisting of: $114.3 million for research and development; $147.3 million for selling, general, and administrative; legal contingency $4.0 million; headquarters relocation $0.4 million; and a $0.3 million acquisition related expense. Leaving income from operations of $144.0 million. Other expense was $9.0 million. Income tax provision $32.1 million.

Taxes were higher than expected due to an international restructuring issue.

Hiring is strong, driving up operating expenses.

Stock-based compensation expense was $35 million.

Q&A:

Flat instrument guidance, by type? We have a normal backlog by mix as we enter 2016. Not true at the beginning of 2015. MiniSeq should give us a positive lift, but with some cannibalization of MiSeq. HiSeq X backlog in 2015 is reason for difficult comparison. We are getting more 2500 orders than we expected.

Cancer panel customers re Grail? We don't have any pan-cancer screening customers. Grail is unique. It is a long term project because of the need for such deep sequencing ability.

Service revenue dynamics and guidance? The NIPT samples we did in the quarter went down as a major customer brought it in house. In 2016 we have some robust consumer business, average risk will help, but then the NIPT customer moving in house. In Q4 it was mainly the install base growth and maintenance contracts, plus consumer business.

R&D expense allocation? We may work more on the platform side for MiniSeq and Firefly in 2016, but that is just a tweak. We don't break down R&D by type.

Obama Cancer Moon shot? It should be a plus. We don't know how much will go to sequencing.

MiniSeq margin? It should be pretty typical of our desktop instruments, similar to MySeq.

Helix update? It is a consumer service company. We want it in start up mode. We now have 4 partners, but the two largest consumer companies have not joined yet. We are actively recruiting a CEO. Everyone wants to move towards sequencing, but it is a matter of economics, given consumer price points. There is no resistance on that front.

Japan has often been a strong contributor to Q1, but we are not counting on that this year given the funding situation there.

China 5 year budget talk? We are hearing big numbers, but none of that is official, and we don't know how much of it will be sequencing directed, or the timing. We may hear more specifics in March.

There is a lot of fundamental work that needs to be done to progress towards a Grail product at scale. We hope to begin large scale clinical trial work in 2017.

Reason for growth in consumable revenue in 2016? It is due to a higher rate of utilization plus the usual growth due to increase in instruments installed in 2015.

In Japan things got a little better in Q4, but not to past peak. China has been challenging the last year or two, but they are disproportionately ordering HiSeq X systems, and NIPT also drives demand. Europe has been pretty steady.

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