Analyst Conference Summary


conference date: May 3, 2016 @ 2:00 PM Pacific Time
for quarter ending: March 31, 2016 (first quarter, Q1 2016)

Forward-looking statements

Overview: Revenue was up 6% y/y, but net income fell on increased costs.

Basic data (GAAP):

Revenue was $571.8 million, down 3% sequentially from $591.5 million and up 6% from $538.6 million in the year-earlier quarter.

Net income was $89.6 million, down 14% sequentially from $104.5 million, and down 34% from $136.7 million year-earlier.

Diluted EPS was $0.60, down 14% sequentially from $0.70, and down 35% from $0.92 year-earlier.


For 2016 non-GAAP diluted EPS is projected between $3.35 and $3.45. 2016 revenue is expected to be about 12% higher than 215 revenue. 34.5% operating margin target for the year.

For Q2 2016 non-GAAP diluted EPS expected between $0.72 and $0.74, with revenue between $590 and $595 million.

Conference Highlights:

"As we have previously shared, Q1 was a slower start to the year than we expected,” stated Jay Flatley, Chairman and CEO. “Our view of the growth potential of the sequencing market remains unchanged, as the largest opportunities are in their earliest stages of development. In the near-term, we are focused on improving execution to restore the growth rate we believe our markets can support.”

After the quarter ended we received a disappointing outlook from Europe, which contributed to the lower 2016 guidance. Some customers delayed orders. Believes some shipments were just too late in the quarter to book as revenue. HiSeq orders that were forecast were not received also contributed to the shortfall.

In the quarter introduced a genomics software tool set, BaseSpace Informatics Suite. Entered co-marketing partnerships with 10X Genomics and NRGene. Partnered with Genomics England to automate genome interpretation. Committed $100 million to pursue early-stage external investments.

In July, Jay Flatley will become Executive Chairman and Francis deSouza will become President and CEO.

Europe revenue declined 2% y/y, but Americas were up 14%. Asia down 5%, but purchasing started to improve in Japan.

Array revenue was up 1% y/y to $90 million. Building out manufacturing capacity. DTC customer demand helped. ASPs were

Sequencer growth was negative 21% y/y . 4 new HiSeq X customers. Benchtop devices and consumables performed well. Oncology shipments grew 9%. Grew backlog.

Consumable revenue was up 17% y/y.

Services revenue was up 12% y/y to $89.0 million, driven by NIPT service growth.

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

GAAP gross margin was was 69.4%, down a bit from 69.6% year-earlier.

Non-GAAP numbers: net income $105.5 million, down 13% sequentially from $121 million, and down 22% from $135.4 million year-earlier. Diluted EPS was $0.71, down 12% sequentially from $0.81, and down 22% from $0.91 year-earlier. Gross margin was 71.7%, down sequentially from 72.2%, and down from 69.6% year earlier. % operating margin, down sequentially from 33.4%. 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 $1.34 billion, down sequentially from $1.39 billion. Long term debt was $1.02 billion. Cash flow from operations was $39.7 million. Free cash flow was negative $13.7 million. Capital expenditures were $53.4 million. $ million was used to repurchase stock. Retired $76 million of 2016 convertible bonds.

GAAP cost of revenue was $174.7 million, leaving gross profit of $397.1 million. Operating expenses were $275.6 million, consisting of: $124.0 million for research and development; $149.2 million for selling, general, and administrative; legal contingency $2 million; headquarters relocation $0.4 million. Leaving income from operations of $121.4 million. Other expense was $5.8 million. Income tax provision $28.4 million.

Stock-based compensation expense was $35.3 million.

Accounts receivable grew to $403 million from $386 million year-earlier, but days sales outstanding remained at 64.


Europe? We moved one of our strong leaders from the U.S. to Europe to implement a more disciplined sales process. We are also trying to close deals earlier in the quarter.

To save costs we can slow our re-staff rate, which we believe we can do for a few quarters without impacting customer support or long term results. We also reexamined initiatives and are pruning the portfolio.

Is guidance assuming better 2H demand, or just easier compares? Comparisons should be easier in the back half. We don't expect any changes in our European outlook. We have a strong backlog and pipeline giving us confidence revenue will grow in 2H.

We did not see any change in fundamental demand factors. Clinical comps were difficult against Q1 last year. We are positive about the clinical adoption rates for the rest of the year.

Long term growth rate given the last 3 quarters? Nothing changed our thinking about sequencing demand or our competitive position. The failure was just short term.

Grail and Helix, when could they become accretive? They are important strategic bets on future massive markets like consumer genomics. We take a long term view. We are not prepared to say when they might turn profitable. Helix could see first revenue in 2017, Grail later.

HiSeq unit rate drop? Nothing in Europe was market specific. Q1 was a low HiSeq story across regions. Orders came in, but we could not recognize the revenue. We believe the Europe problem is around sales execution across instruments and markets.

We are seeing increased purchasing in China as well as in Japan, which was included in our guidance.

The market capacity v. utilization slide just shows there is not excess capacity in the market. 44% capacity utilization is pretty normal but should rise over time. The highest utilization tends to be in the U.S., the lowest in Europe.

Outsourcing cited in pre-announcement? We were scrambling for data. We have been able to break the shortage down to more specific issues. Oursourcing was not the cause of the HiSeq shortfall, which was the cause of the Q1 shortfall.

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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 2016 William P. Meyers