Analyst Conference Summary


conference date: July 26, 2016 @ 2:00 PM Pacific Time
for quarter ending: June 30, 2016 (second quarter, Q2 2016)

Forward-looking statements

Overview: Continued growth story.

Basic data (GAAP):

Revenue was $600.1 million, up 5% sequentially from $571.8 million and up 11% from $539.4 million in the year-earlier quarter.

Net income was $120.4 million, up 34% sequentially from $89.6 million, and up 18% from $102.2 million year-earlier.

Diluted EPS was $0.82, up 37% sequentially from $0.60, and up 19% from $0.69 year-earlier.


"For fiscal 2016, the company continues to project approximately 12% revenue growth and non-GAAP earnings per diluted share attributable to Illumina stockholders of $3.48 to $3.58. For the third quarter 2016, the company is projecting revenue of $625 million to $630 million."

Conference Highlights:

Francis deSouza, the new President and CEO, said “We delivered solid second quarter financial results with notable strength across our sequencing consumable and array portfolios . . . slightly exceeding our guidance. ”

Illumina is making progress on deal structure, accelerating the timing of orders. Also making progress on keeping expenses down. Launched a new oncology product and will launch another later this year. Oncology testing shipments rebounded in the quarter.

Europe revenue declined 4% y/y, but Americas were up 13%. Asia up 29%, mainly driven by China, where revenue was up 70%.

Array revenue was up 30% y/y. Highest array shipments since 2011. Expects double-digit array growth this year.

Instrument revenue (sequencer + array) was up 7% sequentially but down 19% y/y to $126 million from challenging HiSeq comparison in Q2 2015 when new series were launched. Added three new HiSeq X customers, bringing the total to 34. Sequencing instrument revenue was down 21% y/y.

Consumable revenue was up 25% y/y to $379 million. $310 million of that was sequencer consumables, also up 25% y/y. NextSeq utilization was high.

Services revenue was up 18% y/y to $90 million.

NIPT penetration in China increased. In Europe it should increase later in the year with the introduction of new products.

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

GAAP gross margin was was

Non-GAAP numbers: net income $127.2 million, up 21% sequentially from $105.5 million, and up 6% from $119.7 million year-earlier. Diluted EPS was $0.86, up 21% sequentially from $0.71, and up 7.5% from $0.80 year-earlier. Gross margin was 72.8%, up sequentially from 71.7%, and up from 69.8% year earlier. Non-GAAP figures exclude legal settlement benefits, amortization, non-cash interest expense, and smaller items.

Cash, equivalents and investment balance was $1.45 billion, up sequentially from $1.34 billion. Long term debt was $1.03 billion. Cash flow from operations was $217.0 million. Free cash flow was $149.2 million. Capital expenditures were $67.8 million. $100 million was used to repurchase stock.

GAAP cost of revenue was $176.3 million, leaving gross profit of $423.8 million. Operating expenses were $261.9 million, consisting of: $124.6 million for research and development; $148.5 million for selling, general, and administrative; legal contingency benefit $11.5 million; headquarters relocation $0.3 million. Leaving income from operations of $161.9 million. Other expense was $4.9 million. Income tax provision $40.6 million.

Stock-based compensation expense was $32 million.

Agreed to enter into a common to preferred share exchange related to the investment in Grail. That resulted in a $0.01 benefit to GAAP EPS in Q2. Going forward numbers will reflect 50% of Grail losses, not the prior 90%.


Slowness of European recovery? Brexit? We have new leadership in EMEA since the beginning of Q2. He validated the pipeline, and added to it. But some big deals are taking longer than expected to close. We looked at that and sucked in a bit on our forecast for EMEA for the year. But the demand environment seems strong. For instance, the Dutch okayed NIPT for all pregnancies. The Brexit issue is not clear yet. Deals could be slowed down, but will likely go forward. We have seen no change in the competitive environment in EMEA.

China? We are seeing demand flow from the China PMI initiative. We have a strong pipeline there. Then revenue should start showing up from the consumable sales.

21% decline in sequencing instruments? We are where we expected. We knew it would be a tough compare. HiSeq shipments were flat sequentially. In back half of year we expect further strength, mainly from U.S., mainly from HiSeq.

Theory that there is overcapacity in the market? People have asked about the clinical market and complex genetic testing. We don't see any reduction in demand. NIPT is growing, but more of our big customers are testing in house, not through us.

Pull through on HiSeq X? We analyse each customer. The pullthrough range is high. New customers pull the average down, they utilization increases over time.

In the oncology market the growth is driven by the higher-end customers. We have a set of very large customers running at very high utilization.

NGSS reimbursement rates? A lot of growth is from self-pay. Some is cancer centers are distinguishing themselves by providing the service, but it is not reimbursed. We think when the number of panels is consolidated that will help to accelerate reimbursement. We are at the early stages of reimbursement in oncology.

Helix goes out and recruits direct to consumer businesses. There are compelling reasons to go to Helix rather than setting up new labs. Because of segmentation we don't think there is a conflict.

The demand is China is mostly a clinical market. They are mostly private companies going after NIPT and some oncology. The typically buy NextSeq. The PMI customers are more likely to be HiSeq customers.

Customers still want us to lower the price and maximize throughput. Some also want help on the clinical reporting side.

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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