Analyst Conference Summary

conference date: November 1, 2016 @ 2:00 PM Pacific Time
for quarter ending: October 2, 2016 (third quarter, Q3 2016)

Forward-looking statements

Note: due to time constraints and the fact that I don't own ILMN, and the relative steadiness of the business, the notes for Q3 are more shorter than usual. See also Q2 2016 ILMN notes

Overview: Continued solid growth and profitability. But lowered revenue outlook.

Basic data (GAAP):

Revenue was $607.1 million, up 1% sequentially from $600.1 million and up 10% from $550.3 million in the year-earlier quarter.

Net income was $128.9 million, up 7% sequentially from $120.4 million, and up 9% from $118.2 million year-earlier.

Diluted EPS was $0.87, up 6% sequentially from $0.82, and up 10% from $0.79 year-earlier.

Guidance:

Q4 revenue flat to up slightly from Q3. Full 2016 non-GAAP diluted EPS $3.27 to $3.32. Or $2.92 to $2.97 GAAP.

Conference Highlights:

"While sequencing sample volume growth remains robust, our lowered revenue outlook reflects our updated expectations for HiSeq 2500, HiSeq 4000 and HiSeq X instrument purchases, as well as HiSeq 2500 reagent sales,” stated Francis deSouza, President and CEO. “Over the last few weeks it has become clear that certain academic funding practices were modified in the third quarter, limiting our customers’ ability to make HiSeq X capital commitments. Further, HiSeq 2500 and 4000 demand has been impacted by a migration to NextSeq, for enhanced workflow flexibility and HiSeq X, given its beneficial pricing for whole genome sequencing.”

During the quarter partnered with FlowJo to develop software for single cell next-generation sequencing data.

Arrays had strong growth and are expected to continue to grow revenue for at least the next few years.

Instrument revenue (sequencer + array) was $118 million, down 6% sequentially from $126 million, and down 21% y/y from $149 million.

Consumable revenue was $396 million, up sequentially 4% from $379 million, and up 23% y/y from $322 million.

Services revenue was $93.4 million, up 4% sequentially from $90 million, and up 18% y/y from $ 79.4 million.

Non-GAAP numbers: net income $144 million, up % sequentially from $127.2 million, and up % from $120 million year-earlier. Diluted EPS was $0.97, up % sequentially from $0.86, and up % from $0.80 year-earlier. Non-GAAP figures exclude legal settlement benefits, amortization, non-cash interest expense, and smaller items.

Cash, equivalents and investment balance was $1.54 billion, up sequentially from $1.45 billion. Long term debt was $1.0 billion. Cash flow from operations was $150 million. Free cash flow was $93 million. Capital expenditures were $57.1 million. $13 million was used to repurchase stock from a new $13 million authorization.

GAAP cost of revenue was $181.0 million, leaving gross profit of $426.2 million. Operating expenses were $265.4 million, consisting of: $125.9 million for research and development; $139.1 million for selling, general, and administrative; headquarters relocation $0.4 million. Leaving income from operations of $160.7 million. Other expense was $6.3 million. Income tax provision $37.4 million.

Q&A:

Utilization needed as product cycles lengthen? It has been a couple of years since the last big instrument launch. But it is not a plan, new products are ready when they are ready.

HiSeq consumable miss? We looked a lot at this. Utilization patterns were stable. People are making choices about which high-throughput instrument to go for. The broad HiSeq installed base is quite stable.

Sequencing revenue growth has been strong, but volatile, visibility? "Consumable growth has been reliable and robust." The volatility has been on the instrument sales side. Some of this was from customers' funding issues. Missing on guidance is a matter of getting better visibility, we are working on that.

[again, a limited take on a far larger set of Q&A]

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