Analyst Conference Summary


conference date: April 25, 2017 @ 2:00 PM Pacific Time
for quarter ending: April 2, 2017 (first quarter, Q1 2017)

Forward-looking statements

Overview: Growth rate not as fast as some times in the past, but successful NovaSeq launch. Non-GAAP profits down about 10% y/y. But raised guidance for the full year.

Basic data (GAAP):

Revenue was $598 million, down 3% sequentially from $619 million and up 5% from $572 million in the year-earlier quarter.

Net income was $373 million, up 201% sequentially from $123.9 million, and up 314% from $90 million year-earlier.

Diluted EPS was $2.52, up 200% sequentially from $0.84, and up 320% from $0.60 year-earlier.


"For fiscal 2017, the company is projecting 10% to 12% revenue growth, GAAP earnings per diluted share attributable to Illumina stockholders of $5.26 to $5.36 and non-GAAP earnings per diluted share attributable to Illumina stockholders of $3.60 to $3.70. Our annual guidance assumes second quarter revenue growth of approximately 7% versus the prior year, GAAP earnings per diluted share attributable to Illumina stockholders of $0.56 to $0.61 and non-GAAP earnings per diluted share attributable to Illumina stockholders of $0.65 to $0.70."

Conference Highlights:

"We are witnessing an exciting uptake of the NovaSeq platform with more than 135 orders placed in Q1, and look forward to the advancements in genomics this instrument will enable for years to come." stated Francis deSouza, President and CEO. Also launched VeriSeq NIPT Solution in Europe. Most NovaSeq customers are prior HiSeq customers looking for lower processing costs and higher throughput. 25 NovaSeq instruments were made and installed in Q1, and availability will remain constrained through Q3.

Gain on deconsolidation of GRAIL added $453 million to GAAP net income, but was excluded from non-GAAP numbers (below). "GRAIL raised over $900 million in the first close of its Series B financing and that Illumina’s stake is now less than 20 percent of GRAIL."

Consumable and services revenue increase offset decreased instrument revenue y/y.

Instrument revenue (sequencer + array) was $100 million, down 10% sequentially from $111 million, and down 15% y/y.

Microarray revenue increased 17% y/y to over $100 million (that includes consumables).

Consumable revenue was $387 million, down 5% sequentially from $407 million, but up 7% y/y.

Services revenue was $107 million, up 14% sequentially from $93.8 million, and up 20% y/y.

Non-GAAP numbers: net income $94 million, down 25% sequentially from $126 million, and down 11% from $106 million year-earlier. Diluted EPS was $0.64, down 25% sequentially from $0.85, and down 10% from $0.71 year-earlier. Non-GAAP figures exclude the $453 million gain from Grail deconsolidation and $138 million of consequential taxes. 61.5% gross margin. 17.5% operating margin.

Cash, equivalents and investment balance was $1.78 billion, up sequentially from $1.56 billion. Long term debt was $1.06 billion. Cash flow from operations was $168 million. Free cash flow was $85 million. Capital expenditures were $83 million. $101 million was used to repurchase stock.

GAAP cost of revenue was $230 million, leaving gross profit of $368 million. Operating expenses were $308 million, consisting of: $145 million for research and development; $163 million for selling, general, and administrative. Leaving income from operations of $60 million. Other income was $451 million. Income tax provision $157 million. Net loss to noncontrolling interests $19 million.


NovaSeq types of customers, pacing of orders? Majority were HiSeq, HiSeq X, but about 10% were new to sequencing. There is an upgrade cycle in progress here.

Grail? We expect less than 1% of 2017 to come from Grail.

Your guidance is lower than the street estimate, thoughts? We expect slightly lower gross margin in Q2, and slightly higher expenses rest of year.

Cross contamination barcode issue? HiSeq 4000 problem, low levels are part of noise. There are a number of practices to keep index swapping low. A couple of customers reported the problem, we are working with them to see why and address it.

NovaSeq multi-sample loading? It addresses samples with lower DNA inputs, different applications across the flow cells. These are incremental improvements, not likely to change demand much. Also, they will come out in Q4.

We expect NovaSeq to drive the elasticity of the market, enlarging it.

Will prices of older instruments hold up post NovaSeq? We expect relatively little X placements going forward. We don't have a HiSeq or HiSeq X guidance range going forward at this point.

NovaSeq margins? Currently slightly lower HiSeq X, will improve as we go forward, but not likely to reach the HiSeq level. But should be better than benchtop models margins, and consumables margin should be good.

Confidence in demand for NovaSeq consumable consumption? We are confident from experience and feedback from our customers for a variety of applications.

Consumer testing market, new FDA stance? The FDA decision was a really good step forward for the consumer market. "Obviously good for us too." It was not entirely unexpected.

Firefly timeline? We are making good progress, we intend to bring out the sequencing box late this year or early next year.

China? It is about 10% of our business, with strong secular drivers like NIPT and oncology. The Chinese precision medicine initiative is beginning to have an impact.

Desktop sales vs. guidance? In line with what we expected.

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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 2017 William P. Meyers