Analyst Conference Summary

conference date: August 1, 2017 @ 1:30 PM Pacific Time
for quarter ending: July 1, 2017 (second quarter, Q2 2017)

Forward-looking statements

Overview: Good revenue growth. Upped revenue guidance on strong NovaSeq expectations.

Basic data (GAAP):

Revenue was $662 million, up 11% sequentially from $598 million and up 10% from $600 million in the year-earlier quarter.

Net income was $128 million, down 66% sequentially from $373 million, and up 7% from $120 million year-earlier.

Diluted EPS was $0.87, down 65% sequentially from $2.52, and up 6% from $0.82 year-earlier.

Guidance:

Believes full 2017 revenue growth will be 12% over 2016. Diluted EPS estimated GAAP $5.36 to $5.46; non-GAAP $3.60 to $3.70.

Conference Highlights:

“Interest in the NovaSeq platform exceeded our expectations during the quarter. As a result, we have updated our 2017 revenue growth projections to reflect the market demand for NovaSeq and our positive outlook for the rest of the business.” stated Francis deSouza, President and CEO.

Orders beat forecasts for NovaSeq by over 30%. Two-thirds of orders came from HiSeq owners. Commercial customers are leading, with academic purchasers working through the grant application process. Manufacturing capacity was tripled, and 80 systems were shipped. Believes can manufacture at full capacity in Q3, but will take a few quarters to work through the backlog. On the other hand HiSeq and HiSeqX orders are muted.

Instrument revenue (sequencer + array) was $130 million, up 30% sequentially from $100 million, and up 9% y/y.

Microarray revenue was $110 million, up sequentially from $100 million, and increased 16% y/y to over (that includes consumables).

Consumable revenue was $402 million, up 4% sequentially from $387 million, but up 6% y/y.

Services revenue was $119 million, up 11% sequentially from $107 million, and up 32% y/y from $90 million.

Oncology testing customer demand grew 20% y/y. FDA approval of Keytruda based on genetic markers instead of organ or origin should help grow sales.

Non-GAAP numbers: net income $121 million, up 29% sequentially from $94 million, and down 5% from $127 million year-earlier. Diluted EPS was $0.82, up 28% sequentially from $0.64, and down 5% from $0.86 year-earlier. 67% gross margin, down 540 basis points y/y. 22.1% operating margin.

Cash, equivalents and investment balance was $1.89 billion, up sequentially from $1.78 billion. Long term debt was $1.17 billion. Cash flow from operations was $178 million. Free cash flow was $109 million. Capital expenditures were $69 million. $0 million was used to repurchase stock.

GAAP cost of revenue was $228 million, leaving gross profit of $434 million. Operating expenses were $291 million, consisting of: $130 million for research and development; $169 million for selling, general, and administrative; and an $8 million legal contingencies benefit. Leaving income from operations of $143 million. Other expense was $2 million. Income tax provision $21 million. Net loss to noncontrolling interests $8 million.

Q&A:

Consumables increase, and looking forward? In high-throughput we saw a decline in HiSeq consumables. Translational liquid biopsy and China were strong for X instruments. We also saw strength in NextSeq.

We do expect increased expenses in the second half, but it is not all from Helix.

When might we expect a ramp in consumable spend for NovaSeq? We have already seen the beginning of the ramp. As S4 comes out we expect to see some X customers draw down their inventory. NovaSeq will ramp up, partly offset by declines in HiSeq and HiSeq X.

Less than 10% of HiSeq customers have ordered NovaSeq so far, so we have a long ramp ahead of us.

How many HiSeq units will come out of the installed base in next few quarters? We don't forecast that. It typically takes a couple of quarters before they stop using the old instrument.

We would expect to see a slight increase in instrument placements in the second half, since we did very well in Q2.

We believe that some customers are waiting for S4 before making their orders. We expect to have early access customers out in September and broad availability in October.

We had a trade-in program when we launched NovaSeq, including units ordered but not already shipped. Going forward we will see less of that. The math is compelling for many customers, if their sample volume is high enough.

NovaSeq main applications? Higher intensity sequencing like exomes to genomes, deeper sequencing for cancer, and liquid biopsies.

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