Analyst Conference Summary


conference date: October 24, 2017 @ 2:00 PM Pacific Time
for quarter ending: October 1, 2017 (third quarter, Q3 2017)

Forward-looking statements

Overview: Continued strong revenue and earnings growth.

Basic data (GAAP):

Revenue was $714 million, up 8% sequentially from $662 million and up 18% from $607 million in the year-earlier quarter.

Net income was $163 million, up 27% sequentially from $128 million, and up 26% from $129 million year-earlier.

Diluted EPS was $1.11, up 28% sequentially from $0.87, and up 28% from $0.87 year-earlier.


Raised. Full year 2017 revenue up about 13% y/y. GAAP EPS $5.56 to $5.61 and non-GAAP EPS $3.73 to $3.78.

In Q4 gross margin up slightly sequentially, with more normalized tax rate.

Conference Highlights:

Francis deSouza, President and CEO, said "NovaSeq™ momentum continued to grow in the third quarter, with close to 200 NovaSeq systems now in customers’ hands. Further innovations, including the recently launched S4 flow cell, Xp workflow and Nextera DNA Flex library preparation kit, are expected to fuel incremental NovaSeq demand.”

In the quarter Illumina announced the creation of an independent company, Verogen, for next-generation forensic genomics sequencing.

NovaSeq shipments were no longer manufacturing constrained. Should start catching up on the backlog. HiSeq customers are upgrading to NovaSeq.

Instrument revenue (sequencer + array) was $140 million, up 8% sequentially from $130 million, and up 24% y/y. Sequencing instrument revenue was $128 million, up 21% y/y. Decided not to launch the NovaSeq 5000, to focus on 6000.

Microarray revenue was $121 million, up sequentially from $110 million, and increased 27% y/y (that includes consumables). Instrument revenue was $12 million, consumables $71 million. Helix launched in July.

Consumable revenue was $451 million, up 12% sequentially from $402 million, and up 14% y/y from $396 million. $380 million sequencing consumables, up $42 million sequentially, and up 14% y/y.

Services revenue was $118 million, down 1% sequentially from $119 million, and up 26% y/y from $93 million.

Sequencing has become an important part of research for immunotherapies. United Healthcare is now covering whole exome sequencing for appropriate rare disease patients.

Non-GAAP numbers: net income $163 million, up 35% sequentially from $121 million, and up 13% from $144 million year-earlier. Diluted EPS was $1.11, up 35% sequentially from $0.82, and up 14% from $0.97 year-earlier. 68.8% gross margin, down from 72.0% year-earlier. 26.8% operating margin.

Cash, equivalents and investment balance was $2.0 billion, up sequentially from $1.89 billion. Long term debt was $1.18 billion. Cash flow from operations was $235 million. Free cash flow was $153 million. Capital expenditures were $ million. $75 million was used to repurchase stock.

GAAP cost of revenue was $232 million, leaving gross profit of $482 million. Operating expenses were $301 million, consisting of: $134 million for research and development; $167 million for selling, general, and administrative; and an $0 million legal contingencies benefit. Leaving income from operations of $181 million. Other expense was $6 million. Income tax provision $23 million. Net loss to noncontrolling interests $11 million.


14% y/y consumable growth, more traditional ramp to Q4, what is normal? We expect to go back to a normal ramp. In Q1 and Q2 we saw a destocking. In Q4 NovaSeq should ramp consumables, HiSeq come down. Might see ups and downs. But we are not giving a specific number.

Delay in S1 ship? It is a modest delay. We prioritized the SP workflow. We expect it out in Q1.

What gives you confidence the 5000 customers will pay the extra $200,000 for the 6000 model? One-third of customers are new. We are seeing a HiSeq upgrade wave. X customers starting to try NovaSeq too, now that S4 is available. We have a lighter-end version of most instruments. But customers had little interest in the 5000, they wanted the high throughput of the 6000. Otherwise they are dropping to NextSeq.

Helix contribution? It is too early, they are ramping up. We will give details at some time next year. It is not material yet.

$42 million sequential consumable jump, how much attributable to NovaSeq? Driven across all of our platforms. High-throughput growth had NovaSeq as largest contributor. For benchtop NextSeq was the biggest contributor. Anecdotally, NovaSeq creates price points that drives more consumable spending.

Trade in effects? The deal driver is customer plans going forward.

New areas of research for NovaSeq? Single cell research is exciting. Immuno-oncology. Meta-genomics and proteomics have long-term potential.

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Disclaimer: My analyst call summaries may include both 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