Analyst Conference Summary


conference date: January 30, 2018 @ 2:00 PM Pacific Time
for quarter ending: December 31, 2017 (fourth quarter, Q4 2017)

Forward-looking statements

Overview: Continued strong revenue and earnings growth. Non-GAAP EPS beat analyst consensus of $1.22 by $0.22. New tax law hurt GAAP results.

Basic data (GAAP):

Revenue was $788 million, up 10% sequentially from $714 million and up 26% from $619 million in the year-earlier quarter.

Net income was $68 million, down 58% sequentially from $163 million, and down 45% from $124 million year-earlier.

Diluted EPS was $0.46, down 58% sequentially from $1.11, and up 45% from $0.84 year-earlier.


For full year 2018, estimated 13% to 14% revenue growth, GAAP EPS of $4.14 to $4.24 and non-GAAP EPS of $4.50 to $4.60. Expects non-GAAP gross margin to be up slightly y/y. Expects to ship 330 to 350 NovaSeq systems.

Q1 2018 revenue could be seasonally lower than Q4 2017.

Conference Highlights:

Francis deSouza, President and CEO, said "Illumina finished 2027 on a high note. With 26% revenue growth in the fourth quarter, and 15% for the full year, our 2017 results demonstrate customers’ growing demand across both our sequencing and array portfolios."

During the quarter Illumina launched the iSeq™ 100 Sequencing System, a flexible benchtop sequencer priced at $19,900. AmpliSeq for Illumina became available, developed in partnership with Thermo Fisher Scientific. NextSeq™ 550Dx instrument CE-IVD market platform, to deliver the power of high-throughput next-generation sequencing (NGS) to the clinical laboratory was introduced. Illumina also partnered with KingMed Diagnostics to develop novel oncology and hereditary disease testing applications in China.

iSeq should start shipping this quarter, at under $20,000, making sequencing broadly available. Not likely to be a material revenue driver in the near term.

Instrument revenue (sequencer + array) was $139 million, down 1% sequentially from $140 million, and up 25% y/y from $111 million. Sequencing instrument revenue was $131 million, up 18% y/y. Most high-throughput customers now buying NovaSeq. NextSeq also continues to perform well.

Microarray revenue was $90 million, down 26% sequentially from $121 million, and decreased 10% y/y from $100 million. Instrument revenue was $8 million, consumables $82 million.

Consumable revenue was $514 million, up 14% sequentially from $451 million, and up 26% y/y from $407 million. $432 million sequencing consumables, up 14% from $380 million sequentially, and up 30% y/y.

Services and other revenue was $119 million, up 1% sequentially from $118 million, and up 27% y/y from $94 million.

Non-GAAP numbers: net income $212 million, up % sequentially from $163 million, and up % from $126 million year-earlier. Diluted EPS was $1.44, up 30% sequentially from $1.11, and up 69% from $0.85 year-earlier. 70.9% gross margin, up from 69.5% year-earlier. 31.4% operating margin. Non-GAAP results exclude the tax reform hit and the usual other items.

Cash, equivalents and investment balance was $2.1 billion. Long term debt was $1.18 billion. Cash flow from operations was $294 million. Free cash flow was $218 million. Capital expenditures were $76 million. $75 million was used to repurchase stock.

GAAP cost of revenue was $236 million, leaving gross profit of $542 million. Operating expenses were $312 million, consisting of: $137 million for research and development; $175 million for selling, general, and administrative; and an $0 million legal contingencies benefit. Leaving income from operations of $230 million. Other expense was $6 million. Income tax provision $166 million. Net loss to noncontrolling interests $10 million.

Full year 2017 results:

Revenue $2.75 billion, up 15% y/y. GAAP net income $726 million, EPS $4.95. Non-GAAP net income $591 million, or EPS $4.00. Cash flow from operations $875 million.


Lingering questions about replacing HiSeq with NovaSeq, will overall revenue increase? We spent a lot of time with HiSeq and HiSeq X customers. We released when we saw a new wave of elasticity. HiSeq customers particularly saw value in NovaSeq. "It is playing out as we expected." Customers are doing broader and deeper sequencing. Many projects could not be done on HiSeq.

Installed base retirements slowing down? Retired about 20 HiSeqs from the installed base in q4. It is a 3 to 5 year upgrade cycle. Transition should accelerate this year, and that should mean more instrument retirements, including Xs.

Gave examples of new customers and types of applications enabled by NovaSeq.

R&D expense priorities? We spend a lot of time looking at the opportunities, but have to prioritize, we can't address them all. One area for expansion is our commercial infrastructure, particularly in China, and our partner ecosystem.

NovaSeq backlog? The delivery and replatforming for many customers is still in front of us. The remaining units of a large order from a large genome centers make up a large share of the backlog.

NIPT? Should see demand growth. Reimbursement should grow globally. Consumables should grow once we see reimbursement expand. But NIPT is primarily NextSeq.

Is MiniSeq a good proxy for iSeq? "It is not a great proxy." It is less than half as expensive. But on a volume to price basis, a MiniSeq makes more sense. It is opening up a different segment, so cannibalization should be minimal.

Array business guidance? Building on strong growth from 2017, should see same in 2018.

Total revenue for instruments to be up in 2018? ASPs? We expect growth in placements except for HiSeq. So we expect overall instrument revenue growth in 2018.

Are you shipping instruments to Grail? They are a large customer, as they need capacity they buy it. We can't share specifics.

2018 sequencing consumables? We expect overall consumables growth in 2018. HiSeq consumable dollars will shrink. There will be downward seasonality in Q1.

In Q4 we shipped NovaSeq in the high 80s, the most in 2017.

We plan to offset any equity dilution from stock-based compensation with cash use for share repurchases. We are open to acquisitions that are long-term accretive.

U.S. research dollars are shifting to genomics.

Tax rate for 2018? Believe some improvement from 2017, but too early to state due to the complexity of the tax law changes.

Why were array consumables not up more given the 23 and Me and Ancestry traffic? Ancestry shows up in array services, not consumables. 23 and Me is in consumables. When the consumer buys the kit, say during the holidays, especially as a gift, the sample tube can show up in the next quarter, or even later.

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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 2018 William P. Meyers