Analyst Conference Summary

conference date: April 24, 2018 @ 2:00 PM Pacific Time
for quarter ending: April 1, 2017 (fiscal first quarter, Q1 2018)

Forward-looking statements

Overview: Very rapid y/y revenue and non-GAAP profit growth. But guiding to slower growth rates in 2018.

Basic data (GAAP):

Revenue was $782 million, down 1% sequentially from $788 million and up 31% from $598 million in the year-earlier quarter.

Net income was $208 million, up 206% sequentially from $68 million, but down 43% from $367 million year-earlier.

Diluted EPS was $1.45, up 215% sequentially from $0.46, and down 42% from $2.48 year-earlier.

Guidance:

"For fiscal 2018, the company now projects 15% to 16% revenue growth, GAAP earnings per diluted share attributable to Illumina stockholders of $4.45 to $4.55 and non-GAAP earnings per diluted share attributable to Illumina stockholders of $4.75 to $4.85." Expected non-GAAP tax rate for rest of year is 20%.

Conference Highlights:

Francis deSouza, President and CEO, said "“Our strong first quarter, with momentum across both our sequencing and microarray businesses, was driven by the growing adoption of applications spanning oncology, clinical and non-clinical research, population genomics and personal genomics. Genomic information is more valuable and actionable than ever before and we believe that we are in the earliest stages of a genomics revolution.” Sequencing consumables was the growth driver, with NovaSeq as the device growth driver.

iSeq started shipping in the first quarter, at under $20,000, making sequencing broadly available. Not likely to be a material revenue driver in the near term. Approaching 100 orders.

Instrument revenue (sequencer + array) was $118 million, down 15% sequentially from $139 million, but up 18% y/y. Sequencing instrument revenue was $112 million, down sequentially but up 18% y/y.

Microarray revenue was $152 million, up 81% sequentially from $90 million, and up 48% y/y. Instrument revenue was $6 million. Microarray service revenue doubled to $58 million y/y. Microarray consumables grew 26% y/y to $87 million.

Consumable revenue was $504 million, down 2% sequentially from $514 million, and up 28% y/y. $417 million sequencing consumables, down 4% from $432 million sequentially, and up 31% y/y.

Services and other revenue was $154 million, up 29% sequentially from $119 million, and up 44% y/y from $ million.

Non-GAAP numbers: net income $214 million, up 1% sequentially from $212 million, and up 128% from $94 million year-earlier. Diluted EPS was $1.45, up 1% sequentially from $1.44, and up 127% from $0.64 year-earlier. 69.8% gross margin, up 340 basis points from year-earlier. 29.5% operating margin. Non-GAAP results exclude unusual and the usual other items.

Cash, equivalents and investment balance was $2.37 billion. Long term debt was $0.71 billion. Cash flow from operations was $255 million. Free cash flow was $165 million. Capital expenditures were $90 million. Cash used to repurchase stock was not stated, so probably zero.

In the quarter Illumina released the NovaSeq S1 flow cell reagent kit for the 6000 system.

There were new collaborations with Bristol-Myers Squibb for in-vitro oncology assays and with Loxo Oncology for diagnostics.

GAAP cost of revenue was $244 million, leaving gross profit of $538 million. Operating expenses were $320 million, consisting of: $137 million for research and development; $183 million for selling, general, and administrative. Leaving income from operations of $218 million. Other income was $3 million. Income tax provision $24 million. Net loss to noncontrolling interests $11 million.

Q&A:

Sequencing instrument results v. expectations? Within expectations of seasonality. Very pleased with NovaSeq rollout, which will take a number of years. Customers are upgrading from HiSeq, but only 18% have bought their first Nova. Benchtop customers are moving to Novo, and we have totally new customers to take advantage of the technology.

Population studies and whole genome sequencing, cost drop affect on demand? NovaSeq democratizes access to whole genome sequencing. We are seeing customers to deeper and broader sequencing since the launch. "We continue to believe in the long term elasticity of this market." We are already in dialogues with customers influenced by this trend.

Why the big upside in microarrays, did it effect 2018 guidance? Main factor was Direct to Consumer market, which is still in early stages. The market has headroom to continue to expand. Also more international interest in DTC. Revenue in Q1 was higher than expectations.

Sequencing services strength? Driven by the gel project, but that project should complete over the course of this year.

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