Analyst Conference Summary

conference date: July 30, 2018 @ 2:00 PM Pacific Time
for quarter ending: July 1, 2018 (fiscal second quarter, Q2 2018)

Forward-looking statements

Overview: Continued rapid revenue and profit growth.

Basic data (GAAP):

Revenue was $830 million, up 6% sequentially from $782 million and up 25% from $662 million in the year-earlier quarter.

Net income was $209 million, up 0.5% sequentially from $208 million, and up 73% from $121 million year-earlier.

Diluted EPS was $1.41, down 3% sequentially from $1.45, and up 62% from $0.87 year-earlier.

Guidance:

"For fiscal 2018, the company now projects revenue growth of approximately 20%, GAAP earnings per diluted share attributable to Illumina stockholders of $5.10 to $5.20 and non-GAAP earnings per diluted share attributable to Illumina stockholders of $5.35 to $5.45." But expects Q3 to be the lowest revenue quarter of the year.

Conference Highlights:

Francis deSouza, President and CEO, said "We are now expecting revenue growth of approximately 20% for 2018. Sequencing consumables, array consumables, and lab and other services each grew more than 30% compared to the second quarter of 2017, highlighting the growing interest in genomic information and its application to research, clinical and consumer markets." NovaSeq sales are exceeding expectations. Library prep was another area of rapid growth.

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.

Sequencing instrument revenue was $127 million, down 7% from $136 million year-earlier. Revenue growth was from consumable revenue of $540 million, up 34% from $402 million year-earlier.

Product revenue was $673 million, up 24% y/y from $543 million.

Services and other revenue was $157 million, up 2% sequentially from $154 million, and up 32% y/y from $119 million.

Non-GAAP numbers: net income $212 million, down 1% sequentially from $214 million, and up 75% from $121 million year-earlier. Diluted EPS was $1.43, down 1% sequentially from $1.45, and up 74% from $0.82 year-earlier.

70.3% non-GAAP gross margin, up from 67.0% year-earlier. The increase was largely due to the higher revenue from consumables relative to sequencers.

Cash, equivalents and investment balance was $2.5 billion. Long term debt was $1.3 billion. Cash flow from operations was $295 million. Free cash flow was $218 million. Capital expenditures were $77 million. Cash used to repurchase stock was not stated.

Illumina launched the NovaSeq S4 200 cycle kit and S Prime flow cell. The Edico Genome acquisition was announced, to provide data analysis acceleration.

GAAP cost of revenue was $255 million, leaving gross profit of $575 million. Operating expenses were $348 million, consisting of: $151 million for research and development; $197 million for selling, general, and administrative. Leaving income from operations of $227 million. Other income was $5 million. Income tax provision $32 million. Net loss to noncontrolling interests $9 million.

Q&A:

$13 million stocking order type? Was mainly NovaSeq, with a little NexSeq.

NovaSeq growth surprises? We are seeing what we expected, plus surprises. We are seeing more consumables bought along with NovaSeq. Whole genome, as expected. Unexpected was new and high throughput customers.

Any tariff impacts? We saw $13 million in stocking ordes in Q2, we don't think stocking in front of possible tariffs will be material.

ISeq? Some use is for quality control before running an expensive NovaSeq sequence. Others simply lack either the capital or the regular flow of samples. Third group is totally new to sequencing. We are seeing buyers new to Illumina and new to sequencing. Targetted RNA is one use we are seeing.

NovaSeq consumable ramp? Pull through is continuing to go up, hit a new high in the quarter. It is still volatile, we can't give you a range to expect yet. Customers are using multiple flow cells.

The seasonality we expect is the usual, with a revenue low in Q3, then a strong Q4.

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