Analyst Conference Summary


conference date: October 23, 2018 @ 2:00 PM Pacific Time
for quarter ending: September 30, 2018 (fiscal third quarter, Q3 2018)

Forward-looking statements

Overview: Continued rapid revenue and non-GAAP profit growth.

Basic data (GAAP):

Revenue was $853 million, up 3% sequentially from $830 million and up 20% from $714 million in the year-earlier quarter.

Net income was $199 million, down 5% sequentially from $209 million, and up 22% from $163 million year-earlier.

Diluted EPS was $1.33, down 6% sequentially from $1.41, and up 20% from $1.11 year-earlier.


For fiscal 2018, revenue growth of approximately 20%. Fiscal 2018 GAAP earnings per diluted share of $5.32 to $5.37 and non-GAAP earnings per diluted share of $5.70 to $5.75.

Conference Highlights:

Francis deSouza, President and CEO, said "Illumina's strong performance in the third quarter of 2018 reflected growth across our sequencing and arrays portfolios. Sequencing system revenue of $138 million was the strongest since 2015, reflecting strong demand within our sequencing family from the NovaSeq, the most powerful and flexible sequencer ever, to the iSeq, our most accessible and easiest-to-use sequencer."

S4 flow cells were the highest revenue contributor in the family. NextSeq consumable revenue did extremely well. A legal settlement with Premaitha led to a supply and license agreement.

Sequencing instrument revenue was $138 million, up 12% sequentially, and up 8% from $128 million year-earlier. $154 total instrument revenue (sequencing + array). Revenue was from consumables was $550 million, up 2% sequentially from $540 million, and up 22% from $451 million year-earlier; 55% of revenue.

$134 million microarray revenue, up 11% y/y from $121 million.

Product revenue was $710 million, up 5% sequentially from $673 million, and up 19% y/y from $596 million.

Services and other revenue was $143 million, down 7% sequentially from $154 million, and up 21% y/y from $118 million.

Non-GAAP numbers: net income $227 million, up 7% sequentially from $212 million, and up 39% from $163 million year-earlier. Diluted EPS was $1.52, up 6% sequentially from $1.43, and up 40% from $1.11 year-earlier.

70.0% non-GAAP gross margin, up from 67.5% year-earlier.

Cash, equivalents and investment balance was $3.4 billion. Long term debt was $2.0 billion. Cash flow from operations was $292 million. Free cash flow was $228 million. Capital expenditures were $64 million. Cash used to repurchase stock was $103 million. Raised $735 million issuing 0% convertible senior notes due 2023.

GAAP cost of revenue was $256 million, leaving gross profit of $597 million. Operating expenses were $356 million, consisting of: $159 million for research and development; $197 million for selling, general, and administrative. Leaving income from operations of $249 million. Other expense was $9 million. Income tax provision $44 million. Net loss to noncontrolling interests $11 million.


NovaSeq types of new customers? We continue to see growth from new to high-throughput and sequencing customers. Some are not the usual suspects. A new hospital customer in Europe doing whole genome sequencing. A new customer detecting tumor mutational burdens in blood samples. A customer using it for exomes. So our thesis of broadening the customer base is playing out.

Q4? Expecting flat to sequentially up modestly. We believe China orders were accelerated from Q4 to Q3, mainly consumables, buying ahead of tariffs. Instrument sales should continue to ramp. Arrays will be a hard q/q compare.

Competitive landscape, pricing? It is a big, rapidly growing market, attracting a lot of players. Some are talking about low-cost sequencing for outsourcing customers, running out of China. But our product currently produces better quality data. There are risks in outsourcing to China. In adjacent markets, like long-read, they can do reference genomes, but we have a cost advantage for larger scale work.

$14 million stocking order in consumables for China, how do you know it is not fundamental demand? The tariff is the cause, as we learned from our customers. Large proportion is for NovaSeq. In Q3 we received notice of a 5% tariff on instruments, so far nothing on consumables, but our customers are still worried. Our consumables only work with our instruments, so there is a commitment that should not be affected much by price. Our business in China has growing, the tariff effect is just a small part of the picture.

Shelf life of consumable products? Usually 6 to 9 months.

NIH funding for NovaSeq? We are happy with how grants are playing out. Increase in the NIH budget was welcome by our industry. Use of budget is shifting to genomic testing. They are not requiring NovaSeqs, but last year you could not use the grants for NovaSeq, so an improvement.

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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