Analyst Conference Summary

conference date: July 29, 2019 @ 2:00 PM Pacific Time
for quarter ending: June 30, 2019 (second quarter, Q2 2019)

Forward-looking statements

Overview: Missed guidance. Revenue just above flat y/y, so I question the high P/E ratio that stock still has.

Basic data (GAAP):

Revenue was $838 million, down 1% sequentially from $846 million and up 1% from $830 million in the year-earlier quarter.

Net income was $296 million, up 27% sequentially from $233 million, and up 42% from $209 million year-earlier.

Diluted EPS was $1.99, up 27% sequentially from $1.57, and up 41% from $1.41 year-earlier.

Guidance:

Lowered full year 2019, expects y/y revenue growth of approximately 6%, and GAAP per diluted EPS attributable to Illumina stockholders of $6.41 to $6.51. Non-GAAP EPS of $6.00 to $6.10.

Q3 revenue up 3% y/y.

Conference Highlights:

Francis deSouza, President and CEO, said "While our second quarter results clearly fell short of our expectations, we remain committed to leading innovation in genomics, and to enabling our global community of 6,300 customers who unlock more of the human genome each day in an effort to improve human health and, in many cases, save lives. In addition to continued sequencing consumables growth, we are encouraged by the sequential and year-over-year growth in shipments across our high, mid, and low-throughput sequencing system portfolio, including a record number of NextSeq Dx systems, reflecting the growing clinical opportunity."

Sequencing instrument revenue was $129 million, up 23% from $105 million in Q1, and up 4% from $124 million year-earlier. Revenue from sequencing consumables was $497 million, up 3% sequentially from $481 million, and up 8% from $460 million year-earlier. Sequencing service revenue was $102 million, down 4% from year-earlier.

Recently launched Veriseq NIPT v2. In Q1 launched the S Prime (SP) flow cell, enabling smaller batch sizes and lower output sequencing methods on the NovaSeq System. Also launched TruSight Oncology 500 as a Research Use Only product, empowering laboratories with comprehensive genomic profiling.

$110 million microarray revenue, consisting of $69 million for consumables down 13% y/y, $32 million for services and $9 million for instruments. That is down sequentially from $143 million and down from from $ million year-earlier. Array instrument growth was expected to slow in 2019.

Product revenue was $704 million, up 6% sequentially from $667 million, and up 5% y/y from $673 million.

Services and other revenue was $134 million, down 25% sequentially from $179 million, and down 15% y/y from $157 million.

Non-GAAP numbers: net income $200 million, down 16% sequentially from $237 million, and down 6% from $212 million year-earlier. Diluted EPS was $1.35, down 16% sequentially from $1.60, and down 6% from $1.43 year-earlier. Non-GAAP net income excludes a $92 million unrealized gain from a strategic investment that completed an initial public offering.

Cash, equivalents and investment balance was $3.2 billion, down sequentialy from $3.6 billion. Long term debt was $1.1 billion. Cash flow from operations was $143 million, but included an $84 million payment of the accreted debt discount related to the conversion of the 2019 notes. Free cash flow was $96 million. Capital expenditures were $47 million. Cash used to repurchase stock was $0 million. Repaid $632 million of 2019 Convertible Notes, leaving $1.3 billion of convertible debt outstanding due in 2021 and 2023.

Helix was deconsolidated effective April 25, 2019.

GAAP cost of revenue was $265 million, leaving gross profit of $573 million. Operating expenses were $368 million, consisting of: $166 million for research and development; $202 million for selling, general, and administrative. Leaving income from operations of $205 million. Other income was $141 million. Income tax provision $53 million. Net loss to noncontrolling interests $3 million.

Q&A:

Forward cadence of new products? PopSeq is a whole new area. Expanded from England a few years ago to many countries now. So the ramp is hard to predict. There is a lot to do to set up a system in a new country. We are now more cautious in our guidance. But we expect it to ramp up in some nations in 2020.

We expect to see increased NIPT adoption, particularly in China. Oncology should also be a driver in China.

NextSeq shortfall update? The drop in PopSeq has impacted consumables. NovaSeq consumables grew both sequentially and y/y and placements were to expectations. We take the miss seriously, but this is a cyclical business with strong long-term growth prospects. Eventually what we roll out becomes a standard of care, creating growth over time. We keep placing instruments, which means consumable revenue growth in the future.

TMB assay color? It is an interesting area of research, but not driving the business. Mutation profiling is a big driver, liquid biopsi too. TSO500 does have TMB as a component of the assay.

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