Analyst Conference Summary

conference date: October 25, 2019 @ 2:00 PM Pacific Time
for quarter ending: September 30, 2019 (third quarter, Q3 2019)

Forward-looking statements

Overview: Growing, but not fast enough to justify its P/E. Big improvement on Q2, however.

Basic data (GAAP):

Revenue was $907 million, up 8% sequentially from $838 million and up 6% from $853 million in the year-earlier quarter.

Net income was $234 million, down 21% sequentially from $296 million, and up 18% from $199 million year-earlier.

Diluted EPS was $1.58, down 21% sequentially from $1.99, and up 19% from $1.33 year-earlier.

Guidance:

For fiscal 2019, the company continues to expect y/y revenue 6% growth. GAAP EPS $6.55 to $6.60, non-GAAP EPS $6.40 to $6.45.

Conference Highlights:

Francis deSouza, President and CEO, said revenue was inline with expectations. NovaSeq shipments were strong, including to support the UK Biobank initiative. This adoption drove the highest consumables pull-through this year.

12% y/y growth in sequencing business. Sequencing instrument revenue was $142 million, up 10% sequentially from $129 million, and up 3% from year-earlier. Revenue from sequencing consumables was $525 million, up 6% sequentially from $497 million, and up 11% from $472 million year-earlier. Sequencing service revenue was $138 million, up 35% sequentially from $102 million, and up 27% from year-earlier. NovaSeq now generates the most sequencing data.

24% decline in Arrays revenue. $102 million microarray revenue, down 29% sequentially from $143 million and down 24% from from year-earlier. Array consumables were down 10% y/y, but array systems were up 4% y/y. Decline mainly due to DTC (direct to consumer).

Product revenue was $746 million, up 6% sequentially from $704 million, and up 5% y/y from $710 million.

Services and other revenue was $161 million, up 20% sequentially from $134 million, and up 13% y/y from $143 million.

Non-GAAP numbers: net income $286 million, up 43% sequentially from $200 million, and up 3% from $277 million year-earlier. Diluted EPS was $1.93, up 43% sequentially from $1.35, and up 27% from $1.52 year-earlier.

Cash, equivalents and investment balance was $3.2 billion, flat sequentialy from $3.2 billion. Long term debt was $1.1 billion. Cash flow from operations was $267 million. Free cash flow was $218 million. Capital expenditures were $49 million. Cash used to repurchase stock was $199 million.

Helix was deconsolidated effective April 25, 2019.

GAAP cost of revenue was $259 million, leaving gross profit of $648 million. Operating expenses were $340 million, consisting of: $151 million for research and development; $189 million for selling, general, and administrative. Leaving income from operations of $308 million. Other expense was $38 million. Income tax provision $36 million. Net loss to noncontrolling interests $0 million.

Q&A:

UK biobank? Signed in Q3, started sequencing in Q3, so will drive revenue mostly in 2020. NHS also has a national initiative that should begin to ramp in 2020.

Research funding is down in China, clinical is strong.

Desktop unit weakness? We now have 2 quarters of less pull through. Customers are migrating to bigger systems. We are seeing customers buy NextSeq DX, which is a good long-term positive indicator.

Elasticity of demand going forward? When we launch a new instrument as customers migrate, pull-through drops, then accelerates again.

Is NovaSeq ramping slower than you expected? For Q3 we grew sequencing consumables 11%, which was better than expected. Lower DTC was offset by better consumables. We have taken guidance down slightly for consumables for the full year, to the low teens, driven by MiSeq and NextSeq lower pull through. But Q4 should be a higher growth quarter for sequencing consumables.

Lots of repitition.

UK biobank, all systems already deployed? Labs have ramped up and are sequencing. They may augment their fleet during the course of the project.

For clinical market, for NIPT the big drivers would be national decisions in the EU. In US it will be when reimbursement holdouts give in. For genetic disease we have made good process for reimbursement, but the bottleneck is utilization, so only 1000 tests ordered in the past 6 months. We need to educate physicians. In oncology we are seeing strong growth, reimbursements building, panels proliferating. We will see growth as tests become accessible to community hospitals. As there are more therapies, that drives testing.

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