Analyst Conference Summary

conference date: October 29, 2020 @ 2:00 PM Pacific Time
for quarter ending: September 30, 2020 (third quarter, Q3 2020)

Forward-looking statements

Overview: Pandemic continues negative impact on sales.

Basic data (GAAP):

Revenue was $794 million, up 26% sequentially from $633 million but down 12% from $907 million in the year-earlier quarter.

Net income was $179 million, up 281% sequentially from $47 million, and down 24% from $234 million year-earlier.

Diluted EPS was $1.21, up 278% sequentially from $0.32, and down 23% from $1.58 year-earlier.

Guidance:

Illumina has withdrawn its fiscal 2020 full year revenue EPS guidance due to the COVID-19 pandemic.

Conference Highlights:

Francis deSouza, President and CEO, said "Looking forward, we believe our planned acquisition of GRAIL will catalyze a new era of early cancer detection, transforming cancer survivability and opening up the largest clinical application of genomics we've seen." Expects sequence run rate to improve again sequentially in Q4, and a sequential increase in revenue, including in instrument sales.

During Q3 2020 Illumina announced an agreement to acquire GRAIL to accelerate commercialization and adoption of transformative multi-cancer screening genetic tests. GRAIL was spun off from Illumina in 2016. Will pay $8 billion to acquire it, but believes will close in second half of 2021.

Non-GAAP numbers: net income $150 million, up 63% sequentially from $92 million, and down 48% from $286 million year-earlier. Diluted EPS was $1.02, up 65% sequentially from $0.62, and down 47% from $1.93 year-earlier.

Cash, equivalents and investment balance was $3.32 billion, up sequentialy from $3.27 billion. Long term debt was $0.67 billion. Cash flow from operations was $153 million. Free cash flow was $105 million. Capital expenditures were $48 million. Cash used to repurchase stock was $125 million.

In Q2 2020 Illumina Launched TruSight software to accelerate the identification of rare genetic diseases through whole genome sequencing. Also received FDA authorization for a Covid-19 diagnostic test using sequencing.

In Q2 2020 Illumina acquired BlueBee and Enancio to lower data storage costs and accelerate data interpretation.

In Q2 2020 Illumina partnered with IDbyDNA to co-market IDbyDNA's Explify Platform for use with Illumina's NGS systems and library preparation to provide a complete, streamlined workflow solution for infectious disease applications.

GAAP cost of revenue was $268 million, leaving gross profit of $526 million. Operating expenses were $364 million, consisting of: $172 million for research and development; $192 million for selling, general, and administrative. Leaving income from operations of $162 million. Other income was $53 million. Income tax provision $36 million.

Q&A selective summary:

Better than expected quarter, any sense how much was catch up? Q3 did play out better than we expected after the first few weeks. I think we are at a new baseline.

Elasticity on consumable pricing cut? Version 1.5 reagent catalysed the smaller labs. We did see customer responses. We also saw it encourage an system upgrade cycle. We expect to see the positive dynamics play out quickly.

Instuments, when will they get back to growth? NovaSeq shipments kept growing. We have seen good resilience. We expect sequential instrument growth, including NovaSeq, in Q4.

Operating expense ramp in second half? We want to protect our high priority project innovation. We have looked for other savings, some will come back next year, like travel. In first three quarters we ended up about $150 million lower than expense projections.

NIPT? Those who are eligible do get it. Opening it to average risk group should enlarge use.

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