Analyst Conference Summary

conference date: November 4, 2021 @ 2:00 PM Pacific Time
for quarter ending: October 3, 2021 (third quarter, Q3 2021)

Forward-looking statements

Overview: Grail acquisition means accounting for the quarter is complex.

Basic data (GAAP):

Revenue was $1.11 billion, down slightly sequentially from $1.13 billion and up 40% from $794 million in the year-earlier quarter.

Net income was $317 million, up % sequentially from $185 million, and up % from $179 million year-earlier. Net income and EPS in Q3 included a $900 million gain on investment and related $654 compensation expense.

Diluted EPS was $2.08, up sequentially from $1.26, and up from $1.21 year-earlier.

Guidance:

For 2021 Illumina expects GAAP diluted EPS of $4.41 to $4.51, and non-GAAP diluted EPS of $5.50 to $5.60. Raised annual revenue guidance to a growth of 36%.

Conference Highlights:

Francis deSouza, President and CEO, said "Clinical market expansion is driving momentum in the core business, including significant demand in testing for therapy selection in oncology as we continue to advance genomics as a standard of care in the clinic. Our teams' continued execution to meet this robust demand will enable a strong finish to an exceptional 2021."

In Q3 2021 Illumina, on August 18, closed the Grail acquisition to accelerate patient access to life-saving, multi-cancer early-detection tests; we are holding Grail as a separate entity pending EU regulatory review of the merger. Grail hopes to lead in early cancer detection with the Gallery system. Signed agreements with several health system partners to begin offering services in Q4 2021 and then in 2022. English NHS large clinical trial is underway. MRD products will also be a growth driver.

Sequencing instrument revenue was up 65% y/y. Ended with a record instrument backlog. Consumable revenue was up 45% y/y. Oncology testing led sales. NIPT (non-invasive prenatal testing) is also growing rapidly. Covid surveillance is also driving new revenue.

Non-GAAP numbers: net income $221 million, down 20% sequentially from $276 million, and up 47% from $150 million year-earlier. Diluted EPS was $1.45, down 22% sequentially from $1.87, and up 42% from $1.02 year-earlier. These exclude the gain on investment and compensation expense, but the Grail acquisition resulted in $0.25 dilution.

Cash, equivalents and investment balance was $1.3 billion, down sequentialy from $na billion. Long term debt $1.7 billion. Cash flow from operations was negative $272 million. Free cash flow was negative $324 million. Capital expenditures were $ million. Cash used to repurchase stock was $0 million.

Product revenue was $978 million, services $130 million.

GAAP cost of revenue was $338 million, leaving gross profit of $770 million. Operating expenses were $1,315 million, consisting of: $436 million for research and development; $879 million for selling, general, and administrative. Leaving loss from operations of $545 million. Other income was $965 million. Income tax provision $103 million.

Q&A selective summary:

Q4 guidance, looks weak? In Q4 there is the UK initiative, which is a $20 million headwind from Q3. In Q3 we had $55 million in Covid surveillance, in Q4 will drop to $35 million. The core business is strong.

Oncology strength has been driven by improved reimbursement in the US and using larger panels. Larger customers are expansing NovaSeq fleet plus new customers. We have a strong order backlog for NovaSeq.

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