Analyst Conference Summary

Illumina
ILMN

conference date: April 21, 2015 @ 2:00 PM Pacific Time
for quarter ending: March 31, 2015 (first quarter, Q1)


Forward-looking statements

Overview: Continued strong revenue growth.

Basic data (GAAP):

Revenue was $538.6 million, up 5% sequentially from $512.4 million and up 28% from $420.8 million in the year-earlier quarter.

Net income was $136.7 million, down 11% sequentially from $153.3 million, and up 128% from $60.0 million year-earlier.

Diluted EPS was $0.92, down 11% sequentially from $1.03, and up 130% from $0.40 year-earlier.

Guidance:

In 2015 revenue is expected to grow about 20% y/y despite a negative 3% impact from exchange rates. Estimated non-GAAP EPS range raised to $3.35 to $3.42 per share.

In q2 expects HiSeq X unit shipments to be sequentially lower. Q2 y/y growth should be roughly in line with the 20% annual growth rate.

Conference Highlights:

Illumina saw strong demand for products across its portfolio in Q1. But sequencing consumables were the main growth engine, up 39% y/y.

TruSight HLA was launched in the quarter, as was NeoPrep Library Prep System. Illumina agreed to collaborate with Merck Serono on a universal NGS-based oncology diagnostic.

Sequencing instrument revenue was up 32% y/y. HiSeq X unit shipments were a record, but may be lumpy by quarter. The HiSeq portfolio is being expanded to address various customer classes. Older HiSeq models are being replaced by some customers. NextSeq had strong y/y growth.

57% of revenue came from sales of consumables. $79.4 million was for services. NIPT (non-invasive prenatal testing ) services were a driver for growth.

However, even excluding a large services order in q1, 2014, microarray revenue was down 3% y/y. It was down 11% y/y overall.

There was a decline in demand from Japan but an increase in demand in China.

Non-GAAP numbers: net income $135 million, up 5% sequentially from $129 million, and up 69% from $80 million year-earlier. Diluted EPS was $0.91, up 5% sequentially from $0.87, and up 72% from $0.53 year-earlier. Gross margin was 72.2%, sequentially from 72.3%, and from 70.4% year earlier. 39.3% operating margin, up sequentially. Non-GAAP figures exclude legal settlement benefits, stock-based compensation, amortization, non-cash interest expense, a tax benefit, and smaller items.

Cash, equivalents and investment balance was $1.37 billion, up sequentially from $1.34 billion. Long term debt was $994 million. Cash flow from operations was $67 million. Free cash flow was $30 million. Capital expenditures were $37 million. $35 million was used for stock repurchases.

GAAP cost of revenue was $119.6 million, leaving gross profit of $ million. Operating expenses were 198.9$ million, consisting of: $91.8 million for research and development; $116.3 million for selling, general, and administrative; headquarters relocation $0.7 million; and a $9.9 million acquisition related gain. Leaving income from operations of $176.1 million. Other expense was $1 million. Income tax provision $41.4 million.

Stock-based compensation expense was $31.9 million.

Q&A:

Reimbursement issues for genetic tests? We have seen a lot of growth in the clinical markets, based on tests that are not reimbursed. Reimbursement will only affect a fraction of the market that we anticipate. We are looking forward to codes being issued, but so far, "little or no impact."

X10 data generation vs. data analyzed by customers? Most customers are analyzing the entire exome. Analysis outside the exome is tougher because we are just beginning to have complete human data sets. Tools are less mature. But the broadening of the analysis is clearly coming.

2500 demand exceeded expectations statement, vs. 3000 and 4000 purchasers? We hit about what we expected for 3000 and 4000 models. We had to have systems in the manufacturing pipeline to cover the range of expectations. People have to get additional funds to get a 4000, but we think over time there will be a shift to the 3000 and 4000 models. The 4000 offers the ability to run all applications; BGI would be an example customer.

Our guidance assumes similar FX through the year, except perhaps less in Q4.

BGI update color? They had some early 2000s mothballed. We hope the initial 4000 purchases are the beginning of an upgrade program, but no wholesale upgrade has been discussed at this point.

We may have lost some orders in Europe due to the pricing effects from FX.

Customers are looking for lower prices per data point, which the 3000 and 4000 provide. We shipped more 4000s than 3000s in the quarter, but we were surprised at the interest in the 3000, which is for those who can't get funding for the 4000.

In 2014 our backlog built up. In Q1 we were able to catch up on some of that backlog. For the rest of the year we should be shipping to match end demand.

Japan in 2015? Q1 was down y/y for Japan, as it had been in Q3 and Q4. This was due to reorganizing of their NIH equivalent. We don't know the timing, but we hope in 2016 funding will be up again.

Panels are something that will be added to over time. It will vary by sector, like oncology. At first we will focus on a couple of key cancer types, then add genes until the panels are universal.

NIPT in China? We had a burst of business in China, then we had a pause. For the rest of the year we expect to grow the market significantly. But the test ASPs will be lower for the rest of the world.

NIPT reimbursement in U.S.? Our reimbursement contracts are long term, so we are not seeing a rate change this year. In 2016 the guidelines might be changed; we hope reimbursement for average risk will become common.

NeoPrep rollout? We announced it earlier in the quarter. It is in the hands of early access customers. They like the vastly improved workflow, but are taking user feedback.

If currency rates continue to decline (relative to the US$), that would not be included in the current guidance. The FX effect mentioned in guidance is due to declines late last year.

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Disclaimer: My analyst call summaries may include both our 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 2015 William P. Meyers