Analyst Conference Summary

Illumina
ILMN

conference date: January 31, 2017 @ 2:00 PM Pacific Time
for quarter ending: January 3, 2017 (fourth quarter, Q4 2016)


Forward-looking statements

Overview: solid revenue growth in year and in quarter, expects faster revenue growth in 2017. But instrument revenue was weak; the growth was from consumable sales.

Basic data (GAAP):

Revenue was $619.3 million, up 2% sequentially from $607.1 million and up 5% from $591.5 million in the year-earlier quarter.

Net income was $123.9 million, down 4% sequentially from $128.9 million, and up 19% from $104.5 million year-earlier.

Diluted EPS was $0.84, down 3% sequentially from $0.87, and up 20% from $0.70 year-earlier.

Guidance:

For Q1 2017 revenue is expected between $580 and $595 million, with GAAP EPS between $0.51 and $0.56. Non-GAAP EP expected between $0.60 and $0.65.

Full year 2017 revenue is expected to be up 10% to 12% from 2016. GAAP EPS $3.25 to $3.35. Non-GAAP EPS $3.60 to $3.70.

Conference Highlights:

"We had a stronger than expected revenue finish to 2016," stated Francis deSouza, President and CEO. Revenue was driven by "robust sequencing consumables growth and strong demand for our microarray portfolio." Also "demand from oncology testing customers continued to grow."

In the quarter Illumina launched NovaSeq, a high-throughput architecture "designed to one day usher in the $100 genome." Also introduced the Bio-Rad Single-Cell Sequencing Solution and TruSight Tumor 170.

Instrument revenue (sequencer + array) was $111 million, down 6% sequentially from $118 million, and down 23% y/y. The decline was led by the high-throughput instruments.

Microarray revenue increased 14% y/y to $100 million (that includes consumables).

Consumable revenue was $407 million, flat sequentially from $396 million, and up 18% y/y. Consumables for NIPT grew 65% y/y. Sequencing consumable revenue was $331 million.

Services revenue was $93.8 million, up sequentially from $93.4 million, and up y/y from $93.6 million.

Non-GAAP numbers: net income $126 million, down 12% sequentially from $144 million, and up 4% from $121 million year-earlier. Diluted EPS was $0.85, down 12% sequentially from $0.97, and up 5% from $0.81 year-earlier. Non-GAAP figures exclude stock based compensation of $27 million, legal settlement benefits, amortization, non-cash interest expense, and smaller items. 69.9% gross margin. 29.5% operating margin.

Cash, equivalents and investment balance was $1.56 billion, up sequentially from $1.54 billion. Long term debt was $1.05 billion. Cash flow from operations was $280.2 million. Free cash flow was $198.6 million. Capital expenditures were $81.5 million. $129 million was used to repurchase stock.

GAAP cost of revenue was $199.9 million, leaving gross profit of $419.4 million. Operating expenses were $276.4 million, consisting of: $129.9 million for research and development; $146.1 million for selling, general, and administrative; headquarters relocation $0,4 million. Leaving income from operations of $143.0 million. Other expense was $8.8 million. Income tax provision $26.7 million. Net loss to noncontrolling interests $16.2 million.

For the full year 2016 revenue was $2.40 billion, up 8% from $2.22 billion in 2015. GAAP net income was $463 million, GAAP EPS $3.07, non-GAAP net income $503 million, and non-GAAP EPS $3.32.

Q&A:

NovaSeq order update? We have had orders since the JP Morgan talk. We will have an update later. As to trading dynamics, if a customer has a HiSeq in backlog, they can change it to a NovaSeq. "We expect the majority of them will purchase NovaSeq." But some are sticking with HiSeq. Manufacturing is on track for a first quarter launch.

Trends driving sales in China include the PMI initiative and the NIPT market. We are also seeing growth in oncology testing.

Government funding dynamics, Q3 to Q4? It was a couple of agencies in Q3, no effect on Q4.

Installed HiSeqs, how many might upgrade to NovaSeq? We have 1900 instruments at 800 customers. We have started that conversation. We think the vast majority will upgrade to NovaSeq "in the coming years", but some will move to NextSeq.

We expect array growth in 2017, but lower than overall company growth.

S4 system phase in and consumables pull-through? We see a 20% benefit to customers to move to S4/NovaSeq, while using their Xs for overflow capacity.

Service revenue would be impacted if instruments are decommissioned, but with the gradual rollout, it is not a big impact, and it is included in guidance.

$100 genome path? That announcement ignited imagination across a number of our customers. Now everybody is impatient. A lot of the interest so far has been on the research side, not so much on the clinical side yet.

Backlogs for 3000s and 4000s? Just a small HiSeq backlog, includes 37 Xs.

Trump plans? Of course a lower tax rate would be beneficial.

Grail purchases, starting in Q2, would be recognized by us. They have bought in the past. Over time we would expect them to become a very large customer of ours.

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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 2017 William P. Meyers