Illumina 3Q16 Earnings Call Notes

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Illumina (ILMN) Q3 2016 Results

Francis A. deSouza

Do not believe that excess market capacity, outsourcing or competition affected our results

“This is lower than the outlook we provided in July. Since the close of the quarter, we have analyzed market and funding dynamics, capacity utilization, competition and outsourcing trends. Based on these reviews, we do not believe that excess market capacity, outsourcing or competition materially affected our results or outlook.”

Part of the shortfall was transition to HiSeq X

“The other factor that contributed to the second half shortfall was lower-than-anticipated HiSeq 2500 and 4000 orders, which we believe was driven by legacy HiSeq customers favoring the HiSeq X and NextSeq platforms. The introduction of HiSeq X Ten – HiSeq X in January 2014 enabled whole-genome sequencing to be performed much more economically. And as a result, samples have shifted to whole-genome sequencing at the expense of other applications. Whole-genome sequencing on HiSeq X now represents approximately 15% of all high-throughput runs compared to 2% just two years ago.”

Over time we are indifferent to shifts

“Over time, we are relatively indifferent to these shifts, as in both of these cases the lower operating costs of HiSeq X and NextSeq enables our customers to sequence more samples. However, the timing of the elasticity taking effect or the customer completing their transition varies across customers and can create a temporary dip in spending.”

Wouldn’t say the plan is for product lifecycles to get longer

“Sure. So let me start by saying it has been a couple of years since we released the last sort of big instrument launch, but in general I wouldn’t say the plan is for instrument lifecycles to get longer; they just are ready when they’re ready. Now, that is independent from expectations around utilization, which is driven much more around the capacity in the market as well as the right fit of sequences for a particular application. ”

Not seeing a change in utilization of HiSeqs

“And so we are not seeing a change in the utilization of the HiSeqs in the market at all. So what we are seeing is that people are making choices around which high throughput instrument to go for. Historically, where they would’ve gone for a MiSeq, we’re seeing some customers now go to an X for their whole genome work and, in some cases, to a NextSeq.”

Demand for X units staying stable in that 20 – 30 units a quarter range

” So as we look forward, we continue to expect to see orders in the range of 20 to 30 instruments a quarter. As we looked at the second half of the year when we were sitting at the midpoint of the year, we were tracking opportunities that added up to over 90 X units. And so with that, we gave the guidance we did. Now, driven by some of the things I talked about in terms of the change in the funding practices in certain U.S. government agencies, those weren’t realized and we had a couple of X opportunities move out of Q3 and then one population sequencing opportunity move out of Q4 into 2017. And so, there have been specific dynamics that have caused movements of specific opportunities, but the overall demand for X continues to stay stable in that 20 to 30 units a quarter range, and we expect that to continue going into next year.”

Strongly believe in elasticity of demand at lower price points

“we continue to hear from our research customers especially, that there are lots of projects that they would like to take on, and they will do that as the price of sequencing comes down. And so, whether it’s much deeper sequencing they want to do in oncology research, or more single cell research, there are a whole set of projects that we hear about from customers that they don’t feel they can take on at this price point, but they are looking forward to the price points continuing to go down. So, I continue to deeply believe in the elasticity of the demand in the research customers. The reality is that we understand so little of the functionality of the genome in almost any area that you can think of, that I believe that there’s a lot more sequencing to be done, and a lot of it will be enabled through lower price points. So that’s sort of one point.”