Market Overview

Illumina Reports Financial Results for Second Quarter of Fiscal Year 2018

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Illumina, Inc. (NASDAQ:ILMN) today announced its financial results for
the second quarter of fiscal year 2018.

Second quarter 2018 results:

  • Revenue of $830 million, a 25% increase compared to $662 million in
    the second quarter of 2017
  • GAAP net income attributable to Illumina stockholders for the quarter
    of $209 million, or $1.41 per diluted share, compared to $128 million,
    or $0.87 per diluted share, for the second quarter of 2017
  • Non-GAAP net income attributable to Illumina stockholders for the
    quarter of $212 million, or $1.43 per diluted share, compared to $121
    million, or $0.82 per diluted share, for the second quarter of 2017
    (see the table entitled "Itemized Reconciliation Between GAAP and
    Non-GAAP Net Income Attributable to Illumina Stockholders" for a
    reconciliation of these GAAP and non-GAAP financial measures)
  • Cash flow from operations of $295 million compared to $178 million in
    the second quarter of 2017
  • Free cash flow (cash flow from operations less capital expenditures)
    of $218 million for the quarter, compared to $109 million in the
    second quarter of 2017

Gross margin in the second quarter of 2018 was 69.3% compared to 65.5%
in the prior year period. Excluding amortization of acquired intangible
assets, non-GAAP gross margin was 70.3% for the second quarter of 2018
compared to 67.0% in the prior year period.

Research and development (R&D) expenses for the second quarter of 2018
were $151 million compared to $130 million in the prior year period.
Non-GAAP R&D expenses as a percentage of revenue were 18.2%, including
0.9% attributable to Helix. This compares to non-GAAP R&D expenses as a
percentage of revenue of 19.7% in the prior year period, including 0.8%
attributable to Helix.

Selling, general and administrative (SG&A) expenses for the second
quarter of 2018 were $197 million compared to $161 million in the prior
year period. Non-GAAP SG&A expenses as a percentage of revenue were
23.7%, including 1.0% attributable to Helix. This compares to 25.2% in
the prior year period, including 1.0% attributable to Helix.

Depreciation and amortization expenses were $44 million and capital
expenditures for free cash flow purposes were $77 million during the
second quarter of 2018. At the close of the quarter, the company held
$2.5 billion in cash, cash equivalents and short-term investments,
compared to $2.1 billion as of December 31, 2017.

"Driven by broad demand across applications, systems and geographies,
revenue grew 25% from the second quarter of 2017, and we are now
expecting revenue growth of approximately 20% for 2018," said Francis
deSouza, President and CEO. "Sequencing consumables, array consumables,
and lab and other services each grew more than 30% compared to the
second quarter of 2017, highlighting the growing interest in genomic
information and its application to research, clinical and consumer
markets."

Updates since our last earnings release:

  • Launched the S4 200 cycle kit (available in the fourth quarter of
    2018) on NovaSeq which will enable customers to extend their research
    across more applications including single-cell and exome sequencing
  • Released the NovaSeq S Prime (SP) flow cell (available in the fourth
    quarter of 2018) which is designed for smaller run sizes and/or
    applications that require lower sequencing output
  • Announced the acquisition of Edico Genome, the leading provider of
    data analysis acceleration solutions for next-generation sequencing
    (NGS)

Financial outlook and guidance

The non-GAAP financial guidance discussed below reflects certain pro
forma adjustments to assist in analyzing and assessing our core
operational performance. Please see our Reconciliation of Non-GAAP
Financial Guidance included in this release for a reconciliation of the
GAAP and non-GAAP financial measures.

For fiscal 2018, the company now projects revenue growth of
approximately 20%, GAAP earnings per diluted share attributable
to Illumina stockholders of $5.10 to $5.20 and non-GAAP earnings per
diluted share attributable to Illumina stockholders of $5.35 to $5.45.

Quarterly conference call information

The conference call will begin at 2:00 pm Pacific Time (5:00 pm Eastern
Time) on Monday, July 30, 2018. Interested parties may access the live
teleconference through the Investor Relations section of Illumina's web
site under the "company" tab at www.illumina.com.
Alternatively, individuals can access the call by dialing 800-708-4539,
or 1-847-619-6396 outside North America, both with passcode 47172781.

A replay of the conference call will be available from 4:30 pm Pacific
Time (7:30 pm Eastern Time) on July 30, 2018 through August 6, 2018 by
dialing 888-843-7419, or 1-630-652-3042 outside North America, both with
passcode 47172781.

Statement regarding use of non-GAAP financial measures

The company reports non-GAAP results for diluted net income per share,
net income, gross margins, operating expenses, operating margins, other
income, and free cash flow in addition to, and not as a substitute for,
or superior to, financial measures calculated in accordance with GAAP.
The company's financial measures under GAAP include substantial charges
such as amortization of acquired intangible assets, non-cash interest
expense associated with the company's convertible debt instruments that
may be settled in cash, and others that are listed in the itemized
reconciliations between GAAP and non-GAAP financial measures included in
this press release. Management has excluded the effects of these items
in non-GAAP measures to assist investors in analyzing and assessing past
and future operating performance. Additionally, non-GAAP net income
attributable to Illumina stockholders and diluted earnings per share
attributable to Illumina stockholders are key components of the
financial metrics utilized by the company's board of directors to
measure, in part, management's performance and determine significant
elements of management's compensation.

The company encourages investors to carefully consider its results under
GAAP, as well as its supplemental non-GAAP information and the
reconciliation between these presentations, to more fully understand its
business. Reconciliations between GAAP and non-GAAP results are
presented in the tables of this release.

Use of forward-looking statements

This release contains forward-looking statements that involve risks and
uncertainties, including our financial outlook and guidance for fiscal
2018 and expectations regarding the development and commercialization of
new products. Among the important factors that could cause actual
results to differ materially from those in any forward-looking
statements are: (i) challenges inherent in developing, manufacturing,
and launching new products and services, including expanding
manufacturing operations and reliance on third-party suppliers for
critical components; (ii) the timing and mix of customer orders among
our products and services; (iii) the impact of recently launched or
pre-announced products and services on existing products and services;
(iv) our ability to further develop and commercialize our instruments
and consumables and to deploy new products, services, and applications,
and expand the markets, for our technology platforms; (v) our ability to
manufacture robust instrumentation and consumables; (vi) the success of
products and services competitive with our own; (vii) our ability to
successfully identify and integrate acquired technologies, products, or
businesses; (viii) our expectations and beliefs regarding future conduct
and growth of the business and the markets in which we operate; and (ix)
the application of generally accepted accounting principles, which are
highly complex and involve many subjective assumptions, estimates, and
judgments, together with other factors detailed in our filings with the
Securities and Exchange Commission, including our most recent filings on
Forms 10-K and 10-Q, or in information disclosed in public conference
calls, the date and time of which are released beforehand. We undertake
no obligation, and do not intend, to update these forward-looking
statements, to review or confirm analysts' expectations, or to provide
interim reports or updates on the progress of the current quarter.

About Illumina

Illumina is improving human health by unlocking the power of the genome.
Our focus on innovation has established us as the global leader in DNA
sequencing and array-based technologies, serving customers in the
research, clinical and applied markets. Our products are used for
applications in the life sciences, oncology, reproductive health,
agriculture and other emerging segments. To learn more, visit www.illumina.com and
follow @illumina.

 
Illumina, Inc.
Condensed Consolidated Balance Sheets
(In millions)
   
July 1,
2018
December 31,
2017
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 1,344 $ 1,225
Short-term investments 1,168 920
Accounts receivable, net 395 411
Inventory 362 333
Prepaid expenses and other current assets 68 91
Total current assets 3,337 2,980
Property and equipment, net 1,036 931
Goodwill 831 771
Intangible assets, net 205 175
Deferred tax assets 108 88
Other assets 334 312
Total assets $ 5,851 $ 5,257
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 149 $ 160
Accrued liabilities 422 432
Build-to-suit lease liability 21 144
Long-term debt, current portion 625 10
Total current liabilities 1,217 746
Long-term debt 723 1,182
Other long-term liabilities 343 360
Redeemable noncontrolling interests 217 220
Stockholders' equity 3,351 2,749
Total liabilities and stockholders' equity $ 5,851 $ 5,257
 
 
Illumina, Inc.
Condensed Consolidated Statements of Income
(In millions, except per share amounts)
(unaudited)
 
  Three Months Ended   Six Months Ended
July 1,
2018
  July 2,
2017
July 1,
2018
  July 2,
2017
Revenue:
Product revenue $ 673 $ 543 $ 1,301 $ 1,034
Service and other revenue 157   119   311   227  
Total revenue 830   662   1,612   1,261  
Cost of revenue:
Cost of product revenue (a) 181 168 355 334
Cost of service and other revenue (a) 65 50 127 104
Amortization of acquired intangible assets 9   10   17   21  
Total cost of revenue 255   228   499   459  
Gross profit 575   434   1,113   802  
Operating expense:
Research and development (a) 151 130 288 275
Selling, general and administrative (a) 197   161   380   332  
Total operating expense 348   291   668   607  
Income from operations 227 143 445 195
Other income (expense), net 5  

(2

)

8   450  
Income before income taxes 232 141 453 645
Provision for income taxes 32   21   56   177  
Consolidated net income 200 120 397 468
Add: Net loss attributable to noncontrolling interests 9   8   20   27  
Net income attributable to Illumina stockholders $ 209   $ 128   $ 417   $ 495  
Net income attributable to Illumina stockholders for earnings per
share (b)
$ 209   $ 128   $ 417   $ 494  
Earnings per share attributable to Illumina stockholders:
Basic $ 1.42 $ 0.87 $ 2.84 $

3.38

 

Diluted $ 1.41 $ 0.87 $ 2.82 $

3.35

 

Shares used in computing earnings per common share:

 

Basic 147 146 147 146
Diluted 148 147 148 147
(a) Includes stock-based compensation expense for stock-based
awards:
     
Three Months Ended Six Months Ended

July 1,
2018

  July 2,
2017
July 1,
2018
July 2,
2017
Cost of product revenue $ 4 $ 3 $ 8 $ 6
Cost of service and other revenue 1 1 2 1
Research and development 15 12 30 26
Selling, general and administrative 30 23 58 56
Stock-based compensation expense before taxes (1) $ 50 $ 39 $ 98 $ 89

(1) Includes stock-based compensation of $0.8 million and
$1.4 million for Helix for the three and six months ended July 1,
2018, respectively. This compares to stock-based compensation of
$1.0 million and $1.3 million for Helix for the three and six
months ended July 2, 2017, respectively, and $10.1 million for
GRAIL for the six months ended July 2, 2017.

(b) Amount reflects the additional losses attributable to
the common shareholders of GRAIL and Helix for earnings per share
purposes.

 
 
Illumina, Inc.
Condensed Consolidated Statements of Cash Flows
(In millions)
(unaudited)
       
Three Months Ended Six Months Ended
July 1,
2018
July 2,
2017
July 1,
2018
July 2,
2017
Net cash provided by operating activities $ 295 $ 178 $ 550 $ 346
Net cash (used in) provided by investing activities (536 ) 36 (525 ) 198
Net cash provided by (used in) financing activities 30 23 97 (62 )
Effect of exchange rate changes on cash and cash equivalents (5 ) 1   (3 ) 2  
Net (decrease) increase in cash and cash equivalents (216 ) 238 119 484
Cash and cash equivalents, beginning of period 1,560   981   1,225   735  
Cash and cash equivalents, end of period $ 1,344   $ 1,219   $ 1,344   $ 1,219  
 
Calculation of free cash flow:
Net cash provided by operating activities $ 295 $ 178 $ 550 $ 346
Purchases of property and equipment (77 ) (69 ) (167 ) (152 )
Free cash flow (a) $ 218   $ 109   $ 383   $ 194  
 

(a) Free cash flow, which is a non-GAAP financial measure,
is calculated as net cash provided by operating activities reduced
by purchases of property and equipment. Free cash flow is useful
to management as it is one of the metrics used to evaluate our
performance and to compare us with other companies in our
industry. However, our calculation of free cash flow may not be
comparable to similar measures used by other companies.

 
 
Illumina, Inc.
Results of Operations - Non-GAAP
(In millions, except per share amounts)
(unaudited)
 
ITEMIZED RECONCILIATION BETWEEN GAAP AND NON-GAAP EARNINGS PER
SHARE ATTRIBUTABLE TO ILLUMINA STOCKHOLDERS:
 
  Three Months Ended   Six Months Ended
July 1,
2018
  July 2,
2017
July 1,
2018
  July 2,
2017
GAAP earnings per share attributable to Illumina stockholders -
diluted
$ 1.41 $ 0.87 $ 2.82 $ 3.35
Amortization of acquired intangible assets 0.06 0.08 0.12 0.16
Non-cash interest expense (a) 0.05 0.05 0.10 0.10
Strategic investment related gains (b) (0.05 ) (0.01 ) (0.10 ) (0.02 )
Restructuring (c) 0.03
Legal contingencies (d) (0.05 )
Gain on deconsolidation of GRAIL (e) (3.07 )
Impairments (f) 0.15
Performance-based compensation related to GRAIL Series B financing (g) 0.03
Acquisition related gain (h) (0.01 )
Incremental non-GAAP tax expense (i) (0.02 ) (0.03 ) (0.04 ) 0.91
Excess tax benefit from share-based compensation (j) (0.02 ) (0.09 ) (0.05 ) (0.14 )
Non-GAAP earnings per share attributable to Illumina stockholders -
diluted (k)
$ 1.43   $ 0.82   $ 2.88   $ 1.46  
 
ITEMIZED RECONCILIATION BETWEEN GAAP AND NON-GAAP NET INCOME
ATTRIBUTABLE TO ILLUMINA STOCKHOLDERS:
 
GAAP net income attributable to Illumina stockholders $ 209 $ 128 $ 417 $ 495
Amortization of acquired intangible assets 9 12 18 24
Non-cash interest expense (a) 7 8 15 15
Strategic investment related gains (b) (7 ) (1 ) (15 ) (3 )
Restructuring (c) 4
Legal contingencies (d) (8 )
Gain on deconsolidation of GRAIL (e) (453 )
Impairments (f) 23
Performance-based compensation related to GRAIL Series B financing (g) 4
Acquisition related gain (h) (1 )
Incremental non-GAAP tax expense (i) (3 ) (5 ) (6 ) 132
Excess tax benefit from share-based compensation (j) (3 ) (13 ) (7 ) (20 )
Non-GAAP net income attributable to Illumina stockholders (k) $ 212   $ 121   $ 426   $ 216  
 

All amounts in tables are rounded to the nearest millions,
except as otherwise noted.
As a result, certain amounts may
not recalculate using the rounded amounts provided.

 

(a) Non-cash interest expense is calculated in accordance
with the authoritative accounting guidance for convertible debt
instruments that may be settled in cash.

(b) Amount consists primarily of mark-to-market adjustments
from our strategic investments.

(c) Amount consists primarily of employee costs related to
restructuring that occurred in Q1 2018 and Q4 2017.

(d) Legal contingencies for 2017 represent charges related
to patent litigation.

(e) Amount represents the gain recognized as a result of
the deconsolidation of GRAIL in Q1 2017. The $150 million tax
effect of the gain is included in incremental non-GAAP tax expense.

(f) Amount for 2017 represents impairment of an acquired
intangible asset and in-process research and development of $18
million and $5 million, respectively.

(g) Amount represents performance-based stock which vested
as a result of the financing in Q1 2017, net of attribution to
noncontrolling interest.

(h) Acquisition related gain consists of change in fair
value of contingent consideration.

(i) Incremental non-GAAP tax expense reflects the tax
impact related to the non-GAAP adjustments listed above.

(j) Amount represents tax deductions taken in excess of
stock compensation cost.

(k) Non-GAAP net income attributable to Illumina
stockholders and diluted earnings per share attributable to
Illumina stockholders exclude the effect of the pro forma
adjustments as detailed above. Non-GAAP net income attributable to
Illumina stockholders and diluted earnings per share attributable
to Illumina stockholders are key components of the financial
metrics utilized by the company's board of directors to measure,
in part, management's performance and determine significant
elements of management's compensation. Management has excluded the
effects of these items in these measures to assist investors in
analyzing and assessing our past and future core operating
performance.

 
 
Illumina, Inc.
Results of Operations - Non-GAAP (continued)
(Dollars in millions)
(unaudited)
 
ITEMIZED RECONCILIATION BETWEEN GAAP AND NON-GAAP RESULTS OF
OPERATIONS AS A PERCENT OF REVENUE:
 
  Three Months Ended   Six Months Ended
July 1,
2018
  July 2,
2017
July 1,
2018
  July 2,
2017
GAAP gross profit $ 575   69 .3 % $ 434   65 .5 % $ 1,113   69 .0

%

$ 802   63

.6

%
Amortization of acquired intangible assets 9 1 .0 % 10 1 .5 % 17 1 .1 % 21 1 .7 %
Impairment (a)                   18   1

.4

%
Non-GAAP gross profit (b) $ 584   70 .3 % $ 444   67 .0 % $ 1,130   70 .1 % $ 841   66 .7 %
 
GAAP research and development expense $ 151 18 .2 % $ 130 19 .7 % $ 288 17 .9 % $ 275 21 .8 %
Restructuring (c) (1 ) (0 .1 )%
Impairment (a)                   (5 ) (0 .4 )%
Non-GAAP research and development expense $ 151   18 .2 % $ 130   19 .7 % $ 287   17 .8 % $ 270   21 .4 %
 
GAAP selling, general and administrative expense $ 197 23 .7 % $ 161 24 .2 % $ 380 23 .5 % $ 332 26 .3 %
Amortization of acquired intangible assets (2 ) (0 .2 )% (1 ) (0 .1 )% (3 ) (0 .2 )%
Restructuring (c) (3 ) (0 .1 )%
Performance-based compensation related to GRAIL Series B financing (d) (10 ) (0 .8 )%
Legal contingencies (e) 8 1 .2 %
Acquisition related gain (f)                   1   0 .1 %
Non-GAAP selling, general and administrative expense $ 197   23 .7 % $ 167   25 .2 % $ 376   23 .3 % $ 320   25 .4 %
 
GAAP operating profit $ 227 27 .4 % $ 143 21 .6 % $ 445 27 .6 % $ 195 15 .5 %
Amortization of acquired intangible assets 9 1 .0 % 12 1 .7 % 18 1 .1 % 24 1 .9 %
Restructuring (c) 4 0 .2 %
Impairments (a) 23 1 .8 %
Performance-based compensation related to GRAIL Series B financing (d) 10 0 .8 %
Legal contingencies (e) (8 ) (1 .2 )%
Acquisition related gain (f)                   (1 ) (0 .1 )%
Non-GAAP operating profit (b) $ 236   28 .4 % $ 147   22 .1 % $ 467   28 .9 % $ 251   19 .9 %
 
GAAP other income (expense), net $ 5 0 .6 % $ (2 ) (0 .3 )% $ 8 0 .5 % $ 450 35 .7 %
Non-cash interest expense (g) 7 0 .8 % 8 1 .2 % 15 0 .9 % 15 1 .2 %
Strategic investment related gains (h) (7 ) (0 .8 )% (1 ) (0 .2 )% (15 ) (0 .9 )% (3 ) (0 .2 )%
Gain on deconsolidation of GRAIL (i)                   (453 ) (36 .0 )%
Non-GAAP other income, net (b) $ 5   0 .6 % $ 5   0 .7 % $ 8   0 .5 % $ 9   0 .7 %
 

All amounts in tables are rounded to the nearest millions,
except as otherwise noted.
As a result, certain amounts may
not recalculate using the rounded amounts provided.

 

(a) Impairments for 2017 include $18 million impairment of
an acquired intangible asset and $5 million in-process research
and development.

(b) Non-GAAP gross profit, included within non-GAAP
operating profit, is a key measure of the effectiveness and
efficiency of manufacturing processes, product mix and the average
selling prices of our products and services. Non-GAAP operating
profit, and non-GAAP other income, net, exclude the effects of the
pro forma adjustments as detailed above. Management has excluded
the effects of these items in these measures to assist investors
in analyzing and assessing past and future operating performance.

(c) Amount consists primarily of employee costs related to
restructuring that occurred in Q1 2018 and Q4 2017.

(d) Amount represents performance-based stock which vested
as a result of the financing in Q1 2017.

(e) Legal contingencies for 2017 represent charges related
to patent litigation.

(f) Acquisition related gain consists of change in fair
value of contingent consideration.

(g) Non-cash interest expense is calculated in accordance
with the authoritative accounting guidance for convertible debt
instruments that may be settled in cash.

(h) Amount consists primarily of mark-to-market adjustments
from our strategic investments.

(i) Amount represents the gain recognized as a result of
the deconsolidation of GRAIL in Q1 2017.

 

Illumina, Inc.

Reconciliation of Non-GAAP Financial Guidance

Our future performance and financial results are subject to risks and
uncertainties, and actual results could differ materially from the
guidance set forth below. Some of the factors that could affect our
financial results are stated above in this press release. More
information on potential factors that could affect our financial results
is included from time to time in the public reports filed with the
Securities and Exchange Commission, including Form 10-K for the fiscal
year ended December 31, 2017 filed with the SEC on February 12, 2018,
and Form 10-Q for the fiscal quarter ended April 1, 2018. We assume no
obligation to update any forward-looking statements or information.

 
  Fiscal Year 2018
GAAP diluted earnings per share attributable to Illumina
stockholders (a)
$5.10 - $5.20
Amortization of acquired intangible assets 0.25
Non-cash interest expense (b) 0.21
Strategic investment related gains (c) (0.10)
Restructuring (d) 0.03
Incremental non-GAAP tax expense (e) (0.09)
Excess tax benefits from share-based compensation (f) (0.05)
Non-GAAP diluted earnings per share attributable to Illumina
stockholders
$5.35 - $5.45

 

(a) Amount excludes the potential tax expense as a result
of the Ninth Circuit decision on July 24, 2018 to overturn a tax
court opinion that stock compensation should be excluded from cost
sharing charges.

(b) Non-cash interest expense is calculated in accordance
with the authoritative accounting guidance for convertible debt
instruments that may be settled in cash.

(c) Amount consists primarily of mark-to-market adjustments
from our strategic investments.

(d) Amount consists primarily of employee severance and
retention costs related to the restructuring that occurred in Q1
2018 and Q4 2017.

(e) Incremental non-GAAP tax expense reflects the tax
impact related to the non-GAAP adjustments listed above.

(f) Amount represents tax deductions taken in excess of
stock compensation cost.

 

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