Illumina, Inc. (ILMN) Earnings Call Transcript & Summary

All right. I think we can get started. All right. I'm Puneet Souda, SVB Leerink tools and diagnostic analyst. And it's a pleasure to have Illumina with us today. Sam Samad from -- CFO at Illumina; and Jacquie Ross of Investor Relations with us today. Sam, you want to cover the safe harbor and we can jump into questions.

Yes, gladly. And thank you, by the way. And good morning, everybody. I've been asked to remind you that my comments today could include forward-looking statements. You should refer to our SEC filings for a discussion of the risks and uncertainties that could cause the results to differ materially from our current expectations. It is our intent that all forward-looking statements regarding our financial results and commercial activity made during today's discussion will be protected under the Private Securities Litigation Reform Act of 1995.

Okay. Great. So let's start with the quarter and the guide. Those have been primary questions from investors. You pointed to 1% growth in first quarter. And if we look at the history of Illumina, this -- as I recall, this one is the lowest quarters. There's a cadence here. There's a strong pickup in the back half. Tell us what's behind the first quarter. And then sort of what gives you confidence in the ramp in the second half?

Sure. Thanks, Puneet. By the way, thanks for having us here. So let's talk about the guidance for the full year first, and this is going back to my Q1 comments back when we announced earnings for Q4. So I'll talk about the full year, and then I'll answer your questions around the guide for Q1. For the year, we're expecting -- for our last guide that we gave, we're expecting 9% to 11% full year guide. We're expecting EPS of $6.80 to $7. And within the 9% to 11% of full year revenue guide, we're expecting sequencing consumables at the midpoint to be approximately 17% growth year-over-year. We're expecting sequencing as a whole to be 14%, again at the midpoint. With regards to Q1 specifically, I mean, a few comments on that. First of all, Q1 represents approximately 22% of our full year revenues in terms of the actual contribution of Q1. When you go back to previous launch cycles, specifically, I'm referring to 2017 with NovaSeq, it's exactly aligned to previous launch cycle. So usually, when you have a launch cycle and you have instruments that launch in Q1, you'll have a ramp over the course of the year. That drives part of the fact why Q1 would be lower. The other reason, especially from a year-over-year standpoint, this year, when you think about the 1% that you commented on, which is essentially what our Q1 guide implies, is -- traditionally, in Q1, we've had strength coming from DTC. Specifically last year, we also had strength coming in -- from DTC in Q1 because you have a lot of the samples that get -- essentially the kits that get purchased at the end of the year that then get processed in Q1 of the following year. Well, this year, with all of the, I would say the weakness that's been experienced in DTC over the course of 2019 and that we're seeing, we don't see that bounce in Q1. And so from a year-over-year standpoint, that used to represent significant step-up that we don't see this year as well. So we're having an impact related to that. Q1 of last year, we still saw that. We're not seeing it in Q1 of 2020. And so that represents a headwind from a year-over-year standpoint.

Okay. Got it. Want to then come back to the 9% to 10% sort of longer term. How to think about the long term for Illumina? Illumina has traditionally been a mid-teen sort of growth. The story, 6% growth there in 2019, 9% to 11%, as you've said, in 2020. Is 10% the right way to think about this? Or -- I mean how can you accelerate back to that mid-teens type of a number?

Yes. So again, it's important to talk about the components of it. 6% is definitely not indicative of our long-term growth. I wouldn't say 6%, by any means, is -- as an indication of long-term growth. With regards to the 9% to 11%, again, look at the components of it. We have our core business, which is sequencing, which at the midpoint is expected to increase by 14%. Sequencing consumables, our recurring revenues, are expected at the midpoint to increase by 17%. We have had a significant impact, especially over last year and expected in 2020, from a headwind related to DTC and a reduction related to DTC. In 2018, DTC revenues represented approximately 8% of our revenues. In 2020, they're expected to represent about 3% of our revenues. So you can see the impact that, that's had in terms of -- as a headwind. So when you think about the core revenues, the core revenues this year are growing approximately -- or expected to grow approximately mid-teens. And that's, I think, more indicative of our core business. As the DTC business continues to decline, it becomes less of an impact overall on our overall revenue growth. It's still part of our business. We still own it. But it's part -- it becomes less of an impact in terms of overall revenues.

Okay. Got it. And since we're on the DTC topic, what's your outlook there for longer term? And what does that market mean when you think about the population sequencing efforts that are happening around the world? And what does it -- does eventually population sequencing replace some of the DTC component in terms of offering that value? Or help us understand what's -- how are you thinking about DTC longer term.

Yes. I mean we still see opportunity within that market segment. We still see opportunity, but it's going to take some time to evolve into a different market opportunity. And it's part of it. It's happening, but it's going to happen gradually. We don't expect that market to get back to growth this year. Let me emphasize that. Our expectation for microarrays this year, as part of our guide, is to be down 15% year-over-year. So that's not going to happen this year. And that 15% down, again, at the midpoint of our guide, is really driven all by DTC. Actually, DTC is decreasing significantly and our mature microarrays are roughly flat. But in -- getting back to your question, Puneet, around what's going to drive overall growth going forward, and how is that going to evolve maybe into population genomics, maybe into other initiatives, really, the key there is high-value health applications and, really, informative applications that drive the consumer to really own their information and to really act on their information more actively as they go forward. And so that evolution into health offerings, that evolution into pharmacogenomics, that evolution into other applications that really drive more insight about your genome and more action around those insights. That's -- that, I think, is how this market is going to evolve. It's probably going to evolve also in international markets as well, not just in the U.S. Now this is going to take time. We don't expect that this year. But we are still confident that eventually, as these applications start to mature and grow in terms of high-value health offerings, that this market has potential.

I want to come back to the NovaSeq installs. And sequencing system revenue guidance, I mean, looks aggressive for 2020 given the NovaSeq decline that you're implying there and somewhat -- that's somewhat reasonable given that, as you pointed out, the fourth year of the launch for NovaSeq then as a product cycle, what -- tell us how are you thinking about what helps you meet the systems revenue guidance?

Yes. So first of all, let me talk a little bit about NovaSeq, and then I'll transition to how the parts will play out over 2020 and what drives the growth in sequencing instruments in 2020. First of all, NovaSeq is going incredibly well. The launch of NovaSeq has outpaced our expectations. It's going as we expected from a pacing standpoint. In terms of the growth of the instrument placements over time, we had growth in 2019. Fourth year of launch, the expectation is for NovaSeq placements to be down. I think that's really very much expected in an instrument cycle fourth year of launch. It's actually -- we talked about a protracted placement cycle, and that's exactly been the case with NovaSeq. Now as you get into the fourth year of launch, what's happened is you have the large, high-throughput-instrument customers that have transitioned or at least begun their transition. We've had multi-instrument placements over the course of '18, over the course of '19. In '19, we had the U.K. Biobank placements as well that were multi-instruments purchases as well. As you get into 2020 and you start getting into the -- maybe the lower-throughput HiSeq customers, you get more 1s and 2s in terms of placements. And so that drives that year-over-year decline in terms of instruments on NovaSeq, which is exactly the way we expected it to play out. But in fact, the NovaSeq launch has been the most successful instrument that we've had and has been an incredible launch. Now in terms of what drives the growth, obviously, NextSeq 2000 and 1000. So what you start to see is NextSeq 2000, which is available later in Q1, which will start to scale up over the course of the year. You have NextSeq 1000, which is available late in the year. That also contributes somewhat, but really most of the new instrument placements. So we're expecting 500 instrument placements in 2020 from NextSeq 2000 mostly, some 1000. What you also have is also the existing NextSeq. So when you think about the NextSeq portfolio overall, be it 2000, 1000, 500 and 550, which is the existing NextSeq, that portfolio is growing year-over-year as well. Because even though you have some decline on the NextSeq 500, 550 base, it's really a decline in the RUO base, but you have the NextSeqDx, the validated instrument. We had about 150 placements of those last year. That will continue -- we'll continue to see those placements in 2020. Not to give the actual number, but I mean those -- NextSeqDx customers continue to also place existing NextSeqDx. So overall, the NextSeq portfolio year-over-year is growing.

Got it. So on NextSeq, let's -- when you look -- and I get the 500 guide for the year. But when you look at the 2020 expectations, you have -- I mean when we look at the MiSeq installed base, that's about 7,400, the 3,600 NovaSeq -- sorry, not MiSeq, in NextSeq, 3,600 NextSeq installed base, total of 11,000 instruments sort of out there. When you think about maybe even a 10% penetration into this market, isn't that reasonable to assume that you could get that in the first year? I mean just because this is a new product launch, something that customers wanted and it does kind of fill the gap between the NextSeq, what used to be, and NovaSeq?

Yes. I mean listen, it's an incredible product with incredible innovations. It's positioned to fit a certain portion and niche of the market or a certain segment of the market that's really slightly different than the MiSeq customer base. So I think you have to paint it maybe with a finer brush in terms of where the upgrades are coming from or where the new placements are coming from. So of the 500 NextSeq 2000, 1000 placements that we expect this year, I would say the majority of those, Puneet, are coming from NextSeq 500 and 550 RUO conversion. So the most -- most of those are coming from that customer base. It's customers that may be existing NextSeq customers or they want capacity upgrades. They're going to go to the NextSeq 2000 most likely because of the economics that it offers. Some might go to the NextSeq 1000 when it's available, but the majority will go to the NextSeq 2000. There will be some customers that are not doing sequencing today, new-to-Illumina customers, new-to-sequencing customers, that also purchase the 500. And that's part of our assumption is that, first, the big base is the 500, 550 RUO conversions. Then a smaller base, which is the new-to-Illumina customers. And then you have a small, I would say, few customers, be they HiSeq customers that decide to go to NextSeq 2000 or be they MiSeq customers that decide to go to NextSeq 1000 or 2000. That's a very small piece of the 500. The profile of MiSeq and the output that MiSeq delivers, the economics that MiSeq delivers is very different than NextSeq 2000. So it is a bit of a different customer base, not to say that there won't be some customers that decide to upgrade from MiSeq to NextSeq.

Okay. Got it. So let's talk about population sequencing. It's a major market that's opening here, sizable promise, couple of efforts ongoing. Can you give us the status of where NHS stands and where the U.K. Biobank project is and All of Us and a number of myriad -- a number of efforts that are ongoing and sort of give us a sense of when can this market truly sort of catalyze. And what is needed to -- needed for that to happen in the marketplace?

Yes. I mean I can talk all day about population genomics because it's such an exciting market, and I know it's close to your heart as well. But I'll try to capture the key pieces of -- the key moving parts here. First of all, let's talk about basics and maybe a little bit tactical in terms of what's included in our guide. What's included in our guide is that the U.K. Biobank is scaling at full capacity or production capacity. It actually started scaling up in Q3 of last year. Now it's in full production mode. So I don't think there's a lot of uncertainty around the U.K. Biobank. We're expecting 200,000 samples. Again, at the midpoint of our guide, 200,000 samples to be performed this year. In terms of the U.K. Biobank, I'd say very little uncertainty around it. With regards to other initiatives, you have the GeL collaboration that you talked about and our expectation is that, that starts. We've already signed at GeL. NHS have already signed this with the goal of performing 300,000 to 500,000 samples by 2025, and the expectation this year is that 20,000 samples get performed. It's not really very accretive from a year-to-year standpoint, but still want to be very clear in terms of what's included in our guidance. And then the last one, which I think has some uncertainty around it in terms of timing, although it's been announced, although the work's ongoing in terms of the regulatory approval part, which is the All of Us initiative, they announced a 1 million sample genotyping sequencing, but some genotyping over the course of 10 years. So we're assuming that in the middle of this year with 60,000 samples around it. And as I said, of the 3, that's the only one that still hasn't started and really has a little bit of uncertainty just given the fact that they're still in regulatory approval phase. So we wanted to be very transparent when we gave our guide around what's in the base. Everything else that's in our base is really ongoing. So very little uncertainty around it because it's ongoing and it's contributing. Now in terms of the broader question, Puneet, in terms of what this opportunity looks like and what it could become, I mean the way we categorize those, with the exception of GeL -- is a different one because GeL, we are doing the work in our -- the GeL labs that we have with the NHS. So we're performing the work. The GeL one is one that we're performing the work but it's really exciting because it's basically leading to sequencing being part of standard of care and leading to the adoption of sequencing in the clinics, in the NHS. So even though it's work that's being performed in terms of 300,000 to 500,000 samples over the course of the next 5 years, this could lead to touch millions and hundreds of millions in terms of where care is delivered. And this potentially has the -- these initiatives also have the potential ability to touch billions of people eventually as they blossom from population genomics initiatives to really getting to where the NHS is going in terms of getting to clinical care and sequencing being part of standard of care. That's not going to happen overnight. I don't want anybody to look at that as that's a 1-year, 2-year thing. That will develop over time. And that's why we have some of these other population genomics initiatives, like the All of Us, which is going to take time and which is going to generate lots of valuable insights; like the U.K. Biobank; like others that are out there. The NHS is the really, really important one in the sense that it's now leading to sequencing being incorporated into clinical care and having the propensity to touch really huge numbers of people.