When things go badly in a quarter, management teams often have to talk a lot about what went wrong. When things go well, they get to focus more on the future.
After reporting a better-than-expected fourth quarter on Tuesday, Illumina's (ILMN 6.56%) executives on the earnings call had the opportunity to spend plenty of time on what lies ahead. Here are five key things they want investors to know. (Quotes courtesy of S&P Global Market Intelligence.)
Out with the old, in with the new
The single most discussed topic in Illumina's fourth-quarter conference call was NovaSeq. Illumina first announced its launch of the powerful new sequencing system on Jan. 9. CEO Francis deSouza said that the company has hosted webinars with over 1,000 participants and gone on a three-city road show that included more than 300 customers to talk about NovaSeq. He added that the feedback has been "very positive."
For investors, Illumina's rollout of the new system means a multiyear replacement cycle -- and higher new system sales. Most of the 800 customers that currently use the company's HiSeq systems are expected to migrate to NovaSeq over time.
DeSouza said that Illumina should also roll out the NovaSeq/S4 combination toward the end of this year. He thinks that many of the company's HiSeq X customers will transition to this configuration over the next several years.
Forecasts partly cloudy, then sunny
Illumina's inaccurate sales forecasts became a major topic of discussion in 2016 as the company missed projections several times. The company's management team didn't have to talk about the issue in the latest conference call. There wasn't even an update on Illumina's big project announced three months ago to improve its forecasting processes. That's what happens when projections are met and exceeded, as they were in the fourth quarter.
CFO Sam Samad talked about the company's first-quarter revenue guidance of $580 million to $595 million. He explained that this range is less than Illumina's fourth-quarter revenue total in large part due to the expectation that "high-throughput customers will choose to wait to purchase the NovaSeq platform" rather than buy HiSeq systems.
Samad also said that consumables revenue will be affected by the transition to NovaSeq. This won't just impact the first quarter of 2017. He said to expect "decelerating sequencing consumable growth versus prior years for a number of quarters."
However, Illumina is still projecting solid revenue and earnings growth in full-year 2017. NovaSeq, deSouza believes, should drive continued growth in the future and "reinvigorate demand for high-throughput instruments."
Illumina's success is increasingly linked to its Asia-Pacific region, especially China. DeSouza said that fourth-quarter revenue in Asia Pacific increased 29% year over year. China was the main catalyst for this growth, with revenue in the country jumping around 50% year over year in the fourth quarter.
DeSouza stated that a key driver for Illumina's sales growth in China was the country's precision medicine initiative. Increased demand for noninvasive prenatal testing (NIPT) was also an important factor. He noted that Illumina is "seeing growth in oncology testing play out in China as well."
Changes (or lack thereof) in Washington, D.C.
Illumina experienced challenges in the third quarter from a change in how some U.S. government agencies funded capital projects. The issue didn't go away in the fourth quarter, but Illumina's consumables and microarray sales more than offset the negative impact.
DeSouza said that the company "didn't see any change in how the other agencies fund their projects, and so we didn't really see any impact of that in Q4." Chief Administrative Officer Marc Stapley added that he saw "no reason for us to assume that's not going to continue under the new approach that they've adopted. We don't see an end in sight to that."
When asked about how proposed corporate tax reform by the Trump administration might impact Illumina, deSouza didn't go into much detail. He replied, "It's still early days, but to the extent that we see tax reform and we see a lower corporate tax rate, that would be beneficial."
One of the most exciting future opportunities for Illumina is with GRAIL, the company's spinoff that is focused on developing a single blood test to screen for early detection of cancer. Even though a major Series B funding for GRAIL is expected to be completed in the first quarter, Illumina's executives said the company will only see about 1% of its 2017 revenue come from GRAIL.
In his comments about GRAIL, deSouza said, "Over time, we fully expect them to become a very large customer of ours and likely on a large number of NovaSeqs. So that's going to be over time and not this year."
As for GRAIL's progress, deSouza stated that some results from the company's efforts to develop a circulating cell-free tumor DNA atlas should be ready in the latter part of 2017. He added that this will be "a big step for the team."