Illumina Earnings Beat Easily, Guides Up

Zacks

Illumina Inc. (ILMN) reported second-quarter 2013 adjusted earnings of 43 cents per share beating the Zacks Consensus Estimate by 10.3%. Further, adjusted earnings rose 7.5% over the prior-year quarter driven by robust sales.

On a reported basis, the company posted net income of $35.9 million (or 26 cents per share), higher than the net income of $23.4 million (or 18 cents per share) in the prior-year quarter.

Revenue Details

Revenue climbed 23% year over year to $346 million in the quarter, surpassing the Zacks Consensus Estimate of $332 million. This reflects the seventh successive sequential sales growth for Illumina.

Top-line growth was driven by a strong worldwide performance and solid contributions from the sequencing business, especially the sequencing consumables. Organic revenue increased 19% year over year, owing to strong worldwide demand for sequencing consumables and consistent sales growth of HiSeq instruments.

On a geographic basis, revenue in the Americas rose 22% from the year-ago quarter while revenue from Europe shot up 19% from the prior-year quarter. The company also posted robust growth in Japan. Per management, this reflects solid worldwide demand for Illumina’s offerings.

The company derived 90.6% of its total revenue from products, while the remaining came from services. Product revenues are primarily attributed to the sale of Microarrays and DNA Sequencing products. Product revenues consist of sales proceeds from the Consumables and Instruments segment.

Services and other revenues comprise genotyping and sequencing services as well as instrument maintenance contracts. In the quarter, product revenues surged 21.1% year over year to $313.5 million, while, services revenue jumped 49.7% year over year to $32.6 million.

Consumable revenue (62.1% of the company’s total revenue) was $215 million, up 17% year over year, driven by strong demand for Sample Prep and sequencing consumables, growth in installed base and the addition of BlueGnome (acquired in Sep 2012). Instruments revenues (accounting for 27.4% of total sales) climbed 31% year over year to $95 million in the reported quarter. Growth in this segment was attributable to strong growth for HiSeq products.

The company’s adjusted gross margin was 67% in the reported quarter, down 290 basis points (bps) year over year. Adjusted operating margin was 21.9%, up 180 bps from the year-ago quarter, as higher selling, general & administrative expenses were offset by relatively lower research and development expenditure.

Financial Details

Illumina exited the quarter with cash and cash equivalents and short-term investment of $1.13 billion compared with $1.35 billion at the end of 2012. The company generated $88.6 million in cash flow from operations in the second quarter, down 8% from the prior-year period. Illumina generated free cash flow of $77.1 million in the reported quarter.

Based on its solid cash balance, Illumina repurchased shares of $25 million in the quarter under its earlier announced share repurchase program. The company has shares worth $118 million left under its buyback authorization.

Outlook Tweaked

Following the strong second quarter, Illumina revised its 2013 outlook. The company now envisages revenue growth of 20% compared with 15% earlier. Moreover, Illumina expects earnings per share in the range of $1.68 - $1.72 compared with the prior outlook of $1.55 - $1.62. The Zacks Consensus Estimate of $1.66 lies below the revised guidance.

Our Take

Illumina reported a solid second-quarter to beat the Zacks Consensus Estimate. We are encouraged by the company’s consistent top-line growth and strong global demand for its products. The upward revision of guidance also boosts confidence.

The company is optimistic about 2013 as it has a strong pipeline, impressive product development, investments and clinical strategy. However, gross margin pressure was an area of concern. Illumina is also cautious on contributions from Verinata.

Currently, Illumina carries a Zacks Rank #3 (Hold). Other stocks such as Medivation Inc. (MDVN), Actelion Ltd. (ALIOF) and Sarepta Therapeutics Inc. (SRPT) appear impressive. These stocks carry a Zacks Rank #1 (Strong Buy).

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