Impairment Charge Hurts Illumina

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Illumina (ILMN) reported second quarter 2012 EPS of 18 cents, down considerably from the year-ago level of 22 cents. However, after adjusting for certain one-time items including impairment charges of 16 cents per share, EPS for the quarter came in at 40 cents, beating the Zacks Consensus Estimate of 36 cents as well as the year-ago adjusted EPS of 38 cents.

The company recorded $21.4 million of impairment charge in the reported quarter for in-process research and development expenses associated with an early-stage technology acquired in 2010.

Revenues dipped 2% year over year to $281 million during the quarter and was affected by robust HiSeq sales in the year-ago period. Reported revenues were ahead of the Zacks Consensus Estimate of $277 million. The year-over-year drop in revenues was primarily due to a 4.1% decline in product revenues, partly offset by a 23.8% rise in service revenues. The company derives 92.2% of its total revenue from products while the remaining comes 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.

Consumable revenue (consisting 65% of the company’s total revenue) was $184 million, up 16% year over year, resulting from a larger installed base of both HiSeq and MiSeq. However, Instruments revenues were down 32% year over year to $72 million in the second quarter, primarily due to a decrease in sequencing and microarray instrumentation.

During the quarter, the company introduced BaseSpace Apps, an application store to access a growing community of academic, commercial, and open source applications that simplify and accelerate the analysis of genomic data. BaseSpace pricing for both data storage and downstream analysis had also been introduced.

Moreover, the company launched MyGenome application for Apple's (AAPL) iPad for the analysis of real human genome and view reports about important genetic variation. Further, it introduced a real-time PCR reagent portfolio (compatible with any real-time PCR platform), Nextera XT DNA Sample Preparation kits and RapidTrack Whole Genome Sequencing Service.

Also, during the earnings call, Illumina announced that the Cold Spring Harbor Laboratory has joined the Illumina Genome Network. Moreover, the company got a new contract from Queensland Centre for Medical Genomics, which will replace their fleet of SOLiD/5500 systems with three Illumina HiSeq 2500 systems.

The company’s gross margin stood at 68.8% in the reported quarter, up 150 basis points (bps) year over year. Adjusted gross margin in the quarter was up 190 bps to 70.9% from 69.0% in the prior-year period.

Selling, general and administrative (SG&A) expenses were down 1.01% to $68.5 million while adjusted research and development expenses (excluding $21.4 million of impairment charges) dipped 1.9% to $49.8 million. Adjusted operating margin during the quarter expanded 110 bps to 26.6%.

Illumina exited the quarter with cash and cash equivalents and short-term investment of $1.3 billion compared with $1.2 billion at the end of fiscal 2011. The company generated $96 million in cash flow from operations in the second quarter versus $71 million in the prior-year period.

Based on its solid cash balance, Illumina repurchased 800,000 shares for $32 million and has around $200 million remaining for future repurchases.

Outlook

Illumina reaffirmed its fiscal 2012 revenue guidance of $1.10 – $1.175 billion (annualized growth of 4% –11%). However, the company increased its adjusted EPS guidance to $1.50–$1.60 from $1.40–$1.50. The Zacks Consensus fiscal 2012 revenues estimate of $1.14 billion remains within the guidance range, while the consensus EPS estimate of $1.51 remains at the low end of the company’s guidance.

Based in California, Illumina develops, manufactures, and markets life science tools and integrated systems for the analysis of genetic variation and function at a broader scale. The company derives product revenues from the sale of microarrays and DNA sequencing products.

As a life sciences tools company, Illumina has a track record of innovation and operational excellence. The company primarily competes with Life Technologies Corporation (LIFE) in the sequencing market.

Currently, Illumina retains a short-term Zacks #3 Rank (Hold rating).

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