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Gene Sequencer Illumina Guides '13 Outlook Higher

Gene-sequencing giant Illumina beat second-quarter estimates, raised guidance and announced a new acquisition, sending shares higher in after-hours trading.

Illumina (ILMN) said sales climbed 23% over the year-ago quarter to $346 million, beating analysts' consensus by nearly $15 million, according to Thomson Reuters. Wall Street had expected profit to be flat, but instead it climbed 8% to 43 cents a share.

Management also added a dime to the EPS forecast offered at the end of last year. Executives now see $1.68-$1.72 vs. $1.59 in 2012. They also lifted the sales growth forecast to 20% from 15 %.

Illumina shares rose 6% in late trading to above 78, close to the July 2011 peak of 79.40. The stock slid 1% in the regular session.

"We are very pleased with our operational execution for the first half of 2013," CEO Jay Flatley said in a statement. "Our business demonstrated strong trends globally and our 2013 strategic initiatives for robust long-term growth are progressing as planned.

Razor's Edge

Illumina also announced that it had bought Advanced Liquid Logic, which the press release described as a "leader in digital microfluidic solutions." It did not reveal the purchase price.

The buyout fits into Illumina's razor and razor blade business model. It sells expensive but low-margin gene-sequencing systems — MiSeq and HiSeq — and then keeps its revenue stream flowing with higher-margin consumables involved in preparing and processing samples. In Q2, Flatley said sequencing system sales rose an impressive 37% year-over-year, but sample-preparation shipments soared 50%.

"One of our core strategies is to provide our customers with the complete capability to go from biological sample to answer quickly and easily," Flatley said on the conference call with analysts. "This acquisition will allow us to develop an automated and integrated solution for our low- to mid-throughput customers.

Growth After All?

Advanced Liquid is Illumina's second acquisition of the year. In February it shelled out $350 million to buy prenatal testing company Verinata Health. Analysts generally approved of that buyout as an entree into a fast-growing market, but in the near term it whacked 20 cents off Illumina's 2013 EPS guidance. That, along with considerable investments in R&D, staffing and infrastructure, looked to end three straight years of profit growth.

Now it looks like 2013 may see growth after all, albeit in single digits. Analyst Ross Muken of ISI Group said in an email to clients that both Q2 results and the full-year guidance also beat Wall Street's "whisper number," and called it "an impressive top- and bottom-line beat.

Analyst reports had showed some trepidation going into the results. On July 2 Piper Jaffray's William Quirk downgraded Illumina to neutral, saying the second half of the year will face some challenging comparisons. He also cited the stock's valuation near all-time highs, driven partly by takeover speculation since the firm came close to being bought by Roche (RHHBY) last year.

In a July 16 note, Wedbush's Zarak Khurshid also cited the high price in his neutral rating.

Both analysts, however, said they heard reports of good demand for HiSeq, which is in the midst of an upgrade cycle with the new HiSeq 2500. Flatley told analysts that 75% of new HiSeq orders were for the 2500 model, and that Illumina has completed 85% of the upgrades that have been ordered so far.