Illumina Posts Better-than-Expected Q1 Earnings, Guides Up - Analyst Blog

Illumina Inc. ILMN reported first-quarter 2014 adjusted earnings per share EPS of 53 cents, breezing past the Zacks Consensus Estimate of 44 cents. Earnings also exceeded the year-ago quarter figure by 15.2%. Including one-time items, the company reported earnings of 40 cents per share up significantly from the reported loss of 18 cents per share in the first-quarter 2013.

Revenues in Details

In the reported quarter, revenues climbed 27.1% to $420.8 million, surpassing the Zacks Consensus Estimate of $391 million.

Top-line growth was driven by strong worldwide demand for products and solid contributions from the sequencing business. The company benefited particularly from the strong demand for its new instruments – NextSeq 500 and HiSeq X Ten.  Moreover on the back of solid results across more than 15 different metrics including shipments and orders for sequencing instruments and services as well as HiSeq and MiSeq consumables, Illumina delivered record orders, shipments and revenues in the first quarter of 2014

Revenues by Business Categories

In the Product business (86.1% of total revenue), revenues surged 22.3% year over year to $362.2 million. Within this business, revenues from consumables went up 18% while the same from instruments sales rose 32% year over year.

The improvement in consumables and instrument revenues can be primarily attributed to the increased demand for sequencing instruments, sequencing consumables as well as Sample Prep along with expanded installed base. Moreover, HiSeq and MiSeq consumables reached record levels during the reported quarter.

In the Service and Other business (13.9% of total revenue), revenues soared 68.4% year over year to $58.6 million. The marked improvement in service revenues was mainly driven by continued growth in extended sequencing maintenance contracts, an increase in genomes processed year over year, revenues from verify services and increased demand for genotyping services. Moreover, Illumina completed genotyping service orders worth $8 million and recognized revenues in the reported quarter.

Operational Update

Illumina's adjusted gross margin came in at 69.8%, up 110 basis points (bps) year over year, on the back of improved instruments and service margins.

Adjusted operating margin was 26.9% in the quarter, up 100 bps from the year-ago quarter. Although research and development (R&D) expenses rose 26.2% year over year to $76.9 million in the reported quarter and selling, general & administrative (SG&A) expenses increased 28.0% year over year to $103.2 million, the improvement in the operating margin was owing to higher gross margin in the reported quarter.

Financial Update

Illumina exited the quarter with cash and cash equivalents and short-term investment of $1.1 billion compared with $1.2 billion as on Dec 29, 2013.

Illumina generated $37.1 million in cash flow from operations in the first quarter, marking a decrease of 57.8% from the prior-year period. Capital expenditure amounted to $19 million leading to free cash flow of $18 million in the reported quarter.

Guidance Raised

Illumina revised its business outlook for full year 2014. The revision took into account strong first-quarter results and increased demand for HiSeq X Ten. The company now expects adjusted EPS in the range of $2.10–$2.15 per share (from earlier provided range of $2.00 –$2.06 per share). Revenues are expected to increase at an annualized growth rate of 21% – 23% (15%–17%).

The current Zacks Consensus Estimate for EPS is $2.05 lies below the lower end of the company provided guidance range. Moreover, Zacks Consensus Estimate for revenues is pegged at $5.3 billion.

Our Take

Illumina reported yet another impressive quarter, thus marking the tenth quarter of sequential growth.

We are encouraged by the better-than-expected first-quarter results. A major positive highlight of the quarter is the company's optimistic outlook for both top- and bottom-line growth.

Going forward, Illumina's prospects seem strong on the back of strong global demand for its products and an attractive product portfolio along with successful launch of new products like NextSeq 500 and HiSeq X Ten. With the proposed launch of the pre-implantation genetic screening product – VeriSeq PGS to be used on the popular MiSeq platform and a dedicated management team, we believe Illumina is well positioned to exploit a more than-$20 billion market opportunity and eventually meet its revised guidance.

Currently, Illumina carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the broader healthcare sector that warrant a look are Enzymotec Ltd. ENZY, Myriad Genetics Inc. MYGN and Amgen Inc. AMGN. Enzymotec and Myriad Genetics sport a Zacks Rank #1 (Strong Buy) and Amgen carries a Zacks Rank #2 (Buy).