Illumina (ILMN) Tops Q2 Earnings & Revenues, Ups Guidance

Illumina Inc.ILMN reported adjusted earnings of 57 cents per share in the second quarter of 2014, beating the Zacks Consensus Estimate by 6 cents or 11.8%. Adjusted earnings in the reported quarter also exceeded the year-ago tally by 32.6%. Including one-time items, the company reported earnings of 31 cents per share, up 19.2% from 26 cents per share in the prior-year quarter.

Revenues

In the reported quarter, Illumina's revenues grew 29.3% year over year to $447.6 million, outpacing the Zacks Consensus Estimate of $429 million.

Top-line growth was mainly driven by healthy worldwide demand for consumables, new instruments and NIPT (Non-Invasive PreNatal) testing from the company's sequencing business. While strong demand for NextSeq 500 and HiSeq X Ten contributed to revenue growth, demand for HiSeq and MiSeq also exceeded management's expectations. Moreover, higher number of shipments and record orders also paved the way for higher revenue growth in the reported quarter. Illumina achieved a historic milestone for its HiSeq family of products in the quarter by exceeding 2 billion in shipments since the product's initiation. 

Revenues by Business Categories

In the Product business (87.3% of total revenue), revenues rose 24.7% year over year to $390.8 million. Within this business, revenues from consumables went up 15% to $247 million while that from instruments escalated 48% year over year to $140 million.

The improvement in consumables and instrument revenues is primarily attributable to the increased demand for sequencing instruments, sequencing consumables as well as a larger installed base of instruments including the introduction of HiSeq X Ten and NextSeq. Moreover, HiSeq and MiSeq consumables reached record levels during the reported quarter.

In the Service and Other business (12.7% of total revenue), revenues climbed 74.1% year over year to $56.8 million. The marked improvement in service revenues was mainly driven by constant growth in extended sequencing maintenance contracts associated with a larger sequencing installed base, growth in NIPT services which benefited from test fees, revenue growth from verify services, and improved demand for genotyping services.

Operational Update

Illumina's adjusted gross margin (considering stock-based compensation as regular expense) came in at 70.4%, up 130 basis points (bps) year over year on the back of improved instruments and service margins.

Adjusted operating margin was 26.8% in the quarter, up 150 bps from the year-ago period. Although research and development (R&D) expenses rose 22.2% year over year to $82.5 million and selling, general & administrative (SG&A) expenses increased 34.1% year over year to $112.7 million, the improvement in operating margin was due 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 $178 million in cash flow from operations in the second quarter, reflecting significant growth from $88.6 million in the prior-year period. Capital expenditure amounted to $23.3 million leading to free cash flow of $154.7 million in the reported quarter.

Updated Guidance

Illumina revised its business outlook for full year 2014. The revision takes into account the strong second-quarter results. The company now expects adjusted earnings per share EPS in the range of $2.26–$2.28 (up from the earlier provided range of $2.10–$2.15). Revenues are expected to increase at an annualized growth rate of 25%–26% (earlier 21%–23%).

The current Zacks Consensus Estimate for 2014 EPS of $2.16 lies below the lower end of the company-provided guidance range. The Zacks Consensus Estimate for revenues is presently pegged at $1.8 billion.

Our Take

Illumina reported yet another impressive quarter, marking the eleventh consecutive quarter of sequential revenue growth and the best year-over-year growth tally since the second quarter of 2011.

We are also encouraged by the better-than-expected second-quarter results. A major positive highlight of the quarter was the company's bullish annual outlook for both EPS and revenue.

Going forward, Illumina's prospects seem bright on the back of strong global demand for its products, particularly the recently launched NextSeq 500 and HiSeq X Ten. Moreover, the unusually high demand for HiSeq X Ten surpassed management's expectation. Illumina expects this high demand trend for HiSeq to continue in the upcoming quarters as well.

The company also seems enthusiastic about the successful launch of its VeriSeq PGS product on the MiSeq platform and expects to make it available on the NextSeq platform later in 2014. 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 Biomedical industry that warrant a look include Biogen Idec Inc. BIIB, Curis, Inc. CRIS and Enzo Biochem Inc. ENZ. All these stocks sport a Zacks Rank #1 (Strong Buy).

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