ILMN Illumina Inc

Illumina (ILMN) reported EPS of 15 cents in the third quarter of 2011, well below the year-ago quarter EPS of 24 cents. However, after adjusting for certain one-time items, EPS came in at 22 cents, in line with the Zacks Consensus Estimate but 26.6% lower than prior-year quarter.

Revenues dipped 1% year over year to $235.5 million, and were in line with the Zacks Consensus Estimate. This was primarily due to a 1.9% decline in the product revenues, partly offset by a 20.3% rise in service revenues. The company derives 93.5% of its total revenue from products while the remaining comes from services.

Product revenues at Illumina are primarily attributed to the sale of Microarrays and DNA Sequencing products. Product revenues consist of Consumables and Instruments, which generated sales of $145 million (annualized growth of 9%) and $72 million (down 18%), respectively.

While expansion of sequencing instrument installed base was responsible for the robust growth in consumables, the decline in instrument revenues was due to the Genome Analyzer upgrade program, which drove significant instrument volume in year-ago quarter but failed to do so in the reported quarter.

Services and other revenues, comprising genotyping and sequencing services as well as instrument maintenance contracts, stood at $15.2 million, up 20.3% year over year driven by the increase in maintenance contracts for the company’s installed base of sequencing systems.

The company’s gross margin came in at 66.7% during the reported quarter, up 50 basis points (bps) year over year. The adjusted gross margin was 68.9% in the third quarter of 2011 as opposed to 67.8% in the prior-year period. The company’s selling general and administrative (SG&A) expenses and research and development expenses increased 20.0% to $66.0 million and 12.5% to $50.4 million, respectively. As a result, operating margin contracted 690 bps to 17.3%.

Illumina exited the quarter with cash and cash equivalents of $229.8 million, compared with $248.9 million at the end of fiscal 2010. The company generated $90.0 million in cash flow from operations versus $54.8 million in the prior-year period.

Outlook

With the commercialization of the MiSeq platform, Illumina expects fourth quarter 2011 revenue to exceed the third quarter level.  However, given the uncertainty related to government budgets for research and development and the current global economic environment, the company has not provided any outlook.

However, the company is implementing a restructuring program to better streamline its organizational and cost structure. As a result, the company expects to record restructuring charges of approximately $15-17 million, the majority of which will be incurred during the fourth quarter of 2011.

Presently, Illumina retains a short-term Zacks #5 Rank (Strong Sell) which also corresponds to our ‘Underperform’ recommendation over the long term.

 
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