ILMN Illumina Inc

Life Technologies Corporation (LIFE) reported an EPS of 94 cents in the third quarter of fiscal 2011, beating both the Zacks Consensus Estimate of 88 cents and the year-ago quarter’s adjusted EPS of 87 cents.

Revenues increased 7% year over year to $929 million, surpassing the Zacks Consensus Estimate of $916 million. Excluding the impact of foreign exchange movement, revenue growth for the quarter was 4%. On a geographical basis, revenue growth was witnessed across Europe – 5%, Asia-Pacific – 14% and the Americas – 2%. However, revenues derived from Japan declined 2%.

Life Technologies has witnessed improvement in Greater China business along with robust performance of Ion Torrent products. The company had witnessed temporary slack in business in China in the second quarter but expected the situation to improve in the second half. Funding pressures for academic and government funded projects are expected to continue in the US and Europe.

Adjusted gross margin during the quarter was 66.1%, down 70 basis points (bps) from the year-ago quarter due to the negative impact from higher instrument sales and lower royalty revenue, partially offset by the positive impact from productivity and price. Adjusted operating margin was 29.4% in the reported quarter, 40 bps higher than the prior-year quarter on the back of the company’s continued focus on operational efficiencies.

Operating expenses (adjusted basis) were $343.9 million compared to $340.6 million in the year-ago quarter, owing to a 1% rise in selling, general and administrative expenses to $253.3 million though research and development expenses declined by the same magnitude to $90.6 million. While research and development expenses remained almost unchanged at $89.6 million, selling, general and administrative expenses increased 5% to $250.6 million. Consequently, operating expenses inched up 3.8% to $$340.3 million.

Life Technologies exited the quarter with $635.9 million in the form of cash and short-term investments, lower than $854.8 million at the end of December 2010. Free cash flow during the nine months of the fiscal was $427.4 million with $493.2 million of cash flow from operating activities and $65.8 million of capital expenditure.

Segments

Life Technologies earns revenues primarily from three divisions – Molecular Biology Systems, Genetic Systems and Cell Systems, which recorded adjusted revenues of $426 million (up 3% year over year), $256 million (up 12%) and $244 million (up 10%), respectively.

The Cell Systems division witnessed robust growth across the portfolio with low double-digit growth in BioProduction business. In Genetic Systems, strong sales of Ion Torrent PGM and growth of forensic instrument placements were partially offset by lower sales of the 5500 instrument and consumables.

Guidance

Life Technologies reiterated its outlook for 2011. The company expects revenue growth (excluding currency) of 2-4% resulting in adjusted EPS of $3.70-$3.80.

Recommendation

Life Technologies enjoys a strong position in the life sciences market. We are impressed with the company’s improved performance during the reported quarter after second quarter’s disappointment. The company continues to be affected by funding pressures in US and Europe, although several strategies are being implemented to address these challenges. The company also faces increased competition from players like, Thermo Fisher Scientific (TMO), Illumina (ILMN) among others.

We are currently Neutral on the stock, in line with Thermo Fisher. Both stocks carry short term Zacks #3 Ranks (Hold).
 
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