Business Context and Reporting Period
Company: ILLUMINA, INC.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 28, 2008 (Nine months ended September 28, 2008)
Business Overview: Illumina is a leading developer of integrated systems for large-scale genetic analysis, serving research, pharmaceutical, and clinical markets. The company operates primarily in one segment, focusing on genotyping, sequencing, and gene expression technologies (BeadArray, Sequencing-by-Synthesis, and VeraCode).
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 28, 2008 |
Nine Months Ended Sep 28, 2008 |
Nine Months Ended Sep 30, 2007 |
|---|---|---|---|
| Total Revenue | $150,260 | $412,298 | $254,194 |
| Net Income (Loss) | $(7,288) | $21,538 | $(274,311) |
| Operating Income (Loss) | $1,536 | $44,381 | $(268,442) |
| Cash and Cash Equivalents | $355,219 | $355,219 | $64,107 |
| Total Current Assets | $875,226 | $875,226 | $562,755 |
| Total Current Liabilities | $491,347 | $491,347 | $165,715 |
| Long-Term Debt (less current) | $460 | $460 | $400,000 |
| Net Cash from Operating Activities | N/A | $1,765 | $44,441 |
Note: The 2007 nine-month period included a $303.4 million non-cash charge for acquired in-process research and development (IPR&D) from the Solexa acquisition, which significantly impacted prior year comparability.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 54% for the quarter and 62% for the nine-month period compared to the prior year. Product revenue grew 56% (quarter) and 68% (nine months), driven by higher consumable sales (Infinium products) and instrument sales (Genome Analyzer II).
- Profitability: The company returned to profitability for the nine-month period ($21.5M net income) compared to a significant loss in the prior year ($274.3M), primarily due to the absence of the large Solexa IPR&D charge recorded in 2007.
- Acquisition Activity: Illumina acquired Avantome, Inc. in August 2008 for $25.8 million in cash, recording a $24.7 million charge for acquired IPR&D. This contrasts with the 2007 Solexa acquisition charge.
- Debt Reclassification: $400 million in Convertible Senior Notes were reclassified from long-term to current liabilities because the notes became convertible into cash during the period due to stock price performance.
- Liquidity: Cash and cash equivalents increased significantly to $355.2 million, bolstered by a secondary equity offering in August 2008 that raised approximately $342.6 million in net proceeds.
Guidance, Outlook, and Risks
- Outlook: Management expects product revenue to continue increasing due to new product launches (Infinium HD, iScan System) and growth in the installed base. Operating expenses are expected to rise in absolute dollars to support R&D and sales expansion.
- Liquidity Position: The company believes current cash, cash equivalents, and short-term investments ($649.6 million total) are sufficient to fund operations for at least the next 12 months.
- Investment Portfolio Risk: The company holds $55.9 million in auction rate securities which became illiquid due to market conditions. An unrealized loss of $4.3 million was recorded, classified as temporary. Management believes this illiquidity will not materially affect the ability to execute the business plan.
- Legal Proceedings: Ongoing litigation with Applied Biosystems regarding patent ownership (Macevicz patents) is scheduled for trial on December 1, 2008. The company asserts its technology is not covered by these patents.
- Accounting Changes: The company changed the functional currency of its foreign subsidiaries to the U.S. dollar in Q3 2008, resulting in remeasurement gains/losses being recorded in operations rather than equity.
Key Facts for Investor Verification
- Convertible Debt Status: Verify the terms and conversion triggers for the $400 million Convertible Senior Notes, which are currently classified as current liabilities and convertible through at least December 31, 2008.
- Auction Rate Securities: Monitor the liquidity status of the $55.9 million investment in auction rate securities and any potential future impairment charges if the market does not recover.
- Applied Biosystems Litigation: Track the outcome of the December 2008 trial regarding patent ownership, as an adverse ruling could impact future operations or require significant settlements.
- Stock-Based Compensation: Review the impact of the two-for-one stock split (effective September 2008) on share counts and the increasing expense related to stock-based compensation ($35.8 million for the nine months ended Sep 28, 2008).
- Acquisition Milestones: Monitor the achievement of milestones for the Avantome acquisition, which could trigger up to $35.0 million in additional contingent cash consideration.