ILMN

Business Context and Reporting Period

Company: Illumina, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: January 3, 2010 (53-week fiscal year)
Business Overview: Illumina is a leading developer of integrated systems for genetic analysis, serving sequencing, genotyping, and gene expression markets. The company operates as a single reportable segment for 2009, having reorganized into Life Sciences and Diagnostics units in 2008, with the Diagnostics unit having limited activity. Key technologies include Solexa sequencing, BeadArray, and VeraCode.

Key Financial Metrics

Revenue Composition: Product revenue accounted for 94% of total revenue ($627.2 million), while service revenue was 6% ($39.1 million). Consumables represented 59% of total revenue, and instruments represented 34%.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 16% year-over-year, driven by a 22% increase in instrument sales and a 17% increase in consumable sales.
• Sequencing Growth: Sequencing consumable revenue surged 144% ($68.9 million increase) due to an expanding installed base of Genome Analyzer systems. Sequencing instrument sales rose 43% ($56.4 million increase).
• Microarray Slowdown: Microarray consumable revenue declined 4% ($11.4 million decrease) as customers delayed Genome Wide Association Studies (GWAS) awaiting data from the 1000 Genomes Project and Recovery Act funding.
• Profitability: Net income nearly doubled to $72.3 million. The effective tax rate decreased to 36.7% from 45.8% in 2008, largely due to lower non-deductible acquired in-process research and development (IPR&D) charges.
• Operating Expenses: R&D expenses increased 41% to $140.6 million, and SG&A increased 19% to $176.3 million, reflecting business expansion and personnel growth.

Guidance, Outlook, and Risks

Outlook: Management anticipates higher revenue growth in the second half of 2010 compared to the first half, driven by the manufacturing scale-up of the new HiSeq 2000 sequencing instrument (expected to enable whole human genome sequencing for under $10,000 in reagent costs) and other product launches.

Key Risks and Contingencies:

• Regulatory Approval: The company is seeking FDA clearance for the BeadXpress instrument platform for molecular diagnostics and has submitted a pre-IDE for a cytogenetics test. Delays or failures in approval could impact the diagnostics market entry.
• Convertible Debt: The company has $400 million in 0.625% Convertible Senior Notes due 2014. Due to conversion conditions being met, the notes are classified as current liabilities. The company has a hedge transaction to mitigate dilution upon conversion.
• Auction Rate Securities: Approximately $54.9 million in auction rate securities remain illiquid. The company has a settlement agreement with UBS to sell these at par value between June 2010 and July 2012.
• Customer Concentration: While no single customer exceeded 10% of revenue, one customer accounted for more than 10% of gross accounts receivable.
• Stimulus Funding: Revenue timing is influenced by the American Recovery and Reinvestment Act of 2009, with customers potentially delaying orders until funding is secured.

Investor Verification Checklist

• HiSeq 2000 Launch: Verify the timing of customer shipments and the adoption rate of the new high-throughput sequencing platform.
• Convertible Notes Status: Monitor the conversion status of the $400 million senior notes and the potential for cash settlement versus equity issuance.
• Microarray Recovery: Assess whether the slowdown in GWAS-related microarray sales reverses as the 1000 Genomes Project data becomes available.
• Regulatory Milestones: Track FDA review progress for the BeadXpress platform and the cytogenetics pre-IDE submission.
• Liquidity of Investments: Confirm the status of the $54.9 million auction rate securities and the execution of the UBS settlement agreement.