Illumina, Inc. — Q1 2011 Form 10-Q Summary
Business Context and Reporting Period
Illumina develops and sells life-science tools, integrated systems, consumables, and services for sequencing, genotyping, gene expression, molecular diagnostics, and related genetic analysis. The filing covers the 13 weeks ended April 3, 2011, compared with the 13 weeks ended April 4, 2010. The report was filed May 4, 2011.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Total revenue | $282.5 million | $192.1 million | +47% |
| Product revenue | $266.7 million | $173.7 million | +54% |
| Service and other revenue | $15.8 million | $18.5 million | -14% |
| Gross profit | $188.0 million | $132.2 million | +42% |
| Gross margin | 66.6% | 68.8% | -2.2 percentage points |
| Income from operations | $69.4 million | $38.2 million | +81% |
| Net income | $24.1 million | $21.2 million | +14% |
| Diluted EPS | $0.16 | $0.16 | Flat |
| Cash flow from operations | $88.6 million | $59.1 million | +50% |
Net margin was approximately 8.5%, compared with approximately 11.0% in the prior-year quarter. Operating margin improved to approximately 24.6% from 19.9%, while the effective tax rate declined to 33.0% from 36.4%.
At April 3, 2011, cash and cash equivalents were $410.3 million and short-term investments were $724.3 million, for total cash and short-term investments of approximately $1.135 billion. Total debt carrying value was approximately $763.4 million, consisting primarily of $652.1 million of long-term 0.25% convertible notes due 2016 and $111.3 million of current 0.625% convertible notes due 2014.
Material Changes Versus the Prior Comparable Period
- Sequencing demand drove substantial growth. Consumable revenue increased 30% to $148.1 million, while instrument revenue doubled to $114.3 million, primarily due to the HiSeq 2000 and, for microarrays, the HiScan and HiScanSQ launches.
- Service and other revenue declined 14%, principally because Q1 2010 included a significant one-time service contract.
- Gross margin declined because of HiSeq 2000 discounts, including the Genome Analyzer trade-in program, and lower margins on newer products. The impact was partly offset by higher-margin consumable sales and improved microarray consumable margins.
- Research and development expense increased 15% to $50.2 million, and selling, general and administrative expense increased 31% to $65.9 million, reflecting personnel, commercialization, infrastructure, and professional-service costs.
- The company recorded $2.5 million of headquarters relocation expense, representing accelerated depreciation associated with its planned move to a new San Diego headquarters.
- Other expense increased materially because the company recorded a $27.2 million loss on the extinguishment of $253.1 million principal amount of 2014 convertible notes.
- Illumina acquired Epicentre Technologies on January 10, 2011, for total estimated consideration of $72.5 million, including $59.4 million in net cash payments, contingent consideration, and stock-based consideration. The purchase-price allocation remained preliminary.
- Illumina issued $800 million principal amount of 0.25% convertible senior notes due 2016 and used proceeds partly to repay converted 2014 notes and repurchase 4.9 million shares for $314.3 million. An additional $120 million of 2016 notes was issued on April 18, 2011.
- Financing activities generated $225.5 million of cash, including $786.0 million of convertible-note proceeds, while investing activities used $152.9 million, including $58.3 million for acquisitions and $12.3 million for capital expenditures.
Guidance, Outlook, Risks, and Unusual Items
- Management expected continued demand for next-generation sequencing, increased HiSeq 2000 manufacturing capacity, and instrument shipments within approximately four to eight weeks.
- Management expected to launch new consumable kits in Q2 2011 intended to enable whole-human-genome sequencing for less than $5,000 in consumable costs, begin volume shipments of the MiSeq system in Q4 2011, and begin customer shipments of the Omni 5 microarray in mid-2011.
- Management expected gross margins to improve over 2011 as the Genome Analyzer trade-in program ended, consumables represented a larger share of revenue, and HiSeq 2000 manufacturing efficiency improved.
- Research and development and selling, general and administrative expenses were expected to increase in absolute dollars. Additional headquarters relocation costs, including potential cease-use losses, double rent, and accelerated depreciation, were expected during 2011.
- Management expected the 2011 effective tax rate to approximate the U.S. federal statutory rate and anticipated significant cash tax payments as tax-loss and research-credit carryforwards were used.
- Management stated that cash, cash equivalents, and operating income were expected to fund operating needs for at least the next 12 months, barring unforeseen circumstances.
- Principal risks include dependence on successful development and commercialization of sequencing, array, diagnostics, and consumable technologies; manufacturing execution; customer funding levels, including NIH and Recovery Act-related funding; competition; product adoption; acquisitions and integration; foreign-exchange exposure; and potential conversion-related gains or losses on convertible debt.
- After quarter-end, holders elected to convert an additional $82.5 million principal amount of 2014 notes. The company expected to record an approximately $9.0 million debt-extinguishment loss in Q2 2011.
- Management reported no material changes to previously disclosed risk factors, no material off-balance-sheet arrangements, and no pending legal matters expected to materially affect financial position or results.
Important Facts for Investors to Verify
- Confirm the sustainability of HiSeq-driven instrument growth and the related consumable pull-through.
- Monitor whether gross margin improves as promotional discounts decline and consumables become a larger revenue mix.
- Assess the impact of the $800 million 2016 convertible notes, subsequent $120 million issuance, remaining 2014 note conversions, and possible future dilution or debt-extinguishment charges.
- Review the economics, milestone contingencies, and integration progress associated with the Epicentre acquisition.
- Track headquarters relocation costs, tax payments, capital expenditures, and the company’s continued share-repurchase activity.
- Evaluate customer funding trends, including NIH funding and the effect of the approximately 1% reduction in the 2011 NIH budget compared with 2010.