Illumina, Inc. — Q1 2013 Form 10-Q Summary
Business context and reporting period
Illumina develops and sells genetic analysis instruments, consumables, services, and genomic-based diagnostic solutions serving research, clinical, pharmaceutical, biotechnology, agricultural, and reproductive-health customers. The filing covers the 13 weeks ended March 31, 2013, compared with the 13 weeks ended April 1, 2012. Results are unaudited and are not necessarily indicative of full-year performance.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenue | $331.0 million | $272.8 million | +21.3% |
| Product revenue | $296.2 million | $255.6 million | +16% |
| Service and other revenue | $34.8 million | $17.1 million | +103% |
| Gross profit | $219.3 million | $181.0 million | +21% |
| Gross margin | 66.3% | 66.4% | Down 0.1 percentage point |
| Operating income (loss) | $(45.1) million | $49.6 million | Declined $94.8 million |
| Net income (loss) | $(22.6) million | $26.2 million | Declined $48.8 million |
| Diluted EPS | $(0.18) | $0.20 | Turned negative |
| Cash flow from operations | $87.8 million | $65.4 million | +34% |
Consumables revenue increased 19% to $204.9 million, driven primarily by sequencing consumable sales and growth in the HiSeq and MiSeq installed base. Instrument revenue increased 11% to $88.1 million, primarily from higher HiSeq shipments. Gross margin was broadly stable, but declined slightly due mainly to increased amortization of acquired intangible assets and a less favorable sales mix.
Operating expenses increased 101% to $264.4 million. Research and development expense rose 26% to $61.5 million and selling, general and administrative expense rose 25% to $85.1 million, reflecting increased headcount, business investment, and acquisition-related activity.
At March 31, 2013, Illumina held $443.1 million of cash and cash equivalents and $624.4 million of short-term investments, totaling approximately $1.07 billion. Cash and cash equivalents increased $9.1 million during the quarter. The company generated $87.8 million from operations, used $65.0 million in investing activities, including $345.1 million of net acquisition payments, and used $13.0 million in financing activities.
Debt consisted principally of $920.0 million principal amount of 0.25% convertible senior notes due 2016, carried at $813.7 million, and $40.1 million principal amount of 0.625% convertible senior notes due 2014, carried at $37.6 million. Management stated that existing cash, investments, and expected operating cash flow should fund near-term needs for at least the next 12 months.
Material changes versus the prior comparable period
- Revenue grew 21%, led by higher sequencing consumables, instrument shipments, sequencing services, and service contracts.
- Service and other revenue more than doubled, partly reflecting the addition of non-invasive prenatal testing revenue.
- The company recorded a $105.9 million operating expense related to the Syntrix patent litigation verdict, driving the shift from operating income to an operating loss.
- Verinata Health was acquired on February 21, 2013, expanding Illumina’s reproductive-health diagnostics portfolio. The preliminary purchase price was $401.1 million, including $339.2 million in cash and $61.1 million of contingent consideration.
- Verinata contributed $0.9 million of revenue and $4.0 million of net loss from the acquisition date through quarter-end.
- Goodwill increased to $604.5 million from $369.3 million, and net intangible assets increased to $307.2 million from $130.2 million, primarily due to acquisitions.
- Illumina repurchased approximately 489,000 shares for $25.0 million; $142.5 million remained available under the repurchase authorization at quarter-end.
- The stockholder rights plan expired on March 27, 2013.
Guidance, outlook, commentary, and risks
Management said it expected revenue to continue growing in 2013 and operating expenses to continue increasing as the company invests in research, development, commercialization, and business expansion. The installed sequencing base was expanding, and management expected continued growth in sequencing consumable revenue. The company also expected its effective tax rate for the remainder of 2013 and beyond to trend below the U.S. federal statutory rate as a greater portion of earnings became subject to lower foreign statutory rates.
Key risks include uncertain government and academic research funding, including NIH funding reductions associated with sequestration; competition and technological change in sequencing, arrays, and diagnostics; execution and integration risks related to acquisitions; manufacturing and product-development challenges; foreign exchange exposure; tax uncertainty; and litigation outcomes.
The Syntrix jury found that Illumina’s BeadChip kits infringed a patent and awarded approximately $95.8 million for historical damages at a 6% royalty rate. No final judgment had been entered as of March 31, 2013. Illumina accrued $106.9 million, including estimated prejudgment interest and additional damages, intended to pursue post-trial relief and appeal, and expected to continue accruing royalties on future sales. The company could be required to secure the judgment during appeals.
Other unusual items included a $6.1 million gain from the sale of a cost-method investment, a $25.0 million share repurchase, $24.2 million of share-based compensation expense, and a $24.975 million income-tax benefit. The tax benefit reflected the loss period and deferred tax effects; the Syntrix contingency was nondeductible until paid.
Investor verification checklist
- Verify the final Syntrix judgment, post-trial rulings, appeal status, potential injunctive relief, ongoing royalties, and cash-security requirements.
- Assess whether the Verinata acquisition can achieve regulatory and revenue milestones supporting the contingent consideration of up to $100.0 million.
- Monitor the integration, commercial adoption, and profitability of Verinata’s non-invasive prenatal testing business and other acquired technologies.
- Evaluate whether revenue growth, particularly sequencing consumables and services, offsets rising research, development, selling, and administrative costs.
- Review the maturity and potential settlement or dilution effects of the 2014 and 2016 convertible notes, including outstanding warrants.
- Confirm the sustainability of approximately $1.07 billion in cash and short-term investments after acquisition payments, litigation payments, capital expenditures, and share repurchases.
- Track government and academic funding trends, NIH sequestration effects, competitive pricing, product launches, and demand shifts between arrays and sequencing.