Illumina, Inc. — Form 10-Q Summary
Business context and reporting period
Illumina develops, manufactures, and markets life-science tools and integrated systems for genetic analysis, including sequencing, genotyping, gene expression, molecular diagnostics, instruments, consumables, and related services. The filing covers the three and six months ended July 3, 2011, compared with July 4, 2010; both periods comprised 13 and 26 weeks, respectively.
Financial results and key metrics
| Metric | Q2 2011 | Q2 2010 | YTD 2011 | YTD 2010 |
|---|---|---|---|---|
| Total revenue | $287.5 million | $212.0 million | $570.0 million | $404.1 million |
| Gross profit | $193.4 million | $146.1 million | $381.4 million | $278.3 million |
| Gross margin | 67.3% | 68.9% | 66.9% | 68.9% |
| Income from operations | $66.0 million | $47.4 million | $135.4 million | $85.7 million |
| Net income | $30.6 million | $29.8 million | $54.8 million | $51.0 million |
| Diluted EPS | $0.22 | $0.21 | $0.37 | $0.37 |
| Cash flow from operations | Not separately provided | Not separately provided | $159.8 million | $136.3 million |
- Q2 product revenue increased 36% to $269.9 million; service and other revenue increased 31% to $17.6 million.
- YTD product revenue increased 44% to $536.6 million, driven by higher instrument and consumables revenue. Consumables revenue rose 28% YTD to $307.2 million, while instrument revenue rose 74% to $221.0 million.
- Operating expenses increased 29% in Q2 and 28% YTD, including higher research and development, selling, general and administrative, acquisition-related, and headquarters-relocation costs.
- Effective tax rates were 37.5% in Q2 and 35.6% YTD. Excluding discrete items related primarily to acquired in-process research and development and debt extinguishment, management estimated rates of approximately 34.7% and 34.8%, respectively.
Liquidity, debt, and balance sheet
- At July 3, 2011, cash and cash equivalents were $261.1 million and short-term investments were $972.8 million, for total cash and short-term investments of approximately $1.2 billion.
- Total assets were $2.257 billion, compared with $1.839 billion at January 2, 2011. Accounts receivable increased to $193.4 million from $165.6 million; inventory was essentially unchanged at $142.6 million.
- Debt consisted primarily of $920.0 million principal amount of 0.25% convertible senior notes due 2016, carried at $757.3 million net of discount, and $49.1 million principal amount of 0.625% convertible senior notes due 2014, carried at $40.6 million.
- The company issued $920.0 million of 2016 convertible notes, generating $903.5 million of net proceeds. It used $340.9 million to extinguish 2014 notes upon conversion and $314.3 million to repurchase 4.9 million shares.
- Management stated that cash, cash equivalents, and operating income were expected to fund operating needs, working capital, and capital expenditures for at least the next 12 months, barring unforeseen circumstances.
Material changes versus the prior comparable period
- Revenue growth was strong, but gross margin declined 160 basis points in Q2 and 200 basis points YTD, primarily because of a shift toward lower-margin instruments and HiSeq 2000 promotional discounts.
- Operating income increased 39% in Q2 and 58% YTD, despite increased investment in personnel, product development, infrastructure, and global expansion.
- Net income increased only 3% in Q2 and 7% YTD because of higher interest expense and substantially higher other expense, including $9.7 million of Q2 and $36.9 million of YTD losses on debt extinguishment.
- Operating cash flow increased 17% YTD to $159.8 million. Investing cash use increased to $425.1 million, reflecting purchases of marketable securities, the Epicentre acquisition, strategic investments, and capital expenditures.
- The January 2011 acquisition of Epicentre added approximately $43.6 million of goodwill and $26.9 million of identified intangible assets.
Outlook, commentary, risks, and unusual items
- Management expected demand for the HiSeq 2000 to remain robust, with future shipments reflecting incoming order rates, replacements, additional purchases, new customers, and competitive displacements.
- Management expected gross margin to improve over the remainder of 2011 as consumables became a larger share of revenue and the Genome Analyzer trade-in program ended.
- Volume shipments of the lower-cost MiSeq personal sequencing system were expected to begin in the fourth quarter of 2011. The Omni5 BeadChip began shipping in late June 2011.
- Management expected research and development and selling, general and administrative expenses to increase in absolute dollars as the company expanded its product portfolio, personnel, infrastructure, global operations, and lower-throughput sequencing presence.
- Headquarters relocation expense was $2.5 million in Q2 and $5.1 million YTD. Additional costs were expected, including a cease-use loss, accelerated depreciation, and overlapping rent during the transition.
- Recovery Act funding was expected to support some customer funding through 2012, while uncertainty remained regarding the 2012 NIH budget. The 2011 NIH budget was approximately 1% below 2010 levels.
- Key risks include technology and product-development execution, manufacturing performance, competition, customer funding levels, adverse economic conditions, tax-rate changes, convertible-note accounting and dilution, investment impairment, acquisition integration, foreign exchange exposure, and litigation.
- The company reported no material changes to previously disclosed risk factors, no significant off-balance-sheet arrangements, and no indications of goodwill, in-process research and development, or other long-lived-asset impairment.
- Pending litigation outcomes and potential losses could not be estimated meaningfully, although management did not expect aggregate losses to have a material adverse effect on consolidated results, liquidity, or financial position.
Important facts for investors to verify
- Whether HiSeq 2000 demand, average selling prices, and consumables pull-through offset the lower instrument gross margin.
- The pace and commercial reception of MiSeq and other new sequencing and microarray products.
- The effect of ending promotional programs on future revenue, gross margin, and instrument shipments.
- Future conversions, refinancing, cash settlement, and potential dilution associated with the 2014 and 2016 convertible notes and related warrants.
- Additional headquarters-relocation costs and the timing of the expected cease-use loss.
- Utilization of tax-loss and research-credit carryforwards, future cash tax payments, and the resulting effective tax rate.
- Achievement of Epicentre and other acquisition milestones, including potential contingent consideration of up to $15 million related to Epicentre.
- Customer funding trends, including NIH and other government research funding, and their effect on order rates.