Illumina, Inc. Q2 2019 Form 10-Q Summary
Business context and reporting period
Illumina is a global provider of DNA sequencing and array-based technologies serving research, clinical, pharmaceutical, biotechnology, agricultural, and other markets. The filing covers the 13-week quarter and 26-week year-to-date period ended June 30, 2019, compared with the periods ended July 1, 2018. Illumina reported one segment, Core Illumina, following the deconsolidation of Helix on April 25, 2019.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | YTD 2019 | YTD 2018 |
|---|---|---|---|---|
| Total revenue | $838 million | $830 million | $1,684 million | $1,612 million |
| Product revenue | $704 million | $673 million | $1,372 million | $1,301 million |
| Service and other revenue | $134 million | $157 million | $312 million | $311 million |
| Gross profit | $573 million | $575 million | $1,157 million | $1,113 million |
| Gross margin | 68.4% | 69.3% | 68.7% | 69.0% |
| Income from operations | $205 million | $227 million | $410 million | $445 million |
| Operating margin | 24.5% | 27.4% | 24.3% | 27.6% |
| Net income attributable to Illumina | $296 million | $209 million | $529 million | $417 million |
| Diluted EPS | $1.99 | $1.41 | $3.56 | $2.82 |
Sequencing revenue was $728 million in Q2 and $1,427 million year to date. Microarray revenue was $110 million in Q2 and $257 million year to date. Sequencing consumables were the primary growth driver.
Cash flow, liquidity, debt, and balance sheet
- Cash provided by operating activities was $341 million in the first half of 2019, compared with $550 million in the prior-year period.
- Investing activities provided $1.067 billion, principally reflecting $1.590 billion of maturities and sales of available-for-sale securities, partially offset by $393 million of purchases and $103 million of capital expenditures.
- Financing activities used $609 million, including $550 million of payments primarily related to the 2019 convertible notes, $63 million of share repurchases, and $26 million of taxes on equity-award settlements.
- Cash and cash equivalents increased to $1.943 billion from $1.144 billion at December 30, 2018. Cash, cash equivalents, and short-term investments totaled approximately $3.2 billion at June 30, 2019, including approximately $476 million held by foreign subsidiaries.
- Long-term debt was $1.120 billion at June 30, 2019, consisting principally of the 2021 and 2023 convertible notes. The $633 million principal amount of 2019 Notes matured and was repaid in cash; the excess conversion value was settled with 0.4 million common shares.
- Operating lease liabilities totaled $742 million, including $698 million classified as long term, following adoption of the new lease accounting standard.
- Total assets were $6.973 billion and Illumina stockholders’ equity was $4.332 billion at June 30, 2019.
Material changes versus the prior comparable period
- First-half revenue increased 4%, driven primarily by a 7% increase in consumables revenue and growth in sequencing consumables. Q2 revenue increased only 1% because service and other revenue declined 15%.
- Q2 service and other revenue declined primarily because of weaker genotyping and sequencing services, reflecting continuing weakness in the direct-to-consumer market.
- Gross margin declined 90 basis points in Q2 and 30 basis points year to date, primarily because of lower service-business volumes.
- Operating expenses increased 6% in Q2 and 12% year to date. Research and development expense increased 10% in Q2 and 16% year to date, reflecting increased headcount and product investment.
- Operating margin declined materially because operating expenses grew faster than revenue.
- Net income increased despite lower operating income, primarily because of $136 million of Q2 other income, including a $92 million unrealized gain on a strategic investment and a $39 million gain from Helix deconsolidation. Year-to-date other income also included a $15 million gain related to a GRAIL contingency settlement.
- Helix was deconsolidated on April 25, 2019. Illumina recorded a $39 million gain, removed Helix assets and liabilities from consolidation, and eliminated the related noncontrolling interests.
- Illumina adopted the new lease accounting standard in the first quarter of 2019, recognizing operating lease right-of-use assets and liabilities.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected 2019 revenue to increase from the prior year but anticipated ongoing weakness in the direct-to-consumer market and delays in certain population-genomics projects.
- Operating expenses were expected to continue increasing year over year in absolute terms, although management planned to reduce expenses in the second half of 2019 in response to lower revenue-growth expectations.
- Management stated that available cash, investments, and operating cash flow were sufficient for at least the next 12 months, including the planned PacBio acquisition.
- Illumina expected the all-cash acquisition of Pacific Biosciences for approximately $1.2 billion to close in Q4 2019, subject to customary conditions and antitrust approvals. Termination fees could be $43 million payable by PacBio or, in specified antitrust-related circumstances, $98 million payable by Illumina.
- A Ninth Circuit decision could result in a discrete tax expense of less than $30 million, although the ultimate resolution remained uncertain.
- Illumina had $488 million remaining under its $550 million share-repurchase authorization at June 30, 2019.
- The company had a $57 million remaining callable commitment to a venture capital fund through April 2026. In July 2019, it also committed up to $160 million to a second fund callable through July 2029.
- Management disclosed ordinary-course litigation involving intellectual property, employment, and contractual matters but did not identify a specific material probable and estimable loss. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether sequencing-consumables growth offsets continued weakness in microarray, direct-to-consumer, and service revenue.
- Whether management’s planned second-half expense controls improve operating-margin performance.
- The sustainability of earnings excluding the $92 million strategic-investment gain, the $39 million Helix gain, and other nonrecurring items.
- The timing, regulatory approval status, financing, and integration risks associated with the approximately $1.2 billion PacBio acquisition.
- The ultimate tax impact of the Ninth Circuit decision and the potential sub-$30 million discrete tax expense.
- Future cash requirements from convertible debt, operating leases, capital expenditures, share repurchases, and venture-capital commitments.