Illumina, Inc. Q1 2021 Form 10-Q Summary
Business context and reporting period
Illumina provides sequencing- and array-based genomic solutions for research, clinical, and applied markets. The filing covers the 13-week quarter ended April 4, 2021, compared with the 13-week quarter ended March 29, 2020. Results reflect continuing uncertainty from COVID-19 and exclude any post-closing impact from the pending GRAIL acquisition.
Key financial metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue | $1,093 million | $859 million | 27% increase |
| Product revenue | $953 million | $701 million | 36% increase |
| Service and other revenue | $140 million | $158 million | 11% decrease |
| Gross profit | $764 million | $619 million | 23% increase |
| Gross margin | 69.9% | 72.1% | Down 220 basis points |
| Operating income | $193 million | $189 million | 2% increase |
| Operating margin | 17.7% | 22.0% | Down 430 basis points |
| Net income | $147 million | $173 million | 15% decrease |
| Diluted EPS | $1.00 | $1.17 | 15% decrease |
| Cash flow from operations | $282 million | $281 million | Approximately flat |
Sequencing revenue was $979 million, including $695 million of consumables and $176 million of instruments. Microarray revenue was $114 million. Revenue growth was primarily driven by sequencing consumables and increased shipments of NextSeq and NovaSeq instruments.
Research and development expense increased 26% to $197 million. Selling, general and administrative expense increased 36% to $374 million, including $105 million of GRAIL continuation payments. Share-based compensation expense increased to $67 million from $39 million, including incremental costs related to modified performance stock units.
Cash and cash equivalents were $4.433 billion at April 4, 2021, compared with $1.810 billion at January 3, 2021. Cash, cash equivalents, and short-term investments totaled approximately $4.6 billion, including approximately $586 million held by foreign subsidiaries. Short-term investments were $197 million after the company sold all available-for-sale debt securities in anticipation of the GRAIL transaction.
Total assets were $8.755 billion and stockholders’ equity was $4.922 billion at April 4, 2021. Debt included $992 million of term notes, $1.168 billion of net convertible senior notes, and no borrowings under the $750 million revolving credit facility. The company issued $1.0 billion of term notes during the quarter and received $992 million of net proceeds.
Material changes versus the prior comparable period
- Revenue increased $234 million, led by a $252 million increase in product revenue. Consumables increased 25% and instruments increased 121%.
- Service and other revenue declined $18 million, primarily because of lower development and licensing revenue.
- Gross margin declined because of less favorable product mix, higher COVID-19-related freight costs, and lower development and licensing revenue.
- Operating expenses increased $141 million. The increase included GRAIL continuation payments, higher compensation and performance-based compensation, and increased research and development investment.
- Net income declined $26 million despite higher revenue, reflecting lower gross margin, increased operating expenses, higher interest expense, and a higher effective tax rate.
- Operating cash flow remained broadly stable, while investing and financing cash flows increased substantially because of securities sales, repayment of PacBio continuation advances, and new debt issuance.
- The company recorded a $26 million gain from repayment by Pacific Biosciences of continuation advances related to the terminated PacBio acquisition. It also recorded losses on marketable equity securities and a $14 million loss on sales of those securities.
Guidance, outlook, risks, contingencies, and unusual items
- Management expects revenue to grow in 2021 compared with 2020 and expects operating expenses to increase in absolute dollars, including expenses related to GRAIL and performance-based compensation.
- Management expects existing cash, investments, operating cash flow, and available borrowing capacity to fund near-term operating and capital requirements for at least the next 12 months, including expected GRAIL funding needs.
- Illumina agreed to acquire GRAIL for approximately $8 billion, consisting of $3.5 billion in cash and $4.5 billion in Illumina shares, subject to a collar. Closing was expected in the second half of 2021, subject to shareholder and regulatory approvals.
- The Federal Trade Commission challenged the GRAIL acquisition under Section 7 of the Clayton Act. The European Commission also accepted a referral for merger review and purported to impose a stay on completion. The acquisition could be significantly delayed or prevented.
- Under specified termination circumstances, Illumina could owe GRAIL a $300 million termination fee and be required to make an additional $300 million investment. Monthly GRAIL continuation payments were $35 million, totaling $105 million in Q1 2021, with an additional $35 million paid in April 2021.
- The $517 million principal amount of 2021 convertible notes was convertible through June 11, 2021. During Q1, $27 million of principal was repaid in cash and $17 million of excess conversion value was settled in shares.
- COVID-19 may continue to affect customer activity, sales, supply chains, freight costs, and operating results. Other significant risks include product development and commercialization, third-party suppliers, market competition, foreign exchange, taxation, litigation, and integration or non-completion of GRAIL.
- The company did not repurchase shares during Q1 2021 and stated that it did not intend to repurchase shares during fiscal 2021. Approximately $15 million remained available under the repurchase authorization.
Important facts for investors to verify
- Progress and ultimate outcome of FTC and European Commission proceedings affecting the GRAIL acquisition.
- GRAIL closing timing, total transaction funding, continuation payments, possible termination obligations, and potential dilution from stock consideration.
- Sustainability of sequencing consumables and instrument growth, particularly NextSeq and NovaSeq demand.
- Whether gross margin recovers from the 69.9% level as product mix, freight costs, and development revenue change.
- Magnitude and timing of increased operating expenses, performance-based compensation, and share-based compensation.
- Repayment or conversion of the remaining 2021 convertible notes and the company’s post-acquisition leverage and liquidity.
- Effects of COVID-19, supply-chain constraints, foreign exchange movements, and losses or gains on strategic investments.