Illumina Beats on Q4 Earnings, Revises Outlook - Analyst Blog

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Illumina Inc. ( ILMN ) reported fourth-quarter 2013 adjusted earnings per share (EPS) of 45 cents, beating the Zacks Consensus Estimate by a penny. Earnings also exceeded the year-ago quarter figure by 7.1%.

For full year 2013, adjusted EPS was $1.80, which exceeded the Zacks Consensus Estimate of $1.78 and was up 13.2% year over year. The full year EPS surpassed the upper limit of the Illumina's guided range of $1.75-$1.77.

On a reported basis, ILMN posted EPS of 56 cents, up from 53 cents reported in fourth-quarter 2012. However, for full year 2013, reported EPS fell 20.4% to 90 cents from the prior year.

Revenue in Details

In the reported quarter, revenues climbed 25.2% to $387.3 million, surpassing the Zacks Consensus Estimate of $380 million. For the full year, total revenue was $1.42 billion, up 23.5% year over year, outpacing Illuminas' expected growth of 22%.

The top-line growth was driven by strong worldwide demand for products and solid contributions from the sequencing business. Organic revenues registered an increase of 22% year over year. The fourth quarter was also the second highest in the company's history in terms of orders placed, with record orders booked for HiSeq 2500 and whole genome services, and near-record orders for MiSeq.

On a geographic basis, revenues in the Americas rose 31% from the year-ago quarter, while revenues from Europe shot up 19% year over year. ILMN also posted robust growth in Japan and experienced increased demand from clinical research customers.

Revenues by Business Categories

In the Product business (86.9% of its total revenue), Illumina's revenues surged 20.6% year over year to $336.4 million. For the full year, revenues grew 18.9% to $1.3 billion. In this business, revenues from consumables went up 11% while the same from the instruments sales rose 25% year over year for the quarter.

The improvement in consumables and instrument revenues can be primarily attributed to the increased demand for sequencing instruments, sequencing consumables as well as Sample Prep along with expanded installed base.

In the Service and Other business (13.1%), revenues soared 67.9% year over year to $50.9 million. For the full year, revenues from the business improved 68.8% to $156.5 million. The marked improvement in service revenues was mainly driven by continued growth in extended sequencing maintenance contracts, an increase in genomes processed year over year, revenues from verify services and increased demand for genotyping services.

Operational Update

ILMN's adjusted gross margin was 71.4% in the reported quarter, up 290 basis points (bps) year over year, due to higher sequencing instrument margins, a higher mix of sequencing consumables, and improved warranty costs. For 2013, adjusted gross margin was up 40 bps to 70.1%.

Adjusted operating margin was 32.3% in the quarter, down 80 bps from the year-ago quarter owing to high selling, general & administrative (SG&A) expenses coupled with increased investment in research and development (R&D) to support long-term growth and due to acquisitions.  For 2013, the adjusted operating margin was down 250 bps to 32.5%.

Adjusted R&D expenses rose 37.7% to $65.7 million or 17% of revenues, compared with $47.7 million or 15.4% of revenues in the fourth quarter of fiscal 2012. R&D expenses rose 8.2% quarter-over-quarter from $61 million or 17.2% of revenues. The sequential increase was mainly due to the impact of head-count additions, accrued bonuses and the acquisition of NextBio, as well as other items related to the offshore investments in new products. For year 2013, adjusted R&D expenseswere up 36.2% to $238.8 million.

Adjusted SG&A expenses for the quarter rose 22.6% to $85.8 million or 22.2% of revenues compared with $70 million or 19.9% of revenues in the fourth quarter of fiscal 2012.

SG&A expenses also increased 15.9% from $74 million or 20.6% of revenues reported in the last sequential quarter, due to commission and bonus payments arising from the year-end performance, the additional head count to support the planned commercial growth and the acquisition of NextBio. For 2013, adjusted SG&A expensesrose 32.2% to $295.5 million.

Financial Update

Illumina exited the quarter with cash and cash equivalents and short-term investment of $1.17 billion compared with $1.03 billion at the end of the same quarter previous year. The total long term debt increased 3% year over year to $868.6 million.

ILMN generated $126.8 million in cash flow from operations in the fourth quarter, marking an increase of 60.7% from the prior-year period. The capital expenditure increased 59.6% year over year to $27.3 million. The company rendered free cash flow of $99.5 million in the reported quarter, up 61% from the prior year quarter.

In 2013, Illumina generated $386.4 m i llion in cash flow from operations, up 32.4% year over year. The capital expenditure increased 15.1% year over year to $79.2 million.  Free cash flow for the year came in at $307.2 million, up 37.7% year over year.

Guidance

Following a strong fourth quarter, Illumina revised its outlook for full year 2014. ILMN now expects revenue growth in the range of 15-17% compared with 22% estimated earlier. Moreover, Illumina anticipates adjusted earnings per share in the range of $2.00 to $2.06 compared with the prior outlook of $1.75-$1.77.

The revised guidance validates ILMN's expectation of EPS growth to be slower than revenue growth in the first half of 2014, as it will, during that time, fully absorb the investments made in 2013, including acquisitions, and the higher share count due to the increase in stock price. However, in the second half of the year, Illumina expects the EPS growth to exceed the revenue growth.

Our Take

ILMN carried forward its impressive performance in the fourth quarter. We are encouraged by Illumina's consistent top-line growth and a strong global demand for its products.

Currently, Illumina carries a Zacks Rank #3 (Hold). Some better-placed stocks that are worth a look in the Biomedical industry are Actelion Ltd. ( ALIOF ), Affymetrix Inc. ( AFFX ) and Emergent BioSolutions, Inc. ( EBS ), each sporting a Zacks Rank #1 (Strong Buy).



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EMERGENT BIOSOL (EBS): Free Stock Analysis Report

ILLUMINA INC (ILMN): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Earnings , Stocks

Referenced Stocks: AFFX , ALIOF , EBS , EPS , ILMN

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