Illumina, Inc. (ILMN)

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Illumina, Inc. (ILMN)

Q1 2009 Earnings Call

April 21, 2009 5:00 pm ET


Jay Flatley - President & Chief Executive Officer

Christian Henry - Senior Vice President & Chief Financial Officer

Peter Fromen - Senior Director of Investor Relations


Ross Muken - Deutsche Bank

Doug Schenkel - Cowen & Co.

Tycho Peterson - JP Morgan

Marshall Urist - Morgan Stanley

Quintin Lai – Robert W. Baird

Derik De Bruin - UBS

Isaac Ro - Leerink Swann

Zarak Khurshid - Caris & Company

Matthew Scalo - Canaccord Adams

Davis Bu - Goldman Sachs

Dan Leonard - First Analysis Securities

Bill Quirk - Piper Jaffray



Welcome to the first quarter 2009 Illumina, Inc., earnings conference call. (Operator Instructions). I would now like to turn the presentation over to your host for today’s call, Mr. Peter Fromen, Senior Director of Investor Relations.

Peter Fromen

Good afternoon everyone, and welcome to our first quarter 2009 earnings call. During the call, we will review our financial results released today after the close of the market, offer commentary on our commercial activities, and provide financial guidance quarter and fiscal 2009. After which, we will host a question and answer session. If you have not had a chance to review the earnings release, it can be accessed in the investor relations section of our website at Presenting for Illumina today, will be Jay Flatley, President and Chief Executive Officer, and Christian Henry, Senior Vice President and Chief Financial Officer. This call is being recorded, and the audio portion will be archived in the Investor Section of our website.

It is our intent that all forward-looking statements regarding financial guidance and commercial activity made during today’s call be protected under the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties. Actual events or results may differ materially from those projected or discussed. All forward-looking statements are based upon current information available, and Illumina assumes no obligations to update these statements. To better understand these risk factors, we refer you to the documents that Illumina files with the Securities and Exchange Commission including form 10-K and 10-Q.

Before I turn the call over to Christian, I want to let you know that we will be presenting at the Baird 2009 Growth Stock conference in Chicago on May 13th, the Deutsche Bank Healthcare Conference in Boston on May 18th, and the Goldman Sachs Healthcare Conference in New York which is being held June 9th through June 11th. For those of you unable to attend any of the upcoming conferences, we encourage you to listen to the web cast presentations, which will be available through the investor relations section of our website. With that, I’ll now turn our call over to Christian.

Christian Henry

Good afternoon everyone and thank you for joining us today. During today’s call, I’ll review our Q1 financial results and provide guidance for the second quarter and full year of fiscal 2009. Jay will then discuss our commercial progress and provide an update on the state of the business and our markets.

We are off to a great start in 2009. In the first quarter, we recorded total revenue of $166 million, which represented 36% year over year growth. Product revenue was $156 million and grew 41% over Q1 of last year with significant growth in both our sequencing and microarray product lines. We generated $103 million in consumable revenue, achieving our first $100 million quarter. This compares to $63 million in Q1 of ’08 and $99 million in the fourth quarter, and represents a year over year growth of 63%. While B-chips led the year on a year over year growth in absolute dollars, sequencing consumables drove the sequential increase over Q4. The growing installed base of Genome Analyzers and increase use in production environments pushed sequencing consumable revenue to record levels, growing 44% sequentially.

Instrument revenue for the quarter was just over $50 million, compared to $44 million in the prior period and $51 million last quarter, which represents year over year growth of 13%. We shipped a record number of Genome Analyzers during the quarter which drove our year over year instrument growth. Services and other revenue which includes genotyping and sequencing services as well as instrument maintenance contract was $10 million compared to $11 million in Q1 of last year and $8 million last year. Services revenue is not expected to grow in line with the product businesses as more of our genotyping service revenue is migrating to our CS Pro certified customers. We are relatively indifferent to this shift as our product gross margins are similar to our internal service business.

Before discussing our gross margins and operating expenses for the quarter, I would like to note that we recorded a pre-tax amount of $15 million related non-cash stock based compensation. This impacted our EPS by a tax adjusted amount of $0.08 per pro forma diluted share for the quarter. In my discussion of operating expenses, I’ll highlight both our GAAP expenses which include stock compensation expense and other non-cash charges and the corresponding non-GAAP figures. I encourage you to review the GAAP reconciliation of non-GAAP measures, also included in today’s earnings release.

Total cost of revenue for the quarter was $56 million compared to $48 million in Q1 of 2008. The Q1 ’09 cost includes stock-base compensation expense of $1.4 million, approximately equal to the expense in the prior year period. Excluding this expense and $1.7 million associated with the amortization of intangibles, non-GAAP gross margin was 68.3%. This compares to 66.7% last quarter and 63.3% in the first quarter of ’08, a year over year improvement of 5 percentage points. Both sequential and year over year gross margin gain resulted from improved sequencing and microarray consumable margins as well as the overall product mix.

We have successfully scaled our sequencing reagent manufacturing capability in order to meet the increasing demand. As a result, we are seeing better overhead utilization which is positively impacting sequencing consumable gross margins. Additionally, the reformulated sequencing kits that we launched near the end of Q3 are materially less expensive to produce. During Q1, the annualized consumable pull through on the Genome Analyzer was over $200,000 per instrument and has improved by 40% from Q1 of last year. This is a result of our ability to quickly install new systems and rapidly bring customers to production status.

In our microarray business, pricing in the genotyping market has remained stable. In fact, per chip ASPs on our Infinium genotyping B chips and our whole genome gene expression arrays exceeded the positive trend that we reported in the fourth quarter. During the quarter, annualized consumable pull through was over 600K per installed instrument, higher than Q1 of last year, but lower than the fourth quarter.

Instrument ASPs were also stable across all platforms during the quarter. Research and development expenses were $33 million in the quarter compared to $21 million in the first quarter of 2008 including $4.6 million and $3.3 million respectively in noncash stock compensation expense. Excluding stock compensation expense of $2 million and $2 million related to acquired research and development and $0.9 million of accrued contingent compensation, R&D expenses were $25 million or 15% of revenue, compared to $17 million or 14% of revenue in the prior year period and $24 million or 15% of revenue in Q4. The increase in sequential and year over year research and development spending was primarily attributed to increased head count and increased project activity.

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