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Illumina. Inc. (ILMN - Analyst Report) reported third-quarter 2013 adjusted earnings of 45 cents, surpassing the Zacks Consensus Estimate of 40 cents per share by 5%. The third-quarter figure also remained ahead of the prior-year quarter’s earnings of 41 cents per share, registering an increase of 4% year over year.

On a reported basis, the company posted net income of $31 million or 22 cents, versus the net income of $30 million or 22 cents per share in third-quarter 2012.

Revenue in Details

Revenues climbed 25% to $357 million from $286 million in the prior-year quarter, surpassing the Zacks Consensus Estimate of $344 million.

Top-line growth was driven by strong worldwide demand for products and solid contributions from the sequencing business. Organic revenues registered an increase of 20% year over year, owing to strong demand for sequencing consumables and consistent sales growth of HiSeq instruments.

On a geographic basis, revenues in the Americas rose 25% from the year-ago quarter, while sales from Europe shot up 27% year over year. The company also posted robust growth in Japan, especially in HiSeq instruments.

The company derived 89.3% of its total revenues from Products, while the remaining came from services. Product revenues, consisting of sales proceeds from the Consumables and Instruments segment, were primarily attributed to the sale of Microarrays and DNA Sequencing products. In the quarter under review, product revenues surged 21.4% year over year to $318.6 million.

Service and other revenues comprise genotyping and sequencing services as well as instrument maintenance contracts. Service revenues jumped 62% year over year to $38.2 million. The marked improvement in service revenues was mainly driven by the continued demand for genotyping services from agriculture and consumer customers, along with ongoing growth experienced in maintenance contracts.

Operational Update

The company’s adjusted gross margin was 70.2% in the reported quarter, down 30 basis points (bps) year over year, due to the lower mix of consumables. Adjusted operating margin was 32.4%, down 270 bps from the year-ago quarter, owing to high selling, general & administrative expenses coupled with increased investment in research and development.

Adjusted R&D expenses for the quarter was $61 million or 17.2% of revenue, compared to $59 million or 17% of revenue in the previous quarter.

Adjusted SG&A expenses for the quarter were $74 million or 20.6% of revenue compared to $70 million or 23 - 20.3% of revenue in the previous quarter.

Financial Update

Illumina exited the quarter with cash and cash equivalents and short-term investment of $1.03 billion compared with $1.35 billion at the end of 2012.

The company generated $83.1 million in cash flow from operations in the third quarter, marking an increase of $31.9 million from the prior-year period. Illumina generated free cash flow of $64.2 million in the reported quarter, up $30.7 million from the prior year quarter.

Guidance

Following the strong third quarter, Illumina revised its outlook for full year 2013. The company now expects revenue growth of 22% compared with 20% estimated earlier. Moreover, Illumina anticipates earnings per share in the range of $1.75–$1.77 compared with the prior outlook of $1.68–$1.72.

Our Take

Illumina continued with its impressive performance in third quarter as well, beating our EPS estimate for straight four quarters, with the average beat of 9.68%.

We are encouraged by the company’s consistent top-line growth and a strong global demand for its products. The upward revision of guidance will also boost investors’ confidence.

Currently, Illumina carries a Zacks Rank #3 (Hold). Other well-placed stocks that are worth a look are Actelion Ltd. (ALIOF), Alexion Pharmaceuticals, Inc. (ALXN - Analyst Report) and AMAG Pharmaceuticals, Inc. (AMAG - Snapshot Report), each carrying a Zacks Rank #1 (Strong Buy).

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