Strong Quarter for Illumina

Illumina (ILMN) reported an EPS of 21 cents in the second quarter of 2010 compared to 18 cents in the year-ago period. However, after adjusting for certain one-time items, the EPS was 26 cents, 18.2% higher than the second quarter of 2009. The Zacks Consensus Estimate for the quarter was 22 cents.
 
Revenues were $212 million, surpassing the Zacks Consensus Estimate of $192 million and 31% higher than the year-ago quarter driven by a strong 30% growth in product revenues. The company derives about 94% of its total revenues from products and the remaining comes from services.
 
Illumina derives product revenues from the sale of Microarrays and DNA Sequencing products. Product revenues consist of Consumables and Instruments, both of which generated sales of $126 million (annualized growth of 30%) and $70 million (30%), respectively. While significant growth in sequencing products was responsible for the robust growth in consumables, the growth in instrument revenues is attributable to the success of HiSeq instrument.
 
Services and other revenues, consisting of genotyping and sequencing services as well as instrument maintenance contracts, were $13 million, up 62.5% year over year. An increase in maintenance contracts associated with the growing installed basis of sequencing systems was responsible for the growth.
 
During the quarter, Illumina completed the acquisition of Helixis Inc. and results include two months of Helixis’ operating expenses. Gross margin of 68.9% during the quarter was almost unchanged from the year-ago period. The company’s selling general and administrative (SG&A) expenses and research and development expenses increased 28% (to $53.7 million) and 32% (to $43.7 million), respectively. Increased headcount and legal expenses were responsible for the increase in SG&A expenses. Operating profit of 22.4% remained almost unchanged from the second quarter of 2009.

Illumina exited the quarter with cash and cash equivalents of $237.2 million, up from $144.6 million at the end of January 3, 2010. The company generated $75 million in cash flow from operations, of which $13 million was spent on capital expenditures resulting in $62 million of free cash flow. This is higher than free cash flows of $25 million in the year ago period. Strong collections during the reported quarter not only improved free cash flows but also improved days sales outstanding (DSO) to 64 days from 74 days in the first quarter and 87 days in the year-ago period.

Outlook
 
Based on a strong quarter, Illumina updated its outlook for 2010. The company expects revenues to grow at 28% (earlier guidance 20%) from the 2009 level of $666 million. Additionally, the company raised the lower end of its adjusted EPS guidance by 3 cents to $0.93-$1.00.

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