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Illumina Beats on Earnings, Revenue

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Illumina Inc.’s (ILMN - Free Report) first-quarter 2013 adjusted earnings of 46 cents per share beat the Zacks Consensus Estimate by 21%. Adjusted earnings grew almost 28% over the prior-year quarter driven by strong sales. However, including some one-time litigation expenses, its reported loss stood at 18 cents against a net income of 20 cents in the prior-year quarter.

Revenue Details

Revenue increased a robust 21% year over year to $331 million during the quarter, also beating the Zacks Consensus Estimate of $310 million. Top-line growth was driven by a strong performance of the sequencing business, especially the sequencing consumables. Organic revenue increased 18% year over year, owing to strong demand for instrumental sales, genome sequencing services and sequencing consumables.

The company generates 89.5% of its total revenue from products, while the remaining comes from services. Product revenues are primarily attributed to the sale of Microarrays and DNA Sequencing products. Product revenues consist of sales proceeds from the Consumables and Instruments segment. Services and other revenues comprise genotyping and sequencing services as well as instrument maintenance contracts.

During the quarter, product revenue increased 15.9% year over year to $296.2 million, while, services revenue surged 203% year over year to $34.8 million. Growth in service revenues is attributable to the February acquisition of Verinata Health Inc. A higher number of instrument maintenance contracts, strong demand for genotyping and sequencing also drove the service revenue in the quarter.

Consumable revenue (61.9% of the company’s total revenue) was $205 million, up 19% year over year, driven by strong demand for Sample Prep and sequencing consumables and the addition of BlueGnome (acquired in Sept 2012). Instruments revenues increased 11% year over year to $88 million in the reported quarter. Growth in this segment was attributable to strong year over year demand in array instruments and HiSeq products.

The company’s adjusted gross margin stood at 69.2% in the reported quarter, up 20 basis points (bps) year over year. Adjusted operating margin during the quarter was 33.3% compared with 35.1% in the year-ago quarter, down 180 bps as higher research & development margin and selling, general & administrative margin was offset by relatively low expansion in the gross margin.

Financial Details

Illumina exited the quarter with cash and cash equivalents and short-term investment of $1.06 billion compared with $1.35 billion at the end of fiscal 2012. The company generated $88 million in cash flow from operations in the first quarter versus $65 million in the prior-year period.

Based on its solid cash balance, Illumina repurchased shares of $25 million in the quarter under its earlier announced share repurchase program.

Outlook Reiterated

Illumina reiterated its previously provided fiscal 2013 outlook for revenue growth of 15% and earnings per share in the range of $1.55 - $1.62.

However, the company cautiously mentioned that it will take into account the Verinata dilution, operating expense increases and normalized tax rates when updating its 2013 guidance. The company is confident it should perform well in 2013 as it has a strong pipeline, impressive product development, investments and clinical strategy.

California-based Illumina develops, manufactures and markets life science tools and integrated systems for the analysis of genetic variation and function at a broader scale. The company derives product revenues from the sale of microarrays and DNA sequencing products. As a life sciences tools company, Illumina has a track record of innovation and operational excellence.

Currently, Illumina retains a Zacks Rank #3 (Hold).

Other Stocks to Consider

While we prefer to remain on the sidelines with Illumina, other medical device stocks worth a look are Cyberonics Inc. , Alkermes plc (ALKS - Free Report) and XOMA Corporation (XOMA - Free Report) , all of which carry a Zacks Rank #1 (Strong Buy).

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