Brian Marckx, CFA
Q1 RESULTS
Interleukin Genetics (ILIU) reported financial results for the first quarter ending March 31, 2011 on May 12, 2011. The reported numbers bested our estimates on the top-line, gross margin, operating expense control and net income/EPS.
Revenue
Q1 revenue of $720k beat our $485k estimate and consisted almost entirely of revenue from genetic testing. Revenue grew 95% y-o-y and was up 41% from Q4 2010, breaking the streak of q-o-q sequential declines from Q2 2010 through Q4 2010. While still too early to comfortably expect that revenue will continue to post sequential growth from here on out, we are cautiously optimistic that this will happen. Approximately 65% of revenue came from sales through Amway, up considerably from any other recent period (Amway sales were 51% of total revenue in Q1 2010 and just 32% in all of 2010).
Amway has recently taken steps to more prominently feature Interleukin’s tests including launching a new website for their weight management products with Interleukin’s weight management test displayed on the front page. This, along with more active promotion of the weight management test including new literature, appears to be paying off. Management also indicated that they are seeing additional interest for their weight management test from institutional customers including weight loss clinics.
Gross Margin / Operating Expenses / EPS
Gross margin came in at 50% (versus our 28% estimate), a level Interleukin has not seen since late 2008 and up from 19% for the full year 2010. Management noted cost efficiencies from higher test processing volumes and lower material costs as the reasons behind the beefy gross margin. We have updated our model to reflect what we hope is continued relative strength in gross margin. Gross income was $362k in the quarter, again a level that has not been attained since late 2008.
Operating expenses came in at $1.54 million compared to our $1.61 million estimate. Operating expense control was noteworthy, especially considering the relatively high level of revenue (Amway sales commissions run through here).
EPS came in at ($0.03), slightly better than our ($0.04) estimate.
Cash
Interleukin exited the quarter with $2.84 million in cash and equivalents, compared to $4.0 million at 12/31/10. The revenue growth, significantly wider gross margins and operating expense control also benefitted cash burn. Cash used in operations was $1.17 million in the most recent quarter. Averaging approximately $389k per month, cash burn improved from the $478k average throughout 2010. Interleukin still has $3.3 million borrowing availability (unchanged since 12/31/10) under their revolver with Pyxis.
2011 OUTLOOK / RECOMMENDATION
We have made some slight adjustments to our 2011 estimates. We now look for revenue of $3.2 million and EPS of ($0.15), compared to $2.5 million and ($0.16) prior to Q1 results.
We are maintaining our Outperform rating and $1.60 price target on shares of Interleukin.
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