Illumina Inc.ILMN reported adjusted earnings per share (EPS) of 80 cents in the third quarter of 2015, beating the Zacks Consensus Estimate by a penny. Adjusted earnings also improved from the year-ago number by 3.9%.
Despite currency headwinds dragging the bottom line by 5 cents, solid growth in sequencing consumables and services revenues and solid operational execution contributed to the year-over-year improvement in Illumina’s third-quarter adjusted EPS.
Including one-time items, the company reported earnings of $118 million or 79 cents per share, reflecting an improvement of 26.9% or 25.4%, respectively from the prior-year quarter numbers.
Revenues
In the reported quarter, Illumina's revenues grew 14.5% year over year (up 18% at constant exchange rate or CER) to $550.3 million, almost in line with the Zacks Consensus Estimate of $550 million. However, according to management the top line failed to meet the company’s revenue expectation by 3%.
Year-over-year revenues growth was primarily driven by total sequencing revenue growth of 21% and continued clinical adoption of Illumina’s technologies. Moreover shipments to clinical and translational customers grew more than 40% year over year.
Revenues by Business Categories
Product revenues (85.6% of total revenue) surged 13.1% year over year to $470.8 million. Within this business, revenues from consumables went up 23% to $321 million while that from instruments dropped 3% year over year to $145 million.
Consumables revenue growth was primarily driven by higher demand for sequencing consumables, which was again partly offset by a decline in arrays. Lower-than-expected instrument placement for its NextSeq and MiSeq family of instruments were primarily responsible for the decline in instrument revenues during the quarter.
Service and Other (14.4%) revenues climbed 23.2% year over year to $79.4 million. The year-over-year improvement was primarily owing to growth in Illumina's NIPT services which benefited from increased test send-out revenue, genotyping services, and extended maintenance contracts associated with the larger sequencing installed base.
Operational Update
Illumina's adjusted gross margin (considering stock-based compensation as regular expense) came in at 72.6%, up 110 basis points (bps) year over year, owing to higher mix of consumables.
Adjusted research and development (R&D) expenses rose 17.3% year over year (to $99.2 million) and adjusted selling, general & administrative (SG&A) expenses spiked 14% (to $134.8 million). Despite that, adjusted operating margin of 30.1% improved 820 bps from the year-ago period owing to positive revenue growth and higher gross margin in the reported quarter.
Financial Update
Illumina exited the quarter with cash and cash equivalents and short-term investment of $1.44 billion, up from $1.34 billion as on Dec 28, 2014.
Illumina generated $180.9 million in cash flow from operations in the third quarter, reflecting an improvement of 24.3% from $145.6 million a year ago. Capital expenditure amounted to $29.5 million resulting in free cash flow of $151.5 million, up 29.8% from the year-ago equivalent.
During the third quarter, Illumina repurchased 188,000 shares for $37 million and is left with another $112 million under its previously announced 10b5-1 share repurchase program. In addition, currently Illumina has $96 million remaining under its previously announced discretionary buyback program.
2015 Guidance
Illumina has reduced its financial outlook for full year 2015. For 2015, Illumina now expects adjusted EPS in the range of $3.29–$3.31, down from the previous guided $3.39–$3.45. The current Zacks Consensus Estimate for 2015 EPS of $3.37 lies above the company-provided guidance
On the top-line front, the company now expects to deliver 18% revenue growth in fiscal 2015 (with 21% growth on a constant currency basis), lower than its previous revenue guidance of 20% growth (which included a 3% negative impact from foreign exchange assuming current currency exchange rates). The current Zacks Consensus Estimate for 2015 is pegged at $2.22 billion. In addition, management continues to project pro forma tax rate of 27% for 2015.
For fourth quarter of 2015, the company currently expects to deliver revenue of $570 million and adjusted EPS in the range of 78–80 cents. The current Zacks Consensus Estimate for EPS lies at 87 cents, while the same for revenues is pegged at $571 million; both above the company-provided guidance.
Our Take
Illumina ended the third quarter of 2015 on a satisfactory note. The company’s bottom line comfortably exceeded the Zacks Consensus Estimate, while the top line came in line with the same. However, the company’s reduced guidance for both top and bottom line disappoints us, hinting at management’s anticipation of a lag on the growth trajectory. Moreover, a rating downgrade by an analyst at Leerink Partners for Illumina, at the beginning of Oct 2015, was a dampener on the stock’s price.
On an encouraging note, Illumina completed its earlier announced acquisition of GenoLogics Life Science Software during the third quarter, to drive the adoption of sequencing in new markets and improve genomic workflow. The company’s recent product launches including TruSight HLA solutions and Tumor 15 – an NGS oncopanel – and strategic collaborations like the one with Amoy Diagnostics (to expedite the adoption of precision medicine and targeted therapies in China) are also expected to add value. The company also entered into collaboration with China’s Burning Rock Biotech to penetrate further in the multi-billion dollar oncology market.
We are optimistic about Illumina’s expansion strategy through the enhancement of its portfolio of sequencing products, and the development of strategic partnerships with therapeutics and diagnostic services providers.
Zacks Rank
Currently, Illumina has a Zacks Rank #4 (Sell). Better-ranked stocks in the med-biomed/generic industry include Amgen Inc. AMGN, Anika Therapeutics Inc. ANIK and Nexvet Biopharma Public Limited Company NVET. All the three stocks sport a Zacks Rank #1 (Strong Buy).
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