Illumina Inc. (ILMN) reported adjusted earnings of 87 cents per share in the fourth quarter of 2014, beating the Zacks Consensus Estimate by 11.5%. Adjusted earnings also exceeded the year-ago number by an impressive 93.3%. Including one-time items, the company reported earnings of $1.03 per share, up a massive 83.9% from 56 cents per share in the prior-year quarter.
Full year 2014 adjusted earnings came in at $2.74 per share, beating the Zacks Consensus Estimate by 3.4% and reflecting an improvement of 52.2% from the year-ago quarter's equivalent figure.
Revenues
In the reported quarter, Illumina's revenues grew 32.3% year over year to $512.4 million, comfortably exceeding the Zacks Consensus Estimate of $504 million.
The strong top-line result was primarily driven by record shipments of sequencing consumables and instruments. However, the combined impact of unfavorable foreign exchange fluctuations and deferral of revenues related to Illumina's HiSeq 2500 trade-in program for instruments shipped in the fourth quarter, resulted in a $15 million revenue headwind.
In the Americas, Illumina's shipments grew 34% year over year, while in Europe the company observed shipment growth of 33%. In APAC, Illumina's shipments grew 8% year over year owing to strength in China. However, this shipment growth in China was partially offset by a decline in Japan as funding opportunities remained constrained in the region.
For the full year, Illumina reported revenues of $1.861 billion, reflecting a robust year–over-year improvement of 31% and ahead of the Zacks Consensus Estimate of $1.855 billion.
Revenues by Business Categories
Product revenues (87.9% of total revenue) surged 33.9% year over year to $450.3 million. Within this business, revenues from consumables went up 19% to $290 million while that from instruments escalated 75% year over year to $156 million.
Strong demand for NextSeq and HiSeq X Ten, as well as strong MiSeq unit shipments and stable HiSeq sales contributed to the double-digit growth in instrument revenues in the fourth quarter of 2014. Consumables revenue growth was primarily driven by high demand for sequencing consumables, which was again partially offset by a decline in arrays.
In Service and Other (12.1%), revenues climbed 21.8% year over year to $62.1 million. The year-over-year improvement was primarily driven by growth in Illumina's extended maintenance contracts associated with a larger sequencing installed base. Also NIPT services, which benefited from test fees, increased test send-out revenues and strength in genotyping services, contributed to the revenue growth in this business category.
Operational Update
Illumina's adjusted gross margin (considering stock-based compensation as regular expense) came in at 71.7%, up 90 basis points (bps) year over year driven by improved instrument margins and manufacturing efficiencies, which outweighed the impact of lower mix of consumables.
Adjusted operating margin was 30.2% in the quarter, up 560 bps from the year-ago period. Although adjusted research and development (R&D) expenses rose 20.3% year over year to $92.2 million and adjusted selling, general & administrative (SG&A) expenses increased 17.5% to $120.6 million, the improvement in operating margin was owing to higher gross margin and operating expense leverage in the reported quarter.
Financial Update
Illumina exited 2014 with cash and cash equivalents and short-term investment of $1.34 billion compared with $1.17 billion as on Dec 29, 2013.
Illumina generated a new record of $501.3 million in cash flow from operations in full year 2014, reflecting significant growth of 29.7% from $386.4 million a year ago. Capital expenditure amounted to $106 million resulting in free cash flow of $395.3 million in the full year. During the fourth quarter, Illumina repurchased approximately 185,000 shares for $35 million and has $130 million remaining under its previously announced programs.
2015 Guidance
Illumina has provided its business outlook for full year 2015. For 2015, Illumina expects year-over-year revenue growth of 20% and adjusted earnings per share in the range of $3.12–3.18.
The current Zacks Consensus Estimate for 2015 EPS of $3.19 exceeds the company-provided guidance. The same for revenues is pegged at $2.25 billion.
Moreover, these projections for full year 2015 assume full year adjusted gross margin of roughly 73% and a pro forma tax rate of approximately 28%. Moreover, Illumina expects weighted average diluted share outstanding for 2015 to be approximately 150 million.
Our Take
Illumina reported yet another impressive quarter, marking the thirteenth consecutive quarter of sequential revenue growth. This reflects the strong underlying trends across the company's customer segments and sequencing portfolio, solid operational execution, and a greater-than-anticipated tax benefit. In 2014, Illumina made significant progress in its market development strategies. It now looks forward to pushing these investments even further in 2015.
Per management, Illumina's focus on technology innovation, as validated by the launch of HiSeq XTen that enables the $1,000 genome, and the NextSeq 500, was a major contributor to the strong performance observed in the fourth quarter and full year 2014.
Going forward, Illumina's prospects seem bright on the back of strong global demand for its products, particularly the recently launched HiSeq X Five, as well as the HiSeq 3000 and 4000. We believe Illumina's new product introductions will continue to fuel the high throughput market, further enhancing its customer base and thereby fetching higher profit-earning opportunities for the company.
Zacks Rank
Currently, Illumina has a Zacks Rank #3 (Hold). Better-ranked stocks in the med-biomed/generic industry include Ophthotech Corporation (OPHT), Prothena Corporation plc (PRTA) and Regado Biosciences, Inc. (RGDO). All these stocks sport a Zacks Rank #1 (Strong Buy).
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