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Illumina Reports Strong Start to Fiscal Year 2014

Companies mentioned in this article: Illumina, Inc.

SAN DIEGO -- (BUSINESS WIRE) -- Illumina, Inc. (NASDAQ:ILMN) today announced its financial results for the first quarter of 2014.

First quarter 2014 results:

  • Revenue of $421 million, a 27% increase compared to $331 million in the first quarter of 2013
  • GAAP net income for the quarter of $60 million, or $0.40 per diluted share, compared to net loss of $23 million, or $0.18 per diluted share, for the first quarter of 2013
  • Non-GAAP net income for the quarter of $80 million, or $0.53 per diluted share, compared to $63 million, or $0.46 per diluted share, for the first quarter of 2013 (see the table entitled “Itemized Reconciliation Between GAAP and Non-GAAP Net Income (Loss)” for a reconciliation of these GAAP and non-GAAP financial measures)
  • Cash flow from operations of $37 million and free cash flow of $18 million for the quarter

Gross margin in the first quarter of 2014 was 66.1% compared to 66.3% in the prior year period. Excluding the effect of non-cash charges associated with stock compensation, amortization of acquired intangible assets, legal contingencies, and inventory revaluation adjustments, non-GAAP gross margin was 70.4% for the first quarter of 2014 compared to 69.2% in the prior year period.

Research and development (R&D) expenses for the first quarter of 2014 were $77.0 million compared to $61.5 million in the prior year period. R&D expenses included $11.7 million and $8.0 million of non-cash stock compensation expense in the first quarters of 2014 and 2013, respectively. Excluding these charges and contingent compensation, R&D expenses as a percentage of revenue were 15.5% compared to 16.0% in the prior year period.

Selling, general and administrative (SG&A) expenses for the first quarter of 2014 were $109.6 million compared to $85.1 million in the prior year period. SG&A expenses included $19.4 million and $14.6 million of non-cash stock compensation expense in the first quarters of 2014 and 2013, respectively. Excluding these charges, amortization of acquired intangible assets and contingent compensation, SG&A expenses as a percentage of revenue were 19.9%, flat compared to the prior year period.

Depreciation and amortization expenses were $28.4 million and capital expenditures were $19.0 million during the first quarter of 2014. The Company ended the first quarter of 2014 with $1.09 billion in cash, cash equivalents and short-term investments, compared to $1.17 billion as of December 29, 2013.

“Our first quarter results have set the stage for a strong 2014,” stated Jay Flatley, CEO. “We are experiencing an exciting uptake of our new products, including the NextSeq™ 500 and HiSeq X™ Ten, while demand for the overall product portfolio remains robust. We continue to innovate across the entire spectrum of the sequencing workflow to more broadly enable the adoption of genomics.”

Updates since our last earnings release:

  • Introduced new products to support oncology clinical research and discovery including the TruSeq® RNA Access Library Prep Kit, and the TruSight™ Myeloid Sequencing Panel and several new BaseSpace Core Apps
  • Announced that Novogene, Human Longevity, Inc., and WuXi Genome Center have purchased HiSeq X Ten sequencing systems
  • Published results in the New England Journal of Medicine that demonstrate that the verifi® Prenatal Test performs consistently well in pregnant women regardless of their risk level for fetal aneuploidy
  • Announced that Science for Life Laboratory (SciLifeLab) in Sweden has joined the Illumina Genome Network (IGN)
  • Launched the Illumina Accelerator Program, the world’s first business accelerator focused solely on creating an innovation ecosystem for the genomics industry
  • Repurchased $130 million of common stock under our previously announced share repurchase programs

Financial outlook and guidance

The non-GAAP financial guidance discussed below reflects certain pro forma adjustments to assist in analyzing and assessing our core operational performance. Please see our Reconciliation of Non-GAAP Financial Guidance included in this release for a reconciliation of the GAAP and non-GAAP financial measures.

For fiscal 2014 the Company has increased projections to approximately 21% to 23% revenue growth and non-GAAP earnings per fully diluted share of $2.10 to $2.15.

Quarterly conference call information

The conference call will begin at 2:30 pm Pacific Time (5:30 pm Eastern Time) on Tuesday, April 22, 2014. Interested parties may listen to the call by dialing 888.679.8033 (passcode: 81417326), or if outside North America by dialing 1.617.213.4846 (passcode: 81417326). Individuals may access the live teleconference in the Investor Relations section of Illumina’s web site under the “Company” tab at www.illumina.com.

A replay of the conference call will be available from 9:30 pm Pacific Time (12:30 am Eastern Time) on April 22, 2014 through April 29, 2014 by dialing 888.286.8010 (passcode: 38433522), or if outside North America by dialing 1.617.801.6888 (passcode: 38433522).

Statement regarding use of non-GAAP financial measures

The Company reports non-GAAP results for diluted net income per share, net income, gross margins, operating expenses, operating margins, other income, and free cash flow in addition to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP.

The Company’s financial measures under GAAP include substantial charges related to stock compensation expense, legal contingencies, amortization of acquired intangible assets, non-cash interest expense associated with the Company’s convertible debt instruments that may be settled in cash, acquisition related expense, and others that are listed in the itemized reconciliations between GAAP and non-GAAP financial measures included in this press release. Per share amounts also include the double dilution associated with the accounting treatment of the Company’s 0.625% convertible senior notes outstanding at the beginning of the period and the corresponding call option overlay. Management believes that presentation of operating results that excludes these items and per share double dilution provides useful supplemental information to investors and facilitates the analysis of the Company’s core operating results and comparison of operating results across reporting periods. Management also believes that this supplemental non-GAAP information is therefore useful to investors in analyzing and assessing the Company’s past and future operating performance.

The Company encourages investors to carefully consider its results under GAAP, as well as its supplemental non-GAAP information and the reconciliation between these presentations, to more fully understand its business. Reconciliations between GAAP and non-GAAP results are presented in the tables of this release.

Use of forward-looking statements

This release contains projections, information about our financial outlook, earnings guidance, and other forward-looking statements that involve risks and uncertainties. These forward-looking statements are based on our expectations as of the date of this release and may differ materially from actual future events or results. Among the important factors that could cause actual results to differ materially from those in any forward-looking statements are (i) our ability to further develop and commercialize our instruments and consumables and to deploy new products, services, and applications, and expand the markets, for our technology platforms; (ii) our ability to manufacture robust instrumentation and consumables; (iii) our ability to successfully identify and integrate acquired technologies, products, or businesses; (iv) our expectations and beliefs regarding future conduct and growth of the business and the markets in which we operate; (v) challenges inherent in developing, manufacturing, and launching new products and services; and (vi) our ability to maintain our revenue levels and profitability during periods of research funding reduction or uncertainty and adverse economic and business conditions, together with other factors detailed in our filings with the Securities and Exchange Commission, including our most recent filings on Forms 10-K and 10-Q, or in information disclosed in public conference calls, the date and time of which are released beforehand. We undertake no obligation, and do not intend, to update these forward-looking statements, to review or confirm analysts’ expectations, or to provide interim reports or updates on the progress of the current financial quarter.

About Illumina

Illumina (www.illumina.com) is a leading developer, manufacturer, and marketer of life science tools and integrated systems for the analysis of genetic variation and function. We provide innovative sequencing and array-based solutions for genotyping, copy number variation analysis, methylation studies, gene expression profiling, and low-multiplex analysis of DNA, RNA, and protein. We also provide tools and services that are fueling advances in consumer genomics and diagnostics. Our technology and products accelerate genetic analysis research and its applications, paving the way for molecular medicine and ultimately transforming healthcare.

 
Illumina, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
     
March 30,

2014

December 29,

2013

ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 518,513 $ 711,637
Short-term investments 573,289 453,966
Accounts receivable, net 293,045 238,946
Inventory 164,231 154,099
Deferred tax assets, current portion 40,349 36,076
Prepaid expenses and other current assets   42,516   22,811
Total current assets 1,631,943 1,617,535
Property and equipment, net 210,372 202,666
Goodwill 723,259 723,061
Intangible assets, net 316,984 331,173
Deferred tax assets, long-term portion 101,336 88,480
Other assets   69,676   56,091
Total assets $ 3,053,570 $ 3,019,006
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 86,471 $ 73,655
Accrued liabilities 215,292 219,120
Long-term debt, current portion   848,016   29,288
Total current liabilities 1,149,779 322,063
Long-term debt 839,305
Long-term legal contingencies 138,780 132,933
Other long-term liabilities 191,398 191,221
Conversion option subject to cash settlement 282
Stockholders’ equity   1,573,613   1,533,202
Total liabilities and stockholders’ equity $ 3,053,570 $ 3,019,006
 
Illumina, Inc.
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
(unaudited)
         
Three Months Ended
March 30,

2014

March 31,

2013

Revenue:
Product revenue $ 362,211 $ 296,170
Service and other revenue   58,570     34,788  
Total revenue   420,781     330,958  
Cost of revenue:
Cost of product revenue (a) 111,441 89,978
Cost of service and other revenue (a) 21,513 15,138
Amortization of acquired intangible assets   9,535     6,550  
Total cost of revenue   142,489     111,666  
Gross profit   278,292     219,292  
Operating expense:
Research and development (a) 77,041 61,450
Selling, general and administrative (a) 109,573 85,074
Acquisition related (gain) expense, net (1,013 ) 3,821
Headquarter relocation 595 757
Legal contingencies 105,853
Unsolicited tender offer related expense       7,484  
Total operating expense   186,196     264,439  
Income (loss) from operations 92,096 (45,147 )
Other expense, net   (8,308 )   (2,415 )
Income (loss) before income taxes 83,788 (47,562 )
Provision for (benefit from) income taxes   23,811     (24,975 )
Net income (loss) $ 59,977   $ (22,587 )
Net income (loss) per basic share $ 0.47   $ (0.18 )
Net income (loss) per diluted share $ 0.40   $ (0.18 )
Shares used in calculating basic net income (loss) per share   128,146     123,768  
Shares used in calculating diluted net income (loss) per share   150,619     123,768  
               
(a) Includes total stock-based compensation expense for stock-based awards:
 
Three Months Ended
March 30,

2014

March 31,

2013

Cost of product revenue $ 2,095 $ 1,442
Cost of service and other revenue 285 154
Research and development 11,669 8,006
Selling, general and administrative   19,375     14,617  
Stock-based compensation expense before taxes $ 33,424   $ 24,219  
 
Illumina, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
   
Three Months Ended
March 30,

2014

March 31,

2013

Net cash provided by operating activities (a) $ 37,087 $ 87,840
Net cash used in investing activities (144,387 ) (65,021 )
Net cash used in financing activities (a) (85,924 ) (13,006 )
Effect of exchange rate changes on cash and cash equivalents   100     (712 )
Net (decrease) increase in cash and cash equivalents (193,124 ) 9,101
Cash and cash equivalents, beginning of period   711,637     433,981  
Cash and cash equivalents, end of period $ 518,513   $ 443,082  
 
Calculation of free cash flow:
Net cash provided by operating activities (a) $ 37,087 $ 87,840
Purchases of property and equipment   (19,012 )   (21,441 )

Free cash flow (b)

$ 18,075   $ 66,399  
 

______________________________________________________________________________________________________

(a) Net cash provided by operating activities excludes excess tax benefit related to stock-based compensation of $50.5 million in Q1 2014 and $5.3 million in Q1 2013, respectively. Net cash used in financing activities reflects the excess tax benefit as a corresponding in-flow in the respective periods.

(b) Free cash flow, which is a non-GAAP financial measure, is calculated as net cash provided by operating activities reduced by purchases of property and equipment. Free cash flow is useful to management as it is one of the metrics used to evaluate our performance and to compare us with other companies in our industry. However, our calculation of free cash flow may not be comparable to similar measures used by other companies.

 
Illumina, Inc.
Results of Operations - Non-GAAP
(In thousands, except per share amounts)
(unaudited)
 
ITEMIZED RECONCILIATION BETWEEN GAAP AND NON-GAAP NET INCOME (LOSS) PER SHARE:
 
Three Months Ended
March 30,

2014

March 31,

2013

GAAP net income (loss) per share - diluted $ 0.40 $ (0.18 )
Pro forma impact of weighted average shares (a)
Adjustments to net income (loss):
Amortization of acquired intangible assets 0.09 0.06
Non-cash interest expense (b) 0.06 0.07
Legal contingencies (c) 0.04 0.79
Contingent compensation expense (d) 0.02 0.03
Acquisition related (gain) expense, net (e) (0.01 ) 0.03
Headquarter relocation 0.01
Unsolicited tender offer related expense 0.06
Cost-method investment related gain (0.05 )
Inventory revaluation adjustment
Incremental non-GAAP tax expense (f)   (0.07 )   (0.36 )
Non-GAAP net income per share - diluted (g) $ 0.53   $ 0.46  
Shares used in calculating non-GAAP diluted net income per share   149,971     134,850  
 
ITEMIZED RECONCILIATION BETWEEN GAAP AND NON-GAAP NET INCOME (LOSS):
GAAP net income (loss) $ 59,977 $ (22,587 )
Amortization of acquired intangible assets 13,191 8,131
Non-cash interest expense (b) 9,022 9,052
Legal contingencies (c) 5,846 106,922
Contingent compensation expense (d) 2,840 3,418
Acquisition related (gain) expense, net (e) (1,013 ) 3,821
Headquarter relocation 595 757
Unsolicited tender offer related expense 7,484
Cost-method investment related gain (6,113 )
Inventory revaluation adjustment 458
Incremental non-GAAP tax expense (f)   (10,411 )   (48,724 )
Non-GAAP net income (g) $ 80,047   $ 62,619  
 
ITEMIZED RECONCILIATION BETWEEN GAAP AND NON-GAAP DILUTED NUMBER OF SHARES:
Weighted average shares used in calculation of GAAP diluted net income (loss) per share 150,619 123,768
Weighted average dilutive potential common shares issuable of redeemable convertible senior notes (a) (648 ) (1,062 )
Weighted average potential common shares excluded due to anti-dilutive effect (a)       12,144  
Weighted average shares used in calculation of non-GAAP diluted net income per share   149,971     134,850  
 

______________________________________________________________________________________________________

(a) Pro forma impact of weighted average shares includes the impact of: (1) double dilution associated with the accounting treatment of the Company’s outstanding convertible debt and the corresponding call option overlay; and (2) weighted average shares excluded from calculation of GAAP diluted net loss per share for Q1 2013 due to anti-dilutive effect on GAAP net loss.

(b) Non-cash interest expense is calculated in accordance with the authoritative accounting guidance for convertible debt instruments that may be settled in cash.

(c) Legal contingencies primarily represented charges recorded based on a judgment associated with the patent litigation brought by Syntrix Biosystems, Inc., or Syntrix. Illumina continues to believe that Syntrix’s claims are without merit and are not supported by the law or facts. Accordingly, on December 3, 2013, Illumina filed an appeal to the court challenging the judgment.

(d) Contingent compensation expense relates to contingent payments for post-combination services associated with acquisitions.

(e) Acquisition related (gain) expense, net Q1 2014 consisted primarily of $1.8 million in net gains from changes in fair value of contingent consideration offset by $0.8 million in transaction related costs for a prior period acquisition. Acquisition related (gain) expense, net in Q1 2013 consisted of transaction cost of $3.4 million and net changes in fair value of contingent consideration of $0.4 million.

(f) Incremental non-GAAP tax expense reflects the tax impact related to the non-GAAP adjustments listed above.

(g) Non-GAAP net income and diluted net income per share exclude the effect of the pro forma adjustments as detailed above. Non-GAAP net income and diluted net income per share are key drivers of our core operating performance and major factors in management’s bonus compensation each year. Management has excluded the effects of these items in these measures to assist investors in analyzing and assessing our past and future core operating performance.

 
Illumina, Inc.
Results of Operations - Non-GAAP (continued)
(Dollars in thousands)
(unaudited)
 
ITEMIZED RECONCILIATION BETWEEN GAAP AND NON-GAAP RESULTS OF OPERATIONS AS A PERCENT OF REVENUE:
 
Three Months Ended
March 30,

2014

  March 31,

2013

GAAP gross profit $ 278,292   66.1 % $ 219,292   66.3 %
Stock-based compensation expense 2,380 0.6 % 1,596 0.5 %
Amortization of acquired intangible assets 9,535 2.3 % 6,550 2.0 %
Legal contingencies (a) 5,846 1.4 % 1,069 0.3 %
Inventory revaluation adjustment         458   0.1 %
Non-GAAP gross profit (b) $ 296,053   70.4 % $ 228,965   69.2 %
 
Research and development expense $ 77,041 18.3 % $ 61,450 18.6 %
Stock-based compensation expense (11,669 ) (2.8 )% (8,006 ) (2.5 )%
Contingent compensation expense (c)   (84 )     (489 ) (0.1 )%
Non-GAAP research and development expense $ 65,288   15.5 % $ 52,955   16.0 %
 
Selling, general and administrative expense $ 109,573 26.0 % $ 85,074 25.7 %
Stock-based compensation expense (19,375 ) (4.5 )% (14,617 ) (4.4 )%
Amortization of acquired intangible assets (3,656 ) (0.9 )% (1,581 ) (0.5 )%
Contingent compensation expense (c)   (2,756 ) (0.7 )%   (2,929 ) (0.9 )%
Non-GAAP selling, general and administrative expense $ 83,786   19.9 % $ 65,947   19.9 %
 
GAAP operating profit (loss) $ 92,096 21.9 % $ (45,147 ) (13.6 )%
Stock-based compensation expense 33,424 7.9 % 24,219 7.3 %
Amortization of acquired intangible assets 13,191 3.2 % 8,131 2.5 %
Legal contingencies (a) 5,846 1.4 % 106,922 32.3 %
Contingent compensation expense (c) 2,840 0.7 % 3,418 1.0 %
Acquisition related (gain) expense, net (d) (1,013 ) (0.3 )% 3,821 1.2 %
Headquarter relocation 595 0.1 % 757 0.2 %
Unsolicited tender offer related expense 7,484 2.3 %
Inventory revaluation adjustment         458   0.1 %
Non-GAAP operating profit (b) $ 146,979   34.9 % $ 110,063   33.3 %
 
GAAP other expense, net $ (8,308 ) (2.0 )% $ (2,415 ) (0.7 )%
Non-cash interest expense (e) 9,022 2.2 % 9,052 2.7 %
Cost-method investment related gain         (6,113 ) (1.8 )%
Non-GAAP other income, net (b) $ 714   0.2 % $ 524   0.2 %
 

______________________________________________________________________________________________________

(a) Legal contingencies during fiscal year 2013 primarily represented charges recorded based on a judgment associated with the patent litigation brought by Syntrix Biosystems, Inc., or Syntrix. Illumina continues to believe that Syntrix’s claims are without merit and are not supported by the law or facts. Accordingly, on December 3, 2013, Illumina filed an appeal to the court challenging the judgment.

(b) Non-GAAP gross profit, included within the non-GAAP operating profit, is a key measure of the effectiveness and efficiency of manufacturing processes, product mix and the average selling prices of the Company’s products and services. Non-GAAP operating profit, and non-GAAP other income, net, exclude the effects of the pro forma adjustments as detailed above. Management has excluded the effects of these items in these measures to assist investors in analyzing and assessing past and future core operating performance.

(c) Contingent compensation expense relates to contingent payments for post-combination services associated with acquisitions.

(d) Acquisition related (gain) expense, net in Q1 2014 consisted primarily of $1.8 million in net gains from changes in fair value of contingent consideration offset by $0.8 million in transaction related costs for a prior period acquisition. Acquisition related (gain) expense, net in Q1 2013 consisted of transaction cost of $3.4 million and net changes in fair value of contingent consideration of $0.4 million.

(e) Non-cash interest expense is calculated in accordance with the authoritative accounting guidance for convertible debt instruments that may be settled in cash.

Illumina, Inc.
Reconciliation of Non-GAAP Financial Guidance

The Company’s future performance and financial results are subject to risks and uncertainties, and actual results could differ materially from the guidance set forth below. Some of the factors that could affect the Company’s financial results are stated above in this press release. More information on potential factors that could affect the Company’s financial results is included from time to time in the Company’s public reports filed with the SEC, including the Company’s Form 10-K for the fiscal year ended December 29, 2013 filed with the SEC on February 18, 2014. The Company assumes no obligation to update any forward-looking statements or information.

   
Fiscal Year 2014
Diluted net income per share
Non-GAAP diluted net income per share $2.10 - $2.15
Amortization of acquired intangible assets (0.19)
Non-cash interest expense (a) (0.16)
Legal contingencies (b) (0.10)
Contingent compensation expense (c) (0.02)
Headquarter relocation (d) (0.01)
GAAP diluted net income per share $1.62 - $1.67
 

______________________________________________________________________________________________________

(a) Non-cash interest expense is calculated in accordance with the authoritative accounting guidance for convertible debt instruments that may be settled in cash.

(b) Legal contingencies represent charges to be recorded based on a judgment associated with the patent litigation brought by Syntrix BioSystems, Inc., or Syntrix. Illumina continues to believe that Syntrix’s claims are without merit and are not supported by the law or facts. Accordingly, on December 3, 2013, Illumina filed an appeal to the court challenging the judgment.

(c) Contingent compensation expense relates to contingent payments for post-combination services associated with acquisitions.

(d) Headquarter relocation represents accretion of interest expense on lease exit liability.


Copyright © Business Wire 2014
Contact:

Illumina, Inc.
Investors:
Rebecca Chambers
858.255.5243
rchambers@illumina.com
or
Media:
Eric Endicott
858.882.6822
pr@illumina.com