Illumina (ILMN) Beats Q2 Earnings, Revenues; EPS View Up

Illumina Inc. (NASDAQ:ILMN) reported adjusted earnings per share (EPS) of 86 cents in the second quarter of 2016, which exceeded the Zacks Consensus Estimate by a solid 17.8%. Adjusted earnings also improved from the year-ago number by 7.5%. This bottom-line result also exceeded management’s expectation of 72–74 cents for the quarter.

Higher revenue growth and lower expenses compared to what the company forecasted primarily led to the better-than-expected improvement in Illumina’s second-quarter adjusted EPS. Moreover, the quarterly adjusted EPS included a dilution of 6 cents and 2 cents from the company’s GRAIL and Helix investment, respectively.

Including one-time items, the company reported earnings of 82 cents per share, reflecting a solid year over year improvement of 18.8%.

Revenues

In the reported quarter, Illumina's revenues grew 11% year over year (up 7% at constant exchange rate or CER) to $600 million, surpassing the company’s expectation of $590–$595 million. Moreover the top line comfortably beat the Zacks Consensus Estimate of $594 million.

Per management, growth in sequencing consumables and strong demand from microarrays were the two factors that primarily drove this top line growth.

Revenues by Business Categories

Product revenues (85% of total revenue) surged 10.2% year over year to $509.9 million. Within this business, revenues from consumables were up 25% at $379 million on the back of high demand for both Illumina’s array and sequencing product lines. Instrument revenue dropped 19% to $126 million primarily due to a challenging comparison in HiSeq instruments, given the launch of the 3000 and 4000 versions in the prior year.

Service and Other (15%) revenues climbed 18% year over year to $90 million. The year-over-year improvement was primarily owing to extended maintenance contracts associated with the largest sequencing installed base and genotyping services, partially offset by a decline in NIPT service revenue, given the shift in customer preference to in-house testing as expected.

Operational Update

Illumina's adjusted gross margin (considering stock-based compensation as regular expense) came in at 72.4%, reflecting an expansion of 50 basis points (bps) year over year, owing to higher consumables mix that was partially offset by lower services margin.

Adjusted research and development (R&D) expenses rose 29.4% year over year (to $124.5million) and adjusted selling, general & administrative (SG&A) expenses spiked 19% (to $146.4 million). Consequently, adjusted operating margin of 27.2% declined 400 bps from the year-ago period, driven by the company’s increased investment in head count, GRAIL and Helix.

Financial Update

Illumina exited the second quarter of 2016 with cash and cash equivalents and short-term investment of $1.43 billion, up from $1.34 billion of prior quarter. Illumina generated $217.1 million in cash flow from operations in the second quarter, exhibiting a huge improvement from $39.7 million in the previous quarter.

2016 Guidance

For 2016, Illumina continues to expect to deliver revenue growth of 12%. On the bottom-line front, the company has raised its guidance for adjusted EPS to the range of $3.48–$3.58, compared to the previous guidance of $3.35–$3.45. The current Zacks Consensus Estimate for Illumina’s 2016 revenues is pegged at $2.47 billion, while that for the bottom line is pegged at $3.37.

For the third quarter, Illumina projects revenues of $625–$630 million. The current Zacks Consensus Estimate for third quarter revenue is pegged at $629.6 million.

Our Take

Illumina ended the second quarter on an outstanding note, with both the top and bottom line results comfortably beating the Zacks Consensus Estimate as well as the company’s expectation. The company’s strong cash balance position buoys further optimism.

Going forward, management expects to witness sequentially higher revenue growth in the upcoming fourth quarter of 2016. Moreover, the raised EPS guidance for 2016 is also encouraging, reflecting chance for the company to deliver higher profits in the remaining quarters of 2016.

On the flip side, the company predicts its business in the EMEA to witness slower pace of recovery which in turn indicates the company’s poor performance in Europe to continue; in line with earlier quarter’s outcome. Nevertheless we remain impressed with the robust sequencing and array consumable growth, Illumina witnessed in the second quarter.

Zacks Rank

Illumina currently holds a Zacks Rank #4 (Sell). Some better-ranked medical stocks are Abiomed, Inc. (NASDAQ:ABMD) , Cynosure, Inc. (NASDAQ:CYNO) and Masimo Corp. (NASDAQ:MASI) . All these stocks sport a Zacks Rank #1 (Strong Buy).