Illumina: Side Stepping Macro Pressure And Delivering In The Long Term

By Ivan Deryugin

In the latter half of 2012, shares of Illumina (ILMN) saw increased volatility, owing to the twin combination of takeover speculation regarding Roche (RHHBY.OB), as well as concerns over the company’s relationship with BGI, its largest customer. But in 2013, shares of Illumina are likely to see more stability, driven by continued investment in its product portfolio, a solid balance sheet, and the continued resiliency and growth of its customer base. Illumina’s Q4 2012 earnings offer the company a solid base off of which to execute in 2013. In addition, a number of business aspects may pan out more favorably and quickly than expected, and perceived negatives (NIH spending cuts, academic customer base) may not affect the company as detrimentally as the bears anticipate.

Q4 Review: A Solid End to 2012

For the fourth quarter of 2012, Illumina posted pro forma EPS of $0.42, a 20% increase from Q4 2011. Revenues rose to $309.265 million, an increase of 23.67% driven by continued growth across all of Illumina’s product lines. Illumina’s pro forma operating margins slipped to 33.1% in Q4 2012, down from 35% a year ago, as Illumina ramped up investments in R&D, as well as its infrastructure to support future growth (more on that later). Gross margins fell in the quarter to 68.5%, down from 70.5% in the previous quarter and 70.2% a year ago. This decline was due to several factors. First Illumina experienced some non-recurring costs related to its extended warranty services. Second, the impact of inventory mix and variances in its manufacturing costs contributed to a decline in gross margin. And third, BlueGenome contributed to what CFO Marc Stapley called “margin dilution.” However, he forecast a reversion to Illumina’s historical gross margins, stating that the company is implementing protocols to better manage its inventory, as well as align its manufacturing capacity to better meet growing demand. Consumables revenue rose by 36% to $196 million in the quarter and now comprise 63% of total revenues, up from 57% a year ago….

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