Illumina Reports Financial Results for Third Quarter 2008

Illumina, Inc. (NASDAQ:ILMN) today announced its financial results for the third quarter of 2008.

For the third quarter of 2008, Illumina reported revenue of $150.3 million, a 54% increase over the $97.5 million reported in the third quarter of 2007 and a 7% increase over revenue of $140.2 million in the second quarter of 2008. This represents the Company's 29th consecutive quarter of revenue growth. During the third quarter, the Company completed its acquisition of Avantome, Inc. As part of the acquisition, the Company recorded a charge of $24.7 million associated with acquired in-process research and development. As a result, the Company recorded a GAAP net loss of $7.3 million, or ($0.06) per basic and diluted share, compared to net income of $14.5 million, or $0.12 per diluted share in the comparable period of 2007. Also included in the GAAP net loss were non-cash charges of $12.7 million in stock compensation expense, $2.7 million associated with the amortization of intangible assets and $0.6 million of accrued contingent compensation associated with the acquisition of Avantome, Inc. Excluding the impact of these specified items, and net of pro forma tax expense, Illumina’s net income on a non-GAAP basis for the third quarter of 2008 was $28.6 million, or $0.22 per diluted share, compared to $19.9 million, or $0.17 per diluted share, for the third quarter of 2007.

Gross margin in the third quarter of 2008 was 62.0% compared to 61.3% in the comparable period of 2007. Non-GAAP gross margin was 64.6% for the third quarter of 2008 compared to 63.1% in the prior year period. Non-GAAP gross margin for the third quarter and the prior year period excludes the effect of the amortization of intangible assets and non-cash charges associated with stock compensation.

Research and development (R&D) expenses for the third quarter of 2008 were $27.6 million compared to $19.8 million in the third quarter of 2007. R&D expenses include $3.5 million and $2.6 million of non-cash stock compensation expense in the third quarter of 2008 and 2007, respectively, as well as $0.6 million of accrued contingent compensation associated with the Avantome acquisition completed during the third quarter of 2008. Excluding these charges, R&D expenses as a percentage of revenues were 15.6% compared to 17.6% in the prior year period.

Selling, general and administrative (SG&A) expenses for the quarter were $39.4 million, compared to $24.3 million for the third quarter of 2007. SG&A expenses include $8.0 million and $4.9 million of non-cash stock compensation expense in the third quarter of 2008 and 2007, respectively. Excluding these charges, SG&A expenses as a percentage of revenues were 20.9% compared to 19.9% in the prior year period.

The Company generated $27.3 million in cash flow from operations during the third quarter of 2008 compared to $5.3 million in the comparable quarter of 2007. Depreciation and amortization expenses were $7.2 million and capital expenditures were $15.3 million during the quarter. The Company ended the quarter with $701.2 million in cash and investments compared to $356.1 million as of June 29, 2008.

Highlights since our last earnings release:

• Received orders for six Genome Analyzers following the close of the quarter from researchers across multiple departments at the Max Planck Institute (MPI), bringing the total number of Illumina sequencing instruments at MPI sites to eight. Researchers in the MPI Department of Vertebrate Genomics are running experiments for the 1,000 Genomes Project and researchers in the MPI Department of Evolutionary Anthropology are using the additional Genome Analyzers to study both gene structure and gene expression in humans and apes as well as DNA from archaeological and paleontological specimens.

• Shipped four Genome Analyzers to the Genome Institute of Singapore, a flagship institution of Singapore and one of the top research centers in the world, taking its total installed base to six Genome Analyzers. The Genome Analyzers will be used in a variety of projects, including the construction of transcriptional networks linked to cancer and stem cells.
• Completed the acquisition of Avantome, Inc., a company developing a low cost, long-read, next generation sequencing technology. In conjunction with the close of the acquisition, Illumina appointed Mostafa Ronaghi to Senior Vice President and Chief Technology Officer.
• Released GenomeStudio Software, a program that enables the correlation of biological variation across multiple applications for the analysis of both microarray and sequencing data. GenomeStudio Software also allows researchers to integrate with third-party software providers for advanced downstream analysis.
• Launched mRNA-Seq, a new product for full-length, complementary DNA (cDNA) sequencing on the Genome Analyzer. mRNA-Seq enables researchers to obtain a more in-depth, comprehensive view of the transcriptome, revealing aspects previously unseen using array-based or expression sequence tag (EST) technologies.
• Completed an 8.05 million share secondary offering on August 12, 2008 resulting in net cash proceeds to the Company in the amount of $342.6 million.
• Completed a two-for-one stock split which became effective after the close of market on September 22, 2008.
• Promoted Jorge Velarde, Jr. to the position of Vice President of Business Development.

Financial Outlook and Guidance

The non-GAAP financial guidance discussed below excludes non-cash charges associated with the write-off of in-process research and development, stock compensation expense, the write-off of manufacturing equipment, amortization expense related to intangible assets, the accrual of contingent compensation related to the Avantome acquisition and the double dilution associated with the accounting treatment of the Company’s convertible debt outstanding and the corresponding call option overlay (see table which reconciles these non-GAAP financial measures to the related GAAP measures).

We expect revenue for 2008 between $564 and $568 million, representing year-over-year growth between 54% and 55%. This represents an increase of $11 million from the midpoint of our previous guidance. We expect our gross margin percentage to be in the mid 60s. We expect earnings per fully diluted share between $0.84 and $0.87.

For the fourth quarter of 2008, we expect revenues between $152 and $156 million. We expect gross margin percentage to exceed 65.5%. We expect earnings per fully diluted share of $0.22 to $0.24.

We expect the full year pro forma tax rate to be approximately 36%.

The Company expects full year weighted average diluted shares outstanding for the measurement of pro forma amounts to be approximately 130 million.

Quarterly Conference Call Information

The conference call will begin at 2:30pm Pacific Time (5:30pm Eastern Time) on Tuesday, October 21, 2008. Interested parties may listen to the call by dialing 866-271-0675 (passcode: 79962401), or if outside North America, by dialing +617-213-8892 (passcode: 79962401). Individuals may access the live teleconference under the "Corporate/Investor Information" tab of Illumina's web site at www.illumina.com.

A replay of the conference call will be available from 4:30pm Pacific Time (7:30pm Eastern Time) on October 21, 2008 through October 28, 2008 by dialing 888-286-8010, or if outside North America, by dialing +617-801-6888 (passcode: 71427514).

About Illumina

Illumina is a leading developer, manufacturer and marketer of next-generation life science tools and integrated systems for the large scale analysis of genetic variation and biological function. Using our proprietary technologies, we provide a comprehensive line of products and services that currently serve the sequencing, genotyping, and gene expression markets, and we expect to enter the market for molecular diagnostics. Our customers include leading genomic research centers, pharmaceutical companies, academic institutions, clinical research organizations and biotechnology companies. Our tools provide researchers around the world with the performance, throughput, cost effectiveness and flexibility necessary to perform the billions of genetic tests needed to extract valuable medical information from advances in genomics and proteomics. We believe this information will enable researchers to correlate genetic variation and biological function, which will enhance drug discovery and clinical research, allow diseases to be detected earlier and permit better choices of drugs for individual patients.

Statement Regarding Use of Non-GAAP Financial Measures

The Company reported non-GAAP results for diluted net income per share, net income, gross margins, 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 results under GAAP include substantial non-cash charges related to stock compensation expense, a charge for the impairment of manufacturing equipment, the amortization of intangible assets, amortization of inventory revaluation costs on products sold that were previously written-up under purchase accounting rules, acquired in-process research and development expense related to the Company's acquisitions of Avantome, Inc. in August 2008 and Solexa, Inc. in January 2007 and compensation expense related to contingent consideration due to stockholders of Avantome, Inc. Per share amounts exclude the double dilution associated with the accounting treatment of the Company’s convertible debt outstanding and the corresponding call option overlay. Management believes that presentation of operating results that excludes these non-cash charges provides useful supplemental information to investors that facilitates analysis of the Company’s core operating results and comparison of operating results across reporting periods. Management 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.

"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: this release may contain forward-looking statements that involve risks and uncertainties. Among the important factors that could cause actual results to differ materially from those in any forward-looking statements are Illumina's ability (i) to develop and commercialize further our BeadArray™, VeraCode®, and Solexa® technologies and to deploy new sequencing, gene expression, and genotyping products and applications for our technology platforms, (ii) to manufacture robust instrumentation and reagents technology, together with other factors detailed in our filings with the Securities and Exchange Commission including our 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 disclaim any intent or obligation to update these forward-looking statements beyond the date of this release.