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26.10.2010 20:02:00

Illumina Reports Financial Results for Third Quarter 2010

Illumina, Inc. (NASDAQ:ILMN) today announced its financial results for the third quarter of 2010.

Third quarter 2010 results:

  • Revenue of $237.3 million, a 50% increase over the $158.4 million reported in the third quarter of 2009.
  • GAAP net income for the quarter of $35.4 million, or $0.24 per diluted share, compared to net income of $17.1 million, or $0.12 per diluted share, for the third quarter of 2009. Net income for the third quarter of 2010 included $5.3 million in non-cash interest expense and other items listed in the table entitled "An Itemized Reconciliation Between GAAP and Non-GAAP Net Income.”
  • Non-GAAP net income for the quarter of $40.7 million, or $0.30 per diluted share, compared to $22.6 million, or $0.17 per diluted share, for the third quarter of 2009.

Gross margin in the third quarter of 2010 was 66.2% compared to 67.6% in the comparable period of 2009. Excluding the effect of non-cash charges associated with stock compensation and the amortization of intangibles, non-GAAP gross margin was 67.8% for the third quarter of 2010 compared to 69.5% in the prior year period.

Research and development (R&D) expenses for the third quarter of 2010 were $44.8 million compared to $34.4 million in the third quarter of 2009. R&D expenses include $6.5 million and $4.8 million of non-cash stock compensation expense in the third quarter of 2010 and 2009, respectively. R&D expenses in both periods also include $0.9 million of accrued contingent compensation. Excluding these charges, R&D expenses as a percentage of revenue were 15.7% compared to 18.1% in the prior year period.

Selling, general, and administrative (SG&A) expenses for the third quarter of 2010 were $55.0 million compared to $42.1 million for the third quarter of 2009. SG&A expenses include $9.9 million and $8.5 million of non-cash stock compensation expense in the third quarter of 2010 and 2009, respectively. Excluding these charges, SG&A expenses as a percentage of revenue were 19.0% compared to 21.2% in the prior year period.

The company generated $54.8 million in cash flow from operations during the third quarter of 2010 compared to $20.0 million in the prior year period. Depreciation and amortization expenses were $11.2 million and capital expenditures were $13.1 million during the third quarter. The company ended the third quarter with $806.8 million in cash and investments compared to $693.5 million as of January 3, 2010.

Highlights since our last earnings release:

  • Launched the HiSeq 1000, a single flow cell sequencing system with half the throughput of the HiSeq 2000. The HiSeq 1000 is field upgradeable to the HiSeq 2000.
  • Shipped first commercial units of the Eco™ Real-Time PCR System.
  • Together with the Wellcome Trust Sanger Institute completed the de novo genome sequence of the endangered Tasmanian Devil genome for the purpose of finding genetic mutations in the transmissible cancer that is ravaging its population.

Quarterly Conference Call Information

The conference call will begin at 2:30pm Pacific Time (5:30pm Eastern Time) on Tuesday, October 26, 2010. Interested parties may listen to the call by dialing 800.291.5365 (passcode: 77315540), or if outside North America, by dialing +617.614.3922 (passcode: 77315540). 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 6:30pm Pacific Time (9:30pm Eastern Time) on October 26, 2010 through November 2, 2010 by dialing 888.286.8010, or if outside North America, by dialing +1.617.801.6888 (passcode: 18304626).

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 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 and other charges related to stock compensation expense, incremental interest expense and a gain on debt extinguishment associated with the company’s convertible debt instruments that may be settled in cash, a gain on the acquisition of an investee accounted for using the cost method of accounting prior to acquisition, amortization expense related to intangible assets, in-process research and development and contingent compensation expense related to the acquisition of Avantome, Inc., acquisition expense, and expense related to acquired research and development. Per share amounts also include 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 charges 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 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) our ability to manufacture robust instrumentation and reagents technology, and (iii) reductions in the funding levels to our primary customers, including as a result of the timing and amount of funding provided by the American Recovery and Reinvestment Act of 2009, 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 large-scale 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 application, paving the way for molecular medicine and ultimately transforming healthcare.

Illumina, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
   
October 3, 2010 January 3, 2010
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 210,767 $ 144,633
Short-term investments 596,049 548,894
Accounts receivable, net 170,618 157,751
Inventory, net 130,029 92,776
Deferred tax assets, current portion 16,808 20,021
Prepaid expenses and other current assets   16,076   17,515
Total current assets 1,140,347 981,590
Property and equipment, net 126,269 117,188
Goodwill 278,112 213,452
Intangible assets, net 72,333 43,788
Deferred tax assets, long-term portion 37,538 47,371
Other assets   70,622   26,548
Total assets $ 1,725,221 $ 1,429,937
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 59,792 $ 52,781
Accrued liabilities 134,526 98,253
Long-term debt, current portion   306,106   290,202
Total current liabilities 500,424 441,236
Other long-term liabilities 32,783 24,656
Conversion option subject to cash settlement 83,893 99,797
Stockholders’ equity   1,108,121   864,248
Total liabilities and stockholders’ equity $ 1,725,221 $ 1,429,937
 
Illumina, Inc.
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
(unaudited)
       
Three Months Ended Nine Months Ended
October 3, September 27, October 3, September 27,
2010 2009 2010 2009
Revenue:
Product revenue $ 224,668 $ 150,306 $ 596,885 $ 459,708
Service and other revenue   12,641     8,054     44,558     26,052  
Total revenue   237,309     158,360     641,443     485,760  
Cost of Revenue:
Cost of product revenue (a) 72,248 45,858 184,814 142,377
Cost of service and other revenue (a) 5,621 3,706 15,705 10,024
Amortization of intangible assets   2,295     1,670     5,510     5,010  
Total cost of revenue   80,164     51,234     206,029     157,411  
Gross profit   157,145     107,126     435,414     328,349  
Operating Expenses:
Research and development (a) 44,804 34,406 132,146 100,248
Selling, general and administrative (a) 55,006 42,096 158,956 126,866
Acquired in-process research and development   -     1,325     1,325     1,325  
Total operating expense   99,810     77,827     292,427     228,439  
Income from operations 57,335 29,299 142,987 99,910
Other income (expense), net:
Interest income 2,791 2,536 6,746 8,027
Interest expense (6,190 ) (5,964 ) (18,279 ) (17,361 )
Other income, net   774     1,592     3,142     1,261  
Total other expense, net   (2,625 )   (1,836 )   (8,391 )   (8,073 )
Income before income taxes 54,710 27,463 134,596 91,837
Provision for income taxes   19,263     10,386     48,145     31,261  
Net income $ 35,447   $ 17,077   $ 86,451   $ 60,576  
Net income per basic share $ 0.28   $ 0.14   $ 0.70   $ 0.49  
Net income per diluted share $ 0.24   $ 0.12   $ 0.61   $ 0.44  
Shares used in calculating basic net income per share   124,684     124,557     122,816     123,274  
Shares used in calculating diluted net income per share   145,205     139,874     140,854     137,438  
 
(a) Includes total stock-based compensation expense for employee stock options and stock purchases:
 
Three Months Ended Nine Months Ended
October 3, September 27, October 3, September 27,
2010 2009 2010 2009
Cost of product revenue $ 1,359 $ 1,144 $ 3,869 $ 3,617
Cost of service and other revenue 137 112 394 397
Research and development 6,521 4,788 18,451 14,389
Selling, general and administrative   9,943     8,528     29,090     25,931  
Stock-based compensation expense before taxes $ 17,960   $ 14,572   $ 51,804   $ 44,334  
 
 
Illumina, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
       
Three Months Ended Nine Months Ended
October 3, September 27, October 3, September 27,
2010 2009 2010 2009
Net cash provided by operating activities $ 54,828 $ 19,997 $ 191,092 $ 110,902
Net cash used in investing activities (93,872 ) (158,994 ) (214,996 ) (272,122 )
Net cash provided by financing activities 12,408 25,341 89,930 72,287
Effect of exchange rate changes on cash and cash equivalents   216     87     108     437  
Net (decrease) increase in cash and cash equivalents (26,420 ) (113,569 ) 66,134 (88,496 )
Cash and cash equivalents, beginning of period   237,187     352,097     144,633     327,024  
Cash and cash equivalents, end of period $ 210,767   $ 238,528   $ 210,767   $ 238,528  
 
Calculation of free cash flow (a):
Net cash provided by operating activities $ 54,828 $ 19,997 $ 191,092 $ 110,902
Purchases of property and equipment   (13,111 )   (19,697 )   (37,434 )   (46,288 )
Free cash flow $ 41,717   $ 300   $ 153,658   $ 64,614  
 
(a) 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)
       
AN ITEMIZED RECONCILIATION BETWEEN GAAP AND NON-GAAP NET INCOME PER SHARE:
 
Three Months Ended Nine Months Ended
October 3, September 27, October 3, September 27,
2010 2009 2010 2009
GAAP net income per share - diluted $ 0.24 $ 0.12 $ 0.61 $ 0.44
Pro forma impact of weighted average shares 0.02 0.01 0.04 0.02
Adjustments to net income:
Pro forma impact of non-cash interest expense (a) 0.02 0.02 0.07 0.07
Other pro forma adjustments   0.02     0.02     0.04     0.06  
Non-GAAP net income per share - diluted (b) $ 0.30   $ 0.17   $ 0.76   $ 0.59  
Shares used in calculating non-GAAP diluted net income per share   135,913     132,839     132,473     130,907  
 
AN ITEMIZED RECONCILIATION BETWEEN GAAP AND NON-GAAP NET INCOME:
 
GAAP net income $ 35,447 $ 17,077 $ 86,451 $ 60,576
Non-cash interest expense (a) 5,258 4,849 15,468 14,325
Amortization of intangible assets 2,295 1,670 5,510 5,010
Compensation expense (c) 919 919 2,757 2,757
Gain on acquisition (d) - - (2,914 ) -
Acquired in-process research and development - 1,325 1,325 1,325
Acquisition expense - - 536 -
Acquired research and development - - - 2,000
Gain on extinguishment of debt - - - (767 )
Pro forma impact on tax expense:
Non-cash interest expense (a) (2,065 ) (2,006 ) (6,077 ) (5,609 )
Other pro forma adjustments   (1,114 )   (1,273 )   (1,721 )   (2,467 )
Incremental non-GAAP tax expense (e)   (3,179 )   (3,279 )   (7,798 )   (8,076 )
Non-GAAP net income (b) $ 40,740   $ 22,561   $ 101,335   $ 77,150  
 
(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) Non-GAAP net income per share and net income exclude the effect of the pro forma adjustments as detailed above. Non-GAAP diluted net income per share and net income 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.
 
(c) Compensation expense represents contingent consideration for post-combination services associated with a prior acquisition. This expense is included within research and development on our statements of operations.
 
(d) Gain on acquisition represents the difference between the carrying value of a cost method investment in Helixis, Inc. prior to acquisition and the fair value of that investment at the time of acquisition.
 
(e) Incremental non-GAAP tax expense reflects the increase to GAAP tax expense related to the non-GAAP adjustments listed above.
 
Illumina, Inc.
Results of Operations - Non-GAAP (continued)
(unaudited)
 
AN ITEMIZED RECONCILIATION BETWEEN GAAP AND NON-GAAP RESULTS OF OPERATIONS AS A PERCENT OF REVENUE:
 
  Three Months Ended   Nine Months Ended
October 3, 2010   September 27, 2009 October 3, 2010   September 27, 2009
GAAP gross profit $ 157,145   66.2 % $ 107,126   67.6 % $ 435,414   67.9 % $ 328,349   67.6 %
Stock-based compensation expense 1,496 0.6 % 1,256 0.8 % 4,263 0.7 % 4,014 0.8 %
Amortization of intangible assets   2,295   1.0 %   1,670   1.1 %   5,510   0.9 %   5,010   1.0 %
Non-GAAP gross profit $ 160,936   67.8 % $ 110,052   69.5 % $ 445,187   69.4 % $ 337,373   69.5 %
 
Research and development expense $ 44,804 18.9 % $ 34,406 21.7 % $ 132,146 20.6 % $ 100,248 20.6 %
Stock-based compensation expense (6,521 ) (2.7 %) (4,788 ) (3.0 %) (18,451 ) (2.9 %) (14,389 ) (3.0 %)
Compensation Expense (a) (919 ) (0.4 %) (919 ) (0.6 %) (2,757 ) (0.4 %) (2,757 ) (0.6 %)
Acquired research and development   -   -     -   -     -   -     (2,000 ) (0.4 %)
Non-GAAP research and development expense $ 37,364   15.7 % $ 28,699   18.1 % $ 110,938   17.3 % $ 81,102   16.7 %
 
Selling, general and administrative expense $ 55,006 23.2 % $ 42,096 26.6 % $ 158,956 24.8 % $ 126,866 26.1 %
Stock-based compensation expense (9,943 ) (4.2 %) (8,528 ) (5.4 %) (29,090 ) (4.5 %) (25,931 ) (5.3 %)
Acquisition expense   -   -     -   -     (536 ) (0.1 %)   -   -  
Non-GAAP selling, general and administrative expense $ 45,063   19.0 % $ 33,568   21.2 % $ 129,330   20.2 % $ 100,935   20.8 %
 
GAAP operating profit $ 57,335 24.2 % $ 29,299 18.5 % $ 142,987 22.3 % $ 99,910 20.6 %
Stock-based compensation expense 17,960 7.6 % 14,572 9.2 % 51,804 8.1 % 44,334 9.1 %
Amortization of intangible assets 2,295 1.0 % 1,670 1.1 % 5,510 0.9 % 5,010 1.0 %
Compensation expense (a) 919 0.4 % 919 0.6 % 2,757 0.4 % 2,757 0.6 %
Acquired in-process research and development - - 1,325 0.8 % 1,325 0.2 % 1,325 0.3 %
Acquisition expense - - - - 536 0.1 % - -
Acquired research and development   -   -     -   -     -   -     2,000   0.4 %
Non-GAAP operating profit (b) $ 78,509   33.1 % $ 47,785   30.2 % $ 204,919   31.9 % $ 155,336   32.0 %
 
(a) Compensation expense represents contingent consideration for post-combination services associated with a prior acquisition. This expense is included within research and development on our statements of operations.
 
(b) Non-GAAP operating profit excludes the effect 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 our past and future core operating performance. Non-GAAP gross profit, included within the non-GAAP operating profit, is a key measure of the effectiveness and efficiency of our manufacturing processes, product mix and the average selling prices of our products and services.

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