Illumina Reports Strong Financial Results for Second Quarter of Fiscal Year 2014

Raises Fiscal Year 2014 Guidance

SAN DIEGO--(BUSINESS WIRE)--Jul. 23, 2014-- Illumina, Inc. (NASDAQ:ILMN) today announced its financial results for the second quarter of 2014.

Second quarter 2014 results:

• Revenue of $448 million, a 29% increase compared to $346 million in the second quarter of 2013
• GAAP net income for the quarter of $47 million, or $0.31 per diluted share, compared to $36 million, or $0.26 per diluted share, for the second quarter of 2013
• Non-GAAP net income for the quarter of $85 million, or $0.57 per diluted share, compared to $60 million, or $0.43 per diluted share, for the second quarter of 2013 (see the table entitled “Itemized Reconciliation Between GAAP and Non-GAAP Net Income” for a reconciliation of these GAAP and non-GAAP financial measures)
• Cash flow from operations of $178 million and free cash flow of $155 million for the quarter

Gross margin in the second quarter of 2014 was 67.1% compared to 64.6% in the prior year period. Excluding the effect of non-cash charges associated with stock compensation, amortization of acquired intangible assets, and legal contingencies, non-GAAP gross margin was 70.9% for the second quarter of 2014 compared to 69.5% in the prior year period.

Research and development (R&D) expenses for the second quarter of 2014 were $83.0 million compared to $67.6 million in the prior year period. R&D expenses included $12.8 million and $9.0 million of non-cash stock compensation expense in the second quarters of 2014 and 2013, respectively. Excluding these charges and contingent compensation, R&D expenses as a percentage of revenue were 15.6% compared to 17.0% in the prior year period.

Selling, general and administrative (SG&A) expenses for the second quarter of 2014 were $114.6 million compared to $88.7 million in the prior year period. SG&A expenses included $20.8 million and $13.9 million of non-cash stock compensation expense in the second 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 20.5% compared to 20.3% in the prior year period.

Depreciation and amortization expenses were $27.5 million and capital expenditures were $23.3 million during the second quarter of 2014. The Company ended the second quarter of 2014 with $1.10 billion in cash, cash equivalents and short-term investments, compared to $1.17 billion as of December 29, 2013.

“We are witnessing tremendous interest in our products, which led to record financial results in the second quarter,” stated Jay Flatley, CEO. “With the most extensive sequencing portfolio available, we remain extremely well-positioned to develop and address the large and untapped market opportunities ahead of us.”

Updates since our last earnings release:

• Launched VeriSeq™ PGS, for preimplantation genetic screening of embryos using Illumina’s NextSeq™ 500 and MiSeq® sequencing systems
• Announced that the Sidra Medical and Research Center purchased a HiSeq X™ Ten sequencing system
• Entered into agreements with Biomnis, Genoma, and the Center for Human Genetics and Laboratory Diagnostics Martinsried to expand access for non-invasive prenatal testing across Europe
• Announced that Genomics England selected Illumina Cambridge Ltd, a subsidiary of Illumina Inc., as the preferred partner for the sequencing element of the 100,000 Genomes Project
• Announced that Berry Genomics chose Illumina’s NGS technology as the platform on which to secure Chinese Food and Drug Administration regulatory approval for clinical applications, including NIPT
• Acquired Myraqa, a regulatory and quality consulting firm specializing in IVD and companion diagnostics and appointed Mya Thomae as Vice President of Regulatory Affairs
• Further strengthened Illumina’s management team by appointing Tina Nova, Ph.D. as Senior Vice President and General Manager of Oncology
• Completed an offering of convertible senior notes with aggregate net proceeds of approximately $1,132 million and repurchased approximately $600 million aggregate principal amount of the 0.25% convertible senior notes due 2016
• Repurchased $72 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.

As a result of strong first half results, the Company has increased its full year 2014 guidance to 25% to 26% revenue growth, and its non-GAAP earnings per fully diluted share to $2.26 to $2.28.

Quarterly conference call information

The conference call will begin at 2:00 pm Pacific Time (5:00 pm Eastern Time) on Wednesday, July 23, 2014. Interested parties may listen to the call by dialing 888.679.8034 (passcode: 60693837), or if outside North America by dialing 1.617.213.4847 (passcode: 60693837). 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 6:00 pm Pacific Time (9:00 pm Eastern Time) on July 23, 2014 through July 30, 2014 by dialing 888.286.8010 (passcode: 85586770), or if outside North America by dialing 1.617.801.6888 (passcode: 85586770).

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 year 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.

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(a) Net cash provided by operating activities excludes excess tax benefit related to stock-based compensation of $77.3 million in the first half of 2014, of which $26.8 million was recorded in Q2, and $14.8 million in the first half of 2013, of which $9.5 million was recorded in Q2. 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.

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(a) Pro forma impact of weighted average shares includes the impact of double dilution associated with the accounting treatment of the Company’s outstanding convertible debt and the corresponding call option overlay.

(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) Headquarter relocation for the first half of 2014 consisted primarily of changes in estimated lease exit liability recorded in Q2 and accretion of interest expense on such lease exit liability recorded in the period. Headquarter relocation for the first half of 2013 included a Q2 gain on lease exit liability as a result of the Company entering into a sublease for a portion of its prior headquarters at a more favorable rate than previously estimated. Such gains were offset by accretion of interest expense on such lease exit liability recorded in the period.

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

(f) Acquisition related gain, net in Q2 2014 and first half of 2014 consisted primarily of $3.3 million in net gains from changes in fair value of contingent consideration, of which $1.5 million was recorded in Q2, offset by $2.1 million in transaction related costs for a prior period acquisition, of which $1.3 million was recorded in Q2. Acquisition related gain, net in Q2 2013 and first half of 2013 consisted of net gains from changes in fair value of contingent consideration, partially offset by transaction cost of $3.4 million recorded in Q1.

(g) The Company recorded $0.5 million in cost of goods sold in Q1 2013 for the amortization of inventory revaluation costs in conjunction with the acquisition of Verinata Health, Inc.

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

(i) 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.

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(a) 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.

(b) The Company recorded $0.5 million in cost of goods sold in Q1 2013 for the amortization of inventory revaluation costs in conjunction with the acquisition of Verinata Health, Inc.

(c) Non-GAAP gross profit, included within 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 (expense), 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.

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

(e) Headquarter relocation for the first half of 2014 consisted primarily of changes in estimated lease exit liability recorded in Q2 and accretion of interest expense on such lease exit liability recorded in the period. Headquarter relocation for the first half of 2013 included a Q2 gain on lease exit liability as a result of the Company entering into a sublease for a portion of its prior headquarters at a more favorable rate than previously estimated. Such gains were offset by accretion of interest expense on such lease exit liability recorded in the period.

(f) Acquisition related gain, net in Q2 2014 and first half of 2014 consisted primarily of $3.3 million in net gains from changes in fair value of contingent consideration, of which $1.5 million was recorded in Q2, offset by $2.1 million in transaction related costs for a prior period acquisition, of which $1.3 million was recorded in Q2. Acquisition related gain, net in Q2 2013 and first half of 2013 consisted of net gains from changes in fair value of contingent consideration, partially offset by transaction cost of $3.4 million recorded in Q1.

(g) 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, and the Company’s Form 10-Q for the fiscal quarter ended March 30, 2014. The Company assumes no obligation to update any forward-looking statements or information.

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(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) Cost method investment gain represents additional sales proceeds received from escrow funds related to a prior year sale of investment.

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

(e) Headquarter relocation represents changes in estimated lease exit liability recorded in Q2 and accretion of interest expense on lease exit liability.

Source: Illumina, Inc.

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