Illumina Sequences Profits, Exceeding Q3 Guidance

Summary

• Non-GAAP diluted EPS was $0.77, up 71% y/y.
• Guidance for full 2014 was increased again.
• DNA sequencing machine demand shows no signs of abating.

Illumina (NASDAQ:ILMN), the leading maker of DNA sequencing equipment, reported spectacular third quarter results on Monday, October 20th.

Prior guidance had been that full year 2014 revenue would grow between 25% and 26% over 2013, with non-GAAP EPS between $2.26 and $2.28.

But reported Q3 revenue of $480.6 million was up 35% from Q3 2013. Non-GAAP EPS was $0.77, up 71% from $0.45 year-earlier.

As a result, Illumina raised full year 2014 guidance to revenue growth of 30% y/y and non-GAAP EPS between $2.63 and $2.65.

Apparently, demand for gene sequencing and the gene sequencers used to do it is in an explosive growth phase. The last time Illumina saw growth this fast was in Q2 2011. But that was growth on a smaller base, which was easier to achieve.

Revenue was $480.6 million, up 7% sequentially from $447.6 million and up 35% from $356.8 million in the year-earlier quarter. GAAP net income was $93.5 million, up 100% sequentially from $46.6 million, and up 198% from $31.4 million year-earlier. Diluted GAAP EPS was $0.63, up 103% sequentially from $0.31, and up 186% from $0.22 year-earlier.

On a non-GAAP basis, net income was $114 million, up 34% sequentially from $85 million, and up 81% from $63 million year-earlier. Diluted EPS was $0.77, up 35% sequentially from $0.57, and up 71% from $0.45 year-earlier. Sometimes I look askance at non-GAAP numbers, but in this case, the non-GAAP numbers lead to a more reasonable (lower) EPS growth rate.

Quarter	Revenue (millions)	Non-GAAP EPS
Q3 2013	$356.8	$0.45
Q4 2013	$335.4	$0.45
Q1 2014	$420.8	$0.53
Q2 2014	$447.6	$0.57
Q3 2014	$480.6	$0.77

Click to enlarge

The Equipment

Illumina dominates the DNA sequencing equipment industry with three lines of machines: HiSeq, NextSeq, and MiSeq. The MiSeq benchtop sequencer models are production oriented, bringing relatively low cost genome analysis to companies that need "focused power" to get work done, using the "industry's easiest workflow" whether for science applications or screening samples for specific genes. MiSeq demand is expected to continue to grow through at least 2015.

The NextSeq model provide "flexible power," to do research. It is capable of analyzing whole genomes. It is still in its rollout phase. For Q3, Illumina announced NextSeq is seeing repeat customers. It also said NextSeq production numbers have scaled high enough that margins have improved.

At the high end, Illumina offers HiSeq models 2500 and its latest introduction, X Ten. The HiSeq X Ten was production constrained earlier this year, and Illumina is still doing some rationing, and has a substantial backlog. There was some fear that the X Ten might cannibalize the 2500, but sales of the 2500 have been stable. The HiSeq X Ten is designed to handle the biggest jobs, where large numbers of humans are having their whole genomes sequenced.

All the machines are dependent on specialty chemicals to function. The recent introduction of an improved chemistry for the HiSeq 2500 is expected to help extend its sales life.

One interesting issue is ease of use. This is built into the MySeq models, but it was assumed that HiSeq X Ten users would be highly sophisticated and capable. However, Illumina found that some customers were having difficulty getting up to speed. Illumina is working on software that will make HiSeq easier to use.

The only area showing a lack of growth is arrays, which work on a different principle than sequencers. Micro Array revenue declined 2% y/y. However, some initiatives, particularly with agricultural users, might reverse that trend. For now the expectation is basically flat array revenue in 2015. Arrays tend to be used for lower-complexity testing, they are a more competitive area, and prices have been falling.

Illumina's finances are solid, with both cash and cash flow. The cash and investments balance ended at $1.27 billion, but there was $1 billion in long-term debt on the balance sheet. Cash flow from operations was $146 million.

One Caveat

The only real caveat to investing in Illumina is that the price to earnings ratio, P/E, is high, over 100, as is normal for a company that is rapidly growing earnings. It is not a problem if earnings keep growing rapidly, but if there is a flattening that lasts more than a couple of quarters, there can be P/E deflation, resulting in a drop in the stock price.

But investors were quite happy with Q3 results and full year 2014 guidance. After closing at $164.47 before results were announced, the stock was up over 9% by late-afternoon on Tuesday to $179.79 per share, off a day-high of $180.80. That still does not get the stock back to the 52-week high of $185.00 per share reached on July 24, 2015.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.