Illumina Reports Financial Results for Second Quarter of Fiscal Year 2013

Raises Fiscal Year 2013 Guidance

SAN DIEGO--(BUSINESS WIRE)--Jul. 23, 2013-- Illumina, Inc. (NASDAQ:ILMN) today announced its financial results for the second quarter of 2013.

Second quarter 2013 results:

• Revenue of $346 million, a 23% increase compared to $281 million in the second quarter of 2012
• GAAP net income for the quarter of $36 million, or $0.26 per diluted share, compared to $23 million, or $0.18 per diluted share, for the second quarter of 2012
• Non-GAAP net income for the quarter of $60 million, or $0.43 per diluted share, compared to $53 million, or $0.40 per diluted share, for the second quarter of 2012 (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 $89 million and free cash flow of $77 million for the quarter

Gross margin in the second quarter of 2013 was 64.6% compared to 68.8% 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 69.5% for the second quarter of 2013 compared to 70.9% in the prior year period.

Research and development (R&D) expenses for the second quarter of 2013 were $67.6 million compared to $71.2 million in the second quarter of 2012. R&D expenses included $9.0 million and $7.7 million of non-cash stock compensation expense in the second quarters of 2013 and 2012, respectively. Excluding these charges, contingent compensation, and impairment of in-process R&D, R&D expenses as a percentage of revenue were 17.0% compared to 14.7% in the prior year period.

Selling, general and administrative (SG&A) expenses for the second quarter of 2013 were $88.7 million compared to $68.5 million for the second quarter of 2012. SG&A expenses included $13.9 million and $14.3 million of non-cash stock compensation expense in the second quarters of 2013 and 2012, respectively. Excluding these charges, contingent compensation, and amortization of acquired intangible assets, SG&A expenses as a percentage of revenue were 20.3% compared to 19.4% in the prior year period.

Depreciation and amortization expenses were $23.3 million and capital expenditures were $11.5 million during the second quarter of 2013. The Company ended the second quarter of 2013 with $1.13 billion in cash, cash equivalents and short-term investments, compared to $1.35 billion as of December 30, 2012.

“We are very pleased with our operational execution for the first half of 2013 and the resulting record financial performance,” said Illumina’s President and Chief Executive Officer Jay Flatley. “Our business demonstrated strong trends globally and our 2013 strategic initiatives for robust long-term growth are progressing as planned. As a result we are raising our expectations for 2013 financial performance.”

Updates since our last earnings release:

• Launched the full commercial availability of BaseSpace® Apps, which includes an e-commerce system that allows customers to quickly and easily purchase Illumina and third-party bioinformatics applications
• Applied the CE mark to the MiSeqDx™ Cystic Fibrosis System
• Published clinical laboratory performance data for the verifi® prenatal test
• Announced an agreement with Teva Pharmaceutical Industries and the MOR Institute for Medical Data to commercialize the verifi® prenatal test in Israel
• Launched Phasing Analysis Service for Human Whole-Genome Sequencing empowering gene mapping studies which provide a more comprehensive view of genomic variation
• Announced that HistoGenetics, a leader in high-resolution sequencing-based human leukocyte antigen (HLA) testing services, selected the MiSeq system for use in its CLIA laboratory
• Acquired Advanced Liquid Logic, a leading provider of liquid handling solutions
• Announced collaborations with leading providers of liquid handling robotic platforms to develop automation methods for TruSeq® and Nextera® Sample Preparation kits
• Repurchased $25 million of common stock under our previously announced share repurchase program
• Retired 3 million warrants for $125 million on July 18, 2013

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.

For fiscal 2013 the Company is projecting approximately 20% revenue growth and non-GAAP earnings per fully diluted share of $1.68 to $1.72, including the impact of the Verinata and Advanced Liquid Logic acquisitions. These projections assume full year non-GAAP gross margin of approximately 69.5%, a pro forma tax rate of approximately 30% and stock compensation expense of approximately $105 million. Full-year weighted average diluted shares outstanding, for the measurement of pro forma amounts, is expected to be approximately 138 million shares assuming the current stock price.

Quarterly conference call information

The conference call will begin at 2:00 pm Pacific Time (5:00 pm Eastern Time) on Tuesday, July 23, 2013. Interested parties may listen to the call by dialing 888.680.0879 (passcode: 22024538), or if outside North America by dialing 1.617.213.4856 (passcode: 22024538). 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 4:00 pm Pacific Time (7:00 pm Eastern Time) on July 23, 2013 through July 30, 2013 by dialing 888.286.8010 (passcode: 66585327), or if outside North America by dialing 1.617.801.6888 (passcode: 66585327).

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 expense related to acquired intangible assets, non-cash interest expense associated with the company's convertible debt instruments that may be settled in cash, costs related to the unsolicited tender offer for the company's stock, 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 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 develop and commercialize further our sequencing, array, PCR, and consumables technologies and to deploy new products and applications, and expand the markets, for our technology platforms; (ii) our ability to manufacture robust instrumentation and consumables; (iii) our expectations and beliefs regarding future conduct and growth of the business and the markets in which we operate; (iv) challenges inherent in developing, manufacturing, and launching new products and services; and (v) our ability to maintain our revenue and profitability during periods of research funding reduction or uncertainty and adverse economic and business conditions, including as a result of slowing economic growth in the United States or worldwide, 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.

(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.

(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) Legal contingencies during the current year primarily represent charges recorded based on an amended 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, Illumina filed its post-trial motion on July 17, 2013 asking the court to vacate the amended judgment and to enter judgment in our favor or, alternatively, to grant a new trial. If the post-trial motion is unsuccessful, the Company plans to file an appeal challenging the adverse verdict.

(c) Non-cash interest expense is calculated in accordance with the authoritative accounting guidance for convertible debt instruments that may be settled in cash.

(d) Acquisition related (gain) expense, net in Q2 2013 and first half of 2013 includes net changes in fair value of contingent consideration and transaction costs of $3.4 million recorded in Q1 2013. Acquisition related (gain) expense, net in Q2 2012 and first half of 2012 consisted of changes in fair value of contingent consideration.

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

(f) Headquarter relocation for the first half of 2013 consisted of a Q2 gain on lease exit liability as a result of the Company entering into a sublease at a more favorable rate than previously estimated, partially offset by accretion of interest expense on such lease exit liability recorded in the period. Headquarter relocation expense in Q2 2012 and first half of 2012 consisted primarily of the accretion of interest expense on lease exit liability, double rent expense during the transition to the new headquarters, and moving costs.

(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 increase to GAAP tax expense related to the non-GAAP adjustments listed above.

(i) 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 the Company’s 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 past and future core operating performance.

(a) Legal contingencies during the current year primarily represent charges recorded based on an amended 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, Illumina filed its post-trial motion on July 17, 2013 asking the court to vacate the amended judgment and to enter judgment in our favor or, alternatively, to grant a new trial. If the post-trial motion is unsuccessful, the Company plans to file an appeal challenging the adverse verdict.

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

(d) Acquisition related (gain) expense, net in Q2 2013 and first half of 2013 includes changes in fair value of contingent consideration and transaction costs of $3.4 million recorded in Q1 2013. Acquisition related (gain) expense, net in Q2 2012 and first half of 2012 consisted of changes in fair value of contingent consideration.

(e) Headquarter relocation for the first half of 2013 consisted of a Q2 gain on lease exit liability as a result of the Company entering into a sublease at a more favorable rate than previously estimated, partially offset by accretion of interest expense on such lease exit liability recorded in the period. Headquarter relocation expense in Q2 2012 and first half of 2012 consisted primarily of the accretion of interest expense on lease exit liability, double rent expense during the transition to the new headquarters, and moving costs.

(f) Non-GAAP operating profit, and non-GAAP other (expense) income, 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. Non-GAAP gross profit, included within the 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.

(g) Non-cash interest expense is calculated in accordance with the authoritative accounting guidance for convertible debt instruments that may be settled in cash.

(a) Legal contingencies primarily represent charges recorded based on an amended 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, Illumina filed its post-trial motion on July 17, 2013 asking the court to vacate the amended judgment and to enter judgment in our favor or, alternatively, to grant a new trial. If the post-trial motion is unsuccessful, the Company plans to file an appeal challenging the adverse verdict.

(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) Contingent compensation expense represents contingent consideration for post-combination services associated with acquisitions.

(d) Acquisition related expense, net includes net changes in fair value of contingent consideration and transaction costs.

Source: Illumina, Inc.

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