conference date: January 28, 2:00 PM
for quarter ending: December 31, 2013 (fourth quarter, Q4)
Overview: Continuing strong revenue and earnings growth.
Basic data (GAAP):
Revenue was $335.4 million, up 25% from $309.3 million in the year-earlier quarter.
Net income was $80.7 million, up 12% from $71.9 million year-earlier.
Diluted EPS was $0.56, up 6% from $0.53 year-earlier.
For 2014 Illumina expects 15% to 17% revenue growth. Non-GAAP earnings, full diluted, are projected as between $2.00 and $2.06 per share. The assumed non-GAAP gross margin is near 70.0%; tax rate 29.5%, assuming renewal of R&D tax credit. Stock-based compensation expected near $128 million. Fully diluted weighted average shares 148 million assuming a stock price of $114, or 151 million at $144.
Per Jay Flatley, CEO: "The fourth quarter capped off a spectacular year for Illumina." New products will be introduced in early 2014 that will "redefine the trajectory of sequencing." New organization announced in October has been implemented.
Reached product diversification goal of 50% to non-traditional customers in the quarter.
Microarray revenue grew 10% y/y. Sequencing reflected NGS penetration, growing 32% from the year-earlier quarter. 37% sequencing consumables growth rate. 50% growth in sample prep shipments.
Instrument revenue in the quarter was up 11% y/y. Shipments were lower than orders as demand exceeded production capacity. Many current customers remain capacity constrained.
Product revenue was $336.4 million. Service and other revenue was $50.9 million.
Non-GAAP numbers: net income $65 million, up from $57 million year-earlier. Diluted EPS $0.45, up from $0.42 year-earlier. Gross margin was 71.4%, up from 68.5% year-earlier. 32.3% operating margin. Stock-based compensation expense excluded from non-GAAP numbers was $29.7 million.
Cash, equivalents and investment balance was $1.17 billion. Cash flow from operations was $126.8 million. Free cash flow was $99.5 million. Capital expenditures were $27 million. Inventory was lower sequentially due to production constraints.
GAP gross margin was 66.9%, up from 65.8% year-earlier.
GAAP Cost of revenue was $128.1 million, leaving gross profit of $259.2 million. Operating expenses were $185.5 million, consisting of: $76.7 million for research and development; $111.6 million for selling, general, and administrative; an acquisition related gain of $5.8 million; headquarters relocation $2.8 million. Leaving income from operations of $73.8 million. Other income was $46.6 million. Income tax provision $39.7 million.
Tax rate was higher than usual due to catch up on the Singapore facility.
Growth was strong both in MiSeq and HiSeq lines. MiSeq orders hit a record. HiSeq X Ten, introduced in the quarter, interest was exceptional. It is exclusively to run whole human genomes. Decode Genetics, now own by Amgen, has now purchased the 5th X Ten.
There is an insatiable demand for whole genome sequencing.
Full 2013 $1.42 billion revenue was up 24% over 2012.
HiSeq X Ten production ramp capability? We talked a lot to customers about it. We are evaluating the supply chain, particularly pattern flow cells. We think within one to two quarters we will have a better idea of our production capacity for the second half. We expect high utilization of of these $10 million systems. Customers need to be ready to deal with the IP for the massive information flow.
NextSeq, HiSeq vs. MiSeq positioning? Hits a space in the product line between MiSeq and HiSeq, so it should be incremental, but could cannibalize MiSeq customers coming up or HiSeq coming down.
Is this the time to get aggressive with trade-in programs for competitors' sequencers? Clearly we are broadening our product line and improving our competitive position. The trade-in programs were very successful last quarter. We are adding a trade-in program with NextSeq to address a portion of the market.
Genomic services business trend? We expect the growth rate to slow down, because some service providers will by the HiSeq X Ten. Depending on their markup, they may be able to underprice it; that would be our hope. We wanted to caution people to not extrapolate from the prior growth curve.
NeoPrep? Top six protocols will be put on it this year. That should cover 80% to 90% of the sample prep protocols our customers use. It is an instrument that does one task very well, which is why we can price it under $50,000. It will be very simple for customers to use. It will compete with more complicated sample prep systems from competitors.
Cancer panel details? We think there will be multiple subsegments of the oncology market. One will be the actionable genome panel. These would be reimbursed; we would get that approved by the FDA. A more complex panel would be for clinical trials by pharmaceutical companies.
Top line guidance color, is it conservative? We can see a slower start to 2014, possibly with Q1 being sequentially flat due to product transitions. Then an acceleration during the rest of the year. It is a transition year.
We believe NextSeq will sell in really high volumes, it hits a beautiful price point, especially for customers that are getting their first sequencer.
NeoPrep milestones for summer launch? We need to move all of the applications to it and optimize and test. We should start to ramp production in Q2. All the uncertainty is gone in the instrument itself.
Believes will do more consumer samples in 2014 than in 2013, but that includes closing a couple of large deals.
Does whole human genome sequencing replace something? We think today only 10% is whole genome, we think this will drive to a high percentage of whole genome, so it is incremental growth.
Oncology growth rates are almost meaningless now because we are off such low numbers. With better reimbursement and actionable panels the numbers should go up dramatically.
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