GS: ILMN (IL/N): Q2 worse but rev strong. Profits
start in `05. ABI arbitration 12/04
52-Week Range US$10-3
YTD Price Change -19.15%
Market Cap US$189.1mn
ILMN reported a Q2 loss of $0.09, excluding a litigation related expense of $0.19MM,
$0.01 worse than our estimate due to lower than expected other income. In Q2/04, ILMN
installed its eighth BeadLab system and shipped twelve BeadStation systems. The demand
for the BeadStation systems has exceeded management expectations. Management
expects to break even in 2005. We maintain our 2004 loss estimate of $0.37 and our 2005
EPS of $0.10. ILMN has broad technologies, rapid sales growth, and increasing
dominance in the genotyping market. However, the outcome of the legal disputes on
patent infringement and breach of contract against ABI will not be known until 2005. We
maintain an In-Line rating. Risks to our view include weak demand from service
customers, slower than expected sales, dependence on financial markets and litigation
against ABI. Our coverage view remains Neutral.
1. 2004 MILESTONES AND STATUS
a. Sign 20 genotyping service contracts- 11 contracts signed through Q2/04
b. Ship 20 genotyping systems, including BeadLabs and BeadStations- As of 6/30/04, sold 17
systems (3 BeadLabs and 14 BeadStations)
c. Develop a minimum of 400,000 assays for the HapMap project - on track
d. Operating cash burn of less than $15MM- Cash reserves of $66MM as of 6/30/04
e. Ship whole-genome gene expression product- Expect to start shipping in Q3/04.
2. Q2 LOSS OF $0.10/SHARE, $0.01 WORSE
Total revenues of $11.5 million were $0.5MM higher than our forecast. Excluding $0.19MM of
interest expense related to a litigation judgment and $0.3MM in amortization of deferred stock,
total expenses were $14.5MM. Gross margin of 73% was better than our forecast of 70% due to
improved product mix. R&D expenses were lower than our estimate primarily due to positive
quarterly fluctuations. G&A expenses were higher than expected due to financing costs associated
with a stock offering (see below). Other income of ($0.2MM) was $0.6M lower than our forecast.
In May 2004, Illumina raised over $30MM through the sale of 4.5MM shares of common stock.
Therefore, basic shares outstanding of 35MM were 2MM higher than expected. The net loss,
excluding the litigation charge and amortization of deferred stock was $3MM or $0.09 per share.
3. MAINTAIN 2004 LOSS ESTIMATE AND 2005 EPS
Based on the strong sales trends, we have raised our 2004 & 2005 revenues slightly. We have also
increased the shares outstanding to reflect the recent private offering of 4.5MM shares. The net
impact is neutral to our 2004 loss estimate of $0.37 and 2005 EPS of $0.10. The quarterly and
yearly revisions to our estimates are as follows:
Table 1: Revisions to quarterly 2004 and 2005 estimates
Old New Change
===== ===== ======
Q1/04A (0.11) (0.11) 0.00
Q2/04A (0.09) (0.09) 0.00
Q3/04E (0.09) (0.08) 0.01
Q4/04E (0.09) (0.09) 0.00
2004E (0.37) (0.37) 0.00
Old New Change
===== ===== ======
Q1/05E 0.04 (0.03) (0.07)
Q2/05E 0.02 (0.01) (0.02)
Q3/05E 0.02 0.05 0.03
Q4/05E 0.03 0.09 0.06
2005E 0.10 0.10 0.00
Source: company data and Goldman Sachs estimates
Table 2: Revisions to yearly 2004 and 2005 estimates
2004 old * 2004 new * Change
========= ======== =======
Total revs 44.3 44.8 0.5
COGS 12.9 11.9 -0.9
R&D 21.9 21.8 0.0
SG&A 22.3 23.8 1.5
Net Income/loss -13.3 -13.9 -0.6
EPS ($/share) (0.37) (0.37) 0.00
Shares out 32.8 35.4 2.7
2005 old * 2005 new * Change
========= ======== =======
Total revs 67.0 67.5 0.5
COGS 20.1 17.8 -2.3
R&D 22.7 22.2 -0.6
SG&A 22.1 24.0 1.9
Net Income/loss 2.4 2.9 0.5
EPS ($/share) 0.10 0.10 0.00
Shares out 33.6 37.9 4.3
* in $MM except where indicated
Source: company data and GS estimates
4. NEW PRODUCT LAUNCHES ON TRACK
a. BeadStation 500G.
In Q4/03, Illumina launched BeadStation 500G, a benchtop instrument for genotype analysis by
individual and core laboratories. The BeadStation allows 200,000 genotypes per day when used
with the new Sentrix Arrays and cost $250,000 per system. During Q2/04, Illumina shipped twelve
BeadStations.
b. Gene expression product.
In January 2004, Illumina announced its intent to offer two whole genome gene expression chips
on its Sentrix BeadChip platform starting in mid- 2004. One chip has the capacity to analyze six
discrete whole human genomes at once, while the other can compare up to 8 samples in parallel
against the 22,000 genes sequenced in a third party database. In the gene expression market,
Illumina intends to target middle- market customers conducting experiments on 100-1,000 genes.
Relative to the SNP genotyping systems, the gene expression systems can be installed more quickly
thereby shortening the sales cycle versus the genotyping systems. In addition, Illumina is using its
oligonucleotide sales force to sell its gene expression products, which should improve profitability.
Illumina's gene expression products should be available in Q3/04.
5. ARBITRATION IN APPLIED BIOSYSTEM CASE TO START IN 12/04
In November 1999, Illumina and Applied Biosystems (ABI) agreed to jointly develop a SNP
genotyping system based on Illumina's BeadArray Technology and ABI's assay chemistry and
scanner technology. In July 2002, ABI indicated that the planned launch of the system in mid-2002
would be delayed a second time. The delay led to Illumina to launch its own SNP genotyping
system in July 2002. Subsequently, ABI sued Illumina for patent infringement and breach of the
1999 agreement. Illumina has countersued for breach of contract and other allegations. In
December 2003, the San Diego Superior Court ruled that the contract dispute be resolved by
arbitration. ABI is seeking cash damages of more than $60MM. Illumina management disclosed
that arbitration hearings are scheduled to begin in December 2004. Illumina expects the arbitration
hearing to last approximately 2 months. The decision of the arbitrator is final. However, in the
event of an adverse decision, Illumina intends to appeal the decision that allowed the case to be
brought to arbitration. The patent case is stayed pending resolution of the arbitration process.
I, Maykin Ho, Ph.D., hereby certify that all of the views expressed in this report accurately reflect
my personal views about the subject company or c |
