gs: ILMN (IL/N): Lower rev. and capacity
constraints. Revised 2005 loss est. Maintain
2006-07 est.
52-Week Range US$14-4
YTD Price Change 37.24%
Market Cap US$493.2mn
Fiscal Year (ending in Dec)
2004 2005E 2006E
US$-0.27 US$-0.10 US$0.10
ILMN reported Q2 loss of $0.07, $0.03 & $0.01 worse than our est. & cons., respectively,
due to lower revenues with supply constraints. Expansion of manufacturing capacity may
take several quarters. Based on the loss of 2 constraints worth $8MM and supply
constraints we have revised our 2005 loss est. by $0.06 to $0.10 from $0.04. Our 2006-07
EPS estimates of $0.10 and $0.17, respectively, are unchanged. The negative news on
contracts & manufacturing may put pressure on the shares near term. We maintain our In-
Line rating based on broad technologies, rapid sales growth, & increasing dominance in
the genotyping mkt. Risks are weaker sales and dependence on financial mkts. Our
coverage view is Neutral.
ILMN expanded its genotyping product collection, one of the main drivers for the
company, with the shipping of its Sentrix Human-1 genotyping Beadchip. Furthermore,
the company?s collaboration with Invitrogen also entered the commercial phase with
Invitrogen assuming sales and marketing responsibility. ILMN expects the collaboration to
generate over $100MM within the next few years.
1. REVISED 2005 ESTIMATES. MAINTAIN 2006-07 YEARLY ESTIMATES
For 2005, we lowered our revenues by $5MM to $74MM to reflect the loss of two contracts (please
see section 2 of note for more details). We also reduced our operating expenses by $3MM to
$79MM. The net impact was a $0.06 revision for the worse to our 2005 loss estimate of $0.10 from
$0.04. We maintain our 2006-07 EPS estimates of $0.10 and $0.17, respectively.
Table 1: Revisions to quarterly 2005-07 estimates
Old New Change
Q1/05A (0.03) (0.03) 0.00 Q2/05A (0.04) (0.07) (0.03) Q3/05E (0.01) (0.04) (0.03) Q4/05E 0.03
0.03 0.00 2005E (0.04) (0.10) (0.06)
Old New Change
Q1/06E 0.02 0.02 0.00 Q2/06E 0.02 0.02 0.00 Q3/06E 0.03 0.03 0.00 Q4/06E 0.03 0.03 0.00
2006E 0.10 0.10 0.00
Old New Change
Q1/07E 0.04 0.04 0.00 Q2/07E 0.04 0.04 0.00 Q3/07E 0.04 0.04 0.00 Q4/07E 0.05 0.05 0.00
2007E 0.17 0.17 0.00 Source: company data and GS estimates
2. LOWERED GUIDANCE DUE TO LOSS OF CONTRACTS AND MANUFACTURING
CONSTRAINTS
Illumina lowered its 2005 financial guidance due to the loss of two significant contracts worth
approximately $8MM together. The loss was mainly due to two competitors combining efforts to
guarantee to a customer the generation of 100,000 SNPs (Single Nucleotide Polymorphisms) within
a shorter timeframe compared to what Illumina could offer.
Management also indicated that Q2/05 revenues were negatively impacted by manufacturing
constraints. Illumina has undertaken a program to expand its array manufacturing capacity which
will take several quarters to complete. Management does not expect the increased capacity will
require significant capital investment. In the near term though, we believe there could be some
temporary disruption to sales.
Table 2: 2005 guidance
($ in millions, except per share data) 2/21/2005 4/26/2005 7/27/2005
Income Statement:
Revenues $75-82 $75-82 $70- 76 Revenue growth (%) 48-62 48-62 38-50 Gross margins (%)
Low 70s Low 70s na System sales nearly double nearly double na R&D expense $28-30 $28-30
$28- 30 SG&A expense $31-33 $31-33 $27-29 EPS ($0.14) to ($0.01) ($0.14) to ($0.01) ($0.16)
to ($0.06) Shares ~40 ~40
Balance Sheet/Cashflow
Cash burn $15-18 $15-18 na Days Sales Outstanding na na 70-75
Source: Company data and GS estimates
3. SENTRIX MICROARRAY DELIVERS LOWER-COST SOLUTION FOR GENE
EXPRESSION ANALYSIS
In Q2/05, Illumina began shipping its Sentrix Human-1 genotyping Beadchip, part of its collection
of whole genome genotyping products. The Sentrix Human-1 can analyze over 100,000 SNPs per
sample. Illumina's pricing is $100-200 per sample versus over $400 for competitive products.
Management expects the market size for SNP genotyping, a major driver for the company, to grow
to $1B in 2010 from $250MM in 2005.
In Q1/05, Illumina started shipment of two Sentrix BeadChips that enable whole-genome expression
profiling of multiple samples on the same microarray. The Sentrix BeadChips should reduce the
cost of genome-wide expression analysis, with pricing as low as $100/sample. One chip (Sentrix
Human-6 BeadChip) has the capacity to analyze six discrete whole human genomes at once. The
other chip (Sentrix HumanRef-8 BeadChip) can compare up to 8 samples in parallel against 23,000
genes sequenced in a third party database, the RefSeq database, which is widely used in genetic
analysis. The company intends to release whole-genome expression products for the mouse and rat
in H2/05.
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. Illumina is using its
oligonucleotide sales force to sell its gene expression products, which should improve profitability.
4. OLIGONUCLEOTIDE COLLABORATION WITH INVITROGEN ENTERS COMMERCIAL
PHASE
In December 2004, ILMN entered into a collaboration with Invitrogen which will use its 350
salespeople to market and distribute ILMN's Oligator (oligonucleotide) DNA synthesis technology.
In early Q3/05, the collaboration entered the commercial phase with Invitrogen assuming
oligonucleotide sales and marketing responsibility. Illumina will be responsible for manufacturing
of plate-based and tube-based oligonucleotides. The collaboration with Invitrogen should expand
Illumina's Oligator synthesis technology into the tube-based oligonucleotide market, which is 4
times larger than the plate-based market that ILMN currently serves. Management expects the
collaboration to yield annual sales of $100M within the next few years. Profits will be shared
equally.
I, Maykin Ho, Ph.D., hereby certify that all of the views expressed in this report accurately |
