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Illumina Posts 1 Percent Decline in Q3 Revenues, Plans Restructuring

This article has been updated to include additional information from Illumina's conference call.

NEW YORK (GenomeWeb News) – Illumina today reported that its third-quarter revenues fell 1 percent year over year, in line with the preliminary figure it offered earlier in the month, and it will undertake a restructuring.

The San Diego-based genetic analysis products firm brought in total revenues of $235.5 million for the three-month period ended Oct. 2 compared to $237.3 million for Q3 2010. Its product revenues were $220.3 million, down from $224.7 million, and its service and other revenues increased to $15.2 million from $12.6 million.

Instrument revenues were $72 million for the quarter, down 18 percent year over year and 33 percent sequentially, Illumina CFO Christian Henry noted on a conference call early Tuesday. Henry said instrument revenues faced a tough year-over-year comparison due to an upgrade program last year for the firm's Genome Analyzer, which "drove significant instrument volume" in Q3 2010, which was not repeated in the most recent quarter.

"The sequential decline was the result of a significant decrease in upgrade of Genome Analyzers to HiSeq systems, and what we believe to be an excess of sequencing capacity in the market resulting from the launch of our V3 sequencing chemistry," Henry added.

Illumina's consumables revenues were $145 million for the quarter, up from $133 million in Q3 2010.

Microarray revenues were down 9 percent year over year, which the firm attributed to a tough comparison with Q3 2010 due to last year's launch of its Omni 2.5 Quad microarray. Its microarray instruments sales, however, increased year over year, driven by shipments of the HiScan and HiScan SQ systems, Illumina President and CEO Jay Flatley added on the call.

Illumina had announced earlier in October that the decline in year-over-year revenues was due to uncertainty in funding in the US and Europe, which resulted in purchasing delays of both instruments and consumables, especially among large volume centers.

It said at the time that the launch of its V3 sequencing kits during the second quarter also resulted in a decrease in consumables revenues per instrument due to reduced runs, though Illumina said, "This impact will diminish as customers scale and gain access to greater numbers of samples." Additionally, the firm noted that the number of upgrades to the HiSeq high-throughput sequencing platform from the Genome Analyzer systems was lower than expected, and among Genome Analyzer users reagent use experienced a "significant drop."

The announcement caused Illumina's shares to tumble more than 30 percent and led to a slew of revised estimates from investment banks covering the firm.

Flatley cited a confluence of factors that contributed to the disappointing results. "In the US the combination of the reduced 2011 NIH budget, the potential 1 percent reduction to [the National Cancer Institute and the National Human Genome Research Institute] for 2012, the recent 20 percent reduction to select genome centers for 2012, the roll-off of stimulus, the one-year no-penalty extension of ARRA grants, and uncertainty regarding future budgets were in combination a major impact on our incoming order rate," he said.

"What cannot be determined at this point is the relative contribution of these factors or how 2012 or 2013 NIH budgets will ultimately resolve," he added. However, Flatley said, "Overall, we continue to believe that funding allocations globally are increasingly favoring genetic analysis tools, and in particular next-generation sequencing."

Flatley said that the funding issues and the effects of the V3 kit upgrade were "the key contributors to an unprecedented slowdown in purchasing during our historically strongest quarter. We did not see the historical pattern of large orders at the end of September, when the government fiscal year ends."

Despite the difficulties for the quarter, Flatley said that the firm's market share "is stronger in our core markets than it's ever been."

He added that the Illumina Genome Network, the firm's whole human genome sequencing services business, is gaining traction and received several large orders during the quarter including over 500 genomes from Stanford university and more than 450 genomes from a large biotech company.

Illumina posted net income of $20.2 million, or $.15 per share, compared to $35.4 million, or $.24 per share, for the third quarter of 2010. On a non-GAAP basis, its net income was $29.7 million, or $.22 per share, down from $40.7 million, or $.30 per share. Analysts had expected non-GAAP EPS of $.23 for Q3 2011.

The decline in profit was the result of increased spending for the quarter. Illumina's R&D spending increased roughly 13 percent to $50.4 million from $44.8 million, and its SG&A expenses rose 20 percent to $66 million from $55 million.

Illumina finished the quarter with $229.8 million in cash and cash equivalents, and $902.3 million short-term investments.

Henry said that the firm expects to report fourth-quarter revenues that exceed those of the third quarter, but the firm is declining to provide any specific numbers given the uncertainty surrounding government funding of research.

In addition, due to that uncertainty, Illumina is undertaking a restructuring to "better align the company's organization and cost structure," said Henry. Illumina expects to take a restructuring charge of $15 million to $17 million, the majority of which will be recorded in the fourth quarter. While the firm is expected to provide further details on the restructuring at a later time, officials said that the company will form a business unit focused on clinical markets.

In early Tuesday afternoon trade on the Nasdaq, shares of Illumina were up 10 percent at $31.46.