Your Cheat Sheet to Illumina’s (ILMN) 2Q Earnings Report

A DNA double helix.Yesterday after the bell, Illumina (Nasdaq: ILMN), a leader in genome analysis and sequencing, and a recent Tech Cheat Sheet focus stock, reported a blockbuster quarter: EPS checked in at $0.26/share against estimates of $0.23/share on revenues of $212 million, comfortably above the $194 million estimate.  For the 2010 fiscal year, management projects earnings per share of $0.93-$1.00, raising the bottom line of their estimate, and revenues of $852 million against the previously projected $825 million.

2nd quarter revenues were strong on account of the rapid uptake of Illumina’s HiSeq2000, the first device which can do both genetic arrays and sequencing.  While instrument placements do help revenues and earnings in the short run, the real gains come down the road as “consumable pull through” and maintenance contracts contribute handsomely to the company’s profit margins.  This bodes particularly well for Illumina down the road, as “getting instruments placed is the key to drive big growth.”

In addition to the trifecta of an EPS, revenue and guidance beat, Illumina announced a $200 million share buyback of the company’s shares.  During their conference call, Christian Henry, the company’s Senior Vice President, proclaimed that the “buyback is reflective of the confidence that management and the Board have in [Illumina’s] ability to continue to generate free cash flow.”  For the second quarter, the company generated $62 million in free cash flow, compared to $25 million in the same quarter a year ago.

While the buyback is demonstrative of managements ability and desire to generate return for shareholders, they are also investing in boosting Illumina’s industry-leading product line.  Along with its earnings release, the company announced that during the course of the 2nd quarter, they have acquired Helixis and launched the Eco system, in a combined effort to offer potential customers much more cost-friendly access to genetic sequencing.  At its present pricing structure, Illumina believes that they are “moving much closer to the integration of whole-genome sequence data into the management of one’s health.”

During the last quarter, Illumina’s stock held up exceptionally well as equity markets experienced significant turmoil. In recent days however, the stock pulled in as the market rallied on news that the FDA had approached Illumina (among other sequencing companies) about regulating direct marketing of genotyping.  During their conference call, management professed its openness and ability to work within the framework of the FDA’s guidance, and made clear that revenue from this market is “currently immaterial.”

Following its earnings report, share prices have tested recent resistance at the $45 level.

Illumina looks to break recent resistance in the $45 area.

Disclosure: Long shares of ILMN