Why did Illumina report a net loss in 2007 after a profit in 2006?

The 2007 net loss of $278.4 million reflects a $303.4 million charge for acquired in-process research and development from the Solexa acquisition, which was written off in the first quarter of 2007, and a $54.5 million litigation settlement charge. The company also recorded $2.4 million of amortization of acquired intangibles. Excluding these items, the filing does not present a separate adjusted profit figure.

How much debt does Illumina have and what are its key terms?

Illumina issued $400.0 million principal amount of 0.625% Convertible Senior Notes due February 15, 2014 in February 2007, with net proceeds of approximately $390.3 million. The initial conversion price is about $43.66 per share. Upon conversion, the principal portion must be paid in cash. Holders may require repurchase upon a designated event, such as certain merger transactions.

What drove revenue growth in 2007?

Product revenue growth was driven primarily by increased instrument sales attributable to the Genome Analyzer, introduced in the first quarter of 2007, and by strong demand for Infinium products. Service and other revenue rose to $40.1 million from $28.8 million, mainly due to completed Infinium and iSelect custom SNP genotyping and sequencing service contracts. Revenue from outside the United States was $159.1 million, or 43% of total revenue.

What risks did the filing identify regarding Illumina's investments and liquidity?

The company held about $55.9 million of auction rate securities at February 19, 2008, all rated AAA. Auctions failed for $10.7 million of these in February 2008, so those holdings are not currently liquid, and the company could be required to hold them until redemption or maturity. The company believed it could liquidate its investment without significant loss within the next year and did not expect the lack of liquidity to affect its business plan.

What does Illumina expect for 2008 spending and capital needs?

Illumina expects research and development expenses and selling, general and administrative expenses to increase in absolute dollars in 2008. It anticipates about $25.0 million of capital expenditures in 2008 for facility and manufacturing expansion. Management stated that current cash and cash equivalents and income from operations should be sufficient to fund operating needs for at least the next 12 months.

ILMN 10-K FY2007 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed February 26, 2008. Cited figures are marked; the original filing is the authoritative source.

Illumina, Inc. (ILMN) reported a net loss of $278.4 million^a for fiscal 2007 (year ended December 30, 2007), compared with net income of $40.0 million in 2006, driven mainly by a $303.4 million acquired in-process research and development charge tied to the January 26, 2007 acquisition of Solexa, Inc. and a $54.5 million litigation settlement charge.

Total revenue rose to $366.8 million^b from $184.6 million, an increase of $182.2 million or 99%, with product revenue of $326.7 million (up 110%) driven by instrument sales of the Genome Analyzer and strong demand for Infinium products. Gross margin on product revenue declined to 63.3% from 67.1%, which the company attributed mainly to a shift in product mix toward instruments. The balance sheet strengthened substantially during the year.

Cash, cash equivalents and short-term investments were $386.1 million^c at year-end, up from $130.8 million, supported by $400.0 million of 0.625% Convertible Senior Notes due 2014 issued in February 2007. The company also repurchased 7.4 million shares for approximately $251.6 million. Stockholders' equity rose to $411.7 million, and the accumulated deficit stood at $383.0 million.

The company settled its Affymetrix patent litigation for $90.0 million^d, paid in January 2008, and it disclosed roughly $55.9 million of auction rate securities, of which auctions failed for $10.7 million in February 2008. Management expects continued growth in product revenue and research and development and selling, general and administrative expenses, and it expects capital expenditures of approximately $25.0 million in 2008.

The company stated that its current cash and operating income should fund operations for at least the next 12 months. Risk factors emphasize intense competition, manufacturing scale-up, integration of Solexa, and the dilution and accounting risks associated with the convertible notes.

02—Key points

Key Highlights

Total revenue of $366.8 million for 2007, up 99% from $184.6 million in 2006
Net loss of $278.4 million (EPS of $(5.14)), driven by a $303.4 million acquired IPR&D charge from the Solexa acquisition and a $54.5 million litigation settlement charge
Product revenue of $326.7 million, up 110%, with instruments rising to 37% of product revenue from 28%, largely due to the Genome Analyzer
Product gross margin fell to 63.3% from 67.1%, attributed mainly to product mix shift toward instruments
Cash, cash equivalents and short-term investments of $386.1 million, versus $130.8 million a year earlier, after issuing $400.0 million of 0.625% convertible notes due 2014
Repurchased 7.4 million shares of common stock for approximately $251.6 million during 2007
Agreed to a $90.0 million settlement with Affymetrix in January 2008 to resolve all outstanding patent litigation between the companies

03—Questions

Frequently Asked Questions

Why did Illumina report a net loss in 2007 after a profit in 2006?
The 2007 net loss of $278.4 million reflects a $303.4 million charge for acquired in-process research and development from the Solexa acquisition, which was written off in the first quarter of 2007, and a $54.5 million litigation settlement charge. The company also recorded $2.4 million of amortization of acquired intangibles. Excluding these items, the filing does not present a separate adjusted profit figure.
How much debt does Illumina have and what are its key terms?
Illumina issued $400.0 million principal amount of 0.625% Convertible Senior Notes due February 15, 2014 in February 2007, with net proceeds of approximately $390.3 million. The initial conversion price is about $43.66 per share. Upon conversion, the principal portion must be paid in cash. Holders may require repurchase upon a designated event, such as certain merger transactions.
What drove revenue growth in 2007?
Product revenue growth was driven primarily by increased instrument sales attributable to the Genome Analyzer, introduced in the first quarter of 2007, and by strong demand for Infinium products. Service and other revenue rose to $40.1 million from $28.8 million, mainly due to completed Infinium and iSelect custom SNP genotyping and sequencing service contracts. Revenue from outside the United States was $159.1 million, or 43% of total revenue.
What risks did the filing identify regarding Illumina's investments and liquidity?
The company held about $55.9 million of auction rate securities at February 19, 2008, all rated AAA. Auctions failed for $10.7 million of these in February 2008, so those holdings are not currently liquid, and the company could be required to hold them until redemption or maturity. The company believed it could liquidate its investment without significant loss within the next year and did not expect the lack of liquidity to affect its business plan.
What does Illumina expect for 2008 spending and capital needs?
Illumina expects research and development expenses and selling, general and administrative expenses to increase in absolute dollars in 2008. It anticipates about $25.0 million of capital expenditures in 2008 for facility and manufacturing expansion. Management stated that current cash and cash equivalents and income from operations should be sufficient to fund operating needs for at least the next 12 months.

04—Continue

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