Illumina (ILMN) reported first quarter 2012 EPS of 20 cents, which compared favorably with the year-ago quarter EPS of 16 cents. However, after adjusting for certain one-time items, EPS for the quarter came in at 36 cents, beating the Zacks Consensus Estimate of 32 cents, as well as the company’s guided range of 29-32 cents. The adjusted EPS was also 2.9% higher than the prior-year quarter level.

Revenues dipped 3% year over year to $273 million during the quarter. However, reported revenues were ahead of the Zacks Consensus Estimate of $267 million as well as the company’s guidance range of $250 -$260 million. The year-over-year drop in revenues was primarily due to a 4.2% decline in product revenues, partly offset by an 8.5% rise in service revenues. The company derives 93.7% of its total revenue from products while the remaining comes from services.

Product revenues are primarily attributed to the sale of Microarrays and DNA Sequencing products. Product revenues consist of sales proceeds from the Consumables and Instruments segment. Services and other revenues comprise genotyping and sequencing services as well as instrument maintenance contracts

During the quarter, the company introduced TruSeq Amplicon, for research use. It is a cancer panel for MiSeq system. The company also launched its new Cancer Analysis Service from the Illumina Genome Network (IGN). At the lowest sample input volume of any commercial whole human genome sequencing service (5ug), this Cancer Analysis Service is expected to provide accurate data for comprehensive cancer studies.

Also, during the earnings call, Illumina announced that a Korean sequencing services company Macrogen, Inc. has purchased its additional 10 HiSeq 2000 systems and two MiSeq systems with HiSeq 2500 upgrades. Moreover, the Broad Institute joined the Illumina Genome Network to offer its proprietary sample preparation processes for whole human genome sequencing.

The company’s gross margin came in at 66.4% during the reported quarter, down 20 basis points (bps) year over year. However, adjusted gross margin in the reported quarter was 69.0% (at par with the guidance) as opposed to 68.2% in the prior-year period.

The company’s selling, general and administrative (SG&A) expenses were up 3.5% to $68.0 million while research and development expenses decreased 2.7% to $48.8 million. Operating margin during the quarter contracted 200 bps to 23.5%.

Illumina exited the quarter with cash and cash equivalents and short-term investment of $1.27 billion, compared with $1.19 billion at the end of fiscal 2011. The company generated $65 million in cash flow from operations in the first quarter versus $89 million in the prior-year period.

Based on its solid cash balance, Illumina also announced a new share repurchase program worth up to $250 million.

Outlook

Illumina reaffirmed its fiscal 2012 guidance. In the year, revenues are expected to be in the range of $1.10 – $1.175 billion (annualized growth of 4% -11%). Adjusted gross margin is expected to be 70% for 2012. The company also expects adjusted EPS in the range of $1.40-$1.50.

On April 20 2012, Roche Holdings‘ (RHHBY) tender offer to acquire all outstanding shares of Illumina expired. Although Roche increased the bid price from $44.50 to $51.00, Illumina considered it to be grossly inadequate.

Presently, Illumina retains a short-term Zacks #2 Rank (Buy). Over the long term, we are ‘Neutral’ on Illumina.

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