Friday, November 2, 2012

Life Technologies 3rd Quarter Earnings Release

Life Technologies reported earnings on Thursday November 2nd, 2012 after the markets closed.  Revenues came in at $911 million, coming in above the high range they provided in July of $900-$910 million, while non-GAAP EPS came in $0.92. Analysts’ estimates were at $0.89 prior to the earnings release, and the stock reacted favorably after the release. Their beat on prior estimates were driven mainly by a significant increase in sales of the Ion Proton platform, continued strong growth in emerging markets, and lower R&D spending.

Excluding currency headwinds, they managed to stay inline with estimates with growth in the US and Europe, grew 10% in Asia-Pacific, and 4% in a flat Japanese economy. Gross margins in the third quarter came in at 65.6%, approximately 50 basis points lower than the same period in 2011. Operating margins were 28% in the third quarter representing a 1.4% decrease year over year, mainly due to unfavorable currency rates and greater investments in Asia-Pacific and their medical and diagnostics business.

Life continues to face unfavorable currency exchange rates and uncertainty in academic funding in US and Europe, especially with the upcoming election and the fiscal cliff coming up. In spite of this, management has been proactive in making sure that they are prepared if things go sour for academic funding. They have outlined a strategic share-repurchasing program and continue to look for ways to pull back on discretionary spending while still investing in up and coming markets and businesses, which should continue to offset these headwinds. In the case that the current favored candidate wins the election and congress reaches a deal, revenues could come in much higher for the fourth quarter than they expected.

In light of this, LIFE continues to increase revenues each quarter by utilizing both a product differentiation strategy and offering its new machines at a discount compared to their competitor Illumina, Inc. Currently, Illumina is the favored player in the up and coming genome sequencing market, because of slightly higher accuracy in their machine. Compared to Illumina, LIFE’s machine offers much lower test times at a lower cost, but still offering quality comparable to Illumina’s machine. We feel that these advantages, as well as a possible downturn in academic spending, will push customers to buy LIFE’s product over Illumina’s in the short to mid-term, since researchers will have to find good quality products at cheaper prices. Furthermore, LIFE is always updating and advancing the technology that will improve the accuracy of their machine.

The bull case for LIFE increasingly rests on their new machine, however, management expects that increased sales of their machine can further drive growth in their consumables business through existing clients. Through Ion Torrent, they can offer their broad array of services and tests that they are well known for. Management continues to invest in markets they believe will show significant growth and have raised the lower end of their year end EPS by $0.05 to $3.95-$4.00. 

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