Illumina Q2 Results ‘Fell Short of Expectations,’ CEO Acknowledges

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[Source: Illumina]

Illumina acknowledged delivering disappointing results during the second quarter, reporting a 42% year-over-year increase in net income that largely reflected an investment gain, and only a 1% year-over-year increase in quarterly revenues.

GAAP net income during Q2 was $296 million, up from $209 million in the second three months of 2018. However, a $92 million unrealized gain from a strategic investment in an unnamed company that completed an IPO accounted for more than the difference between the two quarters.

Second-quarter revenue inched up to $838 million from $830 million in Q2 2018. Also disappointing was Illumina’s cash flow from operations of $143 million, compared to $295 million in the second quarter of 2018.

The Q2 2019 cash flow figure included an $84 million payment of the accreted debt discount related to the conversion of the company’s 2019 Notes. Free cash flow (cash flow from operations less capital expenditures) fell to $96 million from $218 million in the year-ago quarter.

“While our second quarter results clearly fell short of our expectations, we remain committed to leading innovation in genomics, and to enabling our global community of 6,300 customers who unlock more of the human genome each day in an effort to improve human health and, in many cases, save lives,” Illumina President and CEO Francis deSouza said in a statement.

During a conference call with analysts yesterday, deSouza attributed the disappointing Q2 results to three factors: the timing of population genomics initiatives; lower than expected direct-to-consumer (DTC) revenue; and lower than expected revenue associated with Illumina’s non-high throughput portfolio.

He said several population genomics programs ramped up more slowly than projected, delaying revenue in the second quarter—and project to keep doing so through the rest of 2019. Illumina will revise its forecasting to reflect slower ramp-up of revenues going forward, he added.

“Given the revenue shortfall, we’re looking carefully at operating expenses to ensure we are spending appropriately through the rest of 2019, but rest assured, we will always prioritize innovation,” deSouza said, according to a transcript published by Seeking Alpha.

DTC Weakness, NextSeq Record

deSouza also cited ongoing weakness in the DTC genetic testing market, primarily impacting array services, as well as revenue from low- and mid-throughput sequencing systems that in some cases met projections, and in most cases fell short of expectations.

He said Illumina placed a “record number” of NextSeq Dx systems during Q2, and mid-throughput sequencing consumables associated with NextSeq were the targeted range of $130,000 to $160,000. The MiniSeq generated revenue within the targeted range of $20,000 to $25,000. However, MiSeq consumable revenues were slightly below the company’s expected $40,000 to $45,000 per system.

The non-high throughput underperformance reflected a number of customer, program, or product-specific factors that routinely impact every quarter, he added, and did not reflect potential a long-term challenge.

“With the exception of the transition in DTC, we do not see any structural or fundamental change in the genomics opportunity,” deSouza told analysts. “We continue to believe that we are in the early stages of a thesis that will play out over the next decade or more. We’re confident that Illumina is well positioned to keep playing an important role in improving human health by helping our customers unlock the power of the genome.”

Asked about the planned $1.2 billion acquisition of Pacific Biosciences of California (PacBio), deSouza said Illumina was working with the U.K.’s Competition and Markets Authority (CMA) to answer questions raised in its in-depth investigation phase of its review of the deal. The CMA referred the deal to its Phase II review on June 27, stating that “on the information currently available to it, it is or may be the case that this merger has resulted or may be expected to result in a substantial lessening of competition within a market or markets in the United Kingdom.”

The Phase II review has a statutory deadline of December 11. Before then, deSouza said, Illumina expects a decision from the U.S. Federal Trade Commission, which is also reviewing the deal: “we would be looking for that decision in the next couple of months.”

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