Illumina Inc. Q3 Weighed Down by Sluggish High-Throughput System Sales

By Markets Fool.com

Illumina Inc. (NASDAQ: ILMN)provided a sneak peek of its third-quarter results a few weeks ago. It wasn't pretty. Was there anything to make investors happier when the genomic-sequencing company announced its actual results after the market closed on Tuesday? Here are the highlights.

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Illumina results: The raw numbers

Metric

Q3 2016 Actuals

Q3 2015 Actuals

Growth (YOY)

Revenue

$607 million $550 million 10.4%

Net income from continuing operations

$129 million $118 million

9.3%

Earnings per diluted share

$0.87 $0.79

10.1%

Data source: Illumina.YOY = year over year.

What happened with Illumina this quarter?

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While low-double-digit percentage revenue growth isn't bad, it's not what Illumina shareholders have come to expect. The primary factor behind the sluggish growth was lowerhigh-throughput sequencing instrument sales.

Illumina's earnings grew less than revenue because of higher costs. In particular, research-and-development costs jumped nearly 27% from the prior-year period. This increase stemmed partially fromnon-cash stock compensation expense and from investing in the company's GRAIL and Helix initiatives.

Other highlights from Illumina's second quarter:

  • A partnership with FlowJo was announced. The two companies will work together todevelop and jointly market analysis software for single-cell next-generation sequencing data.
  • Illumina received orders for an additional 2 million samples of its Infinium Global Screening Array. These additions bring the total to more than 5 million samples ordered to date.
  • Philip W. Schiller was appointedto Illumina's board of directors. Schiller is currently senior vice president of worldwide marketing with Apple.
  • Christian Henry, executive vice president and chief commercial cfficer, left the company. Illumina appointed Mark VanOene to take the position on an interim basis.
  • Illumina's board of directors approved the repurchase ofup to$250 million in outstanding shares. Around$13 million of shares have already been bought back under this authorization.

What management had to say

Illumina CEO Francis deSouza provided some more information about the company's lower-than-expected sales:

While sequencing sample volume growth remains robust, our lowered revenue outlook reflects our updated expectations for HiSeq 2500, HiSeq 4000, and HiSeq X instrument purchases, as well as HiSeq 2500 reagent sales.Over the last few weeks it has become clear that certain academic funding practices were modified in the third quarter, limiting our customers' ability to make HiSeq X capital commitments. Further, HiSeq 2500 and 4000 demand has been impacted by a migration to NextSeq, for enhanced workflow flexibility and HiSeq X, given its beneficial pricing for whole genome sequencing.

Looking forward

Fourth-quarter revenue is expected to be close to third-quarter levels, with perhaps a small sequential increase. Illumina projects full-year 2016 earnings per diluted share will be between$3.27 and $3.32. Investors had been hoping for better, but the realities of the third quarter have lowered those expectations.

Based on deSouza's comments, it seems quite possible that some of Illumina's problems related to customers' capital spending patterns are temporary. The company also appears to be cannibalizing some of its high-throughput HiSeq sales with the NextSeq desktop sequencing system. That's not really unexpected.

Over the long run, Illumina should continue to experience solid growth. However, the stock's lofty valuation makes it subject to bumps along the way when any negative surprises occur.

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Keith Speights owns shares of Apple. The Motley Fool owns shares of and recommends Apple and Illumina. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.