Pacific Biosciences of California Struggles in the Second Quarter With Lower Sales

Pacific Biosciences of California (NASDAQ: PACB) didn't fare so well the last time it provided a quarterly update. After the genetic-sequencing company reported its first-quarter results in late April, its bigger-than-expected net loss rattled investors.

The company announced its second-quarter results after the market closed on Wednesday, and the news wasn't any better than earlier this year. Here are the highlights.

Pacific Biosciences of California results: The raw numbers


Q2 2017 

Q2 2016 

Year-Over-Year Change


 $20.1 million  $20.7 million


Net income from continuing operations

 ($25.5 million)  ($18.5 million)


Net loss per share

 ($0.26)  ($0.21) N/A

What happened with Pacific Biosciences of California this quarter?

There was a glimmer of good news in Pacific Biosciences' second-quarter results. Product revenue increased nearly 22% year over year to $16.5 million. However, there was a lot more bad news to offset this one positive result.

Service and other revenue fell slightly in the second quarter to just over $3.5 million. Pacific Biosciences' main problem, though, was that the improvement in product sales wasn't enough to overcome the loss of nearly $3.6 million in contract revenue recorded in the prior-year period.

Revenue wasn't the only issue for Pacific Biosciences, however. Cost of revenue jumped a whopping 19.5% year over year to $12.1 million. That caused the company's gross margin to drop from 51% in the prior-year period to less than 40% in the second quarter of this year. Again, the lost contract revenue from 2016 was the primary culprit: Pacific Biosciences enjoyed 100% gross margin on that revenue.

To make things even worse, the company spent considerably more in the second quarter compared with the prior-year period. Pacific Biosciences reported total operating expense of $32.4 million, up 12.8% over the same period in 2016.

The company added to its cash position, reporting $102.6 million in cash and cash equivalents as of the end of June, compared with $56.1 million at the end of the first quarter. That increase resulted from Pacific Biosciences' stock offering in June.

Looking forward 

Pacific Biosciences appears to have continued to feel the negative effects of the U.S. government clampdown on spending. This was the main reason the company cut its full-year outlook after its first-quarter performance. The company could keep struggling until the federal money begins flowing fully again.

There's also a big competitive challenge to watch. Illumina (NASDAQ: ILMN) launched its NovaSeq system earlier this year. The introduction of this new sequencing system has gone exceptionally well, with Illumina handily beating revenue and earnings expectations in the second quarter thanks to strong demand for NovaSeq.

Pacific Biosciences is working to double the throughput of its Sequel DNA sequencing system by the end of 2017. This improvement could help it compete more effectively against Illumina, but it could still be a tough battle.

Amidst all the negativity of its second-quarter results, Pacific Biosciences did give shareholders some reason to be encouraged. The company announced that Novogene inked a deal to buy 10 more Sequel systems. Novogene is the largest user of Pacific Biosciences' sequencing systems.

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Keith Speights has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Illumina. The Motley Fool recommends Pacific Biosciences of California. The Motley Fool has a disclosure policy.