This story was originally published on Oct. 29.
In spite of reporting an uptick in revenues and posting a profit in the third quarter, Illumina last week said it was “disappointed“ by its performance because it fell short of analysts' estimates and its own guidance for the quarter.
Total revenues for the three months ended Sept. 27 rose 5 percent to $158.4 million from $150.3 million for the third quarter of 2008. The results were around $4 million below the low end of Illumina's guidance for the quarter and missed analysts' consensus estimate of $167.3 million.
The report caused a mass sell-off in Illumina stock, which had a closing price of $33.37 on Wednesday, the day after Illumina announed its earnings, down nearly 20 percent from Tuesday's closing price of $41.66. Shares of the firm's stock were trading at $32.84 on Tuesday afternoon.
CEO Jay Flatley said during an earnings call that Q3 was a "disappointing quarter for Illumina." He said that delays in orders from projects funded under the American Recovery and Reinvestment Act of 2009, a "continued decline" in demand for whole-genome genotyping arrays, and quality-control issues with the firm's sequencing reagent kits contributed to lower-than-expected revenues.
"During Q3, only very limited stimulus funds were released to customers and we recognized a non-material amount of revenue from these funds," Flatley said. "We estimated around $8 million to $10 million of orders we expected to receive were delayed. Additionally, we did not see the bulk of orders at quarter’s end, as is typical for an end of [the National Institutes of Health's] fiscal year."
According to Flatley, grant approval activity "accelerated significantly at the end of September, and the NIH pushed to meet its fiscal year and deadline to commit." He said that Illumina has received some orders this quarter related to the stimulus but "cannot predict" how much the firm will benefit from the orders in Q4 versus the first quarter of 2010.
"We have been through every single grant that's been awarded. We have analyzed, we've read every abstract, we've categorized them, we know which are arrays, which are sequencing, which ones have Illumina's name in them, which ones don't," Flatley said. He said that the timing of when the company receives those orders remains "ambiguous."
During Q3, Illumina posted consumables revenue of $87 million, down 4 percent from $90 million in Q3 '08, Chief Financial Officer Christian Henry said during the call. According to Henry, the firm's service revenues also declined during the quarter to $8 million from $10 million in Q3 '08 due to the "overall decline in GWA studies." He acknowledged that more of the firm's genotyping revenue has moved to its certified service providers as well.
Henry said that Illumina's custom and fixed-content arrays continued to "show significant growth" during the quarter. Custom array sales rose 20 percent year over year, and sales of fixed-content chips rose 15 compared to the same period of '08. Still, the array sales were "insufficient to offset declines" in its whole-genome genotyping array business.
Specifically, Flatley said that GWAS revenue was $7 million below the firm's internal forecast for Q3. He said that the shortfall between the firm's forecast array revenue and actual revenue was due to several factors.
One factor was delayed orders as customers waited to receive funding. Flatley said that Illumina expects to "recognize many of these orders within the next two quarters and does not believe that it lost any material business to competition in Q3."
Researchers are also waiting for new rare variation content from the 1000 Genomes Project to be incorporated in to new Illumina arrays, Flatley said. He said that based discussions with customers and the number of stimulus grants awarded for GWAS subsequent to the close of the quarter, the firm believes the GWAS market will "return to growth in 2010."
An independent analysis of NIH stimulus grants conducted by BioArray News this month identified 28 GWAS-related grants worth $42 million funded under ARRA (see BAN 10/13/2009). The Illumina platform was mentioned in several of the abstracts for the grants funded.
A third factor impacting GWAS-related revenues was a "significant" slowdown in demand by European researchers. Flatley said the "overall funding environment" in Europe has "lagged the US." But Henry predicted that as the GWAS market recovers in the US, the funding institutions in Europe will fund the next round of GWA studies.
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Illumina last week announced a roadmap for its Infinium whole-genome genotyping platform that could see the firm debut chips that enable researchers to look at up to 5 million variants per sample. The content for the new chips will be drawn from the 1000 Genomes Project as it becomes available, the firm said.
Illumina said that it intends to release an "intermediate" 2.5-million variant product that adds rare variants to the strong backbone of content currently on the HumanOmni1-Quad BeadChip, which launched in May. The company said the chips will launch next year.
Researchers who begin studies using Illumina’s whole-genome genotyping products will also have access to supplemental arrays that build from the Omni content to the full 5-million-variant content chip, Illumina said in a statement.
"This approach will enable customers to begin their rich GWA studies immediately ... and then purchase supplemental arrays," Flatley said.
Henry said that customers are likely to adopt the new chips based on "what their research program looks like" and "where they are in their phase of study." He said the firm is making the chips available in different releases because customers using the 2.5-million variant chip will have "an opportunity of making some very important discoveries early on, as opposed to waiting until the [5 million-marker chip] was fully available."
Reagent QC Problems
Another issue that hurt Illumina's Q3 revenues was related to the firm's reagent kits for its second-generation sequencer, the Genome Analyzer II. Flatley said that last month some customers reported sequencing performance issues that forced the firm to temporarily halt shipping its reagent kits, shaving between $6 million and $8 million off of expected Q3 sales. Moreover, Illumina's fourth-quarter revenue may be negatively impacted by as much as $15 million due to the defective kits, he said.
Flatley said that the root cause of the issue was a "small group of purchased materials" that were used in the production of the reagents, and that the company has now formulated its kits using new raw materials. He said the new kits have been testing well internally, and that customers believe their assays are now running according to specifications.
Additionally, Flatley said Illumina has enhanced quality control procedures to ensure that no additional defective kits are produced or shipped. "We removed the shipping hold, we've ramped manufacturing, and we expect to wrap up the clear backlog," he said. He said these moves helped to contain the problem, and that Illumina will provide customers with warranty replacement kits.
Q3 in Full
Illumina's third-quarter revenues rose 5 percent, and it swung from a loss to a profit.
The company reported total revenues of $158.4 million for the three-month period ended Sept. 27, compared to $150.3 million for the third quarter of 2008. The revenues came in around $4 million below the low end of Illumina's guidance for the quarter and missed analysts' consensus estimate of $167.3 million.
Consumables revenues were $87 million for the quarter compared to $90 million for the third quarter of 2008.
Instrument revenue for the quarter was $61 million compared to $47 million in the third quarter of 2008. That growth was due to sales of its Genome Analyzer next-generation sequencing instrument and its iScan instruments.
Services and other revenue was $8 million, down from $10 million in the comparable period the year before. The decline was due to the overall downward trend in GWA studies and the fact that more of the firm's genotyping services have moved to certified providers, Henry said.
Illumina posted net income of $17.1 million for the quarter compared to a net loss of $10.1 million for the third quarter of 2008. The results from 2008 include $24.7 million in charges related to Illumina's acquisition of Avantome.
The firm's R&D spending for the quarter increased 25 percent to $34.3 million from $27.6 million, while its SG&A spending rose 7 percent to $42.1 million from $39.4 million.
Illumina finished the quarter with $238.5 million in cash and cash equivalents.
The company said that it expects minimum Q4 revenues of $165 million, which implies full-year 2009 revenues of $651 million. This represents 3 percent year-over-year growth in the fourth quarter and 14 percent for the full year, but it is below analysts' current consensus estimate of $200.2 million for Q4 and $694.8 million for full-year 2009.