A "shortfall" in its array business has forced Illumina to cut its second-quarter revenue guidance by between 4 percent and 7 percent, or to approximately $161 million from between $168 million and $173 million, as previously forecast.
The San Diego company said last week that the shortfall in the array business resulted from several factors: customers delaying the start of genome-wide association studies "in anticipation of new, rare variant content arrays;" reduced foundation funding in a few "key accounts;" and order delays related to stimulus funding under the American Recovery & Reinvestment Act.
The updated forecast represents a 15-percent increase over Q2 2008 revenue.
CEO Jay Flatley told investors during a call discussing the guidance revision that the "primary reason for this slowdown is customers waiting for new array content containing new variants derived from the 1000 Genomes Project [that will] support the next round of rich GWAS."
He added that the company "for the first time, saw reduced foundation funding in a few key accounts." According to Flatley, pricing in the array market during Q2 was "stable," and the firm's "competitive position was unchanged in the quarter."
Illumina previously warned investors of a temporary slowdown in array sales as customers await next-generation chips with rare variant content (see BAN 4/28/2009). But this announcement, made July 1, was the first time that the slowdown affected revenues enough to warrant a revision of guidance.
Leerink Swan last week lowered its valuation of Illumina stock while maintaining its overperform rating. Analyst Isaac Ro wrote in a research note that Leerink's "investment thesis" for Illumina "remains intact" due to a "healthy" sequencing business. Also, "should array volumes stabilize ... we continue to think FY10 will be another strong year for Illumina," he wrote.
Thomas Weisel Partners published a note last week that argued that the sluggish array sales and stimulus-related order delays could affect other life sciences firms like Life Technologies and Affymetrix.
During the quarter, Illumina introduced the first of what it expects to be a new generation of chips. The company last month launched its 4-million-feature HumanOmni1-Quad BeadChip, which includes content from the 1000 Genomes Project and other sources. Flatley called the chip at the time an "important flagship" and the "beginning of a family of arrays that we will put out there that will contain rare variant content."
He also predicted that it could take a "year to a year and a half" until the rare-variation content derived from projects like 1000 Genomes is available and for Illumina to design a "penultimate array that has the content that everyone will want" (see BAN 5/19/2009).
Illumina's updated forecast represents a 15-percent increase over Q2 2008 revenue of $140.2 million. Illumina also said it saw "significant sequential growth" in sequencing, despite the negative ARRA effects, though it was insufficient to offset the decline in the array business.
The company said it expects the stimulus funding to have a "significant positive impact" on its business in the fourth quarter and in 2010, but noted that the ARRA program has caused short-term order delays "as customers wait to learn whether and to what extent they will receive incremental funding."
Flatley said that many of Illumina's customers have been "actively writing grants during the first two quarters, and in selected situations, the program has caused order delays as customers wait to learn whether, and to what extent, they will receive stimulus funding."
He said this effect of the stimulus reduced the company's total revenue by approximately $10 million to 15 million during the past two quarters and "created uncertainty" in its third-quarter guidance.
Still, Illumina expects a stimulus-driven rebound in the fourth quarter and has "reset" its full-year 2009 revenue outlook to the original range it provided at the beginning of the year of $690 million to $720 million.
In April, the company raised its full-year guidance to a range of $700 million to $720 million, based on the strength of its first-quarter results, in which its revenues increased 36 percent year-over-year to $165.8 million.
Affymetrix, Illumina's main rival in the GWAS market, has also seen genotyping revenues decline in recent quarters due to the same slowdown that Illumina has cited. Also like Illumina, the company has forecast a second round of GWAS based on new rare-variant content that it expects to revive chip sales (see BAN 4/28/2009).