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Illumina Q2 Revenues Grow 1 Percent

NEW YORK – Illumina reported after the close of the market on Monday that its second quarter 2019 revenues grew 1 percent year over year.

For the three months ended June 30, 2019, Illumina recorded total revenues of $838 million compared to $830 million a year ago, driven by a 6 percent growth in sequencing sales that was offset by a 21 percent decline in microarray revenues.

The company's Q2 revenues came in above previously reported preliminary Q2 revenues of $835 million, but still fell short of the consensus Wall Street estimate of $866.2 million.

Illumina logged $704 million in product revenue, up 5 percent from $673 million in Q2 2018, and $134 million in service and other revenue, down 15 percent from $157 million a year ago.

Consumables, service, and other revenues represented 84 percent of total revenues in Q2. Sequencing consumables revenues grew 8 percent over Q2 2018 to $497 million, and array consumables were down 13 percent, primarily due to DTC. Sequencing services and other revenues were $102 million, down 4 percent year over year, while array services and other revenues were $32 million, down 37 percent year over year, due to decreased DTC services.

In particular, revenue from S4 flow cells exceeded $100 million for the first time, more than doubling from the year-ago quarter. HiSeq consumables revenue continued to decline as expected.

Also, revenue from S1 and S2 flow cells grew, despite price decreases, and shipments of the recently launched S Prime flow cell more than doubled in the quarter.

Instrument revenues accounted for 16 percent of total revenues in the quarter. Sequencing systems revenues increased 4 percent year over year, to $129 million, while array systems revenues were flat.

Nearly 30 percent of NovaSeq purchases came from existing HiSeq customers converting to the new system, and more than half of all NovaSeq orders in the second quarter came from customers with either no Illumina sequencers or with desktop sequencers only.

Illumina also saw growth in NextSeq sales during the second quarter and placed a record number of NextSeq Dx systems. Consumables sales for the NextSeq were within the firm's targeted range of $130,000 to $160,000 per system.

Shipments for the MiSeq and MiniSeq also grew during the quarter. MiSeq consumables sales, however, were slightly weaker than the expected $40,000 to $45,000 per system, whereas the MiniSeq had the targeted consumables pull-through of $20,000 to $25,000 per system.

"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. "In addition to continued sequencing consumables growth, we are encouraged by the sequential and year-over-year growth in shipments across our high-, mid-, and low-throughput sequencing system portfolio, including a record number of NextSeq Dx systems, reflecting the growing clinical opportunity."

During a conference call to discuss the Q2 results, DeSouza reiterated that the revenue shortfall was caused by a delay in the timing of population genomics initiatives, lower-than-expected revenues from the direct-to-consumer market, and lower-than-anticipated revenue from low- and mid-throughput sequencing systems.

Specifically, he said that several population genomics programs ramped up more slowly than projected, which delayed revenues in Q2 and in 2019 overall. One deal in particular was supposed to close in the second quarter but didn't because of the large number of stakeholders involved, he said, but that deal continues to move forward.

The "ongoing weakness" in the DTC market resulted in a significant shortfall in the array business, he said, as a result of which Illumina has lowered its full-year expectation "substantially" in this area.

Regarding the reasons for the decrease in revenue from low- and mid-throughput sequencing, he said that Illumina's analysis "found no consistent contributors" and "no single theme emerged" and the company does not think the decrease is "indicative of any fundamental changes in the business."

Overall, "with the exception of the transition in DTC, we do not see any structural or fundamental change in the genomics opportunity," deSouza said.

Illumina's Q2 net income was $296 million, or $1.99 per share, compared to $209 million, or $1.41 per share, in the year-ago period. On an adjusted basis, EPS was $1.35, beating analysts' consensus estimate for EPS of $1.34. Illumina noted that adjusted EPS excluded a $92 million unrealized gain from a strategic investment that completed an IPO.

Illumina's R&D expenses rose 10 percent to $166 million from $151 million, while its SG&A expenses grew about 3 percent to $202 million from $197 million.

The company finished the quarter with $1.94 billion in cash and cash equivalents and $1.23 billion in short-term investments.

As reported along with its preliminary earnings release, the company expects year-over-year revenue growth of 6 percent for FY 2019. The company also said today that it expects full-year adjusted EPS of $6.00 to $6.10. On average, analysts are expecting FY 2019 EPS of $6.38. For the third quarter, Illumina expects revenues to grow approximately 2 percent over Q3 of 2018.

Illumina still expects NovaSeq shipments in 2019 to be flat or slightly up over 2018, and pull-through per NovaSeq system to grow to more than $1 million per year.

Except for acquisition-related expenses incurred during the first half of 2019, which are reflected in adjusted guidance, the guidance excludes any impact from the pending acquisition of Pacific Biosciences, which Illumina now expects to close in Q4 2019. "We continue to work closely with regulators and expect the deal to close before the end of the year," deSouza said.

In an analyst note, Canaccord Genuity's Mark Massaro downgraded Illumina's rating from "buy" to "hold" and lowered the price target from $330 to $300 per share.

"Unfortunately, we have greater doubts as to when we will see a reacceleration of growth in its various units," Massaro wrote. "While we admire Illumina, we have increased concern about 1) what year [direct to consumer] genetic testing will return to real growth (if ever); 2) [Illumina's] ability to close more complex population genomics contracts; and 3) [Illumina's] ability to close its acquisition of [Pacific Biosystems] (now pushed to Q4), among other challenges."

Earlier this month, after the firm announced its preliminary second quarter revenues, Bank of America Merrill Lynch downgraded shares of Illumina and other analysts lowered price targets.

Illumina's shares were down approximately 1 percent, to $301.20, in mid-morning trading on the Nasdaq.