High-flying Illumina (NASDAQ: ILMN) definitely hit a speed bump with its second-quarter results. Investors accustomed to double-digit sales and earnings growth weren't happy with the gene-sequencing pioneer's anemic 1% year-over-year revenue increase and its nearly 6% drop in adjusted earnings.
As you might expect, Illumina's executives had plenty to say about this lackluster performance in the company's Q2 conference call on Monday. Here are five things they stated that you'll really want to know.
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1. Direct-to-consumer market sluggishness
The biggest factor in Illumina's slowdown in Q2 was sluggishness in the direct-to-consumer (DTC) market. CEO Francis deSouza stated that "the ongoing weakness in the DTC market has resulted in a significant shortfall in our array business." He noted that Illumina has lowered its full-year guidance "substantially" to reflect the uncertainty surrounding the DTC market. Illumina CFO Sam Samad added that the company doesn't know at this point when the DTC market will return to growth.
That's the bad news. But deSouza said that Illumina remains "optimistic about the long-term DTC opportunity." He mentioned that the company estimates that fewer than 10% of Americans and a much lower amount worldwide have purchased a DTC test. He stressed, "We do not believe that the DTC market is saturated." DeSouza stated that Illumina "view[s] this as a transitory phase of growth which is allowing DTC companies to explore new product offerings that meet evolving consumer interests."
2. Population genomics learning curve
Another major factor behind Illumina's disappointing Q2 results was lower-than-expected revenue from population genomics initiatives. DeSouza noted that "this whole area of population genomics is brand new" and that Illumina is continuing to learn how these systems will roll out. The company has lowered its outlook for how much population genomics will add to revenue in 2019 because it's seeing how these efforts can take longer than initially expected.
Again, though, there's good news. DeSouza said that Illumina hasn't seen any "change to the level of commitment that governments and other stakeholders" have with respect to population genomics initiatives. He added that the company "continue[s] to see growth in terms of the number of countries that are interested and have announced initiatives." Illumina expects that population genomics will be "a bigger contributor in 2020 and going forward than it has been historically," according to deSouza.
3. NovaSeq strength
The DTC market weakness and population genomics project delays took center stage for Illumina in Q2, but the main story for the company in recent quarters has been the success of its NovaSeq system. And the story for NovaSeq continues to be a good one.
DeSouza said that "excluding the large [population genomics] deal that didn't close as expected, second-quarter NovaSeq shipments were ahead of expectations." NovaSeq consumables revenue is growing briskly. One area of growth for the system is in liquid biopsy. DeSouza stated that more than 10 NovaSeq systems placed in Q2 were associated with comprehensive genomic profiling (CGP) related to liquid biopsy.
4. Pending acquisition
Illumina's Q2 earnings press release stated that the company expects its acquisition of Pacific Biosciences of California (NASDAQ: PACB) will close in the fourth quarter of 2019. When asked what the "plan B" is if this deal doesn't close, neither deSouza nor Samad answered the question.
DeSouza did say, though, that Illumina is working to give the Competition and Markets Authority (CMA) in the United Kingdom all the information it needs to make a decision on the pending acquisition. He noted that the CMA has until mid-December to announce its decision but might not take that long. Illumina is also answering questions for the U.S. Federal Trade Commission (FTC). The company expects an FTC decision within the next couple of months.
5. Long-term growth opportunities
Francis deSouza emphasized that "it wouldn't be right to take this year's growth rate as sort of indicative of a new normal" for Illumina going forward. He talked about multiple long-term growth opportunities for the company.
DeSouza singled out cancer testing, in particular, stating that "it is increasingly clear that genomic information will transform the standard of care for oncology patients." As mentioned earlier, Illumina is just beginning to pick up momentum in sequencing for liquid biopsy, a potentially huge opportunity over the long run.
Rare and undiagnosed diseases is another big area for growth. Illumina estimates that less than 1% of the eligible patients in the U.S. have had their exome or genome sequenced, even though more than 150 million are covered for whole-exome sequencing when there's a reason to suspect a genetic disease.
DeSouza noted that noninvasive prenatal testing (NIPT) is also a key area where Illumina can grow. Illumina estimates that it has penetrated only 30% of the total NIPT market in the U.S. and China.
The company thinks that population genomics initiatives won't be a one-and-done effort. DeSouza specifically pointed to the U.K. population genomics effort, stating that it will "become a standard of care for the population going forward," adding, "that's how a lot of countries are thinking about it."
DeSouza declared, "We continue to believe that we are in the early stages of a thesis that will play out over the next decade or more." This view appears to be warranted based on Illumina's long-term growth opportunities. And it means that the disappointment in Q2 won't become, as deSouza put it, "a new normal" for Illumina.
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