Illumina's (NASDAQ: ILMN) planned acquisition of Pacific Biosciences of California ("PacBio") hit a snag recently with the decision by regulators in the United Kingdom to investigate the transaction. You can count on this being a major topic of discussion when Illumina provides its first-quarter update on Thursday, April 25, after the market closes.
However, when Illumina announces its Q1 results, investors will focus more on how well the gene-sequencing pioneer fared and the outlook for the future than they will on the pending PacBio acquisition. Here are three key things you can expect when Illumina reports its Q1 results.
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1. Lower system revenue
Probably the biggest thing to look for in Illumina's Q1 update is a significant decline in sequencing systems revenue. Illumina CFO Sam Samad said in the company's fourth-quarter conference call in January that instrument sales could slip by $50 million from the previous quarter's total of $159 million.
Should investors worry about this drop? Not at all. Illumina is coming off very strong sequencing system sales in both the third and fourth quarters. It's also not unusual for the company to post lower quarter-over-quarter system revenue early in the year.
2. Relatively flat consumables revenue
Illumina reported sequencing consumables revenue of $466 million in the fourth quarter. The company is likely to announce a similar result in its Q1 update. With consumables representing a huge source of revenue for Illumina now, some might wonder if flat quarter-over-quarter consumables revenue is a sign of a looming problem for the company. It isn't.
There are a couple of things to keep in mind. First, Illumina should still have solid double-digit-percentage year-over-year consumables revenue growth. Second, the company provided full-year guidance of consumables revenue growth of 20% or more. The key is that this growth will skew toward the second half of 2019.
In addition, Q1 consumables revenue will be a little lower than it ordinarily would have been due to some shifting into Q4. Sam Samad noted in Illumina's Q4 call that a $5 million stock order initially scheduled for the first quarter was accelerated into the fourth quarter.
3. Higher array revenue
One area in which you can expect higher revenue is with Illumina's arrays. The company thinks that array revenue will increase in the high-single-digit percentages from the fourth-quarter total of $132 million.
But the news isn't all positive on this front. Illumina anticipates slowing array growth in 2019, reflecting what Sam Samad called a "cautious view on the consumer opportunity." CEO Francis deSouza stated in the Q4 conference call that Illumina's team had talked to its direct-to-consumer customers, who expected their growth rates to moderate this year.
This should be only a temporary slowing, though. deSouza thinks that array revenue growth will accelerate in the future as health-focused DNA testing generates higher revenue. He also expects strong growth in the future outside the U.S., especially in Asia.
Overall picture and outlook
Wall Street analysts expect Illumina to report first-quarter revenue of $835.5 million with adjusted earnings per share of $1.36. It's likely that the company will post Q1 results very close to those estimates based on the different dynamics at play in the first quarter.
You could look at Illumina's first quarter as kind of a lull before more excitement kicks in later this year. The company should see a nice uptick in consumables revenue as major population genomics initiatives ramp up in the second half of 2019.
There's also a pronounced seasonality effect for Illumina's business. The company typically enjoys stronger sales overall as governments and companies wind up their fiscal years. Because of this, Illumina's first quarter is usually weaker than its quarters later in the year.
Also, remember that Illumina has always expected a multiyear rollout of its NovaSeq system. Seventy-five percent of current HiSeq customers haven't implemented NovaSeq yet, so the product is still in the very early stages of its launch.
The bottom line is that Illumina's prospects for 2019 continue to look strong. And the company's future is brighter than one quarter -- especially the first quarter -- might indicate.
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