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Why Is Illumina (ILMN) Down 14.3% Since Last Earnings Report?

Zacks Equity Research

A month has gone by since the last earnings report for Illumina (ILMN). Shares have lost about 14.3% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Illumina due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Illumina Q2 Earnings Miss Estimates, Margins Decline

Illumina second-quarter 2020 adjusted earnings per share of 62 cents lagged the Zacks Consensus Estimate by 13.9%. Moreover, the bottom line plunged 54.1% from the year-ago quarter.

The adjustments include discrete tax expenses and net gains from mark-to-market adjustments on the company’s investments, primarily from its marketable equity securities.

Including one-time items, the company’s GAAP earnings per share was 32 cents, down by a huge margin of 83.9% year over year.

Revenues

In the quarter under review, Illumina’s revenues dropped 24.5% year over year to $633 million. The top line also lagged the Zacks Consensus Estimate by 6.8%.

The year-over-year decline in the revenues can be attributed to significant adverse impacts of the pandemic and subsequent business disruptions.

Segment Details

Sequencing Consumable revenues totaled $387 million in the reported quarter, down 22.1% year over year. Sequencing Instrument revenues were $88 million, down 31.8% from the year-ago figure. Sequencing revenues, a subsegment of the Service & Other segment, were $91 million, down 10.8% from the year-ago quarter.

In the second quarter, Illumina noted that Sequencing consumable run rates are gradually improving. Sequencing system placements have also increased sequentially, including higher NovaSeq shipments. Additionally, NextSeq 2000 shipments exceeded the company’s expectations. Illumina is upbeat about the steady progress of its population genomics initiatives.

Further, NovaSeq, NextSeq 2000, MiSeq, and MiniSeq shipments recorded sequential growth. Continued adoption of NextSeq 2000 across a broad range of clinical and research applications, including oncology testing and COVID-19 research, has been observed.

Margins

Adjusted gross margin (excluding amortization of acquired intangible assets) was 68.7% in the reported quarter, highlighting a contraction of 85 basis points (bps) year over year.

Research and development expenses declined 6.6% year over year to $155 million, and selling, general & administrative expenses fell 12.4% to $177 million. These dragged down operating costs by 9.8% to $332 million.

Adjusted operating income in the quarter was $103 million, down 52.1% from the year-ago income. Adjusted operating margin came in at 16.3%, reflecting a huge contraction of 939 bps year over year.

Financial Update

Illumina exited the second quarter of 2020 with cash and cash equivalents plus short-term investments of $3.27 billion compared with $3.33 million at the end of the first quarter. Long-term debt (including current portion) in the second quarter was $1.16 billion compared with $1.15 billion at the end of the first quarter.

The company repurchased $143 million of common stock in the quarter and $420 million is available for share repurchase under the company’s current plan.

Cumulative net cash provided by operating activities at the end of the second quarter was $521 million compared with $341 million a year ago.

Cumulative capital expenses incurred by the company at the end of the second quarter were $79 million compared with $103 million a year ago. Accordingly, cumulative free cash flow reported by the company at the end of the second quarter was $442 million, up from the year-ago free cash flow of $238 million.

2020 Guidance

Illumina noted that it is not in a position to estimate the extent of severity and duration of the outbreak as well as quantify the actual impact. Accordingly, it has not provided its financial guidance for 2020 revenues and earnings per share.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -55.69% due to these changes.

VGM Scores

Currently, Illumina has an average Growth Score of C, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Illumina has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.



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