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Why Is Illumina (ILMN) Down 5% Since Last Earnings Report?

Zacks Equity Research

A month has gone by since the last earnings report for Illumina (ILMN). Shares have lost about 5% 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 drivers.

Illumina (ILMN) Q2 Earnings Beat Estimates

Illumina’ssecond-quarter 2019 adjusted earnings per share (EPS) of $1.35 surpassed the Zacks Consensus Estimate by 2.3%. However, the bottom line declined 5.6% from the year-ago quarter’s figure.

Including one-time items, the company reported EPS of $1.99, down 41.1% year over year.

Revenues

In the quarter under review, Illumina’s revenues rose 1% year over year to $838 million. The top line also surpassed the Zacks Consensus Estimate by 0.3%. The year-over-year growth can be attributed to strength across Illumina’s sequencing consumables portfolio, and the high and low throughput categories.

Segment Details

During the second quarter, HiSeq consumables declined due to customers’ transition to NovaSeq. Nevertheless, the overall high throughput consumables portfolio witnessed both sequential and year-over-year growth. NextSeq shipments witnessed sequential and year-over-year growth on the placement of a record number of NextSeq Dx Systems in the quarter.

While Product revenues increased 4.6% year over year to $704 million, Service and Other revenues declined 14.2% year over year to $134 million.

 Margins

Adjusted gross margin (excluding amortization of acquired intangible assets) was 69.6% in the reported quarter, contracting 79 bps year over year.

Research and development expenses rose 9.9% year over year to $166 million and selling, general & administrative expenses escalated 2.5% to $202 million. The operating margin came in at 25.7%, reflecting a contraction of 278 bps year over year.

Financial Update

Illumina exited the second quarter of 2019 with cash and cash equivalents plus short-term investments of $3.17 billion compared with $3.61 billion at the end of the first quarter. Year-to-date net cash provided by operating activities was $341 million compared with $550 million from the year-ago period.

2019 Guidance

Illumina has lowered its 2019 view. The company now expects revenue growth around 6% compared with the earlier projection of 13-14%. The Zacks Consensus Estimate for 2019 revenues stands at $3.57 billion. Adjusting for certain net specified items with respect to the full year, EPS is estimated to be $6-$6.10 compared with the earlier projection of $6.63-$6.73. The consensus mark for earnings is pegged at $6.34, which lies above the projected range. This outlook excludes any impact from the pending acquisition of Pacific Biosciences that is expected to conclude mid-2019.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -13.18% due to these changes.

VGM Scores

At this time, Illumina has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. Following the exact same course, 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 #4 (Sell). We expect a below average return from the stock in the next few months.



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