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Illumina (ILMN) Q2 Earnings Miss Estimates, Margins Decline
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Illumina, Inc.’s (ILMN - Free Report) second-quarter 2020 adjusted earnings per share (EPS) 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 EPS 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.
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 EPS.
Our Take
Illumina exited the second with lower-than-expected results. Its dismal segmental performance due to pandemic-led business disruptions dragged down the overall top line. A year-over-year decline in research and development costs is disappointing as well. Decline in total array revenues is also concerning. The company’s inability to provide its full-year guidance raises apprehensions.
On a positive note, the gradually improving business conditions buoy optimism on the stock. Illumina’s launch of TruSight software to fast-track the identification of rare genetic diseases through whole genome sequencing and receipt of the FDA’s Emergency Use Authorization for its first sequencing-based COVID-19 diagnostic test, COVIDSeq, look encouraging.
Another notable launch by the company is that of the SARS-CoV-2 Data Toolkit, which is a new suite of data analysis tools and workflow functionality for researchers working on the virus using next-generation sequencing. The toolkit will make it easier to detect and identify the virus. Illumina also donated sequencing systems and related consumables to support the expansion of SARS-CoV-2 sequencing capabilities and capacity in up to 10 African countries. All these activities boost investors’ confidence.
Zacks Rank & Key Picks
Illumina currently carries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the broader medical space are West Pharmaceutical Services, Inc. (WST - Free Report) , Thermo Fisher Scientific Inc. (TMO - Free Report) and Hologic, Inc. (HOLX - Free Report) .
West Pharmaceutical reported second-quarter 2020 adjusted EPS of $1.25, beating the Zacks Consensus Estimate by 37.4%. Net revenues of $527.2 million outpaced the consensus estimate by 6.9%. It currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Thermo Fisher, a Zacks Rank #1 company, reported second-quarter 2020 adjusted EPS of $3.89, beating the Zacks Consensus Estimate by 45.7%. Revenues of $6.92 billion outpaced the consensus mark by 0.1%.
Hologic reported third-quarter fiscal 2020 adjusted EPS of 75 cents, surpassing the Zacks Consensus Estimate by a stupendous 108.3%. Net revenues of $822.9 million exceeded the Zacks Consensus Estimate by 37.1%. It currently sports a Zacks Rank #1.
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Illumina (ILMN) Q2 Earnings Miss Estimates, Margins Decline
Illumina, Inc.’s (ILMN - Free Report) second-quarter 2020 adjusted earnings per share (EPS) 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 EPS 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.
Illumina, Inc. Price, Consensus and EPS Surprise
Illumina, Inc. price-consensus-eps-surprise-chart | Illumina, Inc. Quote
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 EPS.
Our Take
Illumina exited the second with lower-than-expected results. Its dismal segmental performance due to pandemic-led business disruptions dragged down the overall top line. A year-over-year decline in research and development costs is disappointing as well. Decline in total array revenues is also concerning. The company’s inability to provide its full-year guidance raises apprehensions.
On a positive note, the gradually improving business conditions buoy optimism on the stock. Illumina’s launch of TruSight software to fast-track the identification of rare genetic diseases through whole genome sequencing and receipt of the FDA’s Emergency Use Authorization for its first sequencing-based COVID-19 diagnostic test, COVIDSeq, look encouraging.
Another notable launch by the company is that of the SARS-CoV-2 Data Toolkit, which is a new suite of data analysis tools and workflow functionality for researchers working on the virus using next-generation sequencing. The toolkit will make it easier to detect and identify the virus. Illumina also donated sequencing systems and related consumables to support the expansion of SARS-CoV-2 sequencing capabilities and capacity in up to 10 African countries. All these activities boost investors’ confidence.
Zacks Rank & Key Picks
Illumina currently carries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the broader medical space are West Pharmaceutical Services, Inc. (WST - Free Report) , Thermo Fisher Scientific Inc. (TMO - Free Report) and Hologic, Inc. (HOLX - Free Report) .
West Pharmaceutical reported second-quarter 2020 adjusted EPS of $1.25, beating the Zacks Consensus Estimate by 37.4%. Net revenues of $527.2 million outpaced the consensus estimate by 6.9%. It currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Thermo Fisher, a Zacks Rank #1 company, reported second-quarter 2020 adjusted EPS of $3.89, beating the Zacks Consensus Estimate by 45.7%. Revenues of $6.92 billion outpaced the consensus mark by 0.1%.
Hologic reported third-quarter fiscal 2020 adjusted EPS of 75 cents, surpassing the Zacks Consensus Estimate by a stupendous 108.3%. Net revenues of $822.9 million exceeded the Zacks Consensus Estimate by 37.1%. It currently sports a Zacks Rank #1.
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These 7 were selected because of their superior potential for immediate breakout.
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