Shares of Illumina (ILMN) dropped in morning trading after the biotechnology company reported weak preliminary revenue for its second fiscal quarter and lowered its fiscal year revenue guidance as a result. Following the disappointing report, one analyst double downgraded the stock, while others said they viewed weakness as a buying opportunity.
WEAK PREANNOUNCEMENT, GUIDANCE CUT OVER 50%: Illumina on Thursday said it expects to report second quarter revenue of approximately $835M, well below analyts' consensus estimates of $888.18M. Illumina said it now expects revenue to grow about 6% this fiscal year, far below its previous expectation for about 13%-14% revenue growth in FY19. Analysts expect the company to report FY19 revenue of $3.77B.
In a statement, the company said its Q2 results were impacted by lower than expected revenue associated with population genomics initiatives, including a sizeable sequencing systems and consumables purchase that did not close as expected in the second half of June. Illumina said it now expects the purchase to close "later in 2019." Additionally, Illumina pointed to lower than expected revenue associated with ongoing weakness in the direct-to-consumer market, and lower than expected revenue associated with its non-high-throughput sequencing systems and consumables. While softer than anticipated, Illumina said NextSeq system and consumables shipments grew both sequentially and year-over-year, and average pull-through per NextSeq system was within Illumina’s target range.
President and Chief Executive Officer Francis deSouza commented that the company is "obviously disappointed with our second quarter financial results." He added that "Our preliminary analysis suggests that these challenges are transitory and do not reflect a macro change to the fundamentals of our business." Additionally, he said that "Despite our shortfall this quarter, we remain as enthusiastic about the long-term growth prospects for our markets as we have ever been, and are committed to setting the industry’s bar for consistency and execution in the dynamic and rapidly growing world of genomics."
Illumina is expected to report its full Q2 results on July 29.
ANALYST COMMENTARY: BofA Merrill Lynch analyst Derik de Bruin double downgraded Illumina to Underperform from Buy and lowered his price target for the shares to $290 from $355. The analyst said views the Q2 miss as surprising given management's positive commentary. Looking ahead, he now sees limited visibility and few near-term catalysts for the shares. Cowen analyst Doug Schenkel lowered his price target for Illumina to $320 from $380 following the company's "huge" second quarter miss and fiscal year guidance reduction. Schenkel said while expectations for the quarter weren't high, "we didn't see a $50M miss coming," adding that the FY guidance cut is "notable." While he says the bias could be to the upside, he contends that Illumina "doesn't get the benefit of the doubt" given recent execution. Piper Jaffray analyst William Quirk lowered his price target for the shares to $382 from $387 but kept an Overweight rating on the name. The PopSeq opportunity remains despite the slower than anticipated ramp and order timing, he said.
Meanwhile, UBS analyst Daniel Brennan kept his Buy rating and $350 price target on Illumina, saying the sell-off in its stock after the "disappointing" Q2 preannouncement represents a buying opportunity. The analyst believes that most of the issues in the quarter appear "timing-related" and expects the company to benefit from accelerating demand in 2020 and beyond. Barclays analyst Jack Meehan lowered his price target for the stock to $340 from $370 and called the magnitude of Illumina's Q2 miss "very disappointing." Given underlying funding and the transitory nature of the Q2 issues, the new guidance could prove conservative, Meehan said. Canaccord analyst Mark Massaro lowered his price target for Illumina to $330 from $377 and reiterated a Buy rating, saying that while disappointing and a re-rating to 2019 growth, this does not change the "funnel of demand" for sequencing, nor does it reveal anything about a change in competitive dynamics.
While last night's preannouncement is "clearly disappointing," Illumina remains one of the best-positioned secular growth stories in the space, JPMorgan analyst Tycho Peterson said. The analyst encouraged longer-term investors to take advantage of today's share weakness and kept an Overweight rating on the name. He admitted, however, that the stock will likely remain under near-term pressure pending better visibility on a 2020 recovery.
PRICE ACTION: In morning trading, shares of Illumina plunged over 15% to $307.96.
Keywords: earnings, quarterly earnings, guidance, analyst, commentary, double downgrade, biotech