Morningstar | Illumina Reports Impressive 2Q on Sequencing Consumables Demand
We plan to raise our fair value estimate for narrow-moat Illumina by at least 5% after the company posted strong second-quarter results that benefited from better-than-expected demand for sequencing consumables, particularly in the high-throughput NovaSeq product line. Management raised its year-end earnings per share outlook to $5.35-$5.45 (from $4.75-$4.85 previously) on the basis of the favorable consumables sales and associated higher-margin product mix combined with operating leverage and a tax benefit. As a result, adjusted EPS growth reached 74% for the quarter.We anticipated a bolus of consumable sales on the growing installed base of NovaSeq instruments, but the 35% sequencing consumables growth this quarter reflects a fast ramp-up in utilization. While this quarter’s sequencing consumables growth did benefit by about $13 million in preorders in China to front-run imposed tariffs, adjusted consumables growth of 31% still reflects a healthy pace of consumables demand for Illumina. We see few major roadblocks for Illumina, especially in the high-throughput portion of the market, thanks to the ongoing trade-up to the NovaSeq product line combined with broader clinical market expansion from the smaller instrument lines like NextSeq and iSeq; this leaves us overall comfortable with our long-term double-digit revenue growth forecast. However, this quarter’s results suggest we may be underestimating the pace of adoption for sequencing capabilities among life science and diagnostic customers, especially as management noted a number of customers transitioning to more complex processes, such as from exomes to whole genomes. Additionally, Illumina’s lower-throughput machines should continue to displace conventional polymerase chain reaction processes. Illumina’s services segment also sustained over 30% growth, benefiting from maintenance contracts, sequencing projects for various customers, and partnerships for oncology panel tests.
Illumina is engaged in sequencing- and array-based solutions for genetic and genomic analysis. The company provides whole-genome sequencing, genotyping, noninvasive prenatal testing (NIPT), and product support services. Using the company's services, customers can perform whole-genome sequencing projects and microarray projects (including large-scale genotyping studies and whole-genome association studies). The company provides NIPT services through its partner laboratories that direct samples to the company on a test send-out basis in its Clinical Laboratory Improvements Amendments-certified, College of Pathologists-accredited laboratory. The company also provides support services to customers who have purchased its products.
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