Illumina (ILMN) To Report Q2 Earnings: What's In The Cards?

Illumina Inc. (NASDAQ:ILMN) is scheduled to report its second-quarter 2016 financial numbers on Jul 26, after the closing bell.

Last quarter, the company posted a negative earnings surprise of 4.05%. Moreover, Illumina’s earnings missed the Zacks Consensus Estimate in two of the past four quarters, with an average negative surprise of 0.36%.

Let’s see how things are shaping up prior to this announcement.

ILLUMINA INC Price and EPS Surprise

ILLUMINA INC Price and EPS Surprise | ILLUMINA INC Quote

Factors at Play

Illumina commenced its journey for 2016 on a bleak note, with its first-quarter results substantially lagging analysts’ estimates. One of the primary reasons behind this underperformance was a huge order – worth more than $700 million – received during the quarter, which did not translate into material revenue generation for the company then.

However on the brighter side, the projected scenario for the yet-to-be released second-quarter’s outcome does not seem so dreary. In fact, management expects a significant portion of the deferred revenue of the first quarter to get recognized in the second quarter, which certainly will give a decent boost to this quarter’s top line.

In terms of products, the company’s expectation for second quarter remains in line with the prior one, as it anticipates the same amount of orders, i.e., 20–30 orders for its HiSeq X instruments per quarter.

Considering a consequential acceleration in the company’s instrument shipments, management expects to generate revenues of $590–$595 million in the second quarter on account of sequential seasonality in Japan and roughly flat HiSeq X shipment. The current Zacks Consensus Estimate for revenue is pegged at $594 million, close to the upper level of the company provided guidance range.

The company expects to deliver adjusted EPS in the range of 72–74 cents during the second quarter. The current Zacks Consensus Estimate for EPS is pegged at 73 cents, in line with the mid-point of the company provided range.

On the flip side, Illumina’s investments in Helix and GRAIL as well as the headcount additions that management undertook in the prior quarter are expected to result in a sequential rise in operating expenses in the second quarter.

Moreover, since the newly found enterprise, Grail, is in the process of development and is yet to generate material revenue for Illumina, management expects to recognize most of the losses on account of this investment in the second quarter.

We currently await an update regarding management’s earlier announced plan to adopt a few structural changes along with alteration in accounting treatment in relation to the Grail investment, in the second quarter. As per management, this proposal might reduce the loss associated with this investment in the second half of 2016.

Earnings Whispers

Our proven model does not conclusively show that Illumina is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.

Zacks ESP: Illumina has an Earnings ESP of 0.00%.That is because both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at 73 cents.

Zacks Rank: Illumina has a Zacks Rank #4 (Sell). We caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some companies you may want to consider as our proven model shows they have the right combination of elements to post an earnings beat this quarter:

Bristol-Myers Squibb Company (NYSE:BMY) , with an Earnings ESP of +3.03% and a Zacks Rank #1.

Allergan plc (NYSE:AGN) , with an Earnings ESP of +0.90% and a Zacks Rank #2.

Laboratory Corp. of America Holdings (NYSE:LH) , with an Earnings ESP of +0.87% and a Zacks Rank #2.