Image source: Illumina

Gene sequencing pioneer Illumina (ILMN 0.41%) took some of the suspense out of its upcoming Q4 earnings announcement at the J. P. Morgan Healthcare Conference by giving investors a preview of results. That preview and some new product announcements cheered investors enough to send the shares up 17% in one day, but what else can we expect to hear when results are released on Tuesday, Jan. 31?

The quarter looks strong

The one specific number for Q4 that the company gave out was a cheery one. Fourth quarter revenue came in at $619 million, above the guidance that the company had supplied last quarter of $607 million - $612 million. The stock jumped in after-hours trading as soon as this number was announced in the presentation, and with good reason. Last quarter's results missed guidance, and investor worries about slowing growth sent shares down 33% in 2016.

Analysts were surely interested to know the details behind the top-line growth in the quarter, but beyond the single revenue number, CEO Francis deSouza only talked in general terms about the whole year. He called sequencing consumables the "star performer" of the year but said that full year sales were up 23% over the previous year. That number is actually lower than the year-over-year growth rates of sequencing consumables for each of the first three quarters of the year, so that may indicate that supplies sales in Q4 were actually a bit disappointing. Utilization rates of HiSeq X and NextSeq were said to have increased, but no comment was made on the HiSeq utilization, which had been the concern in Q3.

Instrument sales information will be closely scrutinized, but comments in the J. P. Morgan presentation indicate that the trends we've seen in earlier quarters have continued. Speaking of the year in general, deSouza said the HiSeq X and NextSeq lines had a strong year, but HiSeq sales had been below expectations. In instruments a well as in consumables, HiSeq has been the weak link. Given that the overall sales number beat projections, perhaps we'll get welcome news that the top-of-the-line HiSeq X held up well.

One interesting bit of information we should hope to hear is some specific numbers on sales of the new MiniSeq instrument. MinSeq was introduced a year ago, and each quarter the company has given an upbeat report about sales while being coy about providing real numbers. The $50,000 low-end instrument could open up a lot of new customers, so it would help to know the impact this product is having on company performance.

Some new developments

Of course, the big news earlier this month was the introduction of the NovaSeq line, which will eventually replace HiSeq and HiSeq X families. Management will no doubt spend a lot of time on the conference call discussing and answering questions about it. We should watch very closely for any information on production schedules, which were not discussed at the J.P Morgan conference. The company said it will only be able to produce a couple dozen NovaSeq units in Q1 and gave no information on volumes past then. 

Perhaps overlooked in the excitement over NovaSeq were some other new product launches. A new solution for the analysis of single cells was launched in partnership with Bio-Rad Laboratories. A partnership with IBM Watson Health was announced that will connect Watson's supercomputing power to Illumina's BaseSpace tool for cloud-based storage and analysis of genomic data. The combination will give researchers rapid interpretation of sequencing data, performing in minutes an analysis that today takes over a week. We should watch for any context about these items in order to understand the potential impact to the business.

Also of interest to shareholders will be an update on Grail, the subsidiary that Illumina launched a year ago to develop an early detection blood test for cancer. Recently, a new round of outside financing in the amount of $1 billion was announced. This will result in reducing Illumina's equity stake to less than 20%, a change in the way the relationship appears on the company's books, and loss of representation on Grail's board. A plus for investors will be less drag on Illumina EPS due to losses incurred by Grail. It will be interesting to hear management comments about the relationship between the companies going forward.

Finally, we should hear detail on guidance for Q1 and the year 2017, always items of interest to Wall Street. At the conference, we got a preview that the company expects 10% to 12% revenue growth for the full year 2017 and GAAP EPS of $3.25 to $3.35. Non-GAAP EPS is expected to be between $3.60 and $3.70.

A transitional year?

Product rollovers, especially major ones such as NovaSeq that replace large portions of existing sales with new products, can be very challenging. Production delays, quality problems, customer cancellations of existing orders, higher marketing costs -- there are many potential issues that can cause temporary setbacks in revenue and profit.

Yet management is guiding to significantly higher top line growth in 2017 as compared with the rather disappointing 8% figure we saw in 2016. I'm skeptical. I think the problems with instruments sales that held back growth in 2016 will continue until NovaSeq production is at full tilt and research organizations have had a chance to integrate the new products into grant proposals and get approvals. That would take time even with a perfectly executed production ramp... and stuff happens. But I also think the long term thesis for this stock is stronger than ever, and 2017 could produce some great buying opportunities for patient, long-term investors. Next week we'll hear the company's case for improved prospects for the new year.