Illumina's (NASDAQ:ILMN) biggest story when the company reported quarterly results in July was its strong growth in consumables used with its genomic-sequencing systems. And that growth came from high-throughput systems NovaSeq and HiSeq down to low-throughput systems MiniSeq, MiSeq, and iSeq.

But Illumina CFO Sam Samad warned that the third quarter could bring more modest consumables growth. The company announced its third-quarter results after the market closed on Tuesday. Did Samad's warning become reality? Here are the highlights from Illumina's update. 

DNA image displayed over the palm of a hand.

Image source: Getty Images.

Illumina results: The raw numbers

Metric 

Q3 2018 

Q3 2017 

Year-Over-Year Change

Sales

$853 million $714 million

19.5%

Net income from continuing operations

$199 million $163 million

22.1%

Adjusted earnings per share (EPS)

$1.52 $1.11

36.9%

Data Source: Illumina.

What happened with Illumina this quarter?

Illumina's sales came from three primary sources: consumables, instruments, and services plus miscellaneous other revenue. Sam Samad's statement in July that consumables revenue growth could moderate was right on target. Illumina reported consumables revenue of $550 million, up 22% year over year but up less than 2% compared with the second quarter of 2018.

It was a different story for sales of new sequencing instruments, though. Third-quarter instrument revenue was $154 million, a 10% year-over-year increase and a 21% quarter-over-quarter jump. This reflected the strongest quarter for instrument sales in three years and was driven largely by newer sequencing systems NovaSeq and iSeq.

Samad also cautioned in July that third-quarter microarray revenue would be noticeably lower than the second quarter due to seasonality in the direct-to-consumer (DTC) market. He was right again. Illumina reported microarray service revenue of $34 million in the third quarter, down 10.5% from the prior-year period and a 33% drop from the second quarter. Sequencing services, though, climbed 36% year over year and nearly 3% sequentially to $109 million. 

Illumina's earnings improved more impressively than its top line thanks in part to an increase in gross margin from 67.5% in the prior-year period to 70% in the third quarter. This gross margin increase helped offset the company's 18% jump in operating expenses.

Illumina also noted several key developments during the third quarter, including:

  • Chinese regulatory approval for the MiSeqDx next-generation sequencing (NGS) system 
  • The launch of the NovaSeq S4 200 cycle kit to support high-throughput sequencing for whole exome, RNA, and single-cell sequencing
  • A legal settlement with Premaitha to license Illumina's intellectual property for noninvasive pregnancy testing 

What management had to say

Illumina President and CEO Francis deSouza stated:

Illumina's strong performance in the third quarter of 2018 reflected growth across our sequencing and arrays portfolios. Sequencing system revenue of $138 million was the strongest since 2015, reflecting strong demand within our sequencing family from the NovaSeq, the most powerful and flexible sequencer ever, to the iSeq, our most accessible and easiest-to-use sequencer.

Looking forward

Illumina continues to expect overall year-over-year revenue growth in 2018 of 20%. The company boosted its full-year earnings guidance, though. Illumina now projects 2018 generally accepted accounting principles (GAAP) diluted earnings per share (EPS) between $5.32 and $5.37, up from its previous forecast of GAAP EPS between $5.10 and $5.20. Non-GAAP EPS is expected to be between $5.70 and $5.75, up from previous guidance of $5.35 to $5.45. 

The fourth quarter should bring higher microarray revenue, as DTC genomics customers like Ancestry, 23andMe, and Helix generate more business during the holidays. Perhaps the biggest wild card for Illumina is the potential impact of escalating trade tensions between the U.S. and China. So far, however, the company hasn't been significantly affected by the trade skirmish. 

Keith Speights has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Illumina. The Motley Fool has a disclosure policy.