For the second quarter in a row, Illumina (ILMN -1.18%) generated more than $1 billion in revenue and exceeded top- and bottom-line expectations. On the Q2 earnings call, CEO Francis deSouza said Illumina is "seeing tremendous momentum in the business ... we expect that to continue going into the second half of the year."

In what Wall Street analysts like to call "a beat and a raise," Illumina upped its full-year 2021 guidance to encompass growth in the range of 32% to 34%, or $4.28 billion to $4.34 billion. That range represents approximately $1 billion more revenue than in 2020.

A person dressed in business casual looks at a laptop with a bemused but happy expression.

Image source: Getty Images.

By the numbers

Illumina reported $1.126 billion in revenue, an increase of 78% year over year. Net income according to generally accepted accounting principles (GAAP) was $185 million, or $1.26 per diluted share. The company didn't repurchase any shares in the quarter, and ended with a weighted average diluted share count of approximately 147 million.

Cash flow from operations was $253 million, which included $491 million to repay convertible notes. Illumina also made $105 million in merger continuation payments to Grail, a provider of early cancer detection tests. Regulators are reviewing the deal due to competitive concerns. The company ended the quarter with approximately $4.3 billion in cash, cash equivalents, and short-term investments on the balance sheet.

Revenue from sequencing instruments grew 115% year over year to $189 million. Shipments of high-throughput NovaSeq systems more than doubled from the second quarter of 2020. Mid-throughput NextSeqDx, NextSeq 1000, and NextSeq 2000 systems also reached a new high.

The story behind the numbers

The earnings beat may have been helped by a bit of sandbagging on the part of management. Despite clear momentum in the business, previous guidance was light. In fact, CEO deSouza said in the Q1 press release that "orders during the first quarter of 2021 reached an all-time high, demonstrating strength in our core business across all regions, reflecting growth in both clinical and research customers."  The results were also helped by relatively easy prior-year comparisons, as customers were forced away from their labs due to COVID-19 in early 2020.

Illumina's stock price closed down 3.6% on the day following earnings. That may be a reflection of low expectations, coupled with the 36% rise in the stock price over the last three months.

What to look for

On the earnings call, management touched on four key areas that could drive continued strong performance: falling costs, increasing volumes, global expansion, and acquisitions.

Falling costs: During the analyst question-and-answer portion of the earnings call, management pointed out several times that the company has been able to deliver a $600-per-genome price point to customers. Continuing to lower prices will open up new markets and keep competitors in check who are targeting $100/genome.

Increasing volumes: Sequencing volumes continue to grow in research and are also expanding rapidly in clinical applications, with key drivers including whole-genome testing, oncology testing, and recurrence monitoring. COVID-19 now seems to be a long-term sales tailwind, as governments around the world are buying more sequencing equipment so national labs can identify and track variants and prepare for the next pandemic. 

Global expansion: Illumina's latest results reflect its progress toward building an international sales, support, and regulatory infrastructure.  In Q2, revenue in the Americas was $589 million, growing at 76% year over year; EMEA (Europe, the Middle East, and Africa) contributed $320 million, up 90%; and Greater China was responsible for $132 million, up 67%.

Acquisitions: The proposed merger with Grail is still caught up in regulatory review. Illumina has until Dec. 20 to resolve regulatory objections before the merger agreement expires. In a candid admission, Illumina management commented they will need to do a better job of working with regulators so they view the acquisition as "pro-competitive." Successfully acquiring Grail would give Illumina an enviable position in the large and growing multi-cancer screening market.

A stock for patient investors

After the recent run-up, Illumina has a market cap of $73 billion and a price-to-earnings ratio of 117, compared with 35 for the S&P 500. Even with a long-term growth rate projected above 30%, it will take a while to catch up with that valuation.

Fortunately, as they say, "winners tend to keep winning" -- and Illumina has a long way to run. For long-term buy-and-hold investors, it's not too late to get in and profit from these exciting genomic developments.