What: After the bell yesterday, Illumina (NASDAQ:ILMN) announced disappointing preliminary revenue for the third quarter. Shares of the company opened down 18%, although they've recovered some of that loss in today's trading.
So what: Illumina estimates that third-quarter revenue will come in at approximately $550 million. While that's a 14% year-over-year increase and 18% growth at constant currencies, investors were expecting more. Through the first half of the year, Illumina had grown revenue 24% compared to the same period last year.
After the second quarter, management reiterated its expectations for "approximately 20% total revenue growth, including a 3% negative impact from foreign exchange assuming current currency exchange rates." Even with the above average first-half growth, there's no way 14% growth is going to get to a 20% average at the end of the year, so management lowered its 2015 revenue guidance to 18% year-over-year growth including the same 3% hit for changes in currencies.
The shortfall from expectations appears to have come from sales of Illumina's desktop instruments. Management also highlighted disappointing instrument sales in Europe and continued weakness in the Asia-Pacific region. Sales of the bigger HiSeq instruments and consumables used while running the machines seem to be doing just fine, with placements of the largest HiSeq X actually exceeding internal expectations.
Now what: Illumina certainly deserves a haircut here. Hyper growth was factored into the share price, and when the company doesn't deliver, shares are going to slump. That goes double with the biotech industry having fallen out of favor over the last few months.
While Illumina's growth is slowing down -- and it isn't clear whether that's a permanent readjustment or just temporary -- the company's business is still in good shape. There are plenty of companies that would love to have 14% revenue growth.
The company's razor-and-blades model will help sustain that growth. In the third quarter, consumables made up nearly half of sales, growing 36% year over year. Strong sales of the HiSeq instruments this quarter will drive consumable sales in future quarters.
Brian Orelli has no position in any stocks mentioned. The Motley Fool recommends Illumina. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.