Illumina (ILMN) Down 14.2% Since Last Earnings Report: Can It Rebound?
It has been about a month since the last earnings report for Illumina (ILMN). Shares have lost about 14.2% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Illumina due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Illumina Q2 Earnings Top Estimates, Margins Dip
Illumina Inc. reported adjusted earnings per share of 32 cents in the second quarter of 2023, beating the Zacks Consensus Estimate of 2 cents by a remarkable margin. However, the bottom line declined 43.9% from the year-ago quarter’s earnings of 57 cents.
The adjustments exclude the impact of GRAIL pre-acquisition net operating losses on GILTI, the utilization of U.S. foreign tax credits and incremental non-GAAP tax expenses, among others. Including one-time items, the company’s GAAP loss per share was $1.48 compared with the year-ago quarter’s loss of $3.40.
Revenues
In the quarter under review, Illumina’s revenues were $1.18 billion, up 1.1% year over year (up 3% at CER). The top line beat the Zacks Consensus Estimate by 1.1%.
Segment Details
Post the acquisition of GRAIL on Aug 18, 2021, Illumina has two reportable segments — Core Illumina and GRAIL.
Core Illumina revenues were flat year over year (up 2% at the constant exchange rate or CER) to $1.16 billion. Core Illumina Sequencing Consumable revenues totaled $739 million in the reported quarter, down 1% year over year. Our model projected Core Illumina revenues of $1.18 billion for Q2.
Sequencing Instrument revenues for Core Illumina of $193 million grew 2% year over year. The increase was partially led by strength in NovaSeq X shipments. Core Illumina sequencing service and other revenues were $134 million (up 7% year over year). Higher instrument service contract revenues drove the upside on a growing installed base.
GRAIL contributed $22 million to revenues during the reported quarter compared with $12 million in the year-ago period. Our model projected GRAIL revenues of $26.5 million for the second quarter.
Margins
The adjusted gross margin (excluding amortization of acquired intangible assets) was 66.3% in the reported quarter, highlighting a contraction of 312 basis points (bps) year over year. The decline is attributed to lower fixed-cost leverage on reduced manufacturing volumes and lower instrument margins due to the NovaSeq X launch, as expected for a new platform introduction.
R&D expenses increased 9.5% year over year to $358 million, whereas SG&A expenses rose 9.8% to $450 million. These pulled up adjusted operating costs by 9.6% to $808 million.
The adjusted operating loss in the quarter was $28 million against the prior-year quarter’s adjusted operating income of $70 million.
Financial Update
Illumina exited the second quarter of 2023 with cash and cash equivalents plus short-term investments of $1.56 billion compared with $1.55 billion at the end of first-quarter 2023. The company did not repurchase any common stock in the quarter.
Cumulative net cash provided by operating activities at the end of the second quarter of 2023 was $115 million compared with $297 million a year ago.
2023 Guidance
Illumina updated its 2023 outlook.
The company expects fiscal 2023 consolidated revenue growth to be 1% (the earlier guidance was -10% year over year). The Zacks Consensus Estimate for the same is currently pegged at $4.92 billion.
The adjusted earnings per share for 2023 is expected in the range of 70 cents-90 cents (the previous guidance was $1.25-$1.50). The Zacks Consensus Estimate for the same is currently pegged at $1.36.
Core Illumina revenue growth is now expected to be flat (the earlier guidance was 6-9% year over year). GRAIL revenues are anticipated to be between $90 and $110 million (unchanged from the outlook provided in the last reported earnings update).
Key Announcements
Throughout the second quarter, Illumina headlined on many occasions. During the quarter, the company launched DRAGEN 4.2, which expands upon award-winning accuracy combined with renowned flexibility and scalability to enable efficient workflows and extract meaningful insights from genomic data.
ILMN entered into a strategic partnership with Pillar Biosciences to make Pillar's suite of oncology assays commercially available globally as part of the Illumina portfolio of oncology products.
The company also unveiled PrimateAI-3D, an artificial intelligence (AI) algorithm that predicts with unprecedented accuracy disease-causing genetic mutations in patients.
Within GRAIL, the company announced results from the prospective SYMPLIFY study, showing strong performance of Galleri in the symptomatic population of more than 6,000 patients and demonstrated the feasibility of using a Multi-Cancer Early Detection (MCED) test to assist clinicians with decisions regarding referral from primary care.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended downward during the past month.
The consensus estimate has shifted -66.85% due to these changes.
VGM Scores
Currently, Illumina has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Illumina has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.
Performance of an Industry Player
Illumina belongs to the Zacks Medical - Biomedical and Genetics industry. Another stock from the same industry, Exelixis (EXEL), has gained 4.1% over the past month. More than a month has passed since the company reported results for the quarter ended June 2023.
Exelixis reported revenues of $469.85 million in the last reported quarter, representing a year-over-year change of +12%. EPS of $0.31 for the same period compares with $0.22 a year ago.
For the current quarter, Exelixis is expected to post earnings of $0.26 per share, indicating a change of -16.1% from the year-ago quarter. The Zacks Consensus Estimate remained unchanged over the last 30 days.
The overall direction and magnitude of estimate revisions translate into a Zacks Rank #2 (Buy) for Exelixis. Also, the stock has a VGM Score of C.
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