Illumina (ILMN) Q2 Earnings Beat Estimates, Margins Contract
Illumina Inc. ILMN reported adjusted earnings per share (EPS) 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.
Research and development 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.
Illumina, Inc. Price, Consensus and EPS Surprise
Illumina, Inc. price-consensus-eps-surprise-chart | Illumina, Inc. Quote
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 EPS 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.
Our Take
Illumina delivered better-than-expected seccond-quarter 2023 earnings and revenues. During the quarter, the company shipped 109 NovaSeq X instruments, boosting its supply capacity to more than 390 instruments for fiscal year 2023. Mid-teens growth in clinical led by continued momentum in oncology and genetic disease testing. During the quarter, the company launched DRAGEN 4.2 instruments. ILMN also unveiled PrimateAI-3D, an artificial intelligence (AI) algorithm that predicts with unprecedented accuracy disease-causing genetic mutations in patients.
The year-over-year performance remained sluggish. An expected Covid-19 surveillance headwind adversely affected Core Illumina’s revenues, including sequencing consumables revenues.
On the flip side, contraction in both margins raises apprehension. The chaos surrounding the GRAIL divestment is worrisome and is putting immense bottom-line pressure.
Zacks Rank and Key Picks
Illumina currently carries Zacks Rank #3 (Hold).
Some other better-ranked stocks in the broader medical space that have announced quarterly results are Penumbra, Inc. PEN, Integer Holdings Corporation ITGR and Intuitive Surgical, Inc. ISRG.
Penumbra, carrying a Zacks Rank of 1 (Strong Buy), reported second-quarter 2023 adjusted EPS of 43 cents, beating the Zacks Consensus Estimate by 53.6%. Revenues of $261.5 million outpaced the consensus mark by 3.3%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Penumbra has a 2024 estimated growth rate of 57.9%. PEN’s earnings surpassed estimates in all the trailing four quarters, the average surprise being 94.2%.
Integer Holdings reported second-quarter 2023 adjusted EPS of $1.14, beating the Zacks Consensus Estimate by 15.2%. Revenues of $400 million surpassed the Zacks Consensus Estimate by 8.9%. It currently carries a Zacks Rank #2.
Integer Holdings has a long-term estimated growth rate of 12.1%. ITGR’s earnings surpassed estimates in all the trailing four quarters, the average surprise being 8.4%.
Intuitive Surgical reported second-quarter 2023 adjusted EPS of $1.42, beating the Zacks Consensus Estimate by 7.6%. Revenues of $1.76 billion surpassed the Zacks Consensus Estimate by 1.4%. It currently carries a Zacks Rank #2.
Intuitive Surgical has a long-term estimated growth rate of 14.5%. ISRG’s earnings surpassed estimates in three of the trailing four quarters and missed once, the average surprise being 4.2%.
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