Illumina (ILMN) Q3 Earnings Beat Estimates, '22 View Slashed

Illumina Inc.'s ILMN adjusted earnings per share (EPS) of 34 cents in third-quarter 2022 exceeded the Zacks Consensus Estimate by 17.2%. The bottom line declined 76.6% from the year-ago quarter’s earnings of $1.45.

The adjustments exclude certain expenses and benefits related to goodwill impairment (of $3.91 billion) related to the GRAIL segment, legal contingencies, and incremental non-GAAP tax, among others.

Including one-time items, the company’s GAAP loss per share was $24.26 against the year-ago quarter’s EPS of $2.08.

Revenues

In the quarter under review, Illumina’s revenues were $1.12 billion, up 0.6% year over year. The top line beat the Zacks Consensus Estimate by 1.3%.

Segment Details

Post the acquisition of GRAIL on Aug 18, 2021, Illumina has two reportable segments — Core Illumina and GRAIL.

Core Illumina revenues rose 0.4% year over year (up 3% at constant exchange rate or CER) to $1.11 billion. Core Illumina Sequencing Consumable revenues totaled $725 million in the reported quarter, unchanged year over year.

Illumina, Inc. Price, Consensus and EPS Surprise

Illumina, Inc. Price, Consensus and EPS Surprise

Illumina, Inc. price-consensus-eps-surprise-chart | Illumina, Inc. Quote

Sequencing Instrument revenues for core Illumina were $162 million, reflecting a 10% decline from the year-ago figure. The decline was due to lower NovaSeq shipments on expected customer lab expansion delays and capital management as well as purchasing DLAs in advance of next year's availability of NovaSeq X. This was partially offset by record NextSeq 1K, 2K shipments on strong adoption by new Illumina customers.

Core Illumina sequencing service and other revenues were $123 million, up 12% year over year on higher instrument service contract revenues on a growing installed base and an increase in core licensing revenues.

GRAIL contributed $10 million to revenues during the reported quarter.

Margins

The adjusted gross margin (excluding amortization of acquired intangible assets) was 68.4% in the reported quarter, highlighting a contraction of 269 basis points (bps) year over year.

Research and development expenses plunged 25.5% year over year to $325 million, whereas selling, general & administrative expenses were reduced 83.4% to $146 million. These pulled down adjusted operating costs by 64.2% to $471 million.

Adjusted operating income in the quarter was $292 million against the prior-year quarter’s adjusted operating loss of $527 million.

Financial Update

Illumina exited third-quarter 2022 with cash and cash equivalents plus short-term investments of $1.04 billion compared with $1.33 billion at the end of second-quarter 2022.

The company did not repurchase any common stock in the quarter.

Cumulative net cash used in operating activities at the end of the quarter was $52 million compared with $272 million a year ago.

2022 Guidance

For 2022, Illumina now expects its consolidated revenue growth in the range of flat to up 1% year over year (down from the prior projection of growth of 4-5%). The Zacks Consensus Estimate for the same is currently pegged at $4.70 billion.

The company also lowered its adjusted EPS guidance for 2022 to the range of $2.35 to $2.50(compared with the previous guidance of $2.75-$2.90). The Zacks Consensus Estimate for the same is currently pegged at $2.77.

Core Illumina revenue growth is now expected to be approximately flat from fiscal year 2021. GRAIL revenues are now expected to be in the range of $55 million to $65 million.

Our Take

Illumina delivered better-than-expected Q3 earnings and revenues. However, year-over-year performance remained sluggish. Within Core Illumina, NovaSeq consumables registered growth in the Americas on growing demand from genetic testing, oncology testing and cancer research customers. However, this was largely offset by customer lab expansion delays and inventory and capital management as well as a decline in COVID surveillance revenues. In EMEA, strong growth in mid-throughput instrument shipments was more than offset by the conclusion of the U.K. Biobank program and a decline in COVID surveillance revenues.

A reduction in full-year adjusted EPS and sales guidance raises apprehension.

One-third reduction of the 2022 guidance from the previous expectations is primarily due to delayed recruitment for some large research projects of Core Illumina in the Americas and Europe and the impact of inflation on research customers in Europe. Further, delays in instruments and consumables purchases, primarily due to the excitement around NovaSeq X, negative foreign exchange impact and consumables inventory deleveraging, are expected to impede growth in the rest of 2022.

As a major setback, in the reported quarter, Illumina incurred a huge goodwill impairment charge related to the GRAIL segment, primarily due to the negative impact of current capital market conditions and higher discount rates, including a stand-alone risk premium on the fair value calculation of the GRAIL segment. This put immense pressure on the bottom line.

Zacks Rank and Key Picks

Illumina currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader medical space that have announced quarterly results are Elevance Health Inc. ELV, Medpace Holdings, Inc. MEDP and Merit Medical Systems, Inc. MMSI.

Elevance Health, carrying a Zacks Rank #2 (Buy), reported third-quarter 2022 adjusted EPS of $7.53, which beat the Zacks Consensus Estimate by 6.1%. Revenues of $39.63 billion outpaced the consensus mark by 1.3%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Elevance Health has an estimated long-term growth rate of 12%. ELV’s earnings surpassed estimates in all the trailing four quarters, the average being 4.1%.

Medpace Holdings, sporting a Zacks Rank #1, reported third-quarter 2022 EPS of $2.05, which beat the Zacks Consensus Estimate by 39.5%. Revenues of $383.7 million outpaced the consensus mark by 8.1%.

Medpace Holdings has an estimated growth rate of 44.9% for the full-year 2022. MEDP’s earnings surpassed estimates in all the trailing four quarters, the average being 22%.

Merit Medical, flaunting a Zacks Rank #1, reported third-quarter 2022 adjusted EPS of 64 cents, which beat the Zacks Consensus Estimate by 20.8%. Revenues of $287.2 million outpaced the consensus mark by 5.2%.

Merit Medical has an estimated long-term growth rate of 11%. MMSI’s earnings surpassed estimates in all the trailing four quarters, the average being 25.4%.

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