On April 25, 2023 Illumina, Inc. (Nasdaq: ILMN) ("Illumina" or the "company") reported its financial results for the first quarter of fiscal year 2023, which include the consolidated financial results for GRAIL (Press release, Illumina, APR 25, 2023, View Source [SID1234630470]).

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"The year is off to a solid start, led by NovaSeq X outperforming expectations in both customer demand and manufacturing supply," said Francis deSouza, Chief Executive Officer. "We shipped 67 NovaSeq X instruments in the first quarter, exceeding our plan. Demand remains strong, with our quarter-end NovaSeq X order book standing at over 200 instruments. We continue to work closely with our customers and partners to help them manage the challenging macroeconomic environment and to deliver on our 2023 goals. Our commitment to higher margins will set Illumina on the best path to deliver long-term sustainable success for our shareholders."

First quarter consolidated results
GAAP Non-GAAP (a)
Dollars in millions, except per share amounts Q1 2023 Q1 2022 Q1 2023 Q1 2022
Revenue $ 1,087 $ 1,223 $ 1,087 $ 1,223
Gross margin 60.3 % 66.6 % 64.7 % 69.9 %
Research and development ("R&D") expense $ 341 $ 323 $ 339 $ 323
Selling, general and administrative ("SG&A") expense $ 378 $ 308 $ 343 $ 320
Operating (loss) profit $ (64) $ 184 $ 21 $ 212
Operating margin (5.7) % 15.0 % 1.9 % 17.3 %
Tax rate 103.9 % 38.3 % 27.3 % 17.8 %
Net income $ 3 $ 86 $ 13 $ 169
Diluted earnings per share $ 0.02 $ 0.55 $ 0.08 $ 1.07

(a) See the tables included in the "Results of Operations – Non-GAAP" section below for reconciliations of these GAAP and non-GAAP financial measures.

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1 The company only provides non-GAAP measures for operating margin targets because of the difficulty of projecting with reasonable certainty the financial impact of specific GAAP operating adjustments. Please see Illumina’s "Statement regarding use of non-GAAP financial measures" for more information.

Capital expenditures for free cash flow purposes were $52 million for Q1 2023. Cash flow provided by operations was $10 million, compared to $172 million in the prior year period. Free cash flow (cash flow provided by operations less capital expenditures) was $(42) million for the quarter, compared to $111 million in the prior year period. Depreciation and amortization expenses were $107 million for Q1 2023. At the close of the quarter, the company held $1,518 million in cash, cash equivalents and short-term investments, compared to $2,037 million as of January 1, 2023. During the first quarter, the company used $500 million to repay the outstanding principal of our 2023 term notes that matured in March.

First quarter segment results
Illumina has two reportable segments, Core Illumina and GRAIL.

Core Illumina
GAAP Non-GAAP (a)
Dollars in millions Q1 2023 Q1 2022 Q1 2023 Q1 2022
Revenue (b)
$ 1,076 $ 1,221 $ 1,076 $ 1,221
Gross margin (c)
63.8 % 69.7 % 65.2 % 70.2 %
R&D expense $ 259 $ 238 $ 257 $ 238
SG&A expense $ 286 $ 251 $ 257 $ 267
Operating profit $ 142 $ 362 $ 187 $ 352
Operating margin 13.2 % 29.6 % 17.4 % 28.8 %

(a) See Table 3 included in the "Results of Operations – Non-GAAP" section below for reconciliations of these GAAP and non-GAAP financial measures.
(b) Core Illumina revenue for Q1 2023 was down 12% from Q1 2022, and down 10% on a constant currency basis. Amounts for Q1 2023 and Q1 2022 included intercompany revenue of $9 million and $8 million, respectively, which is eliminated in consolidation.
(c) The year-over-year decrease in gross margin was primarily driven by less fixed cost leverage on lower manufacturing volumes and lower instrument margins due to the NovaSeq X launch, which is typical for a new platform introduction.

GRAIL
GAAP Non-GAAP (a)
In millions Q1 2023 Q1 2022 Q1 2023 Q1 2022
Revenue $ 20 $ 10 $ 20 $ 10
Gross (loss) profit $ (25) $ (29) $ 9 $ 5
R&D expense $ 86 $ 85 $ 86 $ 85
SG&A expense $ 93 $ 58 $ 87 $ 54
Operating loss $ (204) $ (172) $ (164) $ (134)

(a) See Table 3 included in the "Results of Operations – Non-GAAP" section below for reconciliations of these GAAP and non-GAAP financial measures.

Key announcements by Illumina since Illumina’s last earnings release
•Launched Illumina Complete Long Read Prep, Human, which enables access to both long- and short-read data on the same instrument for the first time
•Partnered with Henry Ford Health, a not-for-profit health care organization in the Detroit metro area, to assess the impact of comprehensive genomic testing in cardiovascular disease
•Launched Illumina Connected Insights, a new cloud-based software enabling tertiary analysis for clinical next-generation sequencing (NGS) data, with applications for oncology and soon rare diseases
•Celebrated the company’s 25th anniversary, a quarter-century after its founding in San Diego in April 1998

•Expanded strategic partnership with Myriad Genetics to broaden access and availability of oncology homologous recombination deficiency (HRD) testing in the United States; under the agreement, Illumina TruSight Oncology 500 HRD (TSO 500 HRD), a research-use-only test, is now available in the US
•Received the international privacy certification (ISO/IEC 27701) of six of Illumina’s cloud-based informatics programs, recognizing that the company implements, and complies with, robust, international data privacy requirements
•Exceeded more than 200 orders for the revolutionary NovaSeq X, representing a diverse customer base spanning research and clinical customer segments in nearly 30 countries
•Was granted expedited appellate review of the FTC order to divest GRAIL

A full list of recent Illumina announcements can be found in the company’s News Center.

Key announcements by GRAIL since Illumina’s last earnings release
•Announced that the 140,000 participant NHS trial has successfully reached its halfway point, with over half of the study participants having returned for their second annual blood draw, and is currently progressing as planned to achieve its targeted retention rates
•Announced that FirstHealth of the Carolinas, Inc., a health system serving patients in 15 counties in the mid-Carolinas, will offer Galleri to eligible patients in North Carolina
•Expanded existing partnership with Providence Health System, one of the largest health systems in the western US, to offer multi-cancer early detection screening as part of clinical care to eligible individuals across the entire Providence health system, consisting of 53 hospitals and 900 clinics across seven states
•Announced that John Hancock, one of the largest life insurers in the US, expanded access to Galleri to eligible life insurance customers participating in the John Hancock Vitality PLUS program following a successful pilot program
•Presented new data at the American Association for Cancer Research (AACR) (Free AACR Whitepaper) Annual Meeting 2023 showcasing the performance of its methylation technology, which had a cancer detection rate of 92% in patients with relapsed or refractory disease across six hematological malignancies

A full list of recent GRAIL announcements can be found in GRAIL’s Newsroom.

Financial outlook and guidance
The non-GAAP financial guidance discussed below reflects certain pro forma adjustments to assist in analyzing and assessing our core operational performance, including the company’s Core Illumina and GRAIL segments. Please see our Reconciliation of Consolidated Non-GAAP Financial Guidance included in this release for a reconciliation of these GAAP and non-GAAP financial measures.

For fiscal year 2023, the company continues to expect consolidated revenue growth of 7% to 10% compared to fiscal year 2022. The company continues to expect Core Illumina revenue growth of 6% to 9% compared to fiscal year 2022. GRAIL revenue is still expected to be in the range of $90 million to $110 million.

The company now expects GAAP diluted loss per share of $(0.28) to $(0.03) and still expects non-GAAP diluted earnings per share of $1.25 to $1.50. The GAAP and non-GAAP diluted (loss) earnings per share guidance ranges continue to assume that the existing R&D capitalization requirements are not repealed in fiscal year 2023 and, as a result, reflect a tax expense impact of approximately $75 million.

Commitment to higher margins; announcing $100 million in run rate cost savings
The company commits to achieving Core Illumina non-GAAP operating margins of 25% in 2024 and 27% in 2025.

Building on the cost reduction steps announced in November 2022, Illumina will further reduce its annualized run rate expenses by more than $100 million beginning later in 2023. These cost savings will accelerate progress toward higher margins as well as free up capital to increase investment in high-growth areas. The company will continue to prioritize and invest in initiatives that generate highly differentiated products that are valued by Illumina’s customers.

Illumina will achieve these savings through a combination of several actions. We will leverage the recent modularization of R&D innovation created as part of the NovaSeq X development, including XLEAP-SBS and new flow cell technology, to lower the cost and accelerate time to market for future platforms. The company will achieve additional savings through leveraging its global footprint, enabling activities at more cost-effective hubs. The company is also streamlining its organization and processes, including rationalizing its global real estate portfolio and third-party vendor spend, as well as accelerating IT optimization efforts.

The company only provides non-GAAP measures for operating margin targets because of the difficulty of projecting with reasonable certainty the financial impact of specific GAAP operating adjustments. Please see Illumina’s "Statement regarding use of non-GAAP financial measures" for more information.

Conference call information
The conference call will begin at 2 p.m. Pacific Time (5 p.m. Eastern Time) on Tuesday, April 25, 2023. Interested parties may access the live teleconference through the Investor Info section of Illumina’s website under the "Company" tab at www.illumina.com. Alternatively, individuals can access the call by dialing 877.502.9276 or +1.313.209.4906 outside North America, both using conference ID 1539055. To ensure timely connection, please dial in at least ten minutes before the scheduled start of the call.

A replay of the conference call will be posted on Illumina’s website after the event and will be available for at least 30 days following.