On November 9, 2023 Illumina, Inc. reported its financial results for the third quarter of fiscal year 2023, which include the consolidated financial results for GRAIL (Press release, Illumina, NOV 9, 2023, View Source [SID1234637371]).
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"While the environment remains challenging, I am confident in our ability to navigate it and position the company for long-term success," said Jacob Thaysen, Chief Executive Officer. "I came to Illumina for the opportunity presented by our core business. While I evaluate the company’s strategy, we will remain focused on driving on further placements of the NovaSeq X, which will boost consumables demand. We will also continue optimizing our operations and drive stronger execution."
Third quarter consolidated results
GAAP Non-GAAP (a)
Dollars in millions, except per share amounts Q3 2023 Q3 2022 Q3 2023 Q3 2022
Revenue $ 1,119 $ 1,115 $ 1,119 $ 1,115
Gross margin 61.1 % 64.3 % 65.4 % 68.4 %
Research and development ("R&D") expense $ 315 $ 325 $ 312 $ 324
Selling, general and administrative ("SG&A") expense $ 303 $ 146 $ 328 $ 336
Goodwill and intangible impairment
$ 821 $ 3,914 $ — $ —
Legal contingency and settlement $ (1) $ (11) $ — $ —
Operating (loss) profit $ (754) $ (3,657) $ 93 $ 102
Operating margin (67.3) % (327.9) % 8.3 % 9.2 %
Tax (benefit) provision
$ (28) $ 144 $ 35 $ 40
Tax rate 3.6 % (4.0) % 39.7 % 43.2 %
Net (loss) income $ (754) $ (3,816) $ 52 $ 54
Diluted (loss) earnings per share $ (4.77) $ (24.26) $ 0.33 $ 0.34
(a) See the tables included in the "Results of Operations – Non-GAAP" section below for reconciliations of these GAAP and non-GAAP financial measures.
During the third quarter of 2023, the company recognized $712 million in goodwill and $109 million in intangible asset (IPR&D) impairment related to the GRAIL segment. The goodwill impairment was primarily due to a decrease in the company’s consolidated market capitalization and a higher discount rate selected for the fair value calculation of the GRAIL reporting unit. The IPR&D impairment was primarily due to a decrease in projected cash flows and a higher discount rate selected for the fair value calculation of the GRAIL IPR&D asset. During the third quarter of 2022, the company recognized $3.91 billion in goodwill impairment related to the GRAIL segment.
Capital expenditures for free cash flow purposes were $45 million for Q3 2023. Cash flow provided by operations was $139 million, compared to cash flow used in operations of $(52) million in the prior year period, which included a one-time payment related to the litigation settlement with BGI. Free cash flow (cash flow provided by (used in) operations less capital expenditures) was $94 million for the quarter, compared to $(119) million in the prior year period. Depreciation and amortization expenses were $108 million for Q3 2023. At the close of the quarter, the company held $933 million in cash, cash equivalents and short-term investments. During the third quarter of 2023, the company used $750 million in cash to repay the outstanding principal of convertible notes that matured in August 2023.
Third quarter segment results
Illumina has two reportable segments, Core Illumina and GRAIL.
Core Illumina
GAAP Non-GAAP (a)
Dollars in millions Q3 2023 Q3 2022 Q3 2023 Q3 2022
Revenue (b)
$ 1,106 $ 1,110 $ 1,106 $ 1,110
Gross margin (c)
64.7 % 67.9 % 66.0 % 68.9 %
R&D expense $ 238 $ 253 $ 235 $ 252
SG&A expense $ 216 $ 66 $ 246 $ 262
Legal contingency and settlement $ (1) $ (11) $ — $ —
Operating profit
$ 262 $ 445 $ 249 $ 251
Operating margin 23.7 % 40.1 % 22.5 % 22.6 %
(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 Q3 2023 was flat as compared to Q3 2022, and flat on a constant currency basis. Amounts for Q3 2023 and Q3 2022 included intercompany revenue of $8 million and $5 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, product mix, as well as lower instrument margins and higher field service and installation costs due to the NovaSeq X launch, which is typical in a launch year.
GRAIL
GAAP Non-GAAP (a)
In millions Q3 2023 Q3 2022 Q3 2023 Q3 2022
Revenue $ 21 $ 10 $ 21 $ 10
Gross (loss) profit $ (27) $ (32) $ 6 $ 1
R&D expense $ 79 $ 74 $ 79 $ 74
SG&A expense $ 87 $ 81 $ 82 $ 75
Goodwill and intangible impairment
$ 821 $ 3,914 $ — $ —
Operating loss $ (1,015) $ (4,101) $ (155) $ (148)
(a) See Table 3 included in the "Results of Operations – Non-GAAP" section below for reconciliations of these GAAP and non-GAAP financial measures.
As previously stated, Illumina is committed to moving as quickly as possible through the legal and regulatory processes associated with its acquisition of GRAIL. At this point, Illumina expects decisions on its appeals from the US Court of Appeals for the Fifth Circuit by the end of 2023 and from the European Court of Justice (ECJ) in mid-2024.
Key announcements by Illumina since Illumina’s last earnings release
•Received order from the European Commission to divest GRAIL; Illumina is committed to resolving all issues in a timely manner, with the objective of achieving the maximum value for shareholders and the best outcome for GRAIL
•Launched TruSight Oncology 500 (TSO 500) ctDNA Version 2, a liquid biopsy assay that enables comprehensive genomic profiling of circulating tumor DNA; key improvements include a faster turnaround time of less than four days, higher sensitivity with lower input requirements, and a more streamlined workflow
•Opened new office and state-of-the-art Illumina Solutions Center in Bengaluru, India to grow the genomics market in the most populous country in the world, unlocking opportunities for advancing health care and combating the effects of climate change in South Asia
•Appointed Jacob Thaysen, Ph.D. as Chief Executive Officer and Dr. Steve Barnard as Chief Technology Officer
•Launched the 25B flow cell (300-cycle kit) for the NovaSeq X, enabling customers to generate tens of thousands of whole genomes per year at the lowest cost per sample of any Illumina platform
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
•Collaboration with HCA Healthcare, Inc. to make GRAIL’s Galleri multi-cancer early detection (MCED) available to patients who meet screening criteria at select HCA Healthcare physician practices
•Published final results from PATHFINDER Study, which demonstrated that an earlier version of Galleri identified many cancer types that do not currently have recommended screening tests, enabled targeted cancer diagnostic evaluations, and supported diagnostic resolution for the majority of participants in less than three months
•Expanded pilot with Point32Health to offer Galleri to members meeting eligibility requirements, making Point32Health the first commercial health plan in the U.S. to offer Galleri in addition to recommended cancer screenings
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 now expects consolidated revenue to decrease 2% to 3% compared to fiscal year 2022. The company now expects Core Illumina revenue to decrease 3% to 4% compared to fiscal year 2022. GRAIL revenue is now expected to be at the low end of the $90 million to $110 million range.
The company now expects GAAP diluted loss per share of $(6.67) to $(6.57) and non-GAAP diluted earnings per share of $0.60 to $0.70.
Conference call information
The conference call will begin at 2 p.m. Pacific Time (5 p.m. Eastern Time) on Thursday, November 9, 2023. Interested parties may access the live teleconference through the Investor Info section of Illumina’s website at investor.illumina.com. Alternatively, individuals can access the call by dialing 866.400.0049 or +1.323.794.2149 outside North America, both using conference ID 1991305. 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.