By the numbers

• Q1 Revenue: $1.09 billion
  11% decrease year-over-year
• Q1 Net income: $3 million
  96.5% decrease year-over-year
• Q1 Diluted earnings per share (GAAP): $0.02
  96.4% decrease year-over-year

Q1 Insights:

Illumina, a global leader in DNA sequencing, said it plans to cut costs by $100 million this year as it works to hold off a boardroom challenge by activist investor Carl Icahn.

Talking to investors on a first-quarter earnings call, Illumina CEO Francis deSouza acknowledged “there's a lot going on” with the activist campaign occurring as the company fights antitrust regulators to retain ownership of liquid biopsy unit Grail.

Icahn wants Illumina to sell Grail and stop wrangling with regulators, while faulting de Souza for a drop of more than 50% in the company’s share price since a peak in August 2021. Icahn now ks waging a proxy battle with Illumina’s board in the hopes of electing three of his own directors, replacing incumbents, including the independent chairman and deSouza.

DeSouza assured investors on the call that “a very small part of the company” is involved in the “regulatory process and so on” and that the “vast, vast, vast majority of our time and attention at Illumina is spent on getting our products out.” Illumina said it made progress on that front in the first quarter. 

“We shipped 67 NovaSeq X instruments in Q1, above initial expectations of 40 to 50, and now expect to deliver more than 330 NovaSeq X instruments this year, up from 300. Clinical demand continued to be stronger than expected, generating approximately 40% of orders, with some customers planning to leverage the NovaSeq X to launch new clinical offerings,” deSouza said on the call.

Still, even as NovaSeq X demand and manufacturing supply outperforming expectations, core Illumina revenue fell 12% from the year=earlier quarter, curbin company-wide sales by 11%. Illumina attributed the decline to a year-over-year slowdown in COVID-19 surveillance, pandemic-related disruptions in China, the transition of some high-throughput customers to NovaSeq X and customers managing constrained capital markets globally.

At the same time, gross margins fell as the launch of NovaSeq X resulted in lower manufacturing volumes and a decline in instrument margins.

Shares of Illumina fell 2.7%, or $5.79, to $212.90 in morning trading on Wednesday.

The future of Grail

Grail’s revenue grew 100% in the quarter to $20 million, exceeding Illumina’s forecast. The performance of the liquid biopsy business was overshadowed by discussions about if and when Illumina will divest the unit.

“The way we're thinking about it is that the whole process comes to a head towards the end of this year, at the beginning of next year, because we expect to get decisions around the two most important appeals in that timeframe,” deSouza said on the call.

In Europe, Illumina expects a decision about whether the European Commission has jurisdiction over Grail. In the U.S., the Fifth Circuit Court of Appeals is reviewing Illumina’s appeal against the Federal Trade Commission’s order to divest itself of Grail. Both regulators argue that since Illumina’s genomic sequencing machines are used by nearly all liquid biopsy companies, a Grail-Illumina combination would stifle competition. 

Illumina is running “a divestiture work stream” in parallel to the legal cases, deSouza said on the call. The team is waiting for the divestiture order from the European Commission, which is due shortly, and “that path will be run in parallel in the same timeframe as the appeals are happening,” the CEO added. The results of the appeals will dictate the next steps.

“If we lose either of the appeals, we'll divest promptly in the best interest of our shareholders,” deSouza said. “If we win both the appeals and, at that time, we have a chance to sort of look at the asset and sort of make sure that the assumptions in the business case that we did hold, in terms of us keeping it compared towards divesting it, that would be the scenario under which we would keep the asset and integrate.”

Cutting costs, again

Illumina outlined its second set of cost cuts in six months in its first-quarter results. In November, the company vowed to reduce its global workforce by 5% amid a challenging macroeconomic environment. Now, Illumina has committed to cutting its annualized run rate expenses later this year by more than $100 million to accelerate margin improvement and create flexibility for further investment in high-growth areas.

“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,” Illumina CFO Joydeep Goswami said on the earnings call. 

Goswami went on to tell investors that Illumina will “achieve additional savings through leveraging its global footprint, enabling activities at more cost-effective hubs,” and is “streamlining its organization and processes, including rationalizing its global real estate portfolio and third-party vendor spend, as well as accelerating IT optimization efforts.”

Forecast:

Illumina reiterated its fiscal year 2023 consolidated revenue forecast of 7% to 10% growth over 2022. The forecast reflects core Illumina revenue growth of 6% to 9%, plus Grail sales of $90 million to $110 million.

At the midpoint of the revenue guidance, Illumina now expects sequencing instrument revenue growth of about 13% year over year, up from 9% under the prior guidance. The increase reflects higher NovaSeq X shipment expectations. The revision was offset by a downgrading of the core Illumina sequencing consumables growth target, from 8% to 5.5%, because of sanctions affecting its ability to conduct business in Russia.

Illumina restated its non-GAAP earnings per diluted share, keeping the range at $1.25 to $1.50, but changed its GAAP outlook. The company now expects a GAAP diluted loss per share of $0.28 to $0.03, having previously forecast GAAP diluted earnings per share of $0.03 to $0.28.