Illumina Reports Flat Q3 Revenue and Cuts Full-Year Guidance Amid Leadership Transition; New CEO Warns of Continued Challenges in 2024

After a turbulent third quarter and year for Illumina, newly appointed CEO Jacob Thaysen, in his first public remarks since taking the helm, expressed optimism but still predicted a similarly challenging 2024.

After Thursday's close, Illumina reported that it has lowered its 2023 revenue guidance due to a lackluster third-quarter performance. The sequencing technology company now expects consolidated revenue to decrease by 2% to 3% compared to 2022, with Illumina’s core revenue projected to decline by 3% to 4%. The company anticipates Grail’s revenue to be between $90 million and $110 million.

The company also expects a loss per share between $6.57 and $6.67 due to $821 million in goodwill and intangible asset impairment related to Grail, as European regulators have required Illumina to divest Grail by next year. On an adjusted basis, Illumina anticipates earnings per share between $0.60 and $0.70.

In August this year, the company lowered its performance forecast for 2023, with revenue growing by approximately 1% year-over-year. Revenue from Illumina's core business remained flat year-over-year, with a loss per share of $2.08 to $1.93, and adjusted earnings per share of $0.75 to $0.90.

On a conference call with investors after Illumina's third-quarter earnings release, Thaysen said, "2024 will be similar, but the company won't provide formal guidance until after the fourth quarter. We expect the macroeconomic environment will not improve in the short term, and geopolitical issues remain persistent."

However, Thaysen added: "I am very clear that we have tremendous opportunities to create value for our customers and global partners, and of course, for our shareholders."

Thaysen pointed out that he has requested the board to establish a special committee to expedite decision-making related to Grail. Additionally, Illumina, Inc. is preparing for a sale or "capital market transaction" and will engage with third parties as a source of investment funding.

He said that Illumina's legal appeal to avoid divesting Grail "offers flexibility," but he emphasized that it is not his primary focus. "There’s no mistake, I’m here to concentrate on the core business," he said.

Thaysen said he plans to "push our top line as much as possible" through ongoing sequencer placements. He also indicated that the company needs to continue innovating in a way that is "highly focused on customer priorities." Automation and sample-to-answer sequencing systems may emerge. Illumina will continue to control operating expenses. The company is already on track to reduce $175 million in annual run-rate expenses, surpassing the previously announced plan to cut $100 million in annual spending.

Cowen analyst Dan Brennan wrote in a note to investors: "Thaysen expressed with a balanced and confident tone that the NGS market is vibrant."

Canaccord Genuity analyst Kyle Mikson downgraded Illumina's stock rating from "Buy" to "Hold," citing a "soft" near-term outlook and "noise" surrounding Grail. In a note to investors, he wrote, "No growth does not mean a valuation premium."

For the three months ended October 1, Illumina reported consolidated revenue of $1.12 billion, flat year over year, or up 1% in constant currency, and below the Wall Street consensus estimate of $1.13 billion.

The company has been reporting consolidated results as well as separate results for its core business and Grail.

Illumina's core business accounted for the vast majority of third-quarter revenue, with Grail contributing approximately $21 million, more than double the $10 million from the same period last year, mainly due to the adoption of Galleri. Sequencing total revenue was negatively impacted by weakness in the Chinese market, sanctions on Russian operations, and a decline in COVID-19 monitoring. Chief Financial Officer Joydeep Goswami stated that clinical sequencing revenue grew 10% year-over-year.

Illumina CFO Joydeep Goswami stated that Illumina's core sequencing consumables revenue was $695 million, a 4% decrease from $725 million in the same period last year. The primary reasons were a 12% decline in sales to research customers and a drop in NovaSeq 6000 consumables sales.

Goswami said that driven by the sales of NovaSeq X, instrument revenue increased from $162 million in the same period last year to $179 million, a year-on-year increase of 10%; however, the company's instrument sales this quarter were lower than expected. Due to the impact of macroeconomic conditions, converting interest into orders at the speed Illumina desires "has become a bit more challenging for us." Illumina shipped 97 NovaSeq X units this quarter and now expects shipments for 2023 to be between 330 and 340 units.

Canaccord Genuity's Mikson wrote: "We believe that the anticipated decline in shipment volumes appears relatively concerning, especially following what seemed to be a strong initial launch of products that the company views as driving long-term growth."

Revenue from COVID-19 monitoring products was $4 million, down from $28 million in the same period last year. Illumina's core services and other revenue grew by 15%, increasing from $123 million in Q3 2022 to $142 million, primarily driven by higher equipment service contract revenue and growth in laboratory services.

Revenue in the Americas was $650 million, an increase of 10% compared to $592 million in the same period last year. Revenue in Europe was $260 million, flat compared to the same period last year. Revenue in Greater China was $98 million, a decrease of 26% compared to $133 million in the same period last year, primarily due to macroeconomic and geopolitical issues as well as competition in the local mid-throughput equipment market. Revenue in Asia, the Middle East, and Africa was $98 million, a decrease of 22% year over year, impacted by weakness in Japan and slowing COVID sequencing.

The company reported a consolidated net loss of $754 million for this quarter, or $4.77 per share, compared to a loss of $3.82 billion, or $24.26 per share, in the third quarter of 2022. The loss includes $821 million in goodwill and intangible asset impairment related to Grail. In the same period last year, Illumina recorded a $3.91 billion goodwill impairment on Grail. Adjusted earnings per share were $0.33, surpassing the analysts' consensus estimate of $0.12.

Illumina's consolidated R&D expenses amounted to $315 million, representing a 3% decrease from $325 million in the same period last year. Specifically, Illumina's core R&D expenses dropped from $253 million to $238 million, marking a 6% year-over-year decline, while Grail's R&D expenses rose by 7% to $79 million from $74 million in the previous year.

The company's combined SG&A expenses increased from $146 million in Q3 2022 to $303 million, more than doubling year over year. Core Illumina SG&A expenses grew from $66 million to $216 million, more than tripling; Grail SG&A expenses were $87 million, a 7% increase from $81 million in the same period last year.

The company's cash and cash equivalents for this quarter were $927 million, with short-term investments at $6 million. This quarter, Illumina repaid the outstanding principal of convertible notes due in August with $750 million in cash.

On November 10, during the Nasdaq early trading session, Illumina's stock price fell by 14% to $91.94.

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