Yahoo Finance Illumina, Inc. (NASDAQ:ILMN) Q1 2024 Earnings Call Transcript
Illumina, Inc. (NASDAQ:ILMN) Q1 2024 Earnings Call Transcript May 2, 2024
Illumina, Inc. misses on earnings expectations. Reported EPS is $-0.79245 EPS, expectations were $0.03. Illumina, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, ladies and gentlemen, and welcome to the First Quarter 2024 Illumina Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Salli Schwartz, Vice President of Investor Relations.
Salli Schwartz: Hello, everyone, and welcome to our earnings call for the first quarter of 2024. During the call today, we will review the financial results we released after the close of market and offer commentary on our commercial and regulatory activity, after which we will host a question-and-answer session. Our earnings release can be found in the Investor Relations section of our website at illumina.com. Providing prepared remarks for Illumina today will be Jacob Thaysen, Chief Executive Officer; and Ankur Dhingra, Chief Financial Officer. Jacob will provide an update on the state of Illumina's business and Ankur will review our financial results, which include GRAIL. Joydeep Goswami who is serving as an advisor to the company through June 30 will then join us for Q&A.
As a reminder, GRAIL must be held and operated separately and independently from Illumina, pursuant to the transitional measures ordered by the European Commission, which prohibited our acquisition of GRAIL under the EU merger regulation. This call is being recorded and the audio portion will be archived in the Investors section of our website. It is our intent that all forward-looking statements regarding our financial results and commercial activity made during today's call will be protected under the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties. Actual events or results may differ materially from those projected or discussed. All forward-looking statements are based upon current available information, and Illumina assumes no obligation to update these statements.
To better understand the risks and uncertainties that could cause actual results to differ, we refer you to the documents that Illumina files with the Securities and Exchange Commission including Illumina's most recent Forms 10-Q and 10-K. With that, I'll now turn the call over to Jacob.
Jacob Thaysen: Thank you, Salli. Good afternoon, everyone. Before going into our first quarter results, I want to take a moment to thank our former Chief Financial Officer, and Chief Strategy and Corporate Development Officer, Joydeep Goswami, for his many contributions to Illumina over more than four years. As Salli noted, Joydeep will stay on an advisory role through June to support a smooth transition. I also wanted to welcome our new CFO, Ankur Dhingra, who you will hear from shortly, and congratulate Jakob Wedel, who has now been named as Chief Strategy and Corporate Development Officer. Jakob joined Illumina in November and has been heavily involved in our long-term strategy planning. Throughout the quarter, I continued to meet with customers around the world and had the opportunity to bring a number of them to our San Diego headquarters to discuss new ways to collaborate, innovate, and shape what their future looks like with Illumina.
Some of our customers shared how they are scaling up their projects with NovaSeq X to unlock greater discovery power. One key area of focus is harnessing whole genome opportunities in minimal residual disease. Other customers are starting to sequence deeper and are adding multiomics layers to their projects, while others are looking at epigenomic biomarkers and methylation to help diagnose and characterize disease. We are seeing a significant opportunity to expand in multiomics. Customers are looking for more sophisticated solutions to support their work, and we are exploring all avenues to create value in this space. Our recent acquisition of Partek, a specialized multiomics software solution, is a building block of our expansion into this space.
Our intent is to collaborate with our customers to understand how we can provide more sample to answer solutions. Illumina is at the heart of the ecosystem and we will continue to catalyze the industry with an even greater focus on our customers' priorities. Turning to our first quarter results, I'll focus my comments on Core Illumina. In Q1, we delivered Core Illumina revenue of approximately $1.06 billion ahead of our expectations. While it was a decent start to the year, we remain cautious due to the persistently challenging global macro environment where customers are still constrained in their purchasing decisions. As expected, we are seeing this playing out across our regions, notably with lower NovaSeq X placements versus the first quarter of 2023, where we shipped our first X instrument to fulfill a strong pre-order book.
Three of our regions declined year-over-year. America's revenue was down 4%. EMEA revenue was down 3%. And Greater China revenue was down 14%. Europe revenue was up 7% year-over-year although we expect a decline in Q2 given the last year's strong X shipment in Europe in the second quarter. Nonetheless, Illumina management team continues to make significant progress executing against my three key priorities to accelerate value creation across the company. My first priority, driving our top line, is grounded in a growing installed base and helping customers realize the full potential of our instruments. In Q1, we shipped an additional 55 NovaSeq X instruments, bringing our total X installed base to more than 400 instruments. This is a solid start of the year and we expect momentum to continue to build.
We also saw promising consumables demand throughout the quarter as our customers continue to scaling their operations and expand their sequencing projects. With the launch of the 25B Reagent Kit in Q4 and the 1.5B in Q1, and alongside with the well-received upgrade of the 10B flow cell, we are now providing our customers with the full suite of NovoSeq X products. In Q1, we also made XLEAP-SBS chemistry available to our mid-throughput customers with the launch of our P4 flow cell on the existing NextSeq 1K, 2K instruments. In the first several weeks post-launch, we have received exceptional feedback from customers who are reporting reads that exceed specs for quantity and quality. Customers are positive about the simple migration that's enabled them to run spatial and single-cell projects, and they are impressed with the accuracy they see with the dragon on board.
Illumina continues to pursue strategic partnership and alliances to drive the entire genomics ecosystem forward. As a recent example, Pillar Biosciences announced FDA approval for its pan-cancer IVD for general tumor profiling on the Illumina MiSeq DX system. We've been partner with Pillar since 2017 and are excited for this important milestone. Also in the quarter, Bristol Myers Squibb joined our previously announced collaboration with Johnson & Johnson Innovative Medicine on the development of our multi-cancer whole genome sequencing based molecular residual disease assay to better understand disease recurrence. You should expect to see more of these types of activities going forward. Now turning to my second priority. I'm continuing my focus on delivering operational excellence by driving margin improvement through increased productivity by sustaining innovation and growth.
It has been my goal to align our organization in a way that best supports our customers' evolving needs. In March, we brought together our marketing and commercial teams under one customer first global function. I'm confident that combining these teams into one global commercial organization will build our agility to better serve customers, while delivering more sustained growth and margins over time. Additionally, we are focused on driving further improvements throughout our end-to-end supply chain and are taking a disciplined approach to improve our cost structure. In Q1, we implemented new initiatives to adjust pricing across our portfolio to better cover our global operational cost. We also made progress in streamlining our real estate footprint as we exited select facilities in the Bay Area and in San Diego.
These actions add to the number of ongoing initiatives that will continue to support our margins and increase further flexibility for investment in high growth areas. We are also tightly focused on stabilizing our Greater China business. And in Q1, we brought on Jenny Zheng as Head of Region. Jenny has deep expertise in healthcare and global organization and a strong leadership and execution mindset. She's already proving to be a great leader of our China team and is introducing changes to make our business more in China for China, which will include improving our local manufacturing and partnerships in the region. Moving on to my third priority, which is working to resolve GRAIL as quickly as possible. In April, we reached an important milestone in the divestment process when the European Commission approved our divestment plan for GRAIL.
The approved plan contemplates both sales and capital markets options and we have made progress on both paths, consistent with the European Commission's divestiture. In the event of a capital market transaction, we are required to capitalize GRAIL with approximately $1 billion, reflecting two and a half years of funding based on GRAIL's long-range plan. The amount includes cash on GRAIL's balance sheet. We are on track to finalize the terms of the transactions by the end of the second quarter. I look forward to having additional updates for you soon. Overall, I'm encouraged by the progress we have achieved in the quarter and optimistic about delivering on our initiatives here in 2024. Now I'll ask Ankur to share more detail on our first quarter results and outlook.
Ankur Dhingra: Thank you, Jacob. And hello, everyone. I'm very excited to join Team Illumina to improve human health by unlocking the power of the genome. I'm passionate about making a positive, meaningful impact in health care. I am very familiar with the role Illumina has played in establishing and advancing the genomics industry over the last 25 years. Building on that strong foundation, I'm confident we can continue leading, supporting our customers, and delivering on the promise of what genomics can do for patients around the globe. I would also like to express my thanks to Joydeep for his support as I transition into my role. It's been a great first two and a half weeks. I'll start by reviewing our segment results for Core Illumina and GRAIL, followed by consolidated financial results, and then conclude with my remarks on our current outlook for 2024.
I will be discussing non-GAAP results, which include stock-based compensation. I encourage you to review the GAAP reconciliation of these non-GAAP measures which can be found in today's release and in the supplementary data available on our website. Starting with our segment financials. Core Illumina first quarter revenue was $1.06 billion dollars, which is down 2% year-on-year, both on a reported and constant currency basis. This revenue performance exceeded our expectations and was primarily driven by three areas. First, strong performance in high throughput consumables. Second, timing of revenue from certain strategic partnerships. And third, some customers accelerating delivery of a few NovaSeq X instruments from Q2 into Q1. Core Illumina sequencing consumables revenue of $698 million was up 1% year-over-year, primarily due to growth in high throughput.
On a sequential basis, NovaSeq X consumables grew in the double digits following the successful launch of the 25B flow cell. Total sequencing GB output on our connected high and mid-throughput instruments grew over 35% year-over-year and grew at a high single digit rate quarter-over-quarter. The research and applied activity benefited as transition to the NovaSeq X continues to ramp and 25B adoption grew at large core labs. Clinical activity continued to be driven predominantly by the NovoSeq 6000. As a reminder, we believe this data is a useful reference that shows the general activity trends across our install base and is directionally correlated with revenue over time. Sequencing instruments revenue for Core Illumina of $110 million declined 29% year-over-year in Q1 2024.
The year-over-year decline was driven both by, one, an expected decline in mid-through-put shipments as capital and cash flow constraints continue to impact purchasing behavior and moderate instrument placements, and second, lower NovaSeq X placements as compared to significant pre-order launch-related shipments in the first quarter of 2023. For NovaSeq X, as Jacob noted, we shipped 55 instruments in Q1. Core Illumina sequencing service and other revenue of $151 million was up 27% year-over-year, driven primarily by an increase in revenue from strategic partnerships and higher instrument service contract revenue on a growing install base. Moving to the rest of the Core Illumina P&L. Core Illumina non-GAAP gross margin of 67.1% for the quarter increased 190 basis points year-over-year, driven primarily by a more favorable mix of sequencing consumables and execution of our operational excellence priorities that delivered cost savings, including freight and improved productivity.
This was partially offset by certain strategic partnership revenue, that is lower margin, and increased warranty and fuel service cost. Core Illumina non-GAAP operating expenses of $491 million were down $23 million year-over-year, primarily due to decreased labor expense as a result of reduced headcount and continued savings from our cost containment initiatives. Core Illumina non-GAAP operating expenses were lower than expected due to timing of project spend shifting from Q1 into Q2 and lower stock-based compensation expense due to one-time reversals. Putting it all together, Core Illumina non-GAAP operating margin was 20.6% in Q1 2024 compared to 17.4% in Q1 2023. Transitioning to financial results for GRAIL. GRAIL revenue of $27 million for the quarter grew 35% year-over-year, driven primarily by adoption of Galleri.
GRAIL non-GAAP operating expenses totaled $197 million and increased $24 million year-over-year, driven primarily by increased headcount to support commercial expansion and research and development. Moving to consolidated financial results. In the first quarter, consolidated revenue of $1.08 billion was down 1% year-over-year, both on a reported and constant currency basis. Non-GAAP net income was $14 million or $0.09 per diluted share, which included dilution from GRAIL's non-GAAP operating loss of $185 million for the quarter. Non-GAAP EPS exceeded our expectations, driven primarily by higher core revenue and lower core operating expenses in the quarter. Our Q1 non-GAAP tax rate was 46.4% compared to 27.3% in Q1 2023, with both periods including a meaningful impact from the consolidations of GRAIL's operating loss, which increased by $21 million year-over-year.
Absent the impact of GRAIL, our Q1 2024 and Q1 2023 tax rates were in the mid-20s. Our non-GAAP weighted average diluted share count for the quarter was approximately 159 million. Moving to consolidated cash flow and balance sheet items for the quarter. Cash flow provided by operations were $77 million. Capital expenditures were $36 million and free cash flow was $41 million and we did not repurchase any common stock. We ended the quarter with approximately $1.12 billion in cash, cash equivalents and short-term investments. Moving now to 2024 guidance. As a reminder, Illumina is moving as quickly as possible to resolve GRAIL, and the company is focusing its 2024 financial outlook on Core Illumina, given the uncertainty around the specific timing and impact of the GRAIL divestment.
Our guidance does not assume any impact from the potential divestment of GRAIL in 2024. We will provide non-GAAP EPS guidance for 2024 upon completion of the divestment. We are encouraged by our results in Q1 that came in ahead of our expectations, both for top line and margins. We've also seen the seasonal rebuild of our total performance obligations, our backlog, which increased more than 20% from the end of Q4. At the same time, we're still not seeing any significant improvement in the macroeconomic environment or our business in China. And we are monitoring the impact of a strengthening US dollar. While we are seeing early strength in consumables to start the year, it's being offset by capital constraints that are continuing to weigh on instrument purchases.
As such, we are reiterating our full year 2024 Core Illumina revenue guidance of approximately flat from 2023, and non-GAAP operating margin of approximately 20%. Our operating margin expectations continue to reflect the benefit of gross margin improvement and disciplined management of our expenses, including reduced headcount, offset by normalization of our performance-based compensation, as well as the impacts of inflation. For the second quarter of 2024, we expect Core Illumina revenue in the range of $1.072 billion to $1.084 billion, reflecting a year-over-year decline of 6.5 to 7.5 percentage points. The year-over-year decline is predominantly because of the lower NovaSeq X instrument shipments, given the significant backlog we worked through early last year following the launch.
At the midpoint, this guidance reflects a $22 million sequential increase from Q1 of 2024. For the second quarter, we expect Core Illumina non-GAAP operating margin of approximately 18%, resulting from a seasonal step up in operating expenses in Q2 compared to Q1, primarily due to an increase in stock-based compensation expenses from the timing of equity grants. We also expect an increase due to some project spending shifting into Q2 from Q1. With that, I will now turn it back over to Jacob for his closing remarks. Thank you.
Jacob Thaysen: Thanks, Ankur. Before we close and move to Q&A, I'd like to comment on our upcoming strategy update event. Illumina's leadership team has been reexamining our strategy, the roadmap and initiatives for achieving it, and the profitable growth we believe it can produce. Our strategy will continue to play to Illumina strength of building the genomics ecosystem and maintaining a tight customer focus in an increasingly competitive space. Central to this is our goal of making customers the heroes in their labs. In every customer meeting we are listening intently to understand what they need to unleash the full power of their Illumina instruments and making their priorities the core of our strategy. You will see us continue to develop more sample-to-answer solutions to enable the genomics and multiomics ecosystem.
We'll maintain our open platform approach and continue to drive the innovation that our customers need to succeed and for which Illumina is known. Illumina has long been the standard at NGS. Our strategic, hands-on support for customers globally, our deep experience and expertise across multiple research and clinical markets, and our decade-long technology roadmap position us well to continuing leading the industry and enabling our customers to improve human health. I am excited to announce that we will be sharing our comprehensive strategy work with you during a virtual event in the fall of this year. We will have more information in the coming month. Thank you for joining. I'll now invite Ankur and Joydeep to join me for Q&A.
Operator: Thank you. [Operator Instructions] Our first question comes from the line of Doug Schenkel with Wolfe Research.
See also
Top 20 States Where the US Military Spends the Most Money and
15 Biggest Aircraft Carriers in the World.
To continue reading the Q&A session, please click here.
