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Illumina (ILMN) Q2 Earnings Miss Estimates, Slashes '22 View

Illumina Inc.’s ILMN adjusted earnings per share (EPS) of 57 cents in second-quarter 2022 missed the Zacks Consensus Estimate by 9.5%. The bottom line also declined 69.5% from the year-ago quarter’s earnings of $1.87.

Our model projected an adjusted EPS of 63 cents in Q2.

The adjustments exclude certain expenses and benefits related to legal contingencies, incremental non-GAAP tax, among others.

Including one-time items, the company’s GAAP loss per share was $3.40, down 45% from the year-ago quarter’s EPS of $1.26.

Revenues

In the quarter under review, Illumina’s revenues were $1.16 billion, up 3.2% year over year. The top line missed the Zacks Consensus Estimate by 4.7%.

The second-quarter revenue compared with our own estimate of $1.22 billion.

Segment Details

Post the acquisition of GRAIL on Aug 18, 2021, Illumina has two reportable segments — Core Illumina and GRAIL.

Core Illumina revenues rose 2.7% year over year to $1.156 billion. Core Illumina Sequencing Consumable revenues totaled $744 million in the reported quarter, up 6% year over year, driven by a 20% growth in oncology testing.

Sequencing Instrument revenues for core Illumina were $119 million, reflecting a surge of 1% from the year-ago figure. The upside was driven by a 23% growth in NovaSeq shipments, offset by a 14% decline in the mid-throughput shipments on a year-over-year basis.

Illumina, Inc. Price, Consensus and EPS Surprise

Illumina, Inc. price-consensus-eps-surprise-chart | Illumina, Inc. Quote

Core Illumina sequencing service and other revenues were $125 million, down 2% year over year on one-time revenue recognized from NIPT royalties last year. The downside was partially offset by enhanced instrument service contracts and contributions from oncology co-development partnerships.

GRAIL contributed $12 million to revenues during the reported quarter.

Margins

The adjusted gross margin (excluding amortization of acquired intangible assets) was 69.5% in the reported quarter, highlighting a contraction of 239 basis points (bps) year over year.

We projected an adjusted gross margin of 66.9% for Q2.

Research and development expenses increased 61.9% year over year to $327 million, whereas selling, general & administrative expenses plunged 0.7% to $410 million. These pushed up operating costs by 19.8% to $737 million.

Adjusted operating income in the quarter was $70 million, reflecting a decline of 63.9% from the prior-year quarter’s $194 million. Operating margin contracted 1120 bps year over year to 6%.

The adjusted operating margin, according to our model, was 10.3% for Q2.

Financial Update

Illumina exited second-quarter 2022 with cash and cash equivalents plus short-term investments of $1.33 billion compared with $1.42 billion at the end of first-quarter 2022.

The company did not repurchase any common stock in the quarter.

Cumulative net cash provided by operating activities at the end of the quarter was $297 million compared with $535 million a year ago.

2022 Guidance

For 2022, Illumina now expects its consolidated revenue growth in the range of 4-5% year over year (down from the prior projection of 14-16%). The Zacks Consensus Estimate for the same is currently pegged at $5.20 billion.

The company also lowered its adjusted EPS guidance for 2022 to the range of $2.75-$2.90 (compared with the previous guidance of $4.00-$4.20). The Zacks Consensus Estimate for the same is currently pegged at $4.09.

The guidance considered both Core Illumina and GRAIL segments’ expected performances.

Our Take

Illumina delivered impressive top-line results in the second quarter of 2022. The substantial improvement in Core Illumina businesses looks encouraging. Contributions from the recently-concluded GRAIL acquisition also buoy optimism. Robust NovaSeq consumable and instrument shipments during the quarter under review seem promising. The continued strength in the company’s oncology markets is an added advantage.

However, Illumina’s earnings and revenues for the second quarter missed the Zacks Consensus Estimate. A stupendous rise in operating expenses led to a contraction in operating margin in the reported quarter. Deterioration in short-term cash levels raises concern. A reduction in full-year adjusted EPS and sales guidance raises apprehension.

Zacks Rank and Key Picks

Illumina currently carries a Zacks Rank #2 (Buy).

Some better-ranked stocks in the broader medical space that have announced quarterly results are Quest Diagnostics Incorporated DGX, Molina Healthcare, Inc. MOH and Merck & Co. MRK.

Quest Diagnostics, carrying a Zacks Rank #2, reported second-quarter 2022 adjusted EPS of $2.36, which beat the Zacks Consensus Estimate by 9.8%. Revenues of $2.45 billion outpaced the consensus mark by 7.5%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Quest Diagnostics has an earnings yield of 6.9% compared with the industry’s 3.9%. DGX’s earnings surpassed estimates in three of the trailing four quarters and missed the same in one, the average being 12.1%.

Molina Healthcare, having a Zacks Rank #2, reported second-quarter 2022 adjusted EPS of $4.55, which beat the Zacks Consensus Estimate by 4.8%. Revenues of $8.1 billion outpaced the consensus mark by 6.2%.

Molina Healthcare has a long-term estimated growth rate of 16.4%. MOH’s earnings surpassed estimates in the trailing four quarters, the average being 3.2%.

Merck reported second-quarter 2022 adjusted earnings of $1.87 per share, beating the Zacks Consensus Estimate of $1.67. Revenues of $14.6 billion surpassed the Zacks Consensus Estimate by 5.4%. It currently has a Zacks Rank #2.

Merck has a long-term estimated growth rate of 10.1%. MRK’s earnings surpassed estimates in the trailing four quarters, the average surprise being 16.8%.


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