On February 7, 2023 Illumina, Inc. (Nasdaq: ILMN) reported its financial results for the fourth quarter and fiscal year 2022, which include consolidated financial results for GRAIL (Press release, Illumina, FEB 7, 2023, View Source [SID1234626937]).
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"Our fourth quarter operating results were in line with our expectations, with ongoing traction across our product portfolio amid a challenging macroeconomic environment," said Francis deSouza, Chief Executive Officer. "Illumina’s continued focus on innovation across multiple new products, including the NovaSeq X, the most powerful, most sustainable, and most cost-effective sequencer ever developed, have been met with strong customer interest. Our order book is exceeding expectations and we have begun shipping instruments. GRAIL ended the year with accelerating consumer excitement for its Galleri test; more than 4,500 health providers ordered the test in 2022, contributing to more than 60,000 tests ordered to date."
Fourth quarter consolidated results
GAAP
Non-GAAP (a)
Dollars in millions, except per share amounts
Q4 2022
Q4 2021
Q4 2022
Q4 2021
Revenue
$ 1,083
$ 1,198
$ 1,083
$ 1,198
Gross margin
62.1 %
68.2 %
66.6 %
71.5 %
Research and development ("R&D") expense
$ 346
$ 350
$ 339
$ 350
Selling, general and administrative ("SG&A") expense
$ 432
$ 426
$ 351
$ 361
Legal contingency and settlement
$ 21
$ —
$ —
$ —
Operating (loss) profit
$ (127)
$ 41
$ 31
$ 146
Operating margin
(11.7) %
3.4 %
2.9 %
12.2 %
Tax rate
16.8 %
(30.4) %
29.3 %
15.6 %
Net (loss) income
$ (140)
$ 112
$ 22
$ 117
Diluted (loss) earnings per share
$ (0.89)
$ 0.71
$ 0.14
$ 0.75
(a) See the tables included in "Results of Operations – Non-GAAP" section below for reconciliations of these GAAP and non-GAAP financial measures.
Capital expenditures for free cash flow purposes were $88 million for Q4 2022. Cash flow provided by operations was $147 million, compared to $282 million in the prior year period. Free cash flow (cash flow provided by operations less capital expenditures) was $59 million for the quarter, compared to $212 million in the prior year period. Depreciation and amortization expenses were $107 million for Q4 2022. At the close of the quarter, the company held $2,037 million in cash, cash equivalents and short-term investments, compared to $1,339 million as of January 2, 2022. Cash as of the close of the quarter included $991 million in net proceeds from the term notes issued on December 13, 2022.
Fourth quarter segment results
Illumina has two reportable segments, Core Illumina and GRAIL.
Core Illumina
GAAP
Non-GAAP (a)
Dollars in millions
Q4 2022
Q4 2021
Q4 2022
Q4 2021
Revenue (b)
$ 1,065
$ 1,193
$ 1,065
$ 1,193
Gross margin
65.9 %
71.0 %
67.3 %
71.6 %
R&D expense
$ 264
$ 274
$ 257
$ 274
SG&A expense
$ 347
$ 351
$ 271
$ 306
Legal contingency and settlement
$ 21
$ —
$ —
$ —
Operating profit
$ 70
$ 222
$ 190
$ 274
Operating margin
6.6 %
18.6 %
17.8 %
22.9 %
(a) See Table 3 included in "Results of Operations – Non-GAAP" section below for reconciliations of these GAAP and non-GAAP financial measures.
(b) Core Illumina revenue for Q4 2022 was down 11% from Q4 2021, and down 8% on a constant currency basis. Amounts for Q4 2022 and Q4 2021 included intercompany revenue of $5 million, which is eliminated in consolidation.
GRAIL
GAAP
Non-GAAP (a)
In millions
Q4 2022
Q4 2021
Q4 2022
Q4 2021
Revenue
$ 23
$ 10
$ 23
$ 10
Gross (loss) profit
$ (26)
$ (30)
$ 8
$ 3
R&D expense
$ 85
$ 76
$ 85
$ 76
SG&A expense
$ 86
$ 76
$ 81
$ 55
Operating loss
$ (197)
$ (182)
$ (159)
$ (128)
(a) See Table 3 included in "Results of Operations – Non-GAAP" section below for reconciliations of these GAAP and non-GAAP financial measures.
Fiscal year 2022 consolidated results
GAAP
Non-GAAP (a)
Dollars in millions, except per share amounts
2022
2021 (b)
2022
2021 (b)
Revenue
$ 4,584
$ 4,526
$ 4,584
$ 4,526
Gross margin
64.8 %
69.7 %
68.6 %
71.3 %
R&D expense
$ 1,321
$ 1,185
$ 1,313
$ 989
SG&A expense
$ 1,297
$ 2,092
$ 1,346
$ 1,140
Legal contingency and settlement
$ 619
$ —
$ —
$ —
Goodwill impairment (c)
$ 3,914
$ —
$ —
$ —
Operating (loss) profit
$ (4,179)
$ (123)
$ 487
$ 1,096
Operating margin
(91.2) %
(2.7) %
10.6 %
24.2 %
Tax rate
(1.6) %
13.8 %
26.0 %
17.3 %
Net (loss) income
$ (4,404)
$ 762
$ 336
$ 892
Diluted (loss) earnings per share
$ (28.00)
$ 5.04
$ 2.12
$ 5.90
(a) See the tables included in "Results of Operations – Non-GAAP" section below for reconciliations of these GAAP and non-GAAP financial measures.
(b) Consolidated financial results for GRAIL are included in 2021 for the period after the acquisition.
(c) The company recognized $3.91 billion in goodwill impairment related to the GRAIL segment in 2022, primarily due to the negative impact of current capital market conditions and higher discount rates, including a standalone risk premium, on the fair value calculation of the GRAIL segment.
Capital expenditures for free cash flow purposes were $286 million for fiscal year 2022. Cash flow provided by operations was $392 million, compared to $545 million in the prior year. Free cash flow (cash flow provided by operations less capital expenditures) was $106 million for the year, compared to $337 million in the prior year. Depreciation and amortization expenses were $394 million for fiscal year 2022.
Fiscal year 2022 segment results
Following the acquisition of GRAIL on August 18, 2021, we have two reportable segments, Core Illumina and GRAIL. GRAIL financial results are reflected for the period after the acquisition.
Core Illumina
GAAP
Non-GAAP (a)
Dollars in millions
2022
2021
2022
2021
Revenue (b)
$ 4,553
$ 4,519
$ 4,553
$ 4,519
Gross margin
68.2 %
70.7 %
69.1 %
71.3 %
R&D expense
$ 1,004
$ 885
$ 996
$ 885
SG&A expense
$ 1,003
$ 1,502
$ 1,069
$ 1,064
Legal contingency and settlement
$ 619
$ —
$ —
$ —
Operating profit
$ 481
$ 808
$ 1,081
$ 1,273
Operating margin
10.6 %
17.9 %
23.8 %
28.2 %
(a) See Table 3 included in "Results of Operations – Non-GAAP" section below for reconciliations of these GAAP and non-GAAP financial measures.
(b) Core Illumina revenue for 2022 was up 1% from 2021, and up 3% on a constant currency basis. Amounts for 2022 and 2021 included intercompany revenue of $24 million and $5 million, respectively, which is eliminated in consolidation.
GRAIL
GAAP
Non-GAAP (a)
In millions
2022
2021
2022
2021
Revenue
$ 55
$ 12
$ 55
$ 12
Gross (loss) profit
$ (117)
$ (41)
$ 17
$ 3
R&D expense
$ 330
$ 300
$ 330
$ 104
SG&A expense
$ 296
$ 590
$ 279
$ 76
Goodwill impairment (b)
$ 3,914
$ —
$ —
$ —
Operating loss
$ (4,657)
$ (931)
$ (592)
$ (177)
(a) See Table 3 included in "Results of Operations – Non-GAAP" section below for reconciliations of these GAAP and non-GAAP financial measures.
(b) The company recognized $3.91 billion in goodwill impairment related to the GRAIL segment in 2022, primarily due to the negative impact of current capital market conditions and higher discount rates, including a standalone risk premium, on the fair value calculation of the GRAIL segment.
Key announcements by Illumina since Illumina’s last earnings release
Partnered with Amgen, a global biopharmaceutical company, to whole-genome sequence a cohort of approximately 35,000 DNA samples made up of DNA from African Americans, who are currently underrepresented in research for the clinical applications of genomics, including drug target discovery
Achieved the highest score out of 72 companies in its industry in the S&P Global Corporate Sustainability Assessment, also known as the Dow Jones Sustainability Index (DJSI)
Opened an over 9,100-square-foot state-of-the-art Solutions Center in Dubai, United Arab Emirates to offer Illumina’s partners and customers broad genomic capabilities
Announced a comprehensive, high-accuracy long-read view of the genome for as low as $600 with Illumina Complete Long Read Prep with Enrichment, available in the second half of 2023
Appointed Joydeep Goswami as Chief Financial Officer
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
Launched research use only, methylation-based solution for cancer prognosis, minimal residual disease and recurrence monitoring and biomarker discovery
Expanded partnership with Point32Health to offer Galleri to Harvard Pilgrim Health Care members on the Maine Health Insurance Marketplace, the second phase of a pilot focusing on collecting real-world evidence to assess the impact of Galleri on health care resource utilization and patient-reported outcomes
Announced findings from a fundamental substudy of the Circulating Cell-free Genome Atlas (CCGA) study, demonstrating that methylation had the most promising combination of cancer detection and prediction of cancer signal origin when compared with other evaluated approaches
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 our 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 expects consolidated revenue growth of 7% to 10% compared to fiscal year 2022. We expect GAAP diluted earnings per share of $0.03 to $0.28 and non-GAAP diluted earnings per share of $1.25 to $1.50. The GAAP and non-GAAP diluted earnings per share guidance ranges assume that the existing R&D capitalization requirements are not repealed in fiscal year 2023 and, as a result, reflect an impact of approximately $75 million.
The company expects Core Illumina revenue growth of 6% to 9% compared to fiscal year 2022. GRAIL revenue is expected to be in the range of $90 million to $110 million.
Conference call information
The conference call will begin at 2 p.m. Pacific Time (5 p.m. Eastern Time) on Tuesday, February 7, 2023. Interested parties may access the live teleconference through the Investor Info section of Illumina’s website under the "Company" tab at www.illumina.com. Alternatively, individuals can access the call by dialing 844.394.5144 or +1.773.305.6867 outside North America, both using conference ID 5339523. 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.
Statement regarding use of non-GAAP financial measures
The company reports non-GAAP results for diluted earnings per share, net income, gross margin, operating expenses, including research and development expense, selling general and administrative expense, legal contingencies and settlement, and goodwill impairment, operating income (loss), operating margin, gross profit (loss), other income (expense), tax provision, constant currency revenue growth, and free cash flow (on a consolidated and, as applicable, segment basis for our Core Illumina and GRAIL segments) in addition to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. The company’s financial measures under GAAP include substantial charges such as amortization of acquired intangible assets among others that are listed in the itemized reconciliations between GAAP and non-GAAP financial measures included in this press release, as well as the effects of currency translation. Management has excluded the effects of these items in non-GAAP measures to assist investors in analyzing and assessing past and future operating performance, including in the non-GAAP measures related to our Core Illumina and GRAIL segments. Additionally, non-GAAP net income and diluted earnings per share are key components of the financial metrics utilized by the company’s board of directors to measure, in part, management’s performance and determine significant elements of management’s compensation.
The company encourages investors to carefully consider its results under GAAP, as well as its supplemental non-GAAP information and the reconciliation between these presentations, to more fully understand its business. Reconciliations between GAAP and non-GAAP results are presented in the tables of this release.