On February 8, 2024 Illumina, Inc. (Nasdaq: ILMN) ("Illumina" or the "company") reported its financial results for the fourth quarter and fiscal year 2023, which include the consolidated financial results for GRAIL (Press release, Illumina, FEB 8, 2024, View Source [SID1234639940]).

Schedule your 30 min Free 1stOncology Demo!
Discover why more than 1,500 members use 1stOncology™ to excel in:

Early/Late Stage Pipeline Development - Target Scouting - Clinical Biomarkers - Indication Selection & Expansion - BD&L Contacts - Conference Reports - Combinatorial Drug Settings - Companion Diagnostics - Drug Repositioning - First-in-class Analysis - Competitive Analysis - Deals & Licensing

                  Schedule Your 30 min Free Demo!

"I’m pleased that in the fourth quarter, my first full quarter with the company, Illumina delivered results ahead of our expectations, driven by NovaSeq X instrument and consumables sales," said Jacob Thaysen, Chief Executive Officer. "While our customers generally remain constrained in their purchasing, we are well-positioned for growth as market conditions improve. Illumina is focused on three key priorities to accelerate value creation: driving our top line; focusing on operational excellence, including boosting productivity, cost savings, and customer-focused innovation; and working to resolve GRAIL as quickly as possible."

Fourth quarter consolidated results
GAAP Non-GAAP (a)
Dollars in millions, except per share amounts Q4 2023 Q4 2022 Q4 2023 Q4 2022
Revenue $ 1,122 $ 1,083 $ 1,122 $ 1,083
Gross margin 60.1 % 62.1 % 64.4 % 66.6 %
Research and development ("R&D") expense $ 341 $ 346 $ 329 $ 339
Selling, general and administrative ("SG&A") expense $ 485 $ 432 $ 342 $ 351
Goodwill and intangible impairment $ 6 $ — $ — $ —
Legal contingency and settlement $ 6 $ 21 $ — $ —
Operating (loss) profit $ (164) $ (127) $ 51 $ 31
Operating margin (14.6) % (11.7) % 4.6 % 2.9 %
Tax provision (benefit) $ 8 $ (28) $ 26 $ 9
Tax rate (4.9) % 16.8 % 55.4 % 29.3 %
Net (loss) income $ (176) $ (140) $ 22 $ 22
Diluted (loss) earnings per share $ (1.11) $ (0.89) $ 0.14 $ 0.14

(a) See the tables included in the "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 $51 million for Q4 2023. Cash flow provided by operations was $224 million, compared to cash flow provided by operations of $147 million in the prior year period. Free cash flow (cash flow provided by operations less capital expenditures) was $173 million for the quarter, compared to $59 million in the prior year period. Depreciation and amortization expenses were $109 million for Q4 2023. At the close of the quarter, the company held $1,054 million in cash, cash equivalents and short-term investments.

Fourth quarter segment results
Illumina has two reportable segments, Core Illumina and GRAIL.

Core Illumina
GAAP Non-GAAP (a)
Dollars in millions Q4 2023 Q4 2022 Q4 2023 Q4 2022
Revenue (b)
$ 1,097 $ 1,065 $ 1,097 $ 1,065
Gross margin (c)
63.3 % 65.9 % 64.7 % 67.3 %
R&D expense $ 260 $ 264 $ 248 $ 257
SG&A expense $ 391 $ 347 $ 259 $ 271
Goodwill and intangible impairment $ 6 $ — $ — $ —
Legal contingency and settlement $ 6 $ 21 $ — $ —
Operating profit
$ 33 $ 70 $ 203 $ 190
Operating margin 3.0 % 6.6 % 18.5 % 17.8 %

(a) See Table 3 included in the "Results of Operations – Non-GAAP" section below for reconciliations of these GAAP and non-GAAP financial measures.
(b) Core Illumina revenue for Q4 2023 was up 3% as compared to Q4 2022 and up 3% on a constant currency basis. Amounts for Q4 2023 and Q4 2022 both included intercompany revenue of $5 million, which is eliminated in consolidation.
(c) The year-over-year decrease in gross margin was primarily driven by the mix of lower margin strategic partnership revenue, lower instrument margins due to the NovaSeq X launch, which is typical with a new platform introduction, and increased field services and installation costs, partially offset by lower freight costs.

GRAIL
GAAP Non-GAAP (a)
In millions Q4 2023 Q4 2022 Q4 2023 Q4 2022
Revenue $ 30 $ 23 $ 30 $ 23
Gross (loss) profit $ (19) $ (26) $ 14 $ 8
R&D expense $ 84 $ 85 $ 84 $ 85
SG&A expense $ 94 $ 86 $ 83 $ 81
Operating loss $ (197) $ (197) $ (152) $ (159)

(a) See Table 3 included in the "Results of Operations – Non-GAAP" section below for reconciliations of these GAAP and non-GAAP financial measures.

Fiscal year 2023 consolidated results
GAAP Non-GAAP (a)
Dollars in millions, except per share amounts 2023 2022 2023 2022
Revenue $ 4,504 $ 4,584 $ 4,504 $ 4,584
Gross margin 60.9 % 64.8 % 65.3 % 68.6 %
R&D expense $ 1,354 $ 1,321 $ 1,325 $ 1,313
SG&A expense $ 1,612 $ 1,297 $ 1,367 $ 1,346
Goodwill and intangible impairment (b)
$ 827 $ 3,914 $ — $ —
Legal contingency and settlement $ 20 $ 619 $ — $ —
Operating (loss) profit $ (1,069) $ (4,179) $ 247 $ 487
Operating margin (23.7) % (91.2) % 5.5 % 10.6 %
Tax provision $ 44 $ 68 $ 98 $ 118
Tax rate (3.9) % (1.6) % 41.8 % 26.0 %
Net (loss) income $ (1,161) $ (4,404) $ 137 $ 336
Diluted (loss) earnings per share $ (7.34) $ (28.00) $ 0.86 $ 2.12

(a) See the tables included in "Results of Operations – Non-GAAP" section below for reconciliations of these GAAP and non-GAAP financial measures.
(b) The company recognized $712 million in goodwill and $109 million in intangible asset (IPR&D) impairment related to the GRAIL segment in 2023. The goodwill impairment was primarily due to a decrease in the company’s consolidated market capitalization and a higher discount rate selected for the fair value calculation of the GRAIL reporting unit. The IPR&D impairment was primarily due to a decrease in projected cash flows and a higher discount rate selected for the fair value calculation of the GRAIL IPR&D asset. In 2022, the company recognized $3.91 billion in goodwill impairment related to the GRAIL segment.
Capital expenditures for free cash flow purposes were $195 million for fiscal year 2023. Cash flow provided by operations was $478 million, compared to $392 million in the prior year. Free cash flow (cash flow provided by operations less capital expenditures) was $283 million for the year, compared to $106 million in the prior year. Depreciation and amortization expenses were $432 million for fiscal year 2023.

Fiscal year 2023 segment results

Core Illumina
GAAP Non-GAAP (a)
In millions 2023 2022 2023 2022
Revenue (b)
$ 4,438 $ 4,553 $ 4,438 $ 4,553
Gross margin 64.4 % 68.2 % 65.8 % 69.1 %
R&D expense $ 1,030 $ 1,004 $ 1,001 $ 996
SG&A expense $ 1,248 $ 1,003 $ 1,032 $ 1,069
Goodwill and intangible impairment $ 6 $ — $ — $ —
Legal contingency and settlement $ 20 $ 619 $ — $ —
Operating profit $ 552 $ 481 $ 885 $ 1,081
Operating margin 12.4 % 10.6 % 19.9 % 23.8 %

(a) See Table 3 included in the "Results of Operations – Non-GAAP" section below for reconciliations of these GAAP and non-GAAP financial measures.
(b) Core Illumina revenue for 2023 was down 3% from 2022, and down 1% on a constant currency basis. Amounts for 2023 and 2022 included intercompany revenue of $26 million and $24 million, respectively, which is eliminated in consolidation.

GRAIL
GAAP Non-GAAP (a)
In millions 2023 2022 2023 2022
Revenue $ 93 $ 55 $ 93 $ 55
Gross (loss) profit $ (96) $ (117) $ 38 $ 17
R&D expense $ 338 $ 330 $ 338 $ 330
SG&A expense $ 366 $ 296 $ 337 $ 279
Goodwill and intangible impairment $ 821 $ 3,914 $ — $ —
Operating loss $ (1,621) $ (4,657) $ (638) $ (592)

(a) See Table 3 included in the "Results of Operations – Non-GAAP" section below for reconciliations of these GAAP and non-GAAP financial measures.

Key announcements by Illumina since Illumina’s last earnings release
•Announced the decision to divest GRAIL, executed through a third-party sale or capital markets transaction, with the goal of finalizing terms by the end of the second quarter 2024
•Submitted a confidential, draft registration statement on Form 10 related to the GRAIL divestment to the U.S. Securities and Exchange Commission
•Signed agreement with Janssen Research & Development, LLC (Janssen) to collaborate on the development of Illumina’s novel molecular residual disease (MRD) assay
•Expanded the Alliance for Genomic Discovery, adding Bristol Myers Squibb (BMS), GSK and Novo Nordisk to join founding member organizations AbbVie, Amgen, AstraZeneca, Bayer, and Merck, who together will co-fund the whole-genome sequencing (WGS) of 250,000 data samples and have access to the resulting data for use in drug discovery and therapeutic development
•Launched the Global Health Access Initiative to support access to pathogen sequencing tools for public health in low- and middle-income countries (LMICs)
•Conducted a stewardship-focused non-deal roadshow led by Illumina’s independent board directors; held discussions with shareholders owning more than half of outstanding shares

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
•Highlighted the presentation of analytical and clinical validation data on a novel prognostic test in early-stage lung cancer, generated through collaboration with the Samsung Medical Centre and AstraZeneca, demonstrating sensitive and specific detection of circulating tumor DNA (ctDNA) for Lung Adenocarcinoma (LUAD) at a clinically meaningful threshold for disease prognostication
•Announced that it will initiate Real-world Evidence to Advance Multi-Cancer Early Detection Health Equity (REACH/Galleri-Medicare study) following the U.S. Food and Drug Administration’s (FDA) approval of GRAIL’s Investigational Device Exemption (IDE) application and the Centers for Medicare and Medicaid Services’ (CMS) approval for Medicare coverage of the study
•Announced BeniComp, a customized health plan provider, and Curative Insurance, a pioneering healthcare services company, will make Galleri available to eligible patients

A full list of recent GRAIL announcements can be found in GRAIL’s Newsroom.

Financial outlook and guidance
For fiscal year 2024, the company expects Core Illumina revenue to be approximately flat compared to fiscal year 2023 and Core Illumina non-GAAP operating margin to be approximately 20%. While Illumina continues to move as quickly as possible to resolve GRAIL, the company is focusing its financial outlook on Core Illumina, as the specific timing and impact of the GRAIL divestment remains uncertain.

The company provides forward-looking guidance on a non-GAAP basis. The company is unable to provide a reconciliation of forward-looking non-GAAP financial measures to the most directly comparable GAAP reported financial measures because it is unable to predict with reasonable certainty the financial impact of items such as acquisition-related expenses, gains and losses from our strategic investments, fair value adjustments related to contingent consideration and contingent value rights, potential future asset impairments, restructuring activities, and the ultimate outcome of pending litigation without unreasonable effort. These items are uncertain, inherently difficult to predict, depend on various factors, and could have a material impact on GAAP reported results for the guidance period. For the same reasons, the company is unable to address the significance of the unavailable information, which could be material to future results.

Conference call information
The conference call will begin at 2 p.m. Pacific Time (5 p.m. Eastern Time) on Thursday, February 8, 2024. Interested parties may access the live teleconference through the Investor Info section of Illumina’s website at investor.illumina.com. Alternatively, individuals can access the call by dialing 877.400.0505 or +1.323.701.0225 outside North America, both using conference ID 1615812. 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.