On November 4, 2021 Illumina, Inc. (NASDAQ: ILMN) reported its financial results for the third quarter of fiscal year 2021, which include the consolidated financial results of GRAIL (Press release, Illumina, NOV 4, 2021, View Source [SID1234594426]).
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Third quarter consolidated results:
Revenue of $1,108 million, a 40% increase compared to the prior year period
GAAP net income for the quarter of $317 million, or $2.08 per diluted share, which included a $900 million gain from our previously held investment in GRAIL and $654 million in day one compensation expense related to the GRAIL acquisition. This compared to $179 million, or $1.21 per diluted share, for the prior year period
Non-GAAP net income for the quarter of $221 million, or $1.45 per diluted share, which included dilution from GRAIL non-GAAP operating loss of $0.19 per diluted share and incremental dilution from the 9.8 million shares issued to fund the GRAIL acquisition of $0.06 per diluted share. This compared to $150 million, or $1.02 per diluted share, for the prior year period. Non-GAAP net income excludes gain on previously held investment in GRAIL, day one compensation related expense and other acquisition-related expenses (see the "Reconciliation Between GAAP and Non-GAAP Net Income" table for a reconciliation of these GAAP and non-GAAP financial measures)
Cash flow from operations of $(272) million compared to $153 million in the prior year period
Free cash flow (cash flow from operations less capital expenditures) of $(324) million for the quarter compared to $105 million in the prior year period
"Illumina’s financial results again exceeded expectations in the third quarter led by record shipments for both clinical and research," said Francis deSouza, Chief Executive Officer. "Clinical market expansion is driving momentum in the core business, including significant demand in testing for therapy selection in oncology as we continue to advance genomics as a standard of care in the clinic. Our teams’ continued execution to meet this robust demand will enable a strong finish to an exceptional 2021."
Gross margin in the third quarter of 2021 was 69.5% compared to 66.2% in the prior year period. Excluding amortization of acquired intangible assets, non-GAAP gross margin was 71.2% for the third quarter of 2021 compared to 67.4% in the prior year period.
Research and development (R&D) expenses for the third quarter of 2021 were $436 million compared to $172 million in the prior year period. Excluding acquisition-related compensation expense, non-GAAP R&D expenses as a percentage of revenue were 21.7% compared to 21.2% in the prior year period.
Selling, general and administrative (SG&A) expenses for the third quarter of 2021 were $879 million compared to $192 million in the prior year period. Excluding day one compensation related expense and other acquisition-related expenses, and fair value adjustments on contingent consideration liabilities, non-GAAP SG&A expenses as a percentage of revenue were 26.0% compared to 24.8% in the prior year period.
Depreciation and amortization expenses were $65 million and capital expenditures for free cash flow purposes were $52 million during the third quarter of 2021. At the close of the quarter, the company held $1.3 billion in cash, cash equivalents and short-term investments, compared to $3.5 billion as of January 3, 2021.
Third quarter 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.
Updates since our last earnings release:
Closed the GRAIL acquisition to accelerate patient access to life-saving, multi-cancer early-detection tests; we are holding GRAIL as a separate entity pending EU regulatory review of the merger
Announced TSO 500 partnership with Merck to develop and commercialize tests that identify genetic mutations used in the assessment of homologous recombination deficiency (HRD)
Co-authored study published in JAMA Pediatrics reporting findings from the NICUSeq Randomized Time-Delayed Trial, demonstrating whole genome sequencing outperforms usual care by two-fold in diagnostic efficacy and clinical management of acutely-ill newborns with suspected genetic disease
Announced an agreement with Israel’s Ministry of Health for a pilot program to implement the use of whole-genome sequencing in critically-ill infants suspected of having a genetic disorder in neonatal intensive care units
Expanded presence in Latin America with the creation of Illumina Colombia S.A.S. and Illumina México Productos de Biotecnología to advance clinical business in the region and increase support for local customers and partners
Announced net zero global greenhouse gas emissions commitment by 2050, including milestone targets of 46% reduction in emissions and 100% renewable electricity by 2030
GRAIL announced Galleri was approved for prescription by the New York State Department of Health, making the test commercially available in New York, and marking a significant regulatory milestone.
NHS launched UK trial of Galleri under a commercial partnership program that aims to confirm Galleri’s clinical and economic performance in the NHS system as a precursor to its routine use by the NHS
Appointed Robert Ragusa, former Chief Operations Officer of Illumina, as Chief Executive Officer of GRAIL
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 Non-GAAP Financial Guidance included in this release for a reconciliation of the GAAP and non-GAAP financial measures.
For fiscal 2021, the company now expects both consolidated and Core Illumina revenue growth of approximately 36%. The company now expects GAAP earnings per diluted share of $4.41 to $4.51, and non-GAAP earnings per diluted share of $5.50 to $5.60, which includes dilution from GRAIL non-GAAP operating loss of approximately $1.00 and incremental dilution from the 9.8 million shares issued to fund the GRAIL acquisition of $0.15.
Conference call information
The conference call will begin at 2:00 p.m. Pacific Time (5:00 p.m. Eastern Time) on Thursday, November 4, 2021. 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 1 (844) 200-6205 or 1 (929) 526-1599 outside North America, both using conference ID 808648.
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 net income per share, net income, gross margins, operating expenses, including research and development expenses and selling general and administrative expenses, operating income (loss), operating margins, gross profit, other income, 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, non-cash interest expense associated with the company’s convertible debt instruments that may be settled in cash, and others that are listed in the itemized reconciliations between GAAP and non-GAAP financial measures included in this press release. 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 relating 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.