Illumina Earnings: Management Maintains 2023 Outlook and Introduces Margin Expansion Plan
Narrow-moat Illumina’s ILMN first-quarter results mildly exceeded expectations, and management maintained its 2023 guidance and announced a margin expansion plan in its legacy sequencing business that appears roughly in line with our estimates. Overall, we are maintaining our $269 fair value estimate, and we continue to believe shares are undervalued. Activist investor Carl Icahn’s interest in the name may hold management’s feet to the fire, too, and provide options for long-term shareholders, if management’s plans are not realized.
In the quarter, sales declined 9% in constant currency (up 1% sequentially), as we believe many sequencing customers delayed instrument and consumable purchases in the early days of its new product launches. For example, Illumina was only able to ship 67 NovaSeq X instruments after launch in the quarter (albeit more than the 40-50 expected previously). The order book included over 200 NovaSeq X instruments at the end of the quarter, and management expects to be able to ship 330 systems in 2023, up from 300 expected previously.
With this early success offset by Russian sanction effects, management maintained its 2023 guidance roughly in line with our assumptions, including 7% to 10% sales growth that includes manufacturing capacity constraints as the firm ramps up on new processes for launching products. Considering those constraints, $670 million of expected Grail operating losses, and a higher tax rate; management expects only $1.25-$1.50 of adjusted EPS in 2023. Our expectation is at the low end of that range. Also, management highlighted goals to reach an adjusted operating margin of 25% by 2024 and 27% by 2025 in its legacy sequencing business, up from just 17% in the first quarter that may rebound substantially starting in the second half of 2023 as capacity constraints ease. Overall, we continue to believe demand for Illumina’s tools should rise substantially, and its earnings growth looks set for a rebound in the intermediate term.
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