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Illumina Earnings: Management Maintains 2023 Outlook and Introduces Margin Expansion Plan

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Illumina Inc
(ILMN)

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.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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About the Author

Julie Utterback, CFA

Senior Equity Analyst
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Julie Utterback is a senior equity analyst for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. Within the healthcare industry, she covers medical technology and service companies. She is also the chairperson of the equity research team’s capital allocation methodology.

Utterback joined Morningstar in 2005 as an equity analyst in the healthcare industry. At that time, she covered medical technology companies, including orthopedic device, medical equipment, and cardiac device firms. In 2010, she joined Morningstar's credit research team, initiating coverage of the entire healthcare industry and generally helping the organization expand and maintain its credit coverage across many industries. She held that senior credit analyst role until April 2019, when she returned to the equity team to cover medical technology and service companies.

Prior to joining Morningstar, Utterback was an equity analyst at State Farm Insurance for several years. She holds a bachelor's degree in finance from the University of Illinois Urbana-Champaign. She also holds the Chartered Financial Analyst® designation.

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