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Illumina Earnings: Uncertain End Markets Pull Down 2023 Outlook, Despite Decent Results

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Illumina Inc
(ILMN)

Narrow-moat Illumina’s ILMN second-quarter results exceeded expectations, but a challenging macroenvironment in life sciences, especially in China, has created more uncertainty in its near-term prospects and caused management to reduce its 2023 guidance. While disappointing, we have seen similar views from other life science companies this quarter, and our $269 fair value estimate does not look likely to change materially at first glance, given cash flows since our last valuation update.

In the quarter, Illumina’s sales increased 3% in constant currency (up 8% sequentially), as supply remains constrained for new instruments and we believe many sequencing customers delayed instrument and consumable purchases in the early days of new product launches. For example, Illumina was only able to ship 109 NovaSeq X instruments after launch in the quarter, albeit more than the 80 expected previously. Management now expects to be able to ship 390 systems in 2023, up from 330 systems previously and 300 originally.

With this early launch success and decent results on the bottom line in the second quarter (adjusted EPS of $0.32 versus $0.02 FactSet consensus), we were disappointed to see management push down guidance for 2023, especially given the easier comparable periods through the rest of 2023. For 2023, management now expects only 1% sales growth (down from 7% to 10% previously) and adjusted EPS of $0.75 to $0.90 (down from $1.25-$1.50 previously.) Trimming our near-term expectations based on uncertainty in Illumina’s end markets for the rest of 2023 does not materially affect our fair value estimate, though, which depends more on longer-term prospects. However, investors should realize that high uncertainty surrounds Illumina’s future cash flows (compared with medium for most of its life science peers), mainly related to the uncertainty around the Grail liquid biopsy assets, although the risks in its core business were on display with this guidance change too.

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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Julie Utterback

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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